SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Why Real Estate Investing

How I Got On the Real Estate Path

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When I speak with high school kids about getting a part-time job, I give them all the same advice: find a job waiting tables.

The restaurant industry is like a career boot camp. The skills needed to wait tables are integral to every field and transferable to any dream. Restaurant servers have to be experts at customer service, relationship building, time management, multitasking, delegating, and so much more.

That’s where my story starts.

I was 17 years old waiting tables with a fire in my belly and the motivation to GET OUT. I had built a great client base of recurring customers. One of the best tips that I ever received came in the form of a book—given to me by a married couple who owned their own business. The book was Rich Dad Poor Dad by Robert Kiyosaki.

Let me be honest; I hated that book.

I read it in a day expecting to eventually get past the endless parables, metaphors and imagery. I wanted direction. I wanted a to-do list. I wanted someone to tell me what to do, when to do it and how! So, I threw the book to the side, but the seed had been planted.

A few years later, my mother’s home fell into foreclosure. I couldn’t help but remember Kiyosaki’s lesson of homeownership being a liability not an asset (unless it creates cash flow).

I attempted to buy my first home at 21, knowing that my mortgage would be cheaper than my rent. My income from waiting tables, coupled with fresh student loan debt, didn’t help my chances. The loan fell through right before I was set to close.

So, I waited until I had job that could be directly deposited. I saved, and I studied.

I found a neat little house to rent well within my budget. When I met with my landlord to sign the lease, I took the opportunity to ask him a slew of questions. He was kind enough to answer them and provide a couple of book recommendations.

I started checking books out of the library. I took my landlord out to lunch. I attended Real Estate Investor Association meetings. I went to seminars and deals tours. I found co-workers with rental properties. I signed up for alerts from all of the appropriate websites, and here I am.

All of these experiences, and so many more, coalesced to carve out a path for me in real estate. Don’t get me wrong, I did my share of digging and paving.

But the path is there if you want to find it.

The Time Is Now To Get Into Real Estate!

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Right now there is almost a perfect storm for real estate investors.  If you are thinking of getting into real estate investing and becoming a landlord there is no better time than now.  Real estate is currently on sale and mortgage rates are at the lowest points anyone has ever seen!  Even better, rents are on the rise because more and more people can’t purchase a home and are there fore forced to rent.

If you are thinking about becoming a real estate investor, I can’t emphasize enough how good the conditions are right now.

If you have been thinking about it and you want to jump off the fence and get into real estate investing here is what I would do.

  1. Do your homework.  Learn about real estate investing.  What are the major expenses and how will you handle them.  Join a local REIA for expert local advice.  Get this book for some real expert advice.
  2. Pick a place to farm as I explain here.  You need to start out in someplace you know and someplace you can get to rather easily.  Find a place and get to know it like the back of your hand.  Learn what properties rent for and what they are selling for so when a deal comes along you can run your numbers quickly and grab it.
  3. Get your money lined up.  If you have your own funds, great!  If not, you should go and talk to a mortgage broker about setting up some investor loans.  If you have good credit and income, it can be done.
  4. Look at buying foreclosures.  Foreclosures are everywhere right now and can really be priced right because banks can’t get rid of them fast enough.  There were over 4,000 in my area just this year alone!   Plus, with a foreclosure there are many other advantages that Richard, Jo and I talked about here.
  5. Once you find a deal, jump on it!  You have done your homework, plowed your farm and have some money lined up.   These conditions will not last forever.

Trust me, in a few years you will be wishing you had bought more real estate.  Like my friend Richard says “Don’t wait to buy real estate, buy real estate and wait.”  That’s great advice!

There Is No “Right Way” In Real Estate

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My last post was about analyzing a good buy and hold deal.  In it I went through many of the criteria that I look at in evaluating if a potential deal is a good one or not.

A fellow investor and friend of mine read the post and we then had an e-mail discussion on a couple of the points.  He pointed out some of the criteria he uses and the logic behind his methods, which were very sound.  I did the same.

He is quite successful and good at what he does and it got me thinking that there just is no “right way” to do this business.  And that is one of the things that make the real estate investing business great.  As an investor, you can mold the business to fit you, or your customer’s needs based upon expectations or experiences.

However, you have to start somewhere.  You can go it alone if you want to, but I don’t recommend it.  If you are just starting out or fairly new to real estate investing here is what I suggest:

  • Read all you can on real estate investing, business and entrepreneurship.  Even if the subject is not real estate, you need to get your mindset to that of a real estate investor and an entrepreneur.
  • Join a local reia to network with other local investors.  The price of admission will be rewarded back to you many times over.
  • Buy a few of the more respected “Guru” courses.  As I said you do not have to go it alone and you should not.  Some of these gurus have already invented the wheel and will provide you a sound base to get started that again will reward you many times over what you initially invest.  Some of the gurus I have invested in include:
      • Mike Butler
      • Alan Cowgill
      • Robyn Thompson
  • Once you do the above get out there and get a few deals under your belt!  You have read the books, bought the courses and attended the reia meetings.  Now do it!  There is no better teacher than experience.
  • Once you get a few deals done, then you can begin to modify and refine the techniques you have learned to fit your particular niche.  You may want to focus on a particular area, or a particular form of real estate for example.
  • As you become more and more experienced, you can begin to write your own business systems for your particular circumstances and who knows, maybe you become the guru.

Whatever you do, remember there is no “Right” or “One” way to do real estate investing.  There are so many different deals in so many different areas with so many different customers that the sky is literally the limit.

Until next time work smarter not harder!

Is That a Good Buy and Hold Deal?

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Buy and hold deals are my favorite kind of real estate deals.  They provide you with monthly income and generate long-term wealth.

 

With buy and hold deals, cash flow is the name of the game.  The deal must generate positive cash flow.  A property is not a deal if it just breaks even.  It is not a deal if you have to write a check to cover expenses every month.  You want to collect checks, not write them!   Do not bet on price appreciation.  Appreciation is a nice benefit to get, but it is almost completely out of your control.

 

So how do you determine if a property will generate positive cash flow?  First, you need to determine how much potential income a property will generate.  Most of the time income equals rent, but there could be other sources of income such as utility and vending income.  For now, let’s keep it simple with rental income.

 

Expenses are more varied.  Let me list those:

 

  • Most of us need to borrow money to acquire the deal (if you do not, good for you!).  So your first expense is your principal and interest payment or the cost to borrow other people’s money.  This is the one major expense that we as investors have control over on the front end.  This control comes in the form of the price we can offer for the property.  Too high a price will skew the principal and interest costs up turning a potential deal into no deal.  Remember you make money in real estate when you buy.  So buy them right on the front end.
  • The second expense is property taxes.  Be sure you include everyone who can add a little piece to your bill.  Where I am today I just pay city and county taxes.  I recall living in Fort Lauderdale, Florida where there were no less than six or seven different taxing authorities.
  • Property insurance is third on the list.  The cost of this expense will vary depending on your location.  These first three make up the major expenses and are sometimes collectively referred to as PITI (Principal, Interest, Taxes and Insurance).
  • Repairs and maintenance are next.  Something always needs to be fixed and there is routine maintenance such as keeping the yard cut, raking leaves, cleaning gutters, painting, etc.  Budget approximately 10% of your gross rents in this category.  In other words, if monthly rental income is $1,000, budget about $100 per month for repairs and maintenance.   It will not always be exactly $100 per month.  Some months will be higher and some will be lower but over the course of time 10% is surprisingly accurate.
  • Vacancy is another expense you will have.  Your rental unit will never be 100% occupied 100% of the time.  If it is not occupied, it is not generating any income and you still have to pay the bills.  So a good rule of thumb is again to budget about 10% of your gross rental income towards a vacancy credit.  Depending on your location and market, this number can be higher or lower.  Use your own experience and expertise and adjust accordingly.
  • Utilities should also be figured into the deal.  There may be house electric meters or it may be common for the landlord to pay for water in your market.  Market conditions will vary, as will rates.  Some properties for example will be charged residential (lower) rates while others will be charged commercial (higher) rates.  Make sure you know your market and your rates.
  • Reserves are an expense that more and more bankers are asking about these days.  Reserves are funds that you set aside for those big future expenses such as roof replacements.  A lot of banks got burned in the real estate bust because landlords did not budget for this (among other things) and left the bank holding a ruined property.  If you are going to borrow bank funds, show them that you are going to set aside 10% of gross rents for future major repairs.  Plus it is nice to have that money there when something major happens (notice I said when not if).
  • Other expenses could include trash removal, homeowner association fees, advertising, professional fees (for lawyers and accountants), license fees and other various taxes.  These types of expenses will all vary depending on your local laws and market conditions.  Sometimes I just throw in a miscellaneous category of about 2.5% gross rents just to be safe.

 

Once you have determined your potential income and expenses for a particular deal, you can then list them to determine the potential cash flow.  Let’s say I am looking at a single family house that will rent for $1,000 per month.  The owner is asking for $50,000.  Is that a deal?

 

I always look for at least $150 per month positive cash flow after all expenses outlined above are paid.  I will also have to pay 7% interest with a 20 year amortization to borrow $50,000.  Those terms make my principal and interest payment $387.65 per month.

 

Let’s outline it.

 

Income (monthly)                                                $1,000

 

Expenses (monthly)

Principal and Interest                                        $387.65

Taxes                                                                    $50

Insurance                                                            $30

Repairs/Maintenance                                        $100

Vacancy Credit                                                    $100

Utilities                                                                 $0

Reserves                                                             $100

Misc.                                                                     $25

 

Total Expenses (monthly)                                 $792.65

So is this property a deal?  You bet it is.  Using the numbers above this property should generate a positive cash flow of just over $200 per month.  Not to bad.  If you buy 10 of these type properties they would generate $24,000 per year in positive cash flow.  What could you do with that extra money?  This positive cash flow is why buy and hold deals are my favorite deals.

Podcast – Your Real Estate Journey

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My latest podcast where I along with Jo Garner and Richard Scarbrough talk about beginning your real estate investing journey and some of the things you should consider if you want to get into real estate investing.  Originally aired on AM 600 WREC on 1/7/2012.

 

 

5 Financial Reasons to Invest in Real Estate

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Fourplex apartments can be a great cashflow generator.


You have probably heard that real estate is a good investment.  You may even know some people who are active investors.  You may even be thinking yourself that you should get into real estate investing (you should be).  But have you ever thought about why real estate is such a good investment.  My friends and fellow investors Richard Scarbrough, Jo Garner and I briefly went over the reasons why on the radio this past Saturday.  Since we were constrained by time, I thought I would share some more detail.  Be sure and read through for a bonus at the end of this post.

 

There are financial and non-financial reasons why real estate is a good investment. I’ll go through the top 5 financial reasons today and save the non-financial reasons for a future post.

  1. Cahsflow is KING in the real estate investing world.  Cashflow is income from the property such as rent, less expenses including principal and interest payments, insurance, property taxes, 10% repair credit and 10% vacancy credit.*  For example, if monthly rental income is $1,000 and your monthly expenses total $850, that leaves a monthly cash flow of $150 or profit per month. Cashflow is King!  Are you beginning to understand the beauty of real estate?  All of your expenses are paid by your tenants.
  2. Leverage – Leverage simply means having the ability to use other people’s money (OPM).  Think about how you purchase real estate.  You purchase it with a loan or mortgage.  That is using OPM.  You can even purchase real estate with no money out of your pocket, entirely using OPM!  Even better, your first purchases will often utilize a low, fixed interest rate payable over thirty years.  What other investments allow you to do this?  What if you wanted to buy some gold coins (you should be doing that as well, but that is another post)?  Would a bank lend you the money to buy gold?  How about stocks or bonds?  The answer in general is no.  You would have to come up with 100% of the purchase price to buy any of those other investments.  Leverage is a huge advantage for real estate investors.
  3. Monthly Mortgage Paydown – Owning real estate also allows you to build wealth every month.  Every time you make your mortgage payment, some of that payment goes to interest and some goes to principal.  The portion that goes to principal is just like putting money in the bank.  Every month you owe a little bit less on the property and have little more equity on your balance sheet.  Plus, remember who is paying it down for you, your tenants!
  4. Federal Tax Savings – We all know that Uncle Sam takes a chunk with income taxes while allowing fewer and fewer deductions.  Real estate investing is one of the few methods that can actually bring your earned income down to zero!  Yes, zero so you pay little or no federal income taxes.  Now, I’m not doing anything illegal and do not suggest you do either.  However I do take every legal deduction available and there are many.  One of the best is something called depreciation, but that’s another post for another day.  Want to learn more about the tax benefits of real estate investing?  I suggest reading this (Nolo’s Every Landlord’s Tax deduction Guide) book.  (Please note that I am not a CPA or professional tax advisor.  Please consult an appropriate expert before completing any investment decision.)
  5. Appreciation and Equity – You may not think that this applies today with the recent real estate boom and bust.  But part of the art of being a real estate investor is finding the good deals, deals where equity and appreciation are still available.  They are out there.   Find one and get instant equity when you close.  Plus, we are pulling out of this recession and while real estate still has to hit bottom in some areas, it will eventually start to appreciate slowly once again.

 

There you have them, the top five financial reasons why you should invest in real estate.  And here is the bonus I promised.  With any other investment vehicle, such as stock, bonds or precious metals, you might get one, maybe two of these financial benefits.  Owning real estate gives you all five.  There is no other investment vehicle that gives you all of these benefits.

 

I’ll blog again soon about the non-financial reasons to invest in real estate.  Until then, work smarter, not harder!

 

* As a general rule of thumb, always allow for a vacancy credit and a repair credit equal to 10% of the gross monthly income.  If a property’s income is $1,000 for example, then the vacancy and repair credits would be $100 each.