Tag: chicago rental properties

  • Dreaming About Rental Properties but Ignoring Money Mindset?

    Dreaming About Rental Properties but Ignoring Money Mindset?

    Do you dream about owning rental properties so you can generate semi-passive income while spending more time with your family?

    I want to hear about those dreams. What would you do with that time?

    Travel?

    Exercise?

    Read?

    It’s so motivating for me to learn what you would do with that kind of freedom.

    At the same time, it’s my job to remind you to not ignore key personal finance fundamentals while you’re dreaming about the future.

    When it comes to buying rental properties, this is especially true.

    Let me explain.

    If you’ve been keeping up with the blog, we’ve now learned how to run the numbers on potential real estate deals.

    In fact, I showed you that the analysis is not actually that hard. Your job is simply to account for the fixed costs and make informed predictions for the speculative costs.

    Then, we did the math together on an actual property in my target zone. By using a real example in Chicago, my goal was to further convince you that running the numbers should be easy.

    Finally, we talked about how to evaluate a rental property when the initial math looks bad. The truth is most rental properties are not going to immediately look like great investments. It’s our job as investors to negotiate and look for potential.

    By this point, you may be thinking that buying a rental property sounds great, except for one big problem:

    How are you supposed to come up with the money for a downpayment?

    Great question.

    It’s such a great question that it requires us to take a step back.

    Before evaluating rental properties, you need to evaluate your personal finances.

    It’s no secret that in order to buy a rental property, you first need available money for the downpayment.

    Unless you plan on taking on partners or getting the money from family, coming up with a sufficient downpayment is a major challenge.

    Yes, there are loan options available that require a smaller downpayment. We’ll soon talk about some of those options. I’ve used loans like this in the past.

    Still, a “smaller downpayment” does not mean “no downpayment.”

    So, how can you come up with a downpayment?

    For a downpayment, you need to have available money.

    To have available money, you need a budget that actually works.

    To have a budget that actually works, you need honest, powerful life goals.

    Does this sound familiar?

    It all comes back to money mindset.

    When was the last time you checked in on your money mindset?

    If you take a look at the Think and Talk Money homepage, you’ll see six main category tabs across the top of the page:

    Each one of these categories builds upon the previous categories.

    It all starts with money mindset.

    A strong money mindset is the foundation of the personal finance journey. Maintaining a strong money mindset requires constant and intentional thought.

    wooden boat on blue lake during daytime indicating what you can do with financial freedom.
    Photo by Pietro De Grandi on Unsplash

    I revisit my money mindset every week by taking a quick look at my Tiara Goals for Financial Freedom.

    It may seem overly simplistic, but money mindset is what separates people who reach financial freedom from those who struggle to get ahead in life.

    Don’t believe me?

    Budgeting is really not that hard. We all understand the basic concept: spend less money than you earn. Still, most of us can’t do it.

    The same applies to debt and credit. We all know to avoid debt. We know to use credit responsibly. So, why don’t we do it?

    Investing can seem complicated at first. Is it really that hard? Entire books and websites have been created to show you how to create massive wealth through simple index funds.

    What about buying rental properties? We did the math together. Analyzing deals is not that hard. The impediment for most people is coming up with the money for a downpayment.

    You may be in a similar boat right now. You want to buy a rental property but you’re discouraged because you don’t have the downpayment saved up.

    It’s not just about how much money you make.

    Buying rental properties is not just about how much money you make. Plenty of lawyers and professionals make a lot of money and struggle to come up with any excess money to invest.

    Sadly, the struggles don’t just relate to coming up with money for investments.

    Lawyers as a profession have long struggled with mental health issues. I first learned about these challenges during law school orientation. Today, I see it in practice.

    Being a lawyer is a hard way to make a living. When you work as a lawyer, the hours are intense and stress levels are consistently high.

    In 2023, the Washington Post analyzed data from the U.S. Bureau of Labor to determine what the most stressful jobs are. The study confirmed that lawyers are the most stressed.

    Of course, lawyers are not alone in struggling in this regard due to long, stressful hours.

    The same study showed that people working in the finance and insurance industries were right up there with lawyers as being highly stressed.

    Well, what can we do about it?

    How can we address these struggles?

    Where can we find money for a downpayment?

    I have some thoughts.

    How motivated are you to truly get ahead in life?

    Are you truly motivated to get ahead in life?

    Have you worked on your money mindset and found the motivation to actually create a budget that generates savings?

    If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?

    When I mention side hustle, is your initial reaction that you’re too busy or important?

    Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.” 

    In my personal finance class, we spend a lot of time challenging that notion.

    Very few people- and I mean very few- are too important or too busy to take on a side hustle.

    For most of us, it’s an excuse.

    You may think you’re one of those “too important” people.

    I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”

    Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?

    Setting that conversation aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time.

    Some examples of side hustles my students have come up with in class include:

    • Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
    • Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
    • Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
    • Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.

    How about this idea for aspiring real estate investors: part-time property manager?

    My wife and I recently needed some help with apartment showings. We reached out to one of our favorite young people in the world to see if she’d be interested.

    A chance to make some money on the side and learn a new skill?

    She jumped on board without hesitation.

    We’ve known her for years and were not the least bit surprised. She’s exactly the type of person who will no doubt be successful in whatever she chooses to do.

    There is always a way to make more money.

    The point is there are always ways to make more money by doing things you like to do anyways. Even if you’re busy. You just have to exert some mental energy to figure out how.

    Then, when you make that extra money, put it to work for you. Make all your hustle worth it.

    At that point, we can talk about investing or buying real estate.

    Unfortunately, most people don’t want to go through this process.

    woman walking on street surrounded by buildings and thinking about own rental properties.
    Photo by Timo Stern on Unsplash

    Too many lawyers and professionals come to me and primarily want to talk about investing or buying real estate.

    They want to skip the foundation and jump right to the more exciting stuff.

    Most of the time, these are people who have never kept a budget. Or, they have massive student loan debt with no real plan to pay it off. Maybe they have a good W-2 job but no other sources of income.

    When I start exploring their situations with them, it’s clear they haven’t thought much about the personal finance building blocks.

    When they mention how hard it is to save for a downpayment, they haven’t considered looking for a new job that pays more or starting a side hustle.

    Before jumping right to owning rental properties, these are the personal finance obstacles that need to be addressed.

    If this sounds like the situation you are in, your ongoing mission is to generate more cash to fuel investments.

    The fun part is once you’ve discovered your motivations and established strong habits, you will consistently have money available so you can invest month after month for the rest of your life.

    My wife and I would not own five properties today if we didn’t first learn personal money wellness. 

    My wife and I would not own five properties (11 rental units) today if we had not first learned money wellness fundamentals.

    I don’t just mean we wouldn’t have had money available to invest, although that is certainly true. 

    I also mean we wouldn’t have the skills and knowledge to successfully run our real estate business.

    If you’ve ever wanted to be a business owner or investor, working on personal finance skills now is critical.

    Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”

    If you knew someone that made $1,000,000 per year, and at the end of the year, had only invested $20,000, what would your reaction be?

    What if you knew someone who made $100,000 per year and invested $20,000? Did your reaction change?

    How often do you think about your money mindset?

    Do you tend to think more about the “fun stuff” (investing, real estate) than the fundamentals (money mindset, budgeting, debt, etc.)?

    Let us know about your money mindset in the comments below.

  • How to Easily Evaluate a Rental Property with Real Numbers

    How to Easily Evaluate a Rental Property with Real Numbers

    For beginners, running the numbers on a potential real estate deal can seem complicated. 

    It doesn’t have to be.

    If you’ve been practicing good budgeting habits with your personal finances, this part should actually be easy. 

    The key is simple: more needs to come in than goes out.

    When you have more coming in than going out, that means you have positive cash flow.

    For lawyers and professionals acquiring rental properties to accelerate our journeys to financial freedom, we don’t need to overcomplicate things.

    What we need to know is whether a property is going to put more money in our pockets than it takes out.

    Today, we’ll look at a real example of how I quickly and easily evaluate potential deals in my primary market.

    If you haven’t already, check out my previous post on evaluating real estate deals for a detailed explanation on why I focus on the below elements.

    As a quick refresher, let’s first look at the fixed costs and speculative costs involved in evaluating rental properties.

    There are fixed costs and speculative costs involved in evaluating a rental property.

    Whenever you evaluate a rental property, there are some fixed costs and some speculative costs involved. This holds true whether you are a beginner or an experienced investor.

    It’s helpful to differentiate between the fixed costs and the speculative costs. In a lot of ways, we can control the fixed costs, but we cannot control the speculative costs.

    Fixed costs generally include reoccurring monthly bills that are relatively constant.

    The main fixed costs you’ll want to know when evaluating a rental property include:

    • Mortgage payment (Principal and Interest)
    • Taxes
    • Insurance
    • Utility Bills
    • Property Upkeep
    • Preventive Maintenance

    Speculative costs include those unpredictable, irregular costs that do not occur every month and maybe don’t even occur every year. 

    I separate the speculative costs into three main categories:

    • Vacancy Rate
    • Unexpected Repairs
    • Property Improvements

    Vacancy rate refers to the percentage of available units that are unoccupied at a particular time. When running the numbers on a prospective rental property, I recommend adding in the cost of 5% vacancy.

    When you own rental properties, things are going to break and require money to fix. If you target properties in decent condition, I recommend saving 5% of the monthly rent for unexpected maintenance. 

    If you don’t improve your property over time, you risk your unit becoming unattractive. Again, if you target decent properties to begin with, I recommend saving another 5% per month for property improvements. 

    With these costs in mind, we can now quickly and effectively run the numbers on any available property.

    Let’s take a look at a property that recently became available in my target market of Chicago.

    I regularly check available properties in my target area in Chicago.

    I have a searched saved on the Redfin app for multifamily properties within a certain price range in my target areas of Chicago.

    That makes it easy to scroll through the listings a few times every week to keep myself educated on my local market.

    I do this for a few reasons, regardless of whether I’m actively shopping for a property.

    white ceramic sink near brown wooden table indicating a nice rental property but do the numbers check out.
    Photo by Huy Nguyen on Unsplash

    First, I want to know what new properties come on the market. I’m interested to see if developers and rehabbers are still drawn to my area.

    I also check to see how much properties have sold for recently so I can stay on top of market conditions. For example, I’m curious if sellers are accepting below-asking-price offers and how long properties are staying on the market.

    I’m also looking to see if there have been any price reductions on properties that previously caught my eye.

    All of this simple research helps me move quickly when an attractive property becomes available.

    This research has also helped me develop a list of basic requirements I look for in a rental property.

    Before running the numbers, a property has to match my initial requirements.

    Before I run the numbers on any property, it has to satisfy some basic requirements. This is not an exhaustive list, but here are some of the most important factors my wife and I evaluate when considering rental properties in Chicago:

    1. Location, location, location. In Chicago, proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
    2. Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
    3. Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
    4. Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
    5. Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.

    If a property becomes available that meets these requirements, I’ll then run the numbers.

    Only after confirming that a potential property meets these requirements do I actually run the numbers.

    There’s no reason to waste time on a property that may project well in a spreadsheet but will cause me nothing but headaches as a landlord.

    The other day, a new property popped up that caught my eye: 2501 N. Sacramento Ave.

    It’s a five-unit apartment building listed for $1,800,000 and located directly in my target zone.

    Here’s the listing description from Redfin:

    Fully Gut Renovated 5-unit building, a prime turnkey investment opportunity in the best Logan Square Location Possible. Double Vanities, Fully built out walk in closets, in unit W/D, tankless hot water heaters, thin shaker kitchens and full height quartz backsplashes are just a few of the features that make this building feel more like condo living. Perfectly situated just steps from the Logan Square Farmers’ Market, residents can enjoy an eclectic mix of trendy bars, restaurants, cafes, and shops right at their doorstep. Renovation done with full plans and permits, include a new roof, windows, insulation, drain tile system with sump pump, back deck, and still warrantied appliances!

    It’s not always the case, but in this instance, the pictures seemingly match the description of a beautifully renovated property. Of course, we can confirm the quality of the work when we tour the property.

    So, this property passed my initial screening. Now, I can run the numbers to see if it would be a good investment.

    By the way, I target gut-renovated properties because I have a full-time job as a lawyer and don’t have the time to dedicate to a major renovation project.

    Let’s plug in the numbers to see if this would potentially be a good investment property.

    Just because a property looks nice and is in a great location does not mean it’s a great investment. As investors, it’s our job to make sure the numbers work out so more money comes in than goes out.

    Using the cost categories above, we can pull most of the information we need directly from the listing.

    For example, Redfin (like most sites) provides a useful payment calculator where you can adjust the downpayment, interest rate, taxes, etc. for any property based on your personal situation.

    Home office vibes perfect for running the numbers on a rental property.
    Photo by Paul Calescu on Unsplash

    Here are some tips before you get started:

    • It’s a good idea to talk to your mortgage broker ahead of time to learn what mortgage rate you will likely qualify for and what downpayment you’ll need.
    • Remember, this is an initial evaluation. Before you make your final decision on a property, you’ll need to confirm these numbers with your real estate team during the due diligence period.
    • Try to be conservative with your projections. When you otherwise like a property, the temptation is real to modify the numbers so it looks better on paper.
    • You’ll notice listing agents may try to enhance a property’s value by suggesting “potential rent” or “market rent” instead of the actual rent. Don’t fall into this trap and end up with a nice-looking property that makes no money.

    OK, let’s look at the numbers on this property for educational purposes only. You are responsible for running your own numbers on any potential deal.

    2501 N Sacramento Asking Price: $1,800,000

    Monthly Rent: $13,840

    Mortgage Payment (Principal and Interest)$8,982
    Taxes$1,429
    Insurance$400
    Utility Bills$350
    Property Upkeep$200
    Preventative Maintenance$200
    Vacancy Rate (5%)$692
    Unexpected Repairs (5%)$692
    Property Improvements (5%)$692
    Total Monthly Cost$13,637

    Monthly Cash Flow (Rent – Costs): $203

    It took me less than five minutes to do this initial evaluation.

    I can see that based on these numbers, the monthly cash flow is $203. We’ll talk about what that means in a moment.

    A few notes on the above numbers:

    • For the mortgage payment, I estimated a 25% downpayment, which is common for investment property loans, and a 7% interest rate.
    • Taxes are a major cost that can make or break any deal. Make sure you are familiar with how taxes are assessed in your market. For example, in Chicago, property taxes are reassessed every three years. That means taxes go up every three years.
    • Many property listings will indicate the prior year’s taxes because they are lower. This particular listing has the prior year’s taxes, which I know are soon going to change for the worse. For now, I’ll run the numbers with the current taxes but would definitely account for higher taxes before moving forward with this deal.
    • Property insurance is a real wildcard these days. Insurance costs are going up everywhere. You’ll need to talk to a good insurance broker for an accurate estimate. I used my experience in the neighborhood with similar properties to make a reasonable estimate.

    So, what have I learned from running the numbers on this property?

    First, this is a beautiful property in a great location. If I made my decision based only on the pictures and the location, this would be a winner.

    Unfortunately, the numbers tell a different story.

    This property would not be a good investment for me. I invest for cash flow. For me, this property is way too expensive for only a couple hundred dollars of monthly cash flow.

    At a price point of $1.8 million, I would only be interested if this property had a monthly cash flow of at least $4,000 per month.

    Now, your preferences and goals may be different. Maybe you’re more focused on the other benefits of investing in real estate, like appreciation and debt pay-down. In that case, you may view this deal differently.

    So, is that it?

    Cross this property off the list and move on for good?

    Not necessarily.

    In our next post, we’ll explore ways to make this property a more attractive investment.

    We’ll take a look at how the numbers change if we can successfully negotiate the purchase price, find a better loan option, and improve the monthly rent.

    Real estate investors: let us know what you think of this property as a potential investment.

    Would you be interested in moving forward at these numbers?

  • Running the Numbers on RE Deals Should be Easy

    Running the Numbers on RE Deals Should be Easy

    For beginners, running the numbers on a potential real estate deal can seem complicated.

    It doesn’t have to be.

    If you’ve been practicing good budgeting habits with your personal finances, this part should actually be easy.

    The key is simple: more needs to come in than goes out.

    When you have more coming in than going out, that means you have positive cash flow.

    Today, we’ll discuss what information you need to forecast positive cash flow. My goal is to make this part of the process as simple as possible.

    I’ve read full books dedicated to evaluating the numbers on real estate deals. If you want to take a deep dive, I recommend Real Estate by the Numbers: A Complete Reference Guide to Deal Analysis by J. Scott and Dave Meyer.

    But, the truth is that most of us lawyers and professionals targeting rental properties as a supplemental income stream don’t need that kind of depth.

    Sure, if you’re targeting large multifamily properties or hoping to make rental property investing a full-time pursuit, you’ll absolutely want to pick up a book like Real Estate by the Numbers: A Complete Reference Guide to Deal Analysis.

    For the rest of us acquiring rental properties to accelerate our journeys to financial freedom, we don’t need to overcomplicate things.

    What we need to know is whether a property is going to put more money in our pockets than it takes out.

    In other words, we want to buy assets, not liabilities. When we’re tracking our net worth each month, we want to see that a rental property is helping.

    So, the question is: how do I know if I’m buying an asset and not a liability?

    Let’s take a look.

    There are fixed costs and speculative costs involved in evaluating a rental property.

    Whenever you evaluate a rental property, there are some fixed costs and some speculative costs involved. This holds true whether you are a beginner or an experienced investor.

    Fixed costs generally include reoccurring monthly bills that are relatively constant.

    Speculative costs include those unpredictable, irregular costs that do not occur every month and maybe not even occur every year.

    It’s helpful to differentiate between the fixed costs and the speculative costs. In a lot of ways, we can control the fixed costs, but we cannot control the speculative costs.

    Regardless, we need to account for both in our deal analysis.

    Here are examples of fixed costs when evaluating a rental property.

    The clearest example of a fixed cost is your mortgage payment. If you take out a 30-year fixed-rate loan, you’ll know exactly what your monthly mortgage payment will be for the next 360 months.

    You’re required to pay that amount each month, that’s why it’s a fixed cost. Easy enough.

    I also include insurance costs and property taxes in my fixed costs. These are fixed costs, at least for 12 months at a time, that you are required to pay each month.

    You’ll oftentimes see the acronym PITI to reflect the above basic elements of a mortgage payment:

    • Principal
    • Interest
    • Taxes
    • Insurance

    It’s safe to also include utility bills, like water, trash, and common electricity, in your fixed costs since there shouldn’t be much variation month-to-month in these expenses.

    The same goes for landscaping, snow removal, and pest control. I refer to these fixed costs as property upkeep.

    The final category of fixed costs includes preventative maintenance, like regular HVAC tune-ups.

    black computer keyboard number pad indicating how easy it is to run the numbers on real estate deals.
    Photo by Aykut Eke on Unsplash

    Yes, it’s true that the cost of insurance, taxes, utilities and other bills will go up over time. But, you usually don’t see dramatic increases in these fixed costs year over year. At least, in ordinary times. Plus, rents also go up, which offset the higher costs.

    To recap, the fixed costs you’ll want to know when evaluating a rental property include:

    • Mortgage payment (Principal and Interest)
    • Taxes
    • Insurance
    • Utility Bills
    • Property upkeep
    • Preventive maintenance

    If your goal is monthly cash flow, there’s no excuse for ignoring any of these fixed costs when evaluating a rental property.

    Here are examples of speculative costs when evaluating a rental property.

    Speculative costs are, by definition, harder to forecast. Even for experienced investors, the best we can do is guess at what these costs will be.

    I separate the speculative costs into three main categories:

    • Vacancy Rate
    • Unexpected Repairs
    • Property Improvements

    What is vacancy rate?

    Vacancy rate refers to the percentage of available units that are unoccupied at a particular time. Obviously, vacancy is bad for rental property investors because we are not collecting rent from the unoccupied units.

    To calculate your vacancy rate, simply divide the amount of weeks (or days or months, if you prefer) in a year by the amount of weeks (or days or months) your rental unit was unoccupied.

    Then, multiply that number by 100 to see your vacancy rate as a percentage.

    If you have multiple rental units, add your units together to get your total vacancy rate, like I show you below.

    Vacancy Rate = (Weeks Unoccupied / Total Weeks) x 100

    For example, I have 10 rental units in Chicago. This past spring, we had eight lease renewals and two leases end.

    We filled one of the two units without a single day of vacancy. The other unit resulted in six weeks of vacancy so we could tackle some needed repairs. More on that below.

    This means that I had 6 weeks of vacancy spread over 10 rental units. To calculate my vacancy rate, I can take 520 (10 rental units x 52 weeks in a year) and divide that by 6 weeks:

    (6 weeks of vacancy / 520 weeks) x 100 =1.154%

    Now, what do we do with this information?

    This is where the guesswork comes in. That’s because there’s no guarantee that next year I will have a vacancy rate of only 1.2%. In some years, we have 5 or 6 units to turnover. We may have 24 weeks of total vacancy instead of 6 weeks.

    The best I can do is speculate what my vacancy rate will be moving forward.

    I wish I could tell you that a 1.2% vacancy rate is a good forecast. In reality, predicting 5% vacancy is a better idea. That allows for about 3 weeks to turnover a vacant unit, reasonable estimates in decent markets.

    So, when running the numbers on a prospective rental property, be sure to add in the cost of 5% vacancy.

    As an example, if a potential property brings in $6,000/mo in rent, subtract $300/mo to account for 5% vacancy.

    What are unexpected repairs?

    Remember the leaky toilet?

    When you own rental properties, things are going to break and require money to fix.

    Predicting how much money you’ll need for these unexpected repairs depends on a variety of factors.

    If you are handy and don’t have to pay a plumber to fix the leaky toilet, you’ll save money on these kinds of repairs.

    Likewise, if you have a new construction property instead of a 100-year-old property, you’ll likely need to do less repairs.

    The bottom line is you’ll have to make educated guesses how much you’ll need to save for these kinds of repairs.

    This is actually one of the main reasons I recommend beginner investors don’t quit their day jobs. It’s a powerful advantage to have income coming in from your primary job to help cover any major, unexpected expenses.

    If you target properties in decent condition, I recommend saving 5% of the monthly rent for unexpected maintenance. With our prior example of $6,000/mo in rent, you should deduct another $300/mo for unexpected repairs.

    You shouldn’t need to use that 5% every month, so that balance should build up until you need it.

    What are property improvements?

    I mentioned above that we took 6 weeks to improve one of our vacant units. The floors were in rough shape and the apartment needed a full paint job.

    By the way, these are two relatively easy jobs that can add a lot of value to a property.

    Since we were in great shape with our other units all being occupied, the timing was right to spend a bit of money and lose out on a bit of rent.

    In the end, we spent about $5,000 and have brand new floors and a nice looking apartment. We didn’t have to spend that money, but we risk our units becoming unattractive if we don’t keep them fresh.

    white and red love print box with numbers indicating it's not too hard to run the numbers for beginner real estate deals.
    Photo by Elena Mozhvilo on Unsplash

    How should you account for this type of property upkeep?

    Again, if you target decent properties to begin with, I recommend saving another 5% per month for property improvements. That’s another $300/mo subtracted in our deal analysis based on $6,000/mo in rental income.

    Too many beginner real estate investors skip these speculative costs in their deal analysis.

    It’s tempting to ignore these speculative costs when you otherwise like a rental property. You might see monthly rents of $6,000/mo and fixed costs of $5,000 and convince yourself that this is a great deal.

    By ignoring the speculative costs, you’ve ignored the additional $900 for vacancy, unexpected repairs, and property upkeep that this property will cost you.

    Those extra costs might make this property unattractive.

    You can easily find most of the information you need to run the numbers online.

    It has never been easier to access the key numbers you need to know when evaluating a rental property.

    Sites like Redfin and Zillow typically have all the information you’ll need for your initial evaluation.

    One of the most useful features of these sites is the mortgage payment estimator. You can quickly see whether the PITI payment is going to exceed the amount of rent you can reasonably expect.

    Because of high interest rates and high property costs, most deal analysis I’m doing today ends right there.

    Of course, if the PITI payment is too high, you can play around with the asking price to see at what cost the property might be worth pursuing. Just don’t forget to take into account the other costs discussed above.

    Note: above, I specifically wrote “initial evaluation.”

    Before closing on a property, you’ll want to confirm the numbers in the property listing are accurate and not being exaggerated.

    For example, you’ll want to get verification from the seller on the actual monthly rent. As part of the due diligence process, sellers are required to turn over the current leases.

    Sometimes you’ll see listings where the rent is listed as “maximum monthly rent” or “potential rent.” That means the seller is suggesting the apartment could rent for that much, but there is no lease in place for that amount.

    I’m always skeptical of listings like this. If it was so easy to obtain the maximum monthly rent, why didn’t the seller get leases for that amount? If they did, they could surely expect a higher sales price.

    Always confer with your real estate broker on what the rents are in your market. And don’t forget, a five-star real estate broker should be able and willing to teach you how to run these numbers.

    Likewise, you’ll also want to verify with your mortgage broker exactly what your monthly payment will be based on current rates and your qualifications. The same goes for verifying what your actual insurance costs will be.

    Did you notice that I did not include a cost for property management in the above?

    If you are pursuing your first rental property or have a small portfolio, I recommend you self-manage.

    Most importantly, you need to learn how to be a landlord.

    There’s no better training than first-hand experience. If you do end up hiring a property manager someday, you need to know how to “manage the property manager.”

    There’s another good reason why beginner investors should self-manage.

    Unfortunately, it’s hard to find good property managers who are willing to work with small investors. It’s a near certainty that your property manager will not care about your property as much as you do.

    Plus, because of the cost involved, a property manager will likely suck up most of your monthly cash flow.

    While it varies by market, in major cities you can expect a property manager to charge between 8% and 10% of the monthly rent. It’s hard to cash flow with that kind of drag on your profits.

    If your portfolio grows or your circumstances change to the point where you can no longer self-manage, be sure to factor in this major cost to your deal analysis.

    Buying a rental property does not require an advanced degree in math.

    If you’ve been reluctant to buy your first rental property because of that math involved, hopefully you now see that it doesn’t have to be that complicated.

    You need to account for certain fixed costs and predict some speculative costs.

    There are countless online calculators to help with the math. You can also use a basic spreadsheet.

    Plus, your real estate team can help you with running the numbers.

    In an upcoming post, we’ll run through some examples of how I run the numbers on potential rental properties.

    Experienced real estate investors: what did I miss?

    Beginner investors: what else would you like to know about running the number?

    Let us know in the comments below.

  • Be Sure to Have an Experienced Accountant on your RE Team

    Be Sure to Have an Experienced Accountant on your RE Team

    I invest in real estate for the massive tax benefits.

    In fact, the massive tax benefits are one of the four main reasons why I invest in real estate. The other three reasons are cash flow, appreciation, and debt pay-down.

    I’ve previously written about how I earn rental income and legally pay close to nothing in income tax on my rentals each year.

    How is that possible? Am I some type of tax wizard?

    Of course not.

    But, I do have a tax wizard on my real estate team.

    OK, more accurately, I have a Certified Public Accountant (CPA) on my real estate team.

    Your accountant is so integral to your financial success that he is the next person you need to have on your real estate team.

    Why is it so important to have an accountant on your team?

    The federal government has long encouraged investment in real estate. People need places to live, work, and socialize. The government long ago decided to reward investors who take on the risk of providing these opportunities.

    These incentives come largely in the form of tax benefits.

    The challenge for real estate investors is to actually take advantage of all these tax incentives.

    That’s where your accountant comes in.

    Because I work with an accountant, I don’t have to be a tax expert. I just have to know enough to have intelligent conversations and make decisions when the time comes.

    My accountant makes sure I get all the tax benefits for owning rental properties.

    Before talking further about accountants, let’s review the first three members that you’ll want to have on your real estate team.

    Your Spouse is the Most Important Person on Your RE Team

    The most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved.

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    Isn’t that true for most things in life?

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Build Out Your RE Team Starting with a Five-Star Broker

    Once you and your spouse are on the same page, it’s time to start building out the rest of your real estate team.

    Start building your real estate team by finding a great broker. Your broker is like a five-star hotel concierge who can make your entire experience so much better.

    During your search for a great rental property, a good broker will:

    • Educate you about the market you’re investing in.
    • Send you properties that match your goals.
    • Tour properties with you to help identify any red flags.
    • Negotiate on your behalf to ensure you get the best possible price.
    • Connect you with other key members of your team.
    • Steer you away from making poor choices.

    But, you don’t just want a good broker. You want to work with the best brokers as a rental property investor.

    The best brokers will do all of things for you during the acquisition process. But, that’s just the beginning.

    The best brokers are in it for the long run and will help you navigate challenges as they pop up. That might mean helping with marketing and showing your property.

    More importantly, that means continuing to give you advice and tutelage as you learn to be a landlord.

    two businessmen having a meeting in the park reflecting the next most important people on your real estate team are your accountant, lawyer, insurance advisor, and handyman or general contractor.
    Photo by Medienstürmer on Unsplash

    How to Evaluate a Great Mortgage Broker for your RE Team

    With a five-star real estate broker on your team, it’s time to find a great mortgage broker.

    A great mortgage broker is like a tour guide who is the local expert and knows the ins-and-outs of the neighborhood. She has an intimate knowledge of the local food scene based on years of experience. 

    She’ll show you the hidden gems and recommend what to order at each restaurant based on your personal preferences. She can educate you as to what’s in certain dishes and why you may like to try them.

    She’ll also steer you away from the tourist traps and prevent you from going to the wrong places to ensure you have the best experience possible.

    Recommendations? Education? Preventing mistakes?

    Love all those things.

    And, this is exactly what a good mortgage broker will do for you.

    A good mortgage broker will:

    • Recommend the best loan for your goals.
    • Stop you from borrowing more than you really can afford.
    • Help get your loan approved. 
    • Explain the numbers.
    • Not let you refinance until the time is right. 

    Take your time finding a good mortgage broker. It’s important to work with someone who does more than just promise the best rates and terms.

    With your spouse, a five-star real estate broker, and a great mortgage broker on your team, it’s now time to fill out the rest of the key positions.

    Seek out an accountant with real estate specific experience.

    I mentioned earlier that the key way the government incentivizes real estate investors is through tax deductions. 

    To accomplish its goal, the government allows real estate investors to deduct certain rental property expenses from their income.

    When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.

    However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.

    The key is to work with someone who has significant experience specific to rental property investing.

    The truth is there are numerous tactics and strategies that apply to real estate investors that don’t apply to all businesses.

    An accountant who may be ideal for a restaurant owner or law firm might not be a good fit for real estate investors.

    This is not a knock on accountants, either. In this day and age, professionals in all industries tend to specialize in niche areas.

    For example, I am a lawyer who specializes in helping people with mesothelioma. You wouldn’t hire me to represent you in a divorce.

    If you broke your foot, you wouldn’t go see a brain surgeon.

    You get the idea.

    When seeking out an accountant, be sure to work with one who has experience specific to real estate investing.

    How can you tell if an accountant has experience specific to real estate investing?

    When my wife and I were searching for an accountant, it became very clear to us that not all accountants work with real estate investors.

    For instance, most accountants are well-versed in common rental property expenses. These common expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

    We met with plenty of intelligent accountants who understood these basics.

    Brainstorming over paper representing having a good real estate accountant on your team.
    Photo by Scott Graham on Unsplash

    But, we wanted more than just basic help. We wanted help in crafting a long-term strategy for achieving financial freedom through real estate.

    When you start meeting with accountants, ask them how many real estate investors they work with. Ideally, you’ll find an accountant who works with a number of investors similar to you.

    You’ll also want to find an accountant whose style matches yours. Some accountants are more aggressive and some accountants are more conservative.

    For example, say you own a vacation condo that you rent out sometimes and use personally other times. You may get different advice from two accountants on what counts as a rental property deduction for that condo.

    It’s ultimately up to you to find an accountant that matches your style.

    Find an accountant who answers your phone calls.

    Maybe this goes without saying, but you want an accountant who answers the phone when you call. As investors, we never know when an opportunity may pop up that we need timely advice on.

    You might be surprised how many real estate investors don’t have an open line of communication with their accountants. I think it’s a mistake to only consult your accountant after you’ve gone ahead with a decision.

    As one example, a few years ago, I thought about buying an 8-unit apartment building with a number of partners. It seemed like a good way to earn some cash flow with only a small amount of my own money in the deal.

    Before I moved ahead with the deal, I called my accountant. We had a long chat about all the additional complexities involved from a tax perspective.

    He took the time to educate me so I could make a good decision. In the end, I walked away from the deal.

    If I didn’t have a good relationship with my accountant, I might have made a big mistake.

    A good accountant will help you reap the massive tax benefits of investing in real estate.

    As a real estate investor, you don’t have to be an expert in every part of the business.

    There’s no better example than when it comes to taxes.

    Find a good accountant who is willing to educate you and strategize with you. You want more than just someone to prepare your tax returns.

    When you have a good accountant on your real estate team, you’ll move that much faster towards financial freedom.

    What other traits should real estate investors look for in a good accountant?

    Let us know below.

  • How to Evaluate a Great Mortgage Broker for your RE Team

    How to Evaluate a Great Mortgage Broker for your RE Team

    Ever been on a good food tour in a foreign country?

    Stay with me.

    We recently talked about how the most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved before you buy your first rental property.

    Once you and your spouse are on the same page, it’s time to start building out the rest of your real estate team.

    Start by finding a great real estate broker. Your real estate broker is like a five-star hotel concierge who can make your entire vacation so much better.

    With a real estate broker on your team, it’s now time to find a great mortgage broker.

    To continue our analogy, if your real estate broker is the hotel concierge, your mortgage broker is a trusted tour guide.

    Have you ever visited a foreign country for the first time and been excited, but a little bit nervous, about what’s in store for you? There’s so much to see and do, but you don’t speak the language and are a bit anxious to venture out on your own.

    Fortunately, you have an expert tour guide lined up to meet you at the hotel and lead you on an memorable adventure.

    Think about how the concierge and tour guide each help you in different ways.

    The concierge does not actually join you for each experience on your vacation. He helps you plan an itinerary and makes the arrangements before setting you on your way.

    He knows his role and leaves it to the specialists, like tour guides, to lead isolated parts of your trip.

    For instance, the concierge may help you book a food tour around London with an experienced tour guide. My wife and I did this years ago and had a wonderful time.

    The tour guide is the local expert who knows the ins-and-outs of the neighborhood. She has an intimate knowledge of the local food scene based on years of experience.

    She’ll show you the hidden gems and recommend what to order at each restaurant based on your personal preferences. She can educate you as to what’s in certain dishes and why you may like to try them.

    She’ll also steer you away from the tourist traps and prevent you from going to the wrong places to ensure you have the best experience possible.

    Recommendations? Education? Preventing mistakes?

    Love all those things.

    And, this is exactly what a good mortgage broker will do for you.

    Why it’s important to have a good mortgage broker on your team.

    Mortgage lending is big business. Just about every person out there needs a mortgage to buy a home or an investment property. As a result, there are a lot of banks and companies out there who want your business.

    To be sure, not all mortgages are created equal.

    And, not all brokers, banks, and lending companies are created equal.

    Your job as an investor is to find a mortgage broker who truly has your best interests in mind.

    That means working with someone who wants what’s best for you and your family, not what’s best for him and his family.

    Plus, because rental property investing is a long-term game, you want someone on your team who’s also in it for the long run.

    What should you look for in a good mortgage broker?

    During your loan process, you will be talking to your mortgage broker a lot.

    Refer back to the tour guide analogy. During the tour, you are essentially dependent on your tour guide. If you’re going to depend on someone, you probably want to like that person.

    The same goes for your broker during the mortgage process. You will be dependent on your broker to make sure your loan gets approved.

    Make sure you find someone that you mesh with.

    Here are some of the qualities you should look for in a good mortgage broker.

    People eating a meal around a table symbolizing the importance of a good mortgage broker.
    Photo by Priscilla Du Preez 🇨🇦 on Unsplash

    A good mortgage broker will:

    Recommend the best loan for your goals.

    There are numerous mortgage options out there. Selecting a mortgage is not a “one-size-fits all” kind of thing. Your broker should be well-versed in all the options and make recommendations based on your priorities. 

    Stop you from borrowing more than you really can afford.

    There’s a difference between what you might get approved for and what you can reasonably afford. A good mortgage broker will help you understand the difference.

    If you’re tempted to take out more than you should, your mortgage broker should help reign you back in.

    Help get your loan approved.

    Your mortgage broker’s primary job is to match you with a lender and loan product to meet your needs. The underwriters will have the final say in whether your loan gets approved.

    If you haven’t had the pleasure, you’ll need to provide the underwriters with documentation about your income, savings, investments, and so much more.

    While it’s ultimately not up to your broker to approve the loan, he can serve as an advocate on your behalf. He can help get the underwriters the information they need to approve your loan. Don’t underestimate the importance of this part of the job.

    Explain the numbers.

    This is especially important for rental property investors. After all, you’re buying a rental property to make money. All mortgage brokers can show you how much that property will cost every month.

    The best brokers will take it a step further and show you how much you can expect to cash flow from that property each month. Then, you can decide if it makes sense to buy a property based on the numbers. 

    Not let you refinance until the time is right.

    It’s tempting to refinance at the first moment rates drop. There are costs involved with refinancing that can oftentimes eat away at any savings from refinancing. A good mortgage broker will stop you from doing so until the moment is right.

    Be patient as you look for a great mortgage broker to work with.

    Take your time finding a good mortgage broker. It’s important to work with someone who does more than just promise the best rates and terms.

    Plus, if you shop around enough, you’ll learn that there’s not much variation in the rates from one provider to the next. Rates are mostly dependent on economic conditions outside the control of mortgage brokers and lenders.

    That’s why your mission is to stay patient and find a mortgage broker that you are comfortable with.

    When my wife and I were first getting started, we were told by a few different people that we had to work with this one particular mortgage broker. He was the best, apparently. His website was full of accolades and awards.

    We decided to give him a shot. We called his office and set up an introductory phone call for later in the week.

    At the scheduled time, he didn’t call. When we emailed him, he apologized and explained something came up with his kids.

    OK, no problem. That’s understandable. We rescheduled.

    At the rescheduled time, he again didn’t call. That was enough of that. We moved on. Maybe he really was great at his job, but he didn’t seem to care too much about us.

    We found a good broker years ago and have never looked back.

    In the end, it all worked out for the best. My wife and I met with a number of brokers before connecting with the guy we still use today. We’ve used him for all our Chicago purchases and multiple refinances.

    As a side note, I firmly believe that when you find someone good for your team, you commit to that person. Commitment leads to trust. And, trust leads to the best outcomes. This is true for anyone you work with, not just mortgage brokers.

    man holding a phone and texting reflecting what a good mortgage broker will do for you.
    Photo by NordWood Themes on Unsplash

    On top of being a mortgage broker, our guy is an experienced rental property investor. If you want to buy a rental property, I recommend you work with someone who also owns rental properties.

    At a minimum, find someone who has ample experience working with investors.

    For instance, with our first purchase in 2018, our broker recommended a conventional loan (at the time called “Home Possible”) that I had never heard of before.

    The loan allowed us to put 5% down, instead of the normal 20%, which meant we could more quickly buy our second property. This one recommendation allowed us to buy two cash-flowing rental properties within 6 months.

    This is just one example of how a good mortgage broker can help accelerate your real estate goals.

    Find a broker for your real estate team who understands your goals.

    Our broker understands exactly what we’re trying to accomplish with each purchase. I can be straight with him and he can be straight with me. It’s refreshing.

    We’ve had in-depth conversations about the numbers on every property we’ve considered. Importantly, he’s prevented us from borrowing more than we can afford. 

    And, whenever the underwriters ask for so many documents that I am about to lose my mind, he steps in to make it all better.

    Same as us, this is exactly what a good mortgage broker will do for you.

    What has your experience with mortgage brokers been like?

    What else do you look for that I didn’t mention above?

  • Build Out Your RE Team Starting with a Five-Star Broker

    Build Out Your RE Team Starting with a Five-Star Broker

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    We recently talked about how the most important person on your real estate team is your spouse. Make sure you each understand the financial, time, and emotional commitments involved.

    Isn’t that true for most things in life?

    Whether it’s a project you’re working on or a vacation you’re taking, it’s better when you do it with other people.

    Owning rental properties is no different.

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income. 

    For me, the benefits of owning rental properties significantly outweigh the downsides of being a landlord.

    It’s a tradeoff that I would happily make again and again… as long as I have good help along the way.

    That help starts with a real estate broker.

    If you find the right broker, he will guide you in building a rental property portfolio that you’re proud of.

    Let’s take a look.

    Start building your team by finding the best real estate broker.

    Start building out your team by finding a real estate broker (or real estate agent) who matches your style and understands your goals.

    Think of your real estate broker as a concierge at a five-star hotel in a foreign country.

    My wife and I went to Australia years ago. It was probably the best trip we ever took. We started in Sydney and eventually made our way up the coast to the Great Barrier Reef.

    While in Sydney, we took a couple of day trips to the Hunter Valley wine region and the Blue Mountains. We climbed Harbour Bridge and saw some animals at a zoo we had never seen before.

    We met some amazing people and had some wonderful meals.

    All of these experiences were arranged through the concierge at our hotel.

    Before we ever left Chicago, we coordinated with the hotel’s concierge. He asked us what our priorities were, sent us options to consider, answered our questions, and then made all the arrangements.

    The decisions were ultimately ours, but the concierge used his expertise and what he learned about our priorities to help us make the best decisions. Importantly, he steered us away from making poor choices.

    We would have been completely lost without his guidance.

    Just as the concierge helped us navigate Sydney, your real estate broker will help you navigate the rental property experience.

    Your broker will wear many hats in helping you find a great rental property.

    During your search for a great rental property, a good broker will:

    • Educate you about the market you’re investing in.
    • Send you properties that match your goals.
    • Tour properties with you to help identify any red flags.
    • Negotiate on your behalf to ensure you get the best possible price.
    • Connect you with other key members of your team.
    • Steer you away from making poor choices.

    These are all invaluable services that a good broker can provide.

    But, you don’t just want a good broker. You want to work with the best brokers.

    The best brokers will do all of things for you during the acquisition process. But, that’s just the beginning.

    The best brokers have one other trait in common.

    The best brokers remain a key part of your team (life?) long after the transaction has concluded.

    Getting a good rental property is just step one. Keeping the property is just as, if not more, important.

    We’ve talked about how owning rental properties is a long-term game. You want a broker on your team who’s in it for the long run to help you navigate challenges as they pop up.

    That’s why you want a broker who is willing to help you keep that property for the long run. That might mean helping with marketing and showing your property.

    More importantly, that means continuing to give you advice and tutelage as you learn to be a landlord.

    For that reason, if you are going to buy a rental property, I recommend you work with a broker who also owns rental properties.

    Ugmonk lady looking out window and talking on phone while closing a real estate deal.
    Photo by Dane Deaner on Unsplash

    I recommend you find a broker who is also an investor.

    There are different factors to consider when buying a rental property compared to buying a primary residence.

    A property could be a great home but would be a poor rental.

    When it comes to working with a broker, you want somebody on your team who has personally experienced the challenges in owning rental properties that lie ahead.

    Real estate brokers who are also investors are better equipped to teach you if tenants will love or hate a certain rental apartment.

    Here’s a very basic example to illustrate this point:

    I use the garbage disposal in my home multiple times every day. I never really thought about it before, but the garbage disposal is a wonderful invention. I’ll go as far as to say that I love my garbage disposal.

    However, in my rental properties, I refuse to install garbage disposals.

    In rental properties, garbage disposals constantly break because tenants are not always careful about what they put down the drain. Each time a garbage disposal clogs or breaks, that’s a costly repair. It’s just not worth it in a rental property.

    I first learned to avoid garbage disposals in my rental properties years ago from my broker.

    Yes, it’s a small consideration overall. You’re not going to pass up on a wonderful property because of a garbage disposal.

    But, each property you look at will have countless little elements like this that need to be considered.

    A broker who is an experienced rental property investor will have a better eye for these types of things.

    Find a real estate broker can help make a list of the most desirable features for renters in your market.

    My wife and I have worked with the same broker in Chicago for almost a decade. He’s been a mentor and a friend. He has helped us in countless ways, including putting together a list of features we look for in every rental property.

    It’s not an exhaustive list, but here are some of the most important factors we evaluate when considering rental properties in Chicago:

    1. Location, location, location. In Chicago, proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
    2. Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
    3. Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
    4. Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
    5. Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.

    There are certainly other factors we consider, but these are some of the first things we look for thanks to the guidance of our real estate broker.

    Key in white door with black handle representing what is possible when you have a good real estate team.
    Photo by Jaye Haych on Unsplash

    A good real estate broker is absolutely critical if you’re investing outside your home market.

    I live in the Chicago area and own a rental property in Colorado. Everything we just talked about becomes even more important when you invest outside your home market.

    In your home market, you have the benefit of relying on your daily experiences to help select the right property.

    I rented apartments in Chicago for 15 years before I bought an apartment building. That gave me a huge advantage when looking for a good rental property.

    I didn’t have the same level of intuitive knowledge in the Colorado market.

    Even if you have personal experiences in certain out-of-state markets, your knowledge will never match that of your hometown. No matter how many times you’ve visited a place, it’s not the same as living in that place.

    That’s why having a good broker on your team becomes even more critical when you’re investing out-of-state.

    I’m happy to say that our real estate broker in Colorado is the best there is.

    And if you ever tell him I said that, I’ll deny it and say I was hacked.

    Our Colorado broker spent hours and hours educating us about the local market when we were shopping for a rental property.

    Even though my wife and I had vacationed in the area for years, we didn’t know the first thing about real estate in the area.

    Before we considered any specific units, we had numerous conversations with our broker about our goals and preferences. He helped us pinpoint locations and features that we had not previously through about.

    I still have the pages of notes I took during these conversations, which I reviewed constantly during our search.

    If you are going to shop for properties outside your home market, be sure to find a good broker first.

    The most successful rental property investors have a team of professionals working with them.

    It’s not an exaggeration to say that having the right people on your real estate team can make or break your investing experience.

    Having a good team in place, starting with your real estate broker, will help you avoid mistakes and stay motivated so you can keep your properties long-term. 

    I’ve seen too many investors sell their rental properties after a couple of years because they didn’t have the right people on their team. They end up making preventable mistakes and give up because being a landlord is too hard.

    Unfortunately, that means they give up their properties long before getting the benefits from cash flow, appreciation, debt pay-down, and tax advantages.

    If you’re going to take on the challenge of being a landlord, you might as well hold your properties long enough to reap the benefits. 

    And, you should take all the help you can get along the way, beginning with a great broker.

    You will not regret having a great broker on your team.

    My wife and I have been incredibly fortunate to work with two top-class brokers, first in Chicago and then in Colorado.

    Thinking about it now, our brokers are similar in that they have been teachers and mentors to us.

    Before you start looking for your first rental property, be sure to work with a great broker. Don’t just settle for the first broker you meet with.

    This may take some time. Years ago, my wife and I met with six different brokers in Chicago, who all came highly recommended.

    We were patient, asked a lot of questions, and went with the person who matched our style and who we felt comfortable with. The time we took during this process was well worth it.

    Like a five-star hotel concierge, our brokers have made our investing experience as smooth as possible.

    Without their guidance, I highly doubt we would have bought, and still own, five properties today.

    Have you worked with a real estate broker before?

    What should new rental property investors be on the lookout for?

    Tell us about your experience in the comments below.

  • Your Spouse is the Most Important Person on Your RE Team

    Your Spouse is the Most Important Person on Your RE Team

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income.

    The bottom line is owning rental properties is a job. It’s not a full-time job. It’s not even a regular, part-time job. But, it is a job.

    There will be tenant issues, work orders, money spent, and tough decisions to be made like in any other business.

    For me, the benefits of owning rental properties significantly outweigh the downsides of being a landlord. It’s a tradeoff that I would happily make again and again.

    But, I wouldn’t be saying that if my wife wasn’t also fully committed.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Before building out the rest of your real estate team, get on the same page with your spouse.

    Owning rental properties should not be a solo adventure. The entire experience is better when you have someone to share it with.

    Isn’t that true for most things in life?

    Whether it’s a project you’re working on or a vacation you’re taking, it’s better when you do it with other people.

    Owning rental properties is no different.

    In fact, the most successful rental property investors have a team of professionals working with them.

    Having a good team in place will help you avoid mistakes and stay motivated so you can keep your properties long-term.

    It’s not an exaggeration to say that having the right people on your team can make or break your investing experience.

    I’ve seen too many investors sell their rental properties after a couple of years because they didn’t have the right people on their team. They end up making preventable mistakes and give up because being a landlord is too hard.

    Unfortunately, that means they give up their properties long before getting the benefits from cash flow, appreciation, debt pay-down, and tax advantages.

    If you’re going to take on the challenge of being a landlord, you might as well hold your properties long enough to reap the benefits.

    And, you should take all the help you can get along the way.

    There is plenty to say about building out your real estate team. And soon enough, we’re going to talk about the key professionals that can help you run your rental property business successfully.

    But, that’s all for another day.

    Before we get to any of that, we need to talk about the single most important member of your team:

    Your spouse.

    The same holds true whether you have a significant other, partner, girlfriend, boyfriend, or anyone else you share your life wife.

    Don’t worry about analyzing the numbers and finding the perfect deal. The rest of your team came wait.

    Start with your spouse.

    Here’s why.

    Your spouse is the single most important person on your team.

    To be a successful rental property investor, your spouse needs to be on board.

    Even if you are going to be the one actively running the business, you won’t get very far if your spouse is not as committed as you are.

    Before anything else, the first thing you need to do is sit down with your spouse and talk about why you really want to own rental properties.

    That’s because owning rental properties is all about commitment.

    It’s a financial comment, a time commitment, and most of all, an emotional commitment.

    With these kinds of commitments involved, it’s essential that your spouse understands the full scope of what you’re both getting into as rental property investors.

    Here’s what I mean.

    Walking down a remote road near Reykjavik, Iceland indicating that investing in real estate takes a team, the most important person being your spouse or partner.
    Photo by Rod Long on Unsplash

    Owning rental properties is a financial commitment.

    This one should be obvious. Owning rental properties is a major financial commitment. It takes capital to buy properties and capital to maintain them.

    When you choose to invest your hard-earned money in rental properties, that means you’re not spending that money elsewhere.

    That might mean sacrificing retirement savings. It could also mean having less money to spend on your dream home. Or, less money to spend on vacations.

    The point is that before you make the financial commitment, your spouse needs to be on board with why you’re making these sacrifices.

    I’m fortunate that my wife and I have been on the same page with our rental properties since Day 1. Neither one of us needed any convincing once we did our homework and learned what was possible.

    Today, we both understand why we’re still doing it: owning rental properties speeds up our journey to financial freedom.

    It took some major financial sacrifices to get here, but we made those sacrifices together.

    As the most obvious example, we delayed buying our “forever home” until I was almost 40 and we already had two kids.

    Instead of buying a home in a nice neighborhood to raise our kids, we used our savings to buy rental properties. We were doing something different and it was important to be committed to our plan.

    It wasn’t easy to see our friends and family members buy beautiful homes in wonderful areas. We definitely noticed more than a few confused looks when we would have people over to our small apartments in the city.

    At times, we both wondered whether we were making a mistake.

    As it turned out, the trade-off was well worth it.

    Owning rental properties is a time commitment.

    Make no mistake about it, owning rental properties is a time commitment.

    We’ve talked about how owning rental properties means having a job. For lawyers and professionals, this means having a second job on top of a primary job. 

    Even with the best team and systems in place, there’s no getting around the fact that owning rental properties will always be a time commitment.

    What does the time commitment look like? What does this have to do with your spouse?

    Depending on your availability and skills, the time commitment will vary from one landlord to the next.

    You might be the type that heads over to the property every weekend to mow the lawn. To take it one step further, maybe you’re the type who has the skills to handle all maintenance requests yourself.

    Or, you might handle all showings and tenant issues personally.

    The truth is that in the beginning, many rental property investors do all of the above themselves.

    Rental property investors think of this time commitment as “sweat equity.”

    Sweat equity is what you contribute to your business but don’t exactly get paid for. When cash flow is tight, as it is for most beginners, we make up for it with sweat equity.

    The more jobs we take on ourselves, the less we pay out to other people.

    The tradeoff is that the more sweat equity you put into your properties, the less time you have to spend at home with your spouse.

    If your spouse is not on board with you being away from home, it’s going to be difficult to succeed as a rental property investor.

    If you have young kids, it’s even harder. When one spouse is at the rental property, the other spouse is usually alone with the kids. Anyone with kids knows which of those two jobs is harder.

    For example, there have been entire weekends that I’ve spent fixing up one apartment or another.

    By the way, if you’ve ever wanted to take a tour called “The World’s Worst Drywall Repairs,” I’ve got you covered.

    If it’s not repairs eating up your free time, it could be analyzing new properties, doing apartment showings, meeting with contractors, or basic bookkeeping.

    With all these time commitments, I’m lucky that my wife and I are on the same page when it comes to our rental property business. We split up these tasks and cover for each other when one person is busy with other responsibilities.

    Yes, you can outsource these jobs. We outsource as much as we can. But, there are certain jobs that you’ll always need to, or want to, handle yourself.

    real estate team meeting near a transparent glass indicating the importance of having the right people on your team before you buy rental properties.
    Photo by Charles Forerunner on Unsplash

    As just one example, we do all our showings ourselves.

    Finding the right tenants is the most important job in owning rental properties. If we outsourced this particular job, we could end up with tenants who could cause us major stress for the next year.

    Regardless of the recipe that works for you and your spouse, have the conversation before investing in rental properties.

    Make sure you each understand the time commitment involved.

    Owning rental properties is an emotional commitment.

    The financial commitment and the time commitment are only the beginning.

    Most of all, owning rental properties is an emotional commitment.

    Without having a spouse on the same emotional wavelength as you, it will be very hard to succeed as a rental property investor.

    When you own rental properties, there will be stressful times and you’ll want to lean on your spouse for support.

    There will also be moments to celebrate, and you’ll want to share those moments with your spouse.

    If your spouse is not on the same wavelength as you, these moments can feel very lonely. The lows can feel much lower and the highs don’t feel quite so high.

    Without someone to commiserate with and celebrate with, you’ll be more likely to give up.

    My wife and I have endless stories about our experiences as landlords that very few other people would truly appreciate. We can each list off the jerks we’ve rented to and the biggest headaches we’ve encountered.

    We once offered a lease renewal to a tenant at her same price. She responded that she would be happy to stay for another year if we simply replaced the kitchen countertops and appliances, added an additional bedroom and built out some new closets.

    Ummm, we’ll pass.

    My wife and I can laugh about these moments because we’re both emotionally committed to the journey. Living through these experiences together has helped us stay the course.

    Unfortunately, I’ve met a number of real estate investors over the years who tried to go it alone. I think that’s a mistake. Oftentimes, these investors don’t stay invested very long.

    It’s not because they bought bad properties or had bad tenants.

    The problem was they never prioritized the most important person on their real estate team.

    When challenges arose, they didn’t have a spouse to lean on.

    When you’re spouse is on board, investing in real estate is a rewarding challenge.

    It’s all about the journey, right?

    When times get tough in our real estate business, my wife and I lean on each other. When we miss out on evenings with the kids or nights out with friends, we remind each other what it’s all about.

    We remind each other that we wouldn’t be where we are today if we didn’t start buying rental properties in 2018.

    We both realize the commitments involved, whether it be our money, our time, or our emotions. If we weren’t in this together, there’s no way we could run our rental property business as well as we do.

    Before you buy a rental property, I encourage you to talk to your spouse first. Make sure you both are on the same page. 

    No, you do not have to have an equal division of labor. 

    Yes, you each have to commit to the good and the bad that comes along with owning rental properties.

    If you both can make that commitment, you have the best shot at owning your properties for a long time and reaching that ultimate goal: financial freedom.

    Did you talk to your spouse before buying rental properties?

    Do you run your rental property business with your spouse?

    What lessons have you learned along the way?

  • Use Common Sense to Help Identify Good Rental Properties

    Use Common Sense to Help Identify Good Rental Properties

    If you want to be a successful rental property investor, you need to buy good rental properties.

    Good rental properties equal good tenants.

    Good tenants equal less headaches.

    Less headaches equal a longer holding period.

    A longer holding period equals more cash flow, appreciation, debt pay-down, and tax benefits.

    Add it all up and that equals more financial freedom.

    And, it all starts with buying the right property.

    How do I know if I’m buying the right property?

    One of the biggest mistakes that beginners make is buying bad rental properties. The reality is that most properties that hit the market are not good rental properties.

    I typically look at hundreds of properties online before finding any that are even worth walking through. Of the ones I walk through, less than 10% are worth buying.

    Don’t waste your time by running the numbers on every property that hits the market. The numbers only tell part of the story, anyways.

    Instead, the first step is to develop and commit to specific criteria for attractive properties in your market.

    If a property does not meet your criteria, move on.

    This will save you precious time, especially important if you are still working a full-time job.

    It will also save you from the disappointment of visiting properties that looked good on paper but failed to meet your other requirements.

    So, how do you develop a set of standards for quality rental properties in your market?

    Use common sense and your own life experiences to develop criteria for your market.

    Obviously, every market is different. Don’t believe anyone who tells you they have a one-size-fits-all solution for evaluating properties. What works in Chicago won’t necessarily work in Los Angeles.

    However, regardless of what market you’re in, you can and should use common sense and your own life experiences to evaluate rental properties.

    Don’t overcomplicate this part.

    Before you do anything else, think about what you would personally want in a rental property.

    Forget about complex formulas and deal metrics. We’ll get to the numbers soon enough.

    Start with a basic question:

    What would I want if I were a renter in this market?

    Before anything else, write down a list of the most important features that you would want in an apartment. Then, use that list as a guide to finding the right kind of properties.

    By the way, using your own common sense is one of the best parts about investing in real estate. You don’t need an advanced degree or a background in real estate.

    We all have some idea of what makes a neighborhood a good place to live. The same goes for what makes an apartment a good apartment.

    We may not always agree on what those things are, and that’s OK. It may be for a simple reason, like we are not targeting the same potential tenant pool.

    The bottom line is you should absolutely use your common sense and life experiences to help formulate your investing strategy.

    Ask yourself what you would want in an apartment. Don’t waste your time running the numbers on any property that doesn’t match your criteria.

    I prefer to invest in properties that make sense to me.

    Warren Buffett has famously said that he does not invest in companies or products that he doesn’t understand.

    We can apply that same logic to rental properties. Invest in properties that inherently make sense to you.

    If you are a buy-and-hold investor like I am, you are going to be dealing with a certain tenant pool in your market for years to come. You want to make sure that you understand that tenant pool so you can buy properties that will be appealing to them.

    You also want to be able to effectively communicate with prospective applicants and current tenants. The best way to ensure that happens is by investing in markets that you understand.

    @sawyerbengtson picture of the Chicago Bean which is where I invest in rental property because of location, location, location.
    Photo by Sawyer Bengtson on Unsplash

    Work with a real estate broker and don’t be afraid to ask for help.

    If you’re having trouble identifying the key factors to look out for in your market, ask around.

    Talk to your colleagues and friends about what people in your target demographic look for in an apartment. Most of us tend to want the same things.

    Of course, don’t underestimate the importance of working with a good real estate broker.

    A good real estate broker can help you come up with a list of the most desirable features for renters in your market.

    My wife and I have worked with the same broker for almost a decade now. He’s been a mentor to us and helped us come up with our list of key factors. More on that below.

    He also knows exactly what we want in a property and doesn’t waste our time with properties that don’t match our criteria.

    Having a good broker on your team is essential if you want to be a successful investor.

    How I’ve used my life experiences to target rental properties in Chicago.

    I invest in a Chicago neighborhood that typically attracts young professionals in their 20s and early 30s.

    Why do I target young professionals in Chicago?

    Well, I am one.

    OK, fine.

    I used to be one. Oof.

    As a young professional in Chicago, I rented apartments throughout the city for nearly 15 years. Based on my own experiences, I have a good idea of what that demographic is looking for in an apartment.

    I believe that gives me an advantage in targeting the right kinds of properties.

    Plus, I teach nearly 100 law students each year and work with young professionals at my law firm. It’s a demographic that I’m comfortable with and still have a good understanding of what matters in a rental apartment.

    Besides my personal experiences, why else do I target young professionals?

    Generally speaking, young professionals earn consistent paychecks, are respectful to apartments, and are too busy to complain about minor issues.

    All good things, as far as I’m concerned.

    Location, location, location.

    We’ve all heard the number one rule in real estate:

    Location, location, location.

    While a number of factors combine to make particular locations attractive, I’ll highlight one factor that’s very important to me in the Chicago market.

    First, for a bit of context.

    As mentioned earlier, I target properties in Chicago that would be attractive to young professionals.

    Traditionally in Chicago, young professionals commute to office buildings in The Loop (Chicago’s downtown, central business district) via public transportation.

    Yes, even in the “work from home” era, most young professionals living in Chicago commute downtown at least a couple days each week.

    Since I know my ideal tenant likely commutes downtown, I look for properties that make commuting easier.

    That means targeting properties near public transportation.

    More specifically, I target properties within a half mile of the L (Chicago’s train system, short for “elevated.”)

    Young professional enjoying a night out reflecting one of the most important factors in buying rental properties.
    Photo by Pablo Merchán Montes on Unsplash

    I target properties close to public transportation because of my own experiences as a renter and because of what I’ve learned from potential tenants.

    When I was renting apartments in Chicago, I always wanted to be close to the L. There’s nothing worse than walking 20 minutes to a train when it’s 10 degrees or 90 degrees outside.

    It makes sense that now as an investor, I should target these same types of apartments close to public transportation.

    Having done hundreds of apartment showings over the years, I’m confident that young professionals want to live close to public transportation.

    I believe that the most desirable properties for young professionals are the ones close enough to an L station that people can walk there in 10 minutes or less.

    Plus, coffee shops, restaurants, shops and other attractive offerings tend to be located near L stations.

    So, in terms of location, proximity to the L is one of the most important factors for me.

    No matter how attractive a property looks online, I’m not interested if it doesn’t satisfy this requirement.

    What are some of my other top requirements for a rental property?

    What I look for in a rental property may be different from what you look for. Use your own life experiences and common sense to decide if these elements would be beneficial in your market.

    My wife and I have relied on our own life experiences, coupled with advice from our real estate broker, to come up with this list.

    It’s not an exhaustive list, but here are some of the most important factors we evaluate when considering rental properties in Chicago:

    1. Location, location, location. See above. Proximity to the L and social life (coffee shops, restaurants, bars, etc.) are crucial. Most of the young professionals we rent to are still in the “going out” phase of life. They want to live in fun neighborhoods so they can enjoy themselves when they’re not working. They typically stay in our apartments for 2-3 years, oftentimes before buying a place of their own and “settling down.”
    2. Taxes. Property taxes can eat away your cash flow. We have high property taxes in Chicago across the board, but taxes vary widely from neighborhood to neighborhood. I look for properties in areas that have more attractive taxes.
    3. Big bedrooms. One of the most common questions I get when I do apartment showings is, “Can I fit a king size bed in here?” People love big beds these days. This can be a challenge considering Chicago’s standard 25-foot wide lot. I look for properties with a minimum bedroom size of 10 x 10.
    4. Outdoor space. Young professionals want to have outdoor space, even if they never use it. When I was a renter, I always wanted an apartment with a balcony for my grill. It didn’t matter to me that I only used it a handful of times each year. Maybe having outdoor space made me feel more grown up?
    5. Parking. Even though Chicago is a very public transit-friendly city, people still like having cars. Because most young professionals aren’t using their cars every day, they want to keep it safe in a dedicated parking space.

    There are certainly other factors we consider, but these are some of the first things I’m looking for when I look through listings on the internet.

    These factors were important to me when I was a renter and are still important to the young professionals I rent to today.

    While I don’t invest in other cities besides Chicago, I imagine these factors would also be important for young professionals everywhere.

    What is your specific criteria for rental properties?

    The fist step in purchasing good rental properties is having a set of specific criteria that match your needs and market.

    Don’t overcomplicate it. Use your common sense and life experiences as a framework.

    Run your criteria by your real estate broker and other investors in your market.

    Only after you have come up with a list of important features should you worry about running the numbers.

    Whether you currently own rental properties or are hoping to get started, what factors are most important in your market?

    Let us know in the comments below.