Rental property investing a beginners guide to rental real estate investing

RENTAL PROPERTY INVESTING A Beginner's Guide to Rental Real Estate Investing: How to Create Wealth with Rental Property Business Eddy Moore © Copyright 2019 Eddy Moore All rights reserved Rental Property Investing © Copyright 2019 Eddy Moore All rights reserved Written by Eddy Moore First Edition Copyrights Notice No part of this book may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without written permission from the author Pictures inside this book are of the respective owners, granted to the Author in a Royalty-Free license Limited Liability Please note that content of this book is based on personal experience and various information sources Although the author has made every effort to present accurate, up-to-date, reliable and complete information in this book, they make no representations or warranties with respect to the accuracy or completeness of the content of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose Your particular circumstances may not be suited to the example illustrated in this book; in fact, they likely will not be You should use the information in this book at your own risk All trademarks, service marks, product names and the characteristics of any names mentioned in this book are considered the property of their respective owners and are used only for reference No endorsement is implied when we use one of these terms This book is only for personal use Please note the information contained within this document is for educational and entertainment purposes only and no warranties of any kind are declared or implied Readers acknowledge that the author is not engaging in the rendering of legal, financial or professional advice Please consult a licensed professional before attempting any techniques outlined in this book Nothing in this book is intended to replace common sense or legal accounting, or professional advice and is meant only to inform By reading this document, the reader agrees that under no circumstances is the author responsible for any losses, direct or indirect, which are incurred as a result of the use of information contained within this document, including, but not limited to, errors, omissions, or inaccuracies Table of Contents Introduction Chapter Real Estate Investment Real Estate Scams Maintenance of a Property and Tenants Chapter Good Investment Strategies Start Small Investment Location Investing Preparedness Chapter Real Estate Niches Single-Family Houses Large Multi-family Commercial Raw Land Mobile Homes Helping First-time Buyers Bottom line Chapter Getting Ready to Invest A Simple Explanation of The Real Estate Market Cycles Should You Partner? Building a Team Chapter Finding Deals Tips on Finding Good Deals Common Ways to Find Deals Foreclosures Ways to Find Great Deals Research Marketing Eviction Records Wholesalers House Flipping Chapter Financing the Deals Traditional Bank Financing Equity in Your Investment Property Private Money Lenders Self-Directed IRA Joint Venture Deals Seller Financing High Ratio Financing All Cash Crowdfunding Chapter Making Your Real Estate Business Passive Engage Professional Property Management Real Estate Partnerships Consider Turnkey Real Estate Companies Combining "Lease Up Only" with A Handyman Chapter Unexpected Expenses Purchase of the Property Investment Property Fees Maintenance Expense Estimations Conclusion Introduction Real estate is a tangible investment that you can see and feel, and because of his physical nature, it’s a more secured investment compared to others, where you can easily be defrauded Investing in rental real estate does not have to be a fulltime activity and you can it in your free time Anyway, you may come to enjoy it so much that you want to it full time, but it is not necessary In other words, you not have to quit your day job to give real estate investing a try You can learn and invest with the time you have available You can physically run background checks, inspect the property, ensure the physical property actually exists, and see physical documentation before you commit your money Real estate is a people necessity and properties are available in various types, from single family homes, to duplexes, condos, townhomes, apartments, co-ops, and much more Real estate, unlike many other businesses and investments, provides something that absolutely everyone needs With other investments like stocks, you are only left with the option of trusting the investment broker It is relatively less risky and easier to understand real estate investing than other non-tangible investment vehicles You can safely leverage real estate for debts, more so than some other investments vehicles Investing money into a property is a business and for it to be successful and lucrative, there is a need to have knowledge of what the upside of real estate investing can be as well as the downside This book will answer all your questions on RENTAL PROPERTY INVESTING Chapter Real Estate Investment What are the first steps that are you need to take before you make a real estate deal? Evaluate your personal finances Nothing can happen, nothing can be purchased without finances being in place Even if you only have enough for a deposit on one property and plant for any repairs or renovation if needed, you need to know how this investment is going to fit into your personal finances You need to prepare a personal income statement outlining your finances Understand what income you have, subtracting all the necessary essentials needed to live, debts and savings all calculated to give you a clear picture as to what finances you have to capitalize in a property, as well as monies set aside for maintenance and repairs The financial statement will give you a total picture of what you have for your investment capital Is it enough to pay for your investment in cash? If so, you can avoid monthly mortgage payments and interest on the loan Also, realize that in order to endow in real estate using a lender, many want at least 20% down on a real estate investment Now comes the decision making - how much should you invest? The answer is within the capital you have, the budget you will be comfortable with and mathematics Again, even if you have enough for one property investment, it is key to know exactly what you can when investing, so you don't get into any financial difficulties As stated earlier, banks treat real estate investments differently than when you purchase a property for your personal use A second plan has to be created, one that will define how much you can invest Planning for the Investment The plan guides you through the financial steps you need to follow to prepare the investment Now, you've decided on how much capital can be invested in a property The plan you will create should outline the steps to take and monies shown included in this plan: If you are going to finance the property, getting pre-qualified for a loan and having at least 20% as a down payment of the purchase price will save you time when you are out looking at properties The competition is fierce, and if you have your funding in place, you can make an immediate offer on a property Property and Liability Insurance Property Taxes Inspection and appraisal costs (if you are financing the purchase through a lender) Closing costs, accountant fees, attorney fees, property management service fees Costs of permits needed to renovations if needed before the property is ready for renting It is important to have the property up to code and avoid fines that can be imposed by the local municipality Pre-rental repair costs Funds for any future repairs - post rental There are different elements that comprise the first steps to invest in real estate They are done at the same time All the costs are subject to a) how much you will be investing and b) once that is decided, and you find your property, costs are based on what you offer as a purchase price If it is appropriate, then you will find out what the costs for property and liability insurance, property taxes (this information is usually found in the listing) closing costs, and any fees for an attorney if necessary, permits for repairs, and the pre and post repair costs More about costs - An inspection of a property prior to the closing is mandatory if the sale is funded by a lender The cost of an inspection is usually priced on average run about $278-$389 nationally Condos and smaller homes under 1,000 square feet can be as little as $200 Larger homes approximately 2,000 square feet will cost approximately $400 or more These costs are an estimate and maybe more in some of the major cities Dependent on your location in the United States, there are additional inspections, such as for mold, radon, termites can impact the inspection If there are any problems that arise in the inspection, it is usually incumbent on the seller to address the problem Closing costs can be anywhere from 2% to 5% of the purchase price of the home For example, if the house is purchased at $150,000 you may pay from $3,000 to $7,500 in closing costs for the property Nationally, on average, buyers pay approximately $3,700 in closing feels Property and liability insurance depend on the price you are paying, and the area the property is located The average annual cost for home insurance based on a nationwide average can be $1,228 $2,000 for the dwelling with $1,000 deductible and $100,000 liability coverage With a $300,000 liability coverage, the insurance on the dwelling is $1,244-$200,000 These are nationwide averages In doing your research, you need to adapt this information to the state/county/city where the property is located and speak with insurance agents Another element of your investment plan deals with the information both legally and financially that you should have in order to decide how to purchase the property Have Your Legalities Covered A good lawyer, especially one that practices and focuses on real estate law and investing, is a must If you can find one that you can consult with (and not have on retainer), it would be a really smart move It is always good to have someone who knows about law Get a Good Accountant Unless your profession is being an accountant, it pays having a licensed accountant, not a bookkeeper They can keep track of the financial picture with regard to your property, give you're a quarterly review of all income from rent, expenditures for repairs, taxes, and what the cash flow is for the quarter You can decide on how to manage the cash flow and expenditures Banks and Mortgage Companies Get acquainted with your local bank's loan officers and some of the more reputable, licensed mortgage companies When you're ready to be pre-qualified, having done your research will help in your decision on what kind of financing you will use to buy the property Investment loans that are conventional are determined by having your investment funded by a bank, mortgage broker or credit union A 20% deposit of the purchase price is mandatory for a down payment There are a few reasons that a considerable down payment is required are the risk banks take when they lend on investment properties The main reason is protecting your assets Below are some other reasons: Avoid private mortgage insurance - 20% of the purchase price of a property is what banks prefer as a deposit for investment properties and is the lowest deposit accepted Anything less will have additional private mortgage insurance tax charges What would be considered upfront savings will have to be more costly in the end The Interest Rate - a higher deposit will facilitate a lower interest rate In addition, you can "buy down" the interest rate meaning lower the interest rate by buying an interesting point One point of a mortgage rate, i.e., the mortgage rate being charged is 4%, and you want to "buy" a point You buy one point which is valued at 1% of the mortgage, $1,000 for every $100,000 This can be paid before the loan is finalized If you buy the one point, your mortgage percentage rate will be 3%, a lower interest rate over the life of the loan and a big difference in the monthly mortgage paid out Private Money Lenders One way to access real estate financing is through private money lenders I personally encourage any new investor who wishes to leverage other people's money to use this option, as they are poised to ensure your growth in your new career Basically, accessing fund from private money lenders follows a simple process Cash is made available for investors who in turn pay back the money within a predetermined period, plus a specific interest rate The payback period usually is within months to year Private money lenders are more inclined to make cash available only when there is a strong indication that the real estate investor is capable of raising the value of their proposed property within the shortest possible time If you opt to use this method to finance your deal, be sure to have a concrete exit strategy Self-Directed IRA Do have an Individual Retirement Account that has enough cash to buy a real estate property? If you answered yes, then you can simply convert that account to a Self-Directed IRA which you can use to buy real estate properties that a regular IRA account can't buy The thing about a Self-Directed IRA is that it gives room for compounded growth free of tax This means you can access funds from your Self-Directed IRA and use it to finance your deal, rehab the property, and sell it with the added advantage of deferring taxes But, if you are not up to 60 years of age and you withdraw funds from your Self-Directed IRA, you may be penalized for early funds withdrawal Joint Venture Deals This is a relatively simple agreement between two (or more) parties to pool their resources together in order to close a real estate deal You may not qualify for financing with financial institutions, and you may not have enough cash for down payment even when you qualify for financing, but you certainly can find another investor who has something you don't (in this case, capital) and who doesn't have something you have (the real estate deal or expertise) Note also that both parties can bring cash to the table to finance the deal A joint venture can also be between a capital member (e.g a company that intends to develop a plot of land) and an operating member (e.g an individual who has real estate expertise but lacks the necessary capital to fund the project) Generally, the joint venture agreement will cover the distribution ratio of profits as well as liabilities in concrete black and white There are several ways to structure a real estate joint venture deal, like a simple 50%/50%, 75%/25% or something as complex as 25%/35%/45% in the case where there are more than two parties There is no one right way to structure a joint venture deal, however, you should ensure that there are no grey areas in the agreement so that there will be no confusion in the future Typically, funds invested in the project are paid first, and whatever proceeds are remaining will be shared according to the agreed structure Seller Financing When conventional financing and every other real estate financing option seems a bit out of reach for you, you can consider using the seller financing option This is a mutually-beneficial agreement (promissory note) to finance a real estate deal by the seller or owner of the property Typically, payment is made directly to the owner of the property boycotting banks as the owner (seller) is now the financier of the deal Using this option usually means that you have flexible loan terms, less stringent down payment requirements, and better interest rates which may not be available with other financing options The seller is equally motivated, as this makes room for a smoother sale without going through the hassles of conventional mortgage lending difficulties, fees and costs usually associated with closing deals, etc Best of all, this option gives you a long-term mutually beneficial relationship with a real human being rather than a cold, unfeeling institution High Ratio Financing If you are buying a property with the intention to move into it, perhaps you should consider the High Ratio Financing option As a new real estate investor, this option allows you to go into the deal with a smaller payment, usually between 5% and 15% of the property's price Note, however, that because the High Ratio Financing is insured by a company, it is a more restrictive option than traditional bank financing Nevertheless, you get to enjoy a good interest rate since you are going to live in the property This is because banks typically consider it as a more low-risk deal than if you are purchasing the property as an investment Here's one way to make the most from this option You can make the small down payment on a property that has a suite, then move in and rent the suite to a tenant If the property has no suite, you can add a legal suite to it (after obtaining the necessary permission of course) In this case, you are not just looking for funds to finance your deal; you are also creating great deals You can live in the property for a couple of years, move out, and still hold on to the property as a long-term investment Then, find another deal and repeat the process Before long, you would have built an amazing portfolio with steady cash flow, all from seeking real estate financing! I should add, however, that it is necessary to check with your mortgage broker for the current rules about using the High Ratio Financing, as there is a possibility of changes being made to the rules All Cash This option means exactly what the name suggests: you pay cash for the real estate property Question: Do you have enough capital for the property? Is this a good option for beginners or reserved only for experienced investors? Answer: Not everyone can afford to pay all cash for a real estate property, although it is a great idea to graduate to all cash buying as you grow your portfolio and wealth If you have a really great deal (beginner or not), this option may get sellers to give you great discounts Plus, there are a lot of hassles you will avoid by paying cash But you will have to show proof that you have the said funds readily available But which is better: buying all cash, or using other people's money (leverage)? Each has its pros and cons, which I'll briefly highlight below: The advantages of All Cash buying include: You get to make quick purchases when you have cash instead of waiting for some lending institution to go through an approval 100% of the investment cash flow comes to you instead of a lending institution There is no fear of foreclosure There is no interest payment due to any lending institution or private lender A large chunk of the rent is pure profit You are not frantic about losing money even if there is no tenant occupying the property The downsides of All Cash buying include: You cannot close many deals with the same amount of money; meaning you have fewer chances for diversification You not enjoy tax deductions for mortgage interest Opting to use a mortgage may be the most trodden path for many real estate investors since, as earlier mentioned, not very many people can afford the All Cash option (a lot of people even have difficulty raising enough capital for down payments!) Here's what you should know about using leverage (other people's money): The pros of using a Mortgage: Capacity to close more deals using the same amount of capital High chance of greater rate of return on investment Higher opportunity to multiply or diversify your investment Mortgage interest is deducted from your tax The cons of using a Mortgage: In case your lending institution calls in your loan, you will be forced to pay in full or face foreclosure Monthly interest paid to the lending institution cuts into your profit No rent from the property (when it becomes vacant) means you are losing money fast Risk of foreclosure if you cannot meet your mortgage obligation The value of your investment property may eventually go down, in which case, you may have some difficulty covering the mortgage when trying to dispose of the property Crowdfunding This right here is one of the most recent additions to the world of real estate investing What makes it stand out is the informal approach it uses to provide a market for both pros and newbies Crowdfunding provides an opportunity for potential investors to pool their finances together (usually small amounts of money) to generate large sums of money This fund is available for businesses to access for their projects Usually, crowdfunding platforms are online and social media platforms like Facebook or Twitter can be used to directly market ventures to a greater audience of potential investors Crowdfunding leans more on the side of passive investing and is a great way to diversify your portfolio Basically, it serves a dual purpose: investors can passively invest in other people's projects using crowdfunding, and businesses can access project funds (in the form of loans or equity) from crowdfunding But, just like everything else, this may not be a good fit for every real estate investor or every type of project you have I would strongly suggest that before you crowdfund your project, take the time to search for projects that are similar to yours on popular crowdfunding websites to see the success rate of those projects If you cannot find satisfactory results, perhaps it's not such a great idea to crowdfund your project Nevertheless, if you are looking for a passive way to invest in real estate as a beginner, this may be the way to go if you have the required minimum investment capital Pros 1) Small investment capital: real estate investing is capital intensive, but with crowdfunding, you can start with as little as $1,000 to $5,000 depending on the crowdfunding platform This throws the door open to a lot of investors who may not have a lot of money to put their money into projects of their choice 2) Passive Real Estate Investment: actively managing your investment can be very timeconsuming If you are looking for a way to invest in real estate without having to engage in the hassles of managing your properties, crowdfunding is a great option to consider All you in crowdfunding is put in your money and wait for the investment to grow 3) Diversification of Location: crowdfunding gives you the opportunity to invest in properties located in different parts of the world This is a good thing, because even if the market for one location drops, it does not affect the rest of your investments Cons 1) Difficulty in Cashing Out: crowdfunding involves a lot of investors putting their money into a property, and this can result in the investment becoming too rigid When you eventually want to sell your part of the investment and cash out, it may not be possible to so as quickly as you want due to the complexities involved 2) Low Rental Returns: with a lot of REITs, is it possible to get 90% of the rentals from properties split up among investors, but that is not the case with crowdfunding, as there is no such rule This means your crowdfunding investment in rental properties is likely to generate a very low return 3) Lack of Control: your investment is usually a small amount, which means control over your investment is equally very small This may not be appealing if you really want to take charge of the management of your property Chapter Making Your Real Estate Business Passive Congratulations! You've finally purchased your first real estate property and you can now call yourself a real estate investor But you are beginning to observe that you are constantly busy running your real estate business You are either attending to one complaint from your tenant, or you're reminding them that their rent is due, and in between that you are still driving for dollars, or one contractor is delaying the supply of some material for you next fix-and-flip project You have cash flow, but the hassles are getting too hectic and your team isn't as perfect as you thought In fact, you are beginning to think the business is running you instead of you running the business! Well, that's an indication that you need to take your real estate business to the next level; make your business passive! What would be the point of generating wealth if you cannot enjoy the time freedom that comes with more money? Wealth is supposed to give you the freedom to spend time with family, friends, and loved ones, learn new skills, and find other ways of multiplying your wealth and giving back to society With more wealth, you should be able to have enough time to shift your attention to more important things in life aside from chasing money However, the reverse seems to be the case with a lot of real estate investors, as they are constantly on their toes and working their heads off It really doesn't have to be so Maybe in the initial stages, it should be expected But after a considerable amount of time in the business, you should be able to lay back and watch cash pour into your account without backbreaking effort on your part So, here are some ways you can convert your very busy real estate career into a passive one I should add that you will still have to some minimal work (even if it is just an hour's research) Passive income doesn't necessarily mean zero work and lots of cash, rather, it is very minimal work compared to the income generated The idea of having a passive real estate business is completely the opposite of being slothful you should take a serious interest in your business to ensure that it continues to generate strong positive cash flow Engage Professional Property Management The very first step to ease your work as a landlord who has multiple properties is to hire a property manager They will take over the day-to-day running of your properties, like tending to the needs of your tenants, property inspection and maintenance, rent collection, etc In short, they will be in charge of the management of your properties Notice that I have deliberately mentioned "properties" and not "property." This is because I not think it is wise to hire a property manager if you own just one rental property Making your real estate business passive should come only when you have diversified your investment into multiple real estate properties When you make business decisions, it is vital to always think about the cost/benefit analysis, else you may be throwing away money for no just cause Hiring professional property management will cost you money, so decide carefully if your net income from your properties (after paying the property manager) will be worth it Once you have a reliable property manager taking charge of your properties, you should be able to have less work on your part while you receive monthly passive income You can also choose to use a real estate partnership to make your business passive The next section shows you how to that Real Estate Partnerships What if you have just one property and you still want passive income from real estate? What if you don't want to completely entrust the management of your property to a property manager, but still want to make your business passive? Here's what you can do: consider going into real estate partnerships Going into partnerships means that responsibilities are shared between the partners of the real estate business through an agreement Finance distribution is not the only goal of real estate partnership; division of tasks such as taking turns in managing your properties, and joint decision making are also vital parts of partnerships Depending on the partnership terms, each partner has their own responsibilities to fulfill without taking on the bulk of the duties of a one-man investment It is also another avenue to grow your network within the real estate circle This is actually a method of going passive that I recommend to beginners, because it actually gives you the opportunity to earn while learning the ropes of real estate investing without being too caught up in the various business aspects of your investment It lessens the overwhelming feeling that usually overcomes newcomers, as they have to suddenly think about and handle a whole set of new responsibilities, they barely have any experience with While this does not make your business completely passive, it does take some workload off you and gradually gives you a feel of what passive real estate income is Consider Turnkey Real Estate Companies This is another way to turn your real estate business into a passive one, and I would recommend this for persons who may not really have the time to focus on the hassles of running a real estate business You can simply choose a turnkey rental company that will all the work for you - finding the property, fixing it, and renting it out Some turnkey rental companies also handle property management So, if you are in a different city, for example, you can use a turnkey real estate company to own an investment property and earn passive income from it It doesn't matter if you are a beginner or an experienced real estate investor; this strategy is suitable for anyone who can afford the services of a turnkey rental company But if you choose to use a turnkey rental company, keep the following in mind: Be sure to get an independent inspector and appraiser for the property inspection, rental rate verification, etc Do not depend on the company's inspector Be wary of turnkey rental companies that want to use the scarcity language to sweet-talk you into buying immediately There are some of these companies that use dishonest tactics like showing you a rental property, and then when you call back in a couple of hours or the very next day, they tell you it's sold That way, when they show you another "great" property, you may jump at the opportunity without due consideration so that someone else will not buy it Generally, there are other ways you can invest in real estate without actually owning property For example, investing in crowdfunding, syndication, REITs, Real Estate Service Companies, etc., but this book isn't about showing you how to invest in real estate without actually owning property My goal is to show you how you can significantly reduce your workload in your real estate business while continuing to earn income That's why I'll share with you one more passive income strategy that is relatively uncommon COMBINING "LEASE UP ONLY" WITH A HANDYMAN This is a rare passive income generation strategy that allows you to play the role of a landlord without the usual hassles associated with being a landlord As a matter of fact, this is a creative way to make rental income feel every inch like passive income Here's the plan: First, seek out a property management company that offers a "lease up only" service The company will be saddled only with the business of interviewing and screening tenants, advertising, and marketing your rental property Once the company gets the tenants set up in your rental property, their job is done and you take over as the landlord Next, employ a handyman that will be in charge of maintaining the property Then automate the process of rent collection; no need to go around for checks Finally, sit back, relax, and enjoy your passive real estate business and income! Chapter Unexpected Expenses There is always a tradeoff in most everything and in real estate investing it is no different It has its rewards and drawbacks One of the biggest drawbacks is the unexpected Unexpected expenses The unexpected issues that pop up There are several ways this can happen before you complete the purchase of the property to after you own it Here are some unexpected expenses that you will want to take note of when you are getting your purchasing finances in order Purchase of the Property There are a number of peripheral expenses that are involved in the purchase of the property These are expenses that are mandatory, especially if you are funding the transaction with lender dollars You can avoid unexpected expenses by learning about them and know that these expenses need to be part of your capital budget Incorporating them at the onset won't let these costs reduce your estimated return on investment profit Home Inspection - don't make a mistake and forego inspecting the property you will be investing in If you and you discover issues that could have been taken care of by the seller prior to the sale, then the onus of how much more will be spent in repairing these repairs fall on you, the investor If you are paying cash, then it is your choice However, if financing the transaction with a lender, it is mandatory The lender wants to know that they're investing in a viable property A home inspection costs anywhere from $400-$500 dollars, depending on the size of the property If there are issues that need to be addressed or repaired, i.e., roof, plumbing or electrical, a second inspection may need to be done to see that the repair has been done properly Those additional inspections fall on the seller, who is having the repairs done Home inspections are not only for discovering the condition of the property but also if you're not happy in what you hear from the inspector and the condition is too extreme and repairs too costly to remain within your budget, then it is a good way to step back and out of a contract It is acceptable to so, and your deposit will be returned to you if that is your decision Closing Costs - there are a number of factors that are part of the closing on a property When you finance a property, the lender advises you about the closing costs that are needed to be paid The closing costs have different real estate fees Understand that costs are different from state to state, and will be different because of the kind of loan used for financing the transaction The fees are: Escrow and Pre-paid fees - for some investors, it is sometimes easier for the lender to include the property taxes and insurance in escrow and pay these payments when due These are fees wrapped up in one mortgage payment and then disbursed to the insurance company and property taxes municipality when they are due Attorney and Title Fees - title search and title insurance are included in title fees and paid by the investor to make sure the property has no unpaid taxes, code violations, outstanding balances for water/sewer, open permits or financial liens on the property There is a fee for recording the deed and real estate ownership This is to register the ownership by the investor Documents and registration record the ownership of the property at done at the courthouse A notary is needed to witness the investor sign all the investment paperwork The notary is also paid a fee to witness the document signing The final fee is paid to the title company or attorney who is handling the closing and oversees all the documents are signed and correctly executed Loan and Mortgage Lender Fees - the lender origination fees are closing cost fees The funding of the transaction, when the mortgage is created for the investment, the lender initiates closing costs Application fees, a processing fee from the lender, underwriting, appraisal, and wire transfer fees and the credit report are all included in the closing costs Mortgage Insurance - the mortgage insurance cost depends on the amount of the initial down payment that was made and the kind of mortgage that will finance the transaction As stated earlier, a 20% deposit is required for investment loans, anything less, the lender will add on mortgage insurance closing costs FHA, VA loans are government-backed loans The investor has to pay mortgage insurance costs prior to closing, or the loan will not be approved The lender will not accept the risk or approve the loan If approved, the mortgage insurance costs will become part of the monthly mortgage payment as a separate fee, as well as the home insurance costs and property tax This cost can also be paid as part of the closing costs attached to investing, or the housing costs and added in the mortgage payment Investment Property Fees Congratulations! You're now a real estate investor and the property is finally yours You've decided you want to make your investment a rental However, before you can advertise the property for rent, your investment needs work The property is not in need of a lot of work The inspection only found minor issues that were taken care of by the seller prior to the closing A coat of paint in the kitchen, bathroom and dining room The front of the house needs the lawn to be cut and possibly new shrubs put in the front The cost of these improvements won't be any more than $1,500-$2,000 and will be completed in two weeks according to the handyman you hired to the paint job The shrubs were ordered from the nursery and will be delivered closer to the end of the two weeks and planted This kind of upgrading is minimal for rental investment Often, the properties have been left in disrepair and have not been maintained in years There are many reasons this can happen, but if you are looking for properties at below market value, it could possibly be you would be looking at much more than a paint job and upgrading the curb appeal of a property A leak in the plumbing, roof needing to be replaced and many other repairs can add up in thousands of dollars Another unexpected expense can come after you've rented the property for a while and that is the tenant moves out You're left with an empty rental that needs to be cleaned and possibly painted and repairs to be done for the next tenant That means a vacancy Your cash flow has been positive, and the financial statement has enough to sustain a three-month vacancy and enough to cover maintenance and repairs However, that's too long a time, and you really would like at most to lose a month's rent To be clear about the tenant's security deposit - it covers any unpaid rent, or clean and repair anything more than normal wear and tear The security deposit is not to be used to upgrade the toilet in the master bathroom or purchase new kitchen appliances Only extreme, severe damage should the security deposit be used to take care of repairs The other point that needs clarity is the tenant's interpretation of the security deposit The tenant may be under the impression that the security deposit is the last month's rent This is not true The security deposit is to cover any unpaid rent and have the property cleaned and any repairs made that are over and above the usual wear and tear If the tenant paid first month's rent and security, the security falls under this description, and the tenant must pay the last month's rent before vacating If the tenant has paid first and last month's rent and security, the tenant has already paid the last month's rent, and the security is what the landlord uses to any cleaning and repairs if necessary Maintenance Expense Estimations The amount of rental income, as an average, that you should put aside annually is 1-3% of the value of the property for repairs The square footage of the property can also determine maintenance costs As an example, the property is 2,800 square feet, the maintenance cost would be $2,800 If you use to decide to use the property value as your calculation, the property is worth $225,000, and you take 1% of the value, the maintenance cost is $2,250 Problems of a different nature can occur when you manage a property Another way to estimate your maintenance costs would be the 5x Rule Take the monthly rent and multiply it by 1.5 If the rent is $1,800/month, the annual maintenance would be $2,700 The final repair and maintenance formula are the 50% rule - all operating costs of insurance, taxes, repairs, and maintenance will be equivalent of half of the monthly rent paid by the tenant If the property's rent is $1,800/month, $900 of the rent will cover all the costs monthly This will work if you have a tenant that is a late payer, this formula won't work These formulas are to give you a ballpark figure as to how much to set aside There is really no exact figure because there are too many variables to think about when coming to an exact estimate Consider this - 76% of annual repair and maintenance costs will be higher than you expect and 99% of the repair and maintenance expenses will probably be higher than you want Conclusion Owning an investment property sometimes calls for decisions to be made that are difficult to make, but need to be made because they affect how you manage your investment, or if the property begins to drain your finances, produce a negative cash flow You need to know when to let go If the neighborhood where your property is situated starts showing signs of a decline, if there are layoffs, people moving away to find jobs in other areas, this would be the time to begin to think about selling the property As was stated earlier, a company leaving and the employees becoming unemployed is not the only loss, but the neighborhood feels the loss as well You may have a tenant that you had to evict for non-payment of rent because of a job loss Once they're gone, who will replace that rental income? People are moving away, not moving into the neighborhood What is your recourse? Neighborhood businesses are hurting as well The purpose of your investing in a real estate property was to create a steady, positive cash flow income The change in the neighborhood could very possibly change the income from positive to negative Knowing what your profits and losses are will help you decide how long you can, or wish to continue on a loss cycle Trying to play catch up financially if you allow the deficit to continue is not a great way to handle the situation Rather than continuing to hold on to the property, it may be a good idea to get out while you financially can Preparing for unexpected expenses before you purchase your real estate investment will help you understand all the fees involved with the purchase transaction and be able to make the process move along as quickly and smoothly as possible When you understand that repairs and maintenance costs for your property are an ownership reality, considering the options of estimating the annual costs and which one feels the best option to go with can alleviate a great number of financial problems in the future www.eddymoore.com ... him The realtor could not produce a contract that showed that a cutoff date was indicated All that the realtor could show was a basic signed contract The realtor wanted to make a sale, and the... called them earlier in the day and asked for a few more days to hear back about a loan A few more days passed and the realtor called the buyer again The realtor told the buyer that the contract... breaking any rules that the Department of Real Estate of their state that has suspension and fines attached to them Maintenance of a Property and Tenants When you own a real estate property and