90 Million People Can’t Be Wrong

The dream is always the same. Make some smart choices and then sit back and collect income. Passive income. The money just comes in. It’s a great idea and real estate is just the way to make it happen, right?

Here are just a couple of listings currently seen in Google – How about these headlines?

How to Get Rich Off Real Estate Like Warren Buffett
How to Strike It Rich: Investing in Real Estate
How to Get Started in Real Estate Investing – 4 Magic Numbers to Make You Rich and Wealthy (I love that one).

And then, a final dose of reality desperation:

Is Everyone Getting Rich In Real Estate But Me?

This is just a sampling of the 90,300,000 results in Google that return for a search about making money with real estate. If Internet content is any indicator of market interest, this is a big one.

90 Million pages about getting rich with real estate. Let that sink in for a minute!

So there is a ton of information about real estate investing. But why? The truth is that there is money to be made in owning properties, but there is a lot to it and it is certainly not quick, fast, or easy.

What Is The Reality About Being a Landlord and Getting Rich Doing It?

The reality is that you can make money with the right investments. Lots of people do. But there are about a million considerations. We’ll try to cover some of the big ones in this article. Here is the short version:

Types of Real Estate Investing
Setting Up Before You Even Start
Finding Your First Buy
Making it Work in Northern Virginia
Tenants, tenants and more tenants
Being a Landlord
Cash Flow
Growing the Business
Getting Rich?

Types of Real Estate Investing

You may have a rental property, or you may have several. But there are many types of real estate investments that you may not have even considered like retail, office space, industrial and even hotels. The key that we need to focus on is whether or not the investment provides income.

There are many (very wealthy) people out there who invest in properties that never see a dime of income. These people rely on capital appreciation to make their money.

Are you the kind of investor who can front large sums of money and take big risks? Well then, this type of investment might be for you.

But changes are, you are renting a residential property or are considering it, either out of desire to make extra money or out of necessity.

The Necessity Part – Military families often end up being landlords. It just happens. They buy a house, then get stationed somewhere across the country, or across the globe. Often times, the house can be rented for a couple of years until they return. Presto, a landlord is born. It happens to all kinds of people. A job relocation, moving to be near a sick relative, you name it there are myriad reasons a homeowner may need to pick up and move, but hold onto the house.

There are many Management Pros clients who fit this description. These folks don’t generally have any interest in expanding their real estate empire, just holding on to a home until life lets them move back.

Let’s assume that you are proactively seeking to be a landlord. Then what? Well, we need to start with income in mind.

While we’re on assumptions, let’s also stipulate that you’re interested in residential properties, either single family or multi-family dwellings.

Getting Started Being a Landlord

So you’re in. You’re going to start your real estate empire. Couple things you’ll need to take care of before you start making offers on properties. Step one is to talk to your accountant.

The tax laws regarding real estate are very complex and have so many implications, you have to get this part right. You may even want to form a separate business entity through which you manage the real estate investing business. But that’s the key – it is, in fact, a business. You have to treat it as such.

Take a look at your Finances. If you are preparing to buy your first residential investment property, you will likely need at least a 20% down payment. Moreover, to qualify for the mortgage on the property, you will need income sufficient to qualify for both your primary residence AND the investment.

Do you have enough income to qualify for both?

The best way to begin is to start with a lower cost investment so that you can learn the ropes with minimum risk. That means finding great deals, in an area you know and doing your homework on the rent.

Finding The Perfect Investment Property

You’ve decided you’re going to become a landlord. Now you just need a residential property to buy. Where to go?

Brandon Turner, over at Biggerpockets.com, has a great summary on how to find investment properties. Turner writes:

“The MLS: The MLS, or Multiple Listing Service, is a collection of lists put together by local real estate agents that include all the homes currently for sale through an agent. In the old days, agents kept their listings in a file cabinet, but today you can search the MLS online, through multiple websites like Realtor.com, RedFin.com, Zillow.com, or Trulia.com. Buying a property through an MLS listing is as easy as finding a real estate agent you like (and trust) and letting them submit an offer for you. Typically, the MLS is used primarily for single family homes and small multifamily properties, though larger multifamily and commercial properties can sometimes be found as well.

Commercial Broker: Typically, if you are looking to buy commercial real estate, a commercial real estate broker will be a valuable member of your team. Often times, commercial brokers will have “pocket listings” which means deals that are not public knowledge. If commercial real estate is the niche you’ve chosen, definitely find a commercial broker you can trust.

Loopnet: Loopnet.com is the largest listing site for commercial and large multifamily properties. You can search for anything from a small apartment building to a office building or restaurant here.

Direct Mail: Direct mail is the process of sending out a large number of letters or postcards to a targeted list of individuals, based on certain criteria. Lists can be obtained from many sources and may be cheaper than you think. Check out services like Click2Mail or PostCardMania to learn more specifics on pricing and options. You may send out 1000 letters and only hear back from 50 people – but if you can close just one deal, it can often be a great way to buy directly from an owner before a real estate agent gets involved. For a great summary of direct mail, see this article.

Networking: Finally, many individuals find their ideal investment property simply by networking. Whether through formal networking channels like investment clubs or simply through person to person contact in daily life, many deals are exchanged through personal connections. Be sure to have a professional business card on you at all times – you never know when you may need it.”

This is an excellent summary. While there are many ways you can find a great property on thing remains stable: You need to be patient and find one that works with your budget and business plan.

Making It Work in Northern Virginia

We have a different situation here in northern Virginia than in most other parts of the country. Even through 2009, the economy here did not suffer as badly as it had across the other 49 states. The reason is simple: The Federal Government. Since this is the seat of government, the entire local and regional economy is cushioned, as so many businesses are – in some way – connected to providing services for government.

But there is more…

Northern Virginia real estate investing benefits from all kinds of unique reasons:

Being close to the capital city
Military and supporting industries thrive here
Several major universities are in and around the area
There is a very transient population because of the government
It is very affluent

Renting a home in northern Virginia is always a better proposition than doing so in say, south western Virginia.

Get this – according to Forbrs Magazine, of the top 10 richest counties in the United States, five of them – five! – are right here in Northern Virginia. Here is the order:

Falls Church City, Va.
Loudoun County, Va.
Los Alamos County, N.M.
Howard County, Md.
Fairfax County, Va.
Hunterdon County, N.J.
Arlington County, Va.
Douglas County, Colo.
Stafford County, Va.
Somerset County, N.J.

So you have an edge right off the bat. This means that more people have more money to pay rent!

There are a few areas that deserve special attention for prospective landlords. Arlington is a hot spot for young professionals. For both work and socializing, the up and coming crowd is all over the place. Lots of night life and culture attract hordes of young professionals, many of whom do not have the resources to own. That means the rental market is ripe. Similarly, Alexandria and parts of Fairfax near George Mason University have plenty of opportunity.

Finding a Tenant in Northern Virginia

If you don’t find the right tenant, you could be in big trouble! There are a couple of things to consider here. First is that you should definitely be looking into property management companies (ahem). Second is that your screening process must be top of the line.

Just think about potential for someone to trash your property, constantly badger you for any and all issues, cost you thousands in legal fees if you try to evict.

Tenants aren’t just an important consideration – the wrong choice could cost you the entire investment.

Do you Really Want to Be a Landlord?

Well, let’s rephrase that… Do you really want to actively manage your property? Perhaps if you own only a single property. But certainly not if you own multiples – it would be a full time job! Some great tips on being a successful landlord include:

Keeping Your Expectations Reasonable – You will not find a property, get a great deal and start making tons of money overnight. With the right planning and execution, you can make great money, but you need to fully understand that there is a lot of hard work and due diligence involved.

Find a Balance between Earnings and Effort – Your time is worth something! Always be aware of how much time you are spending on working a deal or managing a property (a great case for a property manager).

Know the Rules – Unless you want to end up in a courtroom, you need to know county, state and federal laws. This is another area that screams for hiring a great property management company.

Have the Property Inspected – Get a qualified person to give the property a complete once over.

Make Sure Your Leases Are Legal – Again, avoid court. Your leases need to be perfect. Hire someone who knows what they are doing to help.

Take the Time To Call References and Run Credit Checks – Don’t skimp on this – it is too important.

You Want The Cash Now? The All Important Cash Flow

Calculating cash flow is critical. I mean, it’s what we’re doing this for, right? What you need to realize is that the proper calculation is not simply mortgage paid vs. rent payments. There are all kinds of influences that can change your cash flow situation. This is why it is so important to begin the exercise by talking to your accountant!

Your real estate cash flow will be determined by operating expense, depreciation and mortgage interest. Your tax benefit will be variable depending on what tax bracket you’re in.

The bottom line is that there are all kinds of things that stand in the way of your cash flow. Here is a great calculator to help you see all the details: http://investfourmore.com/rental-property-cash-flow-calculator/

Growing Your Real Estate Investment Business

As with any business – and this IS a business, you need to develop a plan to grow. This is essentially a marketing plan. One way to go about this is to start with your goals. Concrete goals that are very specific. For example, “I want to make $10,000.00 per month in rental income.” That would make a great goal.

Now, how do you get there?

Of course we have to look at the cash flow for a given property and from there determine an estimate for how much activity we’ll need. Here there is the all-important subjective measure of how much risk you are willing to accept. You could easily meet your goal with a single investment. But how much upfront cash would it require? What type of property (at that level we’re most certainly talking about a commercial investment).

On the flip side, how many $120,000 town homes would you need to buy and rent in order to meet your figure?

This requires planning and marketing. You’ll need to set out your activity list far ahead of time and start working your plan. Identifying properties, a buying strategy, working with a property management company, screening tenants, and on and on. It is all necessary and you will not grow unless each aspect of this is taken care of.

Getting Rich. Or Not.

It’s fun to think about. What would you do with an extra few million dollars? The harsh reality is that it is perfectly possible, but there is no simple route. Solid planning and execution are critical. Your tolerance for risk is the key that holds it all together. But perhaps most importantly, what is your definition of rich? Are we talking Donald Trump rich? Or are we talking about having a beach house? Gulfstream 5 rich or a new SUV?

One thing is certain. You will never move the needle at all unless you take action. What’s the old saying, “80% of success is just showing up.” Well, that’s kind of true. You’ll never meet your goal unless you take action.

Ready, set, go!

Any tips or tricks you’d like to share about getting started or growing your rental income? We’d love to hear about it!

Get Rich With Real Estate! Or Not. But Here is What You Need To Know About Being a Landlord.