The final Deal Section is the Landlording Section.
Having a rental property is a pretty basic concept that virtually everyone is at least somewhat familiar with. You simply buy a property and rent it out to a tenant, right?
Actually, there is a lot to knowing how to properly purchase a property and then rent it out so that you have the maximum amount of cash flow with the least amount of hassle. There are also many tax advantages and tax consequences that must be considered.
As you go through this system, you’ll learn how to purchase the right properties at the right terms using little or no money. You'll also learn how to repair a property in such a way that it reduces your future maintenance costs. Furthermore, you'll learn how to pre-qualify tenants and structure your lease agreements in such a way as to reduce management hassles as well.
Cash Flow Is King
It has long been said that the three most important things in real estate are "location", "location", "location". That is great if you plan to open up a retail store. However, if you are going to be dealing in rental properties, the three most important things are going to be "cash flow", "cash flow", "cash flow".
Not only that, you should never buy a property that has a break even or negative cash flow, unless you are sure you can get the property to bring a positive cash flow within a short period of time. If you are ever going to achieve financial freedom, you must have a residual cash flow coming in every month. Having a small portfolio of good income producing Landlording is a great way to do this.
Let The Government Pay The Rent
In this course we're also going to cover how the government will pay the rent on your properties. One of the most popular government programs is Section 8. Under this program, the government will pay some or even all of the tenants rent for them.
There are landlords out there who do have horror stories of bad tenants under such programs. However, most of their problems could have been avoided by better management and screening of their tenants. All in all, if you choose good tenants, maintain quality housing, and treat your tenants with respect, you shouldn't have very many problems.
The one big thing about renting through programs like Section 8 is that you can sleep well at night knowing that your rent will be paid and that you won't have to go around knocking on doors every month collecting rent. Of all things to worry about when being a landlord, it is whether or not the tenant is going to pay their rent.
Types Of Properties To Invest In
What Areas Of Town Have The Best Cash Flow?
You might think that the nicer areas offer the best cash flow. While nicer areas do offer higher rents, this does not mean that these areas offer the best cash flow in relation to your expenses.
Lower income properties are going to be cheaper to buy which means your mortgage payments are going to be less. Also, renters in lower income areas don't always expect plush carpet and fancy water and light fixtures. This equates to lower rehab and maintenance costs.
Upper income areas are not necessarily where you are going to get your best cash flow because higher-end homes in more upscale areas require more initial money and have higher maintenance costs, but they do not always offer dramatically higher rent payments. Because of the higher price of these homes, your monthly mortgage payment would also be higher and while the rental payment would be somewhat higher than on lower-income houses, your profit margin would be about the same.
Single Family Houses
The most popular rental properties out there are single-family houses. They appreciate well, are in high demand and they have a lower tenant turn over rate than apartments do.
Because private individuals own almost all single-family homes, it is easy to find motivated sellers and owners in distress. It is also easier to find single-family properties that have not been maintained properly.
Single- family houses are also easy to resell if you ever decide to.
Multi Unit Properties
When it comes to multi unit properties, duplexes present the best investments for several reasons.
First, they are fairly inexpensive to buy when compared to other larger multi unit properties (such as apartment buildings or complexes) and they require less capital and overhead.
It is also easy to find duplexes mixed within residential single-family house neighborhoods, which not only makes the property a great investment but it makes it easier to rent the property out because tenants feel more like they are living in a house versus an apartment.
Duplexes also offer two monthly rent payments coming in, while there is only one mortgage payment to be made. Duplexes also make for a more stable investment because if one unit is vacant, the rent from the other unit is usually enough to cover the mortgage so that you don't ever have a negative cash flow. This is just a few of the reasons why duplexes are so sought after by small investors.
Avoiding Commercial Financing
Something you may want to avoid is multi unit properties with more than four units. Once you get into properties that have more than four units, you will be looking at commercial financing, which is harder to get. This is why it is best to stick to duplexes. They are still considered by most banks to be residential which means it will be much easier to get bank financing.
Advantages Of Owning and being a Landlord
There are a lot of advantages to owning rental properties.
- One of the biggest advantages is that the cash flow you get can be essential to becoming financially free.
- You only have to build up a couple of good rental properties before you will have a nice cash flow and hopefully,
- by the time you go to retire you could have a small portfolio of rental properties paid for free-and-clear.
- Your tenants pay down your mortgage while at the same time the value of your property is going up. This means that over time your equity can really build up. In the mean time, you're still making money from your cash flow.
- You can depreciate the property
which can offset some of its income, and all of your expenses related
to the property are tax deductible including upgrades to the property
that would add value.
- Eventually your depreciation benefits do tend to dwindle.
- At that time, you can take advantage of the 1031 Tax Deferred Exchange by selling the property and buying a larger, more expensive property, without having to pay any taxes.
Don't forget, you also have the pride of ownership, not only in the fact that you own the property, but also in the fact that you have taken control of your financial future and retirement.
Disadvantages Of Owning Landlording
There are of course some disadvantages to owning and managing rental property.
- Such as repairs and maintenance, collecting rent, evictions, vacancies, paying for property taxes and insurance, and you always have to make sure you comply with the fair housing laws.
- Probably the biggest disadvantage is that this part of the business tends to require you to have good credit. If you aren't able to buy the property by getting long-term seller financing, having a good credit history is a must so you can get a long-term mortgage loan from a bank.
- See Credit Repair Section so that you can get a bank loan if necessary.
Disadvantages Of Single Family Landlording
The biggest disadvantage of renting out a single-family house is that you only have one rent payment coming in each month and if the property is vacant, you have no cash flow but you still must make the mortgage payment.
Disadvantages Of Multi Units
There are a few disadvantages to owning multi units.
- One is that it is sometimes harder to find tenants who want to live in a small apartment rather than a house.
- You also have to consider that when reselling multi unit properties, you are usually limited to only selling to other investors, as most homebuyers are not looking to live in a multi unit property.
- Furthermore, properties with more than four units are considered commercial properties, which will require qualifying for a commercial mortgage loan. This can be much more difficult to do than qualifying for a residential loan.
