Summary: This post is a continuation of our step-by-step series providing you with detailed guidance for building your real estate business. In this post, we cover six “insider” tips for buying a rental property. These tips aren’t necessarily going to be obvious to the new investor or even your real estate agent, especially if they don’t specialize in investment properties.
In prior posts we’ve covered a lot of topics leading up to finding a rental property: establishing your reasons for investing, choosing your investing strategy (e.g., buy and hold for cashflow) and how to find investment properties.
This article picks up from the moment you’ve found a potential deal, all the way to completing the purchase.
Note: these tips aren’t meant to substitute what your real estate agent does. These are simply tips and tricks that your agent might not remember to tell you or “insider” information that only experienced investors know but rarely ever tell you.
With that, here are the six insider tips for buying a rental property:
Tip #1: Call the seller’s agent
Let’s say you find a property on your own using an online resource like Redfin, but as is often the case, there isn’t a lot of information about the deal.
Normally, this is an opportunity for your real estate agent to shine. Great agents pick up the phone and call the seller’s agent to dig for as much information they can get.
But as we recently saw our friend do, there’s no reason you can’t pick up the phone and do it yourself. According to our friend who does this regularly, she is always amazed at how much information the seller’s agent gives up.
What type of info are you looking for?
You want to find out why the seller is selling. Are they anxious to sell? Is this part of a reverse 1031 exchange? Is there a problem tenant? Is there a problem with the property?
Every property has a story. We’ve picked up properties that were part of an estate sale. Properties with nightmare tenants that had to be evicted. Properties that were part of reverse 1031 exchanges. Properties that were poorly managed. Without a little digging by our agent, we would have never uncovered these stories.
If you can get inside information about the property, it gives you a leg up in the negotiations (see tip #6), so that you can make a good deal into a great deal.
Tip #2: Make your contract assignable
So your agent hands you the purchase and sale agreement for you to sign, and you see your name listed as the buyer.
Looks good, right?
Not necessarily.
Here’s where you want to think about whether you buy the property in your name, your spouse’s name (if you have one), both you and your spouse’s name or maybe even an LLC.
We have an easy way of handling this.
Just defer the decision to a later time by using “and/or assigns.” For example, if your name is Jane Doe, you would sign the paperwork: Jane Doe and/or assigns.
Adding this statement allows you to assign the contract to someone else or an entity like an LLC at a later time.
The benefit of doing this is that it gives you options.
For example, let’s say that your inspection uncovers a foundation issue and because of this, you aren’t feeling comfortable moving forward with the deal.
One option is to back out completely, but what if you could find someone who would pay you $5000-$10,000 to take over the contract? By having the ability to freely assign the contract, you could assign it to someone willing to take over the deal.
This is the same thing that wholesalers do. They find deals, lock them up, then assign them to a buyer for a fee.
Without the language allowing assignment of the property, you’d have to go back to the seller and get permission to assign the property to someone else. And the seller has no obligation to say “yes.”
Now it’s important to point out that some sellers do not like assignable contracts, so you’ll need your agent to explain the reason for making it assignable (e.g., you may want to assign the contract to your spouse or your LLC) or else the seller may reject it.
Tip #3: Use a preferred title company
Most states use title companies to close real estate transactions. And while they might all seem to all be the same, they aren’t. Just like any business, there are well run businesses and poorly run ones.
As a buyer, YOU have the right to choose your title company. Not the seller. Not the agent. Not the bank.
So what are the things you could potentially look for in a title company?
One thing is to compare fees. While many of the fees are standard, there are some “extras” that some charge that others don’t. These extras can add considerably to your closing costs.
Another is customer service. More specifically, you want a title company that puts in the extra effort to ensure that a transaction closes smoothly and on time.
Over the course of the last four years, we’ve closed numerous transactions while traveling. Some title companies just can’t handle the complexities or anticipate the potential for delays when you are traveling to a remote location. You want to find a title company that is known for excellent customer service and attention to detail.
Another big potential differentiator is title insurance.
If you are planning to transfer your property into an LLC, title companies typically charge you extra to add coverage for the LLC.
This is where you might go out and interview a number of title companies to see if they will cover your LLC for no additional charge. This will save you several hundreds of dollars in extra fees.
Tip #4: Put in every possible contingency
Whenever you buy an investment property, you always want to give yourself a way out.
This is where contingencies come into play.
Your agent should know to include these contingencies, but in our experience, many don’t. Especially if you don’t have an agent that knows how to work with investors.
If your agent doesn’t know this already, show them the following list.
- Inspection contingency
- Lease review contingency
- Title contingency addendum
- Financing contingency
- Appraisal contingency
There is usually standard paperwork available for each of these contingencies, so it shouldn’t be any extra work for your agent.
There is also an ability to write in your own contingencies.
For example, when someone purchased one of our properties recently, they wrote in an extra contingency that allowed them to back out if they weren’t satisfied with their personal walk-through of the duplex.
While this was unusual, they were well within their rights to add in whatever contingencies made them comfortable. It just gave them another way to back out of the transaction, which is smart in our opinion.
It’s important to point out that in certain situations when there are multiple competing offers, you may consider waiving contingencies in order to make your offer stand out. However, for us, investing is about mitigating risks and if you waive contingencies, you risk losing money on a deal.
Tip #5: “All hands on deck” for the inspection
The property inspection is your chance to “look under the hood” and fully evaluate what you are buying.
If you’ve never done this before, what happens after you have a property under contract is, your agent will schedule an inspection and have a licensed inspector perform an inspection of the property. A few days later, you’ll get a report and, based on the report, you’ll decide what to do regarding the inspection contingency (i.e. submit an inspection response with the items you want the seller to repair).
This is the usual process.
What we like to do differently is an “all hands on deck” approach to the inspection. In addition to the inspector, we ask our agent, contractor/handyman and property manager to attend the inspection.
For us, the more eyes and ears that we have looking at the property, the more information we get about the property. This allows us to make a more informed decision.
The other benefit is that we can also get an accurate estimate of the needed repairs from our contractor/handyman. We also get the most accurate estimate of the potential rents from the property manager. It also gives all parties an opportunity to interact with one another and share information about the property, which also enhances the quality of the information coming back to us.
One last benefit is that it’s an easy way to screen property managers and contractor/handymen. If they don’t show up, it tells you something.
When we are new to an area, we sometimes like to have more than one contractor go to the property and give us bids. When they see that there’s another contractor there, they will be sure to sharpen their pencil and give you their best price.
Tip #6: Always look for a “haircut”
“There’s always a haircut.”
That is what one of our agents always likes to say.
This isn’t to say that you’ll always be successful getting a price reduction (especially if there are more buyers waiting in the wings).
The point is that you should go into any deal thinking that you’ll somehow figure out a way to get some kind of a concession from the seller. The idea is, if you are looking for ways to get a haircut, you’ll be more likely find one than if you aren’t actively searching.
And if you’re not successful, that’s OK. At least you tried.
Remember that you’ve locked up the property, the seller can’t give the deal to someone else without starting over. So there’s no downside to asking. The worst the seller can say is “no.”
It’s important to point out that if you know the seller is anxious to close, it’s highly likely that you get some concession out of them. This is why tip #1 is so important – to dig and find out the reason why the seller is selling.
Also remember that the haircut doesn’t have to be a price reduction. We’ve successfully gotten sellers to cover the cost of replacing the roof, to evict tenants before close and to do something as small as put earthquake straps on water heaters.
We generally always ask for something no matter how small.
So there you have it. Our six “insider” tips for buying a rental property.
Did we miss any tips? What are some others that you’ve used in practice?
