Rental Mindset

Helping you reach financial freedom through rental property investing

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Embrace the Mindset of a Beginner

Adults pretty much go about life knowing exactly what we are doing. No new languages, organic chemistry, or learning how to drive.

We can comfortably sit back and enjoy life in our own little bubble. Perfectly content. Or we can push our comfort zone, expand our skills, and strive for a different life than everyone else.

Ever see a kid learning how to ride a bike? What drives him to risk scraped knees and failure?

Investing in different areas of things such as stocks and property could help you to earn huge profits and set you up for the future. Many people have started to invest in German stocks such as “In Bitcoin investieren” which is an investment in Bitcoin, whilst others find it easier to invest in property. Whatever the investment with guidance and research it should offer you a large return.

The Benefits are Worth It

A bike represents freedom to a kid. You can go all over the whole neighborhood and hang out with the big kids.

Rental property investing represents freedom as well. Wherever you are investing in a rental, there is so much room to move around as much as you like without settling on a specific building for the rest of your life. You can look for your dream location before finding your “dream” home, you just have to know where you would like to look. There are homes for rent in Memphis, Pheonix, New Jersey and so many more, so hopefully, after you’ve read this page you can jump right in.

You are clearly interested in putting your money to work. Passive income so you can sit back and work because you want to, not because you have to. You are obviously motivated otherwise you wouldn’t be here.

We’ve looked at the projected Impressive Returns. We’ve looked at my Actual Results after 4.5 years.

So what comes next?

Start Simple, Manage Expectations

As adults, we are kind of babies.

We have leveled up our lives in so many areas, it is embarrassing to be a beginner in another area. “I’m the CEO of a multi-million dollar company, I can’t look like a fool in front of everyone at a beginning yoga class.” That’s a good way to stop improving.

Or maybe we have unrealistic expectations. “I’m a quick learner, in 1 month I’ll be as good as the yoga instructor.” Only to quit when the progress isn’t that fast.

Constantly remind yourself it is a worthwhile long-term goal. Don’t be afraid to be a beginner and don’t quit because progress is slow.

The Beginner’s Mindset in Rental Property Investing

Applying this thinking to rental property investing, the obvious place to start is by learning.

Learn enough but not too much

You have to learn the basics of how it all works. This involves boosting your understanding of market selection, property selection, funding, insurance, taxes, and of course, property management.

Accordingly, if you would like to learn more about the potential advantages of working with a company that specializes in property management jacksonville fl is home to some fantastic real estate management experts that will be more than happy to provide the support that you need.

Above all, you don’t need a master’s degree in any one of those areas. Just learn enough to be able to ask the right questions. Plus, you can always outsource your property management responsibilities to a property management company, so do not let these responsibilities dampen your property investment dreams.

Take a simple action

The reason why you don’t want to learn too much is it will hold you up from actually taking action. The action is required for the benefits.

Back to the yoga example, you don’t need to read the latest studies on biomechanics to get the results. You just need to take action on the basics.

Keep it simple so the action isn’t too daunting.

Protect downside while learning

The kid learning to ride a bike has training wheels when he first starts out. He isn’t reading a book about how to ride a bike, he is taking action similar to his goal, but with downside protection.

Then maybe later his dad runs along side the bike, able to help if anything goes wrong. It’s another step in the right direction with downside protection.

Rental Property Beginners

Keep in mind the long-term goal, the benefits of achieving it, and get started.

If your goal is to reach the passive income of rental properties, a REIT won’t help you learn. Buying a fraction of someone else’s deal isn’t likely to help you learn. You have to go out there and do it yourself. Of course, have your Investment Accountant take a look at your accounts first to ensure you can actually afford to go it alone but your accountant will be able to provide you with the best advice.

I like turnkey rentals as a way to keep it simple when starting out. I’m just a beginner and started there. Later on I can level up if I want by learning more and taking on more responsibility.

I like properties that are $90-100k so they only require an investment of roughly $22k and are likely to have stable tenants.

I like purchasing through large-scale companies with a decade long reputation to maintain as a way to protect my downside.

That’s how I’ve made it past the hardest part – buying rental property #1.

There are a million ways to be a real estate investor, but if you aren’t getting started, maybe it is time to reevaluate your approach.

What is holding you back?

Let’s Double Down! Cash Out Refinance on a Rental Property

Vegas baby! I avoid gambling in risky investments outside of my control, but have you ever played blackjack? Or roulette on a gambling website for that matter?

The thrill when you push all your chips in and get an 11 against the dealer’s 7. You gotta double down!

When you double down, you are betting more of your own money – it would be so much better if your chips just multiplied on their own. Or split like a cell and all of a sudden you had two identical copies. [Mitosis for you science nerds out there]

Did you know rental properties can clone themselves?

Silently Building Equity

For four and a half years I have been cashing rent checks and paying expenses for my Atlanta property. Well, I guess my property manager does most the work – but I read the reports and keep an eye on things!

I’m definitely aware of the cash added to my bank account every month, as well as the tax benefits at the end of the year. Combined they are a cool $7,627 – averaging $1,700 a year from this one property.

This whole time equity has been secretly building without any effort required! Most investors don’t realize the 5 Components of Rental Property Return.

Every year the tenant has been slowly paying down the mortgage for me (1.5% to 2% a year in the first several years of a 30 year mortgage). And the property has appreciated 30% (better than the expected 15%, pretty much due to lucky timing).

When I purchased the property I only had 20% equity. Fast forward four and a half years and I now have 42% equity.

Put Your Money to Work

If you haven’t noticed yet, the focus of this entire website is how to make your money work for you. Passive income. Rental properties.

Equity is a nice cushion, but it doesn’t earn any additional money. Whether my equity is 20% or 75%, the rent is still the same.

The expenses are pretty much the same, such as basic maintenance costs, repairs, some new installations such as chain link fences in Edmonton (or another location), advanced gate systems or CCTV for increased security.

There is something we can do to put that equity to work…

The Cash Out Refinance

You can refinance an investment property up to 75% of the loan value. Basically trading that equity for cash.

That cash is not taxed – it’s already your money, you are just accessing it.

Doubling Down – When A Rental Property Clones Itself

You can take that lump sum of cash and plow it directly into another investment property. You still own the original and will now have another that is producing cash flow, tax benefits, and building equity. Double your pleasure, double your fun!

Pay attention, this is where the compound returns come in. My rental property 1 will clone itself and purchase rental property 3. It won’t require me to save another $20k for a down payment.

Can you imagine if every property cloned itself after 5 to 8 years? Boom!

Any Downsides?

Yes, of course. Most obvious – you have to pay to do it. In my case, the estimate is $3,200.

You will also have a larger loan, likely with a larger payment depending on the interest rates. If you are at a point where you have enough loans and want to start paying them down, a cash out refinance might not be right for you.

You are resetting the 30 year repayment schedule, so if you want to live off the cash flow of your rentals soon, a cash out refinance might not be right for you.

If you are young and still building up your portfolio, go for it!

A Closer Look at My Decision

Let’s examine the details and see if it makes sense for me to do right now.

The current mortgage is at 5.5% and has a balance of $60,655. The monthly payments of principle and interest are $370.

The new mortgage would be at 4.625%. If the property appraises at $105k, the mortgage will be for $78,750 with monthly payments of principle and interest of $405.

Thanks to the interest rate going down, the increase in monthly payments is just $35. It will hurt the cash flow numbers for this property, but the gains in cash flow from a new property will be at least $150 a month.

So it makes sense from a straight cash flow perspective. When you look at the other components of rental property return (appreciation, paying down mortgage, taxes) it becomes a home run.

Feels a Little Tight Though…

Refinancing this loan would be a gain of $18,200. But it will also cost $3,200 to do. So the net is $15k that I can use to purchase another property. I would have to contribute another $6-8k to get a property in my preferred price range.

This is also largely dependent upon the appraisal of the property. If it appraises at $98k I will only pocket $13k. If it appraises at $113k I will pocket $17k.

At what appraisal number does this no longer make sense?

Now or Later?

Now:

  • Double down sooner to have twice as many properties providing cash flow and building equity
  • Lock in the low interest rate now in case things change (unlikely, but even a .1% change is $5 more a month)

Later:

  • Let the property build more equity so when I take it out, the fee isn’t as significant a portion

What do you think, what should I do?

Photo: Images Money

The Money-Time-Risk-Return Investment Continuum – What is Your Sweet Spot?

Have you ever heard of the space time continuum? It’s a very hard to imagine way of viewing the universe used by physicists like Einstein. The idea is that in addition to the 3 dimensions of space that we are all familiar with, there is a 4th dimension of time.

Most physicists believe time can only be traveled forwards though. You can’t go back in time like you can move forward in space, then head back to where you were.

Believe it or not, this thinking just might be relevant to investing.

Money-Time-Risk-Return Investment Continuum

Let’s create our own continuum for investments that includes money, time, risk, and return.

Mo Money Mo Problems

Having more money is a good thing (I like money). But it can become a burden at some point – good thing most of us will never have to worry deal with it!

If you are investing $1, what kind of options do you have to invest and what are the returns? Pretty much just putting it in the bank with a lousy interest rate. If you are investing $1k you have different options with greater returns. $100k even more options with greater returns. $1M even better. Then at some point, say at $1B, it gets worse there are few places you can put all that money to work. Of course, you could get a financial advisor to help you make better investments. But, sometimes, even these brokers and financial professionals can make errors in investment recommendations, which can cause you huge financial losses. Fortunately, you can approach a securities lawyer from the likes of The Law Offices of Robert Wayne Pearce to seek the deserved compensation in the event that you face any financial losses made by the financial professionals.

Time is Money

You could put $1B to work just like the investor with $1M, just do it a thousand times. That takes a lot of time and effort.

The average investor can usually put in more time to find a better return. This might mean researching and finding a way to invest in small private companies or doing your own real estate deals. However, there also automated trading apps in markets like cryptocurrency, such as these Bitcoin Up Erfahrungen, for example. This will save you time as you don’t have to do the investing yourself. On a similar note, more and more people tend to see cryptocurrencies as a good investment. These days, people choose to buy cryptocurrencies, like Bitcoin, Ethereum, and even Dogecoin, with the hope that their value can rise in the future, leading to them being able to cash them out later (visit https://www.coin.cloud/blog/how-to-cash-out-dogecoin for information on how to sell cryptocurrencies.)

High Risk, High Reward

Riskier investments should have a greater expected return, otherwise why would anyone take on that risk?

Lending money to a stable company like Walmart might return 3% and a “who knows if it will survive” company like Yelp might return 11% (with a small chance you get zero, so expected return of something a little lower). This is generally true across all assets: stocks, bonds, real estate, peer to peer lending, etc.

Let’s Graph It!

graph

For a given investment, what is the money, time, risk, and expected return? If you were to graph all possible investments in 4 dimensions, you would be able to visualize the best return for money, time, and risk.

Too bad that’s hard and this is just a thought exercise. If you are thinking in terms of all these dimensions, what is the best investment for you?

Finding Your Advantage

I bet you don’t have a hundred million dollars to invest, where you can push people around and name your terms.

I bet you aren’t an expert at understanding risk, able to notice the flaws in the models of Wall Street.

But you do have time. If we had the 4-dimensional graph, I would imagine there is a sizable bump in expected return by devoting 1 hour a week to your investments.

If you could take your investments from a 8% expected return to 20%, would that be worth an hour a week to you? This is why I chose rental property investing.

Revisiting Space-Time and “Time is Money”

Remember when I said at the beginning that within the space-time continuum, time only travels forwards? You can’t go back in time.

People generally accept the statement that time is money. Time can be easily turned into money, but the opposite isn’t really true. It is much harder to turn money into time. Just look at the richest people in the world – they are running around more stressed out than the rest of us, not sitting on a beach!

With rental property investing there are always more responsibilities you can take on for a greater return. Landlord work, handyman work, increased effort sourcing deals, more aggressive negotiations to only purchase at extreme discounts.

For extra effort might push your return from 20% to 25% with another 1 hour a week per property. Unfortunately it doesn’t scale that well at 5+ properties. Since it is hard to turn money into time, I jump at the chance to pay for someone else to handle those responsibilities.

That’s why I chose turnkey rental properties. I get the benefits of much higher returns through rental property investing, but still fairly low effort.

Managing Risk

Some people have bad experiences with turnkey rental property investing and will be happy to share their nightmare story with you. It is an industry with hundreds of small operations fixing up and selling houses to investors – and many suck.

I could navigate this on my own, but there is certainly a little risk involved. Instead I think it is smart to go through a reputable national marketer like Norada or Jason Hartman. They both have a decade long reputation to maintain and much more experience vetting turnkey providers than me.

The purchase price might be ever so slightly higher than I could find on my own, but I view this as a trade-off between the money and risk dimensions.

Is Rental Property Investing the Perfect Money-Time-Risk-Return for You?

Everyone is different and will come to their own conclusions. For example, maybe spending an hour a week to go from 8% return to 20% return isn’t worth it in your mind. Or maybe you aren’t comfortable with the risk of being directly in charge of your own investments.

For me, rental property investing represents the sweet spot of the theoretical money-time-risk-return continuum. What do you think?

Photo: Etahos
Graph: Jon Waterschoot

The Perfect Year on a Rental Property Investment – Looking at 1 Year of My Memphis Rental

Have you ever made pancakes and discovered you just have just enough syrup left?

Sometimes things work out just right.

It happens in rental property investing too – my Memphis property had an exceptional 2015.

The Property-Year

I like to think in terms of property-years. No, this isn’t a real term, it’s something that makes sense to me and might sound crazy to everyone else.

What is a property-year you ask? It is 1 rental property for 1 year.

I think about things in terms of property-years to better understand randomness. Humans struggle to interpret randomness – it’s just the way we are wired.

We see something happen over and over again and expect it to keep going that way forever. Like expecting good weather in the summer, then being shocked that it rains one day.

We notice a result and make up some cause and effect that just isn’t real. Like a lucky pair of underwear the baseball player wears all playoffs.

We need a way to keep things in perspective and remind ourselves that randomness exists.

The Expected Randomness in a Property-Year

There are any number of expenses that you can encounter for a rental property.

Some are predictably periodic: they happen every X years. You can simply count down until the next time you have to take care of it. An example is insurance, every year I’ll have to pay it, so each month I add a portion to my escrow account.

More difficult to understand are the expenses that will probably occur eventually, you just don’t know when, such as having to call someone from somewhere like Make It Drain Plumbing & Rooter to fix a problem with showers, toilets, pipes, etc. The fact that it doesn’t happen one year doesn’t necessarily make it more likely the next year.

Here are a few:

  • 1 in 2 property-years: a tenant moves out
  • 1 in 10 property-years: replace the water heater
  • 1 in 12 property-years: replace a major appliance like fridge or dishwasher
  • 1 in 15 property-years: a major plumbing expense like a broken pipe
  • 1 in 20 property-years: replace the roof
  • 1 in 30 property-years: replace the garage door opener
  • 1 in 50 property-years: evict a non-paying tenant

The accuracy of the numbers isn’t too important, just the concept. This isn’t a complete list of course – there are many more expenses that could crop up unexpectedly. For example, I recently heard about an investor who had to do a removal because it grew too large too close to the house. This can be a worrying problem for those buying property as it can damage the foundation and cause more expense. That is why investors may want to look into tree removal in Augusta, GA services, or wherever their property is, to make sure they are not paying out for damages alongside removal. Tree maintenance, stump grinding and other important aspects of home renovation by eminent Tree Service providers could prove essential.

Another example of the same could be water damage! Oh, I’ve heard the woes of it from one of my friends (who lives in Colorado Springs) when a broken pipe led to a flooded basement! She had to probably get in touch with specialists who deal with Property Damage Restoration Colorado Springs to get it fixed. I would not wish that on my worst enemies!

That said, the property-year view gives me perspective. The perfect year with no expenses isn’t going to happen every time. The bad year can be expected every once in a while, but it won’t be the norm.

Looking at a Perfect Property-Year

Let’s look at my Memphis property for 2015. The tenant stayed in the property the whole year, rent was paid on time, and there were no major expenses.

In fact, it went even better than I could have predicted! When the tenant’s 1 year lease at $975/month was complete, he opted to stay month-to-month at $1075/month rather than signing a new lease. So the rent collected was $600 greater than expected!

With $12,300 in rent collected, here is a complete list of all the expenses for the year:

  • Principle paid of $1,049
  • Interest paid of $3,951
  • Property Management of $1,230 (10% of income)
  • Taxes of $1,086
  • Insurance of $635
  • Repairs of $150 (replaced thermostat)

The principle paid is like a savings account in my name. It just becomes equity that I can access later, so while it is listed as a cash expense above, it actually is neutral.

My taxes also show depreciation of $2,796. This isn’t something I actually had to pay for so it’s not listed as an expense above. The depreciation gave a tax benefit of $1,043 for 2015 (based on my 37.3% marginal tax rate).

Doing some quick math, here are the results for 2015:

  • Cash in my pocket: $4,199
  • Tax savings: $1,043
  • Principle paid down: $1,049

Not to mention Zillow believes the property increased in value $5,000. All told, this property-year was worth $11,291!

Let’s Celebrate!

Just kidding. I know all years won’t be this good and I should save some of that money for future expenses.

Note: In fact, the tenant moved out on December 31 which led to some significant lost income in 2016. The new tenant is now moved in and later on we will take a closer look at how the tenant turnover process went.

But man, that was a good year! It was roughly 50% of my initial investment!!!

Overall, what do you think? Is the property-year a good way of thinking about the randomness and not getting overly excited about a great year?