Are you planning to buy a property? Many real estate investors seeking cash flow decide to invest in rental properties. A tenant occupies the property and pays rent for the right to do so. Acquiring these properties isn’t easy because of high prices, the learning curve, and other factors, but it is doable for some investors. This article shows how the property acquisition process works, plus an alternative in case you want a simpler path to real estate investing.
What is Property Acquisition?
Property acquisition is the process of buying a piece of real estate. You can buy land, single-family homes, commercial properties, apartment complexes and other types of real estate. These assets have varying price points and usually require a lot of capital to get started.
How the Acquisition Process Works
Understanding how the property acquisition process works can help you save time and avoid costly mistakes. Here’s how to be prepared and confident going into your real estate deal.
Decide on Your Strategy
It’s important to decide your strategy first. Some investors want to fix and flip homes because they can walk away from the property after 1-2 years. Other investors prefer to collect cash flow through rental units. These investors want to buy and hold properties for several years or decades. You can use this simple approach to create a basic strategy, but the most successful real estate investors consider several data points.
Location is the most critical component of real estate, and the filtering options let you get more specific. Some investors target properties in locations with growing populations, declining crime rates and home values that increased by 10% or more in the past year. You can also filter your search to properties located near a Whole Foods store or a particular brick-and-mortar company. Investors can target properties in booming cities or look for properties located an hour away from the city.
Your strategy can be as simple or as detailed as you would like. It takes time to create a more detailed strategy, and it may make more sense to hand that work to professionals.
Property Search
After establishing your investing criteria, you can conduct a property search. The property search becomes easier with established guidelines since you can filter out investments that do not match up with your objectives. You can create shortlists for property types based on location, size and other conditions. Online real estate platforms like Realtor.com make it easier to find promising properties for your portfolio.
Value Assessment
Real estate investors can find multiple properties that match up with their search, but they should visit the property and do an assessment. Some remote investors hire people in the area to look at a property and provide assessments. This process would save you a lot of time, but buying properties remotely without visiting the property is extremely risky for new investors. That strategy is best for seasoned real estate investors who have already made multiple deals.
You should hire an inspector to get a better understanding of the property’s condition. Inspectors can find glaring issues invisible to the naked eye. An inspector’s analysis gives you a better idea of how much it will cost to make necessary changes and if the property has environmental problems, such as the presence of mold, asbestos, radon, lead paint and other contaminants.
Get an Appraisal
During your in-person property search, you will narrow your list of acquisition targets. While these properties may seem promising, you want to pay a fair price. Paying more than what the property is worth will limit your returns and make you more vulnerable to a correction. Getting an appraisal from a reputable appraiser can help guide your offer.
The appraiser will look at the property’s interior and exterior and come up with a price. This figure is arbitrary, which is why it’s important to work with a trustworthy appraiser. The appraiser will provide a written report after reviewing the property and send it to you shortly after. The appraisal process may take 1-2 weeks.
Put in a Written Offer
Once you feel confident about a property and your asking price, it’s time to make an offer. The offer should have the price you are willing to pay for the home, but you should not stop with this detail. A written offer should be in the form of a letter; it is more than a place to list your price and end the conversation. Complimenting the homeowner on the home’s condition and connecting with the seller based on things you saw in the home (for example, if you both like gardening and admire the plants outside, let them know). Add a personal touch to your written offer but keep it short.
Sellers want to maximize their profits from each sale. However, they are also people, and if you cater to their emotions, you could win a bidding war if you and another buyer stay firm at the same price.
Negotiate Terms
The best-written offer won’t let you avoid every hiccup along the journey. You will have to negotiate terms with the seller before acquiring the property. You and the seller may have contingencies that must be met before the property sale can move forward. You will also have to negotiate closing costs and other details surrounding the deal. A written offer with a good letter can make the negotiations more amicable and increase the likelihood of securing a deal.
Buying Properties Through Real Estate Investment Trusts
Property acquisition is a lot of work. It’s one thing to buy real estate full-time, but it’s something else to follow the steps in this process while working full-time and raising a family. You can put some of your money to work in real estate on the side even if you have a full-time job and family, but you could also tap into an easier way to get exposure to real estate.
Real estate investment trusts (REITs) let you save time by having professionals buy real estate instead. You can buy shares in REITs that invest in commercial, residential and other property types. The REIT management team does the research, buys the properties and manages them for investors. REITs must distribute 90% of their taxable income to shareholders as dividends. That type of investment lets you get the returns from real estate without doing the work yourself. You do not have to go through the property acquisition process or worry about saving enough funds to make a down payment. You could approach real estate on your own, but you might be able to generate better returns and avoid costly mistakes if you invest in a REIT.
Grow Your Portfolio with Real Estate
Real estate can make a great addition to a portfolio, but you don’t have to acquire a property to benefit from real estate. REITs make it easier to invest in real estate and generate passive income from your assets.
Frequently Asked Questions
What does acquisition mean?
Property acquisition is the process of buying a property and gaining control over it.
How do you tell if a property is a good investment?
You should first establish criteria that you would like to see in a property, such as population growth, desirable cap rate, and other factors. After creating your investment strategy, it’s easier to determine if a property is right for you.
How do real estate investment trusts (REITs) work?
REITs are managed by professionals who research, buy, sell and manage properties. These funds distribute 90% of their taxable income to investors.
About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.