At Ben Frederick Realty, we seek to provide you with the resources you need to succeed in your investment goals. Today in our video and accompanying blog, we lay out the steps you take when initiating your purchase of an investment property. As Baltimore City’s investment property experts, we help you make the right decisions that will allow you to succeed for years to come. Check out the 7 steps to buying an investment property.
Step 1: Make an Offer.
Making an offer involves signing a contract between you and the seller that establishes the terms of the purchase. It lists the sales price, the deposit, and any contingencies. The main contingencies include financing, titling, and a contingency about the condition of the property. For residential purchases, most contracts discuss a home inspection contingency. With a multifamily building, there are more aspects to be examined and expected. We structure our contracts with a study period, giving you time not only to study the property but to read and proof the leases, observe zoning, learn about city laws and codes, and look at utility costs and service costs applicable to the property. You do include an earnest money deposit to bind the contract. There may be some back and forth to edit the agreement. Then, the contract is signed and both parties begin the work of fulfilling the agreed upon contingencies.
Step 2: Book Your Home Inspection and Aquire a Loan
Because it can often take a week or more to get a home inspection, your next immediate step should be to book the home inspection. Then, you will begin the loan application process. Your prospective lender will request a variety of documents from you to initiate the loan process and determine what you qualify for. You will have to provide two years of tax returns, the prior two months of bank statements (both checking and savings), two recent pay stubs, and your social security number for a credit check. Other documents, such as credit card statements or W-2s may be requested initially, or as the process moves along. It’s important to provide any necessary documentation promptly so the loan process is not stalled. By the time closing approaches, you may need to provide updated bank statements and credit statements. Remember not to omit any pages from your bank statements. If you have other forms of income like alimony or child support, include documentation on these sources as well.
Step 3: Verify the Inspection
By now, the inspection process should be underway. The inspector will observe major items like the roof structure, windows, and doors. They will also test and check heating and cooling systems, as well as every plumbing fixture, electrical outlet, and appliance. You will then meet with your agent to review the information, and determine if you would like to proceed, or cancel the contract based on the property’s condition. In some cases, you may be able to alter the agreement with the seller to require them to make certain repairs or upgrades before the contract is processed.
Step 4: Document Review:
During the document review period, the seller will send you current lease agreements and lead certificates for you to review. Your agent will help you understand any terminology or conditions of the leases you may not understand. We can also help you verify that the lead certificates are valid. Here, the agent will verify zoning and ensure the property is in accordance with local code.
Step 5: Choose Your Titling Company
A titling company does not necessarily represent the buyer or seller. Instead, their sole duty is to ensure the property’s title is free and clear of any issues, and that you can legally acquire the property through purchase. We advised always selecting a title company located in the same jurisdiction as your property. Local title companies know the customs and nuances, as well as have knowledge of local laws and regulations. They typically can work to address issues much faster than a title company that is unfamiliar with the area.
Step 6: Choose Your Hazard Insurance
Next, start shopping for hazard insurance. If you don’t fully understand hazard insurance and how it differs from residential homeowners insurance, check out our webinar on the topic. Lenders will not lend money without a bound insurance policy on the property. Some insurance companies will want to visit the property, and insurance for investment properties cannot be bound over the phone or within an hour like some car insurance policies can be. It’s wise to shop for your insurance. Get a minimum of two or three quotes before choosing one.
Step 7: Receive the All Clear from the Lender and Titling Company
Once all contingencies are satisfied, and your lender has finished their underwriting process, you and your agent will receive word from the lender that the loan is approved and you can proceed to closing. At closing, it’s important that the security deposits and any applicable interest are transferred to you. At Ben Frederick Realty, we prepare this list and provide it to the title company to ensure all security deposits and interest are accounted for. In addition, we go over the rents actually collected to ensure you are given your share of the rents for the month. Other adjustments at closing include prorating the property taxes, license fees, and other service contracts between you and the seller. You will need to call the utility company and transfer local metering to your name. You will also have to ensure any vacant units are entered under your name, especially in the winter. On the day of settlement, you’ll sign all of your loan and title documents. You will then be given copies of the service contracts you inherit, as well as keys to the building, alarm codes, access codes, etc.
As the buyer, the day of closing goes to you. You’ll receive rent that day but you will also begin paying property taxes that day. Your contact info all be distributed to all current tenants so they can contact you about leasing information or maintenance issues moving forwards.
At Ben Frederick Realty, our goal is to help all of our clients succeed in their investment goals. We help provide you with tips about best practices for property management and how to ensure your investment stays successful. If you’re ready to expand your portfolio or are ready to get involved in property investment for the first time, reach out to the Ben Frederick Realty team today.