Easy Money: Becoming a Landlord

1-2-3’s of Becoming a Landlord

Okay, so you have decided you want to rent out your house. Welcome to the world of the land lord. Allow me to help you avoid a couple of the most common pitfalls.

• Don’t rent at a negative cashflow. This may sound like one of those “well duh!” statements, but do you really know how much rent you need to have a positive cashflow? If you said, enough to pay the mortgage – Congratulations you just flunked the exam.
  
  To get a positive cash flow, you have to add up your expenses and your debt payments and the amount you need to set aside for reserves and get more than all that in rent.

Expenses: These are the ordinary costs you have as a landlord such as marketing, insurance, taxes, utility bills, pest control, landscaping, postage, travel, and repairs. These happen on a monthly basis.

Debt Payments: This is the payments you make on the mortgage, principal and interest payments to the lender.

Reserves: This is the money you need to set aside to cover unexpected repairs and other expenses that won’t be covered when the property is not rented out (vacancy expenses). These include mortgage payments (when there is no rental income), costs to paint and put in new carpet or vinyl, a new roof, or a new heater or air conditioner, a broken toilet, or to repair termite damage.

Reserves are the first place most people go wrong when renting out a house; they don’t think about reserves.

If you can add up the rent, subtract expenses, reserves, and debt payments and still have money left over, that is positive cash flow. If you subtract out all those numbers and you end up with a negative result, you have negative cash flow. Negative cash flow is not what you want with rental property.

• Always, always, always, do a background check and financially qualify your prospective tenants. If you rent long enough, it is inevitable that you will eventually have a bad tenant. You can put that off a long time by having good management practices such as background checks, a tight lease, and qualifying your tenants financially.
  

I always check to make sure my tenants don’t have a history of drug crimes, sex crimes or violent crimes. I make sure tenants have a gross household income that is at least three times more than the monthly rent. All prospective tenants have to complete a rental application with a non-refundable application fee. If they won’t pay the fee, they aren’t going to pay the rent.

You can do a lot more in a background check if you want, looking at credit scores, evictions, etc. I don’t, because it isn’t worth all the extra trouble to avoid the few deadbeats that I might eliminate.

• Know your rights and know the tenant’s rights. Make sure your lease is very tight and grants you all the rights you have under the law. On top of that, study the rental laws so that you don’t accidentally violate tenant rights and get yourself on the wrong side of a lawsuit. Your tenants will sue you if they think they can win, and there are a lot of ways you can violate their rights without meaning to. Knowing the law on these points will also allow you to set up systems to quickly and effectively deal with tenants who fail to pay their rent.
  

I know this post seems a bit negative about renting. There are many downsides of being a landlord. You will get late night calls and weekend calls. You will make appointments to show your place and have the confirmed appointment fail to show up. You will have tenants tear up your unit, forcing you make costly repairs.

However, you will also get some great tax breaks and can even get a tax loss while enjoying a positive cash flow (thanks to the magic of depreciation). You can also have the satisfaction of providing people with a decent home at an affordable price and helping them along their way to economic freedom.

The beauty of having a residual cash flow from a rental property, having someone else pay down your mortgage for you, and having tax write offs that decrease your taxable income are wonderful things. To enjoy them, you must be willing to pay the price.

I don’t mind the troubles of being a landlord. I find the rewards are sufficient to offset the risks. But, think about both before you take the plunge.

Tom ~

Why Pay Retail?

http://www.buybelowmarket.com/

Easy Money: Why Buy Real Estate?

Real Estate is the Best Investment

Real estate has been the basis for the wealth of more millionaires than any other form of investment. This is true because real estate is probably the best of all possible investments.

You can make money and have a tax loss, legally with real estate. If your annual depreciation amount exceeds the amount of income you have from the property, it will result in a reduction of your taxable income, even though you actually made money.

Banks will lend you money to buy real estate, sometimes more than 100% of the present value of the real estate. See how many bankers will lend you $100,000 to buy $100,000 worth of stocks.

A good real estate investment will give you dividends and appreciation (growth), not just one or the other as most stock brokers will try to convince you to settle for when buying stocks. Rent payments can be the equivalent of dividends for the smart investor and in spite of the recent downturn in real estate values, the historical average appreciation of real estate exceeds the historical average gains in the stock market.

The value of real estate does not disappear overnight like it can with stocks and bonds. At worst case, if you own it, you can always go live in it. Try that with a stock certificate!

Like they say in buying stocks, the secret to making money is to buy low and sell high. In real estate, we say that money is made in real estate when it is bought, not when it is sold. If you buy low and ensure you have a positive cash flow, it is pretty hard to miss in real estate.

It is a simple formula, but a challenging one to execute. Most professional real estate investors spend a lot of time understanding their markets. They see a lot of houses for sale that they won't make offers on. They know how to tell the winning deal from a loser, because of their experience and training.

Unfortunately, the amateur investor often gets taken in real estate, just as they do in the stock market. Anyone who hopes to consistently make money in real estate investing has to be prepared to pay their dues by getting the right education, getting a good mentor, and then following directions to do deals the right way instead of trying to make it all up on their own, or improvise their own approach to the market.

Because real estate is a capital intensive field, it is easy to loose a lot of money investing foolishly. There are three ways people can profitably get involved in and benefit from real estate investing.

1) Become a private lender. Find an experienced, successful and reputable real estate investor in your area and ask him if he could use a private lender. Use your IRA, move the money in your old 401K into an IRA, or use excess cash you have parked in CDs or less profitable investments. Make it available to this investor to use. Don't try to tell him or her how to find houses or which houses to buy, but require that you get four things every time your money is used:

• A promissory note for the amount loaned, personally guaranteed by the investor


• A deed of trust on the property with your loan in the first lien position


• Lenders title insurance with you (0r your IRA) as the named beneficiary


• Hazard insurance with you (or your IRA) as a named beneficiary/lender

As I mentioned, don't try to tell the investor where or what to buy. But, do feel free to ask why she or he bought the house they did. Learn all you can from the investor and don't begrudge her or him their profits. You are getting paid to learn from them by getting a nice interest rate return on your money.

2) Become an equity partner with an experienced, successful real estate investor. Seek out this investor and tell him or her that you have a sizable chunk of money (this better be at least $500K) and you want to get into the real estate investing business. You commit to providing the capital in exchange for a 50% share of the profits on each deal you do with them.

Again, be sure to pick the brain of the investor as you do each deal so that you can learn how the investor picks the winners, how s/he acquires the property and profits from the deal. Once again you are getting paid to learn.

3) Become a professional (part-time or full-time) real estate investor. First, you will need to set aside about $30K to $50K and invest it wisely in the best real estate investing training you can find (if you ask me, I will provide a confidential list of the best I have seen and some to avoid). As soon as you complete the very first course, apply it, apply it, and then apply it some more - before you attend or sign up for any additional training. Do not sign up for any additional training until after you have worked solid for six months trying to do everything the first course taught you to do. I will make an exception for a coaching program and a mentoring program that can help you apply what you have learned. You probably should sign up for those right away and work them for everything they will give you during that six month startup period.

After you have successfully used your training to buy and profit from three to six deals, then it is safe to go back in the water to sign up for additional courses.

In another post I will discuss the perils of real estate training and how it can distract you from making money.

Of the three ways I mention above to make money in real estate investing, the first two require the least amount of time and effort. The third, even if you do it only part-time, requires a tremendous amount of work, dedication, persistence and applied knowledge. The rewards are greater and so are the risks. Decide for yourself which approach suits you.

If you would like more information on:

1. How to be a private lender see the Investors page of www.BuyAHouseBelowMarket.com.


2. How to become an equity partner, contact me directly at tsheppard@adbproperties.com


3. How to become a successful real estate investor, keep reading these blogs or contact me directly at tsheppard@adbproperties.com

Tom ~

Why Buy Retail?

www.BuyAHouseBelowMarket.com