Last Updated on November 5, 2020 by Mark Ferguson
Rental properties are my favorite way to invest money! Over the years, I have bought more than 30 residential, commercial, and single-family rentals, which may not seem like that much but some of my properties have more than 60,000 square feet. I have been in real estate for almost 20 years now and I have learned a lot over the years. I am still learning and still buying! When building my Instagram page I put together a list of 101 rental property tips. I was planning to turn these into a book, but I decided to post them here for free instead. If you want more in-depth information you can check out Build a Rental Property Empire, a best-selling book that is published as a paperback, ebook, and audiobook.
You can find the tips below and I also linked many articles that go into detail on some of the subjects as well. Enjoy!
1. Don’t Buy a Rental with Negative Cash Flow!
One of the fastest ways to get yourself in trouble with a rental property is to buy something with negative cash flow. Many people think they can weather the storm until the property goes up in value. However, selling a house is expensive, and most people underestimate the expenses on a rental.
Unless you have tons of cash lying around and have no idea what to do with it, buying a rental with negative cash flow usually isn’t wise. You also need to know what the expenses will be on a rental. There is more than the mortgage, taxes, and insurance, which we will get into later with more tips.
2. Don’t Pay Retail Value for Rentals!
I have gotten a great deal on all of my rentals. When you walk out of closing with equity in the deal, it makes the investment so much better. Banks like to lend to you more; you make more money; and you can refinance later to take cash out.
Getting an awesome deal is not easy, but most worthwhile things aren’t easy. Even if a property will cash flow at retail value, I would not buy it unless it is a great deal. If you want to use the BRRR strategy (buy, repair, rent, refinance,) you must get a great deal to get all your money back out of the deal.
3. You Make More Money Using Loans Than Paying Cash
If you buy the right rentals, you will make more money from getting a loan than from paying cash. You will have more equity, more cash flow, more tax advantages, and more diversification. The big advantage is you can buy three times as many properties using loans and buy them much faster than if you pay cash. The sooner you buy rentals, the sooner you will be making money on rent and taking advantage of all the other benefits.
You have to buy rentals below market value with plenty of cash flow to take full advantage of leverage. The more cash flow you make on properties, the more loans make sense.
4. Managing Rentals Yourself Saves Money but Eats up Time
I managed my rentals until I had 7. At that point, I got a property manager. It took too much time, and I was not a good manager. I was too easy on the tenants, and they took advantage of that.
When I got a property manager, it did not cost me much more money because the properties were managed better. I realized how nice it was to not worry about them all the time, and I noticed how much extra time I had!
If you manage properties yourself, do not discount the time it takes. Make sure you are not missing out on other opportunities because you are spending time managing rentals. it may not seem like it takes a lot of time, but you are on call constantly.
5. How to Find a Property Manager
A lot of people have asked me for some tips on finding a property manager.
One of the methods I like the best is calling up the property manager and pretending to be a tenant. See if they answer the phone, call you back, and pay attention to how responsive they are.
You also must drive by properties they manage to see how well they are maintained, including the yards.
6. A Rental Rehab Does Not Need to Be Fancy
Rental properties do not need to be fixed up as nicely as house flips. Many tenants do not pay attention to the details on a rental because it is not their house. They do not get a home inspection, and they realize the landlord will have to fix most issues that come up.
That does not mean we do not make the homes safe or pleasant to be in. We still paint the properties, put in new flooring, check the HVAC, electrical, etc. However, we may not need to replace the entire kitchen or baths on a rental, when we would do that on a flip.
In some cases, we do not have to change doors, windows, or light fixtures. A lot depends on our competition as well. How nice are the other rentals in the area, and can you compete with them at your current design level?
7. The Older a House Is, the More Money You Will Spend
The older a property is, the more repairs and maintenance it will need over the years. I try not to buy rentals that are more than 50 years old if I can help it. There are some older properties that work well as rentals, but you must be prepared for the extra costs. Even if a property is remodeled, there will be more repairs on older homes. The wiring, plumbing, and foundation all have a better chance of failing the older a house is. It is rare that everything is replaced.
I am much more willing to buy older houses as flips because I will not be holding them for the long-term.
8. Do Not Forget Maintenance and Vacancies!
Many people forget to account for vacancies and maintenance, or they fudge the numbers to make a deal sound better. Even if you buy a new construction rental, it will have maintenance and vacancies. Tenants will do damage at some point, and you will have evictions at some point.
Please don’t assume the returns are simply the rent minus the mortgage payment. There are so many more costs that come into play when investing in rentals. It takes a wide margin to make money every month, and that is why it can be hard to find great rentals.
I have a great cash flow calculator on investfourmore.com that shows those costs and what you will actually make.
9. There is No Limit to How Many Mortgages You Can Have
Many banks will tell rental-property owners they can’t have more than four mortgages. What they mean is their bank won’t let you have more than four loans.
Many banks will allow up to 10 mortgages, and some local banks have no limit. There are also national rental property-specific lenders who will finance an unlimited amount of loans. Do not give up if a big bank tells you they can’t give you any more loans!
This subject is actually where the name Investfourmore came from.
10. You Need More Than One Rental
I have 20 rentals now, including a 68,000-square-foot commercial building. I never had a goal of buying just one rental property. I wanted at least 30 when I first decided I would invest in them.
I later set a goal to buy 100 by 2023. I am way off on that goal, but things also change…like the real estate market. I also never thought I would be buying commercial rentals, which I am doing now.
When you are investing in rentals, it is good to have an end goal—something to shoot for, and something to motivate you. Just buying one is great, but owning multiple rentals can not only change your life but allow you to leave a legacy.
One rental will not make you rich, but multiple rentals can. The more rentals you have, the more diversification you have, and the safer the investment becomes.
11. Rentals Are a True Investment
I love to flip houses. House flips make me a ton of money, but they are not a true investment. I have to keep flipping houses over and over to make money. The same goes for wholesaling. You can use a team to turn flipping or wholesaling into a business, but it’s still not an investment. You have to keep working to keep the money coming in.
Rentals keep making you money as long as you own them. The more rentals you buy, the more money you make. The investment increases over time as rents go up, loans get paid down, and equity increases. This all happens without working or buying more deals. Property managers can make rentals a very passive investment. Rentals, to me, are the ultimate investment.
12. Don’t Listen to the Wrong People
Most agents and lenders do not have a clue what a good rental property is. They also have no idea what your goals are or what is best for you. Friends and family most likely have even less knowledge about real estate.
You can learn from others, find a mentor, study the market, and get help from many people. However, you are the one who should decide what a good rental is and how you should buy it, finance it, etc…
When I first started, I made the mistake of listening to people who had more real estate experience than me, but they did not know much about rentals. They told me how horrible rentals were because they did not know the right way to invest in rentals. If you need an agent to tell you what a good rental is, you need to learn more about rentals. If you need a lender to tell you the best loan to use, you need to learn more about financing.
I am all for learning from those who have been successful in what you want to do, but even they can’t tell you exactly what to do. You need to figure that out on your own.
13. You Cannot Be a “Soft” Landlord
I was not a great property manager with my first 7 rentals. I listened to sob stories, didn’t charge late fees, and was not strict when enforcing the leases. I also used my gut instead of facts to choose tenants. I got into some trouble, but luckily, I made it through in fairly good shape. Others have not been so lucky.
I let a property manager take over, and things got so much better. We had better tenants who paid on time and did not take advantage because they knew they could not. If you manage your own properties, you must be tough. You have no idea how many tenants will have dying relatives or how many times they will be in the hospital and can’t pay rent.
If you are not tough enough, it does not mean you cannot own rentals: it means you need a property manager. Even if you are tough enough, using a property manager is still well worth it.
14. There Is No “Best Way” to Invest
There are many ways to invest in real estate. There are many different types of properties. I never like to say one type of property is better than another. Everyone has different goals, different bank accounts, and lives in different markets. What is good for me may not be good for you.
If someone says you should only buy commercial or multifamily, maybe that’s right for them, but that strategy may not be right for you. Come up with your own strategy and what works for you. Some people say you should only buy 16-unit or larger multifamily properties. Well, some people may never buy a rental if they are only shooting for that type of property. Do what you find works for you.
15. Finding Great Rentals Can Be Harder than Finding Great Flips
Finding a good house to flip is actually easier than finding a good rental property. You can flip houses in any market because you only need to worry about the buying and selling price. With a rental, you need to think about the long-term economic prospects, the property’s long-term health, and the cash flow.
I also think about the age of the home, the condition, the cost of repairs, and many other factors. When you flip, you sell the house and are done with it. When you own rentals, you deal with any problems the property has for years. You have to be much more careful about the kind of rentals you buy than which houses you flip.
16. Be Careful If You Become an Accidental Landlord
Rentals can be amazing investments if bought with cash flow and below market value. However, many people keep a house as a rental because they can’t sell it for as much as they hoped for.
When this happens, the house usually does not cash flow, and the expenses are also higher than the owners expect. To save money, they manage it themselves, which causes even more problems.
There are some cases where it makes sense, but I prefer to sell a house and invest my money in a good rental than to keep a marginal rental hoping it will go up in value. Not all accidental rentals are a bad investment, but many are because the owners have no idea what they are doing. If you end up as an accidental landlord, make sure you do your homework and manage the property the right way.
17. Getting Your Real Estate License Can Help You
Being an agent and investor has made me so much money on my rentals and house flips. I buy most of my houses from the MLS, and I save a commission whenever I buy or sell there.
I also get more deals because I have access to the MLS, and I can see houses and send in offers within hours of them being listed.
I also have made some amazing connections from being a real estate agent. I have met contractors, lenders, investors, and even had other agents send me deals.
I can deduct more expenses on my rentals because I am in the real estate industry. Overall, being an agent is a huge advantage for me, but it may not make sense for everyone. It takes a certain amount of deals each year for it to make sense.
18. Doing the Work Yourself Is Not Always a Good Idea
Success in life does not stem from working the most or the hardest. It is about working the smartest. Doing all the work yourself on a rental seems like a money-saving idea, but you are chasing dimes and ignoring dollars.
Your time is much better spent looking for deals, earning income to buy more rentals, or learning ways to improve your business. Finding people to help you is vital to being a successful landlord, especially if you ever want to take a vacation or happen to get sick.
I have even talked to many contractors who don’t do the work on their own houses. They realize their time is valuable, and they are better off paying someone else to do it.
19. Rentals Offer Amazing Tax Advantages
Not only are just about all expenses and repairs deductible or depreciable, but you can also depreciate the structure of a rental. That means you can deduct 1/27.5th of the structure of a residential property or 1/35th the structure of a commercial rental each year. This can result in real-life income while showing as a loss on your taxes.
When you sell a rental, you also will pay capital gains taxes, which may be lower than ordinary income tax. Just remember: you may have to pay taxes on some of the depreciation you recapture unless you use a 1031 exchange.
Remember to always consult your tax professional for specific tax advice.
20. A 30-Year Loan Can Be Better Than a 15-Year Loan
30-year loans have much lower payments than 15-year loans, which gives you more cash flow each month. They also give you a lower debt-to-income ratio, which can make it easier to get loans on more rentals.
The rate is slightly higher on a 30-year loan than a 15-year loan, but the lower payment and flexibility make it a much better option for me.
You will pay more interest over the years, but that is because you are paying much less into the mortgage. I can make much more money investing in rentals than I can by paying a mortgage off early.
21. Rent-to-Value Ratio Is Important
My sweet spot for rentals was when I could buy houses from $60,000 to $120,000, fix them up, and rent them out. However, prices have tripled in my area, and those same properties are now $250,000 to $325,000 houses. The rents have gone up 30 to 40 percent while values have increased 250 to 300 percent.
The more expensive a home is, the tougher it is to cash flow—at least with single-family. I stopped buying SFRs in 2015 but have since been buying commercial rentals
22. House Hacking is a Fantastic Strategy
One of the biggest barriers to investing in rental properties is coming up with the 20 or 25 percent down payment. One way to buy a rental for less is to house hack.
House hacking is when you live in one unit of a 4 or fewer unit property. You can rent out the other units or part of the house (if zoning allows it) to help pay for the mortgage. If you live in the house, you can get down payments for 5 percent or less.
This works with properties that have up to 4 units, and you must have lived in one of the units for at least a year. After the year is up, you can move out and rent out the unit you were living in. You can keep repeating the process over and over again.
You can have one FHA loan, but conventional loans offer low down payments for owner-occupants as well.
23. College Rentals
College rentals often have higher rent-to-value ratios, but they also come with more turnover and maintenance. College kids tend to move often, and you are dealing with people who are on their own for the first time.
Even college students who have good intentions may not know how to take care of a house. My sister has college rentals, and multiple students have turned off the heat on Christmas break to save on bills. Then, the pipes freeze.
You will also be dealing with kids who want to leave early because they can’t get along with their roommates. You will have parties that wreck houses. You will have angry parents calling for all kinds of reasons.
College rentals can be a good investment, but they are not easy money and take more management than other rentals.
24. HVAC Maintenance
I have seen furnaces less than 10 years old need to be replaced because they were not maintained well. A furnace should last 30 years if it is taken care of. Make sure you have the furnaces and air conditioners serviced and cleaned every year. This is on top of making sure the tenants (or someone) is changing furnace filters every month or two.
Nothing is more frustrating than having a ten-year-old furnace break down, and servicing them is a great excuse to get in the house and see how it is being treated.
25. BRRRR Strategy
BRRRR stands for buy, repair, rent, refinance, and repeat. This technique can produce infinite returns because it is possible to pull your entire investment back out of the house.
The key to using this technique is getting an awesome deal. An example would be buying a house for $100,000, spending $20,000 on the repairs, renting it, and then refinancing it for $125,000.
The catch is the house would need to be worth close to $170,000 to refinance it for $125,000. You have to get an awesome deal to get all your money back out. But, it can still work great even if you do not get all your money back. There are more costs to using this strategy unless you have the cash to initially buy the house because you are getting one loan with costs and then refinancing with another loan with costs.
26. Not Every Market is Great for Rentals
In 2015, I stopped buying residential rentals in Colorado because high prices made cash flowing impossible. I tried to go to other states to buy but ended up buying commercial rentals in Colorado instead of residential. I have bought 7 commercial rentals in the last 2 years, including a 68-thousand-square-foot strip mall.
High taxes like what you see in NJ, NY, and Chicago can kill returns as well. Not every market is great for residential rentals, but there may be other niches or markets that work.
If you are frustrated that you cannot find great rentals in your area, know there are rentals out there. It just might take some more work to find them.
27. Condos and Townhomes
Townhomes and condos can be good rentals if the numbers make sense, but they can be a little riskier than single-family homes. In some cases, the HOA can implement special assessments to pay for maintenance or repairs. The assessments could be hundreds of dollars or tens of thousands of dollars.
If you are buying in a complex with a lot of deferred maintenance, be very careful. A special assessment may be coming soon!
The HOA fees can also increase and greatly affect the value and cash flow on the properties.
28. Zoning Laws
Some landlords have found they can get more rent by leasing out each room instead of an entire house. Airbnb is also becoming very popular (short-term rentals). These techniques may get you more rent, but they also may be illegal in some areas.
Many cities have zoning laws that say only a certain amount of unrelated people can live in a house. If the property is zoned correctly, you may be able to have 20 unrelated people living together, but in other areas, you may only be allowed two.
Some cities have rules on how long the rental term can be. They may require a home to be rented for at least one month or longer!
Some cities may also require rentals to be registered with the city.
29. The Longer a Tenant Stays the More Damage They Can Do
It is not always a good thing when tenants stay in a house for years. If you aren’t checking on them, they may be destroying the place.
Some of the worst nightmare stories come from landlords who don’t check their houses. The tenants pay rent and never complain, so why should they check the house? Then, they show up and find the house completely trashed. The tenants paid rent and never complained because they did not want to give the landlord an excuse to come see the property.
It is also smart to re-check a long-term renter’s credit and job history every few years. We had tenants who were great for years suddenly fall apart. If we would have screened them again before renewing their lease, we might have caught the warning signs. Landlords are very careful when screening new tenants, but just because a tenant is doing great when they first rent the property does not mean things will always go great.
30. Paying off Loans Early Will Not Make You the Most Money
I paid off my first rental 3 years after I bought it. I was so excited until I realized it was one of the dumbest things I could have done. I basically spent $65,000 to save $300 a month in interest. I could have done so much more with that money!
I could have bought at least two more rentals that made twice as much income every month than what I saved. I also would have bought the properties below market value, which would have made me $20,000 to $30,000 in equity on each deal. I could have deducted the interest on the loan and depreciated the properties. I also would be paying down the mortgage over time. This does not even consider appreciation.
I make at least 4 times the return buying new rentals than I would be paying off loans early. So what did I do when I paid off the property? I acknowledged my mistake and got another loan on it!
31. I Wish I Would Have Bought More Rentals When I Was Younger
I bought my first rental in 2010 when I was 31. I would be so much better off had I bought more sooner, but I can’t live in the past. I can try to help others avoid the mistakes I made.
One of the biggest advantages of buying rentals is, every year that goes by, they become a better investment. The longer you own them, the more you pay down on the loan, the more rents increase, the more values increase, and the entire time your mortgage payment stays relatively the same.
Even bad investments can become good or great investments given enough time. If you make a great investment to begin with, it can become an amazing investment over time. You have to be careful and buy the right properties, but the sooner you buy, the better off you will be.
32. The Stock Market Is Not Historically Better Than Rentals
Many people will say real estate or rentals are a bad investment because the housing market has only gone up 5 percent a year while the stock market goes up 7 or 10 percent a year. They obviously are leaving out many benefits of rentals, or they don’t know what they are talking about.
My rentals have made over 15 percent cash-on-cash returns a year. That is the return on cash I get from rent every month after paying all expenses, including maintenance and vacancies, compared to the cash I invested. My return is actually much higher after refinancing properties, pulling money out, and all the other advantages of rentals.
I also buy all my rentals below market value, which nets me an instant return close to what my initial investment is.
I am paying down the loan every month.
My houses are going up in value.
I have amazing tax benefits. The increase in housing market prices is actually the thing I pay the least attention to when buying rentals.
In order for the “stocks make more money than rentals because of historical housing market prices” statement to be true, you would have to buy a house with all cash, rent it out for just enough that all the expenses are covered, and never raise rents.
33. You Can’t Be Too Old to Invest in Rentals
I posted advice earlier about wishing I had bought more rentals when I was younger. I can’t go back in time and buy more rentals, but I can buy more rentals now.
Many people tell me they are too old to buy rentals, but you are never too old. Rentals can be an amazing source of income and wealth no matter how old you are. They can be an amazing tool for retirement as well.
If you are close to retirement, investing $20,000 in the stock market is not going to do you much good. But, investing $20,000 in a rental property using leverage could do a lot of good. If you can keep buying rentals, they could help you retire with a decent income thanks to the cash flow they produce.
There is no point in living in the past. Do what you can do now, and live for the present.
34. Cash Flow Reduces Stress
When I was making good money as a real estate agent, I was suffering from money stress. I felt like no matter how much money I made, I had nothing to show for it. I worried about what would happen if my income disappeared. How would I pay for everything? Would I lose everything I worked so hard for?
When I started buying rentals, my net worth starting increasing, and I was earning an income that I did not have to work for. As long as I owned the rentals, money would keep coming in. The amount of money coming in would increase over time. I had something to show for my hard work, and even if I lost my income, I had assets that produced money every month without me working!
It was a huge stress reliever and actually one of the biggest reasons I felt comfortable buying a Lamborghini. I knew I had money that would keep coming in over and over.
35. Retiring Early Is Possible with Rentals!
I earn about $15,000 monthly in passive income from my rental properties. I could retire right now, and that income would come in for the rest of my life. I have built up that cash flow using less than $400,000. According to retirement calculators, I would need $5,000,000 in the stock market to make that much money each month, and I would run out of money at age 85.
That $15,000 a month would only increase over time because rents will go up and loans will eventually be paid off. Why is there such a huge difference between rentals and the stock market? For one thing, the returns on rentals can blow the stock market out of the water if you buy the right properties (leverage, buy below market, taxes, etc.). The other major factor is that you use up your savings when you retire with the stock market. You eat into that money every month.
With rentals, you are not eating away the equity: you are actually gaining equity. Houses will appreciate over time, and loans will be paid down. It is like having $13,000 a month coming in from only dividends on stocks, and you never have to touch the main investment.
This is why rental properties are so amazing. They provide an almost solid monthly return every month until you die. There will be some hiccups, and nothing is guaranteed, but the more rentals you have, the more stable the returns will be. With stocks, you have to try to guess when you will die, what the returns will be in the market, and what the returns will be when you are taking money out.
36. Turn-Key Rental Properties
There are many turnkey rental property companies that sell properties advertised as already rented, repaired, and with property managers in place. While some turnkey rentals can be decent investments, you have to be very careful!
Many turnkey companies do not mention any vacancies or maintenance costs when they advertise their properties. They also sell them for more than retail value. There is also a chance the properties are not rented or repaired as advertised. Some of the worst investor stories I have heard involve turnkey rentals.
If you are going to buy one make sure you have a 3rd party do an inspection on the home. Make sure you interview the property management company. Have a real estate agent perform a BPO (broker price opinion) on the property, which might cost $75 or $100. Do not blindly trust the turnkey company without checking out everything yourself.
Overall, you are much better investing yourself if you can instead of using a turn-key company. One of the big advantages of investing in real estate is getting a great deal and you lose that when you buy a turn-key rental.
37. Tax Advantages
Rental properties have amazing tax advantages! You can depreciate the structure of a rental property. That means you deduct a portion of the value every year for a certain amount of years. For residential the term is 27.5 years and commercial 39 years. If your residential rental property structure is worth $100,000 you can depreciate over $3,600 every year! Depreciation makes it possible to make money on your rental but actually show a loss on your taxes.
When you sell the property you will have to recapture that depreciation assuming you sell for as much as you bought it for. However, the rate of depreciation recapture is most likely less than your ordinary income rate. You also may be able to avoid this with a 1031 exchange or an inherited property.
It is also possible to increase the depreciation rate with cost segregation. This process speeds up how fast the depreciation is deducted.
Almost all other expenses on rentals are deductible or can be depreciated over time. If you hold your rentals in a corporation you may be able to deduct even more money with the new tax laws!
Always talk to an accountant or lawyer for specific tax advice!
38. MLS Deals
I hear from investors all the time about how there are no deals on the MLS. I am in Colorado which has one of the hottest markets in the country. I bought 13 flips from the MLS last year. I also have purchased most of my rental properties from the MLS as well.
I am not the only investor buying from the MLS either. There are deals that can be great rental or flips, but they do not come along every day. You must be diligent in your search, have a great agent, or be an agent.
You also need to know how to look for listings where the seller is willing to negotiate and be willing to jump on great deals right away. Being an agent lets me act faster than almost every other investor. It also gives me access to the MLS, people know who I am and that I won’t screw them over, and I save a ton of money on commissions.
There are deals on the MLS you just may not be the person getting them!
39. Rental Property Rules
There are many rules that people use with rental properties. I have never been a fan of rules because every market and every property is so different. The 50 percent rule states the expenses on a rental property will be 50 percent of the rent not counting the mortgage.
Why do I not like the 50 percent rule? Because the expenses are different on every property. The taxes in Colorado on my $200,000 rental may be $1,000 a year while the taxes in New Jersey might be $7,000 a year on a $200,000 property. A single-family rental most likely has the tenant paying all the utilities, mowing the lawn, and in some cases taking care of minor repairs. On multifamily, the landlord may be paying most of the utilities, mowing the grass, removing snow, etc. There are also different vacancy rates and maintenance costs on different types of properties and in different locations. I see some properties with 30 percent expense ratios and others with 60 percent expense ratios.
I feel the same way about the 1 percent or 2 percent rules that state the rents should be 1 or 2 percent of the purchase price, value, or cost basis. There are too many other variables to take into consideration to decide if a rental is a good investment based solely on a rule.
40. Be Careful With Long-Term Tenants
Long-term tenants are great if you are checking on the property. Some of the worst tenant nightmares come from tenants who are in a rental for years but the landlord never checks on the house. They pay their rent on time, you never hear from them, but they destroy the house.
We check on our rentals every quarter. Make sure the furnace filters are changed, the smoke alarms and CO detectors have batteries, and there are no other problems.
If we have a tenant who stays for many years we also screen them again to make sure their credit and jobs are still good. A lot can change over the years and while it is nice to keep the same tenant you want to make sure they did not have a major change negative change in their life.
41. Investing in REITs
A lot of people say you should invest in REITs instead of rentals because it is basically the same thing with more liquidity.
That could not be further from the truth. REITs are not even close to investing in rentals.
A REIT is much closer to a stock than it is to real estate. The REIT or real estate investment trust buys real estate. However, when you buy a share of a REIT you are not buying it below market value like you can a rental. You are not able to use leverage like you can with rentals, you do not get as much cash flow as you do with rentals, and you do not control the asset. A REIT can be a decent investment but it is not the same thing as buying a rental.
A REIT is like buying a stock or a mutual fund.
42. 1031 Exchange
1031 exchanges can be a great way to defer taxes when you sell a rental property. However, they come with many restrictions and may not be worth doing.
Always talk to an accountant or attorney for specific questions!
Some basics with a 1031 Exchange are that the properties must be held at least a year, must be used for business, and the replacement property must be identified in 45 days and bought in 180 days.
When selling a property and buying a new property in a 1031 exchange, the investor must use all the cash from the sale of his property to buy the new property to avoid paying taxes. The new property must cost at least as much as the sale price of the old property to avoid paying taxes as well.
A 1031 exchange is an awesome tool if you are able to abide by the timelines and know what is expected going in, but they can be tricky. In some cases, you may be able to do a reverse 1031 exchange where you buy properties first and then sell the property you currently own. However, those take more cash and are more expensive.
43. Housing Crash
Many people think every real estate investor went bankrupt in the last housing crash. The truth is many investors did just fine. In fact, only about 8 percent of the worst investor loans made right before the crash went into foreclosure.
Rents will not always go down in a crash either. Many areas saw rents increase during the crash because there were so many more renters. This did not happen everywhere. There is a risk that things could go bad with rentals. But if you stick to the fundamentals of great cash flow and plenty of reserves you should be able to weather a crash.
The investors who get into trouble over-leverage, have no cash flow, and no reserves.
44. Single-Family Rentals
Multifamily rentals are not always better.
Single-family homes have many advantages over multifamily. The tenants tend to stay longer, the tenants often take care of the home like it is theirs, they pay all the utilities, they take care of the yard, and it is easier to sell a single-family home. Everyone is always looking to buy a house to live in, but there are not always investors looking to buy multifamily properties.
Multifamily properties have their advantages as well. You can sometimes get more cash flow in certain markets, you can scale easier with one purchase, Some of the repair expenses may be lower since there is one roof, etc. However, the landlord may have more expenses with parking lots, maintenance, utilities, and turnover.
There is no better investment. A lot depends on the investor and their market. Never assume one type of property is always better than another.
45. Credit Cards
Credit cards can be a fantastic tool if used responsibly. They can help you build credit and can provide huge savings with rewards points. I made over $12,000 last year alone from rewards on my credit cards. We spend a lot of money on supplies for the flips and rentals. They all go on the credit cards to earn rewards points. As long as we pay them off every month we pay no interest.
I have a Capital One Spark card the pays 2 percent cash back on everything with no limits. My Lowes card pays up to 3 percent back on certain items. I could do a better job of getting more cards and higher rewards for certain items.
You have to be careful about having too many cards with too high of balances because that can hurt your credit score. We have to pay ours off multiple times a month.
46. Real Estate is Hard
It is not easy to find good rentals. It is not easy to find great deals. It is not easy to finance them. It is not easy to save the money to buy them. It is not easy to manage them.
However, all these roadblocks stop most people, which makes rentals an amazing investment when you can take the time to do it right. If it were easy everyone would do it and the returns and opportunities would be much smaller.
I love Jim Rohn’s quote:
“Don’t wish it were easier, wish you were better!”
47. The USA Is One of the Best Places for Rentals
Many countries outside the United States have much more expensive houses compared to rents. Some of the affordable countries have questionable laws regarding ownership of real estate or do not allow foreign investment. The mortgages in other countries are also much different from the US. The 30-year mortgage is rare in other countries. Most countries do not even have a fixed-rate loan available for more than 10 years. Banks hate having their money tied up that long but it is an awesome tool for investors.
Even though some markets in the US may be tough to invest in because of housing prices, there are still many great markets for rentals. If you are a US citizen you have a huge advantage over investors from other countries in getting a loan. Take advantage of it!
48. Be Careful With Inherited Tenants
Landlords sell their rentals for a number of reasons. Some landlords are great at screening tenants and keeping an eye on them, but many are not. If you are buying rentals that already have tenants in place you cannot assume they are great tenants. There is a chance they might be, but the chances are greater that they are a pain and that is part of the reason why the owner is selling.
Even when buying turn-key rentals you cannot assume the tenants are amazing. The landlords are going to say the tenants are great whether they are or not. Be prepared for problems. Buying a property with tenants in place is not always an advantage.
If you buy a property with tenants assume they will need to be replaced soon unless you have checked them out like you would a brand new tenant. You can also expect the rent to be a little low in most cases when you take over a property that already has tenants.
49. Home Inspections
I would not recommend this to everyone! We almost always waive our inspection on houses. I have been doing this for a long time and know what to look for in houses. We still get burned on occasion by unknown repairs that come up. Some an inspection would have caught and others it would not have.
I almost never ask for an inspection because I love to get my houses cheap, really cheap. Waving my inspection gives me a huge advantage over other offers that will most likely have an inspection. I also build into my offer room for unknowns that will come up.
I also make cash like offers. What does that mean? I get a loan on almost every house that I buy. However, I write into the contract cash terms with a clause that says I may get a loan through a local bank or private money. This loan will not affect the seller in any way and I have the cash needed to close if the loan does not work out. I have no appraisal or loan conditions deadline in the contract.
To make a cash offer, you do not always have to pay cash. I do have the money available if needed though.
I have seen a lot of houses, and the worst houses I have seen were destroyed by pets. Many people love their pets and I wish they could keep them at my houses, but for the most part, they cannot.
Cats are the worst because their urine will stink up a house and it can be almost impossible to get out. Yes, some cats are great but even great cats get old and lose control of their bladders.
Dogs can be great too, but they can also destroy a house, especially big breeds. They can chew through walls, doors, trim, destroy flooring, and even the yards. Some breeds like pit bulls may even be illegal in your town and you could be opening up to a ton of liability if you allow them.
On rare occasion, we allow pets we charge a non-refundable pet deposit and more rent per month.
51. Owner Occupied Rentals
House hacking is one way to get started buying rentals with little money down, but you don’t have to buy a multifamily property. You can buy a single-family home, live in it for one year, and then rent it out.
You can repeat the process over and over although some banks might give you some trouble when you keep trying to get an owner-occupant loan every year. You can only have one FHA loan at a time, but conventional loans are often better with just as low of down payments. You can put 5 percent or sometimes 3 percent down as an owner occupant. If you are a veteran you can put $0 down!
There are also down payment assistance programs in many areas that will help pay for the down payment and you can ask the seller to help pay closing costs. Some houses like HUD homes even give priority to owner-occupant buyers!
Many people want a partner because they are scared to go at it alone. A partner can make sense in many cases, but make sure you are doing it for the right reasons. Do you need that partner for funding or other skills? Or are simply bringing someone on to share in the risk?
I personally buy almost everything 100 percent on my own. I have a great team that helps me and I use a lot of private money but I do not give up equity. On the few deals that I partner on, everything is in writing. Even when I first started flipping houses with my dad, everything was in writing. If you are going to partner with someone that is the first rule and never break it.
When you partner with someone you also have to make sure both sides know exactly what is expected of them. What their roles are and what they are responsible for. Another reason why it is not good to partner just to partner and assume both sides will do everything equally. The money, the returns, the work, the deal, what happens if one person wants to sell all needs to be in writing from the beginning.
If you have skills you will be using to help the partnership, I think it is best to get paid separately. If you are going to manage the property, get paid from the partnership for that management. If the other person is doing the repairs, pay them from the partnership for those repairs. It is too hard to guess or trade what those skills or work are worth.
53. Sprinkler Systems
This tip varies based on the climate the property is in. I am in Colorado where if you have grass it has to be watered multiple times a week or it will die. In other climates watering may not be needed as often.
On my single-family rentals, the tenant is responsible for yard maintenance. That means they have to water the grass if there is grass. If they have to set a hose out three times a week in different spots, the chances are the yard is going to die. If they have a sprinkler system, we can set it and not worry about the tenant watering.
There is also the possibility of xeriscaping where there is no grass. You have to be careful that your market will accept this. 95 percent of houses around here have grass and xeriscaping can hurt the value.
54. Commercial Real Estate
I have 15 commercial rentals (by the time you read this hopefully more) and love them, but they are a beast compared to residential. There are so many more things to learn about: Cap rates, leases, tenants, TI, CAM, etc. The complications add opportunities to add value but also add risk.
If you are having a hard time finding residential rentals that make sense you may want to look at commercial rental properties. I stopped buying residential rentals in 2015 because the prices were out of control compared to the rents. I was going to buy out of state when I discovered I could make money on commercial real estate as well.
My commercial rentals have been harder to figure out, but make me more money.
55. New Construction
A lot of people are intrigued by new construction rental properties. They are brand new, should be easy to rent, and you don’t have to worry about maintenance. However, you will still have maintenance and repairs on any property. There will always be tenants who don’t take care of properties whether they are new houses or not.
It is also really tough to buy new houses below market value. New houses often sell at a premium and do not come with fences, AC, yards, sprinklers, etc. One of the best things about buying rentals is that you can buy houses below market. If you are buying new it makes it almost impossible unless you are the GC.
If you are the general contractor, managing the project, you could get a very good deal. But it also takes a lot of time and knowledge to build a house. If you are able to build duplexes or multifamily it might make even more sense. But buying new houses from another builder is not always the best way to buy rentals.
56. Vacant Land
Vacant land does not have to sit idle. Land can be rented to farmers or even make money from the government through CRP programs. There are a lot of restrictions on those CRP programs and they don’t pay a lot but it is something.
Land can also be extremely valuable for the minerals underneath it. If you are in an area with oil or gas the mineral rights can be sold or leased. Water rights can be extremely valuable as well in certain areas.
While vacant land does not usually make as much money per month as a property with a structure on it, it can make money. In some cases, land can have a higher upside if the area is growing and you are willing to park money in the investment for many years.
57. Line of Credit
It can be tough to buy your first rental or your second. However, you may have the money to do it you just don’t know it. I refinanced my personal house in 2010 to get the money to buy my first rental. A line of credit can be another great way to get the money to buy a rental.
You can also refinance your house to take money out as well. A lot of people want to pay off their personal house, but I want to use my personal house to get long-term, low money down loans. There are not many loans that are better than the 30 year fixed rate loans you can get on your personal house.
I also feel much more secure owning rental properties that will produce cash flow every month as opposed to paying off a mortgage. I will make more money, have more tax advantages, have more appreciation and more equity from buying below market value. Many people will not like this statement. But paying off the mortgage on your home is not a safe bet if something goes wrong. You will have to sell or refinance to get that money out and it will be nearly impossible to refinance if you lose your job or get sick.
58. Picking an Out of State Location
Many areas of the country have prices that make it really tough to invest in rentals. The higher the prices, the harder it is to cash flow on rentals. One option is to look in other markets, but how do you know where to start?
I think checking markets you are already familiar with or have family in are a great place to start. Markets, where you have friends, can be a great place to look as well. Your friends or family do not have to be real estate investors, just know the area and have an idea about neighborhoods.
Once you have narrowed down a few places look into prices and rent to value ratios to see if the numbers make sense. If those make sense you can look into the economy to see how it is doing. One thing I would never do is invest in an area with negative growth no matter how low the prices are.
59. Cool Rental Properties
The best rentals are often the most boring. When you are renting rentals in the median market you usually do not have to have crazy unique properties to get them rented. The basics are okay with most people.
When repairing or deciding what rentals to buy do not go overboard to make them amazing. The cost to do so is usually not worth it. It can be tough to rent properties that are very unique and only appeal to a very small percentage of the population. I find it better to have boring properties that appeal to many more people.
If you are doing AIRBNB you may need a different strategy. But for long-term rentals in the median price range, I find the boring strategy works well!
60. You Need Money!
A great way to get yourself into trouble is to spend all of your money on a rental property. Most banks will require some money in reserves, but after you buy the property you can spend that money anyway you want.
Rental properties will have expenses in the form of repairs, maintenance, vacancies, and more. You must have reserves or cash available to take care of your properties. If you have no money and a property gets trashed, you will have no way to fix up the place. You will be forced to leave it vacant, sell, or worse lose it.
61. Contract with Contractors
Many people worry about a contract protecting them from bad contractors. The truth is a contract is only enforceable if you are willing to sue. It is much more important to use due diligence to find trustworthy people than to make an airtight contract.
The contract is still useful to remind everyone what is supposed to be done and when. Many times people on both sides forget what was in the scope of work, the price, etc. Using a contract is good practice even if you don’t plan to enforce it.
However, I would never rely on the contract itself to protect you. Spend your time vetting and finding great contractors, not preparing great contracts.
62. Smoke and CO Alarms
Many states require smoke alarms and CO detectors by law, but even if you don’t have to do it, you should. Checking to make sure they work right is a great reason to schedule inspections as well.
Fires and carbon monoxide can kill people. As a landlord, you have a responsibility to make your properties safe and these alarms are some of the easiest and cheapest ways to prevent horrible accidents.
Make sure your properties have these. Do not be lazy or cheap!
63. Don’t Accept Excuses
I was a soft landlord when I managed my rentals. I rarely charged late fees and listened to every sob story my tenants had. The more I let my tenants get away with things, the more they tried to get away with.
The tenants are not bad people because they try to push what they can get away with. That is human nature, we all do it. That is why landlords have to be consistent and tough when it comes to rent payments. If you cannot do it, you need to hire a property manager who can.
It is also not fair to your other tenants if some are not required to pay late fees due to the quality of their sob story. Make sure you are tough and consistent.
64. Maintenance is Key
Rentals can be expensive to maintain but they are much more expensive when you don’t maintain them. If you don’t fix problems they will most likely cost you much more money in the end. You also attract bad tenants if the properties are in bad shape.
If you don’t replace or repair roofs they can leak and cause much more damage. If you don’t paint the siding it will rot. if you don’t fix safety items people can get hurt and sue! The worse your place looks when you rent it the worse tenants you will attract. They will have no motivation to fix up a place if it already looks like junk.
65. Duplicate Bills
On single-family rentals, the tenants usually pay all the utilities and on multifamily, they pay at least some of the utilities. You can tell when problems are coming if they are late paying their bills. Many utility companies will send a duplicate bill to the landlord so that you can see if the bills are being paid.
We can see if the water is not being paid, which lets us know to look out for other problems. This also prevents giant bills from being racked up before the tenants leave without a trace.
66. Friends and Family
Be careful when renting to friends and family! I am not saying you cannot rent to friends or family. I rented to my brother in law for a couple of years without any problems. However, I treated him like a regular tenant. I did not raise his rent when I could have but we were still clear on what his responsibilities were.
The hoarding house I bought last year and recently sold was a family member renting to another family member and they had no lease! I bought another house two years ago that was occupied by family members with no lease and they trashed the house as well.
Do not rent to a family member unless they can pass a tenant screening check just like any other tenant or you are prepared to lose a lot of money.
67. Finding Tenants
Every market is slightly different in how tenants are found. Some markets may use real estate agents to lease rentals and others may rarely use agents if at all. In our market, real estate agents are hardly ever used to lease residential properties. Zillow and Craigslist are the most common places to see rentals. They are also the best places to list places for rent.
When leasing commercial properties, most landlords use a real estate agent to list the properties and represent the tenant. It is a completely different process and often it is about who you know, not how well something is marketed. You also have to factor in paying real estate agents on commercial rentals. Typically they are paid a commission on the entire lease amount.
Make sure to research your area to see what the best way to market your rentals is.
68. Problem Tenants
Many tenants will not take a landlord seriously. If a tenant gets behind on rent the landlord has to charge late fees. However, sometimes late fees are not enough. If a tenant is always behind on rent or slowly falling farther and farther behind, an eviction notice should get their attention.
Your state will determine how and when the eviction notice can be served. Just because you serve it, does not mean you have to go through with the eviction but you can if needed. Often times the eviction notice itself will get the tenants to catch up and be more careful.
If there are continued problems the sooner you serve the better to save time and money. Make sure you are doing everything according to state law!
69. Don’t Listen to the Naysayers!
Most people who say real estate or rentals are a bad investment have never owned them. They don’t want to see others succeed at what they are scared to do.
I have also talked to a few naysayers who own rentals and tell me how awful they are. So why do they still own them if they are so awful? They make them a lot of money!
There some people who had rentals or have them and dislike the business. They often bought wrong, were an accidental landlord, or are trying to do everything themselves. Remember to not let the naysayers discourage you from what you know you want to do. There will be discouraging people in every aspect of life.
70. Commercial vs Residential
I started buying commercial properties in 2017 after I could no longer cash flow with residential rentals in my area. Commercial rentals can be great, but it is in an entirely different business. The leases are different, the sales are different, the tenants are different, and every property is very different from the next.
You need to know many different things when investing in commercial real estate, such as CAP rates, NNN leases, IRR, Tenant Improvement, Zoning, and much more. It can be lucrative but it takes much more work as well.
If you want to jump into the commercial world make sure you study the market, the properties, and network like crazy. I got my best deal not from what I know, but who I know.
71. CAP Rates
The CAP rate stands for capitalization rates and is calculated by dividing the cost of the property by the net operating income. If a property makes $50,000 a year and costs $1,000,000 the CAP rate is 5. If the property makes $50,000 a year and costs $500,000 the CAP rate is 10. The higher the CAP rate the more money the higher the return. So how can the CAP rate be confusing?
Net income should be used for the CAP rate, but many people use gross income or a mix of the two. Net income is the money you make after paying all the expenses. If gross income is used the CAP rate could be a 10, but when the net income used, only a 5. You have to make sure the seller, agent, or whoever is calculating the CAP rate knows what they are doing or are not trying to fudge the numbers. If you are serious about a property they should show you all the financials.
People also get confused because the CAP rate is typically used on the cost of a property, but sometimes it is used for the value of a property. I posted yesterday about how my $2.1 million dollar property went from a 9 CAP to an 11 CAP when we added a tenant. Some people thought that meant the property value went down not the income went up. I was basing the CAP rate on the original cost, not the current value.
The CAP rate can be used to determine the value. If you know what the market expects out of a CAP rate you can work backward to see what your property is worth based on the net income. Just remember that CAP rates vary for many reasons. The tenants, the building, the zoning, the length of the lease, the lease rates, etc.
72. Vacant Properties
I just went by one of my vacant rentals today and someone had thrown a small weight through the window. The heat was on, but it could not keep up with the gaping hole. Luckily we had the water off, but you always need to be checking on vacant properties whether they are flips or rentals.
A lot can go wrong when a property is vacant and people who want to cause trouble tend to be attracted to vacant properties. It is important to make sure the snow is shoved, the grass is mowed, the yard is maintained, the heat is on, the house is secure, and there is no one living in your property!
We try to check our vacant properties at least once a week.
73. Mortgage Pay Down
I want cash flow on every property. I love cash flow, but another perk is that I am slowly paying down mortgages on all of my properties. I do not pay the mortgage down early, but they still get paid down. On my expensive commercial properties, large chunks are being paid down every month.
We took out a $1,575,000 loan on the big commercial property I bought last year. We have already paid off more than $50,000 of the mortgage and we make more than $15,000 a month after paying the mortgage payments and other expenses. I don’t count the mortgage pay down in my cash on cash return but it is cool to see how much of the loan is being paid down with just the bare minimum payments.
74. Insurance Rates
Insurance companies love to change rates often. Don’t be afraid to shop around to find the best rates when your current company increases its rates.
Insurance can be tough on rentals and flips. It may take time to find decent rates. You also want to make sure that you have the right insurance on the properties.
If you have regular homeowners insurance on a rental or a flip and the property is damaged. You may have problems getting the insurance to pay out if you never told them it was an investment property.
75. Seller Paid Closing Costs
On one of the first rental properties I bought, I asked the seller to pay some of my closing costs. I asked for about 3 percent of the purchase price to pay for my loan origination, appraisal, and other lender costs. It helped reduce the cash I needed and allowed me to buy more rentals.
In very hot markets it might be a disadvantage to ask for closing costs and I do not do it anymore. I would rather make sure I get the deal than save the cash. I am also in a much better financial position now than when I first started to buy rentals.
If you are looking to build quickly and save some cash you may want to ask the seller to pay your closing costs. You may have to increase the offer price, but it is usually worth it to save the cash for more investment properties.
76. Conventional vs FHA
One of the best ways to get your start in real estate is to buy as an owner-occupant, live there a year, and then rent the house out. Most people assume FHA is the best loan with 3.5 percent down.
However, FHA has mortgage insurance that can’t be removed. Conventional loans have down payments as low as 3 percent and mortgage insurance that can be removed. They often have lower rates as well.
You are also limited to 1 FHA mortgage in most cases while you can have multiple conventional loans.
Do not assume that FHA is always the best option for low down payment owner-occupants.
77. Sewer Lines
I have had sewers back up in a rental before and it is not pretty. Your tenants will also not be happy with you. It is a fairly cheap expense to get your lines scoped once in a while to make sure they are clear.
If you have a problem line, you may be able to get by with rooting it instead of replacing it, but you have to keep on it. You may have to get the line cleaned every year to keep it working.
Make sure you use a company that you trust. Many companies will say you need a full line replacement when the line will keep working fine for many years to come. It is also wise to scope sewer lines before you buy a property to make sure the lines are in good shape.
78. Timing Markets
A lot of people are waiting to buy real estate until the market drops. But how do you know when it will drop, and how do you know where the bottom is? A lot of really smart people predicted a double-dip recession after the last crash that never came. Some people have been waiting for 8 years to invest. That whole time you could have been paying down your mortgage, and collecting rent, with the bonus of appreciation.
I don’t like to buy properties hoping prices will increase, but if you buy rentals the right way you don’t need prices to increase and you can weather a downturn. If you plan to wait until the next downturn, make sure you have a plan for exactly when you are going to buy. Most people were too scared in the last downturn to buy anything.
79. You Are the Boss!
It is really easy to let a bossy contractor take control of a project. They usually choose the route of least resistance, not what is best or most desirable.
I had a contractor who insisted we needed to drop the ceiling on a property, but I loved the ceiling lines. He knew it would be much easier to drop it and save him time. I knew the place would rent much easier and for more money with the high interesting ceilings. It is easy to just do what the contractor says. Sometimes they are right and it is not possible or too expensive to do what you want. Sometimes they are just looking for an easier way to finish.
Make sure you fully understand why a contractor wants to do something. Is it the easy way out or is there really an issue that is too difficult to overcome?
You also need to make sure you are picking finishes, paint, flooring, etc unless you trust the contractor and they have a proven track record.
80. Landlord Insurance
Landlord insurance once paid me $14k for damage done to a rental from horrible tenants. It can be added as a rider to your policy or may be included with your insurance. Make sure to ask your insurance agent if your policy covers evictions or tenant damages.
If you have an eviction or tenant damages do not forget to inquire with your insurance agent about filing a claim to cover the damages. At the same time, be careful not to file too many claims on insurance or they may want to drop you.
We charge the first-month rent and the deposit upfront. A lot of people want to move in after paying part of the money, then pay the rest later. Talk about a horrible way to start out! We are very strict that you cannot move in before all rent and deposit items are paid. If they can’t pay all of it it is a bad sign regarding their ability to pay the rent.
We also make sure to have pictures, videos, and a tenant check-in sheet to note what condition the property is in when the tenants move in. This removes any doubt of what damage was or was not done by the tenants when they move out.
82. Returning Deposits
Do not return deposits until you know all the expenses have been paid. I have been burned a few times by tenants who promise the trash company is coming to get the trash the next day. “Don’t worry we paid in advance for them to take the extra garbage.” The trash company never comes. We have had tenants fail to pay their last utility bills as well thinking they will get their deposit back before the landlord finds out.
Most leases give the tenant 30 to 60 days to get their deposit back and the reasoning is to ensure all bills are paid by the tenants.
It is best to have an attorney write up your lease for you, or at least your first one. You need to make sure it is written according to state laws and easy to interpret by a judge if there is a problem. What you and the tenant agree to verbally cannot be proven in court.
There are also many online resources for leases as well like Law Depot. Writing up your own lease can get you in a world of trouble if you do not know what you are doing.
84. Tenant Repairs
I have seen some interesting design choices in rentals and they usually come from the tenants. I am very clear in my leases that the tenants cannot do anything without written permission from me. They cannot paint or do any remodeling on their own. If they do ask for permission we usually say no as they often do more harm than good.
Be very careful letting your tenants do any work on properties unless they are qualified to do the work and are extremely clear on what can and cannot be done.
85. Attracting Good Tenants
Not all tenants will treat a nice property well, but the chances are that the nicer a rental is, the better it will be treated. If you try to rent junk, you will attract tenants who like junky places. You do not have to make your rental fancy, but it should be a decent place to live.
Do not be a slum lord and expect your tenants to live in a crappy place because it is cheap.
Airbnb is not my area of expertise but they may not make as much money as advertised. Remember, with a higher quantity of tenants comes much more management, more marketing, more cleaning, more costs as far as utilities, maintenance, furniture, etc…
You also have to be careful that zoning allows for short-term rentals. Denver has arrested multiple landlords who broke the Airbnb rules and then lied about it on a signed affidavit. There are also many locations that are outlawing short-term rentals.
87. Can Your Tenants Afford the Place?
A general rule of thumb is that rent should not exceed 1/3 of the tenant’s income. Otherwise, they will have a very hard time making rent payments. It is also smart to confirm employment and the wages they claim to make.
Stretching the rent to a point where the tenant can barely afford it usually doesn’t work out well for anyone. Just because a tenant says they want a place does not mean they can afford it.
88. Complicated Deals Are Not Always Worth It
I love commercial real estate because there is so much opportunity to add value. There is also a lot of cash flow when you buy the right properties. However, commercial, as well as other types of properties, can come with very complicated problems. The more complicated a deal is, the more that can go wrong and there needs to be a ton of upside to make the risk worth it.
I love to solve problems and complicated properties get me excited when I think I can fix something and make a huge profit.
If you are just starting out, it is usually smart to start with the less complicated deals even if it means you may not have as much upside. When you gain some experience and learn more about how everything works, then think about taking on the more complicated deals.
Even for the more experienced investor, the more complicated deals do not always make the most money. They can be a huge draw on resources and cash.
89. Section 8
I have never rented to a Section 8 tenant. Not because I don’t want to, but because they never apply to my rentals. I have had multiple section 8 tenants already living in flips I bought. Some were great tenants because they knew if they messed up they would lose their section 8 status. Others were not so great.
So many people assume when a rental is trashed it was section 8. But a rental can be trashed by anyone. Being section 8 does not make a renter good or bad. You should screen them just like you would any tenant and choose the best applicant.
It is also illegal in some states to deny a renter because they are section 8. Be careful!
90. Third-Party Checkups
There are a lot of companies selling properties to long-distance investors. Some of these companies are great and others are trying to sell their junk to people who will never see them.
Remember that you can get your own inspection done. You can have a 3rd party check it out. You can hire your own property manager as well. Don’t blindly believe people!
Some of the biggest nightmares come from “turnkey” rentals that the investor never sees. Get a third party to check them out and it can save you a world of hurt. You may be able to get real estate agents to look at properties or even complete a broker price opinion that tells you what they think it is actually worth.
Most people do not like to see a rental property in their neighborhood. They assume it will not be taken care of and it will bring down neighborhood values.
However, they won’t mind a rental that is well maintained with great tenants. Talk to the neighbors and let them know you are the owner and care about the property. They will be happy to let you know of any problems with the tenants or the condition of the property.
They can be a great resource to help you keep an eye on the property and if they know you care they will be less likely to hassle the tenants or you.
92. Restoration Companies
Many “restoration” and “environmental disaster companies” will fix your issues quickly. They will also charge you five times what it should cost assuming the insurance will take care of the bill. Insurance will not always pay for floods, sewer backups, or other issues depending on your coverage. I would avoid the restoration companies at all costs!
Use local people or contractors who will do the same work for a fraction of the cost. In some cases, if it is a huge job and there is no one else available one of the companies may be a last resort, but be ready for a huge bill.
93. Exotic Cars
Weird tip for a rental property article? I promise it is relevant.
It was tough for me to buy a Lamborghini. It was not an easy decision and I worried way too much about what other people would think of me if I did buy one. Eventually, I got over the fear of what others would think and then I had to decide if it was a good financial decision. I had wanted a Lamborghini since I was four. It was a dream that never went away no matter how many times I told myself that it was a dumb dream that I would never achieve.
I realized that it was not a dumb dream because cars are what I love and have a passion for. I also realized that I was comfortable buying a car like this thanks to my rentals and the cash flow that they provide. I worked my butt off and sacrificed many things for years. It was not crazy to buy a Lambo. After buying it, it has paid for itself many times over with the marketing and networking it has provided. Plus it doubled in value!
Rentals allow you to feel comfortable making big purchases and living life to its fullest because you have that cash flow coming in.
What type of housing discrimination is illegal when it comes to property rentals?
The federal Fair Housing Act, the Fair Housing Amendment Acts (42 U.S. Code 3601-3619, 3631), and many state and local laws prohibit a landlord from selecting tenants based on certain protected criteria. A landlord may not refuse to rent to a tenant for the following reasons:
- Race or color
- National origin
- Disability or handicap, including physical and mental impairment
- Sex, including sexual harassment
- Familial status (includes protection for people with children under age 18 or pregnant women)
- In addition, state and local housing discrimination laws may offer coverage beyond federal law, such as protection for sexual orientation, age, and marital status.
What kind of housing discrimination do the federal Fair Housing Acts prohibit?
A landlord must treat every tenant equally. Illegal discrimination occurs when the landlord:
- Refuses to rent to members of a certain race
- Denies the availability of an available rental dwelling or steers renters to a certain area based on race
- Creates unreasonable restrictions on the number of people that may live in the rental unit
- Includes preferences or limitations in a rental advertisement
- Creates different terms or standards for certain tenants
- Terminates a tenancy based on a discriminatory reason
- Provides services or facilities only for certain tenants
- Demands sexual favors or creates a sexually hostile environment
- Refuses to make reasonable accommodations for a disabled tenant
- Fails to stop another tenant from making discriminatory, harassing, or threatening comments to a person in a protected category.
The Fair Housing Acts apply to any person that deals with tenants and prospective tenants, including real estate agents, property owners, landlords, and managers. Even if the property owner did not personally discriminate against tenants or prospective tenants, the landlord may still be liable for the civil rights violations of employees.
95. Real Estate License
If you are buying multiple properties a year it may make sense to get your real estate license. I am a broker and it saves me a ton of money every year. I save a commission on houses I buy from the MLS and on houses I sell as well. I am also able to get better deals and value houses better because I am a broker.
People say you cannot get deals on the MLS, but I am in one of the hottest markets in the country and get great deals from the MLS all the time. Being an agent is one of the keys to getting those deals.
There are also limits to the deductions you can take as a real estate investor. However, if you are in the real estate business those limits disappear (always talk to an accountant for specific advice). Being an agent can also be a great source of income.
An adjustable-rate mortgage is a loan that has a fixed interest rate for a set period of years. After the fixed period the rate can go up, raising the payment amount in some cases. ARMs got a bad rap after the housing crisis because they were often used to defraud unknowing homeowners. They had ARMs with negative interest rates and fixed periods as low as 6 months! The payment would then double after 6 months and the homeowners could no longer afford the home.
These are not the type of ARMs I am talking about. I use ARMs on many of my rentals that have fixed-rate periods of 5 to 7 years. My payment is lower for the first 5 or 7 years than a 30-year fixed-rate loan. After the fixed period my interest rate can go up, but only by a certain amount. Usually only one or two percent per year up to a cap. You save money with ARMs until a few years after the fixed-rate period even with the maximum interest rate increase allowed.
If you plan on selling, refinancing, or paying off the loan in less than 7 years, an ARM will most likely save you money. If interest rates do not go up, or they go down your interest rate will not increase. I also use a portfolio lender who does not offer 30-year fixed-rate loans. If you are an investor with many rentals you may have a hard time finding a fixed-rate loan unless you get a 15 year term instead of a 30 year term which will have much higher payments as well.
I am not advocating people should use ARMs so they can qualify for a more expensive house than they could with a fixed-rate loan. I think that is asking for trouble whenever you buy the most expensive house you can possibly afford. For the investor who is looking to get the most bang for their buck, an ARM can be a great option.
97. Helping Others
I have had a lot of help over the years from my dad and other investors. I also have had a ton of help from my team. I could not do what I do without a lot of people helping me out. While others have helped me out, I try to give back as well.
I try to teach as many people as I can through real estate with my blog, YouTube, social media, and my books. DO I make money with some of these things? Yes, but you can still make money and help people as well. When you are going through your journey make sure you take the time to share some of your knowledge and help out those who are just starting or who have been struggling.
98. More Than Houses
In certain areas with the correct zoning, garages can be rented separately from the residence for much more money than if it was rented with the residence. This works best in big cities or college areas.
Garages can also add value to a rental where parking is tight or in cold climates. Do not discount garages as a landlord. We some houses with garages converted into living space and it can actually decrease the value!
In some places, land can be rented as well to farmers or through the CRP. Water can even be rented as can mineral rights. There are many bonus income streams that come with real estate.
99. Selling and Taxes
Always talk to an accountant or attorney for specific tax advice! The IRS tax code says that rentals are taxed at long-term capital gains tax rates which vary according to the tax bracket you are in. The IRS is vague about how long you have to own a rental but many think that time period is at least one year.
When you sell you will have to pay recapture taxes on any depreciation you took (you must take depreciation whether you like it or not). That rate is also lower than the ordinary tax rate. A 1031 exchange is one way to avoid depreciation recapture on the sale.
100. National Lenders
We know that big banks do not like to lend on rentals, especially when a landlord has more than four or more than ten properties. Local banks can be great options, but they also will balk at lending as well.
There are quite a few companies that focus on rental property financing. They offer ARMs and fixed-rate loans. The rates are a little higher than local banks but they often are more flexible with debt to income ratios and credit scores.
Some of these lenders will not even look at debt to income ratios, but just the properties themselves. I have a list of some of these lenders: https://investfourmore.com/lenders
101. All About Appreciation
So many people talk about how bad of an investment real estate is because the housing market only goes up in value 3 to 5 percent a year. While appreciation is nice, it’s not what I count on. I invest for cash flow that will come in every month for the rest of my life.
Buying below market is another huge advantage as I can buy a $150k house for $100k. Not easy but doable. I buy all my rentals way below market value which allows me to refi if needed and take all or some of my money out.
Leverage allows you to own a very expensive asset like a house with little money. Even if the house does only go up in value 3 percent per year, you make much more on your investment because you spent much less than the full value of the asset.
The returns on rentals are not simply the average return on the housing market. Anyone telling you that does not understand real estate or they are trying to sell you something else.
Congratulations on making it to the end! This was literally a book made into a blog post. These are all quick tips on rental properties. These are not meant to teach you everything there is to know about everything that will happen as a landlord. If you are looking to get into the business or are already in the business I suggest reading Build a Rental Property Empire, my best selling book on rental properties. YOu can also listen to it on amazon as well.