10 Steps to Purchasing Your Next Rental Property

I’ve recommended for years that my clients consider purchasing at least one rental property a year for tax planning and wealth-building benefits. It doesn’t have to be big, and it certainly doesn’t have to be the deal of a lifetime. The key is having a process, running the numbers, and refusing to let emotion push you into a bad investment. Whether you’re buying your first rental or your tenth, these 10 steps can help you get from setting the goal to actually closing on the right property.

1. Make a Goal

Set a deadline to purchase your first or next rental. Stay committed. Let friends and family know your goal and write it down.

But don’t simply write, “Buy my next rental by December.” Set smaller, manageable deadlines for researching markets, looking at properties, analyzing deals, making offers, and ultimately getting to closing.

2. Start Shopping

Just get out there and start looking at rentals. Engage two or more realtors or investors in the markets you’re considering and have them send you leads and options.

Once you start looking at actual properties, you’ll learn quickly. You’ll begin understanding neighborhoods, rents, prices, and what a good deal actually looks like in that market.

3. Get a Spreadsheet

Develop a spreadsheet, even if you have to buy one or create one, to analyze potential properties.

Your spreadsheet should help you compare important numbers such as:

• Purchase price
• Expected rental income
• Operating expenses
• Property management
• Financing and debt service
• Cash flow
• Return on investment (ROI)

Don't buy a rental because you “feel” like it's a good deal. Run the numbers.

4. Look at Lots of Property

Take your time and look at lots and lots of property. There is NO RUSH.

I’ve told clients time and time again: there will always be another deal next week.

The more properties you analyze, the better you’ll become at recognizing a legitimate opportunity. Follow your gut and don’t get sucked into a deal you don’t feel good about simply because someone tells you that you have to act immediately.

5. Make an Offer and Start Due Diligence

Once you find a property that fits the bill, make an offer with the appropriate contingencies and begin your due diligence.

This is where you start verifying that the deal you thought you were buying is actually the deal sitting in front of you.

And remember: don't get emotionally attached to the transaction.

If the numbers change, the inspection uncovers problems, or the deal no longer makes sense and your contract allows you to walk away, get out.

6. Do More Due Diligence

Look at the property from every angle.

Review the condition of the property, expected repairs, rental income, expenses, insurance, financing, leases when applicable, and anything else that could materially affect the investment.

Learn how to do good due diligence. Read books. Talk to experienced investors. Ask them about their nightmare deals and what they wish they had discovered before closing.

Be patient, but don't get discouraged.

7. Open Escrow and Start Planning Your LLC

Once you’re comfortable with your due diligence and the property looks like a winner, start reviewing documents, moving toward closing, and addressing your entity structure.

In many situations, I recommend an LLC to hold rental real estate for liability protection, but the right structure depends on the property, state, financing, ownership, and your overall asset-protection plan.

This is particularly important on your first deal. Don't assume the entity structure can always be cleaned up easily after closing. Get advice about how you should take title and where the property should ultimately be held.

8. Close and Handle the Property Transfer Correctly

You may ultimately close in your individual name or in an LLC, depending on the transaction and your financing and legal strategy.

If you plan to transfer the property to an LLC after closing, don't assume you can simply sign a deed and call it done. Consider the mortgage documents and any due-on-sale provisions, as well as potential transfer taxes, recording requirements, insurance, and state-specific rules before making the transfer.

This is one of those areas where getting the structure right before closing can save you a lot of unnecessary cleanup afterward.

9. Track Your Expenses

Keep track of everything for tax purposes. This includes your closing documents, costs incurred before closing, and expenses related to operating and managing the property afterward.

But remember, not every dollar associated with purchasing a rental property is immediately deductible. Certain acquisition and closing costs may need to be capitalized into the property's basis rather than deducted immediately.

Good bookkeeping from day one will make it much easier to properly categorize expenses, calculate depreciation, prepare your tax return, and eventually determine your gain or loss when you sell.

10. Manage the Property, Tenant, AND Your Property Manager

Don't think this property will run itself.

Stay involved. Keep good records regarding your tenants and the property. Take regular pictures. Visit the property when appropriate and permitted. If you use a property manager, manage the property manager too.

Hiring somebody else to handle the day-to-day work doesn't mean you stop paying attention to your investment.

This is your asset. Treat it like one.

The Bottom Line

With all of these steps and risks to consider, I still feel strongly that rental real estate can be a powerful path to building long-term wealth. With the power of leverage and the strategic use of the bank’s or other people’s money, you can potentially increase your net worth dramatically over time. Don't rush. Take your time, run the numbers, and remember that real estate investing isn't a sprint. It's a marathon.

And if you're getting serious about buying your next rental, don't wait until after closing to figure out whether you bought it in the wrong name or put it in the wrong entity. Book a Comprehensive Entity Set-Up with my team at KKOS Lawyers before you close. They can help you determine the right ownership and asset-protection structure for your situation and get the proper entity in place. Fixing a bad structure after the property, financing, and liability are already locked in can be far more complicated and expensive. Get it right before you sign on the dotted line.