I’m not gonna lie, I never in my wildest dreams ever imagined I’d be writing about how to buy a second rental property, and how I did it myself. This is a recent development, and my second article talking about rental property purchases. I’m so giddy inside, you have no idea 🙂
This journey has been nerve-wracking, scary, and exciting all at the same time! As much as people might call it passive income, it’s definitely not passive at all at the beginning. It is very involving and very taxing. But I’ll do it all over again in a heartbeat.
So for this article, we will talk a little bit more about how I bought my second rental property and how you can buy your own second rental property.
Think of this as a part 2 from my previous article How Exactly I Bought My First Rental Property.
- Why I am investing in real estate
Steps to buying a second rental property
- 1. Find the type of property you are looking for
- 2. Get a bank re-qualification
- 3. Find the property you want
- 4. Run the numbers
- 5. Submit an offer
- 6. Apply for financing from your lender
- 7. Get a property inspection
- 8. Address items with the seller
- 9. Finalize with your lender
- 10. Close the deal, or don’t
- Final thoughts
Why I am investing in real estate
Like I mentioned above and in my previous post, owning rental properties is not something for everyone. It’s not as easy as glamorous as it looks on TV.
I wholeheartedly believe that investing in real estate requires a certain mindset. You must be okay with spending thousands of dollars because the roof started leaking, getting called at 4 a.m. in the morning because of a pipe bursting, or dealing with tenants wreaking havoc on your property.
Even with all this, the value of investing in something for your future, for your family, for your heirs, and for your retirement is absolutely worth it. There is something about closing a deal, signing papers, and getting the keys to an actual house! Riveting!
Investing in real estate is my long-term goal and completely separate from my day job and my blogging life. It’s definitely a part of me, and there’s a reason why so many affluent and wealthy people invest in this stuff. There will always be people and there will always be a need for somewhere to stay. It’s an invaluable asset that appreciates over time and earns you an additional stream of income.
If you are trying to figure out how to buy your second rental property and keep the ball rolling, I’ll show you how!
Steps to buying a second rental property
All right, now that you have a better understanding of my background and reasoning for investing, let’s take a look at how you can also buy your second rental property.
If you are reading this and you already own property number seven, or even just getting started on researching, it will still apply to you. I hope this is super helpful and guides you through things I wish somebody had told me.
1. Find the type of property you are looking for
Now that this is your second time wanting to buy a rental property, you have a better understanding of how your first real estate deal went. Was your first one a single-family unit? Maybe your first investment was an apartment complex. Was it profitable and was it what you expected? These are questions you probably are and should be asking yourself
Depending on your answers, identifying the type of property you are looking for becomes a little easier. As a refresher, here are things you should consider:
- How much property can I afford?
- What kind of building is it? Single Family or Multifamily?
- What down payment can I afford?
- Where do I wanna buy? Near me, or another city?
What I Did:
My first rental property was a single-family ranch house 10 minutes away from me. The speed at which is rented for and the amount of income it’s generates was something I wanted to replicate for my second one. My budget, location, and property type basically remained the same.
2. Get a bank re-qualification
Now that you have identified what kind of property you are looking for, and you’ve figured out your budget, it’s time to approach a bank and get a pre-qualification.
Since you have already done this before, it might be in your best interest to go to the same lender you used before. This will help you develop a deeper relationship with them.
Getting that pre-qualification is a requirement before you can even start negotiating a price with most sellers. Sellers typically don’t want to work with someone that hasn’t even gotten a pre-qualification letter. They don’t want to waste their time.
A pre-qualification letter simply says that the lender is willing to work with you, they had a quick look at your finances, and do you should qualify for a certain loan amount. It doesn’t guarantee anything
What I Did:
Since my relationship with my current lender was so good, my lending agent gave me a pre-qualification letter without even having to go through my finances. All I needed was to fill out a quick form and had a pre-qualification letter in hand.
Building that relationship with a lender just makes things run smoother, faster, and it’s just that much less of a headache.
3. Find the property you want
This is always the hardest and most stressful part. Finding the right deal that has the right numbers, and makes the most sense.
The obvious places like Zillow and Redfin are without a doubt the best place to search for properties. You could also work with your realtor to find deals that aren’t on the MLS, but they are rarer.
Because of my strong belief in creating relationships, I used the same realtor to help me find and look at properties. This is the same realtor that helped me purchase my primary home, my first rental, and now my second rental. Super fun and easy to work with.
Since we have worked together so often, the realtor now has a better understanding of the kind of properties I look for, the price range, and the location. I also have a clear understanding of the fees associated with working with them, so they are no hidden surprises.
What I Did:
My search criteria never changed. I search for the same thing on Zillow and Redfin regarding property price, location, and type. I would send the listing to my realtor to see if it qualified for a conventional mortgage or not. They were always very helpful.
4. Run the numbers
Once you have identified the second rental property that you want to buy, make sure that the numbers look good and align with your friend and two goals. You want to make sure that the property checks one or more of these boxes:
- Ensuring that the property appreciates over time
- Ensuring the property cash flows every month
- All the above
Again, this all depends on your own goals and plans with the rental properties.
A good way to also figure out how much that property might rent for is to use a service called Rentometer! I use it whenever I research properties because it gives me an estimate of how much rent I can charge. It looks at nearby homes of similar size and gives you a really good estimate on rent. You should definitely check it out.
The general rule of thumb is that you should buy a rental property that you’re able to charge enough rent to cover repairs, your mortgage payment, and still have cash remaining
What I Did:
As I look for the next deal, a very decently priced property came on the market. With how hot is the real estate market is right now, it was Paramount that my wife and I went to go see it the very next day. I used to Rentometer to check out the rent prices in that area and how much it would rent for.
5. Submit an offer
Now that this is your second time doing this, you won’t be as nervous and scared as the first time. You know exactly what you want, exactly what you’re looking for, and exactly what your financial goals are.
Offering someone tens of thousands of dollars is nerve-wracking, to say the least. I remember thinking to myself “are you really about to do this a second time? What if the first time was just luck? What if you are getting yourself into deep trouble?”
The self-doubts are real guys. It’s scary, but just part of the process. Just take the time to talk to your realtor, and they can suggest how much you can offer. You can also look at what other properties in the area are selling for.
Remember to always stick to a budget. If the seller comes back and refuses your offer, just make sure your purchase price is exactly where you wanted to be. It’s better to walk away than to over-leverage yourself.
What I Did:
I submitted a lowball offer to the seller in hopes that they would accept. Shockingly, they immediately accepted. My guess is, with COVID and everything else happening, the seller was desperate to get some money.
The house ended up costing way less than the listing price. It was just good timing and luck on my part.
6. Apply for financing from your lender
Once the offer has been accepted and you are now under contract, then you can start working with your lender to get financing. Just like before, I will highlight some key points you need to remember when financing a real estate deal.
- Typically, a lender will need 20% as a down payment when you want to buy a rental property.
- That 20% cannot be gifted and should come all from your funds
- You need about 3-6 months of cash left after closing. These are your reserves, and your lender will want to see this
- Your credit score requirements differ from lender to lender, but it’s typically 620. The higher the better.
- You will need to have been employed and show proof with paystubs
- They will need 90 days of your bank statements showing where the funds will be coming from
- They will also want to see 2 years of your tax returns and W2
- Some will even call your employer for employment verification
What I Did:
Since I was working with the same lender as my first rental, they barely needed any documentation for me. They still had scanned copies of some of the important personal documents that I had submitted before. It was such a smooth process from start to finish.
7. Get a property inspection
This is absolutely vital when buying a property. Since a house is a pretty big purchase, any issue that it might have might end up costing you thousands of dollars. You need to be very careful and diligent when getting a property inspected.
A good inspection will reveal every little thing even things that you might not care about. Things like an outlet not working or a ceiling fan not responding might seem trivial, but property inspectors come through each and everything the house has. Little things add up and end up costing a pretty penny.
Make sure you get a good professional to go through your home and Report any findings they might have. If something is damaged and costs a lot of money to repair, and the seller is unwilling to fix it, then it might be a good idea to walk away.
Whatever you do, just make sure you get an inspection done.
What I Did:
Just like any inspection, it came back with some things that needed repairs. The seller was selling the home as is (meaning they were not willing to perform any repairs). This means that I was okay with any repairs that the inspector found that needed to be done. This will be completely up to you, and your ability to get the items fixed.
8. Address items with the seller
Depending on what you find during the inspection, you could always go back to the seller and renegotiate terms.
If for example, the roof required a $6,000 replacement, you could go back to the seller and lower your purchase price by $6,000 if you wish. In some cases, the seller might also be willing to perform the repairs for you so you can go ahead and close the deal.
Like I mentioned before, and I will mention again, you can back out at any time before signing any papers. If something pops up that you really don’t like, and don’t want to deal with, then you can back out of the deal completely.
What I Did:
During the inspection report, a bathroom tile is missing as well as a broken window in the kitchen. The lender required that those items be repaired before closing. The seller agreed to make those repairs so we were good to go!
9. Finalize with your lender
During this entire time, the lender will also most likely be working with you and getting all the documentation they need. They will need things like home insurance before you close, and making sure that you have sufficient funds for the down payments.
The amount of documentation they required kind of depends on the lender, but chances are they will require an extensive amount of paperwork. They also want to see cash in reserves equaling to 6 months of all your mortgages. This includes your primary house.
So at this point, you are nearing closing so make sure that everything is in order and they have everything they need. You’re almost there!
What I Did:
Since this was the same lender I used for my previous rental property purchase, the documentation requirements were much lighter. They did not need to hound with me for things, I had submitted all of them from the very beginning. The process was so smooth, I wish I knew you all about it when I bought my first one. You live and you learn 🙂
10. Close the deal, or don’t
You made it. You are now about to close on your second rental property. The road was long, it was tough, and it was very emotional. But you, the seller, and the lender are all happy.
As long as your numbers made sense, and you are happy with your purchase, then the closing day should be a day of Celebration and not worry. This time around, going to the title company should be more of a breeze. Maybe some butterflies 🙂
Once everything is signed and everything looks good, you get you a little folder with all the paperwork, and a set of keys for your new rental property!
What I Did:
I closed the second rental property! My wife and I walked into that title office and they all recognized us. This was our third time working with them, so even the title company has a relationship with us now. Closing what’s smoother, she didn’t have to explain that much stuff because we already knew it. It just gets easier as you go.
This is a story of how exactly you can buy a second rental property and how I did it myself. I am sure it resonates with a lot of you that have done it. If you are on your first property, or just getting started, then this will all make sense once you get to this point!
The goal here is not to two rental properties and call it a day. The goal is to get many many more properties and build this little rental portfolio I have started.
Like I said in my previous article, this is not easy. There is a reason why so few do this, and why so few will ever attempt to do this.
I always say this jokingly, but it’s true. If a little boy from Africa who came to the United States for college and now owns 3 properties, you most certainly can too.
Don’t be afraid to go get it. If you really want to get into real estate, and build your own portfolio, just do it!
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