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4 Fascinating Reasons Why You Should Love Debt

Reasons to Love DebtMost everyone hears the word debt and quickly judges it to be bad, and it is…sometimes.  Too much debt can make or break any person financially, but what about too little debt?  Too little debt can stagnate any investment return, no matter what kind of investment.  

For example, let us say that you have $10, 000 personally invested and have borrowed $90,000.  Pretend the $100,000 makes 8% per year and at the end of the first year you made $8,000, with debt service being 5% of the $90k, or $4,500.  Now these numbers aren’t exact, they are just rough numbers, bear with me.  $8000 minus $4,500 equals $3,500.  

In total, you have profited $3,500 in one year with only $10k invested.  That is the equivalent of 35% return on your money and that is pretty good!  

What if all that $100k was your money though?  Then your profit is only 8% and you must invest more of your own money, only to profit less!

This article is not meant to entice you to take on new debt and go buy a new car or new smartphone.  

That debt does not make you money.  

Let me say it again, because if you take anything away from this article, it should be this.  

Do not take on debt that does not make you money.  

More Debt Means More Leverage

Take a quick mental list of your assets.  Did you list your home (if you currently own one)?  Yes? No?  Now, ask yourself, which of those ‘assets’ make you money.  Do any of these assets produce cash, that you can use on a regular basis somehow?  Your home does not make any money until you sell it (or if you rent part out).  Chances are, the only true ‘asset’ listed, is some kind of stock market or retirement account.  

If you are like the majority of the middle and lower socioeconomic class, you have a fair amount of consumer debt.  Consumer debt being regular credit card debt, car payment, etc.  There are all kinds of methods to reduce debt all over the internet, including in the blog from the screenshot above.  So, we won’t get into that.  Instead, we are going to focus on how debt can make you money.

The more debt you have, the more capital, or money to spend, you have.  Therefore, you have more buying power, also known as leverage.  If you want a more in depth look at leverage, it is explained here.  You must buy assets that make you money if you take on more debt.  This is not to say you should over-leverage yourself.  That will only lead you down the wrong path.

Debt Helps Purchase Assets You Couldn’t Afford Otherwise

Going back to the first example, let’s say you don’t have $100k, but you do have $10k. It has taken you absolutely forever to save $10k and is quite the precious sum of money to you.  How do you decide what do you do with it?  

Where you are in life, this decision could go different ways.  If you are about to have your first child, you may spend it on baby items.  If you have teenagers, this could be sporting equipment for them.  You get the idea.  If your first idea was to go into a large amount of debt, you may be a special kind of crazy.  

Just kidding!  That is what some of the best investors and brands in the country do.  They find the best way that their money can make more money.  

Debt allows you or your business to purchase much needed equipment or services, but you must purchase assets.  This cannot be stressed enough.

We can wish right...

Debt Forces You To Be Organized

We all know that kid, just out of high school or college, that buys the nicest car possible before they move out of their parents’ house.  We also all know that this kid made a dumb financial decision.  Having bills that are due on certain days of the month helps the debt owner either be on time or risk have their credit screwed up.  

No one enjoys a car payment, but you should have a car payment for every car you buy, under one condition.  If the loan’s interest rate is lower than the interest rate you could get from investing that money instead.  For example, if you buy a car that costs $20k and you put down 10% or $2k.  You are financing $18k at 5%, for easy numbers.  Let’s say you invest that $18k and it makes 10%.  That means that you are making 5% of $18k or $900 per year that that money is invested.  Since a typical car loan is 5 years, you are making $3,879.11 over that 5 years.  

Or you could just spend $20k on a car.

New car and about $4k in profit for your $20k or just a new car?  It’s a no brainer.    

Organization

Debt Reduces Risk

Ever heard the term ‘diversification’?  This is the same principle.  By using debt, you are diversifying your exposure to risk.  If this is used correctly, you can mitigate the adverse effects of an investment gone bad.  You will have an investment go bad.  

Even Warren Buffet has had bad investments.  The reason that he can stay in business and stay profitable is because he correctly calculates his risk.  

Through this correct calculation, he can endure the tough times of low profits when other businesses and investors cannot.

Conclusion

Debt is not for everyone.  Some people just cannot organize themselves in such a way to manage it effectively, but you can learn!  Maximizing profits from all investments is what every investor ever has tried to do.  They wouldn’t be an investor otherwise.  It stands to reason that if you have more money, you can make more money, due to compound interest.  

So, if you don’t have more money, borrow it.  Learning to be comfortable with debt is sometimes the most difficult part.  

Personal story time.  My grandfather told me a few years ago, that he had not financed anything since the 1970s.  I was flabbergasted.  I had no idea he had that kind of cash.  Now, he isn’t rich by any means, but he is comfortable.  

This approach is and wasn’t the most intelligent approach, if your goal is to make the most money possible.  If he had financed even half of his purchases, his net worth would have gone through the roof over the years.  He didn’t have good debt or bad debt.

Too much unsustainable debt is bad debt.  There is no doubt about that.  Make your debt make you money and you will be able to retire when you want.  

Good luck and if you have any questions, leave a comment or email me at Feedback@PlusFourZeros.com. Thanks for reading!

Learn what I did wrong or right from My Journey in investing, real estate, and rental properties OR check out other articles on my Blog.

-Trey

Posted by Trey Stevens in Blog, Investing, Random, 0 comments

9 Overlooked Steps That Make a Rental Property Profitable

Profitaility steps for rental property used by the professionalsRental property and real estate are lucrative side gigs and/or full time jobs. The problem is that countless number of people jump in with both feet, without doing any research whatsoever. They buy rental property or rent out their first house and end up losing money because they aren’t doing the small things right. If you can’t increase revenue, that you should decrease expenses. It is a basic business principle that especially applies to rentals.

Profitability is not a small feat. To use toddler vocabulary, real estate is hard. Loads of people fail. Focus on being a professional and minimize your losses. Winning big is fantastic, but consistent profitability, even during hard times, is what keeps a business afloat.

decrepit buildingThe Age of The Property

Property age is a piece of the pie that many buyers look past and shouldn’t. Your maintenance costs are directly linked to it. The older the building, the more upkeep you should allocate per year towards it. Ideally, items like lead paint, asbestos, galvanized pipes, and knob and tube wiring are fixed before you purchase.

There is a chance that a previous owner just hid these items and played dumb on the property disclosures. It is a BIG no-no to do, but people do it. Don’t let yourself get screwed over if you can help it. Hopefully your home inspection will find these items, but they can be missed.

YouTube has some great videos detailing these costly items and what to look for to find them.

Utilities: Tenant paid or owner paid

You may not think this makes a big difference, but if you have a multi-unit property, this can get expensive. Tenants do not care how much your energy costs are and they will do family members’ laundry in your machines, using water and electricity you paid for. Tenants will take long showers. THEY DO NOT CARE, unless they are paying for utilities.

Their world changes if they pay utilities. They take better care of everything better for some reason or another. It’s weird, but maybe they get more of a sense of ownership for their place of residence.  Still don't believe the profitability behind it?  Check out what Bigger Pockets has to say.

Coin Laundry

If your units do not have laundry hookups in the units, but have a shared laundry space, use a coin laundry. This will recoup most of the cost of the water and electricity to run them. Also, tenants run fewer loads, so your washers and dryers last longer.

Most cities have a coin laundry service that will put their machines in your property and pay you a certain amount based on their usage. They charge a fair amount. Financially, you are better off buying your own coin operated laundry machines. They are only about $600-$1000 for decent machines and these will pay off in the long run.

FrugalityProperty Taxes

Property taxes vary widely based on which part of town or which town you are in. On one property, they may be $2000 per year, but across the city, the same type of property may have to pay $4000 per year.

It is best to check the county auditor’s website before you purchase. That is extra money in your pocket every year, so long as the rents and everything else are the same. Taxes suck, don’t pay more than you must.

Neighborhood

The perfect property is different to each person. A few items are the same though. No one wants an area with more crime rather than less. A high crime area can be profitable, but it can also be disastrous. A questionable neighborhood can go bad in a heartbeat and this can make your rents go down. The higher the crime rate, the lower the rents. The inverse is also true.

An up and coming neighborhood is great, if you buy at the right time. It can make your property appreciate, but that is not something that you should plan on happening. A rental property should not be counted on to appreciate. You may disagree, but it is better to be pleasantly surprised rather than disappointed.

There are some useful crime maps out there and Trulia.com has one integrated with their listings tool that can be used, even if it isn’t quite perfect.

Zillow.com is a controversial and not always accurate site, but it can be used for certain things. See Bill Gassett’s article explaining more in depth as to its inaccuracies. Zillow is terrific for listing open apartment units you may have open, but is not perfect when it comes to its appraisal estimate or Zestimates.

Bill Gassett

Size of Each Unit

The size of each apartment or unit makes a difference in your bottom line for a few reasons. Obviously, the rents are more expensive cause the units have more room. Less obviously, this means that you are hopefully dealing with people who are slightly more established in their lives, since they can afford more space.

Along the same line of thinking, this tenant may take care of your place slightly better than a tenant who’s thought is, “well, it’s just a cheap apartment.” This is not to say there aren’t exceptions to every rule/guideline, because there are, but the chance that you may have less maintenance is a risk you should take.

Insurance

Property insurance is a necessary item for everyone, but how much you spend and on what amount of coverage is completely different. Only you know what amount is best for your situation. There is one certainty, more coverage is better when you have the unexpected happen.

For example, the first rental property I purchased, is in a flood zone. I bought flood insurance. Within 6 months of purchase, there was the worst flood in the area for at least 50 years. My building did not have water in it at all, but only by mere inches. I am never that lucky, except that one time…  No one gets that lucky.

Buy more than you need! You may pay an extra 40 bucks a month, but it is worth it to have it when you need it.

Increasing Rents

No tenant enjoys a rent increase, but at a minimum, rents should keep pace with inflation. This means that each lease should increase at the same rate, which is typically around 3 % per year. Few owners keep pace with market rent rates like they should because they are afraid to lose a tenant. Having to replace a tenant can be costly and it is sometimes better to keep the rents a little lower than market to keep a long-term tenant.

Now this is not always the case. If a unit can go for $100 more per month, but you have long-term tenants that you do not want to scare away, what is the best solution? The best solution depends on your goals.

One solution can be to increase the rent by a fair amount, maybe $40-$50, but not too much as to scare anyone away. A second option is to increase the rent by the full $100, but only on the worst tenants. This accomplishes one of two things: either they pay the full $100 difference or they leave and you get a better tenant paying the full $100 difference. It is a win-win for the property owner.

Vacancy Rate

Raising rents has a habit of increasing the vacancy rate, because again, no tenant enjoys rate increases. Once you have a plan and raise rents in small increments, ideally your vacancy rate will be more predictable. Make sure you do your best to keep good tenants as best as possible.

You want the quiet, pays their rent on time, doesn’t destroy your property kind of tenant. They are hard to find and the happier they are, the happier your bank account will be also.

A tactic that you can try to use is to attempt to place people that are of similar demographic closer to each other in the property. This is not to say that you can discriminate in any way, because that is highly immoral and illegal. Think more along the lines of putting the little, old ladies closer to each other and not next to the loud and boisterous twenty somethings. It helps keep the peace within the property and keeps the vacancy rate lower.

IRR Calculator

Conclusion

Being in the black is not guaranteed. Countless people buy real estate for use as rental property, own it for a couple years, and sell it because they are losing or have lost money. Maximizing your return on investment now, compounds greatly the longer you hold onto a property. For example, see this rental property calculator. The more knowledge you have, the more profit you can make. This is why real estate investment associations (REIAs) are vital to attend. Membership is usually about $100 a year, and most will let you attend one meeting for free so you can see for yourself how valuable it is.

Knowledge is not the only item you should gain from these. Networking should be your other goal. You may meet someone, get along great, and they may speed up your learning or tell you helpful hints for your market. You never know who you may meet until you go. Just last week, I ended up sitting next to the person who runs the National REIA (I really did)! Now, for full disclosure, the National REIA’s headquarters are in my city, but you may meet a big shot investor or guru. Go to the meetings!

Good luck and if you have any questions, leave a comment or email me at Feedback@PlusFourZeros.com. Thanks for reading!

By Trey Stevens

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Posted by Trey Stevens in Blog, 1 comment

8 Scalability Strategies For The Budding Real Estate Mogul

Scalability Strategies

 

Scalability makes or breaks a real estate and rental property business.  If your budding empire does not have the correct systems in place, you will spend more time and money for mediocre results.  Here are some strategies to use to expand your status as a rental property mogul.

 

Daily To-Do Lists

It sounds simple.  It sounds lame, but billionaires swear by the daily to-do list and we can all agree they are doing something right.  Why not you? Create your to-do lists at the end of the day before, so that you can come in in the morning and get right down to business.  This is key for scalability.

An added benefit to creating your next day’s to-do list at the end of the day is that you know what you did and didn’t get accomplished in the current day.  If you wait till tomorrow, you may have forgotten what you were working on the day before and that makes sure tasks are not forgotten.

 

Create A Monthly And Yearly Maintenance Schedule

Property managers and management companies work for their own interest above all else typically, yet your business relies upon or will rely upon them in the future. Make sure they know where your priorities lie regarding property maintenance.

The better your properties are taken care of, the less headaches you will have.  Items such as yearly boiler maintenance, sweeping out common areas, and clearing exterior drains are perfect examples of what should go on a monthly or yearly maintenance schedule.  

 

Identify Areas That You Spend The Most Time On Per Month

No one can tell you where you spend the most time, so keep track of where you are spending your hours and how many hours you are spending in spreadsheet.  You do not have to buy Microsoft Excel, there are plenty of free options such as Open Office, Google Docs, or if you have a Mac, it is on there for free already.  

Tracking your time allows you to identify where and when you should hire an employee, or if you should.  If you are going to grow, you will need employees at some point.  

 

Create Systems Based On What You Identify To Automate Your Time

Force multiplier is a term that you should apply to your business.  A force multiplier is any item that expands the amount of work you can do with the same amount of effort.  The goal is to be as efficient with your time as possible.  Henry Ford made the assembly line.  You need force multipliers.

These force multipliers can be anything.  It can be hiring a company to take all tenant phone calls and open tickets for each one.  Instead of taking every call, you can focus your effort on the tenant with the water leak over the tenant with the broken cabinet door.

A property management company is the most vital AND detrimental force multiplier to your business.  Choose wisely.

Make And Keep Track Of All Business Contacts

You can do this on your phone, spreadsheet, word document, or via Rolodex, but do it.  Who was that friend of a friend who was a plumber that did great work with good rates?  If you do not keep track now, you won’t have their info when you need it most.  

It doesn’t matter if you do not think you will even ever use them, but keep track in case you do.

Learn To Delegate

Delegating sounds easy, and it should be, but it is not.  When you have put countless hours of your blood, sweat, and tears into a business, giving employee or employees a job to do and seeing them do the job slightly different than you can pain you to your core.

You will nitpick and micro-manage left and right if you are not careful.  No employee wants to feel their boss’s breath on their neck.  I hate it, you hate it, so will your employees.  Hire the right ones, so you don’t have to do it.

Delegating may be the hardest part of scalability for the developing business.  Your employees will screw up at some point.  How you as the boss react to their screw up determines how your employees will react to the situation as well.  If you scream at them and throw a tantrum, you will get the same reaction in return.  

Imagine an employee does something the wrong way and costs your company a ton of money.  The employee is normally a great employee, except for this once. Countless companies would fire the employee immediately.  What does this accomplish?  If you keep the employee, you can be assured that they will never make the same mistake again because it was such a huge mistake, but if you fire them and hire a new person, the new person may make the same mistake.

This is not to say that if they make a ton of mistakes all the time, not to get rid of the employee.

Make And Keep Track Of All Business Contacts

You can do this on your phone, spreadsheet, word document, or via Rolodex, but do it.  Who was that friend of a friend who was a plumber that did great work with good rates?  If you do not keep track now, you won’t have their info when you need it most.  

It doesn’t matter if you do not think you will even ever use them, but keep track in case you do.

 

Learn To Delegate

Delegating sounds easy, and it should be, but it is not.  When you have put countless hours of your blood, sweat, and tears into a business, giving employee or employees a job to do and seeing them do the job slightly different than you can pain you to your core.

You will nitpick and micro-manage left and right if you are not careful.  No employee wants to feel their boss’s breath on their neck.  I hate it, you hate it, so will your employees.  Hire the right ones, so you don’t have to do it.

Delegating may be the hardest part of scalability for the developing business.  Your employees will screw up at some point.  How you as the boss react to their screw up determines how your employees will react to the situation as well.  If you scream at them and throw a tantrum, you will get the same reaction in return.  

Imagine an employee does something the wrong way and costs your company a ton of money.  The employee is normally a great employee, except for this once. Countless companies would fire the employee immediately.  What does this accomplish?  If you keep the employee, you can be assured that they will never make the same mistake again because it was such a huge mistake, but if you fire them and hire a new person, the new person may make the same mistake.

This is not to say that if they make a ton of mistakes all the time, not to get rid of the employee.

 

Use Technology

Today’s entrepreneurs have more free technology than ever that they can use to expand their business.  Find computer programs, websites, and mobile applications that increase productivity.  Try looking on websites such as ProductHunt.com that showcase new applications every day.  

It is not enough to find these applications.  You need to actively educate yourself on how to use them and strangely…you should actually use them.  Paper and pencil are items of the past in terms of increasing productivity.  

https://www.producthunt.com/

Allow For Adaptation In The Future

If your real estate and rental property business is to survive for long, you will need to adapt at some point.  Your focal point now, may not be the same focal point in the future.  Allow for some flexibility.  

For example, right now, your business could be focused in single family homes, but three years from now, you may want to shift gears to go after large apartment complexes.  Structure your business in a way that allows you to shift easily.  

 

Overall

Scalability is vital to a growing rental property business.  Can you say you have ever met a successful startup with enough manpower?  Probably not…  Use these strategies to create force multipliers that allow for better efficiency.  Each business is different and there is no one answer to be successful.  Good luck!

Good luck and if you have any questions, leave a comment or email me at Feedback@PlusFourZeros.com. Thanks for reading!

By Trey Stevens

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Posted by Trey Stevens in Blog, 0 comments

Overcoming The Fears of Getting Started in Real Estate

Overcoming the fears of getting started in real estate and rental properties

Anyone in real estate has gotten over the fear of getting started. For most, there are two overwhelming fears: that you may lose money and that you just do not know enough about it. Here are a few fears of getting started in rental property and real estate and some ways to overcome those fears.

 

From http://dollarsandsense.sg/here-is-why-losing-money-in-investing-can-cause-you-to-lose-even-more-money/


 

Fear 1: You will lose some money eventually

Let me let you in on a little secret, everyone will lose some money at some point in real estate. No one is perfect. If you know someone that hasn’t, I want to meet them. The idea is to minimize the losses when it does happen. Loss mitigation can save your business and you should plan as best as possible.  Fear is a necessary part of the business, and if you are not fearful in some way, you will lose you shirt.

And you are behind the screen yelling, “How am I supposed to know how to plan to minimize my monetary losses?!” The answer is research. It is not the answer you want to hear, I know. How many successful company founders do you know that do not understand their business inside and out with their eyes closed, while riding a unicycle going backwards?

None. No founder succeeds by sheer dumb luck. You already know that. I am not telling you something that you do not already know. Business founders all are extremely knowledgeable about their business in some facet. You should be also.

 

Fear 2: “…but I don’t know enough about real estate”

“Well I do not have time to do research…” you say. And I answer you with the statement, “It sounds like you just do not want it bad enough.” I worked full-time, went to school full-time, and started my business. Not only that, I was able to exceed in all three and educate myself about real estate. Bragging is not my intention, it is my sincere attempt to motivate you by saying it is possible.

I made time. You can as well. Instead of looking at social media, read a book, read a real estate blog, listen to an audiobook or podcast on the way to work. Work through the fear and educate yourself.  Find a way. My point is, it is possible to educate yourself while also living an extremely busy lifestyle. Read while waiting to pick-up your child from an event or sports practice. Watch one YouTube video per night. You would be surprised at how much you can educate yourself in a short amount of time.

 

One hat, two hat, red hat, blue hat

From education comes the self-confidence to know you are making the best decision possible. In cyber security, there are terms such as white hat, black hat, grey hat, blue hat, etc. These describe hackers and specify their intentions. White hats are the good guys, black hats bad, you get it. Similarly, a real estate entrepreneur and investor must wear several hats at the same time. A CEO hat, an accountant hat, a project manager hat, you name it and you will have to wear it.

Research anything even somewhat related to real estate. The more hats you can wear successfully, the more valuable you are to your business. You will probably not be able to hire out everything you want to at first and still turn a profit.

Mortgages are one item that you should focus your research on. Financing is where you can lose a lot of money that could have been reinvested. In the long run, you want every penny to be reinvested.

Different types of real estate deals are another element to educate yourself on. Straight options, lease options, wholesale deals, fix and flips, etc. You should know what these are or do at least in theory. Knowing the specific details of each will come eventually, but it helps your confidence to understand them in concept.

Find a mentor

If you are able to spare some time, find your nearest real estate investors association. They usually have meetings once a week or so and are an extremely great way to meet like-minded investors who can guide a beginner. In my experience, most all are happy to help a beginner for free. If possible, buy a few of them lunch. Who wouldn’t accept a free lunch? It is an inexpensive way to learn and you may have a few mentors out of it.

Finding a mentor is key. Just because you do not know everything right off the bat doesn’t mean you can’t learn from the best. Show your appreciation to them and you will have the finest kind of learning there is, without making all of the beginner mistakes.

A website that may assist in your education is Bigger Pockets. They have all kinds of helpful articles on everything real estate and rental properties. Investopedia is another good site, and it has more than just real estate knowledge. Pick your niche or read everything, it is up to you. The real challenge in real estate is that it is so vast that you don’t know where to start. Why does it matter where you start? It is where you finish that counts. Just start your education, it does not matter what subject within real estate.

Education is a cumulative endeavor. Broaden your horizons and jump into the vastness that is real estate investing. The more you surround yourself with like-minded people and knowledge, the more you will absorb. You can do it, you just have to say you can.

National REIA

By Trey Stevens

Feedback@PlusFourZeros.com

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Heck, tell me what I did wrong by writing me at Feedback@PlusFourZeros.com.  No one is perfect, and if you see a flaw in my plan, let me know.

Posted by Trey Stevens in Blog, 0 comments

Why People Don’t Get into Real Estate and Rental Properties

Windows

Attention grabbing sentence! Generic comment attempting to draw you in to the main point of the article from an umbrella statement. Ever so cliché statement or quote from someone only somewhat famous because the quote fits well with the topic or real estate and rental property.  Rhetorical question?  No one likes this crap, but it works… Without further ado.

The common, unambitious person has three major reasons why they do not get involved in real estate and rental properties.  And they are all obvious!

 

1. “I don’t have enough money to get started.”

Learn to manage your money and lower your standard of living.  You do not need cable.  You do not need a smartphone; a flip phone will do.  Find a roommate.  Do odd jobs for extra cash and pile it away.   Learn to manage your money and lower your standard of living.  You do not need cable.  You do not need a smartphone; a flip phone will do.  Find a roommate.  Do odd jobs for extra cash and pile it away.

There is no shortage of money out in the world, and if you are even halfway competent, you can find a job.  Not enough money is not an excuse.  If you want it bad enough, you will find a way to make it happen.

Let me let you in on a little secret, unless the silver spoon was placed in your mouth at birth, winning the lottery is not in your future.  Force the money to come.  Work your ass off at your job to get promoted.  Even a 25-cent raise helps.

 

2. “There is not enough time in the day.”

That is why property managers exist. Yeah, they are parasitic vermin at times, but what insanely successful person in rental properties takes the tenants phone calls day and night? Why not pay someone to do this job? “But, I bought a rental property and can’t afford one.” Then you chose the wrong property.

Absolutely have a property manager. It makes all the difference because it allows you to keep your full-time job if you have one. Not only that, it keeps you from getting burnt out with it once you have a few.

Scalability is critical once you reach a certain point and that point will come sooner rather than later if you do it correctly. It also allows you to create systems that save time in the long run, increasing profitability.

 

3. “What if X happens?”

Don’t be that guy that only says, “what if, what if, what if.”  Come up with solutions to each what if scenario.  There really should be a gif of Biff Tannen and Marty McFly on this section when Biff calls Marty a chicken and Marty turning around.  Warning, cliché coming… Hope for the best, plan for the worst.  Or if you are an Eagle Scout, like myself, you have the “Be Prepared” motto just about ingrained.  If you have a plan in your head, write it down.  Don’t be that guy that only says, “what if, what if, what if.”  Come up with solutions to each what if scenario.

There really should be a gif of Biff Tannen and Marty McFly on this section when Biff calls Marty a chicken and Marty turning around.  Warning, cliché coming… Hope for the best, plan for the worst.  Or if you are an Eagle Scout, like myself, you have the “Be Prepared” motto just about ingrained.  If you have a plan in your head, write it down.

Write it down:

Write down each situation and come up with a solution that keeps your rental property business alive.  For example, I am never going to allow all my properties to be managed by the same property manager or management company.  They will be split up into two or possibly three groups.  The reasoning for this is so that if one company does a poor job and makes me almost unprofitable, I still can make money from the other properties until I can change the unprofitable ones over to new management.

It is an odd solution, but after you have a property manager almost ruin you, you will plan for it.  This is not to say that at a certain point that I will create my own property management company or hire a personal property manager, because that is on the plate.  You get the point.  It is an odd solution, but after you have a property manager almost ruin you, you will plan for it.  This is not to say that at a certain point that I will create my own property management company or hire a personal property manager, because that is on the plate.  You get the point.

 

Excuses, excuses, excuses

The excuse that you have a family and “just can’t risk it” is a terrible justification.  How is taking control of your future finances riskier than working at one job?  Your company and boss could layoff/fire you tomorrow.  It is far more financially perilous to not have another stream of income.

People skip out on buying real estate and rental properties because of lack of money, lack of time, and from being afraid. All three reasons can be solved with elbow grease and a little sacrifice. You must force yourself to be successful. No one is going to do it for you.

 

By Trey Stevens

Feedback@PlusFourZeros.com

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Posted by Trey Stevens in Blog, 0 comments

How To Choose A Multifamily Rental Property

Multifamily

Multifamily rental properties are a great way to build your experience, cash flow, tolerance, and overall rental property portfolio without spending a ton of personal money.  If you do it correctly, they are self-sufficient from a money standpoint and will allow your business to grow, with just one initial investment.

Multifamily: Residential vs Commercial

We must define what a multifamily property is. A residential multifamily is a property that has between 2 and 4 units. A commercial rental property has 5 or more units. Typically, people do not call properties with 5 or more units a multifamily, but you may see it. For now, we will stick to how to choose a residential multifamily property, because they are much easier to finance for the beginner investor.

When examining a residential multifamily, there are three main items that you should take the most heed of: monthly positive cash flow, price, and location. If you are like me, your overarching goal is to make money. Price is where just about everyone starts and stops. If Property A is listed at $120k and needs $10k worth of work, but if Property B is listed at $140k and is perfectly turnkey, how do you choose? This assumes they gross about the same per month.

Depends

What you choose depends on your situation, and everyone’s situation is different, but I can provide some example scenarios. If it is your first property and you have absolutely no money, there is only one choice, Property B. This is because you will not have the cash to do the repairs. Cash flow is king and you would not have any if you chose Property A because of its deferred maintenance costs. Yes, this is not the best choice in the long haul from an investment perspective, but it is your only choice.

If this is your second property, you may still have to choose Property B. It is all about return on investment. You must determine if the $10k is better spent on fixing the property or putting the money towards the next property. Sometimes it is better to spend a little more, if it means buying another property faster. Let me give you an example.

Bigger Pockets

Check out Bigger Pockets for definitions on the different property classes

Be Smart

My father is the type of person who does not want to pay someone else to do a job that he can do and this is a commendable trait. This personality will lose him money. Plain and simple. If he can perform a $100 an hour job and he chooses to mow the grass, which is a less than $100 an hour job, he has lost money. It pays him to pay someone to mow the grass, if he can work elsewhere making that $100 an hour.

This is the mentality you must have if you want to expand and expand quickly. This is not to say not to do some of the work yourself when getting started. The concept of leverage is one that you will have to master if your goal is to have more than a few properties. Planning your next step is often more important for scalability goals.

Leverage

Investopedia has a great article on the concept of leverage. It has to do with more than just real estate and rental properties, but it is worth the read. I cannot tell you how many people I have met at real estate investors meetings that buy a few properties and stop, because they do not know how to leverage properly or cannot get themselves organized. Enough of this tangent, let’s get back to how to choose a property.

http://www.investopedia.com/terms/l/leverage.asp

Deferred Maintenance: What is it?

Deferred maintenance is the cost of fixing any repairs that have been neglected from the previous owners. Determining the amount of deferred maintenance needed, and the fix-up price that the maintenance entails are arduous tasks if you are just getting started. If you are not well versed at this, you will need to learn how. There are some great YouTube videos out there, but if you want more depth, consider seeking out courses on insurance adjusting or property appraisal. Both will be helpful.

Educate Yourself

Insurance adjusting looks at the cost of replacing specific items and there are several certifications and licenses that you can study, even if you never plan to get the license. Second, learning how professionals appraise properties will help you judge the worth of a property more accurately.
These two are surefire ways that you will know you are correct in your pricing models.

Personally, my father is a licensed insurance adjuster and sold items such decks, roofs, windows, siding, etc. for over a decade, so I have someone who I can bounce ideas and prices off of and be confident of its accuracy. This is a luxury that most do not have. If you have any questions on this, post a comment or send me an email and I will do my best to help.

What should I look for?

Some items that you should look at when buying the property are items that have the higher cost to fix/replace or the items that can cause future issues, such as the foundation, outside grading, roof/gutters/downspouts, any current or prior water leaks, termites, and mold. Personally, I also try to look only at brick buildings (less maintenance than siding) and dislike flat, rubber roofs.

Foundation issues are not something you want to deal with, they are expensive. If it has a basement, look at the walls to see if it has any cracks and if there is any separation between them or sliding. Horizontal cracks are usually the worst, whereas vertical cracks on the corners of the building aren’t unusual and you should not be as worried about compared to the horizontal ones.

Water is your enemy

How the water runs off the building can be a huge issue in the future. Make sure that water doesn’t try to flow towards your building if it were to ever rain, but rather make sure the grading around the building makes the water flow away. Gutters and downspouts make a huge difference with this. Questions to ask yourself are, are the gutters large enough and are they clogged? Visit the potential property when it is raining hard if possible.

Water leaks can also be expensive. Look for signs of water leaks on the drywall or on the floor. They are usually easy to spot. There are also handheld tools that can detect moisture in drywall that you can buy, but they are somewhat cost prohibitive.

 

Home Inspection

Extensive termite and mold are two items that I do not want to deal with. Many people will put up with them, I will not and if you are a beginner, I suggest you avoid both. Of course, a home inspection will check for all of these items in depth, but you do not want to pay for a home inspection more than you have to. The more you know about what to look for, the less you will have to pay someone else. Plus, you should not want to risk your money without having some knowledge about what you are investing in.

What do you want to pay for this property? A Short Look

The second item you should look at is price. There are several metrics you can calculate to determine whether or not the price is a good deal or not. These are each just quick calculations that you can figure to quickly bypass lower quality investments. Many investors like to use capitalization rate or cap rate for short.

Cap rate

For example, let’s say for shits and giggles, that after expenses, a property that is valued at $120k nets $10k a year. 10,000 divided by 120,000, times 100 is 8.33%. That is not a great cap rate in my book and I am not a huge fan of this calculation. The cap rate does not tell the whole story. By using the cap rate in conjunction with other calculations, you can paint a better picture of the property’s value or lack thereof. Never use just one calculation.

1% and 2% Rule

A calculation that I use, and this may not work in your area, is to try to get as close as possible, or over, to the 2% rule. What is this? If a property is selling at $100k, it should hopefully gross 2% of that in rent per month, so $2,000. It would be difficult to get 2% in my market, but I get close. Some markets must use the 1% rule. Again, markets are not all the same, but in my area, this works well.

Lastly, I try to see if the property can pay for itself, from a gross rent number, in five years or less. For example, if a property is listed for $120k and the current gross rents are $20000, then the property is overpriced. There is one very big caveat with this calculation. What if the rents could be increased to make $25,000 per year? Or even $30,000? Then this property could be a good deal. Overall, these three are close to being the same calculation with minor differences, but they allow you to skim properties quickly and find the best deals.

Location, Location, Location (which is incredibly cliché, I know, deal with it…)

Most investors consider there to be four types of properties based on location: Class A, Class B, Class C, and the warzone. Class A are the luxury apartment buildings in the nice neighborhood that you would let your college age daughter live by herself, if you had one. Class B are in the neighborhoods that are in the okay areas, nothing terrible, but not fantastic. This is where I try to be when I buy mine. Class C are in low income areas with a fair amount of crime. If you buy in this kind of area, make sure you have a property manager who will manage here.

Lastly, the warzone. This is the type of place you do not want to be in in the daytime, let alone the nighttime. You will see needles on the ground and get the eye if you drive through it. You know this type of neighborhood, do not buy here unless you like constant migraines.

Rents

Rents are a good place to start and Rentometer.com can give you a rough idea of rents in the area. They are not always accurate, so look at it with a grain of salt, but they get close sometimes. Your best bet is to call other properties in the area, as if you are looking to rent their apartment.

Speaking of cash flow, expenses make or break profitability. When searching for a property, if possible find one with tenant paid utilities. This is not always possible, but in the winter time, your profitability will stay more constant than it would if the owner pays utilities.

rentometer.com

Valuation Methods

My market is Cincinnati, OH. It is just about the national average on most items, such as cost of living index, but it is 54% rental and 46% own. There are all kinds of valuation methods, that you may or may not prefer, but they all will help in some fashion. If you want to see more, Investopedia has a good page on differing valuation methods.

Know that residential multifamily buildings are not valued the same as commercial buildings. Commercial properties are usually valued by how much income they produce, whereas, residential somewhat use a combination of income and comparable multifamily properties in the area. Your realtor should be able to come up with comps of the property you are considering purchasing.

Multifamily vs Single Family

If you are just starting out, I highly recommend residential multifamily buildings over single family homes or commercial rental properties. Losing one tenant does not mean all your income comes screeching to a halt. It means that hopefully you can still pay for the mortgage loan and all required upkeep, even with some vacancy.

Whether you want to be the next real estate mogul or just have a few, you should scale as if you want to be. This way, when you get to where you are able, you do not have a lot of work to do on scalability. Come up with processes and systems that automate time consuming issues because this can keep you profitable. Speaking of profitability…

The Scary Part: The Math, dun, dun dun…

A residential multifamily rental property should make money!  You should calculate that return on investment in depth before you invest and if you spend too long on getting the best deal possible, you may lose money over a good deal done quickly.  It is a balancing act that you must optimize and the only way you can optimize it is to calculate it.   A residential multifamily rental property should make money!  You should calculate that return on investment in depth before you invest and if you spend too long on getting the best deal possible, you may lose money over a good deal done quickly.

It is a balancing act that you must optimize and the only way you can optimize it is to calculate it.  Some of the calculations you can do are the following: cap rate, gross rent multiplier (GRM), cash-on-cash returns, return on investment (ROI), internal rate of return (IRR), modified internal rate of return (MIRR), and/or the 1%/2% rule.  There are hundreds of calculators that others have built on the internet.  Search for them.

One that I use personally, is this one that calculates the internal rate of return or IRR.  There are some drawbacks from using IRR, like if you have different returns for each investment, but it works in my business model currently.  You must decide what works for you.  You don't have to be Einstein.

Calculate (<-- Terrible section heading)

Each real estate guru will inform you of their slightly different opinions on the same calculations. Be sensible, you are intelligent. Everything in moderation. A plethora of investment gurus will tell you to use other people’s money, and that is a great idea if you can do it. For the real estate and rental property investor beginner, that’s tough to do when you have other commitments and do not have the confidence an experienced investor has.

The one simple calculation that you should do is to determine how much net income you will make after expenses. On my second property, my total mortgage payment is just under $700 per month. Currently, it grosses $1,900 per month in rent. Before other expenses, that is $1,200 per month in profit. The rents are going to be increased to at least $2,150 soon. If you use the 50% rule, which is one that states expenses will be 50% of the gross rent or $950 per month, then after everything, my profit will at least be $250 every month.

Worst Case Scenario

Be conservative in your calculations, calculate the worst possible scenarios.  If you still make good money, then it is probably a good first investment.  This is not to discount the return on investment calculation, but not everyone makes money their first time out.  Aim high, but be realistic.  There are a great many people who lose money.  Be conservative in your calculations, calculate the worst possible scenarios.

If you still make good money, then it is probably a good first investment.  This is not to discount the return on investment calculation, but not everyone makes money their first time out.  Aim high, but be realistic.  There are a great many people who lose money.   Cash-on-cash return or cash flow return on investment, is a big one in my book.  It can make you and break you at the same time.

Personal Case Study

I bought my second property and put $28,750 down on it. I expect to make anywhere from $5k-$10k profit this year on it. My cash on cash at $5k is 5000/28750 or 17.4%, not bad. But at $10k, double it, 34.8%. That would be awesome. The reason that this can break you is that if you are too focused on lessening your down payment, you may over leverage yourself. Leverage amplifies both profits and losses. To pull a quote from Paula Pant at AffordAnything.com, “There are experienced investors. And there are over-leveraged investors. But there are not experienced, over-leveraged investors.”

Why Not?

Why not leverage yourself as much as possible, but have a large, liquid emergency fund somewhere? Set aside an emergency fund for each property you buy. Do not dip into it for anything else. Without it, you could be one major expense away from losing your business. Again, you must decide how much risk you are willing to take on.

Choosing the correct properties will make or break your wallet, your dreams, and your business.

 

Good luck and if you have any questions, leave a comment or email me at Feedback@PlusFourZeros.com. Thanks for reading!

By Trey Stevens

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Posted by Trey Stevens in Blog, 0 comments

15 Steps To Buy Your First Rental Property For Less Than 3K

15 Steps

Everyone can do this.  When I bought my first rental property, I was 25 years old, making 30K a year, with no experience in real estate whatsoever.  I managed to save a little over $2,700 and that is all I needed to close.  Did I turn a profit my first year? Yes, but not as much as I could have.

Buying rental properties may or may not be for you, but it can be extremely lucrative in the long run and aren’t you trying to make money.  Just as a forewarning, you will have the most expensive problems at the worst possible times, but that is what a property manager is for, the headaches.  So long as you understand and accept that you have to pay someone to deal with the headaches, you will be fine.

 

1. It is terribly cliché to say, but the first step in owning a rental property is attitude.

Failure is inevitable.  You will fail, and fail hard.  The goal is to minimize the cost of those failures so your business can keep afloat. Your attitude makes all the difference!  All too often when I tell people that I own rental properties, their first words are either, “How do you deal with tenants?” or “Too many headaches…”

Again, use a property manager.  It may cost more, but it will keep you from burning out.  If you are not fully committed, which I was not when I started, then you are doomed to lose money and fail in your goals.

 

2. The first, non-cliché, step is to have your credit in order.

It does not have to be perfect, but you should at least strive for the best possible score.  Try to be in the high 600s at least.  It seems like such an obvious step, but is one that several people miss.  Plus, the better your credit score, the better interest rate you will get from the bank, which will save you money in the long run and if you are buying rental property and not flipping, you are in it for the long haul.

 

3.  Make a budget.

The sooner you start making a personal budget and sticking to it, the more you realize how much you are or aren’t saving towards your goals.  An added bonus from creating a budget is to start learning how to manage income from one source before you have income from multiple.

This is something that I had wished I had done earlier in my rental property ownership career.  Come tax time the first year, I had all my invoices in an unorganized shoebox.  It was a pain, and I was an idiot for not doing it sooner.  Don’t be an idiot like I was.

 

4.  Minimize your debt if possible.

One of the most important calculations a bank uses to determine if you can afford the loan is the debt-to-income ratio.  This is calculated by using the following equation: ((Total monthly debt)/(Gross Monthly Income)) x 100

So let’s say we use my income when I bought my first rental property of $30,000 a year and do an example calculation.  My gross monthly income was $2500 and my total monthly debt was low, about $235 (I was living with a parent still, it sucked.  You do what you have to.).

235 divided by 2500, all times 100, is 9.4%, which is pretty good.  Try to have your debt-to-income ratio as low as humanly possible.  You may have to sacrifice your standard of living some to save and lower this ratio.  Some will tell you to have less than a 43% debt-to-income.  This is after you add in the monthly rental mortgage payment, but I realistically use 36% and you should too.  Again, the lower the better.

 

5.  Get a pre-approval letter from a bank.

These are typically good for 90 days.  If you aren’t ready to start looking for a property, do not get a pre-approval letter because they will pull your credit.  You do not want your credit pulled more than you need to.  Pre-approval letters do not take long to get, any good loan officer can have it to you in a couple hours given the appropriate info.

The loan officer will ask for your last two paystubs, so have those ready.  He or she should also tell you how much you are approved for, amount-wise, so you do not shop outside of your range.  Another helpful tidbit is to start getting your documents that a loan officer will need together.

Some items they will ask for are: last two bank statements for each account you have money in that you will be using as down payment, last two years’ tax returns, last two years’ W-2s, and possibly your last 401k or IRA statement if you have one.  It helps to have these ready for the loan process later on.

 

6.  Find a decent realtor.

Ask friends, family, and/or coworkers.  Someone is bound to have a good realtor friend.  Vet them first though.  Ask if they know about or have ever sold multifamily apartment buildings.  If they haven’t, that is not a deal breaker, but you will learn a lot more if you have a realtor with this experience under his or her belt.  If you are unable to find anyone, start cold calling brokers or looking them up online.  Someone is bound to pop up on your radar.

 

7.  This is the fun part, finding a rental property.

A realtor will ideally find a multifamily rental property for you, but you are always able to look for yourself.  Personally, I have been through 3 realtors in two years and finally found one that I think does a good job, but I enjoy finding the properties myself on various sites like Realtor.com and Trulia.com.

Realtor.com pulls directly from the MLS (Multiple Listing Service) that the realtors use to find you a rental property.  Trulia does the same thing, but I have found that Realtor.com does this faster, which makes a difference sometimes in finding the best rental properties.  Many of the best properties are under contract within 5-10 days.

If you are buying multifamily buildings, chances are that many of the buildings are not going to be in the best areas, and I have found that Trulia’s crime map helps somewhat, even if it is not entirely accurate.  A drive through the area can confirm or deny your suspicions.

Another site that is invaluable is the county auditor’s website.  It can tell you past sale prices, show you images, give you the previous owners’ names, and all kinds of other good info.  Do not discount using the county auditor’s site.  It is invaluable when searching for a rental property.

Get the most information you can about it.  Overall, finding the right property at the right price is what is going to make you money.  It is the most important step, so spend the most time here.

realtor.com

8.  Go see the rental properties you think are the best.

Schedule a showing with your realtor.  If there are tenants currently, the seller may require 24 hours’ notice before you can see it, so that they may give notice to the tenants.  Inspect it to the best of your ability or take someone with you that knows what they are looking for.

When choosing a property, look for the major expense items like cracks in the foundation (especially horizontal cracks), roof leaks, signs of previous or current water leaks elsewhere, mold, termites, old HVAC, and old windows.  Most items on this list are not a deal breaker for me, so long as the price is right.  Determine, what you can handle and what you cannot beforehand, so you do not get emotionally invested in a rental property you shouldn’t.  I do not do mold, some people do, I just don’t.

My thought process is, how do you know when the mold stops without tearing out walls.  All of these will be looked at in depth with a home inspection once you have the property under contract.  Ideally, you do not want to have to pay for more than one home inspection.  This is why you need to inspect them in depth when you see the property.

9.  Make an offer on the rental property.

Contact your realtor, determine the price you want to pay and the conditions of the offer, and send it over to the seller.  The price is what makes or breaks most people, but depending on how clever your contract or realtor is, you can make money in the conditions of the offer.

Items such as making sure all appliances are left on premises, seller paying some closing costs, etc.  There are all sorts of different pieces you or your realtor can put into your offer, but be aware the seller may not accept it if you go too far.

You will have to put down what is called earnest money when you make an offer.  It can be any amount the seller wants, but a typical amount is between 500 and 1000 dollars.  This money will count towards the total amount if you do indeed buy the rental property.  You will lose this money if you break the contract in the wrong manner.  There are ways to get around this legally.

Granted, I am not a lawyer and this is not legal advice, merely an observation.  One that I have read elsewhere is to put a clause in your offer that states something to the effect of, “subject to business partner approval” and just do not say who your business partner is.  The partner could be anyone.

10.  Once you have an accepted offer, start your inspections.

Typically, there is an inspection period.  It is somewhere in or around 10 days most of the time.  During this time, you can have as many inspections as you want.  A home inspection is a good way to go if you do not know what to look for.  The cost depends on the company, but they are usually a few hundred dollars at least.

You do not have to get one with a conventional loan sometimes, but if you are seeking to buy a rental property with as little money down as possible, your loan will probably require it.  We will talk more about loans and your options below.

11. Talk to your mortgage loan officer about types of loans for you and start the loan process.

The loan process was the part that I was not expecting when I did my first deal.  It can be stressful, but if you have everything together beforehand, it will go much smoother.  To be honest, step 9 and step 10 can run concurrently.  This is important if you are trying to buy a property with as little money down as possible.

There are two major loan options, for most people, a third loan option if you were ever in the military, and a fourth if you live in a rural area.  All options require that you live in the rental property for a year.

https://www.debt.org/real-estate/mortgages/

Options:

Option one, is the FHA owner occupied loan for a first time homebuyer, which requires 3.5% down payment.  This loan option has you pay several fees per month that you do not want to pay if you can help it.  This is what I used for my first loan and was a pain in the butt, but I do own the property now because of it.

Option two, is what I wanted to use, but couldn’t due a missed credit card payment, is the conventional owner occupied loan.  This loan requires a 5% down payment and you pay less fees per month than the FHA loan.  If you are not a veteran, this is the loan I would use.

Option three is only for veterans and current military.  It is the VA loan and does not require a down payment, which is awesome from a return on investment standpoint.  By the way, thank you for your service, if you served.

There is a USDA loan that is a low down payment loan also, but it is an arduous process that I would not recommend at all.  You should know about its existence either way.

There are many other types of loans, but these are the ones that require the least amount of down payment.  Before you close, make sure you have the closing disclosure and review it well.  Whatever terms are in there will be set in stone once you close, whether you were promised something else verbally or not.

If you don’t understand specific portions of it, Google can be your best friend or you can email me at Feedback@PlusFourZeros.com and I will help.

12. Find an insurance agent.

You will need an insurance agent in order to acquire a quote.  Shop around a bit.  Not all insurance is the same or the same price.  If you attend your local real estate investment association meetings, which would be recommended, they may have an agent you can use and get a better rate. Insurance agents are somewhat similar to realtors with relation to quality.

13. Wire the down payment to the title company a couple of days before closing.

Wiring the down payment is something that has recently changed.  Make sure you have the wire instructions before you schedule the wire.  Something to note is that scammers have lately been doing is emailing fraudulent wiring instructions to bank customers.

Contact your loan officer or loan processor before you wire any money and ask them whether or not the wiring instructions are legitimate.  It is worth an email or phone call to not wire the money to the wrong person.

14. Close the rental property or real estate.

This involves signing a ton of paperwork.  It is not difficult, but again, read the documents you are signing before you sign them.  In my most recent closing, they had several pieces of information incorrect.  Once you have signed everything, there is one last item to do.

15. Celebrate!

You are now a rental property owner and possibly a landlord if you have not yet hired a property manager.  Congrats and good luck.

By Trey Stevens

Feedback@PlusFourZeros.com

Learn what I did wrong or right from My Journey in real estate and rental properties OR check out other articles on my Blog.

Posted by Trey Stevens in Blog, 0 comments