Really any agent can represent a real estate investor there is no special certification to working with investors. But what is the difference between a regular real estate agent and an investor friendly agent?
The Invest Themselves:
If you are a real estate investor it is important to work with someone who invest themself. When I bought my first property I had no idea what I was doing.
Where do I find a lease?
How do I screen people?
What is legal what isn't?
What is a good property management company?
Do I need a commercial license and a rental license where do I get them?
What kind of book keeping software should I use?
How do I find tenants?
Should I shoot for top of market rent or go $50 below market and just get it rented?
Bonus question - What if you have a tenant with a tenant with a Pitbull certified as a helping dog. Technically you cannot deny someone due to having a service dog but your home insurance has restrictions against Pitbulls. So what do you do?
Luckily my agent that I used at the time was an investor and pointed me to all the right resources. Which is what I do for my clients now. You do not learn everything all at once but over the years I have read tons of books, listened to thousands of hours of podcasts/audio books, and been to many networking events. When I help a client get an investment property I can lease it out for them or if they want to do it on their own I teach them what the steps are.
Their Network Becomes Your Network:
As an Agent who invests I spend most of my free time reading books, or working on my properties. It's really my hobby and I want to perfect my craft! My networking groups some are large Philadelphia wide groups that have a lot of people and some are small where we have 6 or 7 people at someones house. Of course over the years I have had my series of repairs so I have built out an extensive list of contractors from plumbers to electricians. Any agent can probably provide you a list of contractors but can they provide you with contacts for hard money lenders, private money lenders, wholesalers, tax sale properties, great investors to seek advice from, real estate lawyers if you need one, business consultant/accountants? What if you go to buy an investment property and the lender says you need 6 months of reserves for all your properties and your primary residence that can be a lot of money. Is that the end of the road then, or does your agent know someone who can do 90 day reserves for only the investment properties? I know these people because I have made the dozens of calls myself to lenders and found the all of them operate differently. These are very nuanced issues but matter when you are going to buy that next investment property.
Philadelphia and the surrounding areas have been extremely hot the past couple years and it seems to just keeping getting hotter. It is important you have someone who is responsive and can get you in to see a house the day of if you need to. Now this does not mean finding a new house everyday that you may think could work but really are just throwing darts at the wall. Real estate agents are people too so just respect their time like you would anyone else. There are a lot of so called investors who will unfortunately have you show 100 houses and never buy anything. When agents spot one of these they usually choose not to work with them again so respect each others time. But if you find that right property you need someone who can get you in and right an offer day of. Being prepared to spot a deal is your job but get the deal closed is mine and being the first one their is key!
Leveling Up to 5+ Multi-Family
Eventually most investors want to go from single family to multi-family we learned this in monopoly...4 green houses for 1 apartment building. In real estate anything over 4 units (5+ units) is considered commercial multi-family. These deals are hard to find. Sure you can go on LoopNet ... there are some great deals that sit on there but not many. So how do you find good multi-family deals? The key is working with an agent who has networked the multi-family market. No I do not have any 5+ unit buildings myself but I do know how to find them. Most multi-family deals are off market or I have cold called owners for them. Underwriting is also a key part of seeking multi-family deals, there are certain assumptions for vacancies and expense that we know in this market. A lot of deals we get initially are presented with a 10% expense ratio which is far off from realistic. Does your agent know what a good vacancy and cap rate are in the area?
Finding The Investor Friendly Agent
Luckily if you're here you have already found me (shameless plug). But if you are in another market where do you go? I would suggest going to local real estate meetups there will be a lot of agents there. Go and talk to a few and you may find the right one there. Bigger Pockets is also a great place to ask for an investor friendly agent in your area. Or if you know someone who invests in your area ask who their agent is and why they use them. Seek someone who invests, has experience, is honest, kind, and responsive for when the right deal comes.
Disclaimer: The following is based off of my personal experience. I am not a lawyer, CPA, or financial advisor. Consider consulting with financial, legal, and tax professionals before making financial or business decisions.
I always had a passion for real estate and began to think seriously about investing years ago. Whenever you take an interest in something you begin to do the normal things read, learn, and talk about the subject. I read everything and listened to every podcast I could on the subject even networking with real estate investors when I had time. Then I began talking about it with family and friends and got mostly negative feed back: rentals are risky, the markets too high right now, why would you want the hassle, why would you want to evict people, invest in mutual funds, and a million more... When your best friends, family, and co-workers are questioning your decisions you must be wrong there's something you don't know right? Wrong! I now answer these objections with two of my favorite quotes "Free advice is the worst advice" and "Instead of thinking about the cost of doing something ask yourself what is the cost of not doing it".
IS RENTAL PROPERTY INVESTING FOR YOU?
The quick answer is I cannot answer that question you have to ask yourself what your goals are. For me I wanted an investment vehicle that would make more than traditional mutual/index funds. This leaves me with a few options the main two stock picking and rental property investing. I had always been interested in real estate and worked on houses growing up so I chose the latter. I realized that rental property investing wasn't going to be as easy as throwing money in a mutual fund and having it spit out a return year after year. The truth is rental property is a mix of an investment and a job you have to realize this before going into it. Initially it can be very hard because you probably don't know much about houses, leases, insurance etc.. If you work hard building your systems, team, and knowledge upfront everything becomes much more easier year after year!
THE BENEFITS OF RENTAL PROPERTY INVESTING
Live Rent Free: This is how I started investing in real estate. Save enough money for a down payment buy a house and rent out the other units/rooms. You then pay the mortgage, insurance, and taxes with the rents. I then put that saved rent towards my next house and the cycle keeps going!
Cash Flow: - The profit left over after the bills on the property are paid. IE: Your properties mortgage, taxes, and insurance are $500.00 and rents for $1000.00 your cash flow would be $500.00 per month. Many who invest would actually save 50% of that 500, $250.00 for expenses and vacancy which is good practice.
Equity: Your equity is the paid off principal on the property. In your mortgage you pay principal and interest every month. Without realizing it you are building your net worth just buy paying the mortgage every month. Say you bought a house for $200,000 and put it on a 30 year note when you were 25. When you are 55 that house will be paid off and that $200,000 in equity is yours. In 30 years however the value probably has gone up which brings us to our next benefit...appreciation!
Appreciation: Appreciation is the increase in value of your property over time. A Zillow article reports that national annual home appreciation hovers between 3-5% per year and this may change depending on the city. Appreciation is the icing on the cake and many suggest never investing with the sole purpose of appreciation.
Let's say I bought a house at $100,000.00 today and wonder what it will be worth in 30 years when the mortgage is paid. Using a simple online calculator I calculated this.
Starting value: $100,000
Average Appreciation 4% Over 30 Years
Ending Value: $324,339.75
That is $224,339.75 in profit besides cash flow and tax savings just for having your tenant pay your mortgage and you maintaining the property for 30 years!!!
Depriciation: "Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value." (Investopedia). Basically depreciation is reduction in value of the structure itself not the land over a certain period of time. This can be a huge tax write off each year and an overlooked benefit of real estate. I have my accountant do this for me and would suggest always consulting with a tax advisor.
Write offs: There are a number of tax write offs associated with real estate. Personally I am able to write off my interest, insurance, maintenance, repairs, and many more that can reduce my tax liability from a W-2 job. Again consult with a tax advisor on the amazing tax benefits you get from rental real estate!
THE BAD AND THE UGLY
Repairs: After I bought my first rental property I had little to no money. I thought nothing would go wrong because I didn't have any money for something to go wrong. Well stuff went wrong. My house was owned previously by a landlord and did the bare minimum and it became and Easter egg hunt of repairs.
Mitigating repairs: Upfront you should have a great property inspector do your due-diligence and find a good one. Go to the inspection with your inspector and hear what he or she has to say. I get all the inspections that I can. In my mind inspections are best thing to spend money on. I've walked away from deals due to bad inspections which was painful but I believe I'd still be fixing up that first bad house if I had bought it.
Expecting repairs: If your inspector points out that you may need a new furnace in a few years budget for that repair. I don't expect any cash flow my first year owning a property because most likely that money will be spent on repairs.
If you own a rental property eventually you will get a bad tenant it is part of the business. We cannot avoid this issue completely but we can put some preventions in place.
Screening: Screening your tenants is critical to the welfare of your business and your sanity. I use Cozy. I provide the client with a link then they fill it out and pay and I get a credit check, work history, and criminal history etc... This service is $40.00 per applicant there are other services out there but this one has been easiest for me.
Knowing the rules: If you are operating any business you should know the laws and regulations better than anyone. If the time comes in which you have to evict a tenant you should know how to execute that process. A great tip I also got at one of my real estate meetings is to go me your district judges and ask them about the process. One this will give you face to face and they will appreciate you trying to be proactive by learning the rules.
Leases: Have a great lease and try to predict situations that may arise and build that into your lease. If you know a Realtor cough cough me shameless plug. I can get you general Pennsylvania leases and other landlord forms.
Along with having a great inspector to mitigate the upfront risk of buying a money pit property having proper insurance will help manage your risk. In my basement I have steel pipes that are 80 years old and are likely to break at some point. This can be a $15,000 repair if they need to be replaced. Guess what, there is insurance for that! What if you have a no dog policy but your tenant has a service dog that is a German Shepard and this will violate your insurance policy? In most places you cannot deny a tenant based on having a service dog but you need insurance. Do you know what company does not have a breed exclusion? State Farm, I don't actually use them but if I ever come across the situation I know who I'm going to! It is important to mitigate these potential issues before they arise.
Rental Property Investing is Too Much Work:
Rental property investing is work which is why you can get higher returns. This work can be replaced by systems over time! My book keeping is done through QuickBooks which when I swipe my debit card automatically sends to my QuickBooks. I then submit this along with my other info to my accountant at the end of the year. My rent is collected through a paypal like service (Venmo) which goes right to my phone all I do is hit transfer to bank. Leases are electronically signed and stored on Google Drive so I can access them from my phone. Repairs and maintenance I still do myself but when I grow more this will be outsourced to property management.
WOULD I INVEST AGAIN? Absolutely! Rental property investing has been the greatest vehicle I have put my money into. It is hard work and at times it can be extremely stressful. You have to ask yourself if you are willing work hard for awhile and deal with some stress to gain the amazing yields real estate has to offer. This work and stress can always be outsourced too! Now that I have a great handyman the management is really easy. I have stopped trying to fix stuff myself which has made my life 10x easier. No other investment gives you the ability to scale as quickly and powerfully. Everyday I learn more, build more systems, and make my life easier. New problems arise but I realize that's one less problem I'll deal with down the road because I have learned the solution today. At first jumping in is scary but once you do the fear quickly wears off and the profits will come.
They say that ceo’s read an average of 52 -75 books a year. The average American reads 4 books a year.
If you’re like me a few years ago that number was 0. I was very interested in real estate and wanted to learn more, but hated reading. I was never someone who read in class I was the kid who used spark notes to study. I told myself that I wasn’t a reader and just didn’t have the personality for it. Then something changed. I found a subject that I was interested in. I started with a book that kept getting recommended to me over and over again to me. It was Rich Dad Poor Dad and I could not put it down, I finished it in 3 days. I then went on to Millionaire Next Door and Think and Grow Rich by: Napoleon Hill. I wanted to get to the book a week mark but as someone who works most of the day I didn’t have time. So how can I read a book a week in a timely and affordable way?
If you like reading real books with paper and cover there are a few free or low cost options I utilize.
Thrift books are my favorite distributor of books. They’re low cost used books with a wide catalgog and get delivered pretty quickly. I usually pay 3.79 a book and after three you get free shipping!
The best free resource known to man. Don’t forget about your local library. Just make sure you actually read and return the books!
Used book stores:
Another favorite resource of mine! Used book stores are great and have cheap 5$ books. They are an important resource in the community. They’re catalogs of books are generally ok for business books. If you’re having trouble finding something I’d refer back to Thrift books.
Ebooks are pdf books that you can print out, read on your computer or Kindle. I love Ebooks because you can download them the day you want them, you can bring a ton of books on your Kindle/computer, and sometimes they're FREE.
Basically just go on Amazon find a book you like and it will be available for download as an Ebook usually cheaper than hardcopy or audio.
Google Books (HAS FREE TITLES):
This is a great resource that no one knows about! The free titles I generally find are older books but they are great reads. History, the Classics like Charles Dickens, and many more.
I will elaborate on Scribd below but for now Scribd is 9.99/mo and you can get unlimited ebooks per month! Although they don't have everything I usually find every book I want on Scribd.
Audiobooks are key to hitting your reading goals. Audiobooks allow us to learn while doing other tasks. So you may think I don’t have time to read I’m too busy? Ok fair but do you have a commute to work, gym time, food preparation, laundry time, a job that allows you to have ear phones in?
Instead of putting on music maybe you could use a portion of that time to listen to a book. If you live in a city like me your commute maybe an hour or more each way. If you started listening to books during that time not only would you crush your reading goals it would make your commute more enjoyable. Now I’m not saying to maximize every minute of your life with audiobooks. When I go to the gym I listen to music because I spend other parts meeting my reading goals. When on the treadmill listening to books breaks up the monotony of running in place for thirty minutes. If you feel yourself overwhelmed from constantly listening to audiobooks turn it off for awhile and comeback. The goal is to improve not read 100 books a month.
Audible: when I started using Audible I thought it was a 15$ fee for unlimited books. It was for 1 book which is costly if you listen to a book a week that’s 60$ a month. I began looking for a service like Spotify that is a monthly fee and unlimited audiobooks. After a lot of sreaching I finally found ScribD.
ScribD: had been just what I had been looking for an totally increased my reading. I pay 9.99/mo for ScribD and get unlimited reads of their entire collection. Now they don’t have every book known to man but I’ve found they have most books I’m looking for. Usually if they don’t have a book you’re looking for they tell you when it will be available. They also have ebooks which you can read on your kindle and that is include in the price.
Library free app: When I started listening to audiobooks my library had a free app. This app was called Overdrive and works through your local library I believe it may be called Libra now. So all the books my library had access to I had access to through my app. This app was great at first however there are always caviots with free. First the catalog of audiobooks was slim and there are only a certain number of copies. So if you want to read a book someone else has it you could end up waiting months. It’s a good starter and this app also has ebooks.
Podcasts are amazing ways to get a financial education without the tuition. No they won’t tell you how to calculate the withholding on a dividend. They will tell you how to become financially free which is the point right?
So Here are some of my favorite podcasts:
Bigger Pockets Podcast:
This is a real estate podcast and my favorite. There’s over 300 episodes and all are interviews with different everyday real estate investors. From people starting out to Grant Cardone! When anyone asks me on how to get started in real estate I tell them to listen to every episode of the BP podcast.
Bigger Pockets Money Podcast:
This is the personal finance podcast of Bigger Pockets. They cover everything from saving at the grocery store to investing in HSA’s. The episodes taught me so much about things I never knew existed. If you’re looking to pay off debt or maximize your pretax savings this is the podcast for you!
Side Hustle School:
Ever had the idea of growing your income but don’t want to just get a second job. Side Hustle School is the podcast for you! The episodes are only 5-6 minutes long and will spark the entrepreneur in you. Definitely a great podcast for someone who needs ideas for extra income while working on a passion project.
How I Built This with Guy Raz:
This podcast follows the amazing journey of entrepreneurs whose brands we all know: Home Depot (my personal favorite), Kate Spade, Ben and Jerrys, Sierra Nevada Brewing... You think all of these people started with a 10 million dollar loan from friends and family? Most of them all started barely making payments to suppliers, scared but ambitious. It's amazing to hear the personal journey they went through to the titans they are today.
Progress not perfection. Don't strive to read 50 books a year. Just strive to start and maybe read 10 pages a day. One you get started you have something to build off of!
Thrift Books: https://www.thriftbooks.com
Google Books: https://books.google.com
Overdrive Library App: https://app.overdrive.com
Bigger Pockets Real Estate Podcast: www.biggerpockets.com/podcast
Bigger Pockets Money Podcast: www.biggerpockets.com/moneyshow
Side Hustle School: https://sidehustleschool.com/podcasts/
How I Built This: www.npr.org/podcasts/510313/how-i-built-this
I try to keep this real estate / business related and having your own health insurance is part of being a Realtor / business owner. It is now becoming the reality of many people who have been laid off this week or were let go do to the state of the economy. I am not in health care field or insurance field so I'd contact the appropriate parties before moving forward. This is just how I did it.
I had no idea how to get started. I had the Cobra plan from my old employer but that was looking like a payment of at least 500/month. My real estate plan that my brokerage offers is atleast 562/mo. I do not really go to the doctor or take prescriptions I just needed a plan incase crap hit the fan, dental, and a physical every year. A lot of people fall in this boat and others need a lot of prescriptions/frequent hospital visits. Having Independence Blue Cross and Blue Shield insurance before I went to their website: https://www.ibx.com/individuals/find_plan/index.html . You will find the below page:
Next I went to individual plans, then shop now, then see if I am eligible. So if you start going through this or talk with someone they will tell you The Period for Open Enrollment is closed! However losing coverage or a job is a "life event" and you will be eligible to enroll.
You then will click apply now and answer some personal questions and it will select a list of plans for you to choose from. There were 20 some plans but the below is just an example of what you will see:
For me I didn't need much as stated earlier. I would highly suggest calling them, some people are eligible for a credit from the government based on certain factors that a representative could explain. For me my plan worked out to
$33.00/mo for dental.
I think that is an amazing deal for a plan with dental. I have heard of other people going through other suppliers and getting better rates so shop around. This is what worked for me.
What this article is not about:
This is not a knock against stock market investing. I've known many people who invested their whole lives in mutual/index funds and have done fantastic. They were consistent in investing and did not waiver when the stock market headed for down turn. The theme with what they did and successful real estate investing is consistency, long term holding, and not quitting when it gets tough. If you want to learn more about the mutual fund/index fund side of investing check out a book called The Wealthy Barber.
Disclaimer: This is based off my personal experience. Talk with your financial advisor and or CPA before considering investing options.
A Crazy Week for Stocks
It has been another crazy week in the market. Stocks plummeted again Monday almost 8% with fears of Coronavirus and oil prices. The key word in that sentence is fear. When we see wild swings in the market it is usually a key indicator of fear or uncertainty in the current state or short term future of the market. The American economy is strong but the trading is not reflecting that. People have been saying since 2015 that a correction or recession was on the verge because "we have never seen growth last this long" or "we're due for one". We do not get recessions because we are owed one. Never the less the current market is reflecting fear and bearishness which no one ever knows how long that will last. With the swings in the market it has made me reflect on why I believe in real estate investing.
Real estate is too risky!
If you ask people what they think about real estate investing many would probably say it is too risky! Just let me reiterate that stocks dropped 8% in ONE DAY not in a year. The Dow Jones lost 2000 points IN A DAY. The stock market is not a bad place to invest. But to invest in a vehicle that can lose 8% IN A DAY then call real estate too risky I think is short sighted.
When I talk about investing in real estate long term I am referring to buy and hold, CASH FLOWING, properties. The key word is CASH FLOWING. They do not need to make 1000/mo but there should be money above and beyond the reserves for capital expenditures and pay the mortgage, taxes, insurance, and interest. Investing in property that you lose money every month on because you think it will appreciate one day is really speculation and not investing.
Cash Flow: It is not hard to find a property that cash flows 200-400 bucks a month after paying the (PITI) or principal, interest, taxes, and insurance. The more you put down the less of a mortgage payment you have thus more cash flow per month. I have a property I did an FHA loan on 3.5% down and I still do well on that one.
Equity: The one everyone forgets about! Each month you gain equity in the property by paying the mortgage. Lets assume you buy a property that is worth 250,000 and put 20% down on thus the loan is 200k (30 year fixed). In the first year each month you gain around 293/month in equity. Or your net worth increases by 293/month. With fixed rate mortgages the principal you gain increases every month and the interest amount generally shrinks. In 30 years (without appreciation) you have an asset worth 250k paid off by your tenants. So you are getting 200-400/mo in cash flow before maintenance, and end up with an asset worth 250k at the end. Over the years rents should be increasing 2-3% per year and of course taxes and insurance will go up as well.
Appreciation: The growth in value of real estate on an annual basis. The trend in the United States has been 3-5% appreciation of value annually. So now we have three benefits Cash flow/equity pay down/ and appreciation.
Depreciation: The definition is the reduction of value in an asset with the passage of time , due to wear and tear. Real estate value is made up of the land and structure (home) value. Only the structure can depreciate which for residential real estate is over 27.5 years. Thus divide the value of your home over 27.5 years. Then multiply the depreciation expense by the marginal tax rate to get the property tax savings from real estate depreciation. So why is it important? Depreciation gets written off against your taxable income. (I am not a CPA so talk with one more about this). Depreciation will be recaptured if the property is sold hence part of why the hold is important! So that is 4 benefits (Cashflow, equity, appreciation, and depreciation).
What About the Housing Crash of 2008:
I'm talking about insulating risk through diversifying into real estate. I have to talk about 2008 right? Before 2008 people always said housing was a safe investment and it will always go up in value. Which over long periods of time I believe to be true generally throughout the country with exception of a black swan (unexpected) event. So what happened in 2008. In 2008 a lot of people over extended and got approved for NINJA (No income No Job) loans. People bought properties they could not afford and a lot of what happened also was real estate speculation. Some were buying properties expecting the value to go up then sell, the values did not go up, and people took losses on these properties until they foreclosed. The industry learned from this event and it is incredibly more regulated today. Not to say that is could not happen again.
Insulating Against Risk:
Per the above graphic: Philadelphia actually had one of the lowest foreclosure rates in the county (in the 0.1-.5% range). The big insulator against risk is what class of property people invest in. If someone only invests in A Class properties (Luxury homes/apartment buildings) when the economy slows wallets tighten and people cannot afford those places. Thus the rents on A Class properties have to take a hit to stay afloat. Those A class tenants end up moving to B or C class properties. This is why I choose and others I know invest in B or C class properties. The rents are more insulated to risk because the demand for more affordable housing heightens during periods of economic downturn. People may use the term workforce housing interchangeably when referring to B or C class properties. The premise is still the same.
You Control Your Investment in Real Estate:
When we see dives in the stock market like this week. It is easy for people to feel like they have no control over their investment and can even change life plans for them. Real estate allows you to have full control over your investment which is both a positive and a negative!
Negatives of control:
If you do not have property management (which I do not) you are the one getting the calls Sunday night at 9pm that something broke (the calls are always Sunday at 9pm I don't know why). In addition for the first year you are fixing everything the past homeowner or landlord put off. A good inspector can save you some of these headaches but you will have a lot of surprises that first year. This is a long term play though so have to realize that one year of headaches may provide you a great property for the next 30.
You are the one filling vacancies, writing leases, and dealing with issues. At first this was a big issue for me who do I call to fix a fridge, how do I write a lease, how do I find tenants? I would say I have gotten a decent handle on things now (knock on wood). I have a great network of contractors for any and everything. Washer breaks I know a guy, fridge breaks I know a guy, lease needs to be written I have standard docs that are electronically signed. (I will be writing an article in a few weeks on building systems for rental real estate.)
I used to try to fix everything myself which turned into me watching a YouTube video saying that's easy then wasting time and money on supplies when I couldn't fix it. A big part of this is knowing what you are not good at. For me anything mechanical I just pay someone for now, and plumbing... and electrical. Instead of wasting my time learning to fix a dryer I can be reading a book on investing strategies.
Positives of Control:
You control your asset completely, you get all the cash flow, you get all the equity in the property, appreciation, and depreciation off your taxes. Did I forget to mention the tax write-off for the interest paid on your mortgage?
When you fix something or pay a contractor to you can do it how you like. So if the bathroom goes in the first month (which it did for me) and you can redo it to your style. Even though you are paying to fix that bathroom you are adding value (forcing appreciation) to your asset by doing a great job and making it look great. This is a whole side of investing research BRRR investing, Flipping, or value add for more info. When a tenant moves out you can choose to raise the rents or build an addition and get more bang for your buck. You could live in one room and rent the rest and live rent free. There are so many opportunities when it comes to real estate investing.
Real estate investing has so many benefits but it is more work than mutual fund/index fund investing. It is up to the person investing. There is no magic investment that will make you get rich quick overnight or a perfect stock to pick. The strategy I stick to is consistency, long term investing, and focusing on one or two investment strategies. The more I focus the better I get, the more I know how to deal with issues more cost effectively, the more money I save which I can reinvest.
Matt Tallent is a Realtor with The How Group. His passions include rental property investing and helping others achieve their real estate goals.
Real Estate Investing
Buy and Hold