Tag: rental property investing

  • The Ultimate Landlord Tip: Choose Your Tenants Wisely

    The Ultimate Landlord Tip: Choose Your Tenants Wisely

    What’s more important: choosing the right property or choosing the right tenants?

    If you ask any experienced landlord, you’ll get the same answer every time:

    Choosing the right tenants.

    @thinkandtalkmoney

    One wrong tenant can turn your dream property into a nightmare. #landlordtips #RealEstateTok #thinkandtalkmoney #moneytok

    ♬ original sound – Thinkandtalkmoney

    Yes, choosing the right property is important. Of course, you need a property that will attract the right kind of tenants.

    But, selecting the property is a one-time decision during the acquisition process.

    As a landlord, choosing the right tenants is something you need to do constantly.

    When you choose your tenants wisely, your experience as a landlord can be very rewarding.

    When you fail to choose your tenants wisely, life as a landlord can be very difficult.

    Let’s dive in.

    Choosing the right property is just the first step as a real estate investor.

    When my wife and I bought our first rental property, we were fortunate that our real estate broker took the time to mentor us.

    He was a fellow investor and landlord and had learned a lot over the years.

    He has helped us in countless ways, including putting together a list of features we look for in every rental property.

    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.

    Once you choose the right property, the hard part begins.

    If you are going to be a landlord, selecting the right property is just the first step.

    An equally important decision soon follows, one that you will need to repeat every time you turnover an apartment.

    Of all the lessons our mentor taught us, this is probably the most important one:

    Choose your tenants wisely.

    You can have the best property in the world in the best location with the best amenities.

    If you have lousy tenants, managing that property will be a total nightmare.

    Not only will the experience be miserable, your bottom line will likely suffer.

    I know a number of landlords who have had such bad experiences with tenants that they sold their properties.

    I’ve known other landlords who stopped offering up their homes for short-term rentals because of difficult guests.

    When you’re forced to sell your rental property too soon or stop earning rental income, you’re missing out on the four main reasons to invest in real estate.

    If you don’t choose your tenants wisely, you’ll miss out on the four main reasons to invest in rental properties.

    Here are the four main reasons to invest in real estate:

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    Below is a quick breakdown of each of the four main benefits. 

    For a more detailed description of each benefit, you can read my series on investing in real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    If you don’t choose your tenants wisely, you might not be able to collect the rent on time.

    You may have to evict a tenant or ask a tenant to part ways.

    Or, you may have costly maintenance and repairs that eat away all your profits.

    Whatever the case may be, when you are not receiving timely and consistent rent payments, your cash flow suffers.

    This is especially problematic if you depend on monthly cash flow to pay your living expenses.

    Old Caucasian woman shopping for fruit and choosing wisely like what a landlord needs to do when selecting tenants.
    Photo by Beth Macdonald on Unsplash

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    Appreciation takes time to materialize.

    When you don’t choose your tenants wisely, your experience as a landlord may be so miserable that you end up selling prematurely.

    If you have lousy tenants and choose not to hold your property long-term, you won’t benefit from his massive wealth-generator.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases.

    Of course, if your tenants are not paying rent consistently and on-time, you’ll be stuck paying off your own debt.

    Depending on your overall financial situation, you might not be able to pay the mortgage without the rental income coming in.

    That’s a big problem for obvious reasons.

    4. Real estate investors earn massive taxes benefits.

    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.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    However, if you don’t have rental income coming in because you didn’t choose your tenants wisely, this benefit is not so helpful.

    How to choose your tenants wisely.

    Now that you understand why it’s so important to choose your tenants wisely, the next question is how to do it.

    The first, and most important, rule to remember is that you are not allowed to discriminate when screening potential tenants.

    That should go without saying.

    For more information, please refer to The Fair Housing Act, which prohibits discrimination based on race, color, national origin, religion, sex, familial status, and disability.

    You also need to be aware of any local rules in your area.

    Disclaimer: While I am a lawyer, I am not your lawyer and am not providing legal advice. This post is for educational purposes only.

    The next most important rule is that you need to personally meet every tenant before you sign a lease.

    Forget about credit scores and income sources and references for a minute. You can confirm all of that during the application process.

    Before you get to any of that, you need to see what kind of person you may be getting into a relationship with.

    You are going to be depending on this person for your livelihood for the next 12 months or more. You can’t afford to get this decision wrong.

    Choosing the right tenant is like dating. No, you don’t have to love this person. You don’t even have to like the person. But, you have to do your best to figure out if he’s going to make your life miserable.

    Avoid the temptation to sign a lease with the person qualified applicant who walks through the door. Make sure an applicant is a good fit, even if this means saying no to people who otherwise qualify on paper.

    Ask yourself these questions when you’re sizing up a potential tenant.

    When meeting a potential tenant, ask yourself these questions:

    • Is he pleasant to be around?
    • Does he seem reasonable?
    • Is he a jerk?
    • Is he rude?
    • Does he seem respectful?
    • Is he a complainer?
    • Does he give off “party-until-2am” vibes?
    • Is he sloppy?
    • Does your apartment seem to match what he’s looking for?

    By asking yourself these questions, you give yourself a better shot at finding a good tenant for your apartment.

    Why is this so important?

    There are going to be times when things go wrong. Dishwashers break. The tenant upstairs will be too loud. The hot water heater stops working.

    When these things happen, the last thing you want is to be dealing with a jerk on top of the problem that needs to be fixed.

    Trust your gut. Use your common sense.

    You won’t be right 100% of the time, but you will be in a much better situation if you put in the effort to personally meet potential tenants before signing a lease.

    A landlord working in an office on a virtual call interviewing a prospective tenant because choosing your tenants wisely is critically important.
    Photo by LinkedIn Sales Solutions on Unsplash

    Does your apartment seem like a good fit for the potential tenant?

    Don’t ignore that final question above.

    A landlord-tenant relationship is a two-way street. You want to find someone who will be happy in the apartment.

    However, landlords oftentimes focus only on whether a potential tenant is a good fit for the landlord.

    Yes, that’s important. But, it’s just as important that the apartment seems like a good fit for the tenant.

    For example, maybe a potential tenant tells you that outdoor space is on the top of his wish list.

    If you convince him that outdoor space is not very common in your area, sure, you may close the deal. But, is closing the deal all that matters?

    In this example, you’re stuck with someone for 12 months or more who’s living in an apartment without the number one thing he wanted. That could lead to an unhappy tenant who can’t wait to move on after his lease expires.

    Think about it like this: if you end up with a tenant who doesn’t really like the apartment, he could make your life difficult during the lease term.

    He might go out of his way to find things to complain about. Or, he might not be cooperative when you need to access his apartment for routine maintenance or future showings.

    Plus, he’ll be more likely to move out at the end of his lease instead of renewing for another term.

    Because vacancy is a landlord’s worst nightmare, your goal should be to find tenants who might end up renewing their lease at the end of the term.

    The point is: part of your job as a landlord is to think about whether your apartment is a good fit for a potential tenant, not just whether a potential tenant can afford the rent.

    You won’t always be successful in choosing your tenants wisely.

    Despite your best efforts, you may end up in a difficult situation with your tenants. This happened to me recently.

    We have an apartment building in a terrific location with units that are in great shape. We’ve never had any trouble finding tenants.

    This year was no different.

    After three showings and very little effort, we happily signed a lease with new tenants. As a bonus, the former tenants had moved out early, so we were able to fill this unit with zero days of vacancy.

    All was well… until it was not.

    Let’s just say that after about six weeks, it was apparent that the relationship with our new tenants was not working out. The tenants were not bad people, but it was clear that we could not meet their expectations.

    Instead of living through a difficult year with these tenants, we offered them the chance to break their lease, without penalty. They accepted our offer and moved out two weeks later.

    We all remained civil and amicably split up. The tenants left the apartment in good shape and we all avoided unwanted confrontation. 

    We re-listed the apartment and found a wonderful new tenant after one showing.

    In the end, we lost out on three weeks of rent between leases but now have a very happy new tenant.

    Upon reflection, I’m confident this was the right decision for all parties involved.

    The tenants could find a place more to their liking, and we could start over with a new tenant.

    If you can’t do the tours yourself, set up a virtual meeting before signing the lease.

    Since 2018, my wife and I have done every apartment showing ourselves (except one unexpected occurrence when we were out of town).

    This is the best way to truly get a read on what kind of person you may be renting an apartment to.

    If you can’t do the tours yourself, the next best thing is to set up a virtual meeting before you enter into a lease.

    With apps like Zoom and FaceTime, it’s easy to set up a 15 minute call. At that time, you can find out more about the potential tenant and ask yourself the questions we covered above.

    Putting in this extra effort is what separates successful landlords from those who give up and sell their properties prematurely.

    Choose your tenants wisely.

    Showing apartments and interviewing tenants is not always fun.

    It’s time-intensive. It may lead to awkward conversations. You may not love meeting new people.

    But, it’s critically important to the success of your rental property business.

    Being a landlord takes effort. If you are hoping for completely passive income, opt for index funds, not rental properties.

    Choosing the right property is just the first step.

    Choosing the right tenants is equally as important.

    Landlords: what are things you look for in a potential tenant?

    Have you made mistakes in choosing your tenants previously?

    Let me know in the comments below.

  • Don’t Give Up When Being a Landlord Feels Heavy

    Don’t Give Up When Being a Landlord Feels Heavy

    There comes a time for every rental property investor when the job of being a landlord starts to feel like too much.

    It all starts to feel too heavy.

    You’ll want to quit.

    You’ll convince yourself that it’s much easier to be a passive stock market investor.

    When that moment as a landlord comes for you:

    Don’t quit.

    The long term benefits are too good.

    @thinkandtalkmoney

    Landlord Tip of the Week! ☑️🏡 #thinkandtalkmoney #rentalproperty #realestateinvesting #landlordtips #landlord

    ♬ original sound – Thinkandtalkmoney

    Remind yourself why you bought a rental property in the first place.

    I know there are tough moments. I’ve been there. Many times.

    In fact, my wife and I had a couple of experiences recently that pushed us close to that point of quitting.

    With the passage of enough time to reflect, I’m happy and proud of us for sticking with it.

    We’re still on track to achieve financial freedom quicker than we ever could have without our rental properties.

    Today, I’ll share a couple of experiences I’ve recently had as a landlord that had me thinking about quitting.

    If you’re a landlord, I’m sure you’ve had moments just like these.

    Here’s a look back at our recent experience leasing out two apartments.

    This past lease renewal season started off looking very strong. We were thrilled that 80% of our tenants signed on for another year.

    That left only 2 apartments to turnover.

    This was great news because vacancy is a rental property investor’s worst nightmare. Every week that an apartment sits empty is money down the drain.

    Vacancy can eat away your entire year’s profits. That’s why we usually offer current tenants the chance to renew at the same rent.

    When you do the math, it almost always works out than continued occupancy beats the prospect of higher rent plus vacancy.

    When you have an empty rental unit, doubt creeps into your mind. You start telling yourself that you’ll never find a new tenant and your place will sit empty forever.

    I know, I know. A bit extreme, right?

    But, I’m telling you. That’s where your mind goes. Any landlord out there knows what I’m talking about.

    So, when 80% of our tenants renewed for another year, we were very happy. We assumed that meant we would have an easy leasing season.

    As it turns out, that was not the case.

    Here’s what happened in each of these two apartments.

    For one apartment, we received an odd request.

    Before these tenants decided to leave, they made an odd request.

    As a side note, this apartment was the unit where my wife and I lived for about five years. We brought two babies home to that apartment.

    It’s located in the first building we ever bought and will always hold sentimental value for us.

    OK, back to the story. This past spring, we actually thought the former tenants would renew for another year. That would have meant 90% of our units would have stay leased for another year, a major win.

    When we first approached these tenants about renewing, they indicated that they wanted to stay. They were great tenants, so we were happy.

    Then came a unique request.

    These tenants were students and wanted to live at home for the summer. They asked if they could keep their stuff in the apartment but not pay rent for July and August since they wouldn’t actually be living there.

    We’ve had all sorts of requests from tenants over the years. Keeping an apartment without paying rent for two months was a new one.

    I understood the request from their perspective. Rent is a major expense. They didn’t need an apartment for the summer. They liked the apartment, but it was hard to justify paying for something they didn’t need.

    The problem from our perspective is not hard to spot. If we agreed to their offer, we would be left with the equivalent of 2 months of vacancy.

    Losing out on 2 months of rent payments is the equivalent of foregoing 17% of the total rent for the year.

    We thought about it. And as tempting as it was to not have to find new tenants, that arrangement was not going to work for us.

    Elephant isolated on white background illustrating that landlord life can feel heavy but a reminder not to quit.
    Photo by Kaffeebart on Unsplash

    Turnover is a chance to make property improvements.

    After they moved out, we took the opportunity to refresh the apartment. We knew this would take some time and result in at least a few weeks of vacancy, but the apartment needed some love.

    So, we replaced the flooring and painted the entire apartment. We did some needed repairs in the bathrooms (i.e. caulk, grout, new shower rod).

    Plus, we made a point to tackle any deferred maintenance throughout the apartment.

    We used a contractor for the work, so our involvement was limited to paying the bills and supervising the projects. Not exactly time intensive, but not exactly cheap either.

    When the work was finished, we lined up a number of showings and had the apartment rented out after a few of weeks of effort.

    In total, the apartment was vacant for 6 weeks.

    What did we learn from this experience?

    On the positive side, we now have a rehabbed apartment and fresh tenants. Plus, the apartment was empty for only 6 weeks instead of 8 weeks.

    On the negative side, it was stressful to get the apartment fixed up and re-leased.

    To state the obvious, it’s not fun spending money to fix up an apartment without a signed lease in place. Every week that goes by, money is going out without any money coming in.

    During that phase, you can’t help but doubt yourself as a landlord.

    Did we make the wrong choice?

    Should we have let the former tenants stay, even if that meant automatically sacrificing two months of rent?

    If we had gone that route, we would not have spent any money this year turning over the unit.

    We also would have had a less stressful leasing season. We would have saved a lot of time and mental energy if we didn’t have to worry about this unit.

    On the other hand, the apartment would still have needed a facelift as soon as it was empty. At some point, we were going to have to do the rehab. Now, that project is behind us.

    We also have great new tenants who seem more likely to stay for an extra year or two.

    In the end, I’m happy with the decision we made. That doesn’t mean it was right or wrong, but we made it through a unique challenge.

    I’m good with that.

    a man standing in a field with his back to the camera as evidence that sometimes it's better to split up with tenants that aren't working out.
    Photo by SAJAD FI on Unsplash

    The second learning experience involved letting our tenants out of their lease after two months.

    In our other vacant unit this past spring, the former tenants bought a condo so needed to move out. They had lived there for two years and were wonderful tenants.

    This unit was located in a different building from the one we just discussed. The building is in a terrific location and the units are in great shape.

    We’ve never had any trouble finding tenants. This year was no different.

    After three showings and very little effort, we happily signed a lease with new tenants. As a bonus, the former tenants had moved out early, so we were able to fill this unit with zero days of vacancy.

    All was well… until it was not.

    Let’s just say that after about six weeks, it was apparent that the relationship with our new tenants was not working out. The tenants were not bad people, but it was clear that we could not meet their expectations.

    Instead of living through a difficult year with these tenants, we offered them the chance to break their lease, without penalty. They accepted our offer and moved out two weeks later.

    We all remained civil and amicably split up. The tenants left the apartment in good shape and we all avoided unwanted confrontation.

    We re-listed the apartment and found a wonderful new tenant after one showing.

    In the end, we lost out on three weeks of rent between leases but now have a very happy new tenant.

    Upon reflection, I’m confident this was the right decision for all parties involved.

    The tenants could find a place more to their liking, and we could start over with a new tenant.

    So, what’s the takeaway from our experiences with these units?

    As a landlord, you are running a business. It won’t always be easy.

    You have to make business decisions, even when there’s no clear right answer.

    Sometimes that means foregoing profit and dealing with confrontation.

    In each of these instances, I’m happy with how things worked out. In the first instance, I sacrificed some of my profit this year to improve my asset.

    For the second apartment, it was clear that the relationship was not working. Even though we lost some money in the process, all parties involved should now be happier.

    These are tradeoffs I would readily make again.

    Even with stress like this, I’m not ready to give up on being a landlord.

    Compared to my day job as a lawyer, this is nothing.

    Should you become a landlord?

    The truth is my wife and I know so many people who have owned rental properties but did not like being landlords. There’s nothing wrong with that. It’s not for everyone.

    If you’ve been in, or are currently in a similar boat, I hope these experiences resonate with you.

    In the end, as stressful as it can be to run a business, this is also what makes being a landlord fun.

    What do I mean, fun?

    When you are a landlord, you are a business owner. You get to make the final decision. It’s your business and you are in control.

    Having that autonomy is a nice change of pace for most W-2 employees.

    Still, you may be faced with tough decisions. You may not know what to do in the moment. It’s helpful in those moments to have people to talk to so you can make the best decision possible.

    I happen to like being a business owner. However, it’s not for everyone.

    If just thinking about making decisions like these stresses you out, I would not recommend that you become a landlord.

    If you can handle the job, you can benefit immensely.

    Landlords- have you been in situations like this before? How did you handle the stress of the job?

    Let us know in the comments below.

  • How to Use Two Simple Metrics to Compare Investments

    How to Use Two Simple Metrics to Compare Investments

    If you had $200,000 saved up, should you invest in the stock market or in a rental property?

    In our previous post, we explored why you may want to consider investing in both the stock market and in rental properties.

    However, without the proper tools at your disposal, the choice between investing in stocks or investing in real estate can be tricky.

    Fortunately, there are a couple of quick and easy ways to analyze the strength of a rental property as compared to investing in the stock market.

    Today, we’ll dive into two metrics that investors use to quickly compare investments across asset classes. The two metrics are known as:

    1. Cash-on-Cash Return on Investment (CoCROI)
    2. Return on Investment (ROI)

    With just these two metrics, you’ll be able to quickly compare the returns of a potential rental property to the typical returns of the stock market.

    You can also quickly compare two different rental properties.

    Then, you can decide what’s the best investment for your personal situation.

    One note before we begin:

    Don’t worry if math is not your thing. There are plenty of online calculators like this one that will do all this math for you.

    The key is to understand what the math is telling you. That way you’ll know what to do with the information that the online calculators pump out.

    So, before you go running off to one of the online calculators, stick around and see how the math works and what it all means.

    Now, let’s think about your options with that $200,000 you’re sitting on.

    The S&P 500 historically earns 10% annually.

    Before looking at our two real estate metrics, let’s establish a baseline comparison with the stock market.

    The S&P 500 has historically earned an average annual return of 10%.

    By investing in an index fund that tracks the S&P 500, like I do in my 401(k), I have a pretty good chance of earning consistent returns in the long run.

    Sure, there may be ups and downs. And, there are no guarantees the S&P 500 will continue performing at 10%.

    But, check this out:

    Since 1996, the S&P 500 has ended the year in positive territory 23 times and negative territory only 7 times.

    In other words, the S&P 500 has generated positive returns three times more frequently than it generates negative returns.

    And even with those 7 negative years, with the exception of 2000-2002, the S&P 500 returned to positive territory the following year.

    What this all means is that while the S&P 500 will drop occasionally, the down periods are historically short-lived.

    Because of this historical consistency, I feel comfortable using 10% as a baseline to compare other investments with.

    Note that predictable returns does not mean guaranteed returns.

    There are no guarantees in the stock market or with any other asset class.

    To recap: the S&P 500 has historically provided an average annual return of 10%.

    While not guaranteed to continue in the future, 10% average annual returns represents a safe projection for our calculations.

    That means we can use 10% as a baseline investment return to compare other potential investments to.

    With this baseline in mind, we can now move to our two real estate metrics.

    a calculator and a pen on top of paper to show you how to use CoCROI and ROI to evaluate different investments.
    Photo by Aaron Lefler on Unsplash

    Calculate your Cash Flow.

    The first step in evaluating any real estate deal is to calculate the expected cash flow.

    For a detailed explanation on how to analyze real estate deals and calculate cash flow, check out my post here.

    To keep in simple, cash Flow is whatever money you have left over after paying all expenses. Think of it as your monthly profit.

    Today, we’ll use an example of a hypothetical property that is listed for $1,000,000.

    Here’s a quick snapshot of how you might calculate the cash flow on this property:

    Asking Price: $1,000,000

    Monthly Rent: $9,000

    Mortgage Payment (Principal and Interest)$4,500
    Taxes$900
    Insurance$300
    Utility Bills$300
    Property Upkeep$200
    Preventative Maintenance$200
    Vacancy Rate (5%)$300
    Unexpected Repairs (5%)$300
    Property Improvements (5%)$300
    Total Monthly Cost$7,300

    Cash Flow = Income – Expenses

    $1,700 = $9,000 – $7,300

    This hypothetical property has a monthly cash flow of $1,700.

    That means it has annual cash flow of $20,400, a number that we’ll need for our next calculation.

    So, is this property a good deal?

    That brings us to our first metric, Cash-on-Cash Return on Investment.

    What is Cash-on-Cash Return on Investment (CoCROI)?

    Cash-on-Cash Return on Investment (CoCROI) measures how much cash flow a property earns in one year relative to how much money was initially invested.

    The formula looks like this:

    CoCROI = Annual Cash Flow / Total Cash Invested

    With this simple metric, we can compare the return of a potential rental property to the returns of any other investment, like an S&P 500 index fund.

    Then, we’ll have some useful information to decide if this is a good deal.

    Keep in mind that CoCROI does not factor in appreciation, debt pay-down, or tax benefits. That analysis comes with our next metric.

    To continue our example above, we know the annual cash flow on this property is $20,400.

    Let’s assume our down payment is 20% of the purchase price, or $200,000.

    In addition to the down payment, we paid $10,000 in closing costs and invested another $5,000 to clean up the property before renting it out.

    In total, our initial investment is $215,000.

    Let’s plug those numbers into the CoCROI equation:

    CoCROI = Annual Cash Flow / Total Cash Invested

    .095 = $20,400 / $215,000

    The CoCROI on this property is .095 or 9.5%.

    Does a 9.5% CoCROI automatically mean this is a bad deal?

    Back to the important question: is an initial investment of $215,000 to earn $20,400 in annual cash flow a good idea?

    What does the math tell us?

    We now know that the return on this property in the first year falls just short of the S&P 500’s 10% annual return.

    Does a 9.5% CoCROI automatically mean this is a bad deal?

    Not at all.

    The answer will depend on what your preferences and goals are as an investor.

    Keep in mind that CoCROI is a projection tool designed to measure the expected return on this rental property in just the first year.

    Because of all of the variables at play, use CoCROI to help you compare investments. But, don’t make your investment choices based solely on the CoCROI.

    Also keep in mind that CoCROI is a quick and easy way to compare the initial investment on one rental property to another rental property.

    If you’re evaluating a lot of properties, you can quickly see which ones give you the best initial return on your money.

    To recap, CoCROI is a great way to quickly compare the returns on different investments in the first year.

    However, what if we wanted to evaluate the long-term investment potential on a property?

    For example, what if we plan to hold a property for 10 years?

    By holding a property for 10 years, we’ll ideally profit through appreciation and debt pay-down, not just through cash flow.

    Let’s learn how to factor in those profits by calculating our overall Return on Investment (ROI).

    Data reporting dashboard on a laptop screen to show you how to use CoCROI and ROI to evaluate different investments.
    Photo by Stephen Dawson on Unsplash

    What is Return on Investment (ROI)?

    Return on Investment (ROI) factors in cash flow, appreciation, and debt pay-down. It also factors in the sales expenses associated with selling a property after a defined holding period.

    Put it all together and ROI is a great way to project the overall returns on an investment over time.

    The ROI formula looks like this:

    ROI = (Total Profit / Total Investment) / Years

    Let’s continue our example to calculate the ROI on this property over a 10-year period.

    The first step in calculating ROI is to total up the cash flow.

    We already know that this property will earn $20,400 in annual cash flow.

    Over 10 years, that means we will earn $204,000 in total cash flow.

    Remember, cash flow is only part of our total profits.

    Next, we need to calculate the equity we will earn through appreciation and debt pay-down on this property.

    Next, figure out the expected appreciation and debt pay-down.

    To calculate the rest of our total profits, let’s start with some basic assumptions.

    First, let’s assume that this property will appreciate at 3% annually.

    Using an online calculator like this one, we learn that our property will be worth $1,343,916 in 10 years.

    In other words, since we bought the property for $1,000,000, we have earned $343,916 in appreciation over those 10 years.

    Next, we need to calculate how much our loan balance has decreased over those 10 years. This is known as loan amortization.

    Recall that our initial loan was for $800,000 because the property cost $1,000,000 and we put 20% down.

    Again, we can use a simple amortization calculator like this one to do the math for us.

    Assuming a 6.5% interest rate and a 30-year loan, we will have $678,209 remaining on our balance after 10 years.

    Since our loan balance started at $800,000, this means that we have earned $121,791 in debt pay-down over those 10 years.

    By adding the appreciation and debt pay-down together, we learn that our total equity in this property after 10 years is $465,707.

    If we add up our total cash flow, appreciation, and debt pay-down, we see that our total income on this property is $669,707.

    Don’t forget to factor in the costs of selling the property.

    When we sell this property, we will incur some costs that we don’t want to ignore in our analysis.

    Let’s assume that we will pay 6% to real estate agents, 2% in closing costs, and another $15,000 to fix up the property before selling.

    In total, that adds up to $107,513 in costs associated with selling this property.

    When we subtract the sales expenses from our total income, we see that our total profits on this property after 10 years are $562,194.

    Now that we know our total profits, we can calculate the ROI.

    How to Calculate ROI.

    We now have all of the pieces we need to calculate the ROI on this property.

    As we added up above, our total cash flow, appreciation, and debt pay-down, combine for a total income on this property of $669,707.

    When we subtract the sales expenses from our total income, we see that our total profits on this property after 10 years are $562,194.

    We also saw above that we made a total investment of $215,000 (our down payment plus closing costs) to acquire this property.

    Now, we can plug this information into the ROI formula.

    ROI = (Total Profit / Total Investment) / Years

    .261 = ($562,194 / $215,000) / 10

    ROI or Total Return: 26.1%

    In the end, this property generates a total annual return of 26.1%.

    So, what should you do with your $200,000?

    Is this property a good deal?

    Would you be better off investing in an S&P 500 index fund and earning 10%?

    Using CoCROI and ROI can help you make that decision.

    As an investor, you may be thrilled with a 9.5% CoCROI or 26.1% ROI.

    On the other hand, you may not be interested in doing the work and taking on the risk involved with owning that rental property.

    Remember, we are making projections based on a number of variables. Nobody can predict exactly how an investment will perform.

    In the end, only you can answer this question based on your personal preferences.

    The point in doing the math is to provide additional data points so you can make the best decision possible.

    There’s no right or wrong answer.

  • How to Think About Investing in Both RE and the Stock Market

    How to Think About Investing in Both RE and the Stock Market

    Let’s say that you have $200,000 that you want to invest.

    Up to this point, all of your investments are in the stock market, mostly through tax-advantaged retirement accounts like a 401(k).

    However, you’ve recently started thinking about buying your first rental property.

    You have an important question to sort through:

    Should you buy your first rental property or just keep investing in the stock market?

    This is a common dilemma for all real estate investors, not just people thinking about buying their first rental property. Personally, I’ve been thinking about this question quite a bit lately.

    The way I see it?

    Why not do both?

    Why not build your overall investment portfolio to include both stocks and at least one rental property?

    @thinkandtalkmoney

    Happy to provide the geniuses a place to live. #thinkandtalkmoney #realestateinvesting #rentalproperty #genius

    ♬ original sound – Thinkandtalkmoney

    Today, we’ll explore why you may want to invest in the stock market and own rental properties.

    If you’ve been on the fence about buying your first rental property, this post will help you think about why it may be a good idea.

    Real estate is my favorite asset class.

    It’s no secret that real estate is my favorite asset class. Without my four rental properties, my journey to financial freedom would look much different.

    I’m confident that real estate will remain a powerful asset class moving forward.

    That’s because no matter how much the world changes with AI, quantum computing or any other new technology, I know one thing will always be true:

    People will always need a place to live.

    At this point in my life, I know that I’ll never become a brilliant coder or software engineer solving the world’s hardest problems.

    But, I can provide the geniuses a place to live.

    That’s why I’m comfortable with the majority of my net worth being in real estate right now.

    By investing in rental properties, I can make money in four different ways:

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    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.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    Even though I love owning rental properties, I still invest in the stock market.

    While there are certainly real estate investors out there who are 100% committed to real estate, I’m not one of them.

    Even with my passion for rental property investing, I have a significant portion of my net worth in the stock market.

    For one reason, I enjoy having some totally passive income streams. Compared to being a landlord, there is essentially zero work involved in being a passive stock investor.

    For another reason, I see the value in having multiple, diverse streams of income to help protect me against life’s uncertainties.

    Plus, like many of you, my investing journey began with my employer-sponsored 401(k) plan.

    401(k) investing is easy and relatively straightforward. With automatic contributions from my paychecks, I don’t even need to think about funding my account.

    As a W-2 employee since 2009, without even thinking about it, I’ve invested regularly in the stock market and enjoyed the benefits of compound interest.

    As my career progressed and my family grew, I added investment accounts to my portfolio.

    Besides my 401(k), my favorite investment accounts include a Roth IRA, 529 college savings accounts for my three kids, and a Health Savings Account.

    In conjunction with my rental properties, I view each of these different investments as part of my overall strategy to reach financial independence.

    Combined, I refer to these different investment and income streams as Parachute Money.

    Reach for the sky. Sometimes normal is too boring. invest in both real estate and the stock market for a safe landing with Parachute Money.
    Photo by Vlad Hilitanu on Unsplash

    What is Parachute Money?

    Parachute Money is one of my favorite concepts in all of personal finance.

    Pretend your life is like flying on an airplane.

    For whatever reason, you decide you need to get off this airplane. You decide to take control and make a change. You’re ready to jump.

    All you need is a parachute.

    You have a choice between the only two parachutes on the plane.

    The first parachute has only one string (or line) connecting the canopy to the harness . You think to yourself, “This doesn’t seem very safe. What if that one string breaks? That would end very badly for me.”

    Then, you look at the second parachute.

    The second parachute has 10 strings. You say to yourself, “OK, this one looks much safer. If one string breaks, the parachute still has nine other strings to keep me safe. Even if something goes wrong with one or two strings, I would glide safely to the ground.”

    It’s obvious which one of these parachutes to choose, right?

    Why is having Parachute Money important?

    The central idea of Parachute Money is to create multiple sources of income so you are not beholden to any one source.

    Picture each source of income as a string on your parachute. The more strings on the parachute, the stronger it is.

    With Parachute Money, if one of your sources of income dries up, you are more than covered with your other sources.

    Likewise, the more sources of income you have, the stronger your personal finances are.

    Parachute Money includes your primary job, any side hustles, any income generating assets, and your emergency savings account. It also includes the income of your significant other, if you share finances.

    The key to Parachute Money: protect yourself with as many investment and income sources as you can.

    That’s why I own stocks and own rental properties.

    Should I buy a rental property or stick with the stock market?

    Lately, I’ve been asking myself this very same question, “Should I look into buying a fifth rental property? Or, should I invest that money in the stock market?”

    There are certainly lifestyle considerations that go into this question beyond just the strength of the investment on paper.

    For example, owning rental properties means taking on a job. On the other hand, investing in the stock market is mostly passive.

    If you’re not ready for the job of being a landlord, then you should stick with investing in stocks.

    Setting lifestyle considerations aside, we all have limited dollars available to invest. And, we work hard for those dollars.

    When we choose to put those hard-earned dollars to work for us, we want to make sure we’re getting a good return on our investment.

    It’s hard enough deciding where to invest your money once you’ve decided on the asset class. Take real estate, for example.

    Even if you know you want to buy a rental property in a specific area, there might be hundreds of potential properties available.

    Picking the right property is not easy and requires some careful analysis.

    How much more difficult does the decision become when you’re not even sure if you should invest in real estate or invest in the stock market?

    That decision can start to feel overwhelming.

    The perfect landing with a parachute indicating the importance of having parachute money through real estate and the stock market.
    Photo by Ali Kazal on Unsplash

    Deciding between various asset classes can feel overwhelming.

    With so many investment choices out there, it can be difficult to choose where to invest your money. That’s why it’s useful to have a way to compare one type of asset class to another.

    Then, you can consider investment opportunities in different assets classes and make informed choices on where to invest.

    Fortunately, we can use two simple metrics to help with this analysis:

    1. Cash on Cash Return on Investment (CoCROI)
    2. Return on Investment (ROI)

    Real estate investors have long used these two metrics to decide if a potential property is a good deal compared to investing in the stock market.

    In our next post, we’ll take a close look at each of these metrics. We’ll learn how each of these metrics can help you compare a rental property investment to typical stock market returns.

    Don’t worry if math is not your favorite thing.

    These two numbers are easy to calculate with an online calculator. The key is to make sure you understand the underlying principles and variables that go into the calculations.

    Are you comfortable investing in rental properties and the stock market?

    I like to invest in rental properties and the stock market to protect myself from economic and life uncertainties.

    I don’t want to be all-in on only one asset class.

    So, I view my rental properties and my stock investments as parachute strings working together to protect me should my airplane start going down.

    Because I’m comfortable investing in both rental properties and the stock market, I need a way to help choose between options across those asset classes.

    In our next post, we’ll learn how to do just that.

    Do you invest in the stock market and in rental properties?

    Which asset class did you invest in first?

    Is part of your reasoning for investing in both asset classes to add layers of protection to your overall finances?

    Let us know in the comments below.

  • Shrink Your Magic Retirement Number With One Rental Property

    Shrink Your Magic Retirement Number With One Rental Property

    “Wait- how much do I need to save for retirement!?”

    Have you ever felt that way after learning how much money you think you need to retire?

    I’ve certainly felt that way in the past.

    The prospect of saving millions of dollars in order to retire can seem impossible, especially when you’re just starting out.

    You may have even wondered, “How do people even come up with these retirement numbers?”

    The most common answer to that question is the “4% Rule.”

    Using the 4% Rule, you can calculate your magic retirement number and determine how much money you need to save for retirement to maintain your current lifestyle.

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years. 

    If you do so, you can expect your money to last for 30 years.

    Today, we’ll take it one step further.

    Let’s explore how owning even a single rental property can further reduce the amount you need to save for retirement.

    The results may shock you- in a good way.

    @thinkandtalkmoney

    4% rule plus a rental property=chef’s kiss for retirement #thinkandtalkmoney #rentalproperty #retirementplanning #4percentrule

    ♬ original sound – Thinkandtalkmoney

    How to use the 4% Rule to forecast your magic retirement number.

    First, let’s look at an example using the 4% Rule to forecast your magic retirement number.

    In some fun news, Bill Bengen, creator of the 4% Rule, just released a new book showing that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    Bengen’s research is significant because it means you can safely retire with even less money. That’s because the higher your safe withdrawal rate, the less you need squirreled away to maintain your lifestyle.

    In light of Bengen’s updated research, we’ll use 4.7% as our safe withdrawal rate.

    Let’s say that your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .047.

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49 

    Based on the updated 4.7% Rule, you need $2.55 million to maintain your current lifestyle in retirement.

    By the way, under the original 4% Rule, you would need $3 million in investments ($120,000 / .04 = $3,000,000.00).

    See why people are excited about the updated 4.7% Rule?

    Does saving $2.55 million for retirement seem like an impossible task?

    Saving $2.55 million for retirement may seem like an impossible task.

    If that’s your initial reaction, be sure to check out my ongoing series on investing. We cover everything you need to know to start investing with confidence.

    You may be surprised to learn that If you start investing early and often, reaching $2.55 million is actually not that hard.

    Even so, there’s another way to massively shrink your magic retirement number: owning rental properties.

    Why would anyone want to own rental properties?

    There are four main reasons why I invest in rental properties: 

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    decorative lights under a tree at night showing how one rental property can shrink your magic retirement number.
    Photo by Jay on Unsplash

    Before we look at an example of how owning rental properties shrinks your magic retirement number, here’s a quick breakdown of each of the four main benefits. 

    For a more detailed description of each benefit, you can read my series on investing in real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    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.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    With these benefits in mind, let’s see what happens when we add a single rental property to your portfolio.

    How owning a single rental property lowers your magic retirement number.

    Let’s continue our example from above where your current lifestyle costs $120,000 per year. We learned that means your magic retirement number is $2.55 million based on the 4.7% Rule.

    Now, let’s add a single rental property into the mix.

    Let’s assume that you own a rental property that cash flows $2,000 per month. That’s a total of $24,000 per year.

    Remember, your cash flow is the profit remaining after paying your mortgage, taxes, insurance, and any other costs.

    To learn how to properly run the numbers on a potential rental property, click here.

    With $24,000 per year generated by your rental property, you don’t need your investment portfolio to fund your entire $120,000 lifestyle.

    Instead, your investments only need to generate $96,000 per year ($120,000 – $24,000 =$96,000).

    So, let’s plug $96,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $96,000 / (.047)=$2,042,553.19

    By adding a single rental property to your portfolio, you’ve lowered your magic retirement number by half a million dollars!

    You now only need $2.04 million to maintain your current lifestyle in retirement.

    Macro X-ray of some mushrooms with false coloring showing how to shrink your magic retirement number with one rental property.
    Photo by Mathew Schwartz on Unsplash

    What happens to your magic retirement number if you pay off your mortgage?

    This example shows how your magic retirement number drastically shrinks with the addition of just a single rental property.

    Keep in mind that in this example, we assumed that you have a mortgage on your rental property. That mortgage obviously reduces your cash flow.

    But, what if you paid off that mortgage before you retired?

    Let’s finish our example by assuming that you have a 30-year fixed rate mortgage and your payment is $3,500 per month. And, you make it a goal to pay off that mortgage before you retire.

    Once the mortgage is paid off, you can add that $3,500 to your monthly cash flow.

    That increases your monthly cash flow on this property from $2,000 to $5,500. Annually, that’s $66,000 in cash flow.

    Continuing our example, you now only need your investment portfolio to generate $54,000 per year ($120,000 – $66,000 =$54,000).

    Look what happens when we plug $54,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $54,000 / .047 =$1,148,936.17

    By paying off the mortgage on this single property, you’ve now reduced your magic retirement number by $1.4 million dollars!

    You now only need $1.15 million to fund your current lifestyle in retirement.

    Have you considered adding a rental property to your overall investment portfolio?

    The point of this post is to show you how owning even a single rental property can reduce your magic retirement number.

    Think about what would happen if you owned two rental properties. Or, what about three rental properties?

    If you can handle the job of being a landlord- which I’m betting is easier than your job as a lawyer or consultant or doctor- owning rental properties is a great way to accelerate your journey to financial freedom.

    After seeing the math, you may want to consider adding a rental property (or two) to your overall investment portfolio.

    Are you intimidated by the thought of saving enough for retirement?

    Have you done the math with the 4.7% Rule to see how much you really need?

    Have you considered adding a rental property to your portfolio to shrink you magic retirement number?

    Let us know in the comments below.

  • How to Analyze a Property When the Initial Math Looks Bad

    How to Analyze a Property When the Initial Math Looks Bad

    Most rental properties that you evaluate are not going to immediately look like great investments.

    Does that mean you should just give up?

    No way.

    It’s up to us as real estate investors to research, negotiate and buy properties only at the right prices. Or, to buy properties that have untapped potential.

    Ideally, we can do both.

    The other day, we ran the numbers on an example property in Chicago that had caught my eye in.

    Through that example, we learned what costs to include in our initial analysis to quickly determine if a property was worth pursuing further.

    Today, we’ll look at the next step of the evaluation process.

    Specifically, we’ll focus on what we can do when the initial math on a potential property doesn’t look very attractive.

    Now, let’s get to it.

    Our example property is a small multifamily building in Chicago.

    Our example property is a five-unit apartment building listed for $1,800,000 and located directly in my target zone in Chicago.

    Remember, this analysis is for educational purposes only. You are responsible for running your own numbers on any potential deal.

    Here’s the listing description from my preferred listing site, 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!

    This property passed my initial screening, so we ran the numbers to see if it would be a good investment.

    Here’s what the initial numbers looked like:

    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. 

    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.

    The initial math on this property did not look great.

    In the end, I concluded that this is a beautiful property in a great location but would not be a good investment for me.

    The reason is simple: I invest for cash flow. For me, this property is way too expensive for only a couple hundred dollars of monthly cash flow.

    More specifically, I am not interested in shelling out a down payment of $450,000 (not to mention more for closing costs) to earn $2,400/year in 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.

    For another investor, it’s possible that this would still be a good investment based on appreciation and debt pay-down. For me, that’s a big risk I’m not willing to take with that kind of money.

    So, what now?

    Is that the end of the analysis?

    Cross this property off the list and move on?

    Not even close.

    This is when the fun starts.

    person using laptop to evaluate a rental property using real numbers.
    Photo by Kaitlyn Baker on Unsplash

    What to do if you don’t like the results of your initial evaluation.

    Most of the time that you evaluate properties you won’t love the initial results.

    You should expect that to be the case.

    Think about it from the seller’s perspective. Ask yourself: why is the seller putting this property on the market?

    Obviously, the seller is trying to make a profit. Maybe the seller is a developer or flipper who just completed an expensive rehab. He might even have investors who paid for the project that now expect to be paid back, at a profit.

    The seller wouldn’t be doing is job if he didn’t try to find a buyer at a high asking price. He can always lower the price later on.

    Also, you can think of it another way.

    If a seller owns a wonderful property that is making tons of money every month, how motivated is he to actually sell?

    He may list the property at a high price just to see if anyone will bite.

    In our example, if the seller was cash flowing $4,000/mo, he’d probably just keep it.

    And, if he had that kind of cash flow coming in, he may just list it at an astronomical price because he doesn’t really need to sell it.

    Sure, there are exceptions. Some sellers don’t want to be landlords and others might just want to cash out. But, I don’t see very many of these situations.

    When these situations do pop up, you need to act fast because other investors will take notice.

    The point is these are just a few reasons why you will rarely find great investment properties based on your initial evaluation.

    Don’t give up.

    Your job is to figure out if a property has untapped potential that would make it a good investment.

    Now, let’s return to our example to see what I mean.

    Is the property overpriced?

    The listing price is only the start of the negotiation.

    The listing price may just be too high. In recent years, the listing price has oftentimes been too low, leading to bidding wars because of high demand and limited supply.

    Your job is to find a price that works for your cash flow needs. The seller may not accept your price, and that’s OK. You may need to move on.

    Let’s explore putting a price on our example property where it would be attractive for me.

    Keep in mind that I would want a monthly cash flow of $4,000 to move forward on this property.

    With that target in mind, I can return to the online calculator on Redfin to see at what price this property might make sense for me.

    Playing around with the calculator, I learned that I would need the price to drop to $1,100,000 to get around $4,000 in monthly cash flow (holding all other costs constant).

    That’s about a 40% price reduction.

    Do you think the seller would go for that?

    Not a chance.

    Depending on your market, sellers may be willing to negotiate the price. But, if you come in too low, they won’t take you seriously.

    If I were to move forward with this property, I would need to find ways to improve the math besides just the price. Still, I might be able to get it for below the asking price.

    For our example, let’s assume the seller would agree to knock 10% off the purchase price.

    Here’s what the numbers look like at 10% reduced purchase price.

    Offer Price: $1,620,000

    Mortgage Payment (Principal and Interest)$8,083
    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$12,738

    With monthly rents of $13,840, that means this property is now cash flowing $1,002/mo.

    We’re heading in the right direction, but I think we can do better.

    Besides negotiating the purchase price, what if we can shop around and improve our mortgage?

    Start with the purchase price but see if you can further to reduce the overall cost.

    For example, can you shop around for a better mortgage?

    Let’s assume you can find a loan with a 6.75% interest rate instead of 7%.

    With a 6.75% interest rate, your mortgage payment drops from $8,083 to $7,880.

    Now, your cash flow increases to $1,211/mo.

    You can start to see how this part of the analysis works.

    The point is to reduce the costs of owning this property to improve your cash flow.

    What other ways can you reduce the costs?

    You should go through this process with each cost associated with the property.

    Maybe you can find insurance for less than $400/mo.

    Or, maybe you are willing and able to handle more of the maintenance responsibilities yourself.

    The idea is that each time you reduce your monthly costs, your cash flow goes up.

    If you can reduce the costs enough, a property may start looking appealing to you.

    two people meeting with laptops as they run the numbers together for a potential deal.
    Photo by charlesdeluvio on Unsplash

    On top of reducing the costs, can you can earn more income from this property?

    At the same time you look to reduce the costs, you should look to see if you can earn more income from a property.

    In other words, can you earn more rent per month than the current rate?

    This is where you’ll need to study the neighborhood to see what similar apartments are renting for. Your broker should be able to help you with this.

    In our example, let’s assume that you do your research and determine that the apartments are under-rented.

    In fact, you learn that each of the 5 apartments could earn $200 more per month.

    Adding that additional $1,000 per month brings our total cash flow to $2,211/mo.

    Now, this property is starting to look more enticing.

    You might be surprised how many sellers under-rent their properties.

    Over the years, my wife and I have been successful in finding properties that have been severely under-rented by the previous owners.

    We don’t renovate properties ourselves because we are busy professionals with full-time jobs and a family. We try to find properties that have bee nicely rehabbed but are currently under-rented.

    You may be surprised to learn that a property flipper doesn’t always know the local market as well as you. It could be that he is just in a hurry to get a property rented out so he can sell it and move on to the next job.

    If you become an expert on market rents in your local area, you can be the one who benefits.

    A few years ago, my wife and I purchased a three-flat in our local area. It was about a half-mile from where we lived at the time and was on our regular walking route. We took an interest in the rehab and followed its progression closely.

    When the property was completed, I saw the rental listings online. It was a beautiful property in a great location. I was shocked when I saw the units were listed for only $1,700/mo.

    This was my local area and I knew these units could easily go for $2,500/mo, if not more.

    When the property hit the market a few months later, we pounced and had it under contract the next day.

    When the original tenants chose to move out at the end of their leases, we quickly found new tenants happy to pay $3,100/mo.

    Sometimes sellers just don’t know what they have.

    Don’t fool yourself into thinking a property is a great investment by unrealistically changing the numbers.

    After reading this post, you can hopefully start to see how to run the numbers to make a potential property more attractive.

    In our example, we tweaked the purchase price, mortgage rate, and rental income to improve the cash flow enough to make this deal potentially attractive.

    After going through an analysis like this, you may be ready to make an offer. Just don’t get your hopes up too high.

    Sellers won’t always negotiate.

    Properties won’t always be under-rented.

    Many of your offers will end up getting rejected.

    Don’t quit.

    There will always be another property out there.

    If you can’t get a property with numbers that work for you, it’s time to move on to the next one.

    No matter how much you love a property, don’t fool yourself into thinking it’s a great investment if it’s not.

    Readers, have you made offers on properties that you knew were undervalued? Did you successfully cash flow on a deal that did not look great on paper at first?

    Let us know 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.

  • Stop Fearing Toilets with a Good Handyman on Your RE Team

    Stop Fearing Toilets with a Good Handyman on Your RE Team

    “You really want to be a landlord? You don’t want to fix leaky toilets at 2 a.m.!”

    If you decide to invest in rental properties, this is one of the first comments you’ll hear from the haters.

    Mind you, these haters who are so scared of the imaginary leaky toilet are not landlords. I’ll go a step further and would wager that none of them have ever even seen a leaky toilet before.

    Instead, they probably heard a story one time and decided that being a landlord was too hard.

    The sad part is that they have shut themselves out from one of the best asset classes (and my personal favorite) for achieving financial freedom.

    The other comment you’ll regularly hear?

    “I can’t be a landlord. I’m not handy.”

    Guess what?

    I’m not very handy either. And, I have 11 rental units in two different states.

    @thinkandtalkmoney

    You don’t need to be scared of leaky toilets when you have a good handyman on your real estate team. You’ll also learn that you don’t need to be handy to be a landlord. #thinkandtalkmoney #handyman #realestateinvesting #realestateinvestor #financialfreedom

    ♬ original sound – Thinkandtalkmoney

    The truth is that you do not need to be handy to be a landlord.

    In reality, you don’t need to be handy to be a landlord.

    And, you definitely don’t need to fear the 2 a.m. leaky toilet.

    Oh, this is not to say that things aren’t going to break and need attention at the most inconvenient time.

    Every landlord has those stories. I’ve certainly had my fair share.

    One example seems on point.

    A few years ago, my family and I were living in one of our rental apartments.

    One evening before leaving for vacation the next day, we were sitting around when my sister-in-law pointed at the ceiling and exclaimed, “What is that!?”

    Well, “that” was a huge, previously undiscovered, water spot in my ceiling.

    Turns out the toilet in the unit upstairs was leaking. (See, on point.)

    The water gradually spread into the wood floors of the upstairs unit and the ceiling of my unit. It also dripped all the way down the plumbing stack to the lower level carpet in the bedroom where my two little kids slept.

    What did I do about this catastrophe?

    I called my handyman and got on a plane the next morning.

    By the time we returned, the wood floors, ceiling, and carpet had all been repaired and there was no sign of damage.

    When you have a good handyman on your real estate team, you don’t have to worry about things like this.

    One of the biggest myths of being a landlord is that you need to be handy.

    Have you noticed that we’ve been talking about investing in real estate for a couple of months now and I haven’t once mentioned leaky toilets or the need to be handy?

    That’s because there are so many other parts of being a landlord that are more important than your skills with a hammer.

    To name just a few more important skills: running the numbers on potential deals, selecting good tenants, keeping good records, dealing with tenant complaints, and paying the bills on-time.

    Plus, for most of us lawyers and professionals who want to own rental properties, we have other time commitments. Even if we have the skills or enjoy doing repairs ourselves, it still makes sense to hire a professional.

    That’s why every good rental property investor has a good handyman on his team.

    Before we talk about what to look for in a handyman, let’s take a look back at the other key members of 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.

    a pile of white toilet paper indicating that being afraid of toilets as a landlord is silly.
    Photo by Colourblind Kevin on Unsplash

    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.

    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.

    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.

    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.

    man standing in front of a miter saw reflecting the next most important people on your real estate team are your accountant, lawyer, insurance advisor, and handyman or general contractor.
    Photo by Annie Gray on Unsplash

    What to look for in a good handyman.

    Here are some of the things I look for:

    1. A handyman who responds to my messages promptly.

    The last thing you want is a handyman who is flakey. When something needs fixing, you need someone who answers your call or messages you back right away.

    Most repairs are not urgent, meaning your handyman does not need to drop everything right away to tend to the issue.

    But, it’s important that you let your tenant know that you’re on it and someone will be around in short order to address the problem.

    2. A handyman who Is not too big for a small job.

    It’s much easier to find a handyman to do a full kitchen renovation than to replace just the kitchen sink. Obviously, the bigger the job, the more money to be earned.

    As a landlord, you need someone who can handle the small jobs. These come up more frequently than the bigger projects and are often necessary to keep tenants happy.

    We recently had a tenant message us that the kitchen sink was leaking. My handyman got over there the same day and fixed the leak for $80.

    This is the type of guy you need on your team.

    3. A handyman who makes a good impression with the tenants.

    Your handyman will inevitably have to interact with your tenants. You want someone who makes a good impression. That means someone who is professional, courteous, and respectful of the tenant’s space.

    It is also very helpful if your handyman can explain to the tenant what the repair involves and what to do if there are still any issues.

    4. A handyman who does not run up the bill.

    Handymen tend to charge by the hour because they don’t usually know the extent of the repair until they begin working.

    While there’s nothing wrong with charging by the hour, you can imagine how someone untrustworthy might take advantage of this billing arrangement.

    With more experience as a landlord, you will start to have the same type of repairs come up regularly. Based on that experience, you’ll know when a handyman is running up the bill on you.

    5. A handyman who comes recommended from other landlords.

    Like anything else in life, a good recommendation goes a long way. It is always a good idea to work with someone who people you trust can vouch for.

    The trust factor works both ways, too. If your handyman knows that you are reputable and come recommended, he is more likely to take your calls and go into business with you.

    6. A handyman who has worked on rental properties.

    When we first started shopping for a rental property, our real estate broker taught us about “condo quality” vs. “rental quality.”

    Condo quality is nicer, more expensive, and tends to be for people buying a home for themselves.

    Rental quality is more affordable and comes with the expectation that things will break and need to be replaced.

    When it comes to a handyman, you want some who understands the difference. It makes no sense to overpay for quality that you just don’t need in a rental unit.

    This has nothing to do with the skill of the handyman, just the wherewithal to make “rental quality” repairs in rental units.

    How many would-be rental property investors have been scared off by the imaginary leaky toilet?

    If you have been reluctant to become a landlord because of the hypothetical leaky toilet, hopefully this post has given you something to think about.

    Being a successful landlord has nothing to do with being handy.

    Don’t let your fears about potential repairs stop you from exploring this powerful asset class.

    If you’re a landlord, what is your best “leaky toilet” story?

    Was it enough to give up on being a landlord?

    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?

  • Fix Your Personal Finances Before Investing in Real Estate

    Fix Your Personal Finances Before Investing in Real Estate

    When my students ask me a question about how to start investing in real estate, I tend to respond with a question of my own:

    “How much savings does your personal budget generate each month?”

    Yes, I know. It’s so annoying to answer a question with a question.

    This particular question usually leads to a double dose of annoyance from my students.

    My students are first annoyed that I ignored their question about real estate. They didn’t come to me to talk about something boring, like budgeting. They want to know about the exciting stuff, like becoming a real estate investor.

    What I’ve noticed is that after this initial annoyance fades away, another form of annoyance sets in. My students get annoyed because they can’t actually answer the question.

    They realize they have no idea how much money they’re saving each month because they don’t have a personal budget.

    That’s a problem.

    @thinkandtalkmoney

    Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out. The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out. #thinkandtalkmoney #realestateinvesting #realestateinvestor #personalfinance

    ♬ original sound – Thinkandtalkmoney

    Not having a personal budget is a problem for anyone who wants to be a successful real estate investor.

    Investing in real estate means running a business. Money comes in and money goes out. To be successful, you have to make sure that more money comes in than goes out.

    This is obvious stuff, right?

    The same logic applies to your personal budget: if you want to get ahead in life, more money needs to come in than goes out.

    The problem is most people have a hard enough time managing their personal finances. How are they going to handle managing business finances?

    That’s why I ask my students, “If you haven’t mastered this idea with your personal budget, are you sure you want to take on the stress and risk of an investment property?”

    It would be much easier to simply invest in an index fund, like VTSAX. At least in that case, you don’t have to manage a business budget. You just have to do your best to constantly add money to your investment account.

    It’s usually around this point when my students start nodding in understanding.

    Before investing in real estate, make sure your personal finances are in order.

    My goal here is not to dissuade you from investing in real estate. I am a big proponent of rental property investing.

    I’ve said it before: I think every professional or lawyer can benefit from owning rental properties.

    My only goal is to help you avoid the mistakes that crush so many beginner real estate investors. One of the biggest mistakes I see is people taking on a major financial commitment (and time commitment) without starting from a strong foundation.

    If you’ve been following along on the blog, you likely noticed the progression in topics we’ve covered.

    You’ll see links to each one of these topics featured on the top of the Think and Talk Money homepage:

    We initially covered each of those topics in order from top to bottom. First, we talked extensively about the mental side of money. Without having your money mindset in the right place, nothing else matters.

    We then spent a lot of time talking about personal finance fundamentals, like budgeting, saving, and handling credit and debt responsibly.

    Only after having our personal finance foundation in place did we talk about more fun concepts like investing and real estate.

    There’s a reason we’ve covered these topics in this order.

    If your money mindset is not in the right place, you won’t be able to stay on budget.

    If you can’t stay on budget, you’ll likely fall into debt.

    When you’re falling deeper and deeper into debt, it doesn’t make a lot of sense to prioritize investing.

    A woman holding a jar with savings written on it suggesting you need to get your personal finances in order before investing in real estate.
    Photo by Towfiqu barbhuiya on Unsplash

    Why bother with real estate if any profits are just going to disappear?

    Let’s focus on that last point for a minute.

    What sense does it make to invest if you’ve never proven to yourself that you can use those investment gains responsibly?

    I never want to see people take on the challenge of investing in real estate just to have any profits disappear because they don’t have a strong personal finance foundation in place.

    Imagine someone does the work to find and sustain a good rental property that generates $1,000 per month in cash flow.

    It’s not easy to earn that much. It takes time and effort, not to mention the risk involved.

    If that same person blows the $1,000 he earned on things he doesn’t care about, what was the point?

    Why take on the risk and do the work if the money will all be gone by the end of the month?

    Unfortunately, this is how many people go through life. They work hard, make good money, and then have nothing to show for it.

    I don’t want that to be your fate. I want you to have a plan for your money before you earn it.

    That means sticking to a budget that consistently moves you closer to living freely on your terms.

    Most of us don’t know where our next dollar is going.

    The reason most people never get ahead with their finances is because they don’t have a plan for where their next dollar is going.

    Their income hits their checking account, they spend it on this or that, and pretty soon that money has disappeared. They haven’t used the money to advance any of their priorities. It’s just gone.

    To me, this is one of the most important money mistakes that we need to fix right away. We definitely need to fix it before we take a chance on investing in real estate.

    If not, you’ll just be making the same mistakes, just with more money to lose.

    Having a plan for our money, before we earn it, is essential if we want to reach our goals. With a plan, we can eliminate the disappearing dollars with confidence that our money is being used to serve our purposes.

    How do you create a plan for your money before you earn it?

    You need to have a budget.

    If you don’t currently have a budget that results in excess money at the end of each month, I encourage you to start there before thinking bout real estate.

    How to create a Budget After Thinking.

    The key to budgeting is to eliminate disappearing dollars by creating a plan for Now Money, Life Money, and Later Money.

    Your Later Money is what you’ll eventually use to accelerate your journey to financial freedom by investing in stocks or buying real estate.

    1. Now Money

    Now Money is what you need to pay for basic life expenses.

    These expenses include housing, transportation, groceries, utilities (like internet and electricity), household goods (like toilet paper), and insurance.

    These are expenses that you can’t avoid and should be relatively fixed each month.

    2. Life Money

    Life Money is what you are going to spend every month on things and experiences in life that you love.

    This bucket includes dining out, concerts, vacations, subscriptions, gifts, and anything else that brings you joy. 

    We can’t be afraid to spend this money. This bucket is usually what makes life fun and exciting. The key is to think and talk so you are spending this money consistently on things that matter to you.

    3. Later Money

    Later Money is what you are saving, investing, or using to pay off debt.

    This bucket includes long term goals, such as retirement plan contributions (like a 401k or Roth IRA), college savings for your kids (like a 529 plan), emergency savings and paying off student loan or credit card debt.

    This bucket also includes any shorter term goals, like saving for a wedding or a downpayment for a house. 

    Most fun of all, this bucket includes any investments you make to more quickly grow your wealth, like investing in real estate or the stock market.

    Later Money is the key category that fuels your ultimate life goals, like financial independence. The more you fuel this category, the faster you can reach your goals.

    black smartphone calculator showing the number 0 indicating how to budget with two simples numbers before investing in real estate.
    Photo by Kelly Sikkema on Unsplash

    When you have strong fundamentals in place, money becomes fun.

    Being good with money doesn’t have to be stressful. Once you have the fundamentals in place, you’ll start to see how each dollar you earn gets you one step closer to financial freedom.

    Before you think about investing in real estate, make sure that your personal finances are in order.

    Owning rental properties means running a business. When the money comes in, you want to make sure it doesn’t go right out.

    Otherwise, the effort, stress, and risk of owning real estate is not worth it. Any dollar you earn is likely to disappear as quickly as it comes in.

    To prevent that from happening, establish good money habits before you buy real estate.

    In the end, you’ll be so happy that you did.

    For any real estate investors out there, did you jump in before establishing strong personal money habits first?

    What advice would you have for beginners thinking about investing in real estate?

    Let us know in the comments below.

  • 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.

  • Why do You Really Want to Own Rental Properties?

    Why do You Really Want to Own Rental Properties?

    Before you start doing something, figure out why you’re doing it.

    Someone smart probably said that at some point, right?

    We’ve spent a lot of time recently talking about the main reasons why I invest in rental properties. We’ve also talked about the work involved with owning rental properties.

    I’m a big believer in the power of real estate. I’ve also come to appreciate just how much work is involved in owning rental properties.

    The reason I’ve spent so much time writing about the benefits and the work involved is to make sure you know exactly what you’re getting yourself into.

    Once you fully understand and appreciate the benefits and the work involved, you’re ready for the next step:

    Think and talk about why you want to own rental properties.

    @thinkandtalkmoney

    No city fines this time! #thinkandtalkmoney #landlord #landlordtips #realestateinvesting

    ♬ original sound – Thinkandtalkmoney

    Depending on why you want to own rental properties, your strategy may be different than mine or someone else’s strategy.

    The key is to figure out your “Why” before making costly mistakes, in terms of both money and time, that don’t help advance your goals.

    Don’t skip this crucial step and jump right to analyzing deals.

    The last thing you want to do is take on such a big commitment without truly knowing why you’re doing it.

    To help you start thinking about a strategy, let’s review the benefits and also the work involved in owning rental properties.

    You can read much more in my series on real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    Blue and orange apartment symbolizing that you need to know your strategy before buying rental property
    Photo by Brandon Griggs on Unsplash

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    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.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    Do not own rental properties if you want passive income.

    Now that you know the benefits, let’s highlight just how much work is involved in owning rental properties.

    At one point or another, you may have heard someone say, “I want to invest in rental properties for some passive income.”

    Yes, we all want passive income.

    No, investing in rental properties is not passive.

    Think of owning rental properties as a way to earn “semi-passive” or “partially-passive” or “somewhat-passive” income.

    Don’t think of owning rental properties as a way to earn “passive” income.

    If you want passive income, you should be investing in index funds, like VTSAX. For more on investing in the stock market, you can check out my series on investing here.

    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.

    How does the old saying go? “If it were easy, everybody would do it.”

    Being a landlord is not easy. It’s definitely not for everyone.

    But, then again, neither is financial freedom.

    In the end, if you are willing to put in the effort, owning rental properties will accelerate your journey to financial freedom.

    Do you still want to own rental properties after knowing the benefits and the work involved?

    Now, you know the main benefits and the work involved with owning rental properties.

    Like I said, owning rental properties is not for everyone. It takes time and effort to learn the basics.

    Then, it takes more time and effort to do your research and develop a strategy.

    At some point, you’ll need to take a chance and make a purchase. That means putting your hard-earned dollars at risk.

    None of this will be easy.

    But, it sure is a lot of fun.

    And, there is a lot of upside.

    If you still want in, I’m going to help you get started.

    for rent sign in window reflecting that all rental property investors need other know their why before they start buying.
    Photo by Aaron Sousa on Unsplash

    Ask yourself: what are my main goals in owning rental properties?

    Before you start analyzing deals, you need to think long and hard about what your goals are.

    Depending on what your’e trying to accomplish, your strategy is going to be different.

    For example, are you looking to move to an expensive neighborhood and just want to offset your ownership costs?

    You may benefit from owning a home with a coach house, granny flat, or garden unit. You can then live in the primary unit and rent out the second unit to reduce your monthly costs.

    Or, your goals might be to leave full-time employment and use rental property cash flow to fund your life. In that case, you’ll need a property that generates significant cash flow, possibly at the expense of personal comfort or long-term gains.

    On the other hand, you may love your job and have no plans of leaving anytime soon. You’re not concerned about present day cash-flow. Instead, you’re looking for long-term gains through appreciation, debt pay-down, and tax benefits.

    In this scenario, you may target markets that have shown strong growth but don’t necessarily cash flow.

    These are just a few possible considerations. One of the things I love most about investing in real estate is how many options there are. It’s up to you to decide what options are most attractive for your goals.

    This is why the first step is to think and talk about why you want to own rental properties.

    Don’t ignore this first step. Spend some serious time thinking about what you’re trying to accomplish.

    Because different properties may offer different benefits, you need to commit to a strategy before you start worrying about how to analyze specific deals.

    Too many beginner investors skip this step and realize much too late that a property they bought doesn’t help achieve their goals.

    My goal in owning rental properties is to accelerate my journey to financial freedom.

    My wife and I invest in rental properties in Chicago and Colorado to accelerate our journey to financial freedom.

    In order to be truly financially free, we need cash flow to cover our present day expenses. So, we’ve targeted properties in Chicago that generate strong monthly cash flow.

    Don’t get me wrong, we certainly hope to benefit from appreciation, debt pay-down and tax advantages. That’s why we’ve chosen to invest in neighborhoods that we think are only getting better.

    However, we view those long-term gains as more of a bonus. Our focus with our Chicago properties is on present day cash flow.

    On the other hand, our Colorado property is a long-term play. It does not generate positive cash flow. That said, we use the rental income to help offset our ownership costs.

    We are planning to keep our Colorado condo in our family for decades to come. Offsetting the ownership costs with rental income will help us accomplish that goal.

    At the same time, we are hoping that our Colorado condo appreciates in value, making it a solid long-term investment. So, even though it does not generate cash flow for us, it still fits into our long-term plans for financial freedom.

    One key point: just because my wife and I invest for cash flow doesn’t mean we are planning on leaving full-time employment.

    I am a big proponent of all lawyers and professionals having multiple streams of income. I refer to these various income streams as Parachute Money.

    Because my wife and I are earning steady paychecks, we’ve been able to use our cash flow for other investments. We have multiple income streams and are putting all those income streams to work. That’s one reason we’ve been able to scale our portfolio so quickly.

    What are your goals in owning rental property?

    You now know the benefits, the work involved, and some different strategies to consider regarding rental properties.

    Now, it’s time to ask yourself why you want to own rental properties.

    Once you figure out the “why,” you can then move onto the “how.”

    So, if you’re considering owning rental properties, what is your why?

    What goals are you trying to accomplish?

    Let us know in the comments below.

  • Do Not Invest in Real Estate if You Want Passive Income

    Do Not Invest in Real Estate if You Want Passive Income

    Turbo 200 Universal Capacitor 67.5MFD: $501.00

    Add Puron-410A, Replace Valve, Freon Charging: $729.00

    CO2 Drain Purge, Remove Water: $437.00

    2 Ton R 410A Coil: $2,000.00

    Total for A/C Repairs: $3,667.00

    If you’re thinking that’s a rough year for air conditioner repairs, you wouldn’t be wrong.

    Unfortunately, those are all repairs we’ve needed on different units in the past 10 days.

    It gets better (worse?)… the average high temperature in Chicago over the past ten days has been around 90 degrees.

    Still want to own rental properties?

    @thinkandtalkmoney

    Owning rental properties does not generate passive income. Being a landlord is a job. Even if you rely on a property manager, it’s still a job. #thinkandtalkmoney #realestateinvesting #realestateinvestor #passiveincome #financialfreedom

    ♬ original sound – Thinkandtalkmoney

    Why would anyone want to own rental properties?

    We’ve spent a lot of time recently talking about the four main reasons why I invest in rental properties:

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    But, make no mistake:

    Owning rental properties does not generate passive income. Being a landlord is a job. Even if you rely on a property manager, it’s still a job.

    Before we talk about the job of owning rental properties, here’s a quick breakdown of each of the four main benefits.

    For a more detailed description of each benefit, you can read my series on investing in real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    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.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    person in black pants and white and black sneakers standing on brown wooden floors about to do repairs as a landlord because owning rental properties is not passive income.
    Photo by Bernie Almanzar on Unsplash

    Rental properties do not generate passive income.

    At one point or another, you may have heard someone say, “I want to invest in rental properties for some passive income.”

    Yes, we all want passive income.

    No, investing in rental properties is not passive.

    Think of owning rental properties as a way to earn “semi-passive” or “partially-passive” or “somewhat-passive” income.

    Don’t think of owning rental properties as a way to earn “passive” income.

    If you want passive income, you should be investing in index funds, like VTSAX. For more on investing in the stock market, you can check out my series on investing here.

    For even more, JL Collins literally wrote the book on investing in VTSAX. His book is called The Simple Path to Wealth and is tremendous. You can read my review here.

    By the way, there’s nothing wrong with wanting passive income. For those of us on our journeys to financial freedom, passive income is what it’s all about.

    It’s just that owning rental properties is not passive.

    To be a successful rental property investor, you have to appreciate that it is a job.

    Owning rental properties is like having another job.

    It’s not a full-time job. In fact, there might be months that go by when you don’t actually do much of anything. Your main job is to be at-the-ready in case a tenant messages with an issue.

    On the other hand, there will be 10-day stretches where you have three a/c units break requiring multiple service calls, tenant coordination, and $3,600 in repairs.

    Granted, this 10-day stretch was just about the worst stretch for maintenance and repairs we’ve had as landlords. It just so happened to occur in the days leading up to me writing this post about being a landlord. Life’s funny, huh?

    Still, talk to any landlord and they will have similar stories to share about the stress involved with being a landlord.

    red and blue repair neon light signage indicating that owning rental properties requires repairs and is not a source of passive income.
    Photo by Jon Tyson on Unsplash

    Most rental property investors who give up did not realize the work involved.

    I’ve known countless rental property investors over the years.

    In my experience, the ones who end up selling their rental properties after a couple of years did not appreciate that becoming a landlord means taking on a job.

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

    These landlords had likely been misled into thinking that owning rental properties was an easy way to generate passive income.

    Look back at the top of the post for the four main reasons I invest in rental properties.

    Cash flow, appreciation, debt pay-down, and tax benefits.

    Did I say anything about easily earning passive income?

    Don’t make the same mistake that so many unsuccessful landlords have learned.

    If you’re considering your first rental property, don’t fool yourself into thinking you’ll be earning passive income. There will be tenant issues, work orders, money spent, and tough decisions to be made like in any other business.

    This remains true even if you have a property manager. You’ll often hear real estate investors griping about “managing the property manager.”

    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.

    At times, it can be very easy. Other times, it’s very stressful.

    If you can handle the job, you can generate massive long-term wealth for you and your family.

    I accept that owning rental properties is a job and have benefitted immensely.

    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.

    How does the old saying go? “If it were easy, everybody would do it.”

    Being a landlord is not easy. It’s definitely not for everyone.

    But, then again, neither is financial freedom.

    Coming up, we’ll talk about tips on how to make your experience as a landlord as smooth as possible. You can also follow me on socials for current issues I’m dealing with as a landlord.

    In the end, if you are willing to put in the effort, owning rental properties will accelerate your journey to financial freedom.

    Are you a rental property investor?

    Do you agree that owning rental properties is a job?

    Let us know in the comments below.

  • Invest in Real Estate for Massive Tax Benefits

    Invest in Real Estate for Massive Tax Benefits

    When was the last time you took a look at your actual pay statement?

    Most of us working W-2 jobs have direct deposit, meaning our paychecks are automatically deposited into our bank accounts. On pay day, all we have to do is wake up, open our banking app, and confirm we got paid.

    When we do this, all we see is our net pay, or take-home pay. Our net pay is what we earn after all deductions are subtracted from our gross pay.

    Deductions may include voluntary contributions, like to our 401(k) and HSA, as well as other benefits, like health insurance.

    That’s all nice so far.

    Not so nice is that our paychecks are further reduced by mandatory tax withholdings.

    For high earning lawyers and professionals, taxes can easily reduce our W-2 income by 25%-40%.

    This is not groundbreaking news to anyone, right?

    As employees, we are accustomed to having significant taxes withheld from our paychecks.

    We’ve become so accustomed to paying taxes as W-2 employees that none of this should surprise us. Taxes are just part of the bargain when you’re an employee.

    Well, what if I told you that automatically paying taxes every month does not have to be part of the bargain?

    In fact, I know of a way to make money where taxes can be reduced or deferred for a long time, if not eliminated altogether.

    And, that means you get to keep and benefit from more of your hard-earned money each month.

    This leads us to the fourth main reason I invest in real estate:

    Real estate offers massive tax benefits.

    I earn income through W-2 employment and rental properties.

    As a W-2 employee and a real estate investor, I know firsthand that not all income is created equal.

    My W-2 income is heavily taxed every month.

    My rental property income is not.

    Today, we’ll introduce some of the main reasons why real estate investors pay less in taxes than W-2 employees.

    Before we talk about these tax benefits, let’s review the first three reasons why I invest in real estate. Each of these reasons has accelerated my journey to financial freedom.

    Note: I am not an accountant or tax professional, so please be sure to consult with an expert for tax advice for your personal situation.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Modern kitchen in a rental property, which is easier to pay for because of the tax advantages of investing in real estate.
    Photo by Jason Briscoe on Unsplash

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    On top of monthly cash flow, appreciation, and debt pay-down, the tax benefits offered to real estate investors is another way to generate wealth through real estate over the long run.

    Let’s take a look at some of these massive tax benefits.

    What are the primary tax benefits to investing in real estate?

    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.

    Sign, Harlingen, Texas. 1939, but if you have real estate, you may not pay any taxes at all on your cash flow. Photographer Lee Russell
    Photo by The New York Public Library on Unsplash

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    Would you rather have rental income or W-2 income?

    This post is not meant to be a primer on income taxes, but we can use a very basic tax bracket calculator to highlight the distinction between rental income and W-2 income.

    I currently receive both types of income so readily appreciate the difference in how each form of income is taxed.

    Let’s say you live in Illinois and are a high-earning lawyer or professional making a gross annual income of $250,000. Based on 2024’s federal tax rates, you will owe $53,015 in federal income tax. That’s 21% of your income.

    an example of how much you'll pay in taxes if you earn $250,000 as a W-2 employee.
    Source: taxact.com

    Illinois is one of the 42 states that also levies a state income tax. Illinois levies a flat state income tax of 4.95%. For our example, that means an additional $12,375 in taxes each year.

    In total, a W-2 employee earning $250,000 in Illinois pays $65,390, or nearly 26%, in income taxes each year.

    Again, this is not meant to be a tax primer. And yes, most W-2 employees take the standard deduction, meaning they’ll get a small refund when they file their tax returns.

    Still, there’s no getting around the reality that when you’re a W-2 employee, you have limited options to reduce your taxable income.

    In the end, you will pay a significant percentage of your income to the government every year.

    On the other hand, real estate investors have a number of legal tax deductions at their deposal.

    That means a real estate investor earning $250,000 in rental income likely pays very little, or even nothing, in income taxes.

    How is that possible?

    Let’s find out.

    How is it that real estate investors pay so little in income taxes?

    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.

    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.

    black platform bed wit white mattress inside bedroom of rental apartment where the landlord is getting massive tax benefits.
    Photo by Sonnie Hiles on Unsplash

    As mentioned above, common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

    When properly tracked and reported on your tax return, these expenses can oftentimes negate all the rental income you earned.

    For today’s purposes, I’ll highlight one key deduction that shows just how much the government wants to encourage real estate investment:

    Depreciation.

    What is Depreciation?

    Depreciation is an accounting method that allows real estate investors to deduct some of the cost of owning a property over time.

    This accounting process is not a trick and is completely legal.

    Calculating your property’s depreciation can get complicated and is best left to the tax professionals.

    In general terms, if you own residential rental property and use standard depreciation like me, you can deduct the cost of owning that property over 27.5 years.

    Each year, you can then reduce your rental income by that annual depreciation.

    Here’s an example to help illustrate how depreciation works.

    Let’s say you buy a rental property for $500,000, and the closing costs are $10,000. The property’s in excellent shape so no capital improvements are needed.

    That means your total initial cost for this rental property is $510,000.

    When you buy a rental property, you are actually buying the land and the building. Your city, county or town’s assessor typically attaches a value to each the land and the building.

    For depreciation purposes, only the value of the building is depreciable. The land is not.

    In our example, let’s say the land was valued at $110,000. You are not allowed to depreciate the value of the land.

    So, your depreciable basis is the initial cost of the property less the land value:

    Initial Cost – Land Value = Depreciable Basis

    $510,000-$110,000=$400,000

    For residential rental properties, you can spread out that depreciable basis over 27.5 years to figure out the annual depreciation.

    Depreciable Basis / 27.5 = Annual Depreciation

    $400,000 / 27.5 =$14,545.45

    What this means is that you can deduct $14,545.45 from your rental income each year.

    Combined with the other available deductions, you can see why real estate investors end up paying very little, or nothing at all, in rental income taxes each year.

    Note: If you sell your rental property, you are responsible for paying depreciation recapture tax, which is a topic for another day. To keep it simple, depreciation recapture is a non-factor for this conversation for many reasons. The most important reason for that is because you have to pay this tax even if you never claimed depreciation on your tax return.

    Your tax professional will help ensure you get all the tax benefits for owning rental properties.

    Fully understanding taxes is not easy. That’s why we have licensed professionals to help us.

    A concept like depreciation can be very complicated. Rest assured that your tax professional will help you benefit as a real estate investor from all the available tax breaks.

    The point of today’s post is to introduce you to the definitive truth that the tax code favors real estate investors.

    While we barely scratched the service today, hopefully you can start to see why it is so advantageous from a tax perspective to own rental properties.

    coffee mug near open folder with tax withholding paper reflecting the massive tax benefits of investing in real estate.
    Photo by Kelly Sikkema on Unsplash

    I personally earn rental income and W-2 income.

    When you legally deduct your rental property expenses, it’s likely that your taxable rental income for the year will be reduced to nothing.

    Compare this reality to that of a high-earning W-2 employee, who regularly pays between 25% and 40% in income taxes each year.

    The W-2 employee needs to earn significantly more money to take home as much as the rental property investor.

    I personally earn rental income and W-2 income.

    One source of income hits my bank account in full on the first of every month. I never worry about taxes.

    The other source of income gets drastically reduced by taxes before I ever see a dime.

    Which type of income do you think I prefer earning?

    How about you?