Transcription
Building generational wealth doesn't have to be a dream. It can be a reality through rental real estate investing. You see, real estate allows you to leverage financing. You can take advantage of depreciation. Plus, you get to grow your net worth steadily over time. Who wouldn't want that? So, today I'll guide you step by step on exactly how to find, how to finance, and how to secure your first rental property so you can start building wealth in your real estate empire today. Without further ado, let's dive in.
All right, guys. Step number one is we have to prepare your down payment. We can't operate out of order and we can't neglect how much money is required to invest in rental real estate. Buying a rental property usually requires a substantial down payment. For most investment properties, lenders will ask for 15 to 20% of the purchase price as a minimum down payment. That means if you're looking at a $200,000 property, you should plan to put down $30 to $40,000. Yes, it's a significant amount of money and for many people it can feel like this big barrier to entry. However, don't let that discourage you. I don't want it to discourage you. This is part of why real estate tends to attract people who are disciplined about saving money and managing their finances. If you don't have this much money saved yet, consider focusing first on building a solid emergency fund and increasing your savings. This will give you the comfortability to invest. Now, you can start by putting aside a fixed percentage of your income every month, cutting any unnecessary expenses, of course, and even taking on side hustles to accelerate your savings. This is a great way to get started.
If your cash is limited, there are alternatives. One option is an FHA loan, which allows you to put down 3.5% as a down payment, but with the requirement that you will live in the property for at least 12 months. Many investors start with multi-unit properties like a duplex, triplex, or a quadplex. Using the FHA loan, they live in one unit while renting out the second, third, or fourth unit. Then they move out that one unit after their one-year requirement, turning all units into rental income. This approach is often referred to as house hacking and is a great way to start investing with minimal cash. Now, keep in mind that FHA loans require mortgage insurance, which adds to your monthly costs. There are also other creative financing strategies such as partnering with investors. You can also look into seller financing, shout out Pace Morby, or using personal lines of credit. But for beginners, focusing on either a 15 to 20% down payment or an FHA loan is the simplest route. So that's what I'm focusing on for this video today. But here's a pro tip. Even if you're going the traditional 15 to 20% route, please make sure you always save for closing costs, moving expenses, and even potential repairs right when you close escrow. A good rule of thumb is to have an additional 3 to 5% of the property's value set aside for these types of costs that can just come up.
Now, let's move on. Step number two is building your credit. Your credit score will heavily influence the mortgage rates that you can get and ultimately the success of your investment. The higher your credit score, the lower your interest rate, which translates to smaller monthly payments and better cash flow. Baby, if your credit score is below 700, it might be worth taking the time to improve it before even applying for a mortgage loan. Here's what I want you to do. Start by paying down high-interest debt first, making sure all bills are paid on time and then fix any errors on your credit report. I want you to ideally aim for a score of 730 or higher before you apply for a loan. This isn't just about getting approved or Carlton's rules. It's about getting approved under terms that make your investment profitable for you. That's what you care about, right? Let's go over an example. Let's say you're buying a $200,000 duplex with a credit score of 680 and the bank offers you a 6% interest rate. If you improve your credit score to 740, you might get a 5% interest rate. And that 1% difference could save you over $100 per month, which adds up to thousands per year. That extra cash that you can reinvest or save for future property improvements allows for you to build wealth quicker. Keep in mind, real estate investing is a long-term game. It's not a short-term game unless you're a flipper. Starting with good credit sets you up for better deals, higher leverage, and lower costs. This is how real wealth is built in real estate.
Now, let's move on to step number three. Step number three is talking with the lenders. Before you officially apply for a mortgage, it's smart to speak with lenders to understand how much you can qualify for. Lenders love this area of helping you. It's the pre-dating stage before they get paid to actually draw out a loan for you. At this stage, they're gathering information and you're providing information. You're not committing to anything. So, I want you to avoid hard inquiries for now as they can slightly impact your credit score. I do want you to provide your income. I do want you to share your debts and credit score to lenders and ask for what's called a preliminary mortgage estimate. This gives you an idea of the loan amount you might qualify for, your potential interest rate, and estimated monthly payments. But here's where you have to do things right. You have to be honest. And throughout this process, when you're sharing your financial details, lenders can only give accurate estimates if they have a complete picture of your financial situation. You do not have to ego flex with a mortgage lender. You don't own anything yet. So, this is where you need to be smart and strategic. You should ask multiple lenders for estimates. Don't only approach one. Different lenders have different underwriting guidelines. And talking to multiple will help you find the most favorable terms. Don't forget, you have to ask about lender fees. You have to ask about closing costs and are there any incentives for first-time investors that your mortgage lender could be providing. You can even request a breakdown of how each lender calculates your monthly payments to better compare options for yourself. Getting this information early will give you a realistic picture of what type of properties that you can afford. It also helps you avoid falling in love with a property that's out of your financial reach like many people do early on when they shop for real estate. Guys, having a clear understanding of your borrowing power allows you to make more confident and strategic decisions when you're shopping for your ideal investment.
Let's go to step number four. Deciding on the type of property. Now that you know your budget, it's time to decide what type of property you want to buy. Options include single family homes. You got duplexes. You can go triplexes. You can even go quadplexes. You can look at condos and even a small apartment building. When you're deciding, consider these factors. Budget number one. If I go multi-unit properties like triplexes or quadplexes, that's going to be more money up front. Obviously, you're buying more units. If you're just starting, a duplex or a single family home might be more manageable. Next is HOA fees. What do HOA fees look like on the property you're potentially about to buy? You want to avoid condos as a beginner. I'm just being honest. Higher HOA fees can eat into your cash flow, and rules around renovations can limit your ability to improve the property over time. Please make sure that you review any HOA restrictions carefully before committing. Next is looking at your local market. I want you to speak with local realtors who specialize in investment properties. They know which neighborhoods offer the best rental potential and property appreciation. So, what you're going to do is you're going to research trends like what are vacancy rates in this city? What is the rent growth? Is it the rent growing at 3% 5% annually? And what are the nearby amenities to ensure strong long-term returns? I want to know what people do in this neighborhood. For example, if you live in a city with strong rental demand for small apartments, a duplex or a triplex might be perfect. If you're in a suburban area where single family homes rent well, that might be the better option for you. But you have to remember the goal as a beginner is to start small and have something that's manageable. You can always scale to larger properties once you have experience and cash flow. Taking a thoughtful, informed approach now will save you headaches later and set you up for long-term success.
Step number five is to conduct your initial property research. This is where the fun starts to begin researching properties to find the best investment opportunities. But if you skip steps one through four, you might end up chasing properties that don't fit your financial situation. So when you start your research, look for properties that are cash flow positive, meaning the monthly rental income exceeds the property's monthly expenses. Expenses include your mortgage payments and property taxes and insurance and utilities and maintenance costs. So, you need cash flow after all of those costs. So, here's an example of a cash flow positive property. A duplex rents for $2,000 per unit per month. The total monthly income is $4,000. The monthly mortgage and expenses are $3,500. That leaves $500 of positive cash flow. Positive cash flow ensures that you're making money every single month, even before accounting for appreciation or equity buildup. I highly recommend only investing in properties that are cash flow positive. Please don't get a property that breaks even and you're like, I'm getting tax benefits. It's just so much easier that way in the long scheme of things. Here are some other tips. Avoid properties needing major renovations. You're not in the business of renovating everything starting out. You're in the business of wanting to learn cosmetic updates like paint or flooring. That's fine. We'll we'll live with that. But avoid homes with structural problems or any expensive repairs like roof replacements. We're not in the business of replacing roofs right now. Consider the neighborhood. I want you to look for low crime areas, good schools, parks, and amenities. You are not looking for areas where your favorite rapper grew up, okay? You are trying to attract renters. Use online tools like Zillow, Rentometer, and mortgage calculators to estimate rental income and monthly costs. You should have an Excel sheet based off the city and state that you are looking to invest in that has the mortgage calculator that estimates rental income and monthly costs. These tools are extremely beneficial and can make the process of finding good properties infinitely easier. Also, keep in mind negotiations can also improve your returns. If a property is close to being cash flow positive, you can make a lower offer to the seller. Many sellers are open to negotiations, especially if the property has been on the market for a little while.
And step number six, get approved by the lender. Once you have a property in mind, it's time to get pre-approved. Yes, I know you knew this, but this is different from speaking with a lender. Pre-approval involves a hard credit inquiry and a detailed evaluation of your financial situation. So, the lender will review your credit score. They'll review your income and employment history, but then they'll start looking at your debt to income ratio. They'll look at the assets that you currently have. They'll look at your reserve accounts and the property's rental income potential. They may also ask for recent tax returns. They may say, "Hey, I want to see your bank statements to verify how long has cash been seasoning inside of your checking account." and they'll ask for any documentation of any other income source to get a complete picture of your financial health. This can include your Robin Hood account. Preapproval gives you a definite idea of how much you can borrow and under what terms. But what it does for you is it signals to sellers that you're a serious buyer, which can strengthen your offer when you go to put down an offer. Additionally, having that preapproval, it speeds up the closing process once your offer is accepted, giving you an advantage in competitive markets.
Step number seven is to make an offer. Now that you're preapproved, you can start making offers. You can work with a knowledgeable real estate agent who understands the investment market. A good agent can identify the best deals before they even hit the market. To be honest with you, they should be contacting you, telling you, "Hey, I have an off-market deal. I would love to get you over here to check it." They can also advise on competitive yet profitable offers and help structure offers contingent on inspections, for example. Always include contingencies for inspection and financing. You'll learn this over time. These protections allow you to back out and renegotiate if issues arise. So, please take the time to carefully analyze each property's potential return on investment before submitting an offer. And please don't rush the offer process. It's better to wait for the right property than to overpay or buy a property that just doesn't fit your investment goals.
We've made it to step number eight. You're going to complete the inspections. Once your offer is accepted, schedule inspections immediately. Do not delay escrow. Inspections reveal hidden problems like water damage, mold, or structural issues. Knowing the repair cost upfront can save you thousands of dollars or help you back out of the deal. A thorough inspection can also uncover maintenance concerns that might not be obvious, such as outdated electrical systems, plumbing issues, or roofing problems that could become costly down the road. If significant issues are found, you can request the seller to fix them. Ask for a price reduction, or even just walk away from the deal if the issues are too much of a problem. So, this is why I always tell new investors, never skip this step. Even experienced investors make mistakes when they ignore inspections. It's better to address potential problems early than face unexpected expenses after closing. Additionally, inspection reports can provide valuable leverage in negotiations and help you plan future renovations. This is how you can be strategic as you're building a business, ensuring your investment remains profitable.
Step number nine, let's close the deal. Closing is the final step. It involves signing documents, transferring funds, paying closing costs, and eventually officially taking ownership. After closing, you can make renovations if needed. You can also list the property for rent on Zillow, Redfin, Trulia, and start generating income. Then it's time to start leveraging tax benefits. I'm talking the big ones we talk about on this channel, depreciation, mortgage interest deductions, and operating expense deductions, like having a management company that you set up that manages the rental property. Pretty smart, huh? Now, owning a rental property isn't just about cash flow. It's also a strategic tax move. I'm sure you knew that. Real estate offers deductions that can reduce your taxable income significantly. If you want to learn a little bit more about the tax benefits of real estate, I put together a whole video for you. You don't even have to worry. It's right here. Just check it out. But the bottom line is is buying your first rental property is a big step, but with careful planning and the right strategy, it's entirely achievable. Everybody should own real estate if they believe that it's the right type of investment for long-term growth. So, I want you to start by saving for your down payment today. I want you to focus on improving your credit as we head into 2026. I want you to start researching the market and working with professionals who know the investment space, not ones that just tell you that would be a great idea for you to start investing. If you follow these steps, preparing financially, securing the right financing, finding the right property, protecting yourself through inspections, you'll be well on your way to becoming a successful real estate investor.
All right, everyone. That's all I got for today's video. I hope this video helped you understand a little bit more about the process that goes into buying your first investment property. If you loved today's video, do something for me. Like, comment, let me know if you already own rental real estate and if you've done a cost segregation study. And be sure to check out our channel and our live events. We will be happy to help you get into your first investment property. My name is Carlton Dennis. Thank you so much for subscribing to our channel today. I look forward to seeing you on the next video. Cheers.