I want to thank my mom for sharing her story. She has come so far and built so much for her family growing from both her failures and triumphs. At 57 her and my dad have acquired 6 rental properties and sold a single family residence with the hope of retiring at 60. I am proud to offer up her wisdom and share it with any who will hear. Read on to learn about her tips to becoming a landlord including loans, interest rates, taxes and budgeting.
In her own words…
“Don’t ever rent, you are throwing money out the window when you do. Buy.”
– Louis Terrazas, 1900 – 1988
That was my father’s pearl and without realizing it, my first lesson in becoming a landlord. I saw it years later in our neighbors who were young newlyweds. They lived in their home for only two years and then rented it out. That was 18 years ago and we still have renters next door! We always said – wish we could do that.
Life and taxes and finally the age of our daughters moving to college was upon us. Maybe this was the time to start buying. Looking back I realize why we never started. It’s scary! Or so we thought.
Beginner thoughts: You have to be in close proximity to your property to be able to check on it.
Experience Landlords: Get yourself a property manager.
One day while scouting my second daughter’s college, flyers were handed out to us to own your own condo! We were already paying for the first child to rent and realized enough was enough. Luckily, we had enough for the down payment of the 3 bedroom condo. Try to put down as much as 20% for better loan rates. Luckily, the flyer people were also the property managers. We paid them 5% of the $1650 rent in 2012. They find the renters, collect the rent, and fix any repairs. They even are our bookkeepers for the end of the year taxes. All made possible by another one of my papa’s advice.
“Save for a rainy day.”
If you are thinking of getting a loan to buy your first rental property you should do it soon before the interest rates go up. We got our loans at 3% and 4% which is great! But five years ago it was even better, at 2%. Be ready to divulge all of your liabilities and assets to whichever bank you choose. But first research! Big banks are difficult to get approved because they have more regulations and have higher interest rates. Credit Unions or regional small banks have less restrictions so personally, my best choice.
Experienced Landlords: Loans are a bear, but great are the rewards. Keep your credit score up!
Interest rates are very important if you plan to keep the loan for a while. That’s why when choosing your bank there are several things you should consider. Your starting point should be which bank has the lowest interest rate. Many banks offer you a chance to pay points to lower your interest rate. With the incentive being, the more points you have the lower your interest rate will be. However, if you can get an interest rate that is already low without having to pay extra then choose that one. After you get the loan you can lower your interest even more by paying extra towards principal every month. Google an amortization schedule and you’ll see the magic. These points and any other loan costs are tax deductible for the year you got your loan. Try not to get a loan with a balloon payment if possible. They say it’s a 30 year loan but at year 5 or 7 the interest rate jumps higher. They’re called ARM (adjustable rate mortgage) loans. Get a 30 year fixed loan, not variable, but remember to pay extra principal each month to lower your interest and years. $25 or $2500 it doesn’t matter how much extra principal. If you finish paying off your loan before the 30 year mark all the extra mortgage payments will be yours to keep and yours to start another down payment for another property.
After you pay off your first investment property then you can use that as collateral for your next loan. There are collateral loans out there. That means you don’t need as high a down payment. But if you go this route you better be sure you have a steady source of income and a balanced budget. If you miss payments on your second property the bank will take your first property. Know yourself first. Ask, is this my priority? If you start young enough you can retire as early as 30, 40 or 50!
Lessons: Write down your goals and put a timeline on them!
Taxes are another good reason to invest in rentals. For one you’re allowed to deduct the loan costs, which include mailings fees and the mortgage interests that you pay all year. But wait there’s more! You’re allowed to deduct one trip a year to check on your rental, which means taxes, insurance, Home Owners Association fees, property management, gas, hotel, airfare, food and especially repairs, to include cleaning products and landscaping. So getting a rental in a vacation area is not a bad idea or at least some place you plan to visit yearly.
My favorite financial education author is Robert Kiyosaki, writer of Rich Dad, Poor Dad and Unfair Advantage. “Don’t work for money, have money work for you.” What he’s talking about here is passive income which can be explained as rentals or dividends. My parents never taught me to how to make passive income so I had to learn by facing my fears and just going for it. There will always be more hurdles to jump but with 6 years of work under my belt I think I can take them! My dad would be proud of me taking matters into my own hands, as he often would say…
“Take care of yourself first because no one else will.”
So how did I get started?
Educate yourself. I recommend Dave Ramsey’s Total Money Makeover, Warren Buffett’s autobiography and both Rich Dad, Poor Dad and Unfair Advantage by Robert Kiyosaki.
Steps to Success:
First, you have to start out with a budget. Write everything down that you spend in a month. Use a debit card and only spend what you allowed yourself for the month. Calculate everything so that your budget should have a zero at the end of the month. Pay yourself first, which I call your savings/emergency fund. Then to a charity fund because remember, “God is your business partner.” Then to an investment fund (this is your down payment) and finally your house and bills. Do away with frivolous items for a few months until you have your emergency fund with about $1000 -$2000 to cover any setbacks. The emergency fund is so important because it gives you peace of mind for your plan.
Second, start paying off all of your bills. Start with the smallest amount bill even if it has the lowest interest rate. Then with the money that is extra begin with the next smallest bill. Soon you will have no more bills! Remember to not use your credit card anymore; you have your emergency fund for that. When you take money out of your emergency fund make sure you replace it the following month.
Third, after all of your bills have been paid off, you can increase your emergency fund to equal 4-6 months of your income. Also remember the higher the down payment the lower the interest rate. Now you’re close to having a great down payment!
Go forth and conquer!