Reserves cash - keep 6 months of expenses for each unit. Ex: $800 per month expense unit, save $4,800 in reserves.
Your real estate business should bring in 3x off your living expenses before you should quit your job. 1x to survive, 1x for unexpected expenses, 1x to reinvest
ROI for retirement formula
Annual cash flow desired / Interest rate returned = cash invested
$100k per year / 10% return = $1,000,000 in cash invested
Five Keys to Rental Property Success:
Think the right thoughts
-A. the 10x rule, 10x your goal and it will help you take massive action to accomplish your original goal.
-whatever your mind can believe, it can achieve.
B. You are who you associate with
you are the average of the 5 people you spend the most time with
Network, look for people with similar interests
C. Change your “I can’t” to “how can I?”
2.) Study the Right Source
FOCUS - overcome analysis paralysis
Stop reading and start doing
Books:
3.) Picking the Right Plan
-What is the end goal?
-What kind of strategy do you want to use?
-What won’t you do?
-What kind of properties do you want to buy?
-How often will you buy properties?
-How will you finance?
4.) Acquire the Right Asset
5.) Manage the Right Metrics
***set aside (if living in)
5% vacancy
5% repairs
5% cap ex (big ticket items)
***set aside (if pm - not living in)
10% vacancy
10% repairs
5% cap ex
11% property mgmt fees
*How to Make $1 mil in rental properties (multi family strategy)
-quadplexes and 24 unit apartment complexes
-cash flow $200 per unit, per month
-buy at 70-80% value
-must have at least 10% value add opportunity (paint, landscape, adding rooms)
-must be in a good, appreciating neighborhood
-Year 1
-buy 4 plex (save cash flow)
-Year 2
-nothing
-Year 3
-buy 2nd 4 plex with cash flow
-Year 4
-buy 3rd 4 plex with cash flow
-Year 5
-1031 exchange (sell quad plexes for a 24+ unit apartment complex - should have 55-60% value in equity plus cash flow of all 3 quads to trade for a 20% downpayment of apartment complex)
-Year 6
-Nothing
-Year 7
-Nothing
-Year 8
-1031 exchange (trade up to a 75+ unit apartment complex)
***build a road map, like this^^
*How to get $5,000 per month cash flow (single family strategy)
-Year 1
-save $20k ($1,000 per month plus $8k from savings)
-Year 2
-buy a 3/2 single family at 80% value ($100k blue collar 1970s house), property brings in $300 per month after expenses ($100 per bedroom)... $370 before income taxes
-now save $1,100 per month (plus $300 is $16,800 saved)
-Year 3
-buy similar house as Year 2
-now save $1,200 per month (plus $600 from two houses = $21,600 saved)
-Year 4
-buy similar house again (third one)
-now save $1,300 per month (plus $900 from three houses = $26,400 saved)
-Year 5
-buy similar house again (fourth one)
-now save $1,400 per month (plus $1,200 from four houses = $31,200 saved)
-Year 6
-buy similar house again (fifth one)
-now save $1,500 per month (plus $1,500 from five houses = $36,000 saved - enough for two houses)
-Year 7
Buy two similar houses (7 total)
-save $1,600 per month (plus $2,100 from seven houses = $44,400)
-Year 8
Buy two similar houses (9 total)
-save $1,700 per month (plus $2,700 from nine houses = $52,800 - enough for 3 houses)
-Year 9
Buy three similar houses (12 total)
-save $1,800 per month (plus $3,600 from 12 houses = $64,800 - enough for 4 houses)
-Year 10
Buy four similar houses (16 total)
-save $1,900 per month (plus $4,800 from 16 houses = $80,400 - enough for 5 houses)
-Year 11
Buy five similar houses (21 total)
-save $2,000 per month (plus $6,300 from 21 houses = $99,600 - enough for 6 houses)
*House hacking strategy
Buy a triplex or quad plex and live in it for free living with a 3.5% FHA loan
*Make $100K per year with the BRRRR strategy (fixer uppers)
Buy, Rehab, Rent, Refinance, Repeat
70% rule, 70% ARV
must be in a good neighborhood
The key to rehabbing a BRRRR property is to make the property as tenant proof as possible, use materials that will last a long time.
To make $100k per year on BRRRRs:
Buy 2 properties per year (get money back out of each with refi)
In year 5, sell the first two properties
Rinse and repeat every year (over 5 years, the property should gain $50k each in value.)
How to find potential mentor:
Ask friends who rent if they have a good landlord.
Ask a real estate agent if they know any big time investors they can introduce you to.
Bigger pockets
**key: offer more value than you are getting
Team:
Spouse (Amber)
Mentor
Real Estate Agent (Tim and Andy)
Lenders (Adam & Brandon)
Contractors / Handymen (Perkins & Dejan)
Bookkeeper (Tim)
CPA (Brett)
Lawyer (need real estate attorney)
Insurance Agent (Frank P or Jeff L.)
Property Manager (Tim, Dean)
How to determine fair market rent:
-scan Craigslist rentals section, Zillow, MLS
-check out local PM websites
-talk to other landlords (network - REIA, real estate investors association)
-start with a high rent and bump down as needed
-too many people rush to your property, raise the rent
Real Estate Rental Expenses:
-mortgage
-taxes (can find online - local tax assessment)
-insurance (call your insurance agent for a quote)
-vacancy (usually 5-10% depending on the area - ask your local real estate agent)
-repairs (5-15% depending on age and condition of the property)
-capital expenditures***
-HOA
-water (call local water dept.)
-sewage (“”)
-garbage (“”)
-gas (“”)
-electricity (“”)
-landscaping (get quote from local company or pm)
-property management (figure 11% unless in house - in which case still budget 11% but pay yourself for working)
***cap ex items:
-make a chart of replacement cost and lifespan to come up with a monthly cost:
-roof (total replacement cost / Lifespan / Cost per year / Coat per month)
-water heater (10 years)
-appliances (10 years)
-driveway / parking lot (50 years)
-HVAC (20 years)
-Flooring (6 years)
-Plumbing (30 years)
-Windows (50 years)
-Paint (5 years)
-Cabinets / Counters (20 years)
-Structure / Framing (50 years)
-Components (ie front door, garage door, etc.) (10 years)
-Landscaping / trees / plants (10 years)
Totals will depend on size of house, style, etc.
Analyzing a Deal:
Figure out Total Project Costs (purchase price, closing costs, holding costs, est. repairs)
Figure out financing total out of pocket (down payment)
Calculate monthly mortgage (non-owner occupied)
Determine monthly rental income (include extras like extra parking and laundry)
Remember cash on cash return doesn’t include benefits like appreciation (average 2-3% annual or tax benefits)
****
Analyze 2 deals per day = 60 deals per month
Offer on 10%
10% of those accepted
You can find one deal every two months
Area classifications
Class A Property - rich, luxury, upper class
Class B Property - upper middle class (10-20 years old)
Class C Property - lower middle class, blue collar, paycheck to paycheck (30 years old)
Class D Property - ghetto, hood, war zone
Brandon looks for class c properties in class b areas
^can find price/rent ratios for specific zip codes, median sale prices and media rent prices
ask local cops about area crime
Ask local property managers or realtors about area vacancy rates
Keys to finding investment properties on the MLS:
Find a great agent (could be you)
Set up auto alerts
Screen out duds
Be faster than the rest
Look for hidden value-add opportunities
Make a lot of offers and fail often
Look for old listings
Focus on distressed
Keep your offer clean (limit contingencies)
Work when nobody is working (make offers on Fridays and Holliday’s - less competition)
How to find deals:
MLS
Direct mail (try FB ads now? Use absentee lists - list source.com or melissadata.com)
Driving for dollars (look up driving for dollars bible posts)
Eviction records - target landlords who just evicted someone.
Bigger pockets market place
Craigslist (search sellers, post as a buyer, directly contact landlords to see if anyone is selling)
Eight problems to look for when real estate shopping:
The Bigfoot smell: usually due to rotten food in cupboards, per urine in the carpet, smoke residue in walls, mildew. Get rid of this by changing carpet and deep cleaning. Unless smell is from busted sewer lines.
Hidden third bedroom.
Ugly countertops and cabinets - kitchens and baths sell houses
Bad roofs - low to no competition
Mold - clean and fix roof
Compartmentalized configuration - knock down some walls to open it up.
Jungle landscaping
Hoarding, clustering junk.
Three problems to avoid:
Bad neighborhood
Foundation issues
Shared driveways
Two most common contract contingencies:
Inspection (10 Day inspection contingency)
Financing (make sure financing doesn’t fall through)
What does an offer include:
Who is making the offer to whom
What is being bought and for what amount
Where are the funds coming from
When is the closing date
Why would either party back at from the offer?
How is it all coming together (fine print)
**the more offers you make, the more deals you will close and the faster you can reach financial independence.
16 tips to getting your offer accepted:
Work fast - be the first to offer, have auto alerts set up with realtor.
Best offer up front
Submit a letter with offer (with photo)
Discover the sellers true motivation - try to solve a problem for them
Feel uncomfortable- if you submit an offer and it doesn’t make you blush, you offered too much
All cash if possible - more attractive offer
Waive the financing contingency
Waive the inspection contingency
Close faster
Give two offers - one lower cash offer, one higher with financing
More earnest money - show you mean business
Provide pre-approval letter
Include escalation clause - if someone bids higher automatically add $500 to my offer until X point
Offer to clean out the property
Pay seller closing costs
Offer again, even if turned down
negotiation tactics:
Be prepared to walk away
Always get last concession - if the person you are negotiating with realizes every time they ask for something they have to give up something else, they will likely ask for less
Find true motivation
Use a red herring (ie: ask for low price and grandmas China - China becomes red herring and they agree to low price)
Penalize them when they ask for concession (delay - have to send to lawyer or whatever)
Stick to your numbers - no emotion
Don’t get offended, don’t insult them
Use data and numbers in your negotiation
Sell yourself as a good buyer
Ask for the lowest price, then go lower, use “would this be unreasonable? - nobody wants to appear unreasonable
Leverage and refinancing a property is much better than buying cash or owning a property free and clear - better to keep refinancing - plus, decreases liability - when you own free and clear you pay more taxes and it decreases liability for any potential lawsuit
Conventional Loan:
Shop - ask about available loans and get pre approved, talk to 3-4 people - let them know the loan is for real estate investment
Pros: lower rates, longer terms, professionals
Cons: slow process, max of 10 loans, property condition - sometimes hard to get loans on fixer uppers, some conventional lenders don’t like entities- better to buy the property in the name of your master LLC
Portfolio Lenders:
-small banks or credit unions
Pros: more than 10 loans, will loan to businesses
-cons: shorter terms, higher rates
Private Lenders:
-can be better than portfolio lenders
-good idea to get 1 year private loan for BRRR strategy, then refi with conventional loans - likely a 6-12% rate (less risky than stock market - property lien if default on loan)... investing in notes is very passive
How to find private lenders?
-go to a forum or club where they might be (or ask realtor), build your brand, ask them their rates
If you use a partner or private lender - make sure everything is in writing, in a contract
-can only have 1 FHA loan at any given time (house hacking - maybe Amber and I should house hack in Wilton area?)
BRRRR -
Use private money to get rehab property
Then once rented, get a conventional mortgage - refinance out
Typical LTV for investment properties is 70-80% (or buyer / refi needs 20-30% Equity)
Debt to income (DTI)
28% front end (monthly payment / monthly income)
36% back end (total monthly debt / monthly income)
Credit karma (free) - 600 or better score
Docs needed for a loan:
-2 year tax returns and W-2
-2 months of pay stubs
-personal financial statement
-purchase and sale docs for property
-description of properties
***put in nice packet for loan officer
***ask for the following:
-Make sure to ask for seller disclosure (what’s wrong with property) and tax returns / existing and former rental contracts
-Also, title company should only cost around $1,000 including title insurance
-current rent roll
-estoppel certificate for current tenants
-recent utility bills (make sure all are paid)
-insurance records
-security deposits
-maintenance logs
-contractor warranties
-HOA docs
From podcast:
-look for separate meters
-don’t shop for a yield, find a building you want to own and make the yield work for you
-need to source off-market deals, MLS is already filtered post investor
-don’t always focus on the deal - look long term, look at proper management and look and finding a good lender
Insurance:
-a replacement cost policy is the preferred option.
-if you are more than 20% under market value, may be subject to a coinsurance penalty - only get paid back for whatever equity portion of the house you own.
-make sure you have liability insurance on the home, go high on it.
-require renters to carry their own renters insurance.
-don’t let tenants have pets - can destroy property and also dogs can be nasty for insurance if they bite.
Set up a separate bank act. With checking and savings
Use savings accounts only for tenant safety deposits, the checking account will be for income and expenses
Necessary docs:
-rental application
-rental min. Qualifications form
-month-to-month lease
-annual limeade
-3 day notice to pay or quit
-a deposit to hold agreement
-property rules and regulations
-adverse action notice (why someone was turned down)
-notice for landlords or maint. To enter unit
-ten day notice to comply
-20-30 day notice to end tenancy
-move out packet
-cleaning expectations
-new tenant checklist
-move in and move out condition report (check list)
-new owner announcement form
-pet addendum
-tenant reference questionnaire
-disposition of deposit
Mold and mildew form
Download samples at:
Www.biggerpockets.com/landlordbookbonus
Buy QB online for accounting or use google sheets until we have a bigger business
Cant use LLC for loan with most lenders - need to check on this at pre approval or get permission to transfer your loan to the LLC before you close
Might not be worth opening a separate LLC until 10 plus doors risk/reward.
Use insurance and leverage as primary protection, LLC secondary
Plan the rehab and set timelines with contractors while you wait for closing
Land lording (chapter 17):
PM responsibilities
-advertising vacant units
-screening applicants
-approving tenants and signing leases
-handling phone calls from tenants
-scheduling maint. Related appointments
-issuing late notices
-filing evictions, if needed
-keeping a record of income and expenses
-pay property bills
Down side to PM:
-nobody will care like you
-still need to manage manager - not 100% passive
-most PMs suck
PM interview questions:
-what are your mgmt fees?
-How do you communicate with owners? How frequently? What about?
-How many properties do you manage,
-How long have you been a property manager?
-Am I locked into a management contract with you? How does that work?
-How many evictions do you have each month?
-What kind of reserves does your company require?
-How long does a typical tenant stay in a property?
-How long do properties stay vacant before being rented?
-How do you screen tenants?
-Do you accept people who have had an eviction on their record?
-How do you handle maintenance requests?
-Is there a min. Charge for maint. Visits?
-How do you market vacant properties?
-managing tenants isn’t difficult if you treat property management as a business.
-create office hours (use google voice for phone)
-have parking systems in place
-collect rent automatically
-issue legal notices the day after tenant is late
-kick out bad tenants
-move in great tenants
-raise the rent regularly
-hire the right maint. Ppl
-work less, make more $
-bad tenants are the only ones attracted to bad properties
-fix up property first, then rent out
-How to find tenants:
Sign in yard - include rental price, security deposit amount, # of rooms, phone number and min. Qualification standards ($20 on vista print for custom sign)... warning, may invite vandalism
Craigslist - don’t include address on this ad.
MLS - main driver in cities
Existing tenants / networking
Min. Qualifications
-gross monthly income must be 3x monthly rent
-600 or higher credit score
-verifiable source of income
-good references
-max. 2 occupants per BR
-only non smokers
-no pets
-no prior felonies
-no prior evictions
-no bankruptcy
To combat no-show appointments
Give them address and schedule drive by first
Batch showings all at same time (5:00-5:30) even if multiple interested parties
Application process
-give application to all applicants, encourage to fill out on spot ($35 charge)
-include:
-name
-DoB
-SS
-phone
-current employer info
-past employer info (last 5 years)
-current landlord
-past landlords (last 5 years)
-emergency contact info
-release of info statement
-signature
-don’t bother running background or credit check if other criteria fails
What to ask old landlords?:
-How long did they rent?
-Monthly rent amount?
-Proper notice when vacating given?
-Did tenant receive security deposit back and leave property in good condition?
-would you let tenant rent from you again?
-denying a tenant:
-always document why and send a written notice
-require a security deposit to hold the property (due in 24 hours)
-also require first and last months rent
-have two copies of “deposit to hold agreement”
-Schedule move in within 2 weeks at most (after vacancy of current tenant)
-have lease signed at your office, at property or at attorneys office
-walk tenant thru lease step-by-step
-consider having tenant initial next to each item
-only accept rent payments in money order, not personal check or cash
Forms:
-make sure FL state laws
-Staples / Office Depot
-future rent payments:
-Dwolla
-QB merchant services
-Venmo
Investing software:
-QB online
-Buildium
-VerticalRent
10 most common repairs you’ll encounter
fridge/stove/dishwasher not working
Water leak in ceiling or under window
Water leak under sink
Water drip from faucet
No hot water - likely hot water heater
Bugs / rodents
Garbage disposals
Running toilet - can costs hundreds in water bill
Clogged toilet - not your responsibility
Furnace repairs (north)
***not all repairs are the responsibility of the landlord - job is to provide a safe, habitable environment up to code.
-do not need to fix tenant caused damages
-do need to fix smoke detectors, heaters, appliances and plumbing.
***get a state landlord tenant laws guide and read thoroughly
-have a handy man perform annual maintenance at all your properties (see list):
Change furnace filters
Vacuum dust from fridge coils
Clean a/c lines out
Replace smoke detector batteries
Check carbon monoxide detectors
Sweep fireplace
Remove dryer lint
Flush water heater
Check exp. date of fire extinguisher
Repair any broken grout or caulk in bathroom and kitchen
Tighten any handles, knobs or racks
Remove shower heads and clean sediment
Check weatherstripping on all doors and windows - repair as needed
Clean gutters
Check sump pump
Test garage door
Check window screens and repair as needed
Look for signs of termites or pests
Check trees for overgrowth and cut
Recaulk doors and windows as needed
Trim landscaping
Inspect attic and or crawl space for water leaks or bugs
Touch up paint as needed
Fertilize lawn as needed
Check water valves
Five most common tenant problems
Late rent - serve notice of 3-5 days to pay or vacate first day overdue. Don’t be nice landlord. Amount of late fee should be in lease. Sometimes cheaper to pay tenant to leave than to evict, Keys for cash (eviction can cost $5k). Make sure they leave before you give the cash. Use an attorney for evictions.
Neighbor conflicts - set neighborhood rules, and stick to them. Otherwise, don’t get involved. Be direct if contract is being violated. 10% of tenants cause 90% of problems, fire them.
Unapproved pets or people - must approve all people who live there, need to fill out application and pay for screening. Don’t let tenants move people or pets in. Never allow pets in multi family. Okay for single family of small dog or cat and they are a great reference. Charge pet fee and make sure shots are kept up.
Breaking a lease
Drugs - don’t let drug dealers live in your place, but don’t confront them about drug dealing. Cash for keys.
If you plan to hold until death, make sure you consult with expert estate lawyers to set up trusts etc.
advantages of seller financing:
Possibly higher sale price
Lower tax bill (only taxed on what comes in)
Ongoing passive income
1031 exchange rules:
Like-kind stipulation
Value of new property must be higher or taxed for “boot” income made (the difference)
45-day identification window - only 45 days to find new property after sale (can officially identify up to 3 properties for purchase)... important to start looking for new property prior to sale going thru, extend closing if necessary. The identification must be documented in writing with 1031 professional.
180 day closing window
Necessity of an intermediary - can’t touch the profit from the sale, must go into a third party intermediary account. Use a qualified intermediary. Can’t be someone you know or work with.
1031 is a big time savings, rather than selling per norm
Pass Estate to heirs after death, if you sell before death capital gains are based on purchase price.
If you sell after death, tax basis bumps up to current market value.
To make investing more passive, can 1031 into syndicated deals (like shopping malls) or into NNN commercial investments.
-don’t rent units below market value price
-how to save money:
-transfer utilities to tenant
-bigger garbage canister
-negotiate lower rates with vendors
-switch to energy efficient appliances
-switching to low flow toilets, saving water
-negotiate better insurance
-TAKE ACTION!!!