What qualifies me to write The Complete Guide to Real Estate Investing?
During my 18-year career in the military, I’ve done quite a bit of real estate investing in my spare time. Eight flips and twenty-one long-term rentals. I’ve managed to do most of this while living overseas.
I currently have twenty rentals that are paid off.
I don’t have a dollar of debt to my name.
This is very strange for a real estate investor! I’m unique.
I’ve done all of this on a military income, through frugal living, with smart investing, and some luck.
I’m also a finance nerd.
In college, I worked for fidelity investments as a stock broker.
Hopefully, my experiences in real estate can help make smart decisions.
If real estate investing is something that works out for you, you can have several investment properties. It can be a substantial passive income that replaces your working income.
The idea is financial independence. Quit your job, if you want.
That’s what real estate investing has done for me.
The first step is to see real estate investing from a different perspective.
The mainstream media has tainted you!
MY PHILOSOPHY ON REAL ESTATE INVESTING
I’ve read all the finance and real estate books. Very few of them are any good.
There are so many books, blogs, courses, and websites that claim they will tell you how to make money in real estate investing. I’ve googled all the search terms about how to invest in real estate and read the “best” of what’s out there.
I don’t like most of the advice I see. It’s risky and misleading.
The below items are commonly accepted “wisdom” in real estate investing that I don’t always agree with. My approach is sometimes different from the typical conventional wisdom:
- If you use leverage to buy lots of houses, you can build substantial wealth from appreciation
- Renting a property is throwing money away
- Buying is always better than renting because you are paying down the mortgage
- If your rent covers your mortgage, you are breaking even
- If you have lots of debt, no cash, poor credit, or are in an otherwise poor financial situation, it is still a good idea to invest in real estate using creative financing methods
- Paying off a mortgage is a bad idea
Let’s pick them apart one-by-one.
If you use leverage to buy lots of houses, you can build substantial wealth from appreciation
I call this the appreciation myth. Housing appreciates at a rate of approximately 3% a year. This is quite a bit lower than the 7-8% a year the stock market in general has been getting over the last several decades.
It’s also far less than most people believe housing appreciates at.
Real estate sometimes appreciates massively at certain locations over certain time periods for reasons nobody is able to predict.
In real estate investing, those that think they know when and where big appreciation in real estate is going to happen are just guessing. It’s like guessing whether or not a stock will go up. It’s essentially gambling.
I saw appreciation on my townhouse in Washington D.C. right after I bought it in 2003. I thought I’d be rich. Unfortunately, over the next 11 years, it really didn’t appreciate much at all, and I ended up with less than 3% appreciation a year.
My good friend and celebrity surfer-blogger Doug Nordman who blogs at the military guide bought two houses in Hawaii and has owned them long term. Everybody makes money on appreciation in Hawaii, right? His appreciation on these two houses over very long time frames have been unimpressive. Appreciation has been averaging between 3-4% a year, even though some years jumped as much as 20% (this is what you always hear about on the news).
I recognize that you can use leverage to magnify the appreciation. That’s all good, but if you jump on the no-money-down leverage bandwagon and hit a downturn in the market when you are vulnerable, the downside is also magnified. You could end up in trouble!
Don’t buy real estate for appreciation. It’s a bonus, but don’t count on it.
Buy for cash flow.
Read my post on What You Didn’t Know About Appreciation in Real Estate
Renting is throwing money away
A military blogger told me once, when you pay rent, that’s the most you’ll pay each month. When you pay a mortgage, that’s the minimum you’ll pay each month.
All thing being equal, renting a property is cheaper than buying. That’s because if you rent a property for $1000 a month, there are no additional fees you need to pay. The landlord is responsible for anything and everything that goes wrong.
When you buy a property and your mortgage is $1000 a month, there are several items you still need to pay on top of this.
- Capital improvements
- HOA fees
Renting frees up money to invest elsewhere. Stock market or more real estate!
Buying is always better than renting because you are paying down the mortgage
You might think you’re paying down the mortgage, but it doesn’t happen as quickly as you would hope. At the beginning of your loan, a large amount of your payments go to interest instead of principal. The first payment is higher than 85% interest, and stays in that range for many years. After paying a loan for five years, you would be surprised how little you’ve actually chipped away at the final balance.
And how many people end up refinancing? That starts the entire amortization cycle over again.
If you want to dive deeper into appreciation, amortization tables, and buying vs renting, read my article:
If your rent covers your mortgage, you are breaking even
This is wildly misunderstood by most people. As I explained earlier, there are several expenses that are not included in a mortgage payment. You pay those out of your pocket throughout the year without realizing it is causing you to lose money on your rental.
There is something called the 50% rule in real estate investing. It means approximately 50% of rent received ends up going to expenses. This is MUCH HIGHER than most people imagine.
So as an example, if your mortgage is $800 a month, and your rent is $1000, you might tell people you have a positive cash flow of $200 a month.
Not true at all!
Approximately $500 of that rent goes to expenses. So you are in negative territory when considering all the additional expenses on top of your mortgage.
To dive deeper into the 50% rule, read my post on calculating how much money will I make from this rental.
If you have lots of debt, no cash, poor credit, or are in an otherwise poor financial situation, it is still a good idea to invest in real estate using creative financing methods
I’m sure I could make a lot of money by making people believe that the answer to their debt problems is getting more debt. Think of all the affiliates that would love to sell overpriced creative loans to you!
While many real estate investing websites argue you can buy a house with no money down or try seller financing or use hard money lenders or mess around with balloon payments, I have a better idea.
Get out of debt and save up some money.
My website talks about how I did this. It’s easy to talk about, and hard to do. It requires a lifestyle change. It’s just not FAST and EASY.
For FAST and EASY, find a no-money-down real estate guru.
Yeah, I know. We all want to get rich now. Don’t worry. There are real estate investing websites that will tell you it’s possible. They will tell you what you want to hear. You’ll find a guru that will show you how to get rich quick with no money down and creative financing.
- You can use credit card advances for down payments.
- You can raid your 401K (or maybe Mom and Dad’s?) or hit up family members to partner with you on deals. (Sorry Grandma)
But you won’t get that advice from me.
If you are willing to invest in real estate the slow, steady, and smart way, stick around.
By the way, I also hear you can get rich day trading. Timeshares are also a smart way to take vacations (I hope you can sense my sarcasm).
Here’s two of my posts on paying off debt.
How to Not Suck at Saving Money (Featured on Business Insider)
Paying off a mortgage is a bad idea
Wait Rich on Money, Are you crazy? Interest rates are so cheap! You are giving up opportunities to make huge money by paying off your mortgage!
First, I want to admit that the benefits of paying off a mortgage are more psychological then financial. If you responsibly use debt to invest in real estate over the long term, you will in most cases have a higher net worth because of the power of leverage.
But I’m retiring from the military in two years, and have plenty of income from these paid off properties and my retirement. The psychological benefit of not having a mortgage cannot be understated.
There is also enormous peace of mind in not having mortgage payments once you give up your traditional 9 to 5 job that you’ve been depending on your whole life
I bought my rental properties in an area where house prices were around $40-$60k. That allowed me to pay cash for all twenty houses I own.
I can’t tell you how much faster money accumulates in your bank account when you don’t have a mortgage!
When I owned six houses outright, it didn’t take long until the income from those six bought the seventh. Once you have ten, the eleventh even comes faster. It creates a snowball effect.
I have twenty properties now. It only takes five months of passive income from rents to have enough income to buy number twenty-one.
That may sound impossible for you, but I did it on a single military income. I did it slowly and systematically. I paid off all my debt early in my career, lived frugally, invested smartly, and bought high cash flowing properties.
You could likely build your real estate empire faster with leverage. I may decide to use leverage myself again in the near future. It can be done responsibly, but the more leverage, the more risk. You have default risk that doesn’t exist with paid-off properties.
Default might seem unlikely, but it was very real last time the real estate market tanked. It’s also real when you become disabled, lose a job, or have a string of bad luck.
Read my post where I analyze the pros and cons of paying off a mortgage.
Now you have my philosophy on real estate investing.
Next, you need to educate yourself. You need to spend enough time, but not too much time, getting the knowledge you need before you actually go out and do that first deal.
Some people spend years reading blogs, taking courses, and buying books on real estate investing, but never pull the trigger and buy a property.
Conversely, others try buying a property without doing any research at all. Those people are called reluctant landlords.
The right answer? Once you are in a position financially to comfortably purchase an investment property, set a reasonable goal for how long you will spend in the knowledge accumulation phase.
Three to six months should be enough. Longer than that, you’re draggin’ your feet.
Here’s how to get ready.
In order of importance:
- Read everything about real estate investing you can on my blog. Whether you decide to use no loans like me, traditional mortgages, or something riskier, you’ll still benefit from learning how I go about investing in real estate. My method is especially beneficial to the military, others who need to move a lot, or anyone who wants to invest in a location they are not currently living (out-of-state, from overseas).
- Read everything on coachcarson.com. He used debt responsibly to build his real estate portfolio. www.affordanything.com is also another great real estate blog. It’s such a great blog, that reading it was what inspired me to start a blog myself.
- Use www.biggerpockets.com to listen to their podcasts. I’ve listened to most of them to get an idea of all the different real estate investing options available (still like mine the best). Once you’ve done this, you’ll really have a good idea what type of real estate investing is right for you. Word of warning: You are witnessing selection bias. You are only hearing the success stories. It’s kind of like late night infomercials. Many that try similar tactics end up unsuccessful, especially involving aggressive leverage tactics.
- Find a mentor or mentors. Find a group of real estate investors in your area and connect with them. Many cities have something like a Real Estate Investors Association (REIA), or some similar organization you can find online. You can often find investors by using the forums organized by city on the biggerpockets.com website. There is a paid version of this site, but you can get what you need from the free version. A word to the wise: Don’t expect something for nothing. Find a way to help these investors so they’ll have a reason to help you. Example: Offer to do free work for them in exchange for a little bit of their time and advice.
- Read a few books on real estate investing. No books have blown me away, but there are a few I like. I’ll recommend The Millionaire Real Estate Investor by Gary Keller and The Book on Rental Property Investing by Brandon Turner.
While all this prep work can help, nothing in the world is better than actually going out there and buying that property. The school of hard knocks (real life) is the best teacher in the whole world. Expect that not everything will go perfectly with your first property, but hopefully you will have mentors as wells a professional team to rely on when you start hitting these inevitable challenges.
We will get to build a team later.
Next, I will discuss investment types and strategies. The idea here is, you want to do something called niche. This means, you want to pick a specific area of real estate, learn as much as you can about it, and focus on that particular area.
There is a steep learning curve with real estate, so trying to do many different things at the same time just wouldn’t work. After educating yourself you may already have an idea what type of investing you want to do, but you can see some additional info here.
Choose an investment type and an investment strategy, and then move forward with putting a team in place and start making offers!
Single Family Homes
This is the type of investment I’ve focused on. These tend to be the best investment for beginners in real estate. Getting financing for them is easy, and they are an attractive option for both purchasing and renting in the United States.
It also ends up being the most common choice for the novice. It’s a good place to start.
Although the simplest to buy, these can be the most difficult to make cash flow well. This is why sometimes it’s prudent to consider multi-family.
If you look through my blog, and see the 2o homes I currently own, they are all single family homes.
Duplex, 3 and 4-Unit
The next progression up is a 2 to 4 unit. These are sometimes known as duplexes, triplexes, or quads.
Now you are into what is called multi-family, but on the small end.
These are great investments, as there is less competition than with single family homes. Getting financing is fairly easy, as banks look at a 2 to 4 unit the same way they would a single family home. These properties tend to cash flow better. They have economies of scale, one loan securing several units, one roof, and one yard, among other benefits.
These houses have the special benefit of lending themselves to the practice of househacking.
Househacking is when you either live in a house and live in one room and rent out the rest, or live in a multi-family unit and live in one unit and rent out the rest. This can work really well on a 3 or 4 unit property.
With 4 units or more, it’s not entirely uncommon to work things out where the rent from the other units may cover the mortgage, and you live in your unit rent-free.
Military readers: If you qualify for a VA Loan, you can use it to purchase a 2-4 unit property, and live in one unit renting out the others (househacking!).
Read my post on The Complete Guide to Investing with VA Loans
When you go past 4 units, you no longer qualify for conventional financing, but need to understand commercial lending to get money. There are some notable differences. You may need at least 25% down.
Getting financing depends on showing the experience you have, the financial resources you command, and the income the property is generating and estimated to generate. The price of a property has nothing to do with comps, but entirely from the income the property is producing.
The 5 to 50 unit range is an interesting area to shoot for because it’s too small for big shot investors to mess around with. It’s not big enough to have full-time management team on-site. You could have a manager living there for free or decreased rent.
It’s also too complicated for novices. This allows an interesting entry point for the brave investor who wants to scale quickly. Cash flow and value-add is much easier to achieve here, with the goal being to fix management, decrease expenses, and find ways to increase rent.
While there isn’t a clear line of when you go from small multi-family to large, at a certain point beyond 50 units you get into the size of property that costs millions of dollars and has full-time management on-site.
There may also be work-out areas, pools, and a staff for handling marketing. These properties can give you a predictable income and be fairly hands off with the right team in place.
Sometimes, large apartment buildings are purchased by syndications. This is when a group of investors pool their money together and purchase the property in a somewhat complicated legal entity. There are ways of doing this totally passively or as a larger stakeholder who helps put the deal together and makes sure everything runs smoothly.
Multi-family is not something I have experience with, so if you really want to focus on this, I recommend hitting up www.coachcarson.com (multi-family) and www.idealrei.com (multi-family and syndication).
A mobile home park can be a interesting alternative to multi-family. It can actually be quite a bit cheaper vs. the amount of units you collect rent on because in multi family you buy the structure and the land. With mobile homes, you purchase just the land including clubhouse and roads.
A big advantage of mobile homes is the maintenance side. Tenants typically own their mobile homes and are responsible for the upkeep. Tenants tend to move less often due to the difficulty of moving or selling a mobile home.
REAL ESTATE INVESTING STRATEGIES
Buy and Hold
This is the most basic and maybe the easiest way to invest in real estate. Simply put, this involves purchasing a property and then renting it out for a long period of time. The investor seeks to make a profit first by the cash flow from a long term rental and then potentially by selling it at a profit sometime in the future.
This is the method I have used recently with the 20 properties I own in Montgomery, Alabama. I also owned a townhouse in Alexandria, VA for 13 years that was a buy-and-hold rental.
The key here is to ensure you have calculated correctly and that you will have a positive cash flow after purchasing this property. Some people will try to tell you to time market cycles correctly and try to buy where you believe property prices will rise quickly. I don’t play this game.
If appreciation happens in your area, take advantage of it, and sell if appropriate. You should never buy a property that won’t make money unless you experience appreciation. Don’t count on or hope for appreciation. This is a losing strategy.
Variations on Buy and Hold
This program is also known as the housing choice voucher program. It is a program where eligible families can receive a voucher for up to 70% on the monthly rent plus utilities, and they are responsible for paying the remaining portion themselves. Keep in mind, sometimes the families don’t understand they are responsible for a certain portion, and end up not paying.
There are certain eligibility requirements to qualify for the program, and there is usually a waiting list to receive assistance once the applicant qualifies.
Advantages of this program are:
- on-time guaranteed monthly rental income
- lower vacancies
- expanded pool of tenants
- above market rental rates
- additional advertising for your rental property listing
- a tedious and grueling inspection process
- special eviction rules
- difficulty getting support from the public housing authority
Turnkey Property Companies
A turnkey property is real estate that has been purchased in poor condition and renovated by a company. In some cases this company will put a tenant in the property and provide a management company and then sell the property to an investor.
The turnkey provider will make a profit between what they buy and renovate it for and what they sell it to the investor for. I personally feel like this profit is something an investor shouldn’t give up. I don’t believe turnkey companies are a good choice.
There are several other potential pitfalls of investing in a turnkey provider. I wrote an article about it:
Wholesaling Real Estate
Wholesaling is an interesting niche within real estate. You are essentially someone who finds deals for investors in your market. You find great deals in your market and put them under contract, giving yourself some time before closing. You then search for buyers who will pay a higher price for the same property. You then keep the difference for yourself.
You never own the property, but assign the contract to the new buyer and receive a fee for the difference.
This is an investment strategy taught in seminars as something you can do with no money or experience. I suppose that’s possible, but being able to find better deals than investors themselves is no small feat. Success may be a little more difficult than advertised.
I feel the same way about wholesalers as I do turnkey providers. I’d rather find the deal myself and keep that profit then give it to a middleman (or woman). Experienced flippers may feel differently, as they may just not have time to be out there hunting for deals.
Flipping Real Estate
This is an investment strategy that most people are familiar with. There are cable shows that dramatize this. It’s when you buy an ugly fixer-upper, make the interior, exterior, and yard beautiful through extensive remodeling and landscaping, and sell it for a higher price.
Sounds easy. It’s also easy to screw up! For one thing, when I fixed houses, I bought my flips with mortgages. When my buyer fell through on his purchase and I had to start the process over, I ended up paying several more months of mortgage out of pocket. That really cuts into your profits.
Also, when you are less experienced, you will find you underestimated repairs, or found damage that was more extensive than you imagined. Also, sometimes contractors can be difficult to work with, and not necessarily follow through on what they promise you.
I’ve flipped about 8 homes, and in general made money. I plan on trying it again in the future. Some make very lucrative careers of this. It’s no walk in the park, and not for the faint of heart.
I’ve blogged a little about my experience with this:
TYPES OF LOANS
TAXES AND REAL ESTATE
There are several ways to save money, delay, or outright avoid paying taxes by using real estate.
One of the best ways is for homeowners with primary residences. It’s a way to avoid capital gains and it’s even a better deal for military members. It’s the rule of living in a property 2 of the last 5 years.
Don’t worry, if you are an investor, there are still several ways for you to benefit from the tax code. I wrote about 1031 exchanges. It’s a way to delay, or even avoid paying capital gains and depreciation recapture on your real estate. Check it out.
BUILD A DREAM TEAM
Before you make an offer on a property, you will need a team of people in place. I call this my dream team.
I know, it’s cheesy.
Real Estate Agent
The importance of a real estate agent can’t be overstated. Ideally these real estate agents understand real estate investing. If not, they need to be taught.
There are a couple things I want to emphasize about this. First of all, are you going to bother using a real estate agent. I always have. Some people will find ways to buy property without using a real estate agent. My advice is, a good real estate agent is worth the commission you’re paying them.
They are worth their commission for many reasons some of which are their contacts, experience, and ability to negotiate for concessions on your behalf. For me, I was often buying real estate from out of state or even out of country, so my real estate agent was also my eyes and ears on the ground.
A real estate agent will make a commission from you. Make sure they earn it. Most real estate agents just want that commission, and want it fast. If you don’t get the service you want from them, let them know. If they don’t adjust their service to what you need, find someone else.
There is a mismatch in incentives between a real estate investor and a real estate agent. Investors want to make multiple low offers on lots of properties hoping that eventually someone accepts their offer. This is a lot of work for a real estate agent, so most aren’t willing to do this. You need to find the ones that are.
You will get protests from real estate agents.
“They’ll never accept an offer that low!”
“They’ll laugh me out of the room!”
“They won’t take me seriously!”
My real estate agent in Montgomery made lots of comments like this when I first starting working with her. Eventually, I starting buying properties and she slowly started getting commissions from me. She’s helped me buy 20 properties now, and totally understands the reason why I make multiple low offers on several properties on a weekly basis. She got to understand real estate investing and the unique needs I had as an investor.
There is another thing I have trained my real estate agent to do to meet my needs.
Since I’m purchasing from out of country, I like to see additional pictures on top of the ones on the websites. I ask the real estate agent to take additional pictures of the property on her phone and send them to me.
Again, either a real estate agent is willing to do what you need them to do, and you keep them, or they are not, and you get rid of them. No middle ground. Their commission is high. You’ll find someone that meets your needs.
You may decide to manage the property yourself, and that’s possible. I’ve done it, especially for one property. But I have twenty now. I’m not going to manage all those myself!
In real estate investing, finding a great management company is one of the most important things in ensuring success. I can tell you from experience, when you know how to find a good management company, they are worth their weight in gold.
Their knowledge of the rental market, neighborhoods, local contractors, and the systems they have in place make worth more than the fees you’ll pay them.
But that’s only if they are HONEST AND DEPENDABLE.
Many of you have had experiences with bad management companies or heard other talk about it. I have fired two management companies myself.
The important thing to do is find a good management company through proper vetting.
Luckily, in my day job, I’m an investigator. I’m accustomed to gathering information about people.
I decided to put that skill to use in my real estate business life (legally, of course).
The first thing I feel is important is looking at their fee structure. How will they charge you? Compare it to other management companies in the area. One important factor to consider is how do they charge for putting a tenant into the property for you? Also, how do they charge for having a tenant renew a lease?
My current company charges a 10% management fee, but doesn’t charge anything to find a tenant or re-write a lease. Some companies charge 7 or 8%, but charge one months’ rent to find a tenant. These fees are important to think about.
Another important thing to consider is how does it work if you are unhappy with their service and want to stop using them?
I’ve seen situations where you essentially sign a lease with the management company which means if you have to give one year notice before you stop using them. This even applied to being unhappy with their service. I took that part out of the contract. I later ended up firing them.
Now it’s time to approach the management company from the renter’s perspective. At this point, I go to their webpage and Facebook page and look around. I see how easy it is to navigate. I see how good a job they do describing the properties and taking pictures of the houses.
I’m concerned how quickly they respond to emails, if at all. Also, how quickly they move from email to getting you on the phone and having you look at a property. How efficient are their systems?
I’ll call the phone number posing as a renter and I try to make an appointment to see a property. Then, I ask a bunch of questions about the property and see what questions they ask me about my income and situation. Next, I may be act difficult and see how they handle it.
I’m concerned about how easy it is to get a person on the phone. If I get voice mail, how quickly do they call me back?
How polite are they? How professional are they with my inquiries?
A big problem would be not getting answers by email and not getting through to a person by phone.
Once I’ve satisfied that test, I move on to talking to the owners of the management company.
Here are examples of questions you can ask to understand the management company better.
- How old is the company?
- How many rental properties do you own yourselves?
- How many rental properties do you manage for investors?
- How many different real estate investors are you managing for?
- Will you let me speak to some of these investors about their experience working with you?
- How do you handle evictions and how will I be charged for it?
- What is your vacancy rates?
- What is your criteria for screening tenants?
- What are your income requirement for tenants?
- What is your pet policy?
- Can I see a sample rental report that you send investors each month?
- Will you let me speak to some of your tenants about their experience working with you?
Check the Better Business Bureau.
Check the Biggerpockets.com forums.
Do internet searches on their company.
Here is another thing I’ve been using my management company for above and beyond just management. These are important for me because I live outside the country and buy properties that I can’t even see myself.
Before I buy a property, I make sure my management company approves of it. There are two different considerations here.
One is the house. Will tenants like this house? Will they like the floor plan or the flow of this particular house? The management company knows this better than the real estate agent or my inspector. They know because they show houses to tenants all the time.
Next is the location. Even if I know this company manages properties in this general area, sometimes one particular street can be bad, and the next street over can be great. These are differences only a management company would be privy to. This is where a management company can really help with real estate investing. I believe I’ve made a lot of money by turning houses down based on my management company’s input.
The most important thing I use my management is this.
It’s probably been the key to my success.
I negotiated with my property management company for them to supervise large rehab projects for me. When I buy an investment property, it’s usually something in bad shape that needs a lot of work. They arrange for and supervise all the work. I pay them a 10% markup on their cost.
This has been key to my success. The trickiest part of long distance real estate investing is arranging for and supervising rehab projects from long distance. This is what stops most people from investing long distance. This is my solution to that problem, and it’s worked out great!
Read more about my 5 secrets to finding the best property manager
General Contractors and Contractors
Another thing you need before you buy a house is access to some general contractors and contractors such as plumber, carpet, hardwood floor, HVAC, tree, lawns, landscaping, roofers, etc. I found that I had access to the best of this through a great management company. They already have great contacts and great rates.
Angie’s list is also a paid service that gets you access to vetted professionals. It’s ideal for real estate investing. The biggerpockets forums is another place. Networking with other investors will give a few more. The REIA I spoke of earlier is another location to share this type of knowledge.
I find myself a good inspector and get every house inspected before purchasing. I use the results of the inspection to drive the price of the property down or ask the sellers to fix certain things. At a minimum, it’s a hedge against having some huge surprise with the property after I buy it. It also acts as a punch list of items for the management company to fix before the first tenants move in.
If you are buying a house with a mortgage, these inspections may be required. I always buy my houses with cash, so they are not required, but I insist on them anyway. Just remember who the inspector is working for. In the case of a mortgage, he’s more concerned about the bank’s interests than yours.
If you purchase the house with a mortgage, you will be required to get an insurance policy. I pay cash, but I still get my own insurance policy. The insurance company I use does their own inspection of the property for me and tells me what I need to fix before they will insure it. This is free of charge, and I just think of it as another check and balance on the property ensuring it will be safe.
GET READY TO MAKE AN OFFER
Paramount in real estate investing is understanding the multiple listing service, or MLS. It’s gotten a lot easier to look at the MLS in recent years, mostly due to sites like Zillow and Trulia, which seem to show pretty much the same thing. We’ve found the ability to shop real estate on these sites almost as effectively as real estate agents shop themselves on the MLS.
The MLS is a database of properties for sale in a regional market, set up by a group of cooperating real estate brokers. In the old days, the only way to have access to the listings in the coveted MLS was to work with real estate agents. This is no longer the case. Trulia, Zillow, and other websites have somehow cracked the code, and most information from the MLS is also listed on those websites.
Realtors will try to tell you that often the information on Trulia or Zillow is incorrect, but I have done most of my investing my purely using Zillow, and been quite successful doing so. I back it up by having my real estate agent look it up herself, but 97% of the time, it’s the same information.
I’ve bought several of my properties straight off the MLS. That’s essentially the same as saying I’ve bought them traditionally as for sale houses without using any special programs. There are, however, several other ways to purchase houses cheaper that straight off the MLS. I’ll name a few.
A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In other words, selling the house would not pay off the mortgage. The lien holders (probably a bank) agree to accept less than the amount owed on the debt and take the loss themselves.
I have bought a few houses this way. It can happen fairly quickly in rare cases, but usually takes several months. In one case, I made an offer that was accepted by the bank six months later. This allows you to buy at a discount, but there is more uncertainty and a long wait involved.
Sometimes you’ll find houses listed on the MLS that are foreclosures that were originally owned by Fannie-Mae, HUD, or some other entity. You’ll see that there is a special process to go through to purchase. There may be a website you have to use such as www.homepath.com or www.hudhomestore.com.
I have purchased houses through these websites at a discount. There is more ass-pain involved in dealing with foreclosures and you buy them as-is, but that is what keeps the novices away. You can benefit by reading the fine print, dealing with the red tape, and you may walk away with a good deal or two like I have. Sometimes, real estate investors are prevented from bidding on foreclosures until a certain amount of time has passed.
I’ve found both short sales and foreclosures to be great ways to buy houses in real estate investing. You can usually find these on the MLS, but they are more complicated, and you’ll get a better deal than the traditional MLS buy.
It’s time to make offers on some properties.
How can you be sure a house you are thinking about buying could be a good rental? The quick way of telling is using the 1% rule.
The 1% rule
The 1% rule is widely used in real estate investing. Monthly rent should be at least 1% of the acquisition price. The acquisition price may be a higher number than the purchase price. It’s purchase price plus the money to get the house ready to rent.
If you buy a house for $80,000 and spend $20,000 remodeling, for a total of $100,000, the house should rent for at least $1,000 a month to meet the 1% rule. This mean it might be a good rental.
If you are actually thinking about buying it, then you need to break out the calculator and do a bunch more calculations. I previously did a post on how much money will I make from my rental property that explains these calculations in much more detail.
Once you are sure the numbers will work for the property, make that offer.
Read my post on What is a cap rate and how to calculate it
As I talked about early, I like making lots of low offers for properties on the MLS that could make good rentals. If you get a decent counter-offer from the seller, then you know you have something to work with. If you get no response, nothing lost, nothing gained.
Make sure when you negotiate your price, you are clear the highest price you are willing to pay. I always made a decision what my lowest return on investment I was willing to accept was.
You need to remember that it doesn’t always make sense to invest in every city. High cost of living (HCOL) cities usually end up being bad investments because you can’t get close to the 1% rule.
Sometimes, certain parts of the city are better than others for investing. An example of this is when I moved to Montgomery, Alabama. Even though we wanted to buy the house we were going to live in, the numbers didn’t work, so we rented. It was in a gated community with good schools and the homes were newer. These don’t always meet the 1% rule.
A few miles away, we ended up purchasing several houses in a different neighborhood that met the 1% rule.
You have to buy the right house in the right location. It has to be able to make good money as a rental, or don’t tie up your money in it!
Buying the right house is illustrated well in an article I wrote called Real Estate Mistakes Military Members Should Avoid
In real estate investing, bargaining tactics can make a big difference in your bottom line. They say you make money when you buy the house, not when you sell it.
One of my favorite bargaining tactics is as follows. This may seem simplistic to you, but it has saved me lots of money on my home purchases. I got home inspections on my properties before I purchased them, and my offers always had a subject to home inspection contingency in them. That meant if I found something I didn’t like, I could back out.
I would use items found in the home inspection to subtract from the offer price. In other words, if I offered $60,000, I would subtract $5,000 from that based on several different items found in the home inspection. Often, the seller would agree to the new price, or at least meet me half-way. Sometimes, they would agree to fix certain items themselves before closing.
When inspections came back with termites, this also gave an opportunity for a large price reduction. While I’ve found termites not to be a big deal, it really scares off the novice purchaser, and really puts a bad taste in most people’s mouths. I’ve got some steep discounts this way. By the way, always get a termite inspection before buying for this reason.
Another great bargaining tactic is to keep track of the houses that you lose out on, but that end up coming back on the market later because the original contracts fall through. This usually means the buyers ended up not qualifying for their loans.
In my case, I was always a cash buyer. I would go back to these sellers who were upset and desperate after having their first buyer flake out at the last second. I would usually come back in at a lower price than my original offer, but it would be cash, and they would be sure they wouldn’t have the same problem again.
Often times, they would be fed up with banks and happy to know it could all be over in a few days. Cash is king.
So you’ve found a way to get your offer accepted.
You either get it move in ready yourself and turn it over to your management company, or you ask your management company to do it for you. I’m lazy, I don’t do it without a management company. They are worth their weight in gold once you find the right one!
CONGRATULATIONS! YOU’RE A REAL ESTATE INVESTOR.
Hopefully, you’ve got a good return on investment on this property.
My method has been to pay the property off as quick as I can and then buy another. Some people are happy having multiple mortgages, especially while rates are still low. Just make sure you can handle a downturn in the market, and could survive if you lost your day job.
Made it this far? Here is a link to all of my real estate posts.
I also wrote an in depth analysis about How to Invest your Money and Retire Early where I show exactly how my money is invested.
This is a living document that I’ll keep adding to. Please comment!