Investing in real estate can be a complicated and frustrating process, but it doesn't have to be. We will walk you through the major considerations for investing in rental properties, discuss what kind of legal entity you should consider for your investment efforts, and provide tips on how to get started.

It's never been easier or more important for savvy investors to buy rental properties than it is right now- especially if this is your first time entering the market as a joint venture real estate partner or as an investor on your own! Before we talk about the risks and rewards of either option, let’s take a look at how buying property works.

How To Buy Rental Properties

When you are buying a rental property, there is a conventional way to purchase homes that have been used for years and years. We'll go over the process that many investors go through and what it involves. This is usually the way that investors who have been in the game for 10+ years do business.

Inspection Phase- In our experience, this is usually the longest phase of the whole deal. You will be looking at how bad repairs can cost you money or an opportunity cost (the time spent working on property vs. outsourcing it). Places like Home Depot, Lowes, and a bunch of other stores that sell all kinds of tools and hardcore home improvement things will help to make your inspection easier.

Underwriting Phase- This is an important phase to make sure you are buying a property that will be profitable for you. You will want to calculate the ARV (after repair value) and see if it is reasonable versus the cost of the house. Some owners just keep their houses on after they have sold them to themselves which we don't recommend - this is what we want to avoid when going through underwriting.

Making an Offer- When you are making an offer on a property, it is good to make sure that you have physical documentation that will help to dispute a claim. Letters from the previous owners can be helpful as well as any other type of documentation like tax records. You will want to make sure that your offer is binding on the current owner and it can be feasible for them to pass it along to the owner who they buy out from.

Buy-Out Phase- This is the phase that involves documenting everything and then paying for the sale of the property. You will want to make sure that you make your escrow account payable directly to the lender which would allow for a smooth sale. Please do not record an "Agency Deed" or "Quit Claim Deed" when paying the previous owner for the property - this can open up a can of worms that you won’t want to deal with down the line!

Funding Phase- This phase involves getting your cash ready to go from your investor account into your escrow account where it will be disbursed. If you are going to finance your purchase, you can pay cash or get a loan for 95% of the ARV. You will find a bank that will provide you with a non-recourse loan and you can use your own money for the other 5%. If you plan on using an investor account to fund your purchase, just make sure that it is properly set up and has the money in it.

Closing Phase- This is where all of the paperwork is signed and you get the keys to your new investment property!

Our process works mostly like this but we have found other ways of making our deals successful. We have also found some ways to sell properties faster and with less headache. Some of our methods include:

Inspection - We have found that the best way to inspect a property is to photograph it and document every problem that you find. Go over all of the photos with the seller and make sure they are clear about anything that needs to be fixed. You will want to see a list of items that they will be fixing prior to closing - this way you know what needs to be fixed before you purchase the property and save yourself from having to start doing those repairs. Some home inspections run $300-$450, but we have found the same inspection for as little as $100 when purchasing a property for less than $150,000.

Underwriting - We base our underwriting on what we found at the inspection. We love to make offers for homes that are not completely renovated and sold as-is. This is the best way to buy rental properties for less money upfront and save yourself a lot of headaches in the long run! If you find a deal with hardwoods, granite countertops, or new appliances then it's always good if the seller has kept up with their maintenance plan.

Making Offers - We usually offer about 10% less than what we think it is worth just to make sure that we don't overpay for anything. As far as how much money we will offer, it all depends on where our investor accounts stand. In the past, we have made offers of as much as 100% of the ARV and been accepted - but we usually like to keep things at 95% in order to meet the bank's standards for a non-recourse loan. We get our bids in writing and make sure that it is a clear exchange - nothing works better than a good paper trail when you are dealing with all of the parties involved.

Buy-Out Phase- We like to use contracts when we buy houses from other investors. It makes the whole process easier and there is never any confusion about what was agreed upon. A lot of the time, we are buying houses as-is and we like to make a warranty agreement that covers us for any work that needs to be done after we have bought the home. This is good for our investors and ensures that they don't have to pay for a bunch of unplanned repairs. We like to get all of our agreements in writing with proof of funds from our investor account.

Funding Phase- We will use an investor account when buying houses if we feel comfortable with providing our own money or if the bank declines it because it is too low of a purchase price. We like to make sure that we have enough money in the account to purchase the property under our terms but nowhere near 100% of the ARV. We always like to have funds ready before we start the "Buy-In" phase - this is where you give up your 25% of ownership for a bank-owned property.

These are things that you should consider or look into before considering or thinking about as a joint venture real estate partner.

For more information, you can visit Real Estate Calculators.