THE BOOK ON RENTAL PROPERTY INVESTING (BY BRANDON TURNER)
Have you ever considered investing in real estate? Well, of course you have! For many, buying their first home is the biggest financial decision in their life. But for this video we are going to look at something different: We are going to examine how you can invest in real estate, not to live there yourself, but to generate a strong cash flow that will speed up your way towards financial freedom. This is a top 5 takeaway summary of The Book on Rental Property Investing. Written by Brandon Turner. I know Graham Stephan will be sleepless in his bed tonight because of it, but yes, this is really happening. The Swedish Investor enters the field of real estate investing. Takeaway number 1: Why you should become a rental property investor There’s much great to say about investing in rental properties. Here are some of the pros: – Purchasing with leverage The Swedish investor. Do you need to have $200,000 in cash to buy that property for $200,000? No, fortunately not. When investing in real estate, it’s fairly simple to borrow someone else’s money so that you can get started earlier and so that you can increase the returns on your capital. – Hustle for greater returns The more time you put into this, the greater your returns will be. You can leverage your time and abilities to increase your success. For instance – by rehabbing a property yourself, by networking to find better deals on mortgages, or by simply spending more time to find the greatest properties. – Insider trading is legal In the stock market, you are put in jail, if you use knowledge that the rest of the investing community doesn’t have access to. When investing in real estate, you are encouraged to take advantage of such information. – Multiple ways to profit There are four different ways to increase your wealth while investing in rental properties, which we’ll discuss in takeaway number three. – Not having to be present to make money Money will roll in even if you decide to stay in bed during that particular day. Convinced yet? Well, hold on a second, because here coooooomess … Takeaway number 2: Why you shouldn’t become a rental property investor? Like everything else in life, rental property investing also has its downsides. You must decide if it’s the right type of investing for you. If you were just convinced in takeaway number one, I’m sorry, because now I’m going to try to … unconvince you. – Building wealth takes time This is not a get-rich-quick scheme. Becoming rich through rental property investing requires that you take consistent action over a long period of time. If you miss that, the key words are “consistent action” and “long period of time”. – It may become all-consuming Like many other passions (I’m looking at you YouTube!) there’s a risk that your rental properties will be pretty much the only thing that you can think about. Working your 9-5? Thinking about rental properties. Walking your dog? Rental properties on your mind. Smashing that like button? Definitely thinking about rental properties. Arguing with your spouse? Having rental property thoughts. Other activities with your spouse? Rental properties. – Dealing with difficult people Tenants can be quite difficult to handle at times. Some of them have truly turned coming up with excuses for late payments and property damages into an art. – It involves paperwork and bookkeeping Much like any other business really, but if you hate this pot, you may have to consider outsourcing it to someone else. You can lose your investment? Just like in any other investing activity -returns are not guaranteed With proper research and by setting up your rental property investing as a business, you can greatly increase your odds of succeeding though. Takeaway number 3: The for wealth generators Alright, so I mentioned that there are multiple ways to profit from rental properties in the first takeaway. Before we talk about what a good rental property deal looks like, it’s important to know about these, so let’s start with … 1. Appreciation Appreciation is the increase in value of an asset over time. If you can sell your house for, say, $200,000 today, and you bought it for $100,000 in 1992, our house has appreciated 100% in value. In Sweden, this wealth generator has played a huge role during the last 30 years, which has made it so that everyone believes that buying your own home is a no-brainer. “Buy NOW, or wait on the sidelines while EVERYONE else becomes richer!” There are two types of appreciation: “Natural appreciation”, which comes from inflation and scarcity, and “forced appreciation”, which comes from you fixing up the property. 2. Cash flow If a rental property cannot generate a nice cash flow for you, you should not invest in it. Cash flow is simply how much money you have left from the tenant payments after paying all of the expenses on the property and the interest on your loan. 3. Tax savings This is country specific, but in most places, there are tax benefits for being a rental property owner. 4. Loan pay down This is an interesting one. When you get a conventional loan from a bank, the payments you’ll make every month will consist of two components: principal and interest. Money spent on principal increases your equity in the property, while interest payments do not. In the early stages of the mortgage payment, you typically pay more towards interest than towards principal. However, this relationship changes over time, so that, in the final year of the mortgage payment, almost 100 percent will go towards principal. Takeaway number 4: What makes a good deal? Okay, so now you know about the for wealth generators. The two most important ones are appreciation and cash flow. However, it’s easier to deal with cash flow than with appreciation as the latter requires a crystal ball to foresee. So let’s focus on the former. Cash flow is calculated by summing up all the incomes from the property and then subtracting all the expenses. Let’s break these two down. The income is determined by the “fair market rent”, which in turn is determined by factors such as: – Location location location – Number of bedrooms – Quality – Size of the property Be sure to stay updated, using sources such as the local papers, Airbnb and Craigslist, to determine what the fair market rent might be for your property. The expenses can be divided into two parts – and the first one is operating expenses, such as taxes, interest, insurance, vacancy, repairs, water, garbage, heat, electricity etc Call people to find out how much these cost. For example, call your local electricity company to find out how much the electricity will cost. The second one is capital expenditures. These are not everyday expenses, but nonetheless they can make or break your investments. For instance, getting a new paint job, doing flooring, getting a new roof, etc. Here’s a cheat sheet from Brandon Turner. Cheat sheet … cheat sheet .. Let’s say that your property generates $1,500 in income per month, and that the expenses are $1,200. That means that you’ll have a cash flow of $300 per month, or $3,600 per year. Is this good? Well, you must consider how much you paid for the property as well. Let’s say that your down payment was $60,000. That would mean that your COCROI, which means “cash on cash return on investment” is 6% per year. That may be a little bit low, considering that an index fund in the stock market could generate about 7-10% per year. You’ll want as high of a COCROI as possible. Takeaway number 5: How do I find good deals? “Price is what you pay, value is what you get”. You’ll have to search far and wide to find the best deals. A good rule of thumb is this: Look at 100 properties, offer on 10 of them, get 1 of them accepted. “A wise investor once told me that if more than one out of ten his offers got accepted, he knew he was offering too much.” But what should you be looking for? Here are a few suggestions: Some of them may seem counterintuitive at first, but keep in mind that problems that appear to be disastrous, but there are actually quite easy to fix, keeps prices down, which allows for a higher return for you as an investor. – A bad smell This is one of the easiest problems to fix, but nonetheless, it drives away 99% of the competition. So if you’re willing to hustle some, a bad smell is the smell of money. – A hidden third bedroom Turning a property from a two bedroom into a three bedroom one can immediately increase its fair market rent. Look for large storage rooms or huge bedrooms that can be split in two, for example. – A bad roof A leaking and/or ugly roof may seem like a huge issue, but it’s not. it costs quite a bit to fix, but it’s simple and quick. – A labyrinth Old properties often have rooms that are separated from each other, but this is not popular in today’s market. Today, we want open spaces – a kitchen-dining-living room. No, I mean a dining-living-kitchen room. Therefore, the old properties sell for less. But sometimes, it’s a simple task to turn the labyrinth home into an open-concept living one. – A jungle If the garden looks like Tarzan’s jungle, you know that you can snag yourself a good deal. Landscaping is neither terribly difficult nor expensive, but it drives away competition nonetheless. Quick summary: Rental property investing has many upsides – such as the ability to use leverage, and the ability to hustle for greater returns. But … Rental property investing also comes with its downsides – such as the fact that the wealth building process takes a considerable amount of time, and that you’ll have to deal with difficult people. Rental property investing generates wealth through appreciation, cash flow, tax advantages and loan pay down. A good deal is one where you have a positive cash flow, preferably as high of a COCROI as possible. Look for properties with problems that are easy to fix, but that scare away the competition nonetheless. Your future bank account will thank you for it. And last but not least – if you haven’t smashed that like button into pieces already – now is as good a time as any! Cheers guys!