Buy It, Rent It, Profit!: Make Money as a Landlord in Any Real Estate Market

One\ Invest in Your Future\ How You Can Become Wealthy as a Landlord\ Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those who are skilled in its keep.\ — The Richest Man in Babylon\ We are all looking for ways to get wealthy. Some people might not state this so bluntly, but let's face it — we all crave the security that money can bring. But it's important to note that wealth doesn't have to mean greed. Wealth can buy you more time off to spend with your family, good education for your children, better health care, and the freedom to live the life you want to live.\ Wealth to me means freedom. I want to have enough money to take time off to travel with my wife. I want to be able to help my parents live out their retirement years in comfort. And I want to give back to my community, particularly to help atrisk children have opportunities to make something out of their lives. All this takes time and money. Money buys me this time, and it provides me with these things that are so important to me.\ The bookstore shelves are lined with titles that promise to reveal the "secrets to success." I was once one of those staring at a wall of titles and wondering which one would help get me to the place I wanted to be. If you're anything like me, you've probably already learned what makes the "millionaire next door" tick and how to "think and grow rich." These are great motivational books — they help you figure out what path you want to take toward building your own life of financial security and freedom. But if you've picked up this book, you probably want something more...specific advice on how to build that wealth through one of the smartest methods around: real estate.\ I've been working in the apartment industry, where I received my Certified Apartment Manager (CAM) designation, for more than a dozen years, first as a manager of large rental complexes and later as an owner. I've worked on every type of property — from single-family homes to 1,000-unit apartment buildings, and just about everything in between. Several years ago, I decided to put all the advice, systems, and "best practices" I've developed over the years into a book and seminar series called The Landlord Academy (www.thelandlordacademy.com). I've trained tens of thousands of would-be rental property owners, some of whom have gone on to be property moguls in their own right.\ But in order to be successful, you don't have to have 100 units — a single-family home or a duplex is just as viable for your first move as a rental investor. And, as I'll show you, it's a heck of a lot safer to hang on to property for the long term than to try to work the market with risky "fix-it-and-flip-it" schemes. The beauty of rental investing is that you can choose the steps you want to take and decide when you are ready to take them. The key, of course, is performing your SEOTA™ (my own method for evaluating the right rental properties, which you'll learn in this book) and allowing this process to help you choose wisely. I'll give you all the tools, checklists, and operating systems you will need to make that first choice with confidence. That is my commitment to you. Read on to learn how Mitchell and Thelma, two of my Landlord Academy success-story clients, put these systems into practice.\ Mitchell and Thelma's Story\ Mitchell and his wife, Thelma, attended several of my Landlord Academy training courses. They were recently married with two young children, and were looking for a way to build wealth. Their financial state was OK (but not perfect) when they came to me. They both had steady jobs (though neither was pulling in the big bucks) and they had OK credit (with some outstanding credit card debt). But they also had a dream for the future: They wanted their kids to go to college (something neither of them had done), they wanted to be able to offer some security to their parents, and they had decided the 401(k)s they contributed to at work weren't going to get them where they wanted to go fast enough. They wanted to take their financial destiny into their own hands.\ Mitchell and Thelma were living in an apartment and needed more space for their growing family. As a two-income family, they decided they were ready to buy a home. However, after attending some of my classes, they were excited to start their rental investment portfolio and were unsure if they should use their limited funds to buy a new home for their family, or continue to live in their apartment and buy a home to rent out.\ I get questions like this all the time. I usually suggest this: Why not do both? Why don't you buy a rental property in which you can live and rent out the other units to help pay down the debt you'll be taking on?\ Mitchell and Thelma had been looking at single-family homes in the $240,000 price range. I suggested that they explore buying a duplex for the same amount. They could live in one apartment and rent out the other apartment in the building to help defray the cost of the mortgage. The rental income would get them started on their journey to real estate wealth, and the family would have a larger place to live in.\ Mitchell called me a few months later to report that while the lure of that bigger, more expensive home had been powerful, they'd resisted the temptation. They thought about their long-term plans and realized that this first investment move needed to be a wise one. Buying a more expensive home would be okay. It would appreciate in value, and they would have some equity to use in the future for college or a real estate investment. But by buying a duplex instead, they would advance two moves, rather than one. They might not have some of the upgrades found in the more expensive home, but they would have more space to live in and an income-producing rental unit. If they had bought the single-family home to live in, they would have had to save up more money or wait a few years for the equity to build up to use to buy a rental property. Mitchell and Thelma had just accelerated their journey to wealth.\ They were smart in another sense as well. Now that they had a rental property, they used The Landlord Academy as a resource to get the training, operations manuals, and forms they needed to manage this rental profitably and legally. They took their first step seriously. It always amazes me when I see people put their entire savings at risk by buying a rental property without getting some training on how to run that property. The time and money you spend in training to be a landlord and researching the best property-management systems (whether you take a class, or you use the guidance offered in this book) will pay off tenfold. For Mitchell and Thelma, the price of enrolling in my Landlord Academy was far less than the cost of one eviction! You can use the same methods Mitchell learned in class by using the processes and forms you find in this book to purchase and operate your own rental property. Mitchell and Thelma found that by using tried and true methods of operation, they were spending less time running the place than they once did worrying about their financial future.\ Mitchell and Thelma knew why their goal of wealth was so important to them. They wanted to be able to pay for their kids' educations. They didn't want to work second jobs to earn more, because they wanted to remain actively engaged in their kids' lives. And they wanted to have enough of a financial cushion to assist family members who might need assistance down the line. They wisely chose real estate as their method of achieving wealth. Then they were smart enough to find a step-by-step system to follow. This book will give you the tools to do the same thing.\ What About My Credit?\ Are you thinking that you might as well put this book down now, because you don't have good enough credit to get a loan? Don't do it! When I started my real estate journey, my credit score was a shaky 582! One of the smartest things I did was immediately get some advice on improving my credit. As I was planning my path to wealth and educating myself on real estate investing, I was also taking small but steady steps to improve my credit. By the time I was ready to make an investment move, my credit had improved dramatically.\ The worst thing you can do if you have less than desirable credit is wait to do something about it. There are many companies that can help you improve your credit, as well as some simple steps you can take on your own. I'll talk more about improving your credit in chapter 6. So, don't be discouraged if your credit isn't stellar right at this moment — you can still become a successful real estate investor. For a list of creditable credit repair services visit thelandlordacademy.com.\ You Can Have It All — Within Reason\ Mitchell and Thelma decided that purchasing a single-family home wasn't the beall and end-all for them at that moment. While that remained a desire, they were willing to put off realizing that dream for a while. They knew that if they acted strategically, eventually they'd be able to own a much nicer single-family home.\ What really convinced them that buying the duplex and renting the other unit was the wisest choice for them was that they understood and put to use the basic principle of leverage — using other people's money to purchase an asset. We will talk more about the power of leverage later on, but for now you need to understand only that their down payment entitled them to own an investment valued at $240,000. In other words, they put a small percentage down and got to own a much more valuable property because the bank loaned them the rest of the value of that property. If you were going to make your riches in the stock market, to buy $240,000 of stock, you would have to write a check for $240,000! In real estate you have to have only a portion of the purchase price in cash. The rest is loaned to you by a bank. Real estate is one of the few investment paths you can take that allows average people like you and me (who don't have huge trust funds to get started with) in the door. In addition, your property will also appreciate in value. Let's look again at Mitchell and Thelma to see several benefits of investing in rental properties.\ The Benefits of Mitchell and Thelma's Investment\ - Their renters help pay for their mortgage. The monthly mortgage of $1,350 Mitchell and Thelma assumed was more than they had been paying before, but they had a tenant who was paying $850 a month to lease the smaller two-bedroom unit in the duplex. So, in effect, they were paying only $500 a month of their own money on the mortgage. That was far less than they had paid previously in rent. They were actually again using other people's money — in this case, their tenant's rent payments — to pay down the debt on the property. \ - As the mortgage balance decreases over time, they can refinance to have lower payments — until eventually the property is paid off. The rent Mitchell and Thelma collect (which is likely to rise over time) will eventually be equal to or greater than their monthly mortgage payment. Eventually, once that balance is paid off, they will bemaking a profit each month in addition to being free and clear of that original debt.\ -The appraised value of Mitchell and Thelma's property will continue to increase. Whenever they decide to sell the place, they will see an increase in their investment, which they can use to reinvest in other properties.\ - Perhaps just as important, they will benefit from 3-D tax advantages — deductible, depreciable, and deferrable. I'll address each of these in more depth later on, but for now, keep in mind all these benefits of investing in rental property.\ \ Mitchell and Thelma Today\ Because Mitchell and Thelma followed my Strategic Evaluation of a Target Area (SEOTA) process to pick the right investment property (which we'll learn about later in the book), they were able to locate the right rental investment for themselves in a desirable neighborhood. As the value of the property increased, so did the rents in the area. (If they'd bought a single-family home, all they would have gotten was the theoretical increase in value of the property and no actual increase in cash flow.) After a year, they were able to get an additional fifty dollars a month for the unit. In four years, that $850 two-bedroom unit was able to command a nice, even $1,000 a month: That meant only $350 of their monthly mortgage had to come from their own income.\ Mitchell and Thelma decided the benefits of rental property ownership were so great, they bought a small apartment complex with the money they had saved by renting out the second unit in their first building and using some of the equity that had built up.\ Today, some five years after they first became Landlord Academy students, Mitchell and Thelma have sold that first duplex, purchased a six-unit apartment complex, and are in negotiation to purchase a twenty-four-unit property. Mitchell has left his job with the parks and recreation department to oversee the operations at their mini real estate-empire. By thinking strategically about their goals and the path to achieve them, today Mitchell and Thelma have a net worth of $1.2 million dollars. Not bad!\ Mitchell and Thelma's story is not unique. I've worked with hundreds of individuals who have achieved similar kinds of results by using the methods and practices I've employed myself and teach regularly. Not only have they learned about the importance of evaluating an investment properly before buying it to avoid costly mistakes, but more important, they have learned the arts of landlording and running these properties efficiently and profitably through my innovative landlording systems.\ While I've been fortunate to assist celebrity clients with significant capital to invest — guys like baseball superstar Gary Sheffield, boxing champion Winky Wright, and basketball's great Chucky Atkins — the vast majority of my students don't have lots of cash to invest. I've helped thousands of regular folks purchase a modest single-family home as a rental property, and just like in the game of Monopoly, these individuals and couples have gone on to purchase other properties with the proceeds from their initial investments! When you think about the whole idea behind Monopoly — to take a little green house and cash it in for a much larger red hotel with more cash flow — you realize that Milton Bradley had it right! And so can you.\ Single Family Homes vs. Multifami ly Residences\ I am often asked if it's better to buy single-family homes to rent out, or multifamily residences. Most people are shocked when I say my preference is multifamily. They've usually been told by many people to steer clear of apartments, that they are a management nightmare.\ This is the voice of inexperience talking. By eventually upgrading their investment portfolio to apartment units, Mitchell and Thelma benefited from something called economies of scale. What does that mean? It simply means a single-family home will generate only one source of income because you have only one tenant. If property taxes go up, which they will, or if insurance goes up, which it will, you still have only one major source to control these rising expenses. You can raise the rent on your one tenant only so much until what you are charging in rent is unreasonable and unrentable. This is where most investors make their mistake.\ With multiunits you are benefiting from the economies of scale. You have more sources of income coming in to not only help control expenses but also to provide cash flow. You can spread your increased expenses over several renters so it's less impactful — and so you can retain the good renters and not go through the added expense of soliciting and evaluating a new tenant.\ Also, multiunits are actually safer in times of economic turmoil. How? If you are renting out a single-family home and you have one vacancy, what's your vacancy rate? That's right: 100 percent. But if you have a duplex and one of your units is vacant, you have only a 50 percent vacancy rate. You're still bringing in some revenue. Clearly, the more units you have to rent, the less a single vacancy affects your bottom line.\ But aren't multiunit buildings more work to manage? Actually, no. It's systematically far easier to manage one set of units than multiple single-family homes in different locations. I'd rather make a trip to one four-plex and deliver all my notices or collect all my rent than have to drive to a bunch of different single-family homes.\ That said, there is nothing wrong with starting out with a single-family home as your first investment, but make sure that you are employing your SEOTA (the checklist to evaluate your property, which we'll discuss in chapter 4) before you buy. The upside with buying single-family homes is that the barrier to entry (price) is generally lower, but the downside is that the margin for error is a lot smaller, so it's important that you properly analyze the deal. We will talk about buying foreclosed properties at length later on, but I warn you that all that glitters may not be gold. Just look at the mistakes so many speculative investors made between 2005 and 2008. Don't make the same mistakes they did. It's easy to get caught up in the moment, but you have to think strategically. With the tools I'll give you in this book, you'll learn how.\ Rich vs. Wealthy\ Mitchell and Thelma's success has allowed them to live their version of the American dream. They are not only providing for themselves and their children and their family today, but they are securing a sound financial future for themselves and for generations to come. They aren't necessarily what I would call "rich" because they learned early on that riches come and go — often going just as quickly as they came. There is a big difference between being "rich" and being "wealthy." Wealth is long lasting and can stand the test of time. It isn't as subject to the kinds of fluctuations and factors that, as I write this in the early part of 2008, are dominating headlines and creating jitters in Americans of all ages and income levels. Wealth is a long-term, strategic plan. Riches are a onetime move to make some money. Getting rich is like checkers, one move at a time, with not a lot of thought to the next. Acquiring wealth is like chess, a strategic plan where you always have your next three moves planned out in advance.\ In many ways, Mitchell and Thelma are the epitome of investors — they have learned that investors can make money in any market if they learn to read market conditions and make the proper investment at the proper time. They don't get suckered into what everyone else is doing. Often by the time you hear what "everyone else is doing" that strategy is drawing to an end of its effectiveness or is going to collapse because everyone will do it at once. A great example of this is the condo craze of 2004 to 2007. Huge numbers of apartment communities "turned condo" and sold their apartment units as condominium homes. Some investors made tons of money with this strategy. Others jumped on the bandwagon only to find that the market was saturated, with too many condos for sale and not enough people to buy them. In fact, I watched the banner at an apartment complex near my house go from reading "Now Leasing" to "Condos Starting in the $260's" to "Condos in the Low $200's" to "Condos Starting in the Mid $100's" back to "Now Leasing" in the span of a year.\ Smart investors learn to forecast the market and plan for where the market will be, not where it is right now, and assess economic conditions to ensure that they are working in their favor and not their detriment. They look toward the horizon, and not a few feet in front of themselves.\ True investors are not speculators — those whose vision is fixated on the short-term, get-rich-quick, fix-it-and-flip-it game. Speculators usually have one short-term plan and can get caught off guard if conditions change and that one plan doesn't work. You really can make money in any market. But you have to know how to recognize the market and apply the right strategy to it. In my quest for wealth, I have investigated all the strategies. My friends called me crazy when I didn't run out and buy a condo to rent during the condo craze and they called me crazy when I didn't snag up some homes to "flip" during the fire-hot real estate market of the early 2000s. I am not saying those would have been bad things to do, but they weren't a part of my long-term plan for wealth. I had my resources pointed toward the one strategy I've found that consistently, over the long term, outperforms every other real estate investing strategy (and any other type of investing for that matter) and that's rental investing.\ Now, lucky for you, you don't have to roll the dice with your first investment move. This book will provide you with the steps to narrow down and select the right neighborhood to invest in, and then to evaluate a specific investment property. I'll help you navigate the tricky waters of securing financing and closing on your deal. Then, once you are officially a "landlord," this book will provide you with day-to-day systems to manage your property efficiently.\ The Five Controls of Real Estate Investing\ As both Mitchell and Thelma told me, the best move they ever made was investing in real estate and not in the stock market. They both love the idea of having something tangible to show for their investment dollars, and they love having direct control over how their money works for them. Neither of them was temperamentally suited to letting someone else call most of the shots. Stocks can be a great investment, depending on what your goals are. However, one of the key benefits I like about real estate is control. Mitchell and Thelma enjoyed:\ - Control over choosing what property to invest in \ - Control over rental rates\ - Control over tenant selection\ - Control over expenses\ - Overall control over cash flow\ \ When you have control over each of these things, you ultimately have control over value! That means that you have control over profit as well. You don't get that in most investment vehicles. I know Microsoft certainly didn't call to ask me what I thought about releasing a new software program, though I had put my hard-earned money into buying their stocks. Now I control my investment dollars, and you can too.\ In this chapter, I've given you a preview of the advantages of the Buy It, Rent It, Profit program. In the next chapter we'll explore why this is really a better plan in the long term than the other hot real estate trend in recent years, the "fix it, flip it" mentality. And I'll tell you a little bit about how I developed this program, so you can benefit from my hard-won wisdom and use the best practices I've developed over years of rental property investment to buy, manage, and grow your own rental empire.\ Copyright © 2009 by Bryan Chavis

Part I You Can Build Wealth Through Real Estate1 Invest in Your Future How You Can Become Wealthy as a Landlord 32 Buy It, Rent It vs. Fix It, Flip It The Game of Monopoly and Its Hidden Secrets for Real Estate Riches 123 The Seven Keys to Becoming a Successful Landlord And the Ten Most Common Pitfalls to Avoid 25Part II Investing In Rental Properties4 Where Should I Buy a Rental Property? The SEOTA Method of Evaluating Properties 375 How Do I Get the Best Deal on a Property? Mastering the Art of Negotiation 596 How Do I Pay for It? Getting the Right Financing 817 Are Foreclosures Too Risky? The Fundamentals of Foreclosures 97Part III Landlording Essentials8 Who Will Live There? Attracting the Right Tenants 1039 When Can They Move In? Understanding the Basic Components of a Lease 12210 What Do I Do When My Tenants Break the Rules? The Most Common Tenant Issues and How to Solve Them 14411 How Do I Move My Tenant Out? Ending the Lease Term 16212 Maintenance-Inspect What You Expect Tenant and Building Maintenance in the Long Term 173Part IV Building Wealth With Real Estate13 How Do I Protect Myself? A Legal Perspective 18714 How Do I Grow? Building Your Real Estate Empire 196Appendix: SEOTA and Due Diligence Forms 201Index 277