"Advice" on how to buy rental property.

General Real Estate Investing
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I spent the afternoon and part of the evening in a mall with my family. While we were there we visited the Barnes & Noble store - my wife wanted a book on web design and my daughter wanted 100 books on Dora, Diego, Cinderella, etc… etc… etc… :O) The funny part was when I heard my wife telling my daughter that she could have only one book because “daddy was saving money to buy some houses and couldn’t afford more books…” :O) And my daughter asked “Why?” I almost put my daughter on my lap and opened my 20-year investment plan to show her why we needed to save money… :O)

Anyway, while we were there I decided to check some of the books in the Real Estate section. I got one that talked about how to buy rental properties. I was curious about what advice the author was giving and decided to read some of it. In all the examples the author presented, the estimated operating expenses were much less than 50% of the rents. Actually they were more like 30 or 35% of the rents… And interestingly enough in most cases the estimated operating expenses + mortgage was within 1 or 2 dollars of the rent. And the author went on to say that cash flow is king. At first I couldn’t understand how he was talking about cash flow in properties where the rents were hardly enough to cover only the mortgage + estimated operating expenses that seemed too low. After reading a little bit more I understood the secret…

He added the tax savings to his calculation. All the positive cash flow he was demonstrating in each example was due to the estimated tax savings… :O)

He also said that owning rental properties generates 4 income streams (1) appreciation; (2) tenants pay principal; (3) tax savings; and (4) cash flow. The problem was that according to his own examples, (3) and (4) were the same - he only had cash flow because he was considering the tax savings… :O) I felt that he was double dipping… :O)

And just before I closed the book I decided to take a look on his estimated expenses - I couldn’t find legal costs, administrative costs, mileage, advertising… Adverstising was listed in the page, but he assigned $0 cost… I guess he uses Craiglist… :O)

No wonder why there are so many “investors” having problems now. I am no expert, but thanks to the advice I got here I was able to recognize the flaws in his analysis.

By the way, he also had a very simple plan to build a $10 million equity over a period of 30 years buying only 10 houses in the first 10 years (1 house per year) and not doing anything for the rest of the 20 years. He used an average of 6.3% appreciation per year. What he forgot to mention is how the person can maintain those properties over those 30 years with 0 or negative cash flow… :O)

And another pearl I got from the book - don’t bother trying to find houses at a big discount. Buy them at or slightly lower than market value. If you try to buy houses at a big discount, it will take too much time and it is not worth it… :O)

Anyway, I wanted to share this with you and recognize the help you are providing to new investors. Thank you.

PS: propertymanager - now I see what you mean when you say that most “gurus” sugar-coat their strategies to make them seem easy.

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PS: propertymanager - now I see what you mean when you say that most "gurus" sugar-coat their strategies to make them seem easy.

That’s why I have been on such a fanatical mission to tell the REAL WORLD side of the business. Almost ALL of the guru stuff out there is B.S. They’re more like cheerleaders (complete with glittery pom-poms) than business people. Either they don’t understand the business or they are LYING about it. Neither is acceptable in someone who is supposed to be educating new investors about the business. Just talking about it is making my blood pressure rise. I’m going to stop typing before blood starts shooting from my eyes!

Mike

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j1dias,

Didn’t you get the memo? Smiley faces are not welcomed here.

http://i104.photobucket.com/albums/m171/jb_bak/smiley.jpg

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j1dias,
While I agree that you should save money for your investments. I also believe that some books are worth their money. Even the children’s books. I have kids and know how they treat them, buy they do learn from them. As far REI books. There are a few that I’ve found helpful.

  1. Propertmanager’s book.
  2. “The Millionare Real Estate Investor” by Gary Keller. ($20).
  3. " The AbC’s of Real Estate Investing" by Ken MKelroy. ($15)
  4. “The Millionare Next Door” ($20)

I’ve learned the difference between spending money and wasting money from these books. I’ve also bought about 10 other Money/RE related books for a total of about $230. Some were good. Some were bad. But I’ve always learned from them.

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Phlemboy - thank you for the suggestions. I do agree with your statement that some books are worth their money. Actually I love to read and learned a lot from reading. We are trying to teach my daughter the love for reading. She is 3 and she seems to enjoy a good book more than TV… :O)

Have a good Sunday!

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My son like to chew on them, then he tries to read them… He’s a work in progress!! :rolleyes Ya’ gotta love em!! :biggrin

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He also said that owning rental properties generates 4 income streams (1) appreciation; (2) tenants pay principal; (3) tax savings; and (4) cash flow. The problem was that according to his own examples, (3) and (4) were the same - he only had cash flow because he was considering the tax savings... :O) I felt that he was double dipping... :O)

j1dias,

I have said in these forums before that serious rental property investors don’t buy the property – they buy the cash flow.

Tax benefits may not have any affect upon the investor’s total tax liability, especially if the investor’s modified adjusted gross income is $150K or greater. Suspended net passive losses are carried forward to the next tax year not to the bottom line on the current year’s 1040.

Most rental property owners buy to hold forever. They use fully amortizing loans because they want to eventually own the property free and clear some day. The debt service on an amortizing loan payment has two components – principal and interest. Cash flow is your Net Operating Income minus Debt Service. If you have a positive cash flow, then, by default your tenants are paying down your loan balance. Tenants paying the loan is not a separate “income stream”, just a side effect of a positive cash flow.

Appreciation is a bonus if it happens, but should never be used to make a marginal cash flow property look better. I would even argue that appreciation is really a lump sum cash flow collected when the property is sold.

Don’t take my comments the wrong way. Appreciation and Tax Benefits are valid reasons to OWN rental property, but a positive cash flow is the reason seasoned rental property owners BUY the rental property.

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j1dias,

Let me save you some money so you can afford to buy your daughter another book. I read “The Millionare Next Door” and enjoyed it tremendously. The lesson from this book is: Live below your means and save the difference. Kyosaki’s “Rich Dad, Poor Dad” was also enjoyable. His lesson is: Don’t work for your money, make your money work for you.

Combine the lessons from these two books and you have: Live below your means and invest your discretionary income in income producing assets. Use the income from your assets to support your lifestyle and to purchase more income producing assets.

If you really take the lesson of “The Millionaire Next Door” seriously, you will stay out of the bookstore. Visit the public library instead.

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While there are many reasons to invest in rental properties, the #1 reason has to be cash flow. Equity buildup is what creates wealth however. When Forbe’s or other money magazines define wealth, its not a persons income, but the net worth they have. Since appreciation is part of equity buildup, I like to prioitize the benefits like this.

  1. Positive cashflow.
  2. Equity buildup.
  3. Tax advantages.
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Sometimes I like to reread books that I haven’t read in a while or use them as a reference. The books are not expensive and I can build my own library for under $300. I have all the “Rich Dad” books and they cost about $15- $20 each. I have a total of about 15 books that I’ve purchased. The rich spend money. They just don’t waste it and put it work. That’s why they’re rich. I also learned from “The millionare Next Door”.

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This forum is really the only place you need to go to get a good plan.

I also like two books:

Building Wealth One House at a Time by Schaub

The Weekend Millionaire’s Secrets to Investing in Real Estate by Summey and Dawson

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j1dias,

You are on the right track with RE Investing. There are many aspects to Investing in RE that your question/reflection speaks to. MANY investors do not ever understand or comprehend what you have already learned from one book. You will go far in this arena. MOST investors do not even have a plan at the start.
I have taken investing one step at a time. With the right material and team around you, you will evaluate each deal for your investments needs at the time you invest. NO investor should be encouraged to quit his/her day job until you have enough cash flow to put food on your families table.
GREAT insight and reflection on the investing arena. YEAH bookstores.