Step-by-Step Process to Passive Income in Real Estate

I remember the first time I bought a rental property and how little I knew about the passive income real estate transaction process.  The excitement was almost overshadowed by how uncertain and nervous I was about all the steps of the process to get the property rented.

Thoughts came into my head like:

• Would I buy a money pit?
• Would I be able to get a renter?
• Would I overpay for the property?
• What if the tenant destroys the place?
• What if I lose money?

I'm sure these ideas thoughts have gone through your mind at some point too.  These thoughts can turn into fear and inaction if you do not educate yourself to get past these fears.

Making Monthly Passive Income from Real Estate

Now, I personally make over $250 from each and every property I buy in passive income and monthly cash flow.

The great thing is that is not hard to actually make passive income in real estate because it is all addition and subtraction. Add up all your expenses, subtract that from your income, and that is your profit in passive income from real estate.

Here is the formula: Rental Income – Expenses = Passive Income Profit

By educating yourself, you will have the knowledge to get you past each step and hurdle.

For me, this was all new and something that I needed to learn myself.  I educated myself and figured out each step of the process so I would make as few mistakes as possible.

The good thing is that, if you have ever bought a property for yourself to live in, you have done 3/4 of the work before.

Buying a rental property is just about the same steps as buying a home but with a few small differences.  If I can get my first rental property with all the fears and excuses I had, you can too!

Let's look at how you buy a rental property from beginning to end step by step and make passive income.  The process is not complicated but there are many steps to understand and follow. It is important to follow each step and learn the process included in each one of the steps in order to not lose money on a deal.

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We will start from the very beginning of the process to the end where you are making money every single month with real estate passive income from the rent received.

Here is a diagram of the real estate transaction process from beginning to end.

The Process of A Real Estate Transaction to Cash Flow

Now let’s look at each one of these individually and dig deeper to what these mean.

Locate and identify the potential investment property

The first step is to find a property among the hundreds that are currently listed for sale in the area you would like to start investing.

There are a few ways to start looking but the quickest is to go to Zillow and search for the type of property that could looking for. I suggest looking for three bedroom two bath single-family homes, with over 1400 square feet and has a two-car garage.

The price range should be between $80,000-$120,000. These types of properties will rent well and bring in a good cash flow each month with the current interest rate that you can get with a single family home.

Evaluate the potential rental property 

Now, single-family homes are valued based upon comparable sales in the area of like properties.

So to find the value of a property you are looking at, you want to find another home within a 2 mile radius of the subject property that has the same amount of bedrooms, bathrooms, and square footage.

By doing this you see what somebody else paid for the property and see if the asking price on your deal is a reasonable price or not.

Zillow does a decent job at finding these comparable sales for you.  It compares like homes to yours and gives you their opinion of what the value should be.

I have found that the Zillow values are on the high end, meaning they value the property a little higher than most appraisers would.

Remember one of the reasons why we buy real estate is that we can buy a property below market value and instantly gain equity in the property.  This is because we make money when we buy the property and we realize the money when we sell it.

Obviously it’s best to get as much equity you can out of the property when you buy it but that all depends on if the seller is going to sell it for less than market value.

What you need to do is negotiate with the seller and try to get them to accept an offer price less than the market value. I try shoot for 80% of the market value so I instantly gain 20% equity in the property.

The example below shows that if you buy a property with the market value of $120,000 for only $100,000 you will instantly make $20,000 in equity because you bought the property cheaper than what it was worth.

Market Value  $120,000
Asking Price  $118,000
Negotiated Purchase Price  $100,000
Money Made When you Bought the Property $20,000 

There are also other things that come into factor like the rehab costs which also eat into your equity because the purchase price plus the rehab costs equal the total amount to get the property rented.

Your equity capture is the market value of the property minus the purchase price minus the rehab costs.

If you fix up the kitchen, flooring, bathrooms, paint the walls, and do other things that make the property worth more you will increase the value of the property.

The example below shows that if you buy a home for $100,000 and you put in $25,000 to fix it up, the new market value will go up. Depending on the market the value can go up quite significantly.

In this example you see the new market value is $180,000 because similar homes that are up-to-date like this one are selling for the same amount.

The comparable sales of these other properties raise the value of your home because of the rehab you did on the home. With rehabbing the property you have forced the appreciation of equity to $55,000! This is on top of the monthly real estate passive income you make each time the renter pays their rent.

New Market Value   $180,000
Purchase Price – $100,000
Rehab Costs   – $25,000
New Equity from Forced Appreciation Through Rehab   $55,000 

Analyze the numbers and make sure the property cash flows in passive income from real estate

This sounds like a hard thing to do, but in reality it really only is elementary school math at play here. The only caveat is if you can account for all of the expenses and income properly and anticipate future expenses that may eat into your cash flow.

What it comes down to is income minus expenses equals a positive or negative cash flow. If the property rents for $1000 per month and your expenses are $1200 per month, you will lose $200 each month just by owning the property because of negative cash flow.

Now if your property rents for $1000 a month and your expenses are only $750 per month, you make $250 per month positive cash flow.

There are many expenses that you will come across. Here is a list of a few you will encounter: accounting, advertising, reserve funds, electricity, insurance, management fees, pest control, repairs, poverty taxes, security services, lawn care, utilities, and other miscellaneous items.

It is important to make sure that you find all the expenses for the property itemized out so you can analyze the deal accurately and not buy a bad property.

You can find my FREE rental property cash flow calculator on my website which will do all the analysis of any deal for you.

You also want to make sure that you understand what it’s going to cost to fix up the property in order to get rented. You may want to bring in a few different contractors and get multiple bids for the repairs.

It is wise to know what it’s going to cost to fix up the property before you buy it. Trained professionals like contractors know what to look for that a new investor would not know about.

Contact the owner and negotiate an agreement with them 

This can be one of the more scary parts of the transaction process. It’s always hard to approach someone you don’t know and ask them if they would be willing to sell you their property for less than market value. But the more you do the easier it will get.

This is the part where your personality must come out and show them that you are a credible and honest person that is willing to help them in any way possible.

If they are willing to sell, you need to agree on a few things and have them put into a contract.

Purchase price, inspection period, escrow length, concessions and or contingencies, and other items that you discuss and agree to.

The owner may be willing to carry a note on the property and basically be the banker and you pay them the mortgage each month.  There are many other questions and items in the contract you need to discuss. That is in our more advanced course.

Create the contract on the agreed upon terms & the contract with the seller 

Once you negotiated with the seller all the term of the contract, you then need to write it up and have them sign it ASAP.

By doing this, you are locking up the property so no one else can buy it from underneath you. There are many different types of templates for contracts in the seller property.

I even used a template I got off the Internet for the first property that I bought. It worked out just fine and those contracts are easy to find. Check my resources page for sample contracts for you to use.

Open escrow with a title company 

Now it’s time to get a third-party involved in the deal. A third-party is somebody that’s impartial to the deal and has experience in the escrow process.

There are many title companies that do this and it’s up to you to find one that you are the seller both can agree upon.

Escrow basically is where the title company receives your contract that is signed by both parties, and holds both parties to said contract.

The title company will then do a search for any liens or encumbrances against the property, making sure that the property does not have any obligations like an outstanding mortgage or overdue taxes.

If the Title company signs off on the property, they issue you title insurance to cover any issues they may have missed while doing the search.  This insurance is there to protect you in case the Title company does not do the job right.

Satisfactory inspections on the real estate

Now that escrow is open it is time for you to start your inspections of the property to make sure that you’re buying a sound property. Inspections that you will probably want to have done are: home inspection, termite inspection, flood inspection, roof inspection.

There are other inspections you can possibly do if you’d like but these are the typical inspections you should do. There is an expense involved in doing these inspections but in my opinion it’s well worth it to do them.  I do not want to buy a property that I will have to put in tens of thousands of dollars into it because I didn’t pull out of the deal when I should have.

Satisfy all necessary contingencies 

There may be contingencies that you and the seller agree to in the negotiation process. Some contingencies may include a financing contingency, insurance contingencies, selling of a current home, appraisal, and basically anything that you and the seller agree to.

You can ask for just about any type of contingency you want but it’s up to the seller if they want to agree to those contingencies. It doesn’t hurt to ask for a contingency if it might be necessary to have.

For example, if the property is in a flood or tornado zone it might be good to have a contingency stating that the sale is contingent on you being able to get adequate insurance for the property.

These contingencies will make sure your real estate passive income is not a loss by spending lots of money on fixing items later.

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Work with the title company to close escrow 

Once the title work has been done and no liens are against the property and all inspections and contingencies are accounted for, it is now time to sign the escrow papers that the title company creates.

Both the seller and the buyer sign the escrow papers itemizing all of the closing costs as well as the terms of the deal.

That title company will then receive your money that you are required to pay the seller, and distribute the proceeds of the sale to the seller. The title company will also create a deed of sale and record it with the local county recorder making the transaction public record for anyone to see.

Once the deed has been recorded the property is now yours and you are ready to start rehabbing the property.

Make ready rent – rehab the real estate for passive income from tenants

Now that you have the keys to the property, it is time for you to get in there and rehab it. If you doing the work yourself you will save a lot of money but there is a lot more work on your shoulders to get done.

Doing the work yourself will also take longer than if you got a good contractor who will work on your property quickly and efficiently.

A good contractor will work hard for you to get the property on the market and ready to rent as soon as possible. Be sure to account for the rehab costs when you are buying the property so you don’t run out of money before you have the ability to rent it.

Find a renter for your property

It is now time to put the property on the markets for rent. There are many different ways to find renters and depending on your market there are different ways for finding tenants.

In some markets craigslist.com is the perfect way to find renters, and in other markets is better to hire a realtor who matches a tenant to a property because that is the way the tenants find places to rent.

Be sure to look at the market and take into account the proper amount of marketing budget you need for the property.

I always have my property managers find the tenants, show the property to them, sift through all the applications, and present the best options to me.

I then have the final say and I run a background and criminal check on all tenants that I choose to have live in my property. In the past, I was cheap and tried to save $30 per tenant by not running the background, criminal, and eviction check.

I eventually realized that by running these checks on prospective tenants, I am able to weed out tenants that would possibly move out of my property quickly. It is expensive to evict a tenant.

Here are some costs you may incur: Eviction Fees, Attorney Fees, Writ Fees, and cleaning up the property.  Don’t forget the loss of rents for that time that the property is not rented.

I found that by spending $30 on a background check it saves me from many evictions that cost upwards of $1,000 $,1500 in total costs.

I was so glad that I did a background, criminal, and eviction check on one lady who had been evicted four times of the last three years. That’s $30 possibly saved me $1500 that I would had to a paved three months later after she stopped paying her rent and I would had to of it is evicted her.

I strongly encourage you to always run a background, criminal, and eviction check on all possible tenants.  Go to my resources page to find good places to do background checks.

Sign the lease agreement with the tenant 

This is another item that I let my property manager take care of. He meets with the tenant, has them sign the lease, pay the first month’s rent, and the security deposit.

Once he has all these done he gives the tenant the keys on the designated date of the move-in. If they move-in in the middle of the month you pro-rate the rent for each day they lived there to the next month.

So if they move in on June 15th, there are 15 more days in the month for them to pay rent for.

If they are paying $700 a month for the rent, you divide the monthly rent ($700) by the days in the month (30) days which gives you $23.33 per day. The daily rate times the amount of days the tenant will live there equals that month rent.

So 15 days times $23.33 equals $350 to move in with 15 days left in the month. Many times you will get tenants that are leaving their previous place they were living in on the 31st and move into yours on the first of the month.

Make positive monthly real estate passive income on your money 

If you follow these steps and bought the property right you will be making a monthly return on your investment.  This is from the passive income from the rent received minus the expenses for the property. Remember that the monthly rents are only one part of five different ways that you can make money.

Conclusion

Now you have a general idea of the real estate transaction process and how you can make money from rental properties.  These steps are just the beginning of understanding how to make passive income with rental properties.  I encourage you to sign up for my FREE 7-day Investing Course.  In it, I'll show you how to make passive income with rental properties.

How are you coming along with your rental properties?  Please leave me a comment below with your thoughts! I love to hear them!

Oh Ya, Here is the screen shot of $25,000 coaching I mentioned in the podcast!

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