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356 pages, Kindle Edition
Published June 1, 2020
CHAPTER 1 WHY I LOVE RENTAL PROPERTIES
Why Rental Properties?
1 Ability to purchase with leverage
2 Ability to hustle for greater returns
3 Ability to manage investment directly
4 People always need a place to live
5 It has worked for millions of people before
6 Fairly stable and predictable
7 Incredible variety
8 Simple and straightforward. Just learn the strategies!
9 You can buy below market value
10 Insider trader is legal
11 Not having to be present to make money
12 Unlike house flipping, which takes advantage of only forced appreciation, with rental properties you can capitalize on all four of real estate’s major profit sources (the four wealth generator), which are:
1 Appreciation: which could be natural or forced. The problem with relying on appreciation is what happened in 2007! “There is no denying the incredible role appreciation has played in investor’s lives, but there is also no denying the risk involved in relying on appreciation to make a profit,” especially when the market is appreciating like crazy.
2 Cash flow
3 Tax savings
4 Loan paydown: “You can automate part of your wealth building by simply obtaining a loan on your rental property and using the income from your tenants to pay that loan down each and every month.”
Downsides of Rental Property Investing
1 Building wealth takes time
2 It can be all consuming
3 You have to deal with difficult people
4 It involves paperwork and bookkeeping
5 You can lose your investment
How Much Money Does One Need to Invest in Rental Properties? In simple terms, enough to cover your down payment and reserves.
You can use leverage (loan) for your down payment. However, the more leverage you use, the greater the risk you may be taking. So think "How secure you are" instead of "What is the percentage of leverage."
Reserves? Do NOT forget cash reserves to cover any problems you might face. The author recommends starting with six months of expenses for each unit you have.
To Quit or not to Quit?
1 Rental properties build wealth slowly so quitting your job soon through rental properties will be tough.
2 Real estate investing can be a job or an investment. Which do you want? “House flipping and real estate wholesaling are jobs. Owning rentals is an investment.”
3 Even if you can quit, should you? If you do so, you lose compound interest and exponential growth, which means the earned money is reinvested again in more assets. You will live off and lose the second wealth generator, cash flow. However, there are two ways to live off your cash flow, there are two ways:
1 The “cash flow per door” method. In simple words, “after all the bills are paid each month, how much money is left over per unit?” And how many units you need to survive.
2 The “return on investment” method. You look at the return on investment and the annual cash flow you want to retire with to know the amount of cash you should invest. Use the following simple formula: Annual Cash Flow / Interest Rate = Cash Invested
CHAPTER 2 THE FIVE KEYS TO RENTAL PROPERTY SUCCESS
Think. Study and learn. Pick the right plan. Acquire assets. Manage them.
CHAPTER 3 FOUR SAMPLE PLANS
The author discussed four strategies to build wealth through rental properties.
CHAPTER 4 THE TEN MEMBERS OF YOUR REAL ESTATE TEAM
2 Mentor/Accountability Partner. Your mentor should be your friend, not a paid coach.
3 Real Estate Agent. They will help you with the listed properties, not the “for sale by owner” properties. Most real estate agents are terrible and will not help you. Build a relationship with a great agent. “Never rely on an agent to make decisions for you.”
5 Contractors and Handymen
7 CPA (Certified public accountant)
9 Insurance Agent
10 Property Manager
CHAPTER 5 ANALYZING A RENTAL PROPERTY
You need to understand the numbers and do the math. Never let anyone else do it for you. The two most important factors when analyzing a rental property are:
1 Appreciation. It is the equity gained as the property value increases.
2 Cash flow
Before You Analyze a Rental Property you need to know:
1 Cash Flow
1 Calculating Income.
2 Calculating Expenses, which include: Mortgage, taxes, insurance, flood insurance (if needed), water, sewer, garbage, gas, electricity, HOA (home owner’s association) fees (if applicable), snow removal, lawn care.
The following four expenses are difficult to calculate and thus “we need to look at those numbers as percentages and translate those percentages into dollar amounts.”
Vacancy: Know the typical vacancy rate. Let’s say it is 5% and the property rents for $1,000 per month, “you simply multiply $1,000 by 0.05 to get $50. This is the amount you will want to include for your vacancy expense each month.”
Repairs: The author assumes repairs to cost around 5% to 15% yearly.
CapEx: Estimate how many years the expensive “big ticket” items will last and how much they will cost and then divide these out by the number of years. CapEx is almost the same for cheap and expensive properties. “What this means is that CapEx is much greater percentage of the income, the lower the property value.”
Cash-on-cash return on investment (CoCROI)
It is a “simple metric that tells us what kind of yield our money is making us based only on the cash flow (ignoring appreciation, tax benefits, and the loan pay down).
CoCROI = Total Annual Cash Flow / Total Investment
Two “Rules of Thumb” That Might Help. The following rules are not strictly accurate.
1 The 50% rule. “A rental property’s expenses tend to be about 50% of the income, not including the mortgage P&I payment.”
Cash Flow = (Total Income x 0.5) – Mortgage P&I
2 The 2% rule. “[It] is simply the ratio between rental income and purchase price. ‘Meeting the 2% rule’ means that a property’s monthly rental income must equal 2% of the purchase price or greater.”
Monthly Rental Income / Purchase Price = X
However, the percentage (2%) is not fixed and it depends upon several factors.
Steps to Analyze a Property
Step One: Figure Out Total Project Cost
1 Purchase Price
2 Purchase Closing Costs: “Included might be loan points, loan origination fees, prepaid insurance, prepaid property taxes, title and escrow fees, recording fees, attorney charges, and other fees custom to your area.”
3 Pre-Rent Holding Costs: “These costs will likely be the mortgage, taxes, insurance, and utilities.”
4 Estimated Repairs
Step Two: Figure Out The Financing and Total Cost Out of Pocket
“We [need] to determine how much the financing on this property will cost us each month.” The down payment percentage is based on the purchase price alone. It will not cover the closing costs, pre-rent holding costs, or the repairs. Total Project Cost – Loan Amount = Total Cash Needed
Step Three: Calculate the Monthly Mortgage Payment
Use a mortgage calculator. You need three numbers:
1 Loan amount
2 Loan period (length)
3 Interest rate
Step Four: Determine Total Income
Step Five: Determine Total Expenses
Step Six: Evaluate the Deal
Now we have all the numbers we need. We will determine the cash flow and the CoCROI it represents. However, take into consideration that this CoCROI “does not take into account the fact that the loan is being paid down each month, that the home has some incredible equity build in (since we did a slight rehab on it), and that there may be other tax benefits to go with it, or that would at least minimize the tax we would need to pay on the property.”
CHAPTER 6 INVESTING WHILE LIVING IN AN EXPENSIVE AREA
When you compare two deals together, take into consideration the “price relativity,” purchase price vs rental income.
Long-Distance Rental Property Investing
It is difficult if not done correctly. The following three strategies will help in this regard:
1 DIY “Do It Yourself:” The author does not recommend this strategy to new investors.
2 Using a Long-Distance Partner
3 Turnkey Investing. “[It] is a loosely defined investment strategy in which the investor buys, rehabs, and has a property managed through a third party, usually from a long distance away.”
CHAPTER 7 TYPES OF RENTAL PROPERTIES
The author discusses the different types of rental properties.
CHAPTER 8 LOCATION, LOCATION, LOCATION!
Properties and neighborhoods are classified into A, B, C, and D because of their location, which is affected by: Crime, drugs, schools, jobs vs unemployment, population growth, housing starts and building permits, transportation, proximity to local businesses, price-to-rent ratio, vacancy rates, and property tax and insurance rates.
CHAPTER 9 HOW TO FIND RENTAL PROPERTIES
There are eight different ways you can find investment properties:
1 The MLS, or Multiple Listing Service. It is “the collection of all homes listed for sale by real estate agents in your area.” The author’s top ten list for getting a great deal on the MLS:
2 Direct mail marketing for deals. “Direct mail is the act of sending out a large number of targeted letters or postcards to people who might be interested in selling their property … The best list you can buy and mail to is the ‘absentee’ list. This means that the person on record for owning a property does not actually live in the property you can find and purchase these lists from companies such as ListSource.com or MelissaData.com.” Repeat sending to the same list!
3 Driving for dollars.
4 Eviction records
5 BiggerPockets marketplace
6 Craigslist. “[It] is an online classified section where it is free to post and free to browse.”
8 Passion. Let people know of your intentions.
CHAPTER 10 WHICH PROPERTIES MAKE THE BEST RENTALS?
What to look for when you are searching for a rental property:
1 Bedrooms. Unlike three- or four-bedroom houses, “it is hard to get long-term tenants in a one- or two-bedroom house.” Tenants who rent a five- or more bedrooms have more kids, which is not good for the property.
2 Age. Older homes need more fixing and the utilities bills are higher.
3 Garage. Properties with garages tend to be rented far longer than those that do not.
4 Utilities. Choose properties that the tenant will pay for their utilities.
5 Lawn. Choose properties with small yards. Tenants will not take care of large yards efficiently.
Eight Problems [the author] look[s] for when shopping for a property that help him get a better deal:
1 The bigfoot smell. It is very easy to get rid of unless the cause is coming from a busted sewer line. This will cost you a lot.
2 The hidden third bedroom. Try, if you are able, to convert a two-bedroom house into a three-bedroom house. The jump in benefit is amazing. The same does not apply to three- into four-bedroom.
3 Ugly countertops and cabinets. It is cheap to convert an ugly old kitchen into a brand new one.
4 The bad roof. Changing a leaky roof into a new one is costly but easy.
5 M…M… Mold?! Mold is a fungus that is present almost everywhere especially places with moisture. So eliminate the moisture to eliminate the visible mold.
6 Compartmentalized configuration
7 Jungle landscaping
8 Junk, junk, and more junk
Three problems to avoid in a property:
2 Foundation issues
3 Shared driveways
CHAPTER 11 SUBMITTING YOUR OFFER
1 How to make an offer
2 The earnest money deposit
Most earnest money deposits tend to be 1% to 2% of the purchase price. It is given to a third party, not directly to the seller, who is handling the closing. So what happens to the earnest money?
1 If the sale goes through, the earnest money becomes part of the cash the buyer would be required to bring to closing.
2 If the sale does not go through, and the buyer does not have a legal reason to back out, then the deposit is forfeited to the seller.
3 If the sale does not go through, and the buyer does have a legal reason to back out, the deposit is returned to the buyer.
That is why you might need to include some contingencies in your offer, the two most commonly used are inspection and financing.
3 What should the offer include. “Every real estate offer can basically be boiled down to the who, what, where, when, why, and how of the deal.
WHO is making the offer and to WHOM?
What is being bought and for WHAT amount?
WHERE am I getting the funds? (the financing)
WHEN am I panning to buy it? (the closing date)
WHY would I back out of this offer? (the contingencies)
HOW is this all going to happen? (the fine print)
4 How much should you offer? It depends on the financials and the situation. You need sometimes to offer a low price, sometimes more than the listed price, and sometimes in between.
16 tips for getting your offer accepted
1 Work fast
2 Offer you best up front
3 Submit a letter with your offer
4 Discover the seller’s true motivation
5 Feel uncomfortable
6 All cash helps
7 Remove the financing contingency
8 Waive the inspection contingency
9 Close faster
10 Give two offers
11 More earnest money
12 Prove your pre-approval letter with the offer
13 Include an escalation clause
14 Offer to clean out the property
15 Pay the seller’s closing costs
16 Offer again
CHAPTER 12 REAL ESTATE NEGOTIATION
You can negotiate for any of the following:
2 Closing date
3 Closing location
5 Financing: Will the seller agree to carry a second mortgage on the property?
6 Closing costs: Who will pay for what during the closing process?
7 Home warranty: A home warranty is sometimes included in the sale of a home and covers certain repair items after the sale happens. This can help smooth any concerns on the part of the buyer. Will you deal include one? If so, who will pay for it?
8 Repairs: What do you need the seller to fix before you purchase the property? Will you hold them to it? Will you buy the property “as is”?
9 Credits: What about getting credits at closing toward certain repairs that are needed? If a new roof is needed, and the seller does not want to put one on before closing, could you negotiate the cost of a new roof given to you at closing?
10 Possession date
11 Items left in the property
13 Tips for Successful Negotiation
1 Be prepared to walk away. “Also, make sure the other party knows that you are prepared to walk from the deal if you do not get what you need.”
2 Know your role
3 Always get last concession
4 Find true motivation
5 Use a red herring
6 Institute a penalty when they ask for concessions
7 Stick to your numbers
8 Do not get offended
9 Negotiate with data
10 Do not be insulting
11 Let the other party feel good
12 Demonstrate why you are a great buyer
13 Ask for their lowest price, then go lower
CHAPTER 13 FINANCING YOUR RENTAL PROPERTY
Traditional methods for financing your property are:
1 All cash. When compared with getting a loan: Safe. More cash flow. Lower CoCROI and lower appreciation percentage, more tax payments. No loan paydown. Lawyers might be more motivated to sue you if you use all-cash because it is a sign that you own money. So when you plan to use all cash on your investment, pay attention to the following tips:
1 Pretend you are not
2 Use entities wisely: At least hide the fact that you own 100% of the property
3 Consider financing later
2 Conventional loans
3 Portfolio lenders
4 Private lenders
Other creative methods are:
1 Home equity: “[Your] equity can be borrowed against at very low interest rates through a home equity loan or home equity line of credit.”
3 Seller financing
4 House hacking: “[It] refers to the unique strategy of combining your primary residence with an investment.” This can be done by either:
1 A live-in flip: Buy a single-family house with the intention of fixing it up and reselling it within a couple of years.
2 A small multifamily property: Buy a small multifamily property (two to four units), live in one unit, and rent the other units out.
5 BRRRR investing (aka fix and rent or fix and hold strategy): “It combines the equity growth and quick financing of house flipping with the long-term stability and wealth creation of rental properties… The property is treated like a flip, using short-term financing such as private money, hard money, a home equity loan, or cash to acquire and rehab. Then, after the property is finished, it is rented out to a tenant. The owner then obtains a refinance on the property to pay off the short-term loan and turn the property into a stable, long-term, cash flow positive property.”
CHAPTER 14 HOW TO GET A LOAN APPROVED, GUARANTEED
The banker you sit down with (sales guy) is not responsible for approving or denying your loan. The underwriter is. So, to get your loan approved:
1 Find the banker (sales guy) who is creative and who will fight to get your loan approved. Ask some real estate agents who their preferred lender is.
2 Make your loan application pencil out for the underwriter. Lenders want to approve good deals only.
What does the bank want to approve a loan?
1 Property type
2 Property location
3 Property condition
4 Loan amount
5 Debt-to-income ratio (DTI). Two types exist: Front-end DTI ratio and back-end DTI ratio.
6 Loan-to-value ratio (LTV)
7 Credit score
8 Repayment source
10 Cash reserves
11 Recent credit changes
12 Compensating factors