How I Cash Flow $10k a Month!
- EVEN if you move every fews years
- EVEN if you don’t have any contacts
- EVEN if you work full-time
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Most people grossly overestimate the cash flow they are actually getting on their rental property.
At the same time, the people trying to sell you investment properties also have a habit of fudging the numbers on cash flow and return on investment.
I’m here to make sure you can spot these inflated numbers a mile away.
The mistake most people make is believing that your money left over after paying a mortgage each month is your cash flow.
You need to subtract your mortgage from rent, then subtract all other expenses to arrive at your actual cash flow.
In many people’s case, this is a negative number.
That means you are not cash flowing, you are paying money out of pocket to own this investment.
Make sure this doesn’t happen to you.
It is helpful to understand two simple concepts for this all to make sense.
Those two things are the 1% rule and 50 % rule, which are easy to do in your head, and can save you the trouble of breaking out the calculator for rental properties that clearly won’t make money.
The 1% rule is quick and easy. Monthly rent should be at least 1% of the acquisition price. The acquisition price may be a higher number than the purchase price. It is purchase price plus the money to get the house ready to rent.
$80,000 to purchase house plus
$20,000 remodeling equals
$100,000 acquisition cost.
$100,000 home should rent out for at least $1,000 a month, or it would not be a good investment.
What is the logic behind the 1% rule?
If a house will give you 1% of the purchase price each month in rent, then it gives you 12% of the purchase price each year. That apparently means the investment makes 12% a year!!!!
WOW, THAT’S AWESOME! I’M RICH (ON MONEY!!)
Do you think you are ready to invest in real estate?
Many people want to invest in real estate before they should.
People see the success of others in real estate, and want that for themselves.
But it is as simple as it looks?
You are not ready to invest in real estate until you have:
- your debt under control
- regular contributions to retirement accounts
- the right knowledge about where you will invest
- the correct type of mentor
Why do we want to invest before we should?
We have FOMO.
Fear of missing out.
We are under barrage from podcasts, books, lame blogs (like this one), and for some of us old people that can remember, Carleton Sheets infomercials.
Real estate investing is made to look easy.
You want to find the best tenants.
That’s how real estate money is made
You don’t want to rent your property to a bad tenant.
A nightmare tenant.
It could end up costing you lots of money in repairs, turnover fees, and lost rent.
Keeping these bad tenants out of your property is not as hard as it looks.
First, I’ll tell you the two most important things I look for.
Neither of them are credit score!
Then I’ll tell you the 6 red flags to avoid.
You’ll do much better than 99% of property managers if you follow this closely and…
You’ll make more money overall!
This is by far the most important item to focus on for finding a good tenant.
My thoughts on Coronavirus and how it affects our investments, real estate, and life…
It seems like investments and real estate IS my life!
I have to admit.
I’m one of the people who thought this crazy thing was limited to Asia, and maybe a few tourist destinations.
There were a lot of people in agreement with me who kept asking what all the hype was.
Well, that hype somehow became reality, at least for the time being.
I tried to fly to Boston yesterday to participate in a real estate event I was asked to speak at.
The event got cancelled as I arrived in a DC airport.
I bought a return ticket same day back to Alabama, realizing this virus was having a significant effect in my life.
In all of our lives.
Here’s a list of things I think are smart to consider for life in this period of extreme uncertainty with Coronavirus (COVID-19).
1. Don’t Sell
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Finding off-market properties and getting a good deal is absolutely key to being successful in real estate investing.
The market is hot. And overpriced.
We are near or at the top of a real estate cycle.
This mean most cities are saturated with investors bidding up the prices of all types of real estate investments.
How can you be successful as a real estate investor in an environment like this?
Find ways to contact motivated sellers that aren’t currently listing their properties for sale.
Finding Great Deals on Real Estate
Here are the top ways to find off-market deals:
- Directly contact owners – voice call, text, or mail
- Driving for dollars
- Short Sales
- Auctions / Foreclosures
- Tax Liens and Tax Deeds
- Networking (Investors, Property Managers, Contractors)
We’ll go through each one-by-one.
Through these methods, you find a way to not pay full price on the multiple listing service (MLS) like everyone else.
Using a HELOC to pay off a mortgage is an interesting debate.
What’s a HELOC?
A HELOC is a home equity line of credit. If you have equity in your home, you can take out a loan from your bank using that equity as collateral.
Paying off a mortgage with a HELOC is paying off a loan with another loan.
While I’m not so sure paying off a mortgage is the smartest financial move anymore (I used to believe it was), doing it using another loan certainly an idea worth exploring.
I’m going to summarize the issues in a
fair and balanced slightly biased way.
So Should I?
My final answer on this is that you should not use a HELOC to pay off a mortgage. HELOCs are variable rate loans instead of fixed rate like a (good) mortgage. HELOC interest is not tax-deductible in most cases. The line of credit can be frozen or reduced by the bank at any time. Also, even if you are making lower, interest only payments on your HELOC, it eventually will revert to a principal plus interest payment that you may not be ready for.
Of course, there is always the debate of should you payoff a mortgage at all.
Pay off Mortgage with a HELOC – How it’s done
One of the main ways to pay off a mortgage with a HELOC is confusing to someone with as simple a mind as mine.
I will attempt to explain the basics.
- Each month you use your entire paycheck and apply it towards the mortgage.
- Then, you use a good credit card (hopefully with points) to handle most of your living expenses throughout the month. This buys you roughly 45 days of interest-free money.
- You then use the HELOC at the credit card’s due date to pay it off, and use the same HELOC to make the minimum mortgage payment each months.
- Next month, you repeat the same process with your whole paycheck.
You will often see articles on how to payoff your mortgage early. People seem to make up their minds it’s the best course of action.
What about the question: Should I pay off my mortgage early? Here is my take on both sides of the argument.
Reasons NOT to payoff a mortgage are: It’s an inflation hedge, you can write off the interest, maintaining liquidity is important, and the money would be better off invested in higher yielding opportunities. Good reasons to pay off a mortgage include peace of mind and primary residence equity having special protection from creditors and bankruptcy in many states. Poor, but often cited reasons to pay off the mortgage are decreasing expenses and gain a risk-free return equal to the interest rate.
I rushed through listing these answers. I go into more detail below.
Before You Payoff a Mortgage Early
We will assume you have an emergency fund, your high interest debt like credit cards is paid off, and you are fully maxing out all retirement savings account opportunities.
This means you are contributing the max to your IRA, your spouse’s IRA if you have one, and your 401K, TSP, or equivalent vehicle. You should not bother paying off a mortgage if you have not done these basic things first.
In the end, I’m partial to keeping the mortgage. I feel like the evidence is strongly stacked against keeping it.
It’s a little ironic, because I paid off my primary residence in 6 ½ years. I also have 20 paid-off single family homes.
Yeah, that’s a little psycho.
This certainly qualifies me, however, to make a fair judgement on the subject.
Since I’m partial to keeping the mortgage, I’ll explore the pros of keeping the mortgage first.
As a military member, the largest difficulty I had was finding the best places to invest in real estate. I moved every 1 to 3 years, so I didn’t have an obvious choice. Through a lot of trial and error, I figured out a system that has worked well for me. It goes against the conventional wisdom on picking the best markets for real estate investing. That’s why it works!
How to Find the Best Markets
The secret to finding the best places to invest, especially in this advanced real estate cycle, is two things. First, you must gain a strong knowledge of the market you are going to invest in. This means you or somebody you trust needs to be your boots on the ground in that location. This will allow you to buy the right house in the right neighborhood in any city you end up choosing. Second, prioritize cash flow over appreciation. Make sure the property you buy will cash flow well, and never sacrifice that for a hope that you will get a large amount of appreciation.
Finding the Best Cities to Invest – Common Advice
To understand the significance of the advice I’m giving, I want to share the advice every other website would give you if you googled “How to choose the best city for real estate investing.”
O yeah. I’ll also tell you why those websites are all wrong.
All the other websites will tell you the most important things to consider in choosing a real estate market to invest in are items such as these:
1. Population Growth
2. Job Growth
3. Housing Appreciation
4. Low Unemployment
5. Low Rental Vacancies
These blogs will sometimes teach you how to lookup these statistics showing you which websites to use so you can pick the best markets to invest in real estate.
What do I know about long distance real estate investing?
As a military member:
- I’ve moved every 1 to 3 years while investing in real estate
- I currently have 20 paid-off single family homes
- I’ve self-managed and used management companies
- I bought 16 properties while living overseas
I read a blog post this morning that said investing long distance requires a slightly different approach than normal real estate investing.
It’s a different ball game altogether.
The secret to mastering long distance real estate investing is getting these 5 things right:
- The Importance of Boots on the Ground
- The Best Real Estate Agent for Long Distance Investing
- Choosing a Property Manager from Long Distance
- Choosing the Right Property from Long Distance
- Managing Contractors from Long Distance
The Importance of Boots on the Ground
This is where I feel a lot of new investors make their first mistake.
They are neglecting the importance of having boots on the ground.
There have been good books written about long distance real estate investing and how easy it can be done using video, pictures, docusign, and aligning yourself with a great “team.”
This all sounds great, and might work for an experienced investor.
I can tell you from a practical standpoint, however, that nothing replaces the importance of having boots on the ground that you can trust in the location you are investing.
Whether it is a contractor trying to rip you off, tenant trashing a house, or just a need to respond quickly to an emergent situation at your property, there is nothing like having someone you trust that can tell you what is actually going on with your property.