- Step 1: Qualify as a borrower
- Step 2: Determine Long Term Goals
- Step 3: Educate, Educate, Educate
- Step 4: Accepted Offer – “First Steps”
- Step 5: Closing Escrow – “Final Steps”
- Step 6: Retaining Stability During Transition
When you purchase an investment property, you must first qualify as a borrower.
- Talk With a Lender – A lender will need to know if you have the ability to put a sizeable down payment and funds available as reserves. You must also disclose all asset and liabilities.
- What Can You Afford – A simple formula to calculate what you can afford is the amount of down payment divided by .35. If you have $500,000 set aside for a down payment, divided by .35, you should be able to afford a property worth about $1.425M. The lender of course will have the final say in regards to this figure.
- Keep In Mind – The property must qualify as well!
As an investor you must be able to determine what your long term goals are. Such questions you may want to ask yourself are;
- Rental vs. Appreciation – Do you plan on “trading up” your property every 3-7 years or do you want to hold all your property forever and only base your decisions on rental income?
- Stability vs. Distressed – Do you prefer a stable cash flow that you can depend on or are you looking to find value in distressed assets?
- Value Add Properties
- Value Add Properties
- Asset Class – Apartments, industrial, retail and many other asset classes all have their positives and negatives and can all shift depending on the market.
- Location – Do you want to remain local or venture into a more stable/risky) market for a lower/higher return?
The more you know the better. You are putting YOUR hard earned money at risk. Yes, real estate brokers are here to advise you, but ultimately YOU make the decision. The more you know, the better off your funds will be.
- Educate Market – If you’re staying local, you should have a good idea of what’s happening in your market. If you’re investing out of state, do you know all their local laws and regulations? What about other factors that may not exist in your marketplace? Floods, hurricanes, etc? For instance, did you know many multifamily properties in the East Coast run off oil, which can severely alter your bottom line with volatility?
- Educate Asset – If you choose apartments over retail, are you aware that they may be more labor intensive management wise than a retail property?
- Educate Basics – If you plan on buying and holding for extended periods of time, you should be focused more on cash on cash. If you plan on buying and “trading up” within a few years, are you aware of the potential internal rate of return (IRR)?
There are four steps once an investment property (or properties) are chosen.
- Financial Analysis – Determine if the properties past, current and future/potential income satisfies what you are looking for. Most sellers will only fully disclose all financials once a confidentiality agreement is signed or once an LOI has been agreed to.
- Offer & Deposit – You have to send in your deposit to the escrow company once your offer is accepted. This will start a timeline or a countdown for you to do all your inspections, have an appraisal done and close escrow.
- Inspections & Other Due Diligence – There are inspections for literally anything that you can imagine; roof inspection, general property inspection, sewer inspection, soils and engineering inspections, etc. Some examples of common inspections in my local area are;
- Property Inspection – Covers the general overall condition of the property, from foundation to roof.
- Termite Inspector – Checks for termites and also checks for dry rot – something which is very common in the Bay Area due to the proximity of the ocean.
- Roof Inspector – Checks condition of roof and estimates remaining useful life.
- Zoning, Permits & Local Ordinances – Check with local city and county departments regarding issues that may apply to your property such as rent control (apartments), retail zoning, etc.
- Local Required Inspections & Unique Circumstances – There maybe others depending on the type or location of property that you buy. For example if you are buying a property on a with a soft story – units above an open garage/retail space – you may want to pay for a structural engineer to check on the general foundation to make sure the property will not collapse during an earthquake.
- Loan Updating & Appraisal – Along with the inspections, you need to provide detailed financial information to whoever is doing your loan. Simultaneously, they will also schedule an appraiser to come out and evaluate the property.
- Recall that the property must also qualify for the loan and must pay for all expenses, the mortgage plus an additional cushion.
- The appraiser and lender will likely need all the leases or tenant estoppels to determine income accuracy.
For the fifth step, all of your inspections have been done along with the appraisal.
- Remove Contingencies – At this point, if you choose to back out of the deal for whatever reason, the seller can keep your deposit for basically wasting their time.
- More Lender Updates – Don’t be surprised if your lender again will likely need newly updated information and maybe even some additional info he or she didn’t request beforehand.
- Prepare Funds – You will need to prepare your funds to be sent over to the escrow company.
- Sign Escrow Docs – A representative from escrow will inform you that your loan docs have arrived and are ready to be signed. After you get to sign the huge stack of loan documents, the escrow officer will let you know when and how to pay the remaining balance that will be due from you.
In the sixth step, you prepare for a smooth transition from seller to buyer.
- Property Management – If you are buying an occupied building, make sure that the existing or new property manager is aware of all of your information, account numbers and preferences. The property manager is likely going to be one of the most important people you will deal with throughout your ownership of the building.
- Pay Funds – Pay all the funds that were requested by escrow and wait the last few days while everything is transferred from seller to buyer and vice versa. Escrow will also record all the necessary documents with the local county office.
- Collect Paperwork – Collect all the paperwork you’ve signed from the escrow company and your real estate broker.
- Utilities – Don’t forget you may to have to switch some of the utilities to your name including the water and garbage if you purchased a non NNN building!
- Collect Rents – Collect rents and begin to grow your income as planned