The Book on Rental Property Investing by Brandon Turner summary

[Mark Negley]

Ch. 1 Why I Love Rental Properties

• Ability to use the leverage
• Ability to hustle for greater returns
• Ability to manage my investment directly
• People always need a place to live
• Its worked for millions of people before me
• Fairly stable and predictable for those interested in long term gains
• Not having to be present

The 4 Wealth Generators (from a rental)

1. Appreciation- natural and forced (the only generator flippers get)

• Can be very risky but can be the icing on the cake

1. Cash Flow- buy properties that offer cash flow today.
2. Tax Savings- considered the icing on the cake
3. Loan Paydown- rental income pays for the loan

How much money does one need to start investing in rental properties?

Using leverage (loan) there is no minimum

• More leverage = more risk
• More knowledge in the market, your investment, and how to manage the less risk
• House hacking ---- FHA (owner-occupied) loan meant for new, inexperienced investors, required to live in the property at least one year.
• Conventional Loan ---- 10-30% loan involving the government

Reserves

• Start with 6 months reserves for each unit you have

How much do you need to get started?

• Enough to cover down payment and reserves

Top 5 Difficulties of Rental Property Investing

1. Building wealth takes time
2. It can be all-consuming

• thinking about it constantly
• although, the business will run how you will set it up to run

1. You have to deal with difficult people

• Contractors, tenants, bankers, the property manager (screen tenants VERY well)
• You can limit your exposure to difficult people by setting up the business you want by doing due diligence upfront, like finding a great contractor or property manager, screening tenants exceptionally well. You can also outsource tasks you don’t want to do is always possible

1. Involves paperwork and bookkeeping

• Lots of paperwork to keep track of
• QuickBooks isn't easy to learn and spreadsheets take time
• Plus tax season

1. You can lose the investment

Why do so many rental property owners fail?

• Too much risk or leverage
• Not educated enough - meetups, books, podcasts
• Not enough analysis - be reverent in the analysis
• Working in your business, not on it - look at your rentals the way a CEO would look at a business

Ch. 2 The Five Keys To Rental Property Investing

1. You need to think the right thoughts
1. Write down your goals and read them aloud every day
2. Surround yourself with successful people
3. Don’t say "I can't" ask "how can I?"
2. Study the right source
1. Focus attention towards what you want (value add single-family or small multifamily)
2. Books - https://www.biggerpockets.com/blog/wp-content/uploads/2016/03/The-Best-Real-Estate-Books-Ever.pdf
3. Act on the things you learn
3. Pick the right plan

Why?

1. Acquire the right assets
1. Collect more assets
2. Decrease liabilities
2. Manage the right metrics
1. How is the property performing?
• Cash flow last 12 months?
• Increase in expenses last 12 months? (t-12)
• What has appreciation done to the property value?

Ch. 3 Four Sample Plans

Plan 1: how to make $1,000,000 through rental properties

Set your buying standards

1. Multifamily apartments
2. Cashflows $200 per unit, per month net
3. Buy it at 80% of its worth
4. Property's value must be able to appreciate 10% the first year with forced appreciation

Remember that hundreds of people do this on bigger pockets, why can't you do the same??

Buying your first property

Year one:

• Buy a 4-plex property using the buying standards above

Year two:

• Focus on managing effectively
• Keep on building equity and saving cashflow

Year three:

• Buy a second fourplex (units don’t matter much, don’t focus on that)

Year four:

• Focus on managing effectively
• Keep on building equity and saving cashflow

Year five:

• Make a trade-up using 1031 tax exchange deferral
• Factor in closing costs and agent fees
• You'll need a little over $200,000 in equity or saved cash to do this step
• Use the same standards as the other properties before
• Buy a 24 unit building ~ $800,000 (but worth $1,000,000)

Year six:

• Focus on managing effectively
• Keep on building equity and saving cashflow

Year seven:

• Focus on managing effectively
• Keep on building equity and saving cashflow
• This is going to pay you around $57,000 a year in passive income

Year eight:

• 1031 exchange it into a 75-unit apartment complex for around $3 million.
• This will make $120,000 a year in passive income

This entire plan was based off of you not putting any of your extra work money into these deals, even if you don’t find these goods of deals, you may have to pay more for some of these properties and that’s okay.

Ch. 4 The Ten Members of Your Real Estate Team

1. Spouse

• Focus on education
• Start slow
• Encourage them to learn
• Share the why
• Include them

1. Mentor/accountability partner

• Not a coach
• Someone else who invests in the area

To find:

• Ask a real estate agent to introduce you to some people
• When you have someone in mind, ask to meet up with some coffee or ask if they'll show you their most recent property. Or offer to help them fix up a unit for free.

Real Estate Agent

• Invests themselves
• Responsive
• Hungry
• Tech-savvy
• One-on-one support

To find:

• Referrals

After you find 3:

• Sit down with each of them

1. Lender(s)

• Start looking now and start building a relationship with a few

1. Contractors and handymen

How to find:

• Ask for referrals
• Check references
• The 6:00 a.m. home depot trick
• Ask store employees
• Make them compete

1. Bookkeeper

• Keeps you organized and get your taxes ready

1. CPA

• Looks at the bigger picture
• Saves you money in taxes
• Ideally, someone who specializes in real estate

1. Lawyer

• Helps you set up leases and other forms and prepare you for the best legal entity for holding the properties
• Help with evicting a tenant
• Advise on any sketchy situation

How to find:

• Ask for referrals

1. Insurance agent

• Ideally a broker

1. Property manager

• Cost around 11% of monthly rent
• Interview a couple to get the details

Ch. 5 Analyzing a Rental Property

Sunday, September 8, 2019

9:20 PM

Calculating Income

To determine rent, look at:

• location
• Number of beds and baths
• Amenities like ac, parking, and appliances
• Size

How to determine these:

1. Constantly scan the local paper (daily and weekly)
2. Check craigslist often
3. Check the competition and property management companies’ websites
4. Read “for rent” signs - call the phone and act as a tenant to gather info
5. Talk to other landlords - look for REIA
6. When your unit goes vacant, bump up the rent
7. Too many applicants = price too low
8. Check the MLS (multiple listings service)

Estimating Rental Expenses

Easy to calculate:

1. Mortgage — mortgage calculator

• Interest rates - ask a lender

1. Insurance — call the insurance salesman for quote
2. Water — call the local water department

• Tenant can pay

1. Sewer — call local water of sewer department

• Tenant can pay

1. Garbage — call rubbish company

• Tenant can pay

1. Gas — call the gas company

• Tenant can pay

1. Electricity — call electric company

• Tenant can pay

1. HOA fees — call HOA president
2. Snow removal — ask local landlords or snow removal company

• Tenant can pay

1. Lawn care — ‘’

• Tenant can pay

1. Property management — Ask local managers in the area

• Usually around 10% of monthly rent and 50% of a first months rent (just call it 11% Incase they charge a fee)
• Even if you don’t want the manager now, you will eventually. Budget fo this!

1. Taxes — call the local county or county assessor’s page

Harder to calculate:

• Vacancy — ask a local management company their average for this kind of house. Then multiply that percentage by monthly rent, that is how much you should budget for
• Repairs — depends on the age and quality of the house. Budget for 5%-10%
• CapEx — not based off percentage — calculate how much the item would cost to replace and how long it has until it needs it then do the math — (roof, water heater, appliances, driveway, HVAC, flooring, plumbing, windows, paint, cabinets/counters, structure, components- garage door…, landscaping)
• Closing costs — around 1.5% property value
• Rehab

Determining Cash Flow

Just subtract income - expenses

CoCROI (cash on cash return)

Total Annual Cash Flow / Total Invested

Rule of Thumbs

• General guidelines and not strictly accurate

The 50% Rule

• A rental property’s expenses tend to be about 50% of the income, excluding the mortgage P&I
• CashFlow = (total income x 0.5) - Mortgage P&I
• Helps just to quickly screen a property for further research

The 2% Rule

• The ratio between rental income and purchase price
• Property’s monthly income must = 2% of the purchase price or greater
• The percentage varies on the area

Ch. 6 Investing While living in an Expensive Area

Sunday, September 8, 2019

9:21 PM

Are you looking for homes on sale?

The low prices that investors find is not retail - they actively look for a deal

Remember that you need to actively search for a deal

As a general rule of thumb, you should look at 100 homes, offer on ten, and only get one accepted

• This means you need to look at a LOT of properties

Is the Price relative?

If the price of a home in California is double the price than in Ohio, is the rental income twice as much as the rent from Ohio?

• Always check if the math works no matter the price of the property
• There are also many ways to creatively invest in these expensive homes (private money, hard money lenders, portfolio lenders…)
• Other times, the rental of the market might not be good, but another investing strategy or method works better. Every market is good for something

Have you checked the outskirts?

Minimum wage workers cannot afford to live in the middle of New York City

• There are pockets of low-priced properties in the outskirts of town (middle class neighborhoods)

Long-Distance Rental Property investing

3 different strategies:

1.) DIY

• Choose your market
• Use an excellent property manager
• Choose the right property - depends if it is the right location
• Talk to local investors to get a feel for the market

2.) long distance partner

• "boots on the ground"
• Can bring many challenges with it
• Go on bigger pockets forums a lot to minimize risk

Turnkey

• Buying an investment that is remodeled with tenant in place and property management company in place

Benefits: service at a distance, market insight, professional staff, marketing machine, management experience, simplicity.

Downside: financial, analytical, ethical

Ch. 7 Types of Rental Properties

Single-family homes

Pros: plentiful, strong exit strategy, involves fewer bills, easy to finance, easier to manage, more stable tenants, better appreciation, less expensive to buy,

Cons: high cost per unit, slower to scale, limited loans, expensive rehabs, more competition

Multifamily Real estate

Pros: more cash flow possibilities, one loan and multiple units, one insurance policy, math over emotion, business not a hobby, income valuations - based on ROI they give the owners, less competition from homeowners that jack up the price

Cons: More expensive, more management intensive, more savvy competition, more complicated, fewer to choose from, government regulations

Condos

Short for condominiums

• Each unit is individually owned by a person
• HOA fees

townhomes

Less apartment feel

• Usually share a wall with the other unit
• Still have HOAs

REOs/Foreclosures - "real estate owned"

1. Usually something distressed about the property - investors need to see past the superficial flaws
2. Banks are numbers-driven, not emotional

Fixer-Uppers - a property that needs significant or minor rehab done

Pros: less competition, forced appreciation, potentially more cash flow, unique financing options

Cons: hidden expenses, stressful, more out of pocket costs

Questions you should ask yourself:

• How bad is it? - some projects are not worth your time or money
• Is it worth it? - look at comparable properties in the area to make sure it will refinance later
• Do you have the time?
• Do you have the skills?
• Do I have the drive? - if you don’t have the skills do you have the drive to learn the skills and get the job done?

Commercial real estate - property leased to businesses for work rather than residential

• Super passive once it's set up
• "triple-net" or NNN - where the commercial tenant pays for nearly every expense
• Much lower return

Ch. 8 Location, Location, Location

Crime

www.usa.com/rank/

• Some details you do not know. Ask locals for more info

Schools

www.greatschools.com

Jobs versus Unemployment

www.city-data.com/

• Higher unemployment rate means you just need to screen the tenants better

Population Growth

www.usa.com/rank/

Price to rent ratio

www.zillow.com/research/data/

How to find:

Median monthly rental price/

Median sales price

Vacancy rates

How to find:

Ask local property managers

• Remember that this will change with how well you manage the property
• Include the average so that when you have someone else managing, it won't be as good

Property Tax and Insurance Rates

Ch. 9 How to Find Rental Properties

The MLS

• Find a GREAT agent
• Set up automatic alerts
• Quickly screen out the bad deals
• Make lots of offers
• Look for old listings
• Focus on distressed
• Make a clean offer (keep contingencies to a minimum)

Direct Mail Marketing

www.listsource.com

• Success is found in repetition
• You need to build your brand
• One needs 8 interactions with a brand before they buy

More info:

"The ultimate guide to using direct mail advertising to grow your real estate business" at www.biggerpockets.com/directmail

Driving for Dollars

Look for distressed houses, write them down, then look into the public records to see who owns it and get their phone number

Eviction Records

Take a trip to your local county administration office and ask to see a list of the current evictions

BiggerPockets Marketplace

Just look around once in a while and post whenever you need something

Craigslist

1. Search for sellers
2. Post an ad
3. Search for landlords

• Instead of wanting to rent from them, they are probably having a hard time managing it so offer to buy it from them. Ask them also if they know anyone who might want to sell to you

Spend a few minutes a day just searching

Wholesalers

The trick is finding a killer wholesaler. There is a lot of them out there

• Call the number you see on the signs you see on the side of the road
• Go to real estate clubs
• Train your wholesaler
• Look on bigger pockets marketplace

Passion

Tell everyone you know about your newfound love of real estate investing and people will want to help you

Ch. 10 Which Properties Make the Best Rentals?

Bedrooms

Remember that long term tenants usually have some kids

• This is why having a 2-3 bedroom house is good for long-term tenants

Age

Older the property, the more value that can be created

• Means a lot more work
• It’s also less efficient for the tenant paying the utilities

Utilities

Look for properties where the tenant pays all the utilities

• Some are not possible

Lawn

Recreational space for the tenant is sometimes important

• Keep in mind that they probably won't take care of it as you would

8 problems to look for when shopping for a rental property

Seem to be bad but are usually easy to fix

1. Bad smell

• Carpet: removing the carpet will usually fix the problem. Plan on hiring someone to take out the carpets
• Mop: mop the floors with bleach and water and let dry for a few hours
• Clean: clean every square inch in the kitchen
• Prime the floors: get some Kilz Oil-based primer with a long-handled paint roller. Use a respiration mask if you want to live
• Wash the walls: soapy water and a sponge
• Prime/paint the walls/ceiling: hire someone to spray the entire inside of the house with the kilz-oil-based primer

Make sure the smell is not coming from a busted sewer line.

• Bring along someone with experience or get a professional inspection done

1. The hidden third bedroom

• You can transform a large "storage" room to a bedroom pretty easily

1. Ugly countertops and cabinets

• You can usually just paint the cabinets and new hardware will do the trick

1. Bad roof

• Usually cost between 5-10 grand. This scares off a lot of people so be aware
• Just need to shop around for a great contractor and ask for referrals to not get screwed over

1. Mold

• Try to figure out where it is coming from so when you get the property you can eliminate it
• Mold comes from accumulated moisture
• Be careful about mold in the basement, there may be a leak in the foundation

1. Compartmentalized configuration

• By removing a wall to open up the kitchen it usually makes it more appealing

1. Landscaping

• If the yard looks horrendous, there is a lot of opportunities there

1. JUNK

• Lots of junk discourage a lot of buyers when it's pretty easy to clear out

Three Problems I Avoid When Shopping for a Rental Property

1. Neighborhood

• Don’t buy in class D areas. That’s something you can't fix

1. Foundation issues

• Can be super expensive

1. Shared driveways

• You have to deal with the neighbor's crap and potentially lead to a decrease value in the property

Ch. 11 Submitting Your Offer

Offering on a property on the MLS

The first step is to find an amazing agent

• They will walk you through the offering process

Offering on a property not listed on the MLS

Usually happens without an agent

• Begins with you making a casual verbal offer to the seller when touring the property
• Its first good to ask the seller how much they want from it
• After some negotiation (next chapter) you will agree on a price
• A letter of intent (unofficial) is often used to get down on paper what was discussed (this is not the P&S agreement) - P&S means to purchase and sale agreement

To get a P&S agreement:

• Local title company
• Online
• Office supply store
• Other investors
• Have an attorney look over the document before proceeding

The Earnest Money Deposit

• The money provided by the buyer to show seriousness
• This money can be lost if the buyer doesn’t fulfill the agreement. Contingencies are the only way a buyer can back out of the deal and take back his earnest money

How much is the deposits?

• Most earnest money deposits are around 1-2% of the purchase price but some make it just a dollar and nobody cares

Who holds onto the deposit?

• It is held onto by an attorney or the title company who is handling the closing. This is done after the contracts have been signed and accepted

What happens to the earnest money?

1. If a sale goes through, the deposit becomes part of the down payment or closing costs as directed by the attorney
2. If the sale doesn’t go through without a legal reason from the buyer, the money is forfeited to the seller
3. If the sale doesn’t go through and the buyer has a legal reason, the money is returned to the buyer

What kinds of contingencies are there?

• You can make it anything you want, but here are the suggestions:

1. Inspection

• You can learn a lot from walking through the property, but not all
• 10-day inspections are is most common, although you can do 3 days, just make sure you have an inspector ready to go and will get the report back to you by then

1. Financing

• When using a loan, there is a risk of losing it, but not having the contingency will look more appealing to the seller

What should the offer include?

• Who is making the offer and to whom?
• What is being bought for and for WHAT amount?
• When am I planning to buy it?
• Where am I getting the funds?
• Why would I back out of the offer? (contingencies)
• How is it all going to happen? (the fine print)

When dealing with the MLS, the agent will walk you through everything

When making a private offer, there is still more to cover:

Where are you getting the funds?

• What kind of financing will you be using? Conventional, hard money, private…
• If you are using financing, it is helpful to provide a letter from the lender showing you are approved (pre-approval letter)

Why would you back out of the offer?

• The P&S should spell all of this out

How much should you offer?

• If you are in a competitive market, don’t lowball
• If it has been sitting vacant for a while and the seller is desperate to try a lowball offer
• Sometimes if you find a screaming deal quickly, offer more to secure that you win the bid
• If someone is desperate to close quickly, close quickly and point out the things wrong with it to get a good deal
• It all depends on the sellers motivations

Tips for Getting Your Offer Accepted

1. Work Fast

• Early bird gets the worm
• Have automatic alerts set up with your agent to run the numbers quickly and make the offer

1. Offer your best upfront and don’t play around. If they counter, just say no
2. Submit a letter with your offer

• Remember that humans are emotional creatures. Get them to like you. Just a quick one like who you are and what you plan on doing with the property. Adding a picture with it will also help. Look page 202 for example

1. Discover the sellers true motivations

• Price? Speed? Buy something else?

1. Feel uncomfortable

• Submitting an offer should make you uncomfortable (for how low it is)

1. All cash
2. Remove financing contingency
3. Remove inspection contingency
4. Close faster
5. Give two offers

• 150k now all cash OR 165k with financing (good negotiating strategy)

1. More earnest money
2. Provide your pre-approval letter with the offer
3. Include an escalation clause

• Automatically offer $500 more then the next offer up to a certain point. Only use this when you know there will be more offers

1. Offer to clean the property out for them.

• Or make two offers, 1 with the junk removal and one without

1. Pay the seller's closing costs
2. Offer again (a few weeks or months later)

Ch. 12 Real Estate Negotiation

• Negotiation is the art of staying steady in turbulent situations and keeping calm when hope for success seems minute.
• Keep learning negotiation strategies

The Negotiation Process

• When they counteroffer, that’s when the negotiation begins
• In a good negotiation, both parties feel like they “won”
• Properties outside the MLS will have negotiations outside of the realtors and will be informal. Try writing the terms down for the record

When to Negotiate

1. At the beginning

• When the big items on the agenda are discussed and your offer is made to the seller. This is the most intense time of the negotiation

1. After the inspection

• If you find something wrong, re-negotiate
• If you have an “inspection contingency” you can back out of the deal with all your earnest money

1. Anytime

• Negotiations can happen throughout the whole process

Strategies

1. Be 100% prepared to walk away

• If you are desperate and let emotions get involved, you already lost

1. Know your role

• Know where you stand, if you’re the only one negotiating, you can probably demand more and if there are many more offers, you can’t demand stuff as much

1. Always Get Last Concession

• ”If the other party realizes that every time they ask for something, they will need to give something, they will naturally shy away from asking for more than what he needs in fear that he will be asked to give up something important for additional (non-essential) demands on his part”

1. Find True Motivation

• They might want to close faster and not care so much about the price. Try to satisfy both your wants

1. Use a Red Herring

• Meant to drive the attention to focus on something inconsequential, distracting the seller from what you want.

1. Institute a penalty when they as for concessions

• Can be as simple as not responding for a few days when they ask for something

1. Stick to your numbers

• Appeal to math because you can't argue with numbers. Explain why the ROI wouldn't be good enough at the price offered but, "a $10,000 reduction would push my ROI up to 10%"

1. Don’t get offended

• Keep things light and professional. Go in there and hash it out to get what you came for

1. Negotiate with data

• Show what other similar properties in the area sold for

1. Don’t be insulting

• You want them to like you during this process

1. Let the other party feel good

• Don’t dominate every part of the negotiation, throw them a bone once in a while

1. Demonstrate why you are a great buyer in subtle ways
2. Ask for their lowest price, then go lower

• When they give you a number, that won't be the lowest, that’s their starting price
• Then ask if you closed in 10 days, and paid 20k less if that would be unreasonable. No one wants to seem unreasonable so they will accept

If you don’t negotiate, finding a good deal is extremely rare

Ch. 13 Financing Your Rental Property

As you do more deals, more methods present themselves

All Cash

Appreciation

• Can’t get a foreclosure on it
• Hope get better cash flow but less ROI
• Appreciation Doesn’t affect your net worth very much, even though appreciation is “icing on the cake”

Tax savings

• You no longer can deduct the mortgage interest payment from your taxes against your rental income
• Tax depreciation- the reduction in the value of an asset over time due to wear and tear

Loan Paydown

• None. Using all cash destroys this method of wealth building

Liability with Cash Offers

• People will eventually try and sue you
• Lawyers love owners with lots of equity

Peace of mind

• Don’t have to worry about losing it in a bad economy

Conventional Lending Process in 7 Steps

Shop

• Shop for a lender. Start with the chase and compare around 4-8 banks, credit unions, and mortgage companies
• Schedule an appointment with a loan officer. Ask what loan programs they have for rental property loans. Ask the rental property loan amounts they typically lend on, the current interest rates, the term, and any other information

Pre-Approval

• The bank approves you before they even see the property you hope to buy. This saves time in the closing process

Submit the Property Information

• Banks require the info about the property, usually, the P&S agreement and updated info on you like pay stubs and bank account information

Loan gets Underwritten

• Done by the lender

Lender issues an Appraisal

• Banks hire one at your expense, around $400 for a single family

Loan Goes Back to Underwriting

• They may need extra financials from you. Move fast if so!

Loan Closes

• Meet at a title company or attorney office. You bring the check down payment and the lender will wire the other funds for the purchase

Pros and Cons of Conventional Loan

Pros

• Low-interest rate
• Long terms
• Professionalism
• Stable

Cons

• Max number of loans — max is 10, but is hard to reach that because most people debt-to-Income (DTI) ratio is too great
• Slow process
• Property condition — the bank won't loan on a deal that is in really bad shape
• Not entity friendly — banks won't loan through an LLC

Portfolio Lenders

• You deal with a person, not a faceless corporation

How to find?

• Lenders will not advertise this, you need to call them and ask
• Ask to speak with the loan officer

Private lending

• A great method for a property needing work
• They lend the purchase price and repair cost, each month pay the individual. After 1 year for “seasoning,” go to the bank and get a traditional 30 year fixed rate mortgage, pay off the private lender, drop interest rates, and increase your cash flow.
• Some lenders might want to play the long game. Use that opportunity wisely for future deals

Why would anyone want to lend to you?

• Higher ROI (between 6%-12% based on the relationship)
• Security — the lender will have a lien on the property as collateral
• Passivity

Where can you find private lending?

1. Go to where private lenders might be — networking, real estate clubs, civic events in the area, bigger pockets forums.
2. Build your brand — talk about what you do, let your passion shine here
3. Ask — ask who they know who would want to lend to you. This opens the convo to let them say they want to lend with you

Keep in mind

• You may not have a brand starting, so do a few deals with a traditional loan and hard money lending first, or just make sure you are the most knowledgeable real estate guy in the room

How to Get a Private Lender to Say Yes

• You need to know what the lender wants to create a win-win situation
• Have a deal — find a killer deal, run it by a few other investors
• Hang with the right people — hang around successful people
• Build your brand — people only lend to people they trust, you must be knowledgeable, experienced, and present yourself well
• Build relationships — deepen the relationships you have with the new people you meet - go out to lunch or coffee
• Have good math — used for presentation. Use rental property calculator if you need it
• Don’t ask them to take on too much risk — don’t ask for 0% down
• Present the deal well:

1. Confidence
2. Clarity
3. Conciseness
4. Convenience
5. Creativity - presentation is important
6. Ask!

Your attorney will provide the note and the deed of trust. The lender will have a first-person lien on the property.

• Unlimited source of funds!!

Other Creative Methods

• Home equity — home equity loan or HELOC (home equity line of credit) (HELOC is renewable) — these loans are generally lower interest but the rates can fluctuate whiteout warning when things get bad
• Partnerships — you can cover each other’s weaknesses. Be extremely careful, don’t pick someone for convenience, but for how well you work together. Make sure work ethic and goals are equal. Have a lawyer write up a partnership contract. Decide from the start how it's going to end
• Seller financing
• House hacking — buy a piece of crap using an FHA fix and rent it
• BRRRR — purchased using short term financing like private money, hard money, home equity loan, or cash. After it is renovated, rent it out. Refinance the property to pay back the short term lender and get a stable, 30-year fixed-rate mortgage. You can only get 25% of the value back on the refinance. You need to make sure the appraisal will come out much more than what you paid for it. Banks will require you to wait 1 year to refinance, so make sure the term of the short term loan is more than 18 months to be safe.

Ch. 14 How to Get a Loan Approved

• Realize the salesman you are talking to is not the decision-maker; rather, the underwriter is

The 12 Digit Code to Get Approved

1. Property type

• Some lenders only loan on certain kinds of properties

1. Property location

1. Property Condition

• Ask what kind of condition they need the house to be in

1. Loan Amount

• Some might want to lend more, others less. Check.

1. Debt to Income Ratio

2 kinds of DTIs

• Front-end DTI ratio: the ratio of how much your loan payment is on your primary residence and your day job income. (Not as important figure for investors) - you want this less than 28%. Calculated by your debt/income
• Back-end DTI ratio: relationship between how much total debt you have and your income - you want this to be less than 36%. Total Debt/income

Lenders will say (28,36), remember that the first number is front-end and the second number is back-end

1. Loan-to-Value ratio

Banks use LTV in the case they need to foreclose on the property

• LTV = total loan amounts/fair market value
• FHA loan — banks will go up to 96.5% LTV
• Commercial property — around 50% LTV

1. Credit Score

1. Repayment Score

• A lender will dig into the stability of your job
• If investing for over 2 years, they will include your rental income (they’ll usually take 70%-80% of this income)

1. Experience

• Especially for multi-family properties

1. Cash Reserves — liquid!

1. Recent Credit changes

1. Compensating factors

Make Your Lender’s Job Easier to Get Your Loan Approved

Lenders have a lot of applications to go through, make it easy for them

What they need:

• Tax returns for the past 2 years
• W-2s for the past 2 years
• Pay stubs for the past 2 months
• A personal financial statement
• Bank statements
• The P&S statement for the property
• Description of all your properties

Use binders and dividers

• Use bigger pocket’s property calculator and took the PDF report and stick it on top of all the info for a broad look at the deal
Ch. 15 The Due Diligence Process

Title Inspection

1. Title - a bundle of rights giving ownership to an individual
   
2. Deed - a legal document that transfers the title from one person to another
   
• Shows that the title has been changed
  
1. Chain of title - every person that has ever owned the property
   
2. Easements - a legal right given by the property owner to another party to allow them to use or cross the property (can get recorded on the chain of title)
   
3. Covenants - a legal document that explains how a property can be used (can get recorded on the chain of title)
   
4. Lien - legal claim against a property made by a person or entity to secure the payment of a debt.
   
Ex: mortgage; where the bank places a mortgage or deed of trust on the property to make sure it gets paid back before the property is sold again
Ex: contractor lien

• When someone has a lien on the property, they have the power to foreclose on the property
  
Goal: buy properties with a “clear title”
The title company or attorney

• West coast- lenders, title companies, escrow, companies, and attorneys handle the title research and closing
  
• Your agent will recommend a company to do that
  
• The company will order your title insurance - lender won't lend unless you have it
  
You won't have too much for this process to happen, just need the right people getting it done
Document inspection
Making sure you know for sure what you are buying

• Seller disclosures - seller lists all KNOWN problems
  
• Seller’s tax returns - most accurate representation of how the property performs - you need to ask for this
  
• Current leases - dig though it well if it was an existing rental property. Remember that a lease stays with the property, when the house is sold, the lease (terms) between the lessee and the lessor stay the same. —— pay special attention to the rental rate, length of the agreement, and any out of the ordinary terms written in
  
• Current Rent Roll - a list of all current tenants, their rental amount, move-in dates, lease terms, and any other info. It's a summary of the lease
  
• Tenant Estoppel Certificates - if buying a property that is already rented, get this from all current tenants. It’s a form the tenant fills out letting you know the terms of their current lease are. This verifies the seller didn’t change the lease agreement without the tenant’s knowledge
  
• Current Year’s Tax Bill - verify the tax amount you ran your numbers with is the same. Check this with the local assessor’s office
  
• Recent Utility Bills - call up the local utility companies - verify who pays for which utility. - also, make sure they are all paid
  
• Security Deposits - verify the correct amounts and get an idea of the work that was recently done on the property
  
• HOA Documents - if it's governed by an HOA, you need to review the declaration of covenants, conditions, and restrictions or the CC&Rs
  
Verify everything else not included
Physical Inspection
How to find an inspector?

• Ask your real estate agent or other investors or other agents
  
• Speed is CRITICAL. You only have a week or so (depending on the terms in the P&S agreement) to do this
  
• After the inspection, it will take a few days to get the report and you may need a few days to think about what to do. Ideally get the inspector on the day after mutual acceptance
  
• Make sure the power, water, and all utilities are on before the inspection
  
• On the day of inspection, BE THERE and take notes
  
• The report will be daunting, but you need to decide what is important and what is not. That’s why you need to be at the inspection
  
• For a single-family home, it will cost between $350 and $500. Think of it as a way to negotiate the price before closing
  
Other Inspections You May Want to Get

• Plumbing: only they can see inside the pipes
  
• Asbestos: it’s a naturally forming fibrous material that used to be used in building material. If your inspector thinks its there, you may want to get it tested with a local environmental agency.
  
• Lead-Based Paint: used before 1978 in the paint. Test by hiring a professional or pick up a lead-test kit from Home Depot
  
• Pests/wood-destroying organisms: if the inspector suspects signs of this, you need to hire a local pest control company
  
After the inspections

• After reviewing the reports, decide if it’s still worth pursuing
  
• If you included an inspection contingency in your offer, you can back out of the deal without losing your earnest money
  
• Remember, it is the job of the inspector to scare you. Talk with other investors in the area for advice or go to www.biggerpockets.com/forums and let them know what the report says.
  
Ch. 16 Getting Ready to Close
Order Insurance

• Call up the same insurance agency that insures your house (or call several) to get a quote on the policy
  
• Tell them it's for a rental property and that you are purchasing it. If the quote looks good, request a binder be sent to the attorney or title/escrow company
  
Insurance for Landlords

• Actual cash value (ACV) policy. - insurance will only cover the value of the property minus the value of the land it sits on. -- sufficient for small damage
  
• A replacement cost policy - preferred because of more coverage and will cover the full cost of a major loss. The house needs to be in good condition to get this policy. Make sure the replacement cost you are shopping for can replace the value of the property (this doesn’t mean the amount you paid for it, but how much a contractor will charge for the same style home you had before)
  
Dwelling coverage= Coverage A

• Be careful, with most insurance policies, if you are more than 20% under market costs, you are subject to a coinsurance penalty. This means that if the home costs $200,000 and you have it insured for $100,000, you are 50%. This means if there is water damage and costs $10,000, the insurance policy would only cover $5,000 of that (½) minus the deductible of course
  
• Make sure your house is insured to full replacement value (note that on an ACV policy, you can get one which covers 100% on partial losses, even though home coverage isn't at replacement value)
  
• Make sure the policy includes the shed and other structures on the property.
  
• Business income coverage – look for this, it pays you when the renters have to move out due to damage to the property
  
• Make sure you have liability coverage (protects people on the property) of around $300,000-$1,000,000
  
• Make the tenants get renters insurance and don’t let them have dangerous pets
  
Setting Up Your Bank Account

• Have a separate checking account (income and expense) and a savings account (holds the security deposits given by the tenant) set this up 2-3 weeks before you close on the property
  
• Create a scalable system before
  
Preparing Forms

• You can use a filing cabinet or simply use google drive – store application, rental minimum qualifications form... more on pg. 270
  
• You can get a sample of these forms at www.BiggerPockets.com/LandlordBookBonus
  
Preparing Bookkeeping

• Consider getting QuickBooks or some other accounting software. (ask dad)
  
LLC?
Pros:

1. Limited liability
   
2. Tax efficiency
   
3. Operational flexibility (easy to use)
   
Cons:

1. Lending on an LLC is almost impossible
   
2. What are you protecting? - do you have that much wealth that needs protection?
   
3. Additional paperwork and hassle
   
4. Takes money to set up, maintain, and to file taxes (around $2,000)
   
Alternatives to an LLC
Insurance – get enough and talk to an insurance agent and tell them your fears
Leverage – if you have a LOT of leverage in the deal, the other lawyer won't want to come after you (no money)

• You can always set up an LLC later when you start to build real wealth!
  
Bottom line: talk to a CPA or attorney
Final Walk-Through of the Property
On the day of closing walk through the property to make sure everything is the same
Plan the Rehab
Plan this before closing. Get contractors in the property and schedule them the day after closing.
Get the materials list together (but don’t buy until after)
Make a plan for what they should do
Sign the Documents

• Your agent will tell you details of the meetup and bring your government ID and a check for the down payment
  
• Review the contract
  
Ch. 17 Managing Your Rentals (part 1)
Should You Hire a Property Manager?
It depends
Things to Consider

• This should never be a passive thing, you need to manage the manager
  
• They free up a lot of your time, but most management companies suck.
  
• Most charge around 8%-10% of gross rent plus 100% of first month's rent.
  
The job of a Manager:

• Advertise vacant units
  
• Screen applicants
  
• Approve tenants and sign leases
  
• Handling phone calls from tenants
  
• Scheduling maintenance calls from tenants
  
• Issuing late notices
  
• Filing evictions
  
• Keeping a record of income and expenses
  
• Clear up your day to look for more deals or work
  
• Good marketers
  
Disadvantages:

• Costs around 8-10% to hold and a renewal fee every year plus 100% month's rent on tenant turnover
  
• If a property returns 12% annually, it can turn it into a 4.8% return if they charge 10% of gross rent. This can easily turn a good investment into a bad one. You need to decide if that extra $1,000 a year is worth it to you
  
Property manager interview questions:

1. What are your management fees?
   
2. How do you communicate with owners? How frequently? What about?
   
3. How many properties do you manage?
   
4. How long have you been a property manager?
   
5. Am I locked into a management contract with you? How does that work?
   
6. How many evictions do you have each month?
   
7. What kind of reserves does your company require
   
8. How long does a tenant typically stay in the property?
   
9. How long do properties usually stay vacant until rented?
   
10. How do you screen tenants?
    
11. Do you accept people who have had an eviction on their record?
    
12. How do you handle maintenance requests?
    
13. Is there a minimum charge for maintenance visits?
    
14. What do you do if a tenant doesn’t pay rent?
    
15. How do you market vacant properties?
    
Mindset

• You need to remember this is a business and that means setting up systems, sticking to a policy, outsource things you are not good at or have time for, and work ON your business, not in it.
  
Getting a Property Rent Ready

• Only show the property after renovations, bad tenants are attracted to bad properties
  
• Take pictures of everything with a DSLR camera
  
• Set up I google voice so you can direct a call to a maintenance guy or someone else you designate
  
5 Ways to Market the Unit

1. Sign in the yard
   
• At a minimum, include rental price, security deposit amount, number of bedrooms, and your phone number. If you have room, include qualification standards like no smoking or minimum credit score
  
• Caution: this increases the risk of vandalism (people can see the house is vacant)
  
1. Craigslist Ads
   
• Tend to be the more abundant and higher quality grade of tenants
  
• Make your ad stand out with the free website www.postlets.com
  
• Don’t put the address on the ad. Craigslist allows you to put the general area of the property
  
1. Newspapers
   
• Depending, you’ll pay around $20 a week for a basic ad. Try abbreviating words to save space. Example of pg. 290
  
1. MLS
   
• You will pay your agent a commission when it is rented
  
• Talk to your agent about how it‘s done in your area as well as pricing
  
1. Existing Tenants
   
• If you already own several units, send your tenants a postcard of the property and offer them a cash reward if they get someone to rent
  
Accepting Phone Calls
Pre-screen the tenant before showing them the house

• Their gross income must be >3x The monthly rent
  
• The credit score of 600 or more
  
• Source of income and provide proof of income
  
• Good references from previous landlords
  
• Number of occupants less than 2 per bedroom (Washington law)
  
• Only non-smokers
  
Showing the Property to Tenants
To avoid no-shows, use these techniques:

1. Give the address to drive by, then tell them to call back if they want to see the inside
   
2. Batch the meetup time with other tenants, Friday from 5-5:30. Will be awkward but this creates scarcity and competition
   
The Application Process
The Rental Application

• Name(s)
  
• Date of birth
  
• SSN
  
• Phone number + alternate number
  
• Previous address (past 5 years)
  
• Current employer (name, hire date, income, contract info)
  
• Past employer (‘’)
  
• Emergency contact info
  
• Release of information statement
  
• Signature
  
• Application fee
  
• ALWAYS take an application fee to take the application (your time and trouble) ask local management company’s what their fee is, this should be around $35 per adult
  
Screening Tenants

• Hold the rental history and income in high regard when in low-income areas
  
Look closely at:

• Prior felonies
  
• Prior evictions filed
  
• Evictions carried out
  
• Bankruptcies
  
• Judgments
  
• Other criminal issues or bad financial history
  
Verifying Income and Rental History

• Remember that people often lie on their application so make sure they sign a “release of information” signature to allow you to properly check their claims
  
• Begin with their job. Call the tenant’s company and talk with the manager, owner, or Human Resources manager. You will need to fax over the release of the information signature.
  
• Ask these questions:
  
1. How much do they currently make?
   
2. How long have they worked there?
   
3. Is the job considered temporary?
   
• Call their previous landlords within 5 years. You need to conduct a background check and credit check to see if any other addresses appear they “forgot” to list a landlord they rented from. Ask these questions:
  
1. How long did the tenant rent from you?
   
2. What was their monthly rent?
   
3. Did the tenant receive their security deposit back?
   
4. Would you rent to this tenant again?
   
Accepting or Denying an Applicant

• To avoid discrimination complaints, the process using a first come first serve basis. To avoid getting sued, be sure you can demonstrate what (non-discriminatory thing) made one better than the other
  
• When you deny an applicant, document and store the reasoning to defend yourself later if you need to
  
• When an applicant is approved, verbally let them know and they are approved, you need to require a deposit within 24 hours of the tenant being accepted. Let the tenant you can't hold it indefinitely, so if they want it to have them pay the deposit (this will eventually be their security deposit)
  
• When collecting the deposit, sign 2 copies of a “deposit to hold agreement” that states what the deposit is for and what the terms are. This will declare a certain, clear date when they have to sign the lease agreement
  
• Try to get it signed ASAP to lose as little rent money as possible
  
• To acquire the lease, go to www.EZLandlordForms.com, www.usleagalforms.com, staples, or your lawyer
  
• Before you get that though, you need to decide how long of a rental agreement you want, month-to-month, one year lease. Most choose a one-year lease to minimize turnover. Make sure the lease doesn’t end between November through January
  
• Check with your attorney for other forms you may be required to give to the tenant
  
Signing a Lease Agreement

• To show professionalism, sign the agreement at your attorney’s office. This also adds a sense of seriousness
  
• Go through ahead of time and highlight where they need to sign, as well as sticky notes here and there
  
• Walk them through the provisions of the lease and have them initial important notes
  
Accepting the Rent

• Prorate the second month to match the first (full month at signing, a fraction at 1st of the month)
  
• Only accept payment in certified funds like a money order or cashiers check, no personal checks or cash
  
• For payments in the future, use intuit payment or check bigger pockets forums for more ways
  
The Move-In Condition Report

• The last thing you need to do is for the tenant to sign the condition report where he walks through the property and check damages. Any flaw, have them document and describe the issue if they ever come back to say “it was already like that”
  
• Recommended to take a video of the property also
  
• A landlord can’t deduct any charges from the security deposit if a move-in deposit wasn’t done when the tenant is present. DOCUMENT EVERYTHING.
  
Handing Over the Keys

• Do not let the tenant move their stuff before signing the lease and paying the rent. Consequences could be disastrous
  
• Keep everything professional, this sets the tone for the tenant
  
Bookkeeping and Taxes

• If you do it wrong, you’ll end up in jail
  
• You can use spreadsheets by dividing it into sections that correspond with the IRS’s categories for income and expense
  
• You can also use QuickBooks. Just take a course and figure out how to configure it to the rental business
  
• Www.landlordaccounting.com
  
• Rental property software like Buildium, VerticalRent, Appfolio
  
• Hiring it out to a pro bookkeeper is also an option
  
Taxes

• Income is tax-deductible
  
• More properties you have, more complex taxes will be. Once you get some traction, hire a CPA
  

Ch. 18 Managing Your Rentals (part 2)

Maintenance and Repairs

The most common repairs:

1. Fridge/stove dishwasher not working

• Repairs are from $50-$100 an hour
• You can also buy used stuff (no dishwasher)

1. A water leak in ceiling or under windows

• Hire the best, not the cheapest

1. Water leak under the sink

• Probably the pipes don’t fit together, easy to fix. Can call a plumber for $100

1. Water drip from faucets

• Always buy high quality faucets

1. No hot water

• Either a problem with the water heater or it might be a heating element inside

1. Bugs/rodents

• Educate the tenant they can't leave food around and be messy
• Hire someone to remove (couple hundred)
• Say in lease after a few months it becomes the tenant's problem

1. Garbage Disposals

• Try not to put these into rentals
• Something might be stuck, or the motor might be burned out which will be a couple of hundred bucks from a handyman

1. Toilet water leaks

• Pretty cheap to fix, probably a problem with the flapper. Won't cost more than $20

1. Clogged toilet

• This is the tenant's problem and they need to call their plumber

1. Furnace repairs

• Most important to fixing. Make sure to call a furnace repair specialist. Make sure the tenant changes the filter often.

Landlord vs Tenant Responsibilities

You're only responsibility is to provide a safe, habitable property that is up to code

Smoke detectors, heat, appliances, plumbing are things you are responsible for

• If a tenant breaks something like a window, hire someone to fix it and charge the tenant
• Tenants responsibility to report problems or they will have to pay for it

Annual Preventative Maintenance

Spot problems before they become an issue

Give the following list to a handyman once a year (interior):

• Change furnace filters
• Vacuum dust from fridge coils
• Replace smoke detector batteries
• Check carbon monoxide detector is working
• Sweep fireplace
• Ensure lint from the dryer vent has a clear path to outside
• Flush water heater
• Check the expiration date on fire extinguisher
• Repair broken caulk or grout in the bathroom
• Tighten any handles, knobs, racks etc.
• Remove showerheads and clean sediment
• Check weather strips on all doors and windows to repair

Ch. 19 Exit Strategies and 1031 Exchanges

Not planning ahead results in chaos

Some exit strategies:

Hold Forever

• Understand your body will not be the same later in life
• Consult with a lawyer to minimize your tax payments

Seller Financing

• Only available if the home is fully paid off so you can play the role of the bank

Benefits: higher sales price, lower tax bill, ongoing passive income

• Be sure to do your homework before doing this

Cash Out

• Just accept the big tax bill and reinvest the funds into another vehicle or spend it how you choose

The 1031 Exchange

• Allows you to "defer" paying any taxes on the profit of a property when it is sold, as long as another "like-kind" asset is purchased using the profit received.
• The government wants to help us because we are providing housing
• Money is held in an intermediary account in the interim

Rules:

1. "like-kind" stipulation - the property being bought needs to be "like-kind" assets.

• Anything real estate related is similar, even if it isn't that similar

1. Required Value of the Replacement Property

• The property being acquired needs to be an equal or greater value than the one being sold - even if the value is dispersed over several properties

1. The 45-Day Identification Window

• The clock starts the day you sell your property
• Start looking for a deal before you think about selling the property
• You're allowed to identify up to three potential deals
• Some exceptions to this rule like the 95% rule and the 200% rule - seldom used

1. The 180-Day Closing Window

• Strictly enforced

1. The necessity of an Intermediary

• The proceeds may never enter your bank account or an account controlled by you
• The necessity of an accommodator

1031 exchange end game

1. Cash-out and pay all that is due to the government
2. Die and pass it all on - tax consequence disappears

• Remember to consult with a tax professional before doing anything

Ch. 20 Final Thoughts

Start taking action!