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The 6 Crucial Factors of an Amazing Tenant

[Note: The following is an excerpt from Brandon Turner’s The Book on Managing Rental Properties. To learn more about screening tenants and saving yourself from the heartache of a poorly managed property, be sure to check it out here!]

The most important decision you make that will determine the success or failure of your rental is the person you put in the property. A bad tenant can potentially cause years of stress, headache, and financial loss, while a great tenant can provide years of security, peace, and prosperity. Don’t underestimate the importance of renting to only the best tenants. While it’s not possible to know with 100 percent certainty what type of tenant your applicant will be, there are some telltale signs and traits that will give you a pretty darn good indication that they are great tenant material. Here’s what you should be looking for.

Related: Yikes! My Tenant Just Went to Jail: Here’s How I Handled It

Their Ability to Afford the Rent Payment

The first and foremost quality of a good tenant is their being financially responsible and their ability to afford the rent. Without proper payment, the landlord will be forced to evict and be faced with potentially thousands of dollars’ worth of legal fees, lost rent, and damages. Most landlords require that a tenant’s (documentable) income equal at least three times the monthly rent. Many tenants believe that they can afford more than they really can – so it is the job of the landlord to set the rules to protect their investment. If the tenant is already financially responsible, earning three times the monthly rent should be sufficient.

tenant-screening

Their Willingness to Pay on Time

While some landlords look at late rent as a benefit because of the extra income from the late fee, a late-paying tenant is more likely to stop paying altogether. The stress involved when the rent doesn’t come in is not a pleasant experience and can be avoided by only renting to tenants who have a solid history of paying on time.

The Long-Term Outlook for Their Job Stability

While a tenant may be able to pay the rent and pay it on time right now, their ability to do so in the future is often determined by their job situation. If they are the type to switch jobs often or have long periods of unemployment, you may find long periods of missed rent.

Their Cleanliness and Housekeeping Skills

No tenant stays forever—and when they leave, you want the property back in good condition. As such, it is important that the tenant’s day-to-day living be clean and orderly. They must take good care of the property you have entrusted with them.

home-staging-tips

Their Aversion to Crime, Drugs, and Other Illegal Activities

A person who has no regard for the law will also likely have no regard for your policies. Tenants who engage in illegal activities will cause nothing but stress and expense.

Related: 10 Invaluable Lessons I Learned From My Very First Tenant Eviction

The “Stress Quotient”—How Much Stress Will They Cause You?

The final quality of a great tenant is something we call their “stress quotient,” or in other words, the amount of stress a tenant will cause you, the landlord. Some tenants are very high maintenance and constantly demand time and attention. Others simply ignore the terms in their lease and need constant babysitting, reprimanding, and discipline (late fees, notices, phone calls, etc.). This type of tenant will only be a thorn in your side.

(Continue reading on BiggerPockets…)

She was a three-unit small apartment located in a great location, with stable tenants, and an ugly paint job. This triplex, which I call “Cherry Street,” was close to becoming the newest addition to my growing rental portfolio, but with Cherry Street I was about to do something I had never done before: start looking at investment property loans.

You see, before Cherry Street, I had only used conventional home mortgages, seller financing, and hard money lenders to invest in real estate. However, Cherry Street was purely a cash flow beast that I was hoping to buy, re-paint (please!) and hold on to for retirement.

However, as I began shopping around for a mortgage, I quickly realized that the process was not going to be the exact same as it had been in the past. What I soon realized was that investment property loans are slightly different than your typical home mortgage in several ways (but similar in several ways as well.) The information below contains a lot of the things I learned in my quest for the best investment property loan, and enabled me to get a great loan, with a great rate, from a great lender. It is my hope that this article does the same for you.

This article is going to look at exactly what a investment property loans are, the difference between and investment loan and a typical mortgage, tips for qualifying for an investment loan, and where to find the best loan for your real estate investment.

What Are Investment Property Loans?

As most readers on BiggerPockets already know, investment properties provide a vehicle that allow you to enjoy the potential for market appreciation while building equity each month. In addition, the monthly cash flow from a real estate investment can provide extra income to your wallet, help you pay down debt faster, or allow you to quit your job and begin living life on your own terms.

However, unless you have all the cash needed for your investment property, a loan is going to be required. Investment property loans can be used for either purchasing an investment property or refinancing an existing investment. Whether you are purchasing or refinancing a single or multi-family home, condo, or shopping mall – getting the best loan is essential to your bottom line. Investment property loans can also be used for real estate development, such as new construction, spec building, or raw land development.

The rate and term that you achieve is going to directly affect your monthly payment, which will affect your monthly cash flow — the life-blood of any real estate investor. We’ll look deeper at both “rate” and “term” in a little while, but first let’s look at the major differences between investment property loans and regular home mortgages.

conventional-loan

There are typically two types of investment property loans:

  • Residential
  • Commercial

Because lending institutions will typically have two completely different departments to deal with these different kind of investment property loans, as well as significantly different qualifying standards, it’s important to know the difference before you go searching for a loan. Let’s look at both those types of investment property loans in greater detail.

Residential Investment Property Loans

Residential loans are designed for properties that provide housing for individuals or families and contain four units or less on the property. These loans more closely follow a typical home mortgage, with similar qualifying standards and processes. These standards include:

  • Debt to Income: Your debt to income ratio is a number used by lenders to determine your ability to pay a certain debt based on how much income you make, typically in a given month. If you have $2000 per month in monthly debts on your credit report, but have an income of $6000 per month – your debt to income would be 33.33%. Debt to income can get a little more complicated than that as well, so for much more thorough information, please see “What Is Debt to Income? 
  • Credit Score: Your credit score is a numerical number applied by three different “credit reporting agencies” and is designed to tell inquirers how you handle credit. On a scale from 300 to 850, you will typically need to have a minimum of 700 to obtain a investment property loan.
  • Loan to Value: The loan to value is another ratio, used by lenders to discover their risk on the property based on how much equity they have in the property if they had to foreclose. The loan to value, as the name suggests, is determined by comparing at the total loan amount to the total fair market value of the property. In the height of the last real estate bubble, many lenders were allowing a borrower to take a loan up to 125% of the value, but today, 70-80% is much more likely on investment properties.
  • Landlord Experience: While previous landlord experience is not a requirement to obtain an investment property loan, it can affect your ability to qualify for a loan. You see, as you attempt to obtain multiple loans for investment properties, your debt to income ratio climbs very quickly, even though that debt is being paid by a tenant. To help increase your income, a bank can add your rental income to your regular monthly income but usually will only do so after you have been a property investor for more than two years – though this requirement can differ greatly between lenders. Keep in mind also – that even with landlord experience, a lender will typically only apply 70-80% of that rental amount toward your income, to protect themselves against losses.

Typically, residential investment loans will extend for up to thirty years and the rate is generally some of the lowest rates you can find, usually between .5% and 1% higher than you’ll obtain for a home mortgage. To check out current rates on investment property loans, be sure to check out the BiggerPockets Mortgage Center.

(Continue reading on BiggerPockets…)

Should You Pay for an Expensive Real Estate Education Course?

 

No doubt, you have seen expensive coaching and training programs advertised on late-night television or internet banner ads. Real estate gurus claim to be able to teach you to become filthy rich through real estate investing. Is this real? Can you really learn from these guys?

Let me first explain how this industry works. Typically, this kind of coaching or training involves several “layers,” and as you peel away the layers, the education gets more and more expensive. Let me share the most common layers, so you’ll be able to recognize them in the future.

 

1. The Free Class

You might come across an advertisement on the radio, on television, in your local newspaper, or on your favorite website –something like “free real estate seminar” at a local hotel or conference center. The marketing teams behind these gurus spend a lot of money to drive traffic to these free seminars, hoping to pack the room with wannabe real estate investors.

2. The Hype

In the seminar, the real estate guru creates massive hype around what real estate can do, showing photos of his properties, citing impressive numbers on how much profit he made, and claiming how easy it was. He tells stories of past students who have amassed a fortune from his investing tips. He pushes on all the right pain points about how hard being broke is, how you are not taking care of your family well enough, how you are missing out on life’s luxuries. Then, he pitches hard for you to attend his weekend boot camp, usually for a small yet not insignificant chunk of money, between $200 and $500. After the pitch, he encourages the attendees to run to the back of the room to sign up — and many people do.

(Continue reading on BiggerPockets…)

I’ve got some bad news for you: There is a major problem with your goals.

No, it’s not that you don’t have any — I’m sure you do. The problem is, they are not big enough. You’ve relegated your ambitions to the kids’ table, and your future-self is begging you to reconsider.

Remember when you first jumped into entrepreneurship? Your goal wasn’t to see a 10 percent increase in sales during the next fiscal year. Your goal wasn’t to talk to ten more sales clients per week. Your goal wasn’t to bump up your net worth by 5 percent this quarter.

Your goal was to become a rock star and change the world. Your goal was to make millions, improve your networth by 10,000 percent, to make a real dent in the universe. But somewhere along the way, you decided to get “SMART.”

SMART goals have a problem.

I’m sure you’ve heard about setting “SMART” goals. This acronym, used in numerous industries to help people create better goals, stands for:

  • Specific
  • Measurable
  • Attainable
  • Relevant
  • Time-bound

While we all generally agree that all five parts of a “SMART” goal are wise, it’s your interpretation of the “attainable” goal that is killing your potential. “Attainable” has become synonymous with “safe.” It’s been defined as “easy to obtain” rather than “what’s possible when stretched.”

You started your journey reaching for the stars, but soon discovered that the stars are an awfully long way away, so you decided that a more “reasonable” goal would be better. After all, you don’t want to miss your goal and let down your team, your family and yourself.

Related: Why I Set Highly Ambitious Goals for My Real Estate Business (& Why You Should, Too)

You set “reasonable” goals only because you lacked the courage to tackle the big ones.

Small goals = small thinking.

The problem with small goals is that they encourage small thinking. (Tweet this quote!)

For example, in my real estate investing business, I spent years trying to buy two properties a year. I believed that the goal of two properties per year was reasonable and I would be able to accomplish this goal. And guess what? I usually did.

(Continue reading on BiggerPockets…)

How to Be a Landlord: Top 12 Tips for Success

[Note from the editor: Dealing with tenants is kind of like knitting (stay with me here): It requires a lot of learning, some people will have no idea why you’re spending your time doing it, and it’s a lot easier if you have an expert around to help you avoid a big, tangled mess. This article was published a few years ago, and since then, we’ve grown significantly. We’re republishing these tips (plus two new ones!) today in hopes of helping out a few more landlords learning the ropes. Please leave your comments below!]

Sometimes I don’t like tenants.

OK, that’s a lie. A lot of times I don’t like tenants. I’m sure individually those tenants are decent people. However, as a whole, I don’t always like tenants.

When I first wanted to enter real estate investing, I heard time and time again all the reasons why landlording is a terrible idea. I’m sure you’ve heard them, too:

  • The tenant won’t pay rent
  • The tenant will trash your house
  • The tenant will make you go bankrupt
  • The tenant will make you clean toilets at 2 am
  • The tenant will drive you crazy

These generalizations are not unfounded. Many investors become landlords and quickly find they are overwhelmed by the amount of work it takes to manage tenants — especially in low-income areas or in multifamily properties (both which I own.) These landlords often find themselves burned out because they never learned how to be a landlord.

Over the past five years I’ve made a lot of mistakes, learned a lot of lessons, talked with a lot of other investors (both successful and not), spent a lot of time on the BiggerPockets Forums, and read an absurd amount of books. During this time I’ve learned a lot of “hacks” from these sources that have made landlording much easier to handle. I finally feel Like I know how to be a landlord – and can help others feel the same. Some of these might work wonders for you – others may not work at all. However, these are all tricks that have helped me manage dozens and dozens of properties and still love investing in real estate.

Like a new puppy or a new employee, tenants need to be trained to act the way that fits your business model. Many of your tenants are coming from a background with terrible landlords who let them do whatever they want. Unless you want the same problem – you need to train your tenant to perform the way you want.

 

How to Be a Landlord: Top 10 12 Tips for Success

12.) Be Smart About Rent Collection

Are you still trekking around the city collecting rents from your tenants physically? Stop! Not only is showing up at your (potentially financially strapped and therefore stressed/angry) tenants’ doors possibly dangerous, but it’s incredibly tedious, time-consuming, and inefficient!

Instead, check out alternative options, from electronic pay systems to an ACH (automated clearing house) to withdraw money from the tenant’s bank account. Get more insight from this article.

11.) Start Adding Systems NOW

You’re just a “mom and pop” landlord looking to make a little side income, right? No need to hone your methods or organize paperwork.

WRONG. If your ultimate goal is to achieve more free time and not be tied to your day job (and yes, landlording can definitely be a demanding day job), you’ll do yourself a HUGE favor to start building systems now. That way, when you’re the proud owner of 10, 20, maybe even 50 rentals down the road, you’ll be able to step away seamlessly for that early retirement — and your business will still run like a well-oiled machine.

(Continue reading on BiggerPockets…)

How I Used Real Estate to Pay for My Newborn Daughter’s College Education

Two months ago, my wife and I welcomed Rosie into the world — our first child. Last week, I had her entire college education paid for without spending a single dollar of my own money. How? Through a single real estate investment.

The theoretical plan was simple, if not necessarily easy:

  1. Buy a piece of property.
  2. Let my tenant pay off the mortgage over the next 18 years.
  3. Sell or refinance the property after it has been paid off.
  4. Use the proceeds to pay for my daughter’s college tuition — or whatever future she wants.

In my case, I purchased a four-unit property in my local area. Fixed up, it should be worth around $160,000 in today’s market; and assuming an average increase in inflation of around 3 percent, I estimated the property to be worth around $275,000 in 18 years. This should be more than enough to cover four years of Rosie’s college education — or if she chooses not to go to college (which I would support wholeheartedly), provide the funds to start a business.

habit-change-life

The beauty is, I’m not the one paying for it — my tenants are. Each month, the mortgage is paid down lower and lower, but the funds are coming from the rental income on that property. At the same time, the value of the property will likely climb each month to keep pace with inflation — increasing my wealth (and Rosie’s college fund) each and every month.

What’s even better, I bought this property for no money out of my own pocket. Sure, I could have put down a large down payment, but real estate is so much more fun when you can put together a deal using only other people’s money. For this particular purchase, I used a private money lender to fund the entire purchase and a rehab of the property.

Related: At Age 26, I’m on the Brink of Financial Freedom: Here’s How I Did It

Once the property has been completely remodeled, I’ll refinance the loan into a long-term, fixed-rate mortgage with a local bank. I call this the “BRRRR Strategy” (buy-rehab-rent-refinance-repeat), a strategy I’m very fond of and discuss in more depth in The Book on Rental Property Investing.

Four Steps to Success

Of course, this strategy is not going to work for just anyone who buys a piece of real estate. Instead, it took several key steps.

First, I had to find the right property — perhaps the most important step in this process. So, I spent a good amount of time prospecting for potential deals in my local market. This property came from a direct mail letter I sent to the owner several months ago. I determined my maximum allowable offer based on a thorough analysis of the property and negotiated hard to get the deal I needed. In real estate, you make your money when you buy — so don’t underestimate the importance of doing a proper analysis on any real estate deal.

(Continue reading on BiggerPockets…)

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