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Welcome back to another episode of the Discount Property Investor podcast. In today’s episode David Dodge and Mike Slane talk about how to get yourself ready to buy a rental property and what do you do when buying a rental portfolio. Listen to this episode if you’re a wholesaler or a new investor who’s getting into real estate.
Things that will cover in this episode:
- How you get yourself ready to buy rentals
- Work on getting your credit
- Creative Financing
- 1031 Exchange Rules
- Make offers
- Come up with a plan and start taking actions
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Mike: Welcome back guys, the discount property investor podcast. Your host, Mike Slane and David Dodge. David, how are you this morning?
David: Hey Mike, I’m great man. I just got some laps swimming today, I’m feeling good buddy, yeah.
Mike: Whoo, man that’s nice. You got your hair cut for the lap swimming, right?
David: That’s right, that’s right.
Mike: Do you do the swimmers cap or you just-
David: No, I don’t do the swimmers cap, I just wear the goggles and you know.
Mike: Yeah yeah, all right.
David: It’s a lot of stuff to keep track of.
Mike: That’s cool man. I don’t know, I’m not a swimmer. That was always my weakness. I wanted to- I used to run and bike and stuff, and I really wanted to do a triathlon, but man I just- I’m a fucking rock in the water so there ain’t no- yeah, there’s no tri’s in my future unfortunately.
David: Swimming is not the easiest but I’ll tell you, after you complete a good lap swim, you feel like a million bucks man.
Mike: Oh dude. Yeah, it’s a good workout brother, it’s a good workout. Cool, well I’m glad-
David: So what are we talking about today? What’s the episode about?
Mike: I’m glad to be back and recording, so previously we were talking about the buy box and it’s kind of more about rental, the rental side of things and what is our personal rental criteria. I know we try to keep our conversations to the newer investor so let’s do the same thing here and let’s talk about a wholesaler or a newer investor who’s getting into real estate and they’ve kind of identified what they want to rent, but then let’s talk about how you get yourself ready to buy rentals, like what do you do to get ready and prep for buying a rental portfolio. So this is just not outlined very well, we’re just kind of having a conversation. I would say first and foremost if you don’t have good credit cuz again you have to really begin with the end in mind when you’re buying rentals, you’re going to be financing these properties most likely. One of my favorite kind of thoughts now is refi till you die. Again, I love the idea of paying them off but what a lot of the big guys do in apartments and multifamily investing and commercial real estate is refinance these things all the time. Why? Because when you refinance a property and say you’re able to pull $10,000 out over single-family or say you’re able to pull $100,000 out of a multi-family or say you’re able to pull a million dollars out of a commercial deal that you own, well guess what? That is a loan, that’s not considered income. You’re not paying income taxes on that money that you’re able to pull out of that refinance. Where does that money go? Well it goes in that checking account. Guess what guys? That’s kind of income. I mean again, that’s your money to spend although you have to pay it back and you’re paying interest on it.
David: Yeah, you got to pay it back and you’re paying interest on it.
Mike: You’ve got-
Mike: -that money, that’s real money. It’s very exciting. It’s real money. That’s what it- that’s why I get so excited about it because that’s real money and this is what we’re doing all the time when we buy our rentals. It sounds so phony baloney but we really do, we cash checks when we buy rentals because we’re using someone else’s money. So we cash a check when we buy it and I would say 7 out of 10 times, we cash a check when we refinance our rental properties. So again, it’s very advantageous to have good credit. So begin with the end in mind, if you don’t have great credit, please, please, please work on getting your credit in better shape, like it’s super important for the long-term success in real estate investing particularly in buying rental properties. Alright, that’s my tangent on credit is just that it’s so powerful to have good credit. I was so impressed with my credit score recently. I don’t know, we had 10 or 15 thousand, 20 thousand dollar balance on our credit cards and I recently just paid it off and my credit score shot up like 80 points, couldn’t believe it. It shot up like 80 points because I was carrying a little balance.
David: Yeah, that’s wild.
Mike: And we have- I mean we have a ton of available credit. I just couldn’t believe it. I mean it was just- it was shocking to me. So we went or I went from like I don’t know, 7- mid-7’s to like low 800’s. I was like what the heck?
David: Isn’t that wild how that happens man?
Mike: Yeah, had I known, it’s like man I would’ve done that a while ago so anyways, get your credit in order guys, it’s super important for real estate investing. Not the end of the world if you don’t have great credit though Dave. So I always like to say here’s ideal, get your credit in good shape, have good credit. What’s your next thing if you don’t is you’re either going to have to find a partner with better credit than you or someone to help you co-sign to get loans so that you can keep playing this game and rebuild your credit while you are still playing this game. I mean, I don’t- I’m kinda going off on a tangent, you might want to steer this in another direction Dave, so one is your credit. How do you prep for a rental investing? That was our topic, right?
David: So I mean really you got to have the right mindset too, right? As a landlord, you are going to have to deal with both people problems and property problems. So if you’re not okay with that, then maybe you shouldn’t be a landlord, right? There’s so many advantages of owning property long-term and renting it out so I think we should briefly touch on those, but that’s the game, that’s the mindset, right? You are going to have to deal with property problems and you are also going to have to deal with people problems. Now, Mike and I don’t necessarily love the people side of the business so much hence why we have a third party property manager. We used to even have an in house for a little while but that’s still intertwined us in the people side of the business, you know.
Mike: We knew too much. We knew too much about the problems of the people, didn’t want to be involved in it and-
David: And actually people ask me all the time, well once you get you know, over a hundred or up to 150 or you know maybe even larger, 250 doors, are you gonna bring the management in house? And my answer is probably not. I’ve tried it and I’d rather just work on building the property side of the business so you know. [inaudible].
Mike: Yeah, Dave I’m 100% the same. Exactly. It may change like again, if we get to yeah, 500 doors or something, like if we start buying big stuff like maybe, but maybe not. I don’t know. Yeah, I’m with you right now, I just- I don’t like it. It’s just easy to have our man do it and he’s really good at it, like really good at it.
David: Yeah, we got a good thing going with our manager. But, mindset guys, mindset really matters, right? So you got to know, you know, what you are basically getting yourself into. It’s not necessarily always going to be smooth sailing. However, you know, that’s the negatives right? There’s pros and cons. You guys have heard me talk about pros and cons a million times but pros and cons, the cons are you know, there’s going to be a people side of this business and there’s going to be a property side of this business. The people side of the business can easily be you know, outsourced which is really, really cool and that’s essentially what we do. We have a manager that will help us with leasing and we have a manager that will help us with rent collection, in the event that we aren’t able to collect the rent and we have to you know, evict, he also will handle that. When there’s issues with the property that the tenants report, they contact him and then he contacts us and we get out there and we address those issues. When the tenants move out, we come in and we turn those properties. That’s it, that’s basically the entire process of managing. So that’s the cons in terms of you know, there’s going to be continued work and if you aren’t interested in both the people and the property then you’ll need to bring in that property manager. Now, the pros of owning real estate long term rental, could even be short term rental, but owning rental property and being a landlord, that’s what we’re talking about here today. Our passive income, right? That’s cash flow basically, that’s money that’s on top of what’s owed every month, and we talked about this briefly in the last episode but basically when you’re dealing with real estate, you are going to have taxes and insurance at a minimum, right? You’re going to have maintenance, you’re going to have a property manager assuming you bring one in, if you’re doing it yourself then you can exclude that. You’re going to have capex which hopefully you can reduce by rehabbing in the beginning and then you’re going to have vacancy. So all these things are either cost or they are phantom costs, like vacancy for example which is lack of income, but at the end of the day, it’s a cost, right? If you’re not working hard every day to get the property re-rented, hence why we like having a property manager, it’s more help, you know, it’s a cost. So the cash flow boom, number one, that’s my favorite thing about it, cash flow. Number two, we are putting ourself into debt when we buy this property. Who’s paying off the debt? Well in theory, we are with the rent, but we’re not going out and having to work 47 jobs to pay all the rent, they are. So we’re getting the asset paid down for us, which I love. Somebody else is paying off this debt. How much debt do we have right now Mike? I don’t even know man, do you have any idea?
Mike: It’s funny, I was just talking with somebody about that and I don’t either, I need to look at it. It’s almost-
David: We should calculate that and then we should start tracking it cuz I would love to get to 20 million in debt, and then once we get to 20, let’s up our goal to 50.
Mike: I do like that goal man.
David: I think we’re probably somewhere around 5 or 6, from the hip. I don’t know, we’ll have to figure that out but-
Mike: Yeah, it’s probably about 4. I can look it up real quick.
David: [inaudible] paying off the debt guys, that’s number two.
Mike: I’mma look it up.
David: Yeah, so somebody else is paying off the debt, that’s number two. So cash flow, somebody else is paying off the debt. What else do we get, right? Well we get to use the property with our taxes to offset other income and this is called depreciation, right? So with a single family residence, it’s 27 and 1/2 years you can appreciate it, so 1 divided by 27 and 1/2 gives you a percentage, you multiply that percentage by your cost basis. Every year you get to deduct that from other income, so when you have a ton of property like Mike and I do, we get away with paying very little taxes and some years, zero cuz we have so much to depreciation which offsets other income, so that’s just another amazing advantage. Behind that, what else do you got? You got cash flow, you got somebody else is paying off your debt, you got the depreciation. I know there’s another one or two at least advantages Mike, help me out.
Mike: Yeah, so then you’ve also got the 1031 currently. There’s been a lot of talk about that going away but the 1031 exchange is very powerful. So this is a way again to further defer tax liability and what it is, 1031 is a section of the tax code that says that if you are to buy or rather if you are to sell a rental property that you’ve depreciated a little bit and you then use it to buy- the funds, you use the funds to buy a like property, you can then roll that in, essentially those- that depreciation that you’ve written off over the years can be written into that new property. So now instead of paying the taxable income that you would from selling it, you have a new cost basis and a new property that you are either depreciating based off of the new number, again from the other one or you’re going to have a lower cost basis rather on the new property. So long story short, you don’t have to pay the taxes on it. It’s a little bit complicated. We don’t do them all that often. You have to have a freaking accountant that-
David: But you can’t do that with other types of assets.
Mike: You can’t.
David: So that’s a very cool thing. Oh, another thing that I love about rental properties and just investing in real estate in general is leverage guys.
Mike: Oh, yeah.
David: Leverage is a huge thing and that’s what I was missing earlier, you know. That’s some of the things that I really love about real estate in general, not just rental real estate, is you can cash flow on it, you can get somebody else to pay the thing off for you, you can use depreciation and then I think that’s the final thing that I love about it is the leverage aspect of it, right? Can I go buy you know, $100,000 worth of stock with maybe 10 or 15 grand of my own money? Probably not, right? But with real estate, I can do that. I can go buy you know, 80 grand, 100 grand, 200 grand worth of real estate for maybe 10 or 20 thousand dollars. I can use leverage and I can use creative financing to get into it. So many more advantages than the disadvantages. But I’m really glad that we kinda took a step back for a second Mike and we talked about those things. So let’s get back on track. The episode that we were going to record today was about buying rental properties or was it about buying your first rental property?
Mike: Just about buying rental properties and what you need to do to get ready for I think was the idea.
David: Love it. So you started off by saying get your credit in line.
David: That is very very important because typically when you’re buying rental properties, there’s two ways to go about doing it. There’s one, using your credit and leverage, the other way is to use creative financing and get the seller to be the bank or to get you know, a lease option type of play or whatever. The other way to do it is to actually take the title, right? And that typically means that you’re going to either have to pay cash or you’re going to have to have financing in place that again allows you to use leverage to acquire and control the property. So start with having good credit and if you don’t, that’s okay, there still ways to get into rental real estate but it’s going to be much easier, I promise you, if you do have the good credit. So number one, boom. Number two, get comfortable making offers. I think that this is so incredibly important because a lot of people, they sit on the sidelines and say oh I’d love to have real estate, I’d love to have some rentals, they may even have you know, some money saved up. They have 20, 30, 40 grand saved up but they’re just waiting on the sidelines and Mike, we talked about this at the beginning of the- of our last episode, but like you’ve got to stop waiting, you got to take action. So really the best way to take action is to start making offers and if you make 30 offers and all of them get you know, denied or turned down, you’re doing better than the guy that’s making no offers cuz you’re taking some sort of action, right? That’s like, that’s so important man. You got to act, you got to- you got to make offers and the reason that not every offer you make is going to get accepted is because hopefully you’re making offers lower than the true value of that property.
Mike: Dave I just found- I found out our total number of doors is 53.
Mike: And our total debt is about 3 million dollars.
David: Okay, well we got to triple that. Let’s get to 10, let’s get to 10.
Mike: Yeah, so- but here’s the thing that is always difficult for Dave and I is like, how many doors do you have? We’re buying and selling our rentals all the time, so like right now I think we have 6 under contract to sell but we’ve got like 9 or 10 under contract to buy. So we always are buying and selling and balancing portfolios so whenever you pin us down, it’s like I don’t know, about 50, and then like pretty soon, eh about 60, eh about- like we just- we don’t- we’re not being deceptive, we just don’t really know.
David: Yeah, I would say by the end of the summer, we’ll be over 5 because I got another you know, you have some personal rentals and so do I, so I probably have another million of personal debt.
David: And then we’re adding another 10 doors, so we’ll be at 5 million essentially. That’s okay.
Mike: Yeah, oh easily. Yeah, any- I’m sorry to distract and we’ll come back on topic.
David: No, I’m glad you brought that up. That’s a great point.
Mike: I just wanted to do it and again, this is from our little Podio system so it’s not perfect, again, I’ve got some loans, we need to adjust balances and yada yada but again, that gives us a ballpark.
David: I love it man.
Mike: Back on topic, what do you guys need to get started? Dave, you we’re doing great.
David: Yeah, so credit I think is- it matters guys and if you don’t have great credit, that’s okay, let’s start working on it. Try to find somebody to help you fix it or repair it, or just make it an effort to know that it matters. I mean it’s that simple so like, make sure you’re not late on your bills and that you pay them on time and you’re not racking up a bunch of consumer debt. You know, if you can avoid those things and I know this is- this is challenging. I’ve had credit card debt multiple times, sometimes I’ve had multiple six figures of credit card debt in the past, I’m not proud of it, right? But I don’t have any to this day. I have zero actually as of this moment which is amazing because I know at this point that that matters and it’s important and if I want to get into more bigger debt versus just go get 30 grand on my credit card, I can go get 300 thousand dollars worth of debt that’s real- that’s good debt versus the bad debt, right? So it does matter. Number two, start making offers guys. If you don’t have the ability to make an offer then you’re not doing something right. Let’s just break this second thing down for a second. In order to make an offer, you have to have somebody that’s willing to sell, right? Which means you’re either going to have to be going around with an agent looking at properties that are listed or you’re going to be calling people that are off market trying to purs- trying to sale- them to sell themself or maybe there are even rental properties that are listed for rent that you’re calling on asking if they’re interested in selling these properties, right? So there’s a couple different ways to go about doing it but in order to make the offer, you gotta be on the phone with somebody typically or- and that may also mean that you have to go view the property. So if you’re not out viewing properties, you don’t have the opportunity typically to make offers, right? So let’s reverse-engineer that, right? So we basically just did. So you got to get out, you got to start looking. You got to figure out what your buy box is guys, and if you don’t know what that is, listen to the last episode that we just recorded prior to this one, we talked a bunch about the buy box. So you want to figure out what those things are. Also, it’s a good idea, I’d say number three, which goes a little bit beyond the credit but have your financing in line, right? So the better your credit is, the easier this third step will be, but this third step is have a plan to fund. It’s really that simple. So are you going to use a hard money lender to buy something and fix it up and rent it out and then refinance it? Which is called the BRRRR method. Mike and I love doing that. The hard money lender or a private money lender, well that’s great that you have the plan but do you have the lender lined up? Have you been pre-approved? Or maybe you’re using a bank, have you walked into the bank? I get this all the time, people send me Instagram messages 3 times a week. Hey Dave, how do I get a bank loan? I’m like have you went into a bank and like talked to a banker? And they’re like no, and I’m like okay, well that’s probably where you should start if you want that bank to lend you money. It’s kind of simple, but people don’t do it, right? So get that financing in line, I think that really really matters. What else Mike?
Mike: So I think that- this is an important one and it’s super easy to do well and it’s super easy to mess it up but it’s have a plan. So I know it kind of sounds silly but I always like to and I know Dave and I like to do this cuz we do. We come up with a three-year plan, we come up with a one-year plan and then we kinda come up with our monthly plan or our three-month plan rather. And we’re not always right, like we’re not even close sometimes to what we think we can accomplish in one year or three years or one month or three months, like we’re sometimes we’re way off and that’s okay. So it’s really easy to mess it up, doesn’t matter, but have a goal, have a plan and start working towards it. I think that’s the most important thing. If you are under ambitious and you say, I just want to buy one property a year for five years and then I’ll have five rentals, that can change your life just having five rentals. That can probably retire your wife or replace maybe your income if you’re working at a Kwik Trip or working in an unskilled field. I mean something like that can be-
David: Yeah, or you’re a government employee, millions of people work for the government, right?
Mike: Right. That is a- it’s a huge amount of money if you buy five rental properties and then five years later, I mean you’ve got some cash flow, you got $1,000, $2,000 a month possibly coming in, like that’s life changing, that can be a huge deal for a lot of people.
David: Yeah, and over 10 years maybe you can acquire 2, 3, 4 hundred thousand dollars worth of wealth, right?
David: Here’s one of the coolest things about real estate, where’s my piggy bank? Let me grab this real quick.
Mike: Yeah, so-
David: So if you are watching, you can see the piggy bank. If you are listening, I’m holding up a big ugly, gaudy pink piggy bank that’s literally a pig with white polka dots and there’s money in here, right? And here’s what I love about this analogy Mike: I’m terrible at saving money. I’ve never really been that good at saving money, but when you buy a piece of rental property right, and you get it rented, somebody else is paying that loan down and in some of my property, like some of the very first property that I’ve ever bought, I never even took the cash flow. So I would just put extra money every month towards what was owed which helps accelerate paying that property down, and then before you know it, you have a property that you’ve owned for 10 or 15 years and you have a hundred or 2 or 3 hundred thousand dollars worth of equity, meaning you’ve paid the debt down and hopefully the values going up and you basically forced savings. This is literally one of my favorite things with real estate. All these other things that I mentioned are- is icing on the cake to this one principle in my opinion. If you have 10 properties and you go and you keep them rented and you pay them every month, after 10 years, if each property gains you know, a hundred thousand in value, that’s a million dollars that you now have access to, you have the equity and trying to save a million dollars month by month for 10 years, do you know anybody that’s done that?
David: Me neither.
Mike: Yeah. So again- yeah.
David: And that’s if they’re really good at investing and they get lucky, right? Or they are super high earners and they can do it in two or three years, but like your typical person Mike that you had mentioned earlier that like may work at Kwik Trip for example or whatever, there is no shot that you’re going to save a million bucks, probably not in 10 years, probably in your lifetime, but you can easily do it, I’m saying easily do it with rental real estate.
Mike: Hit the nail on the head man. So that to me is come up with a plan, I don’t care if it’s the wrong plan. If it has anything to do with acquiring a rental property in the next 12 months, it’s a great plan, all right? So come up with a plan, look at it, work towards it, revised it, again if you think wow that was really easy, I should do two rentals a year or wow, that was really easy, I should do 1 a quarter, you know I mean that is- that’s awesome. Again, we get our plan wrong all the time, we just reviewed our quarterly plan, didn’t even come close so we’re going to revise it and we’re gonna knock it out of the park this quarter. I mean it’s just what happens. Come up with a plan and work towards it. People need goals, you need a goal, I need a goal, we all need to work towards something. It’s super important so again, work on your credit, that’s kind of numero uno. Get that in the back your head if you’re learning real estate, doing some wholesaling. What was the second one you were talking about Dave?
David: Make a lot of offers.
Mike: Make some offers.
David: Guys, get out in the field, do the activities that investors are doing. If you want to be a real estate investor, do the things real estate investors do.
Mike: Love it.
David: Which is go look at houses and talk to sellers and make offers.
Mike: And then come up with a plan for your rental portfolio and start taking action towards it which we had just talked about in the previous one. I think that’s a pretty good summary of what we think we need to do on rental properties. We’ll talk more about it in other conversations I’m sure but Dave, you want to wrap this one up today? I think we should guys.
David: Yeah guys, thank you for listening. Hey, if you haven’t been over to discount property investor recently, go check it out. We have a new website that we’re working on over there. Tons of free courses over there on wholesaling 101, real estate data, driving for dollars, you name it, there’s a free course there on landlording as well, which will pair nicely with this episode, and we also have a free contract generator over there. So we had talked about making offers, right? Well here’s an actionable thing you can do. Go to discountpropertyinvestor.com, create a free account and start taking advantage of that free offer generator. This is something you can basically do from your cell phone in under three minutes and it’ll help you generate an offer to send to a seller and it’s packed with CYA clauses so you’re definitely going to have the ability to gain control of a property but if you need to renegotiate that price or exit the deal cuz it doesn’t work, you can limit your risk basically to zero guys so go check that out, discountpropertyinvestor.com and until next time, signing off.
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