Buy to rent investment strategy

For many people, buy-to-let looks an attractive income investment but if you are considering investing in property – or improving your returns on a buy-to-let that you already own – it’s important to do things right.

People buy property for different reasons. Those who want to create a steady income and build wealth are focused to “Buy to Let “opportunities. There are some basic steps that every investor has to follow in order to move towards the right direction and manage to get profits. The steps to buying rental property, however, are not that drastically different from buying your own home, or any other property. Only a few important differences.

I will try to explain, step by step, how to buy a rental property and begin your entrance into real estate investing.

Step 1: Get Organized Before Buying Rental Property

This is maybe the most important step. Skipping this step can create very bad consequences in the future. The moment you’ve made your decision to buy rental property, it can be easy to start shopping for the type of property you are interested in.

However, your first step must be focused in getting organized and researching. Below are some of the basic questions that you need to have answered before doing anything else.
What kind of investment property you want to buy.

How much you can afford to pay?

What kind of neighborhood you want to invest in?

What the average rent is in the area?

What kind of return on investment you hope to make.?

How long do you want to stay into this investment?

Are you ready to face any possible losses and if yes at what percentage of your initial investment?

Step 2: Make a Plan – Develop Criteria and set up a Budget

Set up your maximum budget and set your criteria. I highly recommend you write down your plan and goals and refer back to them often.

For example, if you are looking to buy a single family home for between Sh15, 000, 000 and Sh20, 000, 000, do not get distracted by a home with the beautiful garden for KES. 25,000,000. That should not even be an option since your budget limit is less. By stating your plan and your criteria, you can hold yourself accountable to your goals. You have to remember, no matter what, you always need to stay within your budget.

Step 3: Do you have sufficient funds or you need finance?

If you have the money to buy it in cash, then it is easier to proceed with the quest of finding the proper property. But if you need to somehow source the money either from future expected income or finance, then things become more complicated.

One of the most common mistakes made by homebuyers is to start searching before determining their budget or arranging for financing. This error has caused untold heartache when buyers find out that they cannot afford the property they’ve found.

This same principle applies to buying rental properties. Before shopping for your new rental property, you need to have secured the required cash or be sure to talk to a bank about how much you can borrow from them.

There are numerous paths to real estate financing so be sure to weigh all your financing options before making your choices. The interest rate you might agree, amongst the rest of the terms and conditions of the finance, will determine the success of your investment.

Step 4: Find the Rental Property that meets your criteria

This is usually the exciting part! There are lots of great ways to find a great rental property. Nowadays, the most common place to start your search is in the web. There are several websites you can use to find the listings.

However, very often, these sites do not contain all the information needed (and sometimes do not even contain all the listings, either.) For this reason, it is important to get in touch with a local real estate agent whom you can trust to get you more information.

The seller generally only pays an agent, when he or she purchases the property – so for a buyer, using an agent is typically free. Try to identify a recognized agent that will assist you with knowledge and experience through the whole procedure of a property purchase.

It is often helpful to find an agent who specializes in working with investors, as they are more keenly aware of what makes a good rental property. Also – be sure to share your criteria (See step two above) for your rental property, and allow your agent to help you find the best properties that meet your qualifications.

You can use the websites to get a very good idea of what is available in the market but get an expert to assist you before you make any decisions.

Step 5: Make Your Offer

When you find that rental property that excites you, and have walked through it, your next step is to make your offer. This is also a step where your agent will come handy. You can use your agent to negotiate on your behalf with the seller.

Remember that your budget is sacred and you need to keep your offer inside it. Be sure to only spend the amount that makes the most sense to you for the specific property.

Determine how much cash flow you need to make and don’t let emotion override the numbers. Be willing to walk away and you will always hold the upper hand in the negotiations. If you cannot agree to a number that works for you then it is not worth buying.

Remember, price is not the only consideration. Depending on the popularity of the property and the strength of the deal, there are many other issues to include in your offer:

• Closing date
• Inspection contingency
• Financing contingency
• Seller financial concessions

Be sure to talk to your real estate agent about all the necessary parts of the offer, and include a term concerning the due diligence results which you will conduct.  This will give you the option to kick out of the deal in case of any negative findings, or the option to renegotiate with the seller.

Once you have a signed agreement with the seller and have agreed upon all terms, you now have what is known as “Mutual Acceptance.”

It is important to remember that the most important rule for successful investments – It is better to have NO DEAL than a BAD DEAL.

Therefore, if you do not feel comfortable with the terms and conditions, walk away. There are more options waiting for you out there.

Step 6: Due Diligence

After agreeing on a price, it is time to begin your “due diligence.” During this period (according to the dates specified in your offer), you will hire an inspector- engineer to perform a condition inspection on the property, looking for any defects that may cost you money in the future or that affect the current value of the property.

If defects are found, you can always go back and re-negotiate with the seller. Even if you are buying in a “hot market” negotiate as much as you can. The fear that the seller may refuse to perform the steps and walk away from the deal, giving it to someone else should not scare you.

The urgency of a hot market has several times pushed investors to make wrong decisions and lose a lot of money. All markets fluctuate and you need to buy a property that will help you sell no matter if the market is hot or not.

You are making a big decision and it has to be perfect. It is important that you do not get stuck with a property that has major problems – so be sure to weigh the decisions carefully and keep your goals in mind at all times.

During this time between “mutual acceptance” and closing – you will need also to finalize the financial arrangements with your bank or other lender if that is required. This is also the time when your lawyer has to check the title of the property.

When the day of closing comes, and you have to sign the documents and pay the money, you need to have no doubts about the deal.

Step 7: Becoming a Landlord

Congratulations, the deal is closed. You bought a property to rent and you are now a landlord! A new project is now in front of you. You need to manage your investment and you have to do it the best way possible.

Remember, if you bought the property using finance, a new financial liability is depending on the success of this investment. In Kenya, it is very common to use a Property Management Company that will take care of your investment. This is a very good solution but be sure that you are choosing the right one.

If you decide to manage your investment on your own in order to save money, then you need to educate yourself and get prepared for the property management. It is not so difficult, neither so easy to manage a property. There is a lot of information you can get from the Internet. Remember that depending on the number and the type of your investment, you will need to spend a lot of time and effort to properly manage your property.

To conclude, I would like to mention that the buy to let investment option has been creating wealth for hundreds of years around the globe. It has also been the reason for big losses. If you feel that you do not have the required knowledge, experience or time, then the best thing you should do is to either use the services of a professional or simply forget about it.

Kosta Kioleoglou

REValuer by Tegova
Civil Engineer Msc/DBM
Director of Engineering and Property Appraisal

Source : Nairobi Business Monthly Magazine