Have you ever wondered how to use rental properties to make money? Nowadays, you can get information just about anywhere on real estate investing for beginners.
So you thought to yourself, “Maybe I can do it too?! .. Wait, but where should I begin!?”
Before my first rental property, I had no clue with what I was doing and where to even start.
There were so many questions that I needed answers for:
- Where do I get the money to buy a rental property?
- How much can I afford?
- How do I even know which property is a good deal?
- What if I get a bad tenant? Or worse… what if I can’t even find a tenant!?
- What if the house burns down!!?
On many occasions, these were all questions that would’ve stopped me from investing in rental properties before I even started.
I’m glad to say that I didn’t let the fear of failure stop me from starting my real estate investing journey. Because now I have 4 cash flowing rental units that are paying for my 5th unit (4 rental properties in total) which I’ll be living in, and money left over to pay for my living expenses.
Not too shabby for a millennial IT yuppie. 😉
While there are many ways to build wealth, I chose real estate investing simply because I LOVE everything about it. Not only has it helped me create a source of passive income, it also taught me to look at my wealth differently.
Investing your money in a rental property doesn’t have to be intimidating. Which is why I’m going to be sharing with you the 7 steps that I took to help me buy my first rental property while working full-time at a desk job. 🙂
Step 1: Get Your Finances Straight
Cut Those Unnecessary Expenses
Being a millennial, I definitely had my share of buying things that I don’t need.
Like that overpriced Chanel bag I bought? Yeah… definitely did not need that.
But somehow I convinced myself that it was a good purchase.
I mean, why wouldn’t it be?!
So if you’re like me, you will need to figure out how much money you’ve been wasting and start working on your spending habits. Start by making it a habit of tracking down everything that you spend.
One of the ways to start cutting your expenses is to start a budget plan and learn to follow it. Resist the urges to blow money on those “temporary high” purchases and invest in your long-term wealth instead.
Try to ask yourself before buying anything, “Do I need this or do I want this?” This simple question is enough to get rid of most of your bad purchases so you won’t end up having buyer’s remorse as often as before.
Once you have established a good habit, saving for your initial capital will be so easy!
Start Saving And Set Up An Automatic “Pay-Yourself-First” Plan’
For those of you who are anti-budgeting – This is for you. In fact, “pay-yourself-first” is the main reason why I was able to save $100k by 25.
What does “Pay-Yourself-First” mean anyway?
It simply means that when you get your paycheck, before paying for your bill(s) or credit card(s). You PAY YOURSELF FIRST! And whatever you’re left with afterward is what you’ll be living with for the rest of the month.
Start by setting up an automatic deposit on the same day that you get paid and put a set amount of money away from your chequing account to a separate investment account. This is a good habit to have because your money is “gone” before you can even use it.
If you don’t have a saving or investment account – Seriously, go to the bank and open one!
Click here to sign up for your own Tangerine account. Use my orange key 32976970S1 when signing up and you’ll receive $50 after you deposit $100 or more into your brand spanking new account. Who doesn’t like free money. 😉
Let’s face it – The person that will care the most about your money is you.
You’ll need to save up a good chunk of money before you buy your first rental property.
Note: I understand that there are full of resources out there about the “no money down” strategies. However, no matter how you purchase it, it’s always smart to have a reserved fund prepared and ready to be used in case anything happens. Hope for the best and prepare for the worst. 🙂
Step 2: Find Out How Much You Qualify For
Now that you’ve got your finances straight. It’s time to see how much “real estate” you can actually afford.
As a real estate investing beginner, you’re most likely going to be getting your loan the conventional way. That is through a mortgage broker or visiting one of the big banks in Canada.
If you do this, you’ll need to make sure your credit score is looking good because banks will be looking at your credit history to determine whether or not they want to lend you the money.
You’ll need to provide banks with information about your annual income, assets, and liabilities. So if you have any unpaid consumer debts, I would suggest that you get rid of your debts to get a better chance of approving for more.
Having a trustworthy mortgage specialist is essential as a part of this process. If you don’t know one, ask around for a referral or interview a few on your own.
Personally, I find that getting a recommendation from your friends or family is better than you trying to find one on your own. This way the mortgage broker is already aware that you’re a referral from their existing client or someone they know.
They’ll work harder for you because they don’t want to embarrass the person who referred them. See what I’m saying. 😉
Step 3: Do Your Real Estate Investing Homework
I know you don’t want to hear this, but seriously, you have to do your homework! Real estate investing is not complicated to understand compared to the stuff we’ve learned in school!
If you ask anyone that knows me personally, you’ll probably hear that I’m all about real estate investing. All. The. Time. I breathe, eat, and sleep real estate. 🙂
Okay, just kidding… Maybe? 😛
So, what kind of homework should you do?
Start by learning about the different real estate strategies that are available and find the method that works best for you. If you don’t know what they are, then start your research.
Personally, I like to invest using the buy and hold strategy.
Then you can learn all the important real estate investing terms and formulas so you can learn to do the math correctly.
Here are some sites and books that I found helpful to me before I bought my first rental property:
- Bigger Pockets: This is an awesome site to learn from, especially when you’re just starting out. They have so much useful knowledge and resources on there. All Free! Not even joking! Yes, I know it’s an American site. But honestly, a lot of the ideas/strategies work in Canada too. Also, look for their podcasts and start listening to them. Instead of doing a ‘Netflix and chill’, why not do a ‘BiggerPockets and chill’ instead!?
- Financial Post: Being a Canadian real estate investor, you always want to keep up with all the latest financial news in Canada. This site tells you exactly that! There are things about real estate investing, personal finance, stock market news and more. Most importantly, it’s really interesting to read too.
- Rich Dad Poor Dad by Robert Kiyosaki
- Think and Grow Rich by Napoleon Hill
These resources gave me the courage and knowledge that I needed to begin my journey. So, I highly recommend these if you just need that extra push to get yourself started!
On top of that, learn from the mistakes of other investors so you can start your own journey like a pro!
Look for real estate investing apps to save time and analyze properties on the go.
Also, You should grow your network; learn to meet and mingle with other like-minded individuals. Yes, I know this is an introvert’s worst nightmare. Being an introvert myself, this is something that I haven’t mastered too!
However, I do try to be open-minded and network whenever I get the chance to; meeting the right person can do wonders for your investing career.
Step 4: Find A Mentor
When looking for a mentor, you want to find someone who has way more experience than you. You want to find “The Yoda” of all real estate investing.
Someone who can guide you along your journey. If you’re lucky enough to know someone like that around you, you should take this person out and pick their brain, like yesterday!
On the other hand, if you don’t know anyone that qualifies to be your mentor yet, don’t worry, me too!
A mentor can be a “virtual” mentor as well. Someone that inspired you from a book, podcast or even a blog post! Some mentors who have inspired me are Grant Cardone, Robert Kiyosaki, and Mr. Money Mustache.
All of them have taught me so much from real estate investing to personal finance. Every time I feel a slight defeat, I look to them for inspiration.
Learning from your mentors can motivate you to do great things.
So stop making excuses and start finding a mentor who inspires you to succeed!
Step 5: Find A Location To Invest In
In the world of real estate investing, finding a location to invest in can be an intimidating thought. If you’re just starting out, I definitely recommend investing somewhere close to where you live. Pick somewhere that you’re familiar with and comfortable to invest your money in. Think of it as looking for a permanent home for your money. 🙂
Here are some of the main criteria that I look for when buying a rental property:
- Future Jobs, Opportunities, and Developments
- Unemployment Rate
- Population Growth
- Vacancy Rate
- Rent Prices
- Crime Rate
- Property Taxes
These are some key points to start your location hunt. Once you’ve picked the location, there are many other things to consider as well, such as a good property manager, contractor, real estate agent, or lawyer. When you get to that point, you want to find someone who is just as motivated as you are; preferably someone who is a real estate investor as well.
Step 6: Practice Analyzing Real Estate Deals
Here are some examples of the types of incomes and expenses that you should consider when doing your analysis:
- Income: rent, garage rental, coin laundry, or any income that your rental property brings in each month.
- Expenses: property taxes, mortgage payments, insurance, property management, maintenance/repairs, vacancy rate, any type of utility rentals, utility costs, strata fees or any expenses that your rental property is costing you each month.
Now that we know what type of incomes and expenses a rental property might have, let’s understand what cash flow means.
The cash flow is the amount of money that is left after you’ve deducted all monthly expenses of the rental property. This is where the monthly passive income comes from.
As you can see here, there are way more expense items listed than incomes. This should be a sign to tell you that surprises are bound to happen at any time.
You always want to be aware of this when analyzing any rental property. Be conservative with your numbers, because you’d rather be underestimating the cash flow than underestimating the expenses. Try to find out as much information as you can before you start analyzing any deal.
Not giving themselves enough room to prepare for worst case scenarios, is one of the reasons why some people go into negative cash flow.
I wrote a post here describing all the
Step 7: Get Out There And Take Action!
This is the last step and the most important! While it’s easy to obtain knowledge about owning a rental property in this information age, unfortunately, most people stop here.
Now that you’ve done steps 1 – 6, you need to start applying this knowledge and turn it into action. Start looking around for properties to buy and try putting some offers down.
Don’t worry about your offers not being accepted or whatever. Just go out there and try it.
You’ll soon realize that it doesn’t matter how many deals you’ve looked at, you just need to find the one that works!
The #1 thing that I’ve learned from other real estate investors is that even if you do fail somewhere along your journey, the experience that you gain from it will be an even greater lesson than anything you can learn anywhere else!
Keep practicing and when the right opportunity comes, you’ll be able to grab and hold onto it with confidence. I know that the fear of failure can be scary, but the feeling of success makes it all worthwhile in the end.
Hopefully, these steps gave you some insight and encouragement to start investing into your own wealth. Try focusing on your own expenses and savings first before you start looking into anything else. Real estate investing is not a “get rich quick” scheme, it will take a lot of time and patience. So do your research, educate yourself and just be a sponge and absorb knowledge from all directions. 🙂
Once you’ve picked the location that you want to invest in, analyze as many deals as you can. Look for properties that have cash flow first before you start speculating the appreciation gain.
Remember, cash flow is easier to predict than appreciation; appreciation doesn’t give you passive income, so if all else fails, you still have cash flow backing you up. Always be conservative with the expenses and have a reserve fund prepared for each rental.
Finally, be ready to take action and actually buy a rental property once you’ve found a good deal. Don’t be afraid that you’re going to fail, just get out there and start investing into your own wealth now!
What are your thoughts? Do you have any questions?