The Complete Guide to Your First Rental Property: A Step-by-Step Plan from the Experts Who Do It Every Day

The Complete Guide

to Your First

Rental Property

A Step-by-Step Plan from

the Experts Who Do It Every Day

Revised 2nd Edition

First Edition by Teri B. Clark

Revised by Jim Kim

Foreword by Andrew McConnell,

Co-Founder and CEO of Rented.com

The Complete Guide to Your First Rental Property:

A Step-by-Step Plan from the Experts Who Do It Every Day –

Revised 2nd Edition

Copyright © 2016 Atlantic Publishing Group, Inc.

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Library of Congress Cataloging-in-Publication Data

Names: Clark, Teri B., author.

Title: The complete guide to your first rental property : a step-by-step plan

from the experts who do it every day / Teri B. Clark.

Description: Revised 2nd edition. | Ocala, Florida : Atlantic Publishing

Group, Inc., [2016] | Includes bibliographical references and index.

Identifiers: LCCN 2016042275 (print) | LCCN 2016050994 (ebook) | ISBN

9781620230596 (alk. paper) | ISBN 1620230593 (alk. paper) | ISBN

9781620230756 (ebook-)

Subjects: LCSH: Rental housing--United States--Management. | Real estate

investment--United States. | Real estate management--United States.

Classification: LCC HD1394.5.U6 C63 2016 (print) | LCC HD1394.5.U6 (ebook) |

DDC 643/.2--dc23

LC record available at https://lccn.loc.gov/2016042275

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Table of Contents

Foreword

Introduction

Chapter 1

Invest in the Best

Think Long-Term

The Past and the Future

Retire With Property

More Than One Way to Invest

Speculation

Investing in seized property

Fixer-uppers

Live in it and then sell it

Private mortgage investing

Real estate stocks

Rental Diversity

Chapter 2

So, You Want To Be a Landlord?

Just a Landlord?

What Is Your Type?

Owner-occupant landlord

Absentee landlord

Property manager

Team Spirit

You Invest, They Manage

Property management company

Independent property manager

Chapter 3

Seek and Ye Shall Find

Wait, Do Not Seek Yet

Look at the time

Networks count

Money matters

In the know

Location, Location, Location

Houses, Apartments, Condos, Oh My

How Much?

Do Not Judge a Book By Its Cover

Today or Tomorrow?

Can You Make It Work?

Chapter 4

Ready or Not, Here I Come

Getting Web Savvy

Read All About It

Real Estate Magazines

Ask a Pro

Scout It Out

FSBOs

Networking

Chapter 5

Will the Property Make Money?

Comparative Market Analysis

Income Method

Replacement Cost Method

Investor Insights

Chapter 6

Pot of Gold

Where to Start?

Mortgage Providers in the Digital Age

What Rainbow to Seek Under

Interest rate

Amortization period

Loan amount

Other factors to consider

Oh, the Paperwork

Private Mortgage Lending

Seller Financing

Owner Occupied Loans

Home Equity Loan and

Home Equity Line of Credit

Refinancing an Investment Property

Chapter 7

Tip Top Shape

Ready or Not, Here They Come

Let there be light

Prepare to prepare

Make it shine

Looking down

Pesky pests

Paint it pretty

Down below

Safe and sound

Curb appeal

Repair While They Are There

Just a Little Extra

Round and round

Open and close

Shutters

Say it with flowers

Give your kitchen and bath a facelift

Go green

Chapter 8

You Are the One That I Need

Make New Friends, but Keep the Old

Stop and Look

Put It in Print

The Internet Era

Let Me Tell You About…

GPS of Rental Tenants

Come On In

Accepting Section 8 Tenants

Chapter 9

More Than Just a Guessing Game

Pay on Time, Every Time

Verify income

Income ratios

Credit check

Character Counts

References

Background check

Applicant interview

Your Standards

The Application Process

The Time Has Come

Chapter 10

The Fine Print

Written Versus Oral

What to Include

Because of the Clause

Written in Stone, Unless…

Hiring the Big Gun

Lead Paint Disclosure

Follow the Law — All of Them

Fair Housing Laws

Are You Insured?

Chapter 11

Dot the i’s and Cross the t’s

Keeping It Straight

Hand It Over… Please

So Long, Farewell

Let Us Talk This Over

The Check Is Not in the Mail

Get Out… Now

Chapter 12

Using the Internet

Finances and the Web

Accounting

Are You Connected?

Buy it, sell it, rent it

Check them out

Chapter 13

The Tax Man Cometh

Rental Income

Tenant-Paid Expenses

Trade for Services

Security Deposits

Repairs Versus Improvements

Reduce That Income

It Is a Loss Cause

Two, Four, Six, Eight, What Do We Depreciate

The 1031 Exchange

Keeping the Records

Net Loss Gets Even Better

Business entity

Advantages of an LLC

Limits on LLC Owner Net Loss Deductions

Real estate professional status

More than one LLC

Chapter 14

Rental Retirement

Rule of 72

Cash Flow or Appreciation Profits — You Decide

Make the Appraiser Your Friend

IRA Your Way

Making It Self-Directed

Be Vigilante About the Tax-Deferred Status of the Account

Do What the IRS Says

Conclusion

Appendix A

Rental Agreements, Applications, and Forms

Appendix B

Landlord Forms

Appendix C

Late Payment Forms

Appendix D

Lead Paint Forms

Glossary

Foreword

For years, decades even, the American Dream held steady: House in the suburbs. Two-car garage. A white picket fence.

But this being America, that dream did not remain static. We are a country of strivers and climbers. We were founded by people who struck out in the hope — no, in the belief — that they could do more and better than their forbearers. And consistently, we do. This refusal to stand still has helped cement America’s place as a haven for those who refuse to settle for what they currently have.

And so the American Dream has evolved. No longer is the house with the two-car garage what we want. Rather, we want to acquire and accumulate wealth in order to obtain a new dream. By obtaining more assets — and not just assets to sit on, but assets we can make work for us — more and more people are achieving the truest of American dreams: passive income.

If you are reading this book, you already know the appeal of passive income. It is the idea that you have money coming in that requires little or no work on your part. What could be better? In particular, you likely understand the added appeal of that passive income coming from a tangible asset such as real estate. Besides the income stream itself, the asset holds real value in which you can invest. If that real value can earn a healthy return on an ongoing basis via rental income, all the better.

Now, you are ready to take the plunge. You are ready to move from the American Dream of the 1950s to that of the 21st century. But how to do it? Fortunately, with this book, you have a roadmap. At every step in the process, at every juncture and decision point you will come across, this book pulls from experts across the industry to ensure you have the tools you need to succeed.

One thing that will likely strike you is that it looks like a lot of work. "I thought passive was the opposite of active," you are likely thinking. And you are right. Yes, there is a lot of work on the frontend. You see, passive income only works when it is set up properly from the beginning. If you don’t do the legwork at the start, not only will your income not be passive, but it will likely turn out to be a bad investment overall.

For example, with any real estate investment, the single biggest lever you can pull to make it a good or bad investment is the price you pay to purchase the real estate. But what is a good price? What is a bad price? To know these things requires you to do your homework; it requires in-depth analysis of the market and trends prior to even looking at an individual property. Do your work at the beginning, and more will fall into place down the line.

One thing you will learn as you work your way through the process is that though there are guiding principles, there is no one-size-fits-all approach to investing and managing rental property. The price points you want to target, the level of activity and engagement you want to maintain throughout the rental process, how many properties you ultimately want to obtain… no book or expert will be able to make those decisions for you. Go in knowing what you want to achieve, and this book will help you achieve it.

In many ways, this is a Choose Your Own Adventure book. Like those books, this one can help take you to places you dream about. Unlike those books, this is one for adults who want their dreams achieved in real life, not just on the page.

I would say good luck, but with this book as a guide, you don’t need it.

—Andrew McConnell

Andrew McConnell is the Co-Founder and CEO of Rented.com, the first online marketplace that helps owners of rental properties find, compare, and choose the best professional property managers. Andrew holds degrees from Harvard College, Harvard Law School, and Cambridge University, and he has worked with some of the world’s largest public and private entities as a management consultant at McKinsey & Co. and as a Director, Solutions Design at Axiom Global, Inc.

Since founding Rented.com, Andrew has focused his attention on one of the fastest growing areas our economy has seen in a number of years: residential rentals. The growth in popularity of platforms like Airbnb and VRBO has created new rental demand and the potential for higher rental incomes than were previously obtainable. At the same time, while many suffered, the dive house prices took coming out of 2008 have made purchasing real estate for the purposes of rental more attractive than ever. The two combined create a once in a generation investment opportunity that Andrew is proud to support and help develop.

Introduction

If you want to build wealth, real estate is one way to do it, and investing in rental property is one of the most popular real estate options today. This is due to the potential rewards as the property appreciates in value, while tenants pay the expenses of the investment.

Of course, any investment has its drawbacks. Managing tenants is a drawback to investing in rental property. Such management includes finding tenants, keeping them, and sometimes evicting them. There are also rules and regulations, state and federal laws, maintenance issues, and rent collections to deal with.

Time is another issue to consider. Rental properties do not create instant wealth, even in strong real estate markets. They are long-term investments with profits coming from the appreciation of property in the market. The money does not come from the actual rental of the property, but from the increase in the value of the real estate over time.

Investing in rental property is not something to enter into lightly. This type of investment involves far more than collecting the rent check each month. To be a successful rental property investor, you do need to understand which properties will appreciate due to location, and you will need to collect those checks, but these things are only one component of success.

Beyond knowledge of the process, you need the mindset it takes to be a real estate investor and landlord. Do you have the time and energy required? Do you have the long-term vision that can get your through the lean times?

Rental property investing takes work. You have to be involved in the process or employ people who are. This type of investing is not like buying a bond and then sitting back and waiting ten years. You will have to be fully committed to owning property as a business venture.

By reading this book, you will acquire the skills you need to:

Understand the investment aspects of rental properties compared to other investment opportunities

Understand the basics of being a landlord

Find available rental homes and choose the right one for you by determining whether the property will make money

Finance your investment property

Prepare your property for rent

Find good tenants

Manage tenant/landlord issues such as late fees, security deposits, and rental policies

Determine the repairs that need to be made and the services that need to be offered

Take advantage of the tax rules and avoid tax mistakes

Offer a lease option

Use the computer for your rental property investing

Retire using your investment funds as income

You will also have access to the landlord tenant laws for all 50 states, documents for closing, word document templates, samples of leases and rental agreements, popular lease clauses, and home maintenance lists.

By the time you finish this book, you will have the knowledge you need to begin investing as a rental property owner. You will also understand what it takes to be a landlord, and you will have the skills and resources necessary to make this form of investing work for you.

Chapter 1

Invest in

the Best

Think Long-Term

Each year, some investments are top performers while others fall well short. Real estate can fall into either category depending on the year. Since the recession of 2008, it’s fair to say that the residential real estate market has been white-hot. In fact, in many areas, real estate prices are near their all-time highs.

Unlike many investments, real estate is tangible. It is not a piece of paper stating that you own shares, a bond showing that you have given a loan to the government, or a savings account with a receipt showing your money is there. Even money is just paper with a stated value that fluctuates according to currency markets.

Real estate, on the other hand, is something you can see. You are in complete control when it comes to the improvement of your investment, and you determine when your investment property needs to have repairs or additions.

For some, control may not be good. If you prefer ease over control, then rental property investing is not for you.

The Past and the Future

One big draw of real estate is that it tends to offer a secure and steady return on investment (ROI), even in times of uncertainty. As of 2016, the United States economy had firmly shook off the Great Recession of 2008–2009 and was growing at a steady, though not spectacular, growth rate. Local real estate markets certainly benefitted.

A big factor is population. The population of the United States will continue to grow well into the future, albeit at a slower growth rate compared with previous decades. It will also become considerably more grey and diverse. Consider these trends:

The U.S. population is expected to increase from 319 million to 400 million in 2051.

One in five Americans is expected to be 65 years old or more by 2033. In the next 30 years, people over the age of 65 will double to 70 million.

Latinos will account for three-fourths of labor force growth by 2020, according to the Bureau of Labor Statistics (BLS).

With population growth comes people getting married, having babies, and finding new jobs as well as retiring, downsizing, and generally easing into their Golden Years. All this generates the need for new housing, which will likely keep the market vibrant and present some intriguing investment options.

Understanding the demographics might lead you to purchase single story homes to accommodate people over 55 or smaller homes to attract the single person household. You may decide that purchasing in a city or perhaps a walkable suburban community is a good idea. Of course, all demographic trends will need to be gauged against the specific geographic area in which you intend to invest.

Demographics can certainly also help you choose geographic locations. For instance, the Latino population will migrate mostly from Mexico, so border states will be growing. Looking at the aging population, you can assume that the Sunbelt states will grow as people in the northern states retire to a warmer climate.

Due to current population trends, real estate will likely remain strong well into the future.

There are many other rules relating to IRA real estate holdings. It is best to contact a lawyer well-versed in IRA real estate tax laws.

Retire With Property

Building a retirement nest egg is one reason why people buy real estate. It is now possible to buy real estate using retirement funds in your IRA or 401(k). To do so, you have to put your funds, or roll them over, into a self-directed IRA. A self-directed IRA allows you to make the financial decisions instead of leaving them to someone else, like a manager of a mutual fund.

Real estate held this way needs to be for the long term. You will get the benefits of the appreciation of your assets, but you will not be able to live off rental income until you have reached the age of 65 ½ without taking penalty losses. You will also be unable to deduct depreciation since the investment is not taxable. The increase in principle, however, will hopefully be enough to offset the negative aspects of holding real estate in an IRA.

It is imperative to know the rules regarding holding real estate in an IRA. Not knowing them can be devastating to you in fines and in taxes.

For instance, you are allowed to purchase any kind of property with an IRA fund as long as you do not use that property for yourself. You may purchase a beach home as an investment property, but may not use it two weeks a year. After you retire, you can take the house out of your IRA as a distribution and use it any way you would like, but while it is in the IRA, you may not use it.

There is also the matter of who you may rent the property to. You cannot rent to your spouse or your direct ascendants or descendants, such as grandparents or children, but you can rent to your siblings, aunts, uncles, and cousins.

• • •