8

HOW TO INVEST IN REAL ESTATE

(EVEN IF YOU HAVE NO CASH, NO CLUE, AND NO TIME)

“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate.”

—Andrew Carnegie

If you found one of those grimy ATMs at the back of a restaurant that was malfunctioning and spitting out $20 every minute, would you tell anyone about it?

Of course not. The same is true for real estate investors. They don’t want to tell you how much they make from real estate because then you’d compete with them and take their money.

If you’re a student reading this, you’re in luck. I’m twenty-eight today and I did my first deal during my last year in college. I had heard that people were making money in real estate but I’d been avoiding it because I thought I didn’t have the time to do it myself. Still, I couldn’t shake the idea of owning a cash-printing property. When I approached 209 Otey Street, one of the first properties I ever bought, a student answered the door. I was clean-shaven and wearing my Virginia Tech T-shirt. Nobody would have suspected I was on the verge of dropping out of school to build my empire, which was about to include real estate.

“Hey, I’m looking to lease a place for the fall semester,” I said. “Do you know if there are any spots open here?” When she said there weren’t, I asked if she could give me the landlord’s contact info so I could ask about future openings. I got the number and left. My plan was on.

I took the owner out for coffee just to get to know him. His house wasn’t for sale, but I wanted to be at the top of his mind when he did think of selling. I learned that he ran a charity and was trying to figure out how to get more cash into the organization. Even better—the charity owned the property.

“Well, when you’re ready to sell,” I said, “I’m willing to give you $200K.”

We reconnected not long after that and struck a deal. Now the house is mine and his charity fixed its cash problem. Keep reading and you’ll see that I didn’t actually spend $200K—not even close.

This scenario isn’t that unusual. The best real estate deals are found by door knocking and it’s the number one way I suggest you look for your first properties. I’ll show you exactly how to find your first deal even when it’s not on the market, how to finance the deal even when you have no money, and how to manage your property even if you have no time for it.

What I love about real estate is that if you do it right, whether you’re a college student with no savings or someone else with very little money, you can actually set yourself up to live for free while others pay your rent.

My biggest concern before owning property was how much time it would take me to manage it. I didn’t realize then that you could outsource pretty much all of the work and still make passive income. The only time I put into the investment properties I now own is fifteen minutes per month to analyze the income and expense reports my property manager sends to me. Here are my February 2018 reports for two of my properties.

INCOME REPORT FROM MY FIRST REAL ESTATE DEAL

209 Otey monthly report (Feb. 2018): $661 in free cash flow:

Here’s my beautiful cash cow:

710 Roanoke (Feb. 2018): $1K in free cash flow each month:

Beauty #2:

The only other time-consuming task is the ten minutes it takes me to forward these statements to my tax attorney at the end of each year so he can file my taxes. All in all, that’s ten or fifteen minutes of my time for about $1,600 in free cash flow each month. And that’s just the cash component. It doesn’t even count the equity buildup that I’m getting. Have I mentioned it’s a thing of beauty?

These charts help me forecast historical versus future cash flows and returns. Here’s the breakdown for 209 Otey:

And 710 Roanoke:

You can totally do this, too, but before I show you how, I want to call out a few common myths about real estate that hold most people back:

  1. You need to know a lot about real estate investing to be a real estate investor.

  2. You need money to do your first deal.

  3. You have to be a handyman so you can fix anything that breaks. (Latka doesn’t touch toilets!)

  4. It takes a lot of time to manage real estate investments.

  5. Now is not a good time.

Keep reading—I’ll bust all of these myths in spectacular fashion. The key is finding something you can afford to buy that will generate you enough income even after you pay your monthly expenses. That means getting the right deal with the right financing and with the right management.

HOW TO FIND A PROPERTY THAT COULD BE A GOOD INVESTMENT

Every real estate deal I’ve done has started with a knock on a door. While most people troll their Zillow and Trulia apps looking for deals, I’m meeting homeowners so I can buy their property before it even makes it to those public listings.

Door knocking gets me better prices, but it also uncovers details that online listings can never capture, and that owners and real estate agents may fight like hell to keep from you. You get to learn a neighborhood (When the listing says “historic,” is it a euphemism for “run-down,” or are the houses maintained?). You get to see what kind of renters occupy a property (Quiet grad students and families, or unruly frat boys?); whether those renters take care of the place (Is there a herd of pets at their feet when they answer the door? A line of beer cans on the porch railing?); or whether it’s a hot spot for renters at all (What answer do you get when you ask if there are openings?).

As far as scouting locations, I only buy within ten miles of a college (I currently own in Austin near the University of Texas and in Blacksburg near Virginia Tech) because students keep those rental markets nearly recession proof. A quick way to confirm this is by researching whether a town’s rental rates and property values dipped in 2008. Just Google “property data” + 2008 + the city or county in which you’re looking to buy. Browse the results until you find the Property Search Map.

If you can’t afford to buy near popular college cities try looking in more rural college towns. Property prices should be lower while rental demand stays high. You’ll start developing your own patterns as you do more deals and find locations that work for you. I just know that college towns work best for me.

Family and friends can also be your research across the country. If you’re close to someone who lives near a good rental market you can have them be your boots on the ground to help scout locations and later help with property emergencies if you do buy in their area.

Start your search by driving to an area you feel you can afford a deal in and knock on doors. Meet the owners, earmark your ideal neighborhoods, and then start studying the numbers. I’ll show you my script for door knocking later. First let’s discuss finding a deal you can afford.

HOW TO FIGURE OUT IF PROPERTY CAN MAKE YOU MONEY

As with any investment, you need to figure out how much potential money you could make from something before deciding how much money you’d spend on it. Rental income is how you make money from real estate, but many times it can be tricky to figure out what people are paying for rents on a given unit.

Figure Out How Much Money You Could Make: Ask Local Real Estate Agents for Direct Access to Their MLS

Real estate agents have access to deals via their multiple listing service (MLS). Because agents want to represent you when you buy, their goal is to help you find a deal. So ask your agent: “Can you add my email to your MLS for any multifamily deals that come on the market anywhere in the county?”

When listings come in, you’ll automatically see the data, which will include rental information. They’ll look like this:

MLS listings are great for data and market research, but again, don’t count on them for finding a great deal. Any good property listed on the MLS is quick fodder for bidding wars that will jack up the price. So aside from door knocking, target pocket listings. These are properties that a real estate agent knows are for sale, or might soon be for sale, that aren’t listed on the MLS. That means the public hasn’t had the chance to see them and spoil your chances at a sweet deal.

Build relationships with all your local real estate agents to make sure they think of you first when they get a pocket listing. That way when a friend or client tells them they’re thinking of selling, they’ll call you and try to close a deal maybe even before they put it up on the MLS. That’s where you want to be.

You don’t need to rule out MLS listings altogether—just know that they’re not where the deals lurk. You can still learn a lot from their data. In the listing on the previous page I see that total rent ($950) is about 1 percent of total list price ($101K), so it’s worth exploring (more later on how I did that math). When the numbers look good I’ll then use the property tax portal to see when a unit was bought and sold in the past and for how much. Let’s dig into that next. . . .

Figure Out What It Will Cost You to Buy

A listing’s sale price tells you only what the seller hopes to get for the property. You can get a more realistic sense of what a unit is worth, and whether it will make you money after expenses, by searching public records. Every county in the United States posts property records in its online tax portal. The particulars vary from county to county, but you can usually find your county’s tax portal by doing a Google search for “Your County Name + Your State + parcel ID.” My first deal was in Blacksburg, Virginia (Montgomery County), so I searched “Montgomery County VA parcel ID.”

You’ll find a page that looks something like this:

What you’ll do next:

How to Find a Better Deal and the Right Seller

Everyone who owns real estate is a seller, whether they know it or not. The trick is to find a seller who didn’t even know they wanted to sell. Once you’ve done your research on a particular area, and you know what average costs and rental incomes are, you’re well equipped to try door knocking.

Once I found an area in my college town that I liked, I’d quickly shave so I could use my baby face to my advantage, put on some college clothes, then hit the streets to knock on doors.

I’d knock and say: “Hey, I’m studying here and looking for a good place to lease, do you have any open rooms in this building?”

If the person answered yes, not a good sign. It means there are vacancies and maybe not a strong rental market. Vacancies will kill your cash flow.

If they say no, ask if they can introduce you to the owner of the property so you can think about renting from him/her when a vacancy does open. Bonus points if you sneak in a question like: “I’ll need to rent in this area in the next few years, do you mind me asking what you pay for rent?”

Once you have the owner’s contact info, invite them to coffee and see if they’d be willing to sell. Offer 100x what they are making on rent per month. If their unit makes them $2K per month, offer $200K.

As a general rule to quickly analyze a real estate deal, rental income should be 1 percent of the total cost of the unit. If the seller wants $100K, monthly rents should be around $1K. This rule works because if you can’t get a rent that is 1 percent of deal value, it’s unlikely you’ll be able to make cash flow each month after paying your financers (banks, mortgages, or other expenses we’ll talk about later).

Once you figure out the price, remember to use the magic rule to figure out if you should make an offer or not. Never offer more than 100x the monthly rent. If monthly rent is $2K, don’t offer more than $200K.

Let’s talk about why that rule makes sense if you’re looking to do a deal that generates passive income for you every month.

Finance: How to Do Your First Deal Even with No Money

Old-school people will say you need $20K up front if you want to buy a $100K piece of real estate, about 20 percent. That’s not true at all. You can buy real estate without putting down any cash, or very little. To do that, you first need to analyze different funding partners. They each require different amounts of money down.

If you have a family member who will loan you the mortgage amount, they may make you put no money down, whereas a bank will make you put down a minimum of 5 percent and a maximum of 25 percent.

If you can’t turn to family and must work with a bank, you can shrink your down payment if you’re willing to find a multifamily house and live in one unit while you rent out the others. Or if it’s a one-family house, aim for a four-bedroom, then live in one and rent out the other three.

Living in the property enables the bank to classify the loan as a “homeowner” loan versus an investment. The benefit to this is banks typically require 25 percent down on investment properties, but only 5 percent down if you’re buying something you plan to live in—sometimes less.

I’ll walk you through funding sources and then give examples of deals with no money down, 5 percent down, and a recent deal I did where I chose to put 25 percent down to maximize cash flow.

Partnering with a Bank

The key terms in a bank loan are:

Percent down: The amount of money the bank will require you to pay on closing day. On a $100K purchase, expect additional closing costs on top of the percent down to be about $4K and include things like lawyer fees. These are real closing costs from my last deal. I purchased the property for $425K and had $6,811.53 in closing costs:

Interest rate: This is how the bank makes money. It’s the cost of borrowing money. On a $100K deal where you get the bank to loan you $80K, you’ll pay about $600 per month, of which $300 will go toward paying down your $80K loan (called principal) and the other $300 will go to the bank as an interest payment.

The interest rate on my last deal in Austin, Texas, was 4.375 percent on a loan of $403,750 so I could purchase the house for $425,000. That interest rate meant I’d pay $2,015.86 each month to pay down the loan and to cover interest payments to the bank. For context, I make about $5K/month on this unit, so it’s cash flow positive to the tune of about $1K to $2K per month.

Amortization: The amount of time you have to pay back the loan. The longer you have to pay back your loan, the lower your monthly payments will be, thus increasing your monthly cash flow. A twenty-year amortization on a $100K loan at 4 percent interest means your monthly payment is higher than the same deal on a thirty-year amortization schedule.

Cash at closing: I needed to bring $18,230.89 to close on this property that would make me $2K/month. I’d get paid back in nine months and then make $2K/month in perpetuity after that, or $24K/year forever, barring some catastrophe, which insurance would cover. Good deal!

If you had $18K today, would you sacrifice it if you could get it back in nine months, then make $24K/year forever?

Balloon: How many years your interest rate is locked in for. If something happens ten years from now and interest rates go up to 10 percent, the bank needs a way to increase your interest rate if they gave you something like 4 percent ten years ago. A balloon is the period that you lock in your interest rate for before having to reset the rate with the bank. To minimize risk, and to get more certainty, always try to negotiate for the longest balloon period you can. The best scenario is to get a fixed-rate mortgage, but banks are usually pretty tough about giving fixed rates.

MY REAL-LIFE BANK NEGOTIATION

Below is my actual email negotiation with a potential banking partner that I ended up using on one of my first deals when I was twenty-two. This will give you an idea of how all these terms work together.

Nathan,

Here is the best final deal I can do for you. Please review and let me and Aaron know your decision so she can inform the buyer’s agent this morning. This gives you two additional years before the balloon and gives you the 25 year amortization you would like but requires you to fund 25% of the purchase price and increases your rate from 4.375% to 4.50% since the balloon is pushed out an additional 2 years. There are no additional changes I can make.

Borrower: Nathan Latka

Loan Amount: $161,250 (75% of the $215K purchase price)

Amortization: 25 years

Term: 7 year balloon

Rate: 4.50%

No Bank Origination Fee or Prepayment Penalty

Approximate Monthly Principal and Interest Payment: $900 (This doesn’t include the taxes and insurance which we will escrow for you monthly)

Thanks, Jonathan

I decided to move forward with this loan because my goal was maximizing monthly cash flow, so I ended up putting 25 percent down.

Those of you reading this and thinking, “But you had to pay 25 percent! I don’t have $55K to do a deal!” You would have negotiated to 5 percent down by buying a place where you could move into one of the rooms as discussed earlier. This would hurt your monthly cash flow but enable you to do your first deal with a much smaller amount of money down. I’ll give a no-money-down example in a minute.

Before I give examples of zero money down versus 5 percent down versus 25 percent down, remember that the less money you put down up front, the higher your monthly payment and the lower your monthly cash flow will be.

Here are the two comparative deals from my Excel document that I use to quickly size up any deal.

Comparing percent down on a $215K unit with $1,800 in monthly rental income:

Putting 5 percent down (about $10K) leads to a $1,135.29 monthly payment:

Purchase Price  $215,000

Estimated Appraised Value  $215,000

Loan Amt  $204,250.00

Interest Rate  4.500%

Term 300 months

First Mortgage (P&L)  $1,135.29

Other Financing (P&L)        

Real Estate Taxes        

Hazard Insurance        

PMI         

HQA   $0.00

Estimate – depends on sales price / assessment by county

Estimated Yearly Premium $840.00

TOTAL PTTT $1,135.29

Putting 25 percent down (about $55K) leads to an $896.28 monthly payment:

Purchase Price  $215,000

Estimated Appraised Value  $215,000

Loan Amt  $161,250.00

Interest Rate  4.500%

Term  300 months

First Mortgage (P&L)  $896.28

Other Financing (P&L)        

Real Estate Taxes        

Hazard Insurance        

PMI        

HQA   $0.00

Estimate – depends on sales price / assessment by county

Estimated Yearly Premium $840.00

TOTAL PTTT $896.28

Remember, the more you can afford to put down now, the lower your monthly expenses will be, which will make your monthly cash flow higher.

In this deal, I chose to put 25 percent down to maximize cash flow. With $1,800 in rental income, subtracting $896.28 leaves me a big, beautiful $900 check every month, or about $11K per year on my $55K investment (20 percent cash on cash return!). I’ll show you pictures of this unit later on, but first, let me show you a no-money-down example.

Putting $0 Down (0 Percent) to Buy a $200K House

Now let’s talk about what you really want to know if you’re a broke college student or just have no extra money.

There are several strategies for getting a deal without putting money down. We need to figure out a way to make the 5 percent down requirement from the bank disappear (about $10K on a $200K multifamily house).

  1. Partner with a family member. If you have a family member who has money sitting in a savings account, look at what current bank interest rates are to see what they are making on that saved money. If they have $100K saved, and interest rates are only 1 percent, you might be able to help them earn more by paying them 2 percent on a $5K loan they give you as long as it still makes financial sense for your real estate deal.

  2. You may feel guilty about taking money from family members, but remember, you’re helping them make more money through the interest you’ll be paying them. You may not be able to get a favorable deal with a bank, but family members trust you, so use that relationship to your advantage—you’re helping them make more money and they’re helping you. Just be reliable in paying them back. (Otherwise Thanksgiving will not be fun.)

  3. Ask the seller to loan you money after the deal is done. Use this script: “Seller, I just closed and put about $200K in your pocket. Would you be willing to loan me $10K of that? It’ll really help me out because coming up with the cash for the down payment was tough—but I got it done! I’ll start paying you back with interest immediately.”

  4. Ask the owner of the property management company you’ll use to write you a loan after the deal. Property management companies take care of things like broken toilets on your rentals so you don’t even have to think about them. They typically charge 10 percent of rental income ($180/month of the $1,800/month rent in this case). In other words, they get more business if you use them—that’s a strong incentive to have them write you a loan. “Property Management Company, I’ll have you manage the property I just bought if you write me a $10K loan, which I’ll start paying interest on immediately.”

The chart below gives you an idea of what your monthly mortgage payment would be if you put 0 percent down to buy a $200K house at a 4.5 percent interest rate that you pay back over thirty years.

It doesn’t matter if you’re paying a family member the 4.5 percent interest rate or a bank the 4.5 percent interest rate.

% DOWN

MONEY UP FRONT

MONTHLY MORTGAGE

INCREASE MONTHLY CASH FLOW

INCREASE ANNUAL CASH FLOW

0%

$-

$1,013.37

$0

$0

5%

$10,000.00

$962.70

$50.67

$608

25%

$50,000.00

$760.03

$253.34

$3,040

This unit does $1,800/month in rent, so if you put 0 percent down, you have only about $800/month left over after paying your mortgage to cover management, repairs, property mortgage insurance, and other expenses that cut into your cash flow, which we will discuss later.

Putting $10K Down (5 Percent) to Buy a $200K House

If you get your mortgage through a bank and you’re unable to use any of the strategies above to finance the 5 percent down the bank requires, a $962.70/month mortgage payment is your most likely scenario.

By coming up with an extra $10K today, the day you do the deal, you’ll save about $608 per year over the life of the thirty-year loan. Big savings. If you have the capital, I recommend you use it to put it down.

Putting $50K Down (25 Percent) to Buy a $200K House

If you’re fortunate enough to have $50K cash now to buy a $200K house that does $1,800/month in rental income, you’re going to reap more rewards over the long term. I recommend you put down as much as possible if you have no other ways to earn a return on your $50K (e.g., other business deals, investments, etc.).

Each year of your thirty-year loan you’ll make $3,040 more in cash flow. A hidden benefit of putting more than 20 percent down on any unit is that you don’t have to pay PMI (private mortgage insurance).

PMI is one of many additional monthly expenses you need to consider when calculating the total amount of take-home cash you’ll make each month from your investment. Let’s take a look at those other management expenses now.

Manage: How to Collect Monthly Checks Without Spending Time with Renters or Fixing Toilets

Many things will cut into your monthly cash flow from a real estate investment. We already discussed the first, and biggest—your mortgage payment. These will also cut into your monthly cash flow:

Property Management Fees: This is what you’ll pay someone to deal with renewing tenant leases, fixing toilets, taking tenant phone calls and complaints, cutting the grass, and more. Typically ranges between 5 and 10 percent of the monthly rent.

Real Estate Taxes: What you pay the government for your property. On a $200K property, depending on where you live, expect to pay $2K–$4,600/year on property taxes.

Hazard Insurance: This will protect the property owner against damage caused by fires, storms, earthquakes, and other natural events. Expect to pay $50 to $80/month for this on a $200K house.

Private Mortgage Insurance (PMI): This protects lenders against losses if a borrower defaults. If you partner with a family member you can avoid this. If you partner with a bank and put less than 20 percent down, expect to pay PMI. This will range between $90 and $150/month depending on your situation.

Homeowners Association (HOA) Fees: If you’re buying a building in a subdivision with an HOA, you’ll owe them monthly fees. This is common in apartment complexes where a $10K roof repair benefits all tenants if it’s fixed.

Repairs: I always assume I’ll have to spend 2 percent of monthly rents on repairs. This could be as small as a clogged sink or leak, or as big as replacing the fridge. I’ve found 2 percent tends to average out nicely to accurately predict repair costs.

Let’s break down each of these expenses, starting with property management fees:

Many people never start in real estate because they think they have to be good at fixing ovens, and fans, and doors, and toilets.

Remember, the New Rich focus on building passive income streams. Fixing stuff takes time and energy, so we need to find someone else to do it. This is what property management companies are for. They’ll take care of your units in exchange for a percentage of the rent. They also make money by finding you new tenants, renewing leases, and managing repairs.

To maximize your monthly cash flows, you want to negotiate your property management fee down. Do this before closing on the property. Use this kind of leverage to get under 10 percent management fees:

  1. I’ll agree to put all future properties I buy under you if you cut me a deal and manage for 5 percent of monthly rent.

  2. Unfortunately, I can’t buy this place unless you agree to help me out and manage for 5 percent. Paying you 10 percent means I’d lose money.

You also want to use your property management company to get an idea of rental rates and potential increases in the future.

The quickest way to be certain your place will be rented is to bring in a property manager before you do the deal. By getting the property manager to commit early, you create a psychological influence on them where they feel like they’d better get your place rented because they told you before you bought the place that they can rent it at a certain price. They’re going to keep their nose to the grindstone for that. That being said, you want to plan for the worst-case scenario. I generally plan for two months per year to go unrented. I don’t count on that rental income. If you can’t suffer that kind of cash flow hit, then you shouldn’t do the deal.

I always loop in my property managers before I close a deal by asking them questions like:

Me:

OK, I’m fine executing either of these options:

  1. 4 renters pay $600/mo. (total rent $2400) and I am responsible for utilities each month

  2. 4 renters pay $550/mo. (total rent $2200) and they pay for utilities <—this is my preference

I’ll have my phone next to me all day tomorrow. Let’s work something out with them if you think it’s going to be more expensive to try and replace their lease.

Property Manager:

They want to do the $2400 option with utilities included. Do you want me to finalize the lease for this? I know you are losing money short term, but if you have to turn the unit over and prepare for new tenants this late in the year I think you would lose more money. I would recommend going with this and we will send renewals with the firm higher rates for next year and prepare for them to vacate and re-lease.

Thanks!

Getting the property manager to either agree or disagree with you on what you think you can get for rents helps align them with your goal.

My property manager will fight harder for future increases in rents because they said they felt good about increasing next year to my levels: “We will send renewals with the firm higher rates for next year.”

Property managers are your biggest allies. They help you keep expenses low and also help you drive rents up. They are your local feet on the ground for any deal. Treat them well. Send birthday cards.

Real estate taxes are the next expense that can eat into your monthly cash flow. You’ll pay different taxes depending on what state your deal is in.

According to WalletHub (https://WalletHub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585/), the states with the lowest real estate taxes are:

Rank

State

Effective Real-Estate Tax Rate

Annual Taxes on $176K Home*

1

Hawaii

0.28%

$489

2

Alabama

0.43%

$764

3

Louisiana

0.48%

$841

4

Delaware

0.53%

$929

5

District of Columbia

0.57%

$1,005

States with the highest real estate taxes are:

46

Connecticut

1.91%

$3,357

47

Texas

1.93%

$3,392

48

Wisconsin

1.97%

$3,459

49

New Hampshire

2.10%

$3,698

50

Illinois

2.25%

$3,959

51

New Jersey

2.29%

$4,029

Take these into consideration when forecasting your monthly cash flow.

The other expenses, such as hazard insurance, PMI, HOA fees, and repairs, are generally fixed or don’t have good benchmarks. So for these, educate yourself up front by finding out the real numbers before agreeing to a deal. You don’t want to learn the hard way that your expenses are way higher than you’d estimated.

Now that we know more about average monthly expenses, let’s take a look back at what monthly cash flows look like with 0 percent, 5 percent, and 25 percent down on a $200K house.

The following chart assumes a best-case scenario of 5 percent paid to property manager, 0.4 percent in annual real estate taxes, no HOA fees, minimum hazard insurance, and no repairs needed:

% DOWN

0%

5%

25%

Rent

$1,800.00

$1,800.00

$1,800.00

Mortgage

$(1,013.37)

$(962.70)

$(760.03)

PMI

$(100.00)

$(80.00)

$-

Property Manager

$(90.00)

$(90.00)

$(90.00)

Real Estate Taxes 0.4%

$(66.67)

$(66.67)

$(66.67)

HOA

$-

$-

$-

Hazard Insurance

$(70.00)

$(70.00)

$(70.00)

No Repairs

$-

$-

$-

Total Expenses

$(1,340.04)

$(1,269.37)

$(986.70)

Monthly Cash Flow

$459.96

$530.63

$813.30

Annualized Cash Flow

$5,519.56

$6,367.60

$9,759.64

Worst-case scenario might have 2 percent repairs, 10 percent to property manager, 2.3 percent property taxes:

% DOWN

0%

5%

25%

Rent

$1,800.00

$1,800.00

$1,800.00

Mortgage

$(1,013.37)

$(962.70)

$(760.03)

PMI

$(100.00)

$(80.00)

$-

Property Manager

$(180.00)

$(180.00)

$(180.00)

Real Estate Taxes 2.3%

$(383.33)

$(383.33)

$(383.33)

HOA

$-

$-

$-

Hazard Insurance

$(70.00)

$(70.00)

$(70.00)

2% Repairs

$(36.00)

$(36.00)

$(36.00)

Total Expenses

$(1,782.70)

$(1,712.03)

$(1,429.36)

Monthly Cash Flow

$17.30

$87.97

$370.64

Annualized Cash Flow

$207.56

$1,055.60

$4,447.64

Monthly cash flows are so much lower in the second scenario because real estate taxes went from $66/month to $383/month and monthly property management fees went from 5 percent to 10 percent. When looking at any deal it’s always good to look at best- and worst-case scenarios.

If the worst-case scenario does not generate cash flow (monthly income greater than $0), do not do the deal. This is called “stress testing” a deal.

Don’t forget that in any deal you have two ways to drive more cash flow: decrease expenses or increase revenue. Use your property manager to drive up rents each year.

In our worst-case scenario above, with 0 percent down we make only $17.30 per month ($207.56 annually). If we increase rent by $200 next year, we make $217.30 per month or $2,607.60 per year—still a win! Yes, it’s a 10 percent increase, but I’ve done it in the past!

Three Common Questions

Is Now the Right Time for Me to Buy Real Estate?

The best time to buy real estate you’ll never let go of is before you are married with kids and two dogs. It makes it easier for you to move into one of your units, which lets you get away with putting only 5 percent down.

As a general rule, always keep six months of your living expenses in a savings account. The rest? Invest!

What If I Have to Pay for Costly Repairs?

A new roof might cost $5K to $10K. Minimize your risk of having to pay for repairs by getting a home inspection done. Actually, get a home inspection no matter what. You’ll get a big report back with every potential repair or building code violation, which you can ask the seller to take care of before your purchase.

How Do I Make Sure My Place Stays Rented?

Do not buy a place unless you are certain you or your property management company can get it rented. Use a site like Revestor.com to see cash flow opportunities in your area. But even in the best scenario, I like to assume a property will be vacant for two months out of the year to put a cushion in my budget.

Comparing My First Two Deals: Big Winner and Big Loser!

I was twenty-four when I did my first deal on January 8, 2014. It was a six-bedroom, four-bath duplex for $215,000 that I found through my real estate agent:

Monthly Overview:

Rental Income: $1,990

Mortgage Payment: ($1,060.57)

Management Fees: ($100)

Lawn Care: ($45)

Repairs: ($35) Net Income: $750

This unit continues to make me $750 in cash flow today. Over the past three years, it’s made me almost $27K ($750/month × 36 months) in free cash flow on my initial $55K investment. Additionally, I’ve grown my equity position in the unit, which is as good as cash. Remember, that $1,060.57 monthly mortgage payment goes toward paying down the loan and paying interest on the loan.

If I pay down the loan, $500 in a given month, that means I own $500 more of the $215K property debt-free. After thirty years, I’ll own the full $215K building plus all the rental cash flows ($750/month × 30 years as back of napkin, or about $270K). This is conservative.

Once you have a cash machine like this set up and working for you, you can begin to consider where to invest your rental income to create even more passive income.

But First, Let’s Talk About My Not-So-Good Deal

I was twenty-six when I did my second deal on April 14, 2016. It was a five-bedroom, four-bath house for $328K that I found by door knocking.

Monthly Overview:

Rental Income: $2,400

Mortgage Payment: ($1,747.45)

Management Fees: ($144)

Gas: ($29) Water: ($136.96)

Electricity: ($398.48)

Lawn Care: ($45)

Repairs: ($35)

Net Income: ($136)

My mistake here was that I assumed a typical utility arrangement when I closed this deal (tenants pay). When I realized this fell on me, it cut into my cash flow significantly.

The good news is, even with losing $136/month in cash flow, I’m gaining more than that in equity in the property with each mortgage payment.

Additionally, when we renew these leases, it’ll increase rent to about $3K per month and the tenants will pay utilities:

Rental Income: $3K

Mortgage Payment: ($1,747.45)

Management Fees: ($200)

Lawn Care: ($55)

Repairs: ($60)

Net Income: $947.55

I put only 10 percent down on this deal, so cash on cash returns are not horrible. There’s value in the negotiation I had back and forth with the bank on this deal. Here’s the thread:

Bank:

I skipped watching the tournament games and looked over your info. How about we talk at 11:55 a.m., I eat lunch and you are approved by 3:30. Here you go.

Borrower: Nathan Latka

Loan Amount: $295,200 (90% of $328,500 Purchase Price)

Repayment Terms: Monthly Principal and Interest Payments based 30 Year Amortization (P & I $1,496) GNB will escrow taxes and insurance. (Approximately $248/month) Monthly payments will be auto debited from your checking account monthly. No PMI. (Private Mortgage Insurance)

Interest Rate: 3/3 ARM–4.00%, 5/5 ARM—4.50%, 10/10 ARM 5.25% (You can pick, let me know)

Origination Fee: $350—Borrower responsible for typical closing costs. (Title Insurance, Deed of Trust Recording Costs, Appraisals, Attorney Fees)

Collateral: 209 Otey Street and 710 E Roanoke St Blacksburg VA. Subject to appraisals on both properties with minimum combined value of no less than $543,600.

If you say you are good to go I’ll order the appraisals and title insurance and closing through the attorneys office. Should be able to close 1st week in April but I need to hear back quickly.

Thanks,

Me:

Thanks for getting this back so fast.

I could say yes to this super fast:

7% down (if you won’t budge on the 10%, I’d probably pull equity out of roanoke street place—pain in ass)

5 years locked interest rate at 4%, int rate cap of 5.5% over 30 year amort schedule

I’m fine on you using both of my properties as collateral.

Bank:

I don’t have a lot of wiggle room on this one pal, trying to get you in this easily.

I need the 10% cash down payment, we are basically using the equity in the rental house as the additional down payment since we are taking both properties. Our loan to value will be 80% total which is what makes it doable for me. Obviously if you have cash in your rental bank account you can pull that out and use it.

From a rate standpoint I’ll play ball a little but again gave you a decent deal.

5/5 ARM at 4.25%, we will cap how much it adjusts every 5 years when it resets, it won’t change more than 2%, won’t change more than 8% over the start rate for the 30 year term.

Rate resets every 5 years are additional 5 year fixed rates equal to 1 year T-bill + 3.72% which today is 4.25%.

In reality this loan probably is not outstanding with us 5 years from now, some point your income will be simple and consistent and you’ll refinance to the secondary market so the resets are not as important.

That’s as far as I can stretch pal. You know I’ll get it done smoothly and timely for you and your time is too valuable to go through the pains of document gathering and BS question answering with a bunch of other secondary market brokers to maybe not even get it to the finish line.

Let me know. That’s the best offer I have bud.

Me:

Deal:)10% down

5/5 4.25% with cap of no more than 2% increase each time reset with max 8% over 30 year term

What’s next? Paperwork?

Now, you’ll look at this and see just a bad deal. However, over time this turned into a great deal when cash flows swung the other way in early 2018. Today I make about $600/month in free cash flow from this unit because of two things:

  1. We increased rents.

  2. We shifted utility expenses from me paying to the renters paying.

Now rental income is $2,600 and expenses are about $1,939.00. A $661 check to me every month on autopilot!

When thinking about real estate investing you should always think about how to maximize cash flow. In the above negotiation you see me do a few things:

  1. Lock in a 4.25 percent rate (or whatever the current rate is) for as long as possible (five years). Lower rate means lower cost of capital, which means more cash flow for me.

  2. Cap the potential interest rate increase at 8 percent (this would be a worst-case sort of deal but important to protect downside).

  3. Minimize cash down at 10 percent.

So there you have it. Two of my early deals: one good, one not as good!

Now let’s get you your first deal and let’s make it really good. Follow these steps.

SUMMARY