Hey, it’s Joe Crump.
This video is about how to find and analyze a rental property.
So, what’s the best way to find a property and then how do you decide whether or not
it’s going to be profitable.
First, you want to look at the different types of lead sources.
I find that some of the best lead sources are For Sale By Owners.
We use Pushbutton Automarketer system to market to those people.
We also use that same system to market to expired listings, properties that have been
on the market for sale on the MLS that did not sell.
And we also use it to go after absentee owner sellers.
Those are typically good lead sources to go after to find properties.
So, what type of property do you go after?
The first thing to look at is the price to income ratio.
Price to income ratio is how much income is on that property and how much that property
costs.
If you’ve got a property that costs you $50,000 and has a $900 a month income on it
versus a property that costs you $200,000 that has a $1,500 a month income on it, the
percentage of the income versus the price of the property is much higher on the cheaper
property.
So, the return on your investment is going to be much higher on the cheaper property.
The other thing you have to think about though, if you get too cheap, if you buy a $10,000
property, for example, in an area that’s very challenging, or that might be crime-ridden,
then can you collect all your rent?
So, even if it does have rent that potentially could be much, much higher than a $200,000
property, does it make sense to buy a property that’s in an economically depressed area
that’s going to be hard to keep rented and hard to collect your rent.
So, what you want to try to do, and what I try to do, is find a balance.
And when you start building a portfolio you want to have properties in both areas.
You know, I’ve got properties that are well over $200,000 and I’ve got properties that
I paid, you know, $2,000 for and then we put money into them and fixed them up and maybe
have $30,000 in them.
So, you can do it both ways.
The return on the investment on the cheap properties is good if you understand your
areas that you’re buying into and you have competent property management who’s willing
to work in those areas and willing to do the work necessary to make that happen.
If you have to do the management in those areas, then there’s a lot more effort that
has to go into that process.
I don’t manage any of my properties.
I don’t enjoy that process at all.
So, I have people that are competent that actually enjoy that work, do that work and
I pay them to take care of it for me.
All I have to do is look at the numbers that come in once a month when they send in the
invoices and they send in the receipts and the income that has come in and that usually
goes to my bookkeeper and my bookkeeper sends it to me as a report and I look at it once
a month so I can see what my vacancy rate is, you know, what the costs are, and then
we also kind of create spreadsheets for each property so we can see how much money they’re
making each month.
We break it down by month so we can see the cost and expense of each month.
I can look at the bottom line and say this month I made this much money.
And this year I made this much money.
And these five years I made this much money.
And this is how much I originally paid for the property and this is how long we’ve
had it.
This is how long it took to get it sold.
This is how much we’ve put into it.
And when we’re doing our spreadsheets we’ll also put in the amount that we paid for it
and the amount that it cost us to get it rent-ready, whether we spent nothing on it or whether
we spent $30,000 fixing up a rough property.
And then we look at what is the current value of that property.
So, that’s the next thing that we should look at - value.
Obviously, if you can buy a property that’s under market value, which is what you’re
going after when you’re going after For Sale By Owners or expireds or absentee owners,
you’re trying to find properties that you can buy under market value.
Because the more under market value you get them, the better your return on investment.
So, you want to look at the return on investment that’s immediate.
So, if you buy a property that, let’s say, one that we just bought for $44,000, actually
I’m closing on it today.
$44,000, I put $10,000 down on this property and we’re going to contract for deed on
the property.
We make payments on it at $420 a month over about a six- or seven-year period.
Zero interest.
So, every payment that we make goes totally towards principal.
It’s going to cost me about $20,000 to $25,000 to fix up this property and make it really
pristine.
Make a really nice property.
So, we’re going to have about $70,000, maybe $75,000 into it, depending on a couple of
things.
You know, when you get into a new property like this you always find surprises.
So, I’m going to have $70,000 or $75,000 in the property, and the comps are showing
that the value is $120,000.
So, once we put this money into this property I’ll end up having about $25,000 for the
rehab, $10,000 to purchase the property which I made for the down payment.
I’ll owe the $34,000 and will make payments of $420 a month on it.
It’ll also rent for about $900 a month.
And then we’ll sell it on a lease option.
We’ll probably get about $3,000 or $4,000 in cash up front for it.
We’ll get another $2,000 to $5,000 as a promissory note for the down payment which
will give us another $150 a month positive cash flow in the deal.
So, we’ll have a really nice positive cash flow position on this property.
Our taxes and insurance are going to cost somewhere around $100, $125 a month on that
property.
So, as you can see, there’s really a nice return on that property as far as a good rental
property that we’re selling on a lease option which they may or may not exercise the lease
option, but if they do, you know, we’ll make, you know, $40,000.
If they don’t, then we’ll be able to keep the property and continue to make the income.
The property will pay for itself over five, six, seven years, completely pay for itself
and we’ll have all of our money back and then we’ll just have that as an income property.
It’ll be bringing us in $700 or $800 a month for the rest of our lives.
So, that’s a nice way to look at rental properties and an easy way to build inexpensive
portfolios.
And this is not in the state that I live in.
So, it’s in a rural area.
And I also buy properties in urban areas and rural areas in that price range because I
think that those are really valuable ways to build a rental property portfolio if you’re
buying single family homes.
There’s some people that like to have multiplexes and I’ve got some multiplexes.
But I find that the single families are nice because they’re so liquid; easy to turn
around and sell them.
The values go up a lot quicker.
Vacancy rates are lower.
When you get into a situation like this one, this pandemic, the people that I know that
have commercial properties have a much higher vacancy rate than I do with single family
homes.
Also, the fact that we’re selling them on lease option makes them more stable and it
means that the people that moved into them originally have some more skin in the game
because they had to come up with a lease option fee and it’s more likely that they’re
going to make their payments and keep up with it and want to keep that contract solid.
Because they see themselves as an owner rather than as a renter.
And, you know, we all know we don’t wash our rental car, you know, you take care of
your own stuff, but you don’t take care of stuff necessarily as well that you’re
renting.
So, it’s a nice way to build a portfolio.
That still doesn’t mean that you shouldn’t be looking for other types of investment properties.
Subject to has been very good to me.
Subject to takes a lot longer to pay off.
Most of the subject to properties that I’ve bought may be in the, you know, $125,000,
$150,000 range when I bought them, you know, at five, ten, fifteen years ago.
But they had mortgages on them.
And most of the time we got them subject to because they didn’t have much equity in
the properties.
But we got them 100% financing, zero down, just, they deeded us the property.
We took it over, we started making payments.
We’d have maybe $100, $200 a month positive cash flow on them.
Sometimes the taxes went up and it would erase our cash flow.
So, sometimes we’d have a little bit of negative cash flow on those properties.
But we would get lease option fees on them and that would raise our positive cash flow
and help us get back to normal and to get to an even rate.
Now, the properties that I’ve had for ten years that I bought of $125,000 are now worth
well over $200,000.
$200,000, $225,000, $250,000, and, you know, this is in an area - Indiana - those particular
properties.
So, it hasn’t taken them long to go up.
Plus, it’s pretty easy to keep those properties rented because there’s not a ton of rental
properties in higher end markets.
And that is a higher end market.
When we bought it, that was the average price range of Indianapolis.
And now the average price range is more like $175,000.
So, now they’re worth a little bit more than the average price range.
Some of them are in better neighborhoods than others as far as the school system goes, and,
you know, being desirable as far as being able to put a family in it.
We’re also looking at three bedroom and four bedroom rather than two bedroom or one
bedroom units.
I find that a four bedroom unit is going to get you a higher return on your investment
almost all the time.
But we still do three bedrooms as well.
But if you can get four I think you’re going to have a better, your deals are going to
end up being better if you can do that.
I wouldn’t make that the only criteria.
I’d be looking at the value versus the price, and also the financing.
So, there’s two ways that you make money as a real estate investor.
One is buying properties that are substantially under market value for cash or assigning those
to someone else if you don’t have the cash to buy them.
Or, two, buying properties on terms at or below market value.
So, buying properties say, subject to or on a land contract where you don’t have to
put any money down or very little down to buy that property.
The one we’re closing today is one where we’re putting $10,000 down and we’re going
to put $25,000 into it and - when I say we - I - am going to put $25,000 into it.
So, I’m going to have about $35,000 into that property and another $35,000 on a mortgage.
But it’s still going to make sense because it’s got such good equity in the property
being it’s valued at about $120,000.
So, you’re goal then is to start building that portfolio.
The next thing you want to look at, just to kind of clear the air is, how to build that
portfolio, how to structure your business so that you build that portfolio.
And I’ve talked about this in other things about LLCs and those types of things.
But just real quickly, don’t put too many properties into one LLC.
Only put as many properties as you can lose in any particular LLC.
So, if you’ve got three properties and you own them free and clear, and they’re each
worth $100,000, it probably doesn’t make sense to put all three of them into one LLC.
If one of them gets sued, and for some reason your liability insurance doesn’t cover it
and I have a million dollar liability policy on every one of my properties individually
- but I’ve never had to collect on any of it.
And I really don’t know for sure whether it would work.
So, let’s say the insurance company figures out a way to weasel out of paying for a deal
and I lose a lawsuit for whatever reason, somebody breaks their leg or hurts themselves
on my property and they sue me and they win for some reason.
And the insurance doesn’t pay off.
And then they’re going to try to collect that money, they’re going to come after
everything in that LLC.
And if I have all three of my properties in that LLC they’ll take all of them and I’ll
be out all $300,000 of my equity.
If I had them in three separate LLCs they could only go after what’s in that particular
LLC.
So, you want to split it up based on your asset base, not based on the number of properties
you have.
Because let’s say all three of those properties were subject to and I didn’t, they’re
still worth $100,000 and I owed $95,000 on each one, or maybe $90,000 on each one of
them.
So, maybe I’ve only got $30,000 of equity in that entire LLC instead of $100,00 of equity.
If somebody came in and tried to take that property from me, there wouldn’t be much
for them to take because there’s no real equity in those properties once you pay a
realtor or somebody else to sell those properties.
Once you liquidate them you’re not going to have any money.
So, it doesn’t make sense for that person who’s trying to sue us to come after that
LLC because there’s not much equity in that LLC to cover.
So, you always want to protect yourself in that way.
I would also suggest that you look at Roth IRAs, self-directed Roth IRAs and put your
long term investments into those Roth IRAs.
You can put subject to’s, you can put land contracts, as long as they have non-recourse
loans on them.
You can design your land contract so that it is a non-recourse loan.
Just put that verbiage in your language of your document, your land contract document.
If it’s a subject to, those are already non-recourse.
They can’t come after you.
So, those are safe in a Roth IRA.
So, once you put those properties in that IRA you can’t really touch that money until
you’re 59 1/2 years old.
But once you reach that age, hopefully those properties will have paid off by then, or
substantially paid off by then and you know, and hopefully you won’t need that money
because you’ll have other income coming in from your other sources.
But you’ll be able to take any money out of that deal without having to pay any taxes
on it.
If you sell that property while it still has a mortgage on it, while it’s still in the
IRA, then you have to pay the UBIT tax.
But if you pay it off entirely before you sell it, and even if you paid it off in cash
a few months before you sold it, you know, it didn’t have to amortize all the way,
but you paid it off in cash, it’s my understanding - and I’m not a CAP, so this isn’t legal
advice - but, my understanding is that you won’t have to pay the UBIT tax because there’s
not any financed amount at the time that you sell it.
So, that’s the thing that they’re looking at.
Now, if somebody has information that’s different than that, I’d love to hear it
in the comments, so please give me that detail because I’m doing that myself and I’d
like to know if it’s different than that.
But that is my understanding of it.
So, that’s how to find properties, how to analyze them.
There’s an awful lot of videos that I’ve created on how to find properties.
An awful lot of videos on how to structure the deals and you know, put together properties
for your portfolio.
Most people, when they’re first getting into real estate investing the goal is to
make money - not to build a portfolio.
Yes, a portfolio would be nice as well, but you need to make enough money to support yourself,
maybe quit your job, do this full time and once you start doing that by flipping properties
using the For Rent Method where you don’t use your money, you don’t use your credit,
you start building an asset base, something that’s reliable, something you can count
on, something you know is going to come in every month.
Once you’ve done that, and you know you’ve got three months in a row where you have regular
income that makes that happen and you quit your job, because I think it takes about three
months - once you do this three months in a row, the likelihood is that you can quit
your job and do this for the rest of your life
But, once that’s done, then you want to start thinking about, okay, I did one property
this month.
Maybe if I do two properties this month I’ll keep one of those properties and then you
can go in that direction.
Anyway, I hope that answers the question, and if you like this video please hit the
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All right - good luck to you.