The Book on Rental Property Investing

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🎯 The Book in 3 Sentences

💡 Key Takeaways

Success in rental property investing: Mindset, learning, planning, property selection, metrics.
Sample plans: Wealth accumulation through rentals, passive income from single-family homes, house hacking to live for free, BRRRR strategy for growth.
A successful real estate team includes a supportive spouse, mentor, real estate agent, lenders, contractors, bookkeeper, accountant, lawyer, insurance agent, and property manager.
Rental property options include single-family homes, multifamily properties, condos, foreclosures, fixer-uppers, and commercial real estate, each with its own benefits and considerations.
Find rental properties through MLS, direct mail marketing, driving for dollars, eviction records, and websites like Craigslist.
Look for fixable issues like bad smells, potential extra bedrooms, countertops, roof, mold, compartmentalized configurations, and jungle landscaping.
When submitting an offer, including earnest money, provide property details, act quickly, offer the best terms, understand the seller’s motivation, and consider waiving contingencies.
Negotiate prices, contingencies, financing, closing costs, and repairs.
Financing options: Traditional methods, creative methods, and alternative strategies like house hacking and BRRRR investing.
Loan approval factors: Property, loan amount, ratios, credit score, experience, and repayment source.
Due diligence process: Title, document, and physical inspections.
Preparing to close: Order insurance, set up bank accounts, prepare forms and bookkeeping, and plan rehab.
Property management: Interview property managers, pre-screen tenants, common repairs, and deal with tenant issues.
Exit strategies: Hold, cash out, or consider a 1031 exchange for tax deferral.

✏ Top Quotes

Price is what you pay, value is what you get.

📝 Summary + Notes

Chapter 1. Why I love rental properties

Ability to purchase with leverage.
Ability to hustle for greater returns.
Ability to manage my investment directly.
People always need a place to live.
Fairly stable and predictable.
Incredible variety.
Can buy below market value.
Access to some secret bit of information to help buy or sell at the right time is legal.
Multiple ways to profit.
Highly passive income stream.

The Four Wealth Generators:

Appreciation.
- Natural appreciation is the natural tendency for prices to rise over time.
- Forced appreciation is the concept of improving a property so the property’s value becomes greater.
Cash Flow.
- It is the income left after paying out expenses that affect the property, such as mortgage, taxes, insurance, vacancies, repairs, capital expenditures, and utilities.
- Buy rental properties that offer cash flow instantly.
Tax Savings.
- The government (in the US) chooses to reward and encourage real estate investors through favorable tax treatment.
Loan Paydown.
- Obtain a loan on your rental property and use the income from your tenants to pay that loan down each and every month.

How much money does one need to invest in rental properties?

House Hacking: If you plan to purchase and live in a small multifamily property of two to four units, you could obtain a bank loan for as low as a 3.5% down payment through the FHA loan program.
Conventional Loan: A conventional loan is a loan that conforms to some strict government guidelines. Most banks want a minimum of a 20% down payment for rental properties.

Difficulties of Rental Property Investing.

Building wealth takes time.
It can be all-consuming.
You have to deal with difficult people.
It involves paperwork and bookkeeping.
You can lose your investment.

To not fail, pay attention to the following points.

Understand that risk is a powerful but dangerous tool, so tread cautiously.
Build a solid educational foundation for yourself before getting in too deep.
Don’t skimp on the math. Always understand the numbers for any property you buy.
Work on your business, not in it. Treat your investments like a business—which they are.

Chapter 2. The five keys to rental property success

Think the right thoughts.
- You tell yourself, “I will do this,” rather than, “I can do this.
- Write down your goals, and read them out loud every day.
Study the right source.
- Start with general knowledge and then get specific.
- Study books, podcasts, blogs, forums, and YouTube.
Pick the right plan.
- What is the end goal? Where are you headed?
- What kind of strategy do you want to use?
- How often will you buy properties?
- How are you going to finance it all?
- Focus on your why and not just on the goals.
Acquire the right asset.
- The right property must fit with your plan, your budget, and your ability to manage.
Manage the right metrics.

Chapter 3. Four sample plans

Plan 1: Rental properties.

Buy incredible rental properties, save the cash flow, and reinvest that cash flow into even more properties.
The goal is to achieve 1.000.000$ in net worth.
It can take 7-10 years.

Setting Buying Standards.

Multifamily property.
Cash flows of $200 per unit, per month.
Property must be purchasable for a discount.
The property’s value must be capable of being improved by 10% during the first year through “forced appreciation”.
Property must appreciate at 3% per year after year one.

Plan 2: Single-family homes.

The goal is to make an extra 5.000$ per month in passive income.
It can be achieved in 10 years.

Plan 3: House hacking.

The practice of buying a small multifamily property (a duplex, triplex, or fourplex), living in one unit, and renting the other units out.
Low (or No) Down Payment Financing.
The goal is to live for free.

Plan 4: BRRRR strategy.

Buy. Buy a great deal on a fixer-upper house.
Rehab. Fixing the property up with the goal of getting the highest After Rehab Value (ARV) and rent possible is important.
Rent. Rent the property out to great tenants.
Refinance. Refinance into a nice conventional mortgage, replacing your existing mortgage loan with a new mortgage that has better terms and conditions. Most lenders will allow you to refinance a property for 70% of the ARV.
Repeat.

Chapter 4. The ten members of your real estate team

Spouse.
- Has a huge impact on your mental state, ambitions, free time, money, future, and every other aspect of your life.
- Convince your spouse by being an expert and answering questions, starting slow, encouraging them to learn, sharing the why, and including them in the journey.
Mentor/Accountability Partner.
- The person you can turn to when things get tough or you need some motivation to continue.
Real Estate Agent.
- Can help you better understand the real estate market, including which areas and property types are selling or renting well.
- Find comparable sales data, so you can know the value of any property you go to look at.
Lender(s).
- A bank, a mortgage company, or a private or hard money lender.
Contractors and Handymen.
- For repair jobs. Hard to find good ones.
Bookkeeper.
- To keep track of income and expenses and to get your finances tax ready.
Certified public accountant.
- A professional accountant who offers financial advice creates financial reports, offers tax recommendations for your business, and prepares your personal and business tax returns.
Lawyer.
- Will help make sure your lease and other forms are legally binding.
- Guide you on the best legal entity for holding your properties.
- Help you evict a tenant who isn’t paying, and advise you on how to handle sticky situations.
Insurance Agent.
Property Manager.
- Advertise vacancies, take phone calls from potential tenants, show units to prospects, hand out and accept applications, screen tenants, choose a tenant and sign a lease, accept maintenance phone calls and schedule needed appointments, and manage problems as they arise.

Chapter 5. Analyzing a rental property

Cash Flow.

It is Income - Expenses.
Calculating income.
- Know the fair market rent: location, number of rooms, size, amenities, etc.
Estimating expenses.
- Taxes, insurance, water, sewer, garbage, gas, electricity, fees, snow removal, and lawn care.
- Vacancy, repairs, property management, capital expenditures (roof, appliances, windows, etc).
- Mortgage.

Cash-on-cash return on investment (CoCROI).

Tells us what kind of yield our money is making based only on the cash flow (ignoring appreciation, tax benefits, and the loan paydown).
CoCROI = Total Annual Cash Flow / Total Investment

Chapter 6. Investing while living in an expensive area

Check the outskirts or long-distance investing.

Chapter 7. Types of rental properties

Single-Family Homes.
- Pros: Plentiful, Strong Exit Strategy, Involve Fewer Bills, Easy to Finance, Easier to Manage, More Stable Tenants, Better Appreciation, Less Expensive to Buy.
- Cons: High Cost Per Unit, Slower to Scale, Limited Loans, Expensive Rehabs, More Competition.
Multifamily Real Estate.
- Pros: More Cash Flow Possibilities, One Loan, Multiple Units, One Insurance Policy, Math over Emotion, Business, Not Hobby, Income Valuation, Less Competition from Homeowners.
- Cons: More Expensive, More Management Intensive, More Savvy Competition, More Complicated, Fewer to Choose from, Government Regulations.
Condos.
- A collection of condos often looks like an apartment complex, but rather than having one owner who leases out all the units, each unit is individually owned by a person who either lives in the unit or rents it out. The exterior walls, roofs, foundations, and other common areas are owned jointly by the entire community.
Foreclosures.
- A property that has been foreclosed upon by a bank and is now owned by the bank.
Fixer-Uppers.
- A home that needs either minor or significant rehabilitation before it can be used for its intended purpose.
- Pros: Less Competition, Forced Appreciation, Potentially More Cash Flow, Unique Financing Options.
- Cons: Hidden Expenses, Stress, Potentially More Out-of-Pocket Costs.
Commercial Real Estate.
- Property leased to businesses for work purposes.

Chapter 8. Location, location, location!

Properties and neighborhoods are classified into

A, B, C, and D because of their location, which is affected by:
- Crime.
- Drugs.
- Schools.
- Jobs vs unemployment.
- Population growth.
- Housing starts and building permits.
- Transportation.
- Proximity to local businesses.
- Price-to-rent ratio.
- Vacancy rates.
- Property tax and insurance rates.

Chapter 9. How to find rental properties

Multiple Listing Service (MLS).
- The collection of all homes listed for sale by real estate agents in your area.
- A tool owned and used by licensed real estate agents.
- How to get a great deal on MLS:
  - Find a great agent.
  - Set up automatic alerts.
  - Quickly screen out the duds.
  - Be faster than the rest.
  - Look for hidden value-add opportunities.
  - Make lots of offers and fail often.
  - Look for old listings.
  - Focus on the deals that need work.
  - Make your offer clean.
Direct mail marketing for deals.
- The act of sending out a large number of targeted letters or postcards to people who might be interested in selling their property.
Driving for dollars.
- The practice of getting in your car and driving up and down the streets of neighborhoods where you want to invest, looking for potential deals.
Eviction records.
- Target landlords who are going through an eviction.
- Take a trip to your local county administration office and ask to see a list of the current evictions.
Websites like Craigslist.

Chapter 10. Which properties make the best rentals?

Bedrooms.
- Three-bedroom houses tend to make the best rentals because they attract long-term tenants, which cuts down vacancy expenses.
- They are generally the best kind of property to sell, which can be great when that time comes.
Age.
- The older the property you buy is, the more expensive it’s going to be to fix.
- Older homes are also generally less energy efficient.
Garage.
- You may have difficulty finding a stable, long-term tenant for a house without a garage.
Utilities.
- Should be paid by the tenant.
Lawn.
- Look for properties that have smaller yards to keep the yard work for the tenant at a minimum.
Parking.
- Stable tenants need a place to park their vehicles.

Problems to look for in a property that can be fixed and increase value:

Bad smell.
- Throw carpets, mop the floor, clean, prime the floors, wash the walls, and prime/paint the walls and ceiling.
Potential extra bedroom.
- Convert a room into a third bedroom.
Ugly countertops and cabinets.
- Replacing countertops is a fairly straightforward process and cabinets can be painted.
Bad roof.
- A roof can be costly and scares off competition.
Mold.
- Eliminate the moisture, and you eliminate the visible mold.
Compartmentalized configuration.
- Compartmentalization is the characteristic found in many homes, especially older properties, where the rooms were designed to be separate from each other
- Today, there is a movement toward open-concept living.
Jungle landscaping.

Problems to avoid.

Neighborhood.
Foundation Issues.
Shared driveways.

Chapter 11. Submitting your offer

Earnest money deposit.
- It is usually 1% to 2% of the purchase price. It is given to a third party involved in the closing. Here’s what happens to the earnest money:
  - If the sale goes through, the earnest money is used as part of the buyer’s payment at closing.
  - If the sale doesn’t happen without a valid reason from the buyer, the deposit is kept by the seller.
  - If the sale doesn’t happen with a valid reason from the buyer, the deposit is returned to the buyer.
A real estate offer should include:
- Buyer and seller information.
- Property details and price.
- Financing source.
- Desired closing date.
- Contingencies.
- Additional terms and conditions.
Tips for getting your offer accepted.
- Work fast.
- Offer your best upfront.
- Submit a letter with your offer.
- Discover the seller’s true motivation.
- Feel uncomfortable.
- All cash helps.
- Remove the financing contingency.
- Waive the inspection contingency.
- Close faster.
- Give two offers.
- More earnest money.
- Prove your pre-approval letter with the offer.
- Include an escalation clause.
- Offer to clean out the property.
- Pay the seller’s closing costs.
- Offer again.

Chapter 12. Real estate negotiation

Negotiate for any or all of the following:
- Price.
- Closing date and location.
- Contingencies.
- Financing.
- Closing costs.
- Home warranty.
- Repairs.
- Credits.
- Possession date.
- Items left in the property.
Be prepared to walk away, stick to your numbers, and be polite.

Chapter 13. Financing your rental property

Traditional financing methods include:

All cash: Pay with your own money, but consider legal risks and disguising ownership.
Conventional loans: Obtaining loans from banks based on standard criteria.
Portfolio lenders: Getting financing from lenders with in-house loan portfolios.
Private lenders: Seeking financing from individuals or private companies.

Creative methods include:

Home equity: Borrowing against your property’s equity at low-interest rates.
Partnerships: Collaborating with others to invest together.
Seller financing: Arranging financing directly with the property seller.
House hacking: Combining your residence with an investment, like flipping or renting out a portion.
BRRRR investing: Buying, rehabbing, renting, refinancing, and repeating the process for long-term cash flow.

Chapter 14. How to get a loan approved, guaranteed

What to consider:

Property type, location, and condition.
Loan amount.
Debt-to-income ratio.
Loan-to-value ratio.
Credit score.
Repayment source: your ability to repay the loan will stay consistent.
Experience level.
Cash reserves.
Recent credit changes.
Make the lender’s life easier.

Chapter 15. The due diligence process

The process you’ll go through after getting an offer accepted but before you actually take ownership.
Title Inspection.
Document Inspection.
Physical Inspection.

Chapter 16. Getting ready to close

Order insurance.
Set up your bank accounts.
- Keep your rental property expenses separate from your personal income.
Prepare forms.
- Print five copies of hard copies.
- Also, save them on the cloud.
Prepare bookkeeping.
Plan the rehab.

Chapter 17. Managing your rentals (part I)

Property Manager Interview Questions:

What are your management fees?
How do you communicate with owners? How frequently? What about?
How many properties do you manage?
How long have you been a property manager?
Am I locked into a management contract with you? If so, how does that work?
How long does a typical tenant stay in a property?
How long do properties usually stay vacant before being rented?
How do you screen tenants?
How do you handle maintenance requests?
Is there a minimum charge for a maintenance visit?
What do you do if a tenant doesn’t pay rent?
How do you market vacant properties?

When you receive a phone call from a prospective tenant, always pre-screen them:

Their gross monthly income must be approximately three times or more than the monthly rent.
Must have a source of income and be able to furnish acceptable proof of the required income.
The number of occupants per bedroom is limited to two.
Only non-smokers are considered.

Chapter 18. Managing your rentals (part II)

The most common repairs you’ll encounter:

The fridge/stove/dishwasher not working.
Water leaks
Water drip from faucets.
No hot water.
Bugs/rodents.
Garbage disposals.
Furnace repairs.

Problems with tenants:

Late rent.
Neighbor conflicts.
Moving in unapproved pets or people.
Breaking a lease.
Drugs.

Chapter 19. Exit strategies and 1031 exchanges

Hold forever.
Cash-out.
1031 exchange. Allows an investor to “defer” paying any taxes on the profit of a property when it is sold, as long as another “like-kind” asset is purchased using the profit received.

Chapter 20. Final thoughts

The success principles of rental ownership:

Manage effectively.
Increase income.
Decrease expenses.
Execute your plan.