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Ryan G. WrightMar 29, 2024 2:13:33 PM9 min read

How to Buy Your First Single Family Home Rental Property - Part 5 (Steps 9, 10, 11 & 12)

Today we are covering Steps 9, 10, 11, and 12 in the process of buying your first single family home rental property. This consists setting up a weekly time schedule with deadlines, how to draw money to complete the repairs, how to rent the property, and how to refinance the house into a DSCR loan to have a lower rate and pay off your hard money loan.

If you haven't watched Part 1 yet with the first three steps click here.

If you haven't watched Part 2 yet for Step 4 click here.

If you haven't watched Part 3 yet for Step 5 click here.

If you haven't watched Part 4 yet for Steps 6, 7, and 8 click here.

If you already have, watch the video below for steps 9, 10, 11 and 12:

If you want to learn more about real estate investing with me, click the button below for a quick webinar where I explain more about how all this works:

Learn More - Attend Our Next Webinar

Next, we're gonna talk about the steps that take place. The property's under contract. You've done your inspections on the property.

Now what happens next? Well, we wanna get that work done on the property. So the first thing that happens is we put a time schedule together.

Basically what this says is by week, week one, week two, week three, what is going to happen in these weeks? What work is going to be get done, which goes back to the scope of work that has been outlined and back to the contractor's general contractor's bid, and that is the plan of the work that's actually gonna be done. So we have a deadline when the work is gonna be done and a week by week. Then on a weekly basis, a walk through is gonna be happening and a determination.

Did this get done? If not, why not? And when will it get done? So that we can modify that scope of work or modify the time schedule as necessary to get the work done to end up hitting the deadline that's been established.

So that's the first thing that happens. Next thing that happens is then we start getting into initial draws or draws. The draws are how the general contractor is getting money to get that work done on the property.

There's a process for that. There's an inspection for that and some paperwork that needs to happen, and then they'll be getting money to go through that, which can happen very fast.

Once the work is complete, there'll be what's called a final draw where the property will get inspected.

After that inspection has been done, then the final draw will be going to the general contractor to pay for, the final invoice in getting the work done on this property.

Now after however many weeks that may be, you are now in the situation where the property is complete. The work is done on the property, and now we move to our next step.

Alright. With the work being done to the property, the next step that we wanna do in this strategy is we actually want to rent the property.

Now you can't rent the property without the lender's approval when you're dealing with a hard money loan. Okay? So and the payments of the rent payments need to get paid to the lender, but those will get credited to your loan. So the idea is lender doesn't wanna see you pocketing money that's going into your pocket.

Any of the money that's coming in through those payments needs to be going to lender and will get credited to your loan, which is what you'd wanna have happen. So you're going to be going out there advertising, finding a tenant. Once you find a tenant, you'll have that tenant do an application.

You'll be doing credit.

You'll be doing background checks and you'll also be doing eviction checks.

Lastly, you'll be talking to the landlords from the prior landlords to see what has happened and to get references on them. Once all of that is looks good to you, you'll put this together in a packet. You will send the packet to the lender and say, hey, I've got these guys. Everything looks great. Here's all the information. Take a look at that. If all that looks good, you'll get the lender's approval in writing or and lender's gonna say, yes, they are approved and you'll be getting information on where those payments need to be made so that you can then give that to the tenant so they can deposit funds into that account so it will be credited towards your loan that is there.

With this, you'll also be able to start looking towards the financing in the takeout financing.

At the very beginning of this process, you will have wanted to get preapproved for takeout financing.

Okay? If you haven't been preapproved, you will wanna get preapproved before you look to rent this property, because that's gonna be a prerequisite required by the lenders to make sure everything is preapproved. So the the the idea is once you get the tenant in there and they've been in there for a little bit of time, you'll be able to do the refinance and then, take over, and get the lender, the hard money lender paid off and go into a long term financing situation.

Alright. So now you've got the tenant in the property. They've been approved by the land or they've been approved by the lender. Payments are going to the lender to pay down the loan amount that you have. So the next step, you've already been preapproved for that type of a loan. You're probably doing a DSCR loan which is a debt service coverage ratio.

Typically on that, it's one point two to one, meaning the payment can't be the rent needs to be one point two times greater than the payment. So if your payment is a thousand dollars, then your rent needs to at least be twelve hundred dollars. Now with these DSCRs, I recommend getting a thirty year fixed.

I would not do any of the arms or need the funny stuff.

I wanna have a fixed rate. Maybe you could do something with interest only for a period of time but our advisors will help you with this in determining what's the right one.

So if your rent is one point two times on the DSCR loan we're not looking at your background. We're not looking at your w twos.

We're not looking at your income. The debt service coverage ratio means does the income that you're currently getting from the property, will it more than cover the payments? The answer to that is yes. And you've got the house and you've got the house rented and you've got some history of some payments there, then this DSCR loan can go through.

The DSCR loan will then pay off the hard money lender, and then you'll be making payments to the new DSCR loan. Now why do you do this? Well, because hard money loans are expensive. They're for short periods of time.

They're for taking properties that are not bankable because of their condition or closing in a fast period of time, and then you're going to something that's more of a conventional, a longer term type loan that is gonna be a much lower interest rate and is gonna save you a bunch of money from the hard money lenders. Because the hard money lenders is short term and expensive money, where the DSCR is longer term, and it's going to be less expensive than the hard money loan.

The ideal with this whole process is to get into rental properties with as little to no money down as possible. And the way that we do that is by buying the property right and by doing value add, adding value to the property that makes the property more valuable than the cost that it was for us to do that. Typically, when you're doing these DSCR loans, most of them will go up to about eighty percent of value. Maybe seventy five, maybe seventy, but somewhere in the range of seventy to eighty. So what that means, we'll just use seventy five thousand as an example.

That means that if your purchase, your rehab, your closing costs, your title fees, and all of those things can be no more than seventy five percent of the appraisal value.

Once the work is done to the property, then what you can do is what's called a rate and term refinance. What you're basically saying is, I want you to pay off my current hard money lender and they need to get their money.

They'll get paid off, pay some of the closing costs. Now if you can get all this done where you're at that seventy five percent in some cases, you can actually close and not have to bring any additional money to the table. Now that's the ideal. Does that always happen?

No. Sometimes there may be some additional funds that needed to come to the table, and that's okay as well. But what we're trying to do is to get into these rental properties with as little money down as possible. We do that by finding great deals.

We do that by executing on our rehab, doing value adds, and we do that by getting the rehab done in a fast manner so we're not building up an accumulation of costs when it comes to the hard money loan. Then, we're quickly finding the right tenant, going for our DSCR loan, doing the refinance, and getting as much as we can for that based upon the new appraisal so that we can then pay off the hard money lender and be into this property as little as possible. And now we're looking at something that's a cash flowing instrument that's gonna be bringing money in.

If you want to learn more about real estate investing with me, click the button below for a quick webinar where I explain more about how all this works:

Learn More - Attend Our Next Webinar