How to Succeed and Make Money with Your First Rental House

How to Succeed and Make Money with Your First Rental House\ \ By Douglas A. Keipper Sean M. Lyden \ John Wiley & Sons\ ISBN: 0-471-45140-1 \ \ \ Chapter One\ Seize the Opportunity! \ If you've been looking to make money in real estate, whether part-time or full-time, you've probably seen the 2 A.M. infomercials that promise: "Earn unlimited income in your spare time!" "Create a personal fortune in real estate with no money down!" "Only $75 will bring you hundreds of thousands of dollars in real estate earnings!!!" These infomercials make buying and managing rental properties seem so easy. They depict people just like you and me enjoying luxury cars, boats, and huge homes-and all the leisure time in the world.\ Does this sound too good to be true? Well, yes and no. Can you make a lot of money in rental properties and retire rich? Absolutely! Many people have done so. But, is it instant and easy money? Not necessarily. Just as in any business, to make money in real estate you must work hard and be disciplined, persistent, and educated. Then you'll experience the fruit of your labor. The reality is that the process of buying a rental house-especially your first one-isn't as easy as it may seem on TV. But one thing is for sure: Buying rental property can be a lot of fun, very profitable, and personally fulfilling when you have the right expectations and are willing to work hard to succeed at it! And to increase your chance of success you need to be educated.\ Andthat's what this book is about. It's designed to show you how to make buying your first rental house a success, from my personal experience. I'll share how I bought my first rental house-the challenges and fears I faced, the people I needed to meet, the books I read, what I did right (and what I did wrong), and what I will do differently on the next one. Remember when you were a kid how your parents would tell you about what happened when they were young? Well, they didn't want you to make the same mistakes they did. They wanted you to learn from their experiences. I want you to learn from my experiences. To give you a frame of reference, for my first rental house, after working 8 to 12 hours for seven straight Saturdays, I earned back my down payment and rehab costs and then cashed out $9,000 tax-free on top of all that. Pretty cool, huh? Well, if a 2.7 GPA from Ball State University can do this, so can you. And this book will show you how!\ MY STORY\ Here's my situation. I am 40 years old, a college graduate, and the youngest of four children. I've been in various facets of the financial services industry for more than 12 years, starting in mortgage banking, retail banking, financial planning, and now settling in as a commercial banker. Granted, I may have more financial training than most readers, but I also have more than most real estate investors who are worth 10 times as much as I am. So being a financial expert is obviously not the magic ingredient to getting started. It is not necessary to have an extensive financial background. This book will discuss many of the financial ins and outs and details of what you can expect. I'm married with two daughters, eight and six years old, and see buying rental properties as a means to diversify my income, pay for my daughters' college educations (and weddings, of course!), and for my wife and me to retire comfortably. Buying my first rental house is the first step to achieving these goals.\ I first got interested in real estate when my older brother Phil read Nothing Down by Robert G. Allen (Simon & Schuster) back in the early to mid 1980s. I was probably a freshman in college and he was a fifth-year architecture major. A few years later he confided to me that he spent an hour a day thinking about how to make money without having to work every day. Eventually he was in a commercial real estate deal with seven partners that turned out great, but he has not gone further than that one deal. Even though he never pursued additional deals, I was fascinated by the details of that one major project.\ Phil is so conservative by nature that the concept of working for profits rather than wages has always scared him. I, on the other hand, have always been fascinated by working for profits rather than wages. I saw my father get laid off after 37 years with the same company because a new accountant thought he was overpaid. As you might imagine, my father is not a big fan of accountants. Working for wages doesn't provide real security. It provides the illusion of security. Real security lies between your ears. Real security comes from having several streams of income through several types of skills. You could have been the best railroad engineer in the world, but when the airplane came along you would be out of a job. Or you could be the best airline pilot in the world, with 25 years' experience, and then videoconferencing and terrorism come along and you get laid off. The world is constantly evolving. Either change and adapt or get left behind. The choice is yours.\ I had seen some of my friends make money in real estate, and in the spring of 2002 I decided it was time for me to do it. I thought, "Why not? I have above-average skills in carpentry and home repair. I finished my basement in 1996. I was a mechanic through high school and college at a marina where I obviously worked with my hands every day. I have a brother who is an architect. I used to have a neighbor who was a building superintendent. Heck! I can ask a lot of questions at Home Depot and Lowe's and get all the free advice I need! While finishing my basement, I visited the home supply stores often. If I was venturing into an area I had never worked in before, I would ask two or three different store employees the same question. Then I might also ask a friend or neighbor. When I received a consistent answer, I would go with that solution. I have also been collecting business cards of people who could help me with electrical and plumbing work, as I need it. So what's holding me back?" The only answer was looking at me in the mirror, and he was not getting any younger.\ Are you reading this and thinking, "Doug, I don't even own a hammer, and I don't have a clue how to open a paint can"? Fret not! I did not do all the work myself. Although I can do some electrical work and plumbing, I preferred to leave all that to the experts. My wife was not too keen on having me on the roof, either. So we had help there also. I will discuss in detail later in the book how to develop your professional team.\ Where most people think of excuses as to why they can not do something, I began listing all the reasons why I can. I knew the mortgage business. I knew how to fix toilets, patch drywall, and light the pilot light on a hot water heater (why don't they call it a cold water heater?). I had all the hand tools of an average homeowner (well, maybe a few more tools than the average homeowner).\ You see, often the biggest obstacles that keep people from succeeding in the real estate business are the obstacles they erect in their own minds-the fears, apprehensions, and worries that come with making a significant change (for the better) in your life. It was time I worked on the obstacles holding me back. Therefore, your first homework assignment is to make an "I can" list. Hint: Your first reason should be "If Doug can do it, I can, too!"\ $9,000 CASH BACK AT CLOSING\ What I did with this first house is a textbook case on the "cash back at closing" type of deal. I'll go in more detail on this in Chapter 8, but here's the overview. The house was foreclosed, vacant, and now owned by a bank. It was dirty inside and outside. The split-level house was appraised for $122,000, and I bought it for $101,000. I got the bank to finance 80 percent of the appraised value, which is $97,600, for the first mortgage. I kicked in $3,400 as a down payment to cover the difference. I then spent $3,000 on expenses such as utilities, a mortgage payment, application fee, appraisal, insurance, and so forth. I spent $7,000 at Home Depot and Lowe's and with contractors to do all the repairs and then advertised it for rent.\ Once I fixed up the house, it was appraised for $139,000. I got a new mortgage for 90 percent of the appraised value, or $125,000. So here's how the numbers break down:\ * $125,000-new mortgage.\ * $97,600-pay off initial mortgage.\ * $7,000-to cover expenses (Home Depot, Lowe's, contractors, newspaper ads).\ * $5,000-for refinancing expenses, including two points for investor rates.\ * $3,000-for expenses (utilities, insurance, mortgage payment, etc.).\ * $3,400-for down payment.\ The net result? $9,000 to me tax-free. This is because loans are not taxable! The money can be spent just like income but it doesn't get taxed like income. All this for seven Saturdays' worth of work! That is an average of $1,285 per day of labor. Of course, that was only the middle of the process. It took time to learn about real estate investing. It took time locating a house. It took time renting out the house. I will take time to maintain the house.\ SLEEPLESS NIGHTS\ Making money is the fun part. But just as with any worthwhile, moneymaking endeavor, you must be willing to pay the price. For me, the price was enduring several sleepless nights, seven sore Sundays, and time away from home.\ Waking up at 2:37 A.M. is not fun, and I did it a lot. I would lie awake worrying whether I was doing the right thing, how much work needed to be done before I could advertise it for rent, and how much more money I would have to spend. What if somebody breaks in and steals all my tools? Did I get the right insurance coverage on the house? How can I get the master bathroom sink to stop dripping? My wife, on the other hand, never lost a minute of sleep! I would tiptoe out of the bedroom wide awake, and very jealous.\ Sometimes I sat at my computer and tried to list all the things I had to do to this house to get it ready to rent. I thought if I got it all out of my head that way it would help me to sleep better. It didn't, so save yourself some time and don't try that method. A couple of times I watched Carlton Sheets infomercials and tried to picture myself on his show. I'd find myself getting mad at those people who made it sound easy. Again, don't try that method! I would be so worn out the next day that I'd come home from work, eat dinner, and then fall asleep on the couch with my kids as we watched Animal Planet. I've taken Melatonin for years to help me sleep at night, but during this process it didn't seem to help much.\ My wife Nan and the kids coped well with Daddy being gone for seven straight Saturdays, 8 to 12 hours at a time. They would always bring lunch, and Nan would try to help for an hour or two before the kids wore out our patience and theirs. If you have ever tried to paint with children around, you know they always want to help. They get a paintbrush, make about five strokes with a brush, and they are done! Now you have an extra paintbrush to clean. Then Nan had to leave with the kids to maintain sanity in the marriage. I will talk later about your support group, but it is worth hearing it here, too. Your family needs to know what is involved.\ Now that I am on the other side of things, I sleep a lot better and do not worry as much. Why? I have gone through the process, survived, and now know what to expect as I build my real estate portfolio. You see, the hardest part about getting into real estate investing is buying the first property. Once you've gotten over the "first-house jitters," you'll gain more confidence to take your real estate assets-and cash flow-to the next level.\ CREATING YOUR OWN SUCCESS STORY\ With that said, let's talk about you. What is your story? What has gotten you interested in buying rental properties? What are your goals? What kind of money do you want to make from your own real estate business? What do you want the money to do for you? Are you looking to generate retirement income or save for your child's education or make enough money to vacation anywhere you want in the world? Does that sound like another homework assignment? Well, I will not be checking your homework, but I do think you need clearly defined goals. Have a plan for your profits from your first house. Do you want to pay off a loan? Do you want a down payment for a second rental house? By setting a goal, you will become more focused on what needs to be done to get there.\ (Continues...)\ \ \ \ \ Excerpted from How to Succeed and Make Money with Your First Rental House by Douglas A. Keipper Sean M. Lyden Excerpted by permission.\ All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.\ Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site. \ \

Chapter 1Seize the Opportunity!1My Story2$9,000 Cash Back at Closing5Sleepless Nights6Creating Your Own Success Story7Do You Have the Right Stuff?10Action Step14Motivational Quotes14Chapter 2Leveraging OPM--Other People's Money!15Bigger Rates of Return15Where to Get the Money16Chapter 3Building a Winning Project Team31Mentors32The Banker or Mortgage Lender37The Real Estate Agent38Attorneys41Accountants43Contractors43Motivational Quote47Chapter 4Getting over the Hump49Action Step61Motivational Quotes61Chapter 5Getting the Government to Pay Your Rent!63How Does Section 8 Work?64Does Your House Qualify?66How Do You Participate?71What Are Your Responsibilities as a Section 8 Landlord?71Motivational Quote73Chapter 6Finding the Right House75Become an Expert on Location78Other Considerations82Analyze the Cash-Flow Opportunity84Summary90Home Inspections91Houses We Did Not Buy and Why94Motivational Quotes98Chapter 7A House versus a Home99The Difference between a House and a Home99Motivational Quotes114Chapter 8Show Me the Money!115Where the Money Came from to Buy My First Rental House115Rental House Points versus Primary House Points122Private Mortgage Insurance123The Bottom Line124Chapter 9Welcome to the Closing Table!127RESPA Required Disclosures129Chapter 10Rehabbing Your Rental House133Taking Stock133The First Saturday134The Second Saturday136The Third Saturday138The Fourth Saturday139The Fifth Saturday140The Sixth Saturday141The Seventh Saturday142Monday Morning Quarterback144Getting the Most Bang for Your Renovation Buck145Motivational Quotes149Chapter 11How I Landed a Tenant151Marketing, Marketing, Marketing152Showing the House155When the Right Guy Showed Up--My First Tenant157Motivational Quote159Chapter 12Qualifying a Tenant161Why Is It Necessary?161What Am I Looking for?162The Credit Report163Renter Profiles166Verify the Funds168Inspection169Chapter 13Protecting Your Investment with the Right Lease Agreements171What Makes a Good Lease Agreement?171Where Do You Find Lease Agreements?176Chapter 14What to Expect When Becoming a Landlord181Motivational Quote187Chapter 15Timeline189Chapter 16Getting Paid on Time197How Eviction Works198Do Not Make These Landlord Mistakes201Resources for Additional Information202Final Thoughts from the Author202Motivational Quote202Appendix of Selected Mortgage Terms203Bibliography221Index223