Buying Rental Property The Right Way to Make Money

Learn how you can find the best properties to buy to make passive income every month. When buying rental property, there are many properties but only a few that you should buy. 

Listen to the podcast Episode:

Let's look at how to buy a profitable income property. Anybody can go out and buy a property.

As investors, we need to find one that is profitable, that is going to make you money over the long term, if we are going to quit our jobs with real estate rental properties.

A little while ago, I did a webinar for a company. This was a paid webinar, where the company’s customers paid the company to watch it.

On it, I shared how to find a profitable income property, which is one that produces passive income.

Those are hard to find, and you need to know what to look for. You can watch the entire webinar, and view all my slides, by clicking on the video above.

How I Got My Start Investing in Rental Properties

“Ninety percent of all millionaires become so through owning real estate.” – Andrew Carnegie

I wholeheartedly agree with this quote. I tried my luck at the stock market, I did my research, and every time I lost money. I was really good at buying high and selling low, which is not what you want to do.

I went into real estate, because I wanted to make monthly income as opposed to earning money from a job.

I grew up in Fresno, California, which is right in the center of the state and I currently live in Phoenix, Arizona.

I moved here to be closer to my in-laws. When we moved here from Fresno, I didn’t need to find a job, because my rental properties were bringing in enough income.

My wife, Melissa, and I have been married for 12 years now and we are raising four kids.

In the past, I started many businesses, even a retail business that I owned for four years before selling. I love entrepreneurship and business.

I began investing in real estate in 2007, just before the crash of 2009. It wasn’t the best time to buy properties, because I was buying high.

However, in 2016, I actually quit my job, because I had enough income from my rental properties to live the life of my dreams.

My family and I love to travel all over the world, and last year in March, we flew to Japan and had a six-week vacation.

We also traveled south in America, through Texas.

In 20 days, we will be leaving for Europe for six weeks, traveling through England, Scotland, Ireland, the Netherlands, Germany, etc. We love traveling and being together.

Greatness In Rental Property Investing

The greatest thing about my rental properties is by buying good income properties, I can do all of this remotely. If you do it right, the business can run itself and other people will do the work.

I don’t need to be anywhere near my rental properties to make passive income each month.

When I started investing in real estate, I bought really cheap properties. Becoming a Landlord in 2007, I bought my first property for $17,000 cash.

I took all of our life savings and bought it. I was living in California and the property I bought was in Ohio, and I started renting it immediately.

Back in 2007, banks were giving away money. I refinanced that first property, took out $15,000, and in October I bought property number two for $10,000, and had a little  money left over.

That property rented for $550. In just one year, I had $1,000 coming in. Minus expenses, I was pocketing about $700 or $800.

After that, I refinanced property number two, took out another $20,000 and, in April 2008, I bought property number three for $10,000 cash. I kept buying properties.

For number six and seven, I actually bought them with a credit card. My bank was offering .75% interest on the life of the cash out balance, and they gave me a credit limit of $14,000.

I was buying inexpensive homes with cash. There are a lot of hassles that come with cheaper homes, but that is a whole other story.

Every year, I bought more and more properties. If you want to see the details, check out the slides. In November 2015, I bought my 19th property.

Three weeks ago, I bought three, single-family homes and a duplex all in one purchase from another investor. It was a great deal. As a landlord, I am able to continually buy rentals.

In just eight years I had $9,500 in gross rents, and $6,500 in monthly net profit and I was still working a full-time job.

My wife and I figured out that we needed $4,200 to live each month and I started wondering why I was still working for someone else. At that point, I decided to quit my job.

Now my sole job is investing, and I have a passion for teaching. I have a lot of people that ask me how they can do what I do.

The Keys to a Profitable Income Property

Buy Good Investments NOT Good Properties

If you learn anything today, this is the main point I want you to take away. You can find a good property that takes $100,000 worth of work to fix it up.

But if you buy it for $100,000 and it is worth $400,000, you made a profit.

You don’t want to look for the best properties, one that you would move into or one that has nice carpet, you want to buy good investments. By doing so, you are going to make money every single month.

A good investment will make you money every single month.

Criteria for a Profitable Investment property

Wouldn’t it be great to buy a property that…

• Gives you the greatest rate of return
• Makes you money from the first day you buy it
• The majority of renters want to live in it
• Families desire to rent it
• Has the least amount of expenses
• Is less expensive to fix up
• Costs less to maintain
• The majority of home buyers want to buy

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Best Type of Property to BUY

This is a run-of-the mill property that is in a suburb in a neighborhood that is great for every single person.

This includes homes that have:

Cookie Cutter Home

• 3 Bedroom
• 2 Bathroom
• 2 Car Garage
• 1,200 sqft – 1,400 sqft

This is your cookie cutter type of home that everybody will want to rent. Eventually, if you sell it, everybody will want to buy it.

There are a lot fewer costs and expenses that go with this type of home and being a landlord makes it all worth it.

I’ve bought homes that are about double this size and have many more rooms and bathrooms, and you don’t get that much more money out of rent.

Why You Should Buy Cookie Cutter Homes

• Less walls to paint
• Fewer bathrooms to repair
• Less electrical problems
• Less carpeting to replace
• Fewer doors to fix
• Fewer windows to get broken
• Large enough for a family
• Larger pool of renters
• $ for $ the best return on your investment
• Larger pool of buyers

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My experience has shown that this is the way I make the most money. Here is the criteria for a profitable investment property:

#1 Cash Flow from Monthly Rent

When you buy your rental properties, you must buy them in such a way that you earn cash flow from day one.

Cash flow is the best way that you make money. As investors, we are going to make money in many different ways, from the appreciation in value and other ways, but my family and I live on cash flow from the monthly rent.

When you buy your rental properties, you must buy them in such a way that you earn cash flow from day one. Make sure you can get a property and make money.

Rent – Expenses = Cash Flow

Add up how much money you are bringing in and then subtract away all of your expenses, including mortgage, insurance, property management fees, etc.

The rent minus expenses is your cash flow for the property.

Rent:   $1,400
Total Expenses:  $1,050
Total Net Profit:     $350

Pro Tip: $250

Only buy properties that make you $250 or more every month. In my opinion, they are not hard to find.

If you go below this amount, you start to lose money, because the property is not going to be rented every single day of every single year.

You might have turnover, an eviction, or an expensive repair like a new furnace or roof. This profit is what you can put toward the rest of the year.

 

#2 Equity In The Property

Equity in the property is valued by how much you can sell the property for minus how much you owe on the property

Market Value: $200,000

Amount Owed: $150,000

Equity: $50,000

When I bought my first property, I refinanced and pulled the money out, so I could buy another property. Equity in a property is one of the best ways for you to increase the value, as well as use that money to buy more properties.

Pro Tip: Make Money When You Buy

You make your money when you BUY the property.

You realize your money when you SELL the property.

 

#3 Location Does Not Matter

Location, Location, Location!

We have all heard this saying right? If we are thinking about an investment property and criteria for an income property — forget that!

In my experience of buying properties all over the country, I’ve learned it is not all about location.

We are not realtors and we are not home owners when we buy our investment properties. We are not looking at this as a place for us to live and we are not looking at this as a place to flip.

We are investors in rental properties.

The location only matters where no one will live. If you are going to buy a home in a location where nobody will want to live, that would be a waste of money. If you are going to buy a property in Fresno or Ohio, there are people living there that will want to rent.

As long as there are people living there, people will want to live there. Everybody needs to have a place to live.

The location only matters where no one will live.

 

Pro Tip: Make Money on the First Day You Own the Property

Never buy a property where you will not make money the first day you own the property.

 

#4 Forced Appreciation

Find properties that need work, so you can increase the value. Do things that will increase the value of your home like paint, new flooring, landscaping, new countertops, etc.

Do things that will increase the value of your home

Paint, Flooring, Landscaping, New Counter Tops, etc.

Market Value:   $120,000

Rehab Costs:    $15,000

Total Costs:  $135,000

After Repair Value:   $165,000

Increase Value:    $30,000

*ARV: After Repair Value

If you watch flipping shows on TV, you understand the value of buying low, fixing it up, and making your money. This is a great way for us as investors to refinance, pull money out, and put money into another property that makes us even more money.

PRO TIP: Buy good investments.

Don’t buy the best house on the street. If you are buying the best house on the street, the rent will not be that much greater.

If it is completely remodeled and looks great, but every other home is not that nice, your rent is only going to be like your next door neighbor. Fix it up to look nice.

Don’t buy the best house on the street

 

#5 Rentability

A rental property is only good if you can rent it to a paying tenant. In 2009, they couldn’t give away homes in Detroit. Nobody wanted to rent there. Find a property where you can get a tenant from day one.

Every good landlord will do everything to keep their properties rented. This increases your rental income and that is what you want for long term profitability.

Here is how to find good areas that are rentable:

Talk to:

• Property managers
• Realtors
• Inspectors
• Handymen
• Other Investors

I talk to anybody about the area. If I am looking at properties in a different state, and I have never been there, I need to talk to other people.

The number one person is your property manager and the number two person is your realtor. Get an investing realtor who knows how to invest.

I’ve looked at areas to invest and talked to property managers who will not manage properties in those areas, because it is not worth their time.

Talk to property managers to see which areas are the best for rentability.

 

#6 Clientele

Rent Range for a property varies. For a cookie cutter house, as described above, the range could be:

High end:   $1,400
Middle:      $1,200
Low end:   $1,000

Upper Class

Higher end rents can be charged in these areas. Look at your clientele to see how much you can charge.

Middle Class

Middle range of rents can be charged. There are more middle-class people in the middle of Phoenix.

Lower Class

Lower end of the rent spectrum can be charged.

Keep this in mind: if you charge middle class rents in a lower class area, you are going to have lower class people move in.

In my experience, they are going to move out within six months to a year to find something cheaper. If they can save $50 a month on rent, they are going to move.

Wherever I am renting, I look at my clientele and also figure out how much I can rent a property, and I adjust accordingly. The last thing I want to do is buy in a low class area thinking I am going to rent it for $1,400 and only be able to get $1,000.

Pro Tip: ALWAYS ALWAYS ALWAYS: Run A Background Check

Years ago, I kept having to evict tenants in my lower class properties, and I was getting really frustrated.

There was a lot of turnover.

I wasn’t doing background checks at the time, so I started doing them and watching to see what type of people would be good tenants.

I had one applicant who looked great on her application, but her background check showed she had four evictions in three years. I moved on, because I didn’t want to be the fifth eviction.

A background check may cost $30 or $40, but an eviction can cost $1,500. It is worth it! I cannot stress this enough.

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#7 Crime

Low

Low turnover, low amount of evictions less problem tenants, less break-ins, less repairs on the property

Moderate

More turnover, evictions are likely, moderate problem tenants, few break-ins, moderate repairs on the property

High

High turnover, evictions are high, more problem tenants, many break-ins, high repairs needed on the property. Landlord owners are not in the business of losing money. When the rents are too high, the turnover will eat away at your rental income quickly.

PRO TIP: Follow the Crime Trend

Try to understand how the crime is moving. Back 10 to 12 years ago, a few houses I bought were in a decent area. Over time, the crime has moved my properties from a moderate crime area to a high crime area.

Try to anticipate where the crime areas are moving to, because if it moves to your investment area, your rents are going to decrease.

 

#8 Property Taxes

Property taxes are not standard across the country.

• Every State has different laws and rates
• Every County has different laws and rates
• Every City has different laws and rates

Verify all the taxes you will encounter before you buy the property.

Make sure they are in your numbers before you buy.

Verify all the taxes you will encounter before you buy the property and include those in your expenses. Make sure they are in your numbers before you buy.

Everywhere I’ve invested, there have been county taxes and those cost the most money.

Very few places have had state property taxes. All of these taxes will eat away at a landlord rental income quickly.

I bought a house in Houston and found that the county taxes were about $1,300 a year and I was going to make $500 or $600 a month in passive income.

After I bought the house, I received a notice that there was also a city tax on the property of about $2,500 a year.

I still made $300 a month, but it was so irritating to find that out after I bought the property.

Verify all of the taxes!

 

#9 Area Specifics

• Job Market: Are there jobs coming in or going out? Will there be fewer renters because demand is lower?
• City, County, State Economy: How is the economy?
• Schools: Are there many schools nearby? How are the schools rated?
• Amenities: Is the property near Disneyland, beaches, mountains, or sports teams? What is the draw to the area? Would Airbnb work better for renting?
• Natural Disasters: Are there hurricanes or earthquakes? Do you need extra insurance?
• Amusement Parks: Disneyland
• Beach/Mountains
• Sports teams

 

Recap:

• Monthly Cash Flow
• Equity Capture
• Location, Location, Location
• Forced Appreciation
• Rentability
• Clientele
• Property taxes
• Area specifics

These are the things you want to look for, when you are buying a property.

Keep these in mind when you are looking for properties and running your numbers, so you can make money every single month, and not lose money.

There is a way to never lose money in real estate.

Income goes up and down, expenses go up and down, but if you do it right, and know how to invest properly, you will never lose money with real estate.

It took me years and years to figure out what a profitable property looked like, because it was trial and error for me. You don’t have to take that approach.

You can learn from my mistakes and implement the lessons into your business. You too can be a landlord and have good rental income.

Go here to learn how to do it even better: http://www.freeinvestoroworkshop.com

You can make money with your real estate rental properties, as opposed to me when I lost money.

Take all of my lessons learned and apply them to your business, so you can change your life forever.

Get out there, start investing, and change your lives for the better!