There’s a certain pride of ownership; however, when a new prospective tenant asks that question – “Are You The Owner?” – I always have to catch myself, before saying “Yes, I am!” – Instead, the best answer is “No, I’m the Property Manager.” - Or even better, “No, I work for the Property Management Company”. That answer will position you with the greatest freedom and leverage to handle matters going forward.

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Intro…

Welcome to Episode #27 - Are You The Owner? No, I’m The Property Manager.

Now I always answered this question incorrectly in the past. Hell, I was proud to be the owner (as long as I've wanted to be a Landlord), so when asked, I’d quickly say – Yes! However, I came to realize a few critical problems with that answer.

First, there are many prospective tenants who are actively seeking an independent Landlord who owns and manages their own properties. Ideally, they’d like for this to be your only property, and even better if they are your first ever tenant. They want an inexperienced Landlord who does not know how to properly screen tenants. They want someone who will fail to run a credit check – revealing their sub-500 credit score and credit report with a ton of collections, liens and judgements. They want you to fail to run a background check – showing their long and recent criminal history and prior evictions. They might be on the sex offenders registry. Or they’re likely going through an eviction right now! They don’t want someone who will check their references, contact prior landlords, verify their employment and income, and on.

Experienced Landlords are far more likely to do all these things – and more! So, it's often the case that when you're showing a home yourself, a less than ideal prospective tenant may ask if you’re the owner just to see if you might be a good target for exploitation of your inexperience. You’re a fly headed right towards the spider’s web. The next question is going to be – “Do you have any other homes for rent?” – not because they are not interested in the home you are showing them now, but again, to see how experienced you are - so their hoping the answer will be no.

I can certainly recall some prospective tenants who asked me those questions… “Are you the owner? Do you have any other homes for rent?” – Who were initially very interested in renting the home when I answered – “YES” to the first question; but who quickly lost interest upon hearing my answer also of “YES” to the second question and then being subjected to my application process, which makes it clear that I’m anything but inexperienced. Upon seeing that I would not be an easy mark and all their baggage and skeletons would be revealed, serving only to cost them time and an application fee – they went elsewhere searching for someone else to take advantage of (maybe You!) – because it won’t be me, if I can help it.

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But not everyone asking that question is out to get you. It can be a totally innocent question – but still one you should treat with all seriousness and avoid the urge to claim the Landlord title as you do your Captain Morgan stance. Despite the name of this Podcast being [… and Landlord!] – it's rare that you hear anything good said about Landlords. It’s a largely thankless job and title that comes with hundreds of years of stigma and current news stories seemingly daily that cast the entire profession in a negative light - so don't claim it where you don't have to.

When asked, I'm the Property Manager (not the Landlord and certainly not the owner). Question... "Are You The Owner?" - Answer... "No, I’m The Property Manager". But even thought I know this is the best answer to that question, it's still hard for me, as I'm very proud to be the owner. Hell, not to pat myself on the back, but I own well over a dozen properties when most people don't even own one! That's an accomplishment and something to be proud of. My mother-in-law almost tiers up with pride when she talks about her daughter's husband. She's proud of me and the things I've accomplished, as is my own mother, father, brother, sisters and lots of other family members and friends. So whenever I'm asked that question, it's hard not to let that wave of pride from multiple sources flow right into a big "YES! I am the owner"... Striking my Captain Morgan stance. But, it's said "Pride goeth before the fall" - so I keep it in check, and just say no.

To do otherwise will likely just cause problems later, that could have been avoided as the Property Manager versus being known to be the Landlord or Owner. And It may also prevent you from falling victim to a Professional Tenant looking for an inexperienced owner to exploit.

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Now, is it a lie to say that you're not the owner (instead the Property Manager) when you really are the owner? Well first, how I answer what I consider to be a "none of your damn business" question anyway - is up to me; however, I do feel the need to be honest in everything I say. Always tell the truth and you never have to remember what you said to anyone. For me, honesty is high on the list of things I value in others and especially in myself.

Of my Rental Properties, I currently own 3 in my personal name, along with my wife. They were the first 3 I bought, before I started using Hard Money Lenders and Commercial Loans on more distressed properties that needed a lot of rehab to be rental ready - and Traditional Lenders typically won't fund them, or its hard to get a 203K Rehab Loan from one.

The tenants in these 3 rentals have been there for years. My first tenant from 2015 is still with me, and she's been great. My second tenants are also still with me, and they've been great. The third property has had one tenant turn-over, but they were also great, as has been the tenants who replaced them. I've had great success with my tenant selection, only having problems with 2 of my former Section 8 tenants, and as I've said before about them - those two tenants are to be thanked, because they made me a much better Landlord (I mean Property Manager), and most of my policies, procedures and lease provisions came as result of what I experienced with those two.

So those who have been with me for awhile, or even more recently before I established this habit of identifying myself as the Property Manager - they know that I'm the owner. And if my name is on title for the property, it's easy enough to learn - so I'd not likely say otherwise in those cases, to avoid the appearance of lying. Thankfully, it hasn't come up for those, as like I said, the tenants have been there for years.

But for my other properties that are not owned in my name directly, but instead owned by my entity - technically, I'm not the owner. Blue Chariot Properties, LLC is the owner. Or in the case of some, one of several other entities (that I'll not name here for asset protection reasons) is the owner, and those sub-entities are then owned themselves by Blue Chariot Properties, LLC. I'm just a member of the owning entity, and my ownership percentage of that entity (while likely 100%) is my business - between me, my CPA and the IRS.

A famous quote on that... “The secret to success is to own nothing, but control everything.” - Nelson Rockefeller

So for best asset protection and to give myself the greatest benefits as a Landlord, I seek to control the properties and be known as the Property Manager - while NOT being the owner. Because I'm NOT the owner - I'm the Property Manager. Blue Chariot Properties, LLC is the owner. And Blue Chariot Properties, LLC has hired Blue Chariot Management, LLC - who then employs me as the Property Manager. I even get a paycheck.

And hey - if you are local to the Raleigh / Durham (Triangle) area of North Carolina, you can also have me as the Property Manager for your Rental Properties - by hiring Blue Chariot Management. The website is BlueChariot.Management.

And especially, now that I'm managing properties under Blue Chariot Management on behalf of other Landlords - prospective Tenants have no idea which are mine directly and which I'm managing on behalf of someone else anyway. Because I treat them all exactly the same.

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More than anything else, claiming Property Manager status, instead of being the owner, gives you the greatest Freedom of Speech. It changes you from being perceived as the mean / greedy Landlord who keeps charging late fees; and who charges for fixing all the things the tenant keeps breaking - to the Property Manager who must just follow the rules of the lease between Owner and Tenant (as an impartial third party); also along with following the contract between the Owner and Property Manager. Your hands are tied, and you're just doing your job.

You're not in a position to make exceptions or to let things slide. And it's not you being mean or greedy, but your legal responsibility to follow the lease and contract.

What if you knew that it was the law that every time the police radar showed a speed more than 5 miles over the limit, the police officer was required to pull you over and issue a ticket every time. In that case, the moment you saw the lights, you'd already know the outcome. You wouldn't be happy, but you're less likely to be mad at the officer who was just doing his or her job and had no leeway in the matter.

But in reality, when you get a ticket now, you are pissed and you are mad at one person - the officer. Because you know they didn't have to give you a ticket. Hell, they didn't even have to pull you over in the first place! They had the authority and option of letting it go or just giving you a warning. But they were mean and greedy. You go off thinking, they probably get a cut of each ticket they write or get a Dunkin' Donuts gift certificate when they hit their quota.

When you are known to be the person in authority and the handling of a matter is at your sole discretion - it will always cause anger and resentment if you handle the matter otherwise than someone affected by your handling would have preferred. So don't claim the authority. Place the authority elsewhere... "No, I'm not the Owner. I'm the Property Manager."

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Now, with his said and fully understood by all involved (even referenced in the lease), you don't have to and should not make comments like "Let me check with the owner" - when at some level, you are the owner. That gets into being needlessly deceptive. Once you've established your roll as the Property Manager, act in that role, and speak with the full authority of that role against the lease. It's not Tenant to Property Manager to Owner. It's Tenant to Property Manager to Lease.

In other words, its not let me check with the owner on that matter to see what the owner says... It's what does the lease say.

Once you've established yourself as the Property Manager, your role is to enforce the lease in legal manner on behalf of the owner. So your communication with the Tenant should not reference the owner, it should reference the lease. The owner and the tenant have nothing to do with each other, beyond their mutual responsibilities towards the lease. So don't speak on behalf of the owner (using false statements to sound as if you are checking with someone else / some third party), speak directly on behalf of the lease.

And if you think that's awkward, remember that you shouldn't be speaking on any matters of the lease in person or by phone anyway. EVERYTHING should be done in writing. We use an email bases ticketing system for all communication.

And if a tenant requests something outside of the bounds of the lease, like new carpet in only their second year - that would logically require owner approval. You don't say "I'll have to check with the owner to approve that request". Instead, you say (in email) something like "the rent for each property under management is based upon a specific annual budget for maintenance, repairs and upgrades - so if we exceed that budget during the lease term, it will result in a rent increase upon lease renewal. Having to replace the carpet early could also incur an immediate charge to you per the lease if it has failed to reach its typical useful life due to actions, neglect or abuse on your part." - and for me, all of this would be spelled out in the lease.

My lease even says how long things like carpet and paint should last - so it's not a matter to be determined by the owner... It's all in the lease. And I fully establish myself as the Property Manager in the lease. Blue Chariot Properties, LLC (or related sub-entity on title) is indicated in the lease to be the Owner; while Blue Chariot Management, LLC is indicated to the the Property Management Firm; and good ole Jonathan Taylor Smith is just the Property Manager or Agent of Blue Chariot.

And even in the case of properties I manage for others, it's the same setup, with them or their entity referenced as owner. And even when I do have to check with that owner on how to handle something, my response back to the tenant on that matter references the lease - not the owner.

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So don't be like I was in the beginning - so proud of myself that I couldn't wait to claim owner status. Even if the question "Are you the owner?" isn't a setup for the spider's web of a Professional Tenant, failing to answer "NO, I'm the Property Manager." - will still put you in the position of being the mean / greedy Landlord. Step out of that darkness into the light of being the Property Manager. Your tenant relations will be sooo much better in the process.

And instead of falsely saying "Let me check with the owner". You can say "I have to follow the lease". Because, you know... Failing to follow the lease and thereby treating one tenant differently than another can be called a "Fair Housing Violation" - and that can land you in both court and jail. It's sooo much easier being the Property Manager who's just following the lease; than the perceived mean / greedy owner.

Okay, that’s it for this week. But, before I go, I wanted to make you aware of something new that you’ll see at andlandlord.com. Go there now, and you will see a new button that says “Subscribe to Newsletter”. It’s in the Podcast player at the center of the page, also at the bottom of the page. Click that button to subscribe to the [... and Landlord!] Podcast Newsletter. I would like to be able to communicate with you in another way. So, share with me your name and email address, and you’ll get a newsletter that will give you additional details about each episode of the Podcast, as well as other things that I will be providing mid-week in between episodes.

So, check that out at andlandlord.com. Please, subscribe to the Newsletter. And, if you don't mind, also, wherever you listen to the Podcast, if it’s not at andlandlord.com, subscribe there as well. If it’s Apple Podcast or Stitcher, subscribe, and give me your feedback - hopefully five stars. But I’d like to get your feedback, and the more I get, the higher the Podcast will rank, and I’m trying to get additional listeners like yourself. 

I appreciate you listening, but let other people know as well, and let them know what you think.

You know, there are a LOT of BAD Landlords out there… And unfortunately, they give the rest of us a bad name – those of us who are trying to do things the right way. I used to joke that I wanted to be a “Slum-Lord”, but that was just me trying to be funny. And without even falling to that level, there are many Rental Property owners who fail to run it as a business. And whether you know it or not, owning Rental Properties and being a Landlord is a business!

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Intro…

Welcome to Episode #26 - The Business & Tools of Rental Real Estate Investing & Being A Landlord

So, do you own a Rental Property or two “on the side” – and it is more or less just your side-hustle or maybe even a hobby? Something you just fell into? Maybe you had no intention of owning Rental Properties and becoming a Landlord, but it just sort of happened? You could have inherited a house. Maybe you needed to move in a hurry, such as relocating for a job – and it was just easier to rent out your prior house instead of trying to sell it quickly? Or maybe you got married and your new spouse already owned a house, or you decided to buy a new house together – so you just rented out your old house?

I need to find some official stats on this, but until then I’ll just make one up (hell, I think that's what others are doing most of the time anyway) - so I'll say that 7 out of 10 Landlords came into it by such a means where it was not a thought out plan that was intentionally executed to this end. I have no proof, but that stat sounds about dead on to me.

And for this reason, a person that did not come into being a Landlord with the thought of creating a business in mind, can almost be forgiven (almost) for not treating it as a business. But now that you are one, you owe it to yourself, to your customers (your Tenants) and to other Landlords who you may now be making to look bad – to learn how to be a Landlord and run your Rental Property BUSINESS as just that, a business!

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Now to one extent or another, I’ve spoken on much of this already over several different shows – but it needs specific focus. Owning Rental Properties and being a Landlord is a serious financial endeavor. You’ve got many tens of thousands and potentially a hundred thousand or more locked into a property.

It could represent many years of work and savings on your part. And then on the other side, a real person / a family lives in this home. This is where they cook their meals, lay their head at night… They LIVE here! Likely everything they own in the world is present in this home, along with all that is most precious to them (like their children and maybe also pets) – call your rental property their HOME. There is a lot of responsibility to go around – on both sides of that equation.

For their part, you expect the tenant to pay rent on time, follow your lease, treat the home with care, report any issues promptly, and on. And for your part, the tenant expects you also to follow the lease - and as such, make timely repairs of items for which you are responsible, be knowledgeable of and follow the law, be professional in your dealings and handling of all matters, and on.

And you may not know it, and the tenant certainly won’t see it this way – but a large part of your responsibility as a Landlord is to NOT rent to anyone who can't meet your well established and legal rental criteria. For example, if you put someone into your $1,000/mo rental who only makes $2,000 per month of total income – who’s fault is it really, when they inevitably are unable to pay the rent on time (if at all). Sure, it is their fault for failing to uphold their agreement. But I’d argue (and so might a court) that it is even more your responsibility / your fault for putting the person in a situation where they were almost certain to fail. Having proper business policies established for setting your rental criteria (such as a minimum income of at least 3x the monthly rent) – would have been the professional thing to do, and it would have saved you and the tenant from a costly eviction and all the resulting hostility on both sides.

Not only do you (as a professional Landlord running a Rental Property Business) need to have well established policies and procedures – but you need to put a tenant screening and on-boarding process in place that eliminates those from consideration who would not meet your legally established criteria. And then for those who do qualify and for whom you ultimately decide to rent to – you must have systems in place and handle your on-boarding in a way that makes it crystal clear that you are a professional, running a business. Then there's no confusion as to what you mean by your “No Smoking” Policy; your “No Animal (not no Pet)” Policy; your “Authorized Occupants” Policy, and on, and on - avoiding confusion, also helps to avoid conflict.

Run your business like a professional and magically people will respect and treat you like a professional running a real business – not just someone who has a house for rent.

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I meet a lot of accidental Landlords who HATE IT. I’ve also met a good number of purposeful Landlords who also HATE IT. The one thing both groups always seem to have in common is that they don’t run it as a business. Or in those few instances where they do – it’s a poorly run business at best. But granted, being in a particularly Landlord unfriend state or city can set you up for failure.

If you're going to do a thing - do it well! But unfortunately, if you're listening to this Podcast, you're likely a person who has already adopted that philosophy - or is at least in the process of doing so. How do I reach the person who's never even considered that they might not be handling their rental properties the right way - as a business?

How do I find the offenders out their and politely say, "hey, you suck as a Landlord. Please listen to my Podcast or read this book so that you might learn how to run your business the right way and stop giving the rest of us a bad name"? Or if they're local, I guess I could say "wow, you really suck as a Landlord. It's embarrassing stop it! You're not cut out for this. You should hire me and Blue Chariot Management to do this for you". Is that an effective marketing message? Persuasive? Should I send mailers like that to all rundown rental properties in my area? I'll go pull a listing of all recent eviction filings and code violations and send that mailer out.

No, I'm just joking about that message, but I will be marketing to local Landlords to get more Property Management clients for Blue Chariot Management. So for those listening to learn or improve your skills as a Landlord - THANK YOU! I'm only putting out the information I've learned from people, books and other Podcasts since I started as a Landlord back in 2015. There's nothing new under the Sun - we're all just building upon what we learned from someone else.

So if you've not already done so, listen to Episodes #18 & 19 for "10 Things That Self-Managing Landlords Need To Stop Doing!" - and also checkout the Books page at: andlandlord.com/books - for a listing of many great books that every Landlord or Real Estate Investor should read. Specific to being the best Landlord you can be and running your Rental Property business as a business - read or listen to "The Book On Managing Rental Properties" by Heather & Brandon Turner of BiggerPockets.com. You'll find it referenced on the page at: andlandlord.com/books.

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Now before I end this episode, let's speak a little about the tools, software and systems you'll need to be a Professional Landlord. When you start and as you grow as a Landlord, acquiring more and more properties - you'll hear a lot about App Folio and Buildium - which are two of the larger and more popular Professional Property Management Systems for Landlords. I think neither is free and I believe both have a minimum number of units they require you to have or at which it makes sense.

But there are now several cheap and even FREE alternatives. I'm currently using Cozy.co - which is FREE to me as the Landlord, and can also be FREE to the Tenant if they pay their rent with a linked checking or savings account, versus using a credit or debit card.

Cozy makes their money by charging the Tenant upon applying for your rental for the credit and background check - but that's a reasonable one-time expense. Cozy works great, has great features and even great support - but it does lack some desired features, especially now that I'm managing properties for others, so I'm moving over to a different system (I'll tell you what that system is later once I'm sure it's viable solution for me needs). But for the Self-Managing Landlord of only their own properties, I could not recommend Cozy more highly - it's been great!

Cozy will allow you to list your properties for rent, take applications, run credit and background checks (charging the tenants), collect rent, handle maintenance, track expenses, and on... Almost everything you'll need to handle your rental properties as a Professional Landlord.

But Cozy does currently lack a few needed features... First, it will not syndicate your rentals to all popular online portals, like Zillow, Trulia and Craigslist. You'll still have to list to these manually, outside of Cozy, but Cozy does syndicate to several - just not the most popular.

Cozy also does not allow the application to be customized, so you'll benefit from having a pre-screening questionnaire form on your website that potential applicants complete BEFORE paying to officially apply for your rental at Cozy.co. I think I'll do an entire episode on Tenant pre-screening, but after we complete some website changes that are now underway.

And as of my last check, Cozy also does not handle the lease creation and signing process - but they do allow for document storage of the completed lease that you created and handled signing elsewhere. For this reason, I still make use of EZLandLordForms.com for all of my lease needs, as well as, Tenant notices and other documents.

EZLandLordForms.com charges an annual fee per unit, but its reasonable. The system is easy to use and it is packed with all sorts of state specific leases, notices and documents - all of which can be customized to your exact needs. You can even handle the application process through this site, although I prefer to handle that with Cozy.co.

Another site I've found useful is Stessa.com (Assets spelled backwards) - which is great for tracking the value, income, return, expenses and all the various numbers and metrics related to the financial performance of your Rentals. You've gotta know if you're making any money or not. And this site also helps to be ready at tax time. It can even make direct connections to your bank accounts to record and track all income and expenses in real-time.

And while certainly not a complete list, the last site I'll mention, I've mentioned many times before... BiggerPockets.com. This site is not only great for the education that comes from all the books, webinars, podcasts and community forum with over a million helpful users (including myself) - but it has some very useful lists and tools. Here you'll find lists of lenders, vendors, and on... And also some pretty useful calculators. I still run Rental, BRRRR or Flip calculators on BiggerPockets whenever I'm considering another property acquisition.

Stessa.com is great for knowing if or how your existing rentals are performing, but the calculators on BiggerPockets.com are great for knowing if you should buy a given property as a rental in the first place.

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So that's it for now... You know if you who sucks as a Landlord. If so, stop giving me and other good Landlords a bad name. Improve by educating yourself and systematize with effective (and legal) policies and procedures. Or get out of the business and sell your properties to me!

If its not a dump in a war-zone and the BP calculator says I'm going to make money at your asking price + rehab needed to bring the property up to my standards - I'll buy it! Single-Family Homes, Small Multi-Family, even Apartment Complexes - if its a good deal, I'm on it... email me at jonathan (at) bluechariot.com. Otherwise, PLEASE start running your rental properties as a business.

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Outro...

Disclaimer

Rental Real Estate is the Ideal Investment – With Ideal (I.D.E.A.L) being an acronym that I’ll cover in this episode. It’s all about the many ways you make money from rental properties and what makes it like no other investment.

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Intro…

Welcome to Episode #25 - Rental Real Estate – The I.D.E.A.L Investment

Now first, I try to give credit to the sources for all information I present here – but for this one, I don’t actually know who came up with this acronym. I’ve heard it multiple times from different sources, so let me just be clear that I did NOT create it.

So, with that out of the way – Ideal (I.D.E.A.L) is a great way to remember the many benefits of Rental Real Estate Investing.

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The [I] is for Income.

Its not just first in I.D.E.A.L because it fits perfectly (“Rent” doesn’t)… It’s also first because this is really why you should want to own Rental Properties to begin with – the so-called "Passive" or Rental Income.

We can debate just how “Passive” it is, but I can say for 100% certainty, that if you have a cash-flow positive Rental Property (one that’s still cash-flow positive even after setting aside something like 20% of the rent for reserves, plus paying all debt and expenses) – then it’s hard to go wrong. Cash-flow can solve just about any problem. What’s cool about Rental Properties is that they have the potential to pay for themselves and kick off nice cash-flow on top of that.

Rental Properties are a Business. And just like any Business, they should produce Income. The Tenants are like your Customers, but they could almost be considered employees, because they work on your behalf (to pay the rent). The House or Rental Unit is both your product and your service. And your Customers (Tenants) pay for this in the form of Rent. And when the Rent covers all the debt payments, expenses, reserves and there's still money left over (called positive cash-flow or profit) – it’s an amazing thing to behold. Especially when you only had to put down 20% to purchase it (which I’ll cover later in the IDEAL acronym).

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The [D] is for Depreciation.

This is the greatest tax savings trick of Real Estate Investing. You get to Depreciate (or write off) the value of the land improvements (meaning the building and what’s within) – over some period of time, like 27 ½ years in most cases. But ways exist to accelerate the Depreciation into a much shorter time, including down to the same year the property was purchased. There are scenarios where you could buy a property on December 31^st (owning it for less than a full day), but write off a full year of Depreciation, as if you owned the property for the full year!

However its handled, this becomes a write-off (or offset) of your taxable income. You can actually have a profit, but through depreciation, show a loss on your taxes for that year and owe nothing in taxes. I’ve mentioned before how this and other tax saving factors of Rental Real Estate took me from owing $14,000 in taxes almost every year to getting $6,000 back as a refund – a swing of $20,000 because I had purchased two rental properties that year, and I owe much of that to the magic of the paper loss created by Depreciation.

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The [E] is for Equity.

Equity is created in two ways… First it happens every month when the mortgage payment is made and some amount of that payment goes towards the principle balance of the loan, thus causing you to owe less and therefore have more Equity. Through Amortization, this amount is small in the beginning, but as time goes by and the loan enters year 5, 10 and 15… The amount of each monthly payment that goes towards principle payment gets ever larger and larger. It doesn't take long before hundreds of dollars of principle payment takes place each month, potentially creating an equal amount of Equity growth.

The second way that Equity is created comes from Appreciation, the [A] in IDEAL that I’ll mention next. This is sort of a phantom increase, because its not realized (becoming real) until the property is sold. But it’s nice to update your Net Worth each month and calculate your Equity growth from both mortgage principle pay-down through amortization and property value Appreciation.

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The [A] is for Appreciation.

Yes, Rental Properties can simultaneously Appreciate and Depreciate! Because like I said earlier, the Depreciation isn’t real - it's only on paper. But the Appreciation can be all-to real, and it comes in both the value of the property typically going up over time (sometimes drastically so); and the rental income also tends to increase over time, creating more cash-flow that hopefully exceeds any increase in expenses.

If you buy your properties in the right areas, its hard to go wrong with Appreciation, as good areas of town tend to stay good or get better; whereas bad areas tend to stay bad or get worse. And while there are always the bad areas that get improved, you don't want to be betting on that. You want to buy in areas that are either already good or clearly in the path of progress towards becoming so. And these areas will tend to Appreciate well, taking your Net Worth up right along with them.

So buy in places that people actually want to live. That way tenants will be glad to have a home there. And they'll be willing to pay ever increasing rents to stay there. And if you ever decide you want to sell your property, it'll be worth more than what you paid for it, because again, people want to live there, they'll be willing to pay an increased price to do so.

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The [L] is for Leverage.

IMHO, Leverage is the greatest benefit of Rental Real Estate Properties, in that you can typically get a Bank or other Lender to give you 80% (sometimes more) of the money to purchase the asset – and at what are currently all-time low interest rates! But I’ve spoken about this multiple times already. I just can’t help repeating myself here, as I’m RE-amazed by this each time I buy another Rental.

What other investment can you name outside of Real Estate, where a Bank or other Lender will gladly provide you with $0.80 out of every $1 needed to purchase a property - and then 100% of the dollars needed to rehab it!? But yet you get 100% ownership; and keep 100% of the tax benefits; and keep 100% of the income; and 100% of the Equity and Appreciation? It really is the best deal going for any investment, so start savings your 20% now and get your credit right to get in the game. It's not too late to grab your piece of the IDEAL Investment.

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So that’s it… Nothing all that long or drawn out here on this. I just wanted to give my take on IDEAL. Remember this acronym when you’re trying to explain to your stock market investing friend or family member, why you’re going to run circles around them when it comes to investment return. And why when the stock market crashes and they’re wiped-out, you may be excited as to how this may allow you to make even more money than before.

The great recession happened in 2008 / 2009, but there was never a better time to buy Real Estate than a couple years later in 2010 / 2011. I regret whenever I think about it that I did not get into Real Estate Investing until 2015. When there’s another downturn (there always is), I’ll be ready this time.

Hopefully you won't still be letting your fears of Tenants, Toilets and Termites - stopo you from benefiting from the IDEAL Investment. And if you get a Rental Property in the Raleigh / Durham area that you'd rather not manage yourself - hire me and Blue Chariot Management to handle it all for you. Check me out at BlueChariot.Management.

Also, I've just changed my Real Estate license association over to eXp Realty - so Blue Chariot Realty is now brokered by eXp Realty. This gives me access to tools, systems and training that will allow me and Blue Chariot Realty to excel in the remaining months of 2019, then on into 2020 and beyond. So if you know anyone in the Triangle area of North Carolina who needs to buy or sell a house, please have them visit BlueChariotRealty.com. A new version of this site is coming that will be fully integrated into the eXp system and Triangle MLS.

So I don't know about you, but I'm putting things in place to do big things in the coming months and years. I'm on the verge of achieving life long dreams - some of which I'll be able to tell you about very soon. I'm just back from Egypt and Dubai, so time to start planning our next trip. What do you have in works for the final quarter of 2019? What are you putting in place to make 2020 the best year of your life? And how can I help?

You're helping me by listening to this Podcast, and I hope the same is helpful for you. It's been said that the best way to learn is to teach, so as I discuss these topics, it only serves to strength my own knowledge and understanding of the same. So THANK YOU - and let me know if I can be of any greater aid to you or if there is something specific you wish to hear or learn about.

Outro...

Disclaimer...

Welcome to Episode #24 - Rehab Lending: Down Payments, Appraisals, Reserves & Credit Scores.

What do these things have in common? You'll need to maintain high numbers for each to secure funding from most rehab lenders.

When you start out in investing in Real Estate, you'll likely do your first few deals with a conventional lender under your personal name. I believe you can play that game up to 10, and if you're married and both work (with sufficient income), you can potentially do 10 each in this manner for a total of 20! But at some point, likely much sooner than 20 - you'll need to opt for some sort of commercial or rehab lending.

This will be especially true if you pursue the BRRRR method, which I explained in Episode #14 is Buy, Rehab, Rent, Refinance, Repeat. You see conventional lenders work fine for move-in ready / Turn-Key properties - that do not require any significant rehab to make rental ready. But the best BRRRR deals will have extensive rehab required. And as such, you'll need either substantial Private Lender funding or you'll be working with a Rehab / Hard Money Lender.

That what this episode is about... What you'll need to have a handle on to secure Rehab Lender funding for your BRRRR projects - Down Payments, Appraisals, Reserves & Credit Scores.

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Down Payments... Now you can find and secure Private or Rehab Lender funding that gives you 100% of both the purchase price and rehab budget. But this doesn't normally happen on your first projects. To get Private Lender funding (outside of close friends and family), you often need to be able to show a track record of several successful deals.

And most Rehab Lenders offering 100% funding often charge ridiculous amounts in points and fees to secure such loans; require extensive experience that you're not going to have early-on; or you must find a deal that is so amazingly great, they don't come along often in the current market. So most Rehab Lenders offering 100% funding rarely actually provide it on typical deals.

In the vast majority of cases, you are going to have to come out of pocket with a Down Payment of 10% to 25% (maybe even 30%) of the purchase price, plus all fees and closing costs - and they'll fund 100% of the rehab. So on a $150,000 house, you're looking at about $35,000 out of pocket (depending on the ARV) - if they fund 80% of the purchase price and fees for closing costs come in at about $5,000 (and they can easily be twice that or more).

What most often determines your percentage of the purchase price that must be paid as a down payment, is the After Repair Value (ARV) of the completed rehabbed home. For example, many lenders will not fund above 70% of the ARV for the total project cost. So let's say that a $150,000 house required $50,000 of rehab to then be worth or sell for $250,000. And 70% of $250,000 is $175,000, which may be the most they're willing to pay on the project in total. Well, if your purchase price is $150,000 and the rehab budget is $50,000, that's a total project cost of $200,000. So you're $25,000 over what the lender may be willing to pay with those numbers on a project like that.

So to get this deal funded, you'd need to pay at least $25,000 out of pocket, which is just a little below 17% of the purchase price. If the points are at 2.00% ($3,000), appraisal is $750, attorney fee is $900 and all the other fees and closing costs are less than the remaining $1,350 - you'd be out of pocket for just below $31,000 on this deal.

Once the project is complete, you do a cash-out refi at 25% of the $250,000 ARV ($187,500). After refi closing costs of say another $2,500 and you pay off the $175,000 owed to the rehab lender, that leaves you with something like $5,000 after accounting for interest only payments on the original loan and other holding costs during the project. So no - not the best BRRRR deal in the world... You left something like $26,000 locked in the property; but you've got $5,000 or so in-hand to put towards the next one.

This sort of BRRRR deal is tighter than one I would target, as I seek to get ALL my money back (plus profit) at refi. But depending on what it can be rented for, you may still be getting a nice return on the money left in the property, so you don't always have to get it all back out.

Even if you got nothing back out but can put aside an extra $2,600 per month in savings, you'd be able to do one deal like this per year. And after only 10 years, you'd have 10 properties likely worth over $2.5 Million - your a millionaire! Now sure, putting aside $2,600/mo may be easier said than done - but if you do better deals and get most or all your money back from each, then it's less that you'd need to save. You may literally only need to save the money once, and each property can then fund the next. I've gotten all my money back plus profit larger than what I put in multiple times - so that was my next two or 3 deals funded from one.

Also, each property will lower your tax burden, so you may find you start getting refund checks that make saving for the next purchase even easier - plus the cash-flow that gets larger with each property. Its a snow-ball effect that gets easier and easier. It was much harder for me to get my 1st and 2nd properties than it was my 10th or 11th. By whatever means you'll need to plan for having 20% plus closing costs ready to take down each new property. And this is also a protection, because as much as I love debt (see Episode #21) - you don't want to get over leverage by putting little to nothing down.

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Appraisals... This all of course assumes that the property appraises for both the as-is purchase price and the after repair value (ARV). If it fails to appraise for what you're buying it for and/or the appraisal does not agree with your target ARV - it changes everything. You may not be able to get the deal funded. You might have to pay more out of pocket; or you might end up with more money locked in the property. You could even end up having to put in additional cash at refi (this has happened to me twice) - thankfully not early on, or it could have been catastrophic.

You live and die by the appraisal, which is why a lot of investors go for 5 unit properties and above, as they're valued based upon net income instead of comparable sales. You more fully control the valuation of 5 units and above (lower expenses / raise rents = increased value); whereas its somewhat out of your control on 1 to 4 units that just looks primarily at what similar nearby properties have sold for recently.

Multiple times I have been hampered with appraisals that came back low on the as-is value or ARV - or both. Thankfully my being a Realtor and now having extensive experience makes this less frequent - as I've largely been able to get the appraisers to consider and accept my suggested comps. But you have to be realistic going in - with an eye to what an appraisers is likely to come back with as a value for a given property.

Once I even forced a second and third appraisal to be preformed on the same property and got the value increased by $60,000 (very rare for a lender to allow that) - but I'm a Realtor and had done several prior deals with them, so they valued my knowledge and experience. The first appraisal was ridiculously low (demonstrably so); and the same appraiser then did another to correct his mistake - which even though a little higher, was still obviously low. So I got a 3rd clean appraisal from a different appraiser, that was $60,000 above the first - and even it was still $10,000 lower than it should have been (in my opinion), but it was good enough.

A bad appraisal can easily kill a great deal, so you have to be up on this. Know your comps. Be realistic. Don't compare properties that are not really alike, too far apart, crossing major highways or tracks, with different amenities and level of finishes, and on... It will come back to bite you.

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Reserves... Most Rehab Lenders are not only going to require that you put down a certain amount into the deal as a down payment. They are also going to want to see a certain amount of cash on-hand in reserve. So most often you'll need to be able to show cash in the bank totaling your down payment, closing costs and something like 6 months of interest payments on the loan.

So that $31,000 you needed to have to take down the example deal I gave earlier, could easily now be $40,000 or more. I've done deals where I needed to show $75,000 in the bank.

Now thankfully, some lenders will allow reserves to be in the form of retirement funds (401K / IRA), giving you credit for some percentage of the amount present within these accounts. Some will consider cash-value life insurance. Some will allow for a percentage of business account funds - which is great for a self-employed business owner like myself.

And since you often need to be able to provide a few months of bank statements to validate these funds - and they ask questions about any large deposits or withdrawals on those statements. I've setup separate bank accounts with sufficient reserve funds present to do almost any deal - and I just keep it there with little to no activity on those accounts. This makes it easy for me to show reserves without having to answer lender questions about transactions on the account.

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Credit Scores... Credit and Reserves are a balancing act for me.

I'll even carry a credit card balance (most are zero interest promotions anyway) - instead of using reserve funds to pay the card off. As I need to be able to show reserves on-hand more than I need to show zero balance on my credit cards - especially when the balance is at zero interest.

But this is always a concern, because Rehab Lenders often require a certain credit score (typically between 680 and 720). Above 740 you can almost walk into any bank and put your foot on their desk while you tell them how much money you need to fund your next deal. My scores were all above 820 - before I started using my credit on BRRRR deals.

You see, whenever I buy an HVAC system, flooring, appliances, cabinets, counters, foundation repair, and on... I'm likely to put it on a credit card with a zero interest promotion of 12, 18, even 24 or 36 months. It's literally FREE money. And each time I successfully pay off a promotion, they increase my limits and give me another promotion for a longer term! I just divide the total by the number of months for the promotion, and put that amount aside in a reserve account each month.

I then setup an automatic payment of the minimum amount due for that card. This means I never miss a payment, and it means my reserve account grows and can be used to show cash on-hand for the next project I seek to fund. If the system for that card allows it, I setup a final payment in advance from the reserve account for one month before the promotion ends. if it does not, I set a reminder in my calendar. Either way, I get FREE use of that money for X number of months - while building both business and personal credit.

The drawback is that those zero interest promotional balances often reflect on my personal credit if the card is in my name or if I'm the guarantor for a business account. Since I'm self-employed and pay myself the minimum, and since I'm often using 100% of the credit line - this has a negative impact on my credit score.

So the days of an 820 score are long gone for me. Despite having zero late payments, no liens, no judgements and no collections on my credit reports - I must manage my card balances and utilization percentages, as well as the number of credit inquires - to make sure that my scores remain above 680 (with my target being above 720).

Now I know that Dave Ramsey and other credit / debt adverse people will cringe at hearing how I use credit. However, your credit scores are either an asset or a detriment. If your scores are above 800 - then you are allowing an asset to go to waste. Some time ago, I wrote a blog post on Bigger Pockets about how ironic it was that I own millions of dollars of Real Estate and have multiple profitable businesses also potentially worth millions - yet my credit scores are often lower than some of the tenants who live in my properties. That should tell you the credit reporting and scoring system is majorly flawed.

And I'm not trying to brag or be condescending, but how can a person who has never had a late payment, no collections, no liens or judgements in over something like 25 years (with a net worth in the millions) - have a credit score lower than his Section 8 tenant with a part time minimum wage job?

The system doesn't like people who leverage their credit. But if you learn how to do so, it is a source of great amounts of FREE money - that will accelerate your growth as a BRRRR investor. Just make sure to learn how to do it right, because YES - it can also ruin you if done improperly - Dave Ramsey and others are not entirely wrong. They're just not speaking to a person like me. I wouldn't recommend jumping out of a plane either, but we can all agree that it can be done safely - if you know what you're doing. And that's far more risky than leveraging your credit. Are you going to tell me that can't be done safely?

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So that's it for today... I just wanted to provide some insight into what you'll encounter when using Rehab Lender funding on your BRRRR projects. Beyond what I've stated here, you'll also need to know how to estimate your rehab budget - as it's most often required to get funding, and you cannot change it later in many cases.

So go out and find an amazing BRRRR deal, and if you're looking for funding, go to: andlandlord.com/contact - I'd be happy to connect you with one of my lenders.

Outro...

Disclaimer...