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Standing Out From The Crowd

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Or Better Yet, Hanging With a Like Minded Crowd

Stand out from the crowdDo your “friends” visibly start drawing back when you start talking about your rental property?

It used to happen to me all the time when I first became involved with Real Estate and the problem wasn’t them, it was me.

You see, I didn’t understand at the time that I was simply talking a different language, a language they didn’t care to learn about and that involved concepts they couldn’t wrap their heads around.

Things like good debt versus bad debt, accruing assets versus liabilities and long term goals versus working for the weekend. Yet I continued to babble on to anyone that would initially listen.

Eventually I started to see that people were looking to avoid me talking about Real Estate and I slowly became wiser about it. So rather than talk to people who’s entire goal during the week was to get to Friday so they didn’t have to work, I looked to hang around people with similar goals and aspirations.

This involved participating in Real Estate investment groups, meeting up with other like minded folks and moving forward as a group rather than being isolated and standing out from the crowd. Oh what a difference.

How Quickly We Forget

The challenge with being a full time or even part time Real Estate investor or landlord is you need to make an effort to find these people who are following a similar path.

Working from home or traveling from one property to another isn’t like going to a job and being surrounded by your coworkers. I’d seemed to forget about this as I often find myself sitting at my computer for days on end. I’m getting stuff done, but I wasn’t hanging out with people who could help inspire me.

I was reminded of this over the weekend as I was invited out for dinner by a fellow Real Estate investor I had assisted through some challenging times over the last several months and she brought along several other investors.

What I expected to be an hour long evening, possibly even 90 minutes, ended up being three and a half hours of sharing stories and tales of our experiences as landlords and investors and it was a fabulous evening.

And it was also a lesson!

That lesson for me was, it’s easy to get wrapped up in your day to day events, but make time to get together with like minded people. Just like I used too!

The lesson for you, is for you to find other investors, landlords and Real Estate folks who you can talk to, who you can bounce ideas off of and who you can grow with. I enjoy receiving all the emails with info from many of the readers telling me where they are from, how they got started and what their aspirations are, but you need to find other local folks you can also share your stories with and to help reinforce what you’re doing.

It can and will make a huge difference to you, trust me on this!

Are you a member of a Real Estate Group, Investors Group or even a mastermind group? Tell me about it in the comments below and share with us how it’s helped you or what you’ve learned!

The Myth of Passive Income From Real Estate

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Passive income from Real Estate is only partially trueAre you familiar with the myth? The Myth of living an easy life by getting passive income from Real Estate?

It’s a pretty common theme in many of the Real Estate investing books, but it’s not reality.

To be successful in Real Estate, especially in a landlord, you need to put time and energy into your property or properties.

Don’t get sold on the idea that owning Rental Property is entirely passive, it simply isn’t.

You need to schedule property inspections, you’ll need to show properties, you’ll need to screen tenants and you’ll need to take calls form your tenants when there’s issues. Now some folks will jump in and say that’s why I have a property manager, to do all that for me!

That’s fantastic, but now you still have to manage your manager! Just because you’ve hired someone else to look after it doesn’t mean it’s entirely passive.

You’ll still want to keep an eye on your local economy so you have an idea what’s happening with rents, you’ll still want to monitor your monthly reports from your property managers to ensure you’re getting good service, you’ll still need to prepare all your tax paperwork and receipts for tax time.

In the end it’s just not entirely passive.

Partially Passive Income From Real Estate

Now I’m not trying to say it’s not all bad. You can maintain your own rental properties or manage your property managers and get partially passive income from Real Estate.

To do this though, you’ll want to make sure you have systems, you have the right people lined up and you understand it’s not quite like you may have been led to believe.

It might require networking with other like minded landlords so you have support if you do go away, it might require having a ton of contacts for repairs and maintenance and it definitely requires the right mindset.

The mindset that even if I have to work a few hours this week on my property, it’s still generating income every minute it’s occupied, it’s still getting paid down every month I make a mortgage payment and understanding if I pay off that mortgage I have steady income flowing in each and every month.

So get over the passive part and start thinking about how you can set up your property so it runs smoothly, systematically and with minimal work by you.

Your thoughts? Is your rental property passive or do you have to still put soem time and energy into it most months? Leave me a comment below, share this on Facebook, LinkedIn or your other social networks and lets discuss how passive Real Estate really is.

Five Signs You Might Be a Bad Landlord

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Are you a bad landlord?
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We can’t all be the perfect landlord (I know I’m not as much as I try!), but there are definitely a few sign that could indicate  you could be heading down the path of becoming a bad landlord.

If you recognize one of these signs, you should be ok. Just correct the problem and you should be able to ditch that bad landlord stigma.

If you recognize two or three of these signs in how you’re running your landlording you’re going to have to make a decision about where you’re heading. You can continue down the pathway towards being a bad landlord, or you can do a bit of a course correction and straighten yourself out.

Finally, if you see four or five of these traits showing up continually with your rentals, it’s time to sell. You’re giving the good landlords a bad name and it’s time for you to move on!

Are you ready to find out about these signs?

Sign #1 You Might Be a Bad Landlord

No Written Leases

Listen, you need a written lease and you need it signed by all the tenants residing in your property.

If you don’t have a written lease you’re leaving yourself open to misunderstandings, potential problems and a ton of ambiguity.

Your written lease should address potential issues before they become issues such as rules regarding smoking, pets and even subletting (where allowed, some areas the “rules” don’t let you dictate what is always allowed or not allowed).

It should break down responsibilities for snow removal, grass cutting and property maintenance where applicable. And it should include what the repercussions for transgressing those rules specifically are.

It should cover all those details that could be rather vague, unless they are pointed out and it needs to protect you as much as possible within the local laws that govern landlord and tenant rules.

By not having your lease signed it’s just as good as not having one and the big problem is situations without written leases become a situation of he said/she said. This ends up being a situation where there is no proof you originally told them it was non-smoking, or that they couldn’t start a rabbit breeding factory in the spare bedroom (no pet policy).

So if you’re serious about being a landlord and you don’t have leases in place, go find some.

It may involve spending a bit of money with a lawyer or it may involve buying them from a local landlord association. Whatever you spend will pay for itself time after time and year after year going forward by reducing problems, headaches and even evictions when things do go bad.

Sign #2 You Might Be a Bad Landlord

You Haven’t Inspected Your Property In Over A Year

visit your rentals every six monthsIdeally you’re visiting your property and doing at least a quick inspection every three to six months, but worst case you need to at least get in there yearly, even if they seem like great tenants!

A lot can go wrong in a year, heck a lot can go wrong in three months!

That beautifully renovated property with the new carpet and high end hardwood may need to be replaced if you find out your tenant has been rebuilding his leaking motorbike on it over the winter months.

The little leak underneath the kitchen sink that the tenant didn’t catch could require completely gutting the kitchen and replacing everything. And these are the obvious things you’ll notice just by visiting and taking a peek!

With quarterly or every six month visits you can replace furnace filters which will extend the life of your furnace, you can replace smoke detector batteries which could save lives and your property and you can even notice potential problems that could grow into huge problems if left un repaired.

If you haven’t visited a rental property of yours in the last six months stop reading now and start scheduling a visit before continue on! Don’t be a bad landlord or a landlord who suddenly has to deal with a very expensive repair in the near future!

Sign #3 You Might Be A Bad Landlord

You Refer To Your Property as “It’s Only A Rental”

If you’re referring to your rental property, your expensive investment, as “it’s only a rental property” you’re setting yourself up for failure.

If you’re creating a mental environment where you’re not thinking of your property as someone’s home, where you’re potentially allowing sub standard work, lower grade finishes and even ramshackle repairs to be done, you’re setting yourself up for failure. And that’s what happens if your property is just a rental.

When you start referring to your property as only a rental you’ve already established you don’t care about it and it’s not long before it starts to become neglected (refer to Sign #2).

It’s too much work to go inspect it, it’s too much expense to do proper repairs (after all it’s just a rental) and in no time flat you start seeing your tenant turnover sky rocket and your vacant periods increase.

Then after a year or two of losing money you become another one of those landlords who say Real Estate doesn’t work and sell off your potential asset.

It’s not just a rental it’s a long term investment that can reward you handsomely over time and with proper care and attention. Remember that, or save yourself time and start planning to get out now.

Sign #4 You Might Be a Bad Landlord

You Ignore Your Tenants

return tenant calls promptlyThere’s nothing as annoying as getting interrupted when you’re out having a nice evening out with a spouse or girlfriend or even your family. It’s worse when it’s your tenant calling about a problem with the furnace, in minus 20 degree weather.

At least until you realize that because you have that rental property you’re able to have a nice evening out, or that you have a few extra creature comforts, like heat, because you’re setting yourself up for long term success.

It’s freezing out and they don’t have heat so you need to get on that and not ignore it!

OK, that’s one of the worst case scenarios, but even if it’s something simple like a broken dishwasher, clogged sink or slow drain in the bath tub, they shouldn’t be ignored.

How you handle situations with your tenant can directly affect how long your tenant stays with you and if you keep them happy by dealing with issues in a timely manner they will stay much much longer!

If you can reduce tenant turnover to once every few years it will make a direct impact on your bottom line.

Tenant turnover leads to vacant months with no rental income, extra time spent on advertising and meeting prospective tenants and money flowing out of your pocket as you cover expenses related to the property like water, heat, insurance, taxes and mortgage payments with money out of your bank account.

Even if you don’t have an answer, don’t leave your tenants hanging. I currently have a tenant in a property about two hours from me with plumbing issues (not a water leak, but a shortage of hot water, probably a tank that simply needs flushing).
I don’t have an answer right now, but I’ve replied back to her that I should have an update later this afternoon. I’m keeping her in the loop, I’m acknowledging there is an issue and I’m addressing it and she knows I’m not ignoring her!

So don’t ignore your tenants. If you keep them happy and keep them satisfied you’re a good landlord, not a bad landlord who can’t be reached, you’ll be rewarded with longer term tenants and more cash flowing into your bank accounts!

Sign #5 You Might Be a Bad Landlord

You Don’t Treat It Like a Business

I bring this up a lot, mostly because it’s important, but also because failing to treat your landlording like a business can lead to you failing. And failing with property can be an expensive lesson.

The more you treat the entire rental business as exactly a business the more you’ll do to set up the proper practices to help you succeed.

This can involve moving from using a simple spreadsheet to track your income and expenses to moving to dedicated software of customized accounting systems that allow you to track and control much more of your business.

It involves moving from picking a tenant cause they seem nice to having a proper system in place to screen tenants, places to acquire credit and criminal reports as necessary and understanding the local laws regarding rentals and how they apply.

If you treat it haphazardly you make mistakes, or take shortcuts and those mistakes and shortcuts cost you dearly. I’ve seen landlords use free leases they found online that were invalid because they didn’t refer to local laws.

I had a landlord try and evict a tenant using an eviction form from the incorrect state (it gave the tenant another free month of rent as he had to resubmit the correct form after the fact).

These are the shortcuts that backfire on you and are another reason that can cause you to quit the rental business.

Set yourself up for success.

Don’t Take Shortcuts

Shortcuts are attractive because they may get you started in the direction you’re heading faster, but shortcuts don’t always provide the results long term you’re looking for.

If you’re serious about being a successful landlord,  become an educated landlord, learn to manage your properties as if it is a business and it will all become easier and simpler to either carry on as is, or to expand later. If you’re doing it right it gets easier.

And if you’re dropping a ton of money into Real Estate already what’s another little bit to make sure you’re doing it right.

Money spent on having the proper leases, money spent on getting the software to make your job as a landlord/property manager easier and time spent making sure you have systems in place all come back to reward you as you move along your rental property ownership path.

Lining up accountants and lawyers familiar with Real Estate make your life simpler and more controlled long term. These are all parts of your long  cut to long term financial wealth so try not to stray.

Is there any other additions I should have on this list that bit you in the butt as a landlord? I’d love to hear your feedback, leave me a comment below!

 

 

 

 

 

 

The Trump Era – Why Landlords Should Be Happy

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Your Rental Property Doesn’t Care Who Won

Storm is ComingAs the stock markets react with fear, uncertainty and turmoil to the election results, it should be comforting to you as a landlord that your property values are essentially the same as yesterday.

You see that’s the great aspect of property and land. It’s not affected with the immediate fear and uncertainty that hits the stock markets after major events like an election. It can still provide shelter, even during stormy times.

Now I’m not going down the rabbit hole of whether Trump will be good or bad for America, it’s far to early to really say what the true outcome will be, but I will say the one aspect that doesn’t change with these results is people still need homes and properties to live in and to rent. And this is good for you!

If the stock market decides to plunge even further (as of the latest news several major markets plunged 4-6% since yesterday but are now holding steady), home prices will generally remain unscathed at least for the near future. Will the markets recover, probably and that’s the great thing about fear based markets, the fear fades and reality eventually returns.

Now there is a chance that if the 48,000,000 Americans who announced they will move to Canada if Trump wins actually do leave there may be some huge fallout, but we all know that isn’t really going to happen.

So today, whether you are feeling despair or triumph, stop for a moment and think about your property. Think about the positives. Think about how smart you were when you first bought it and how much smarter you hopefully feel today.

Owning property now, having an investment that you control and that is not subject to the instant fear, turmoil and uncertainty that accompanies the stock market makes you just that much more secure in your life and you shouldn’t forget it.

So stay the course, be happy you’re a landlord and continue to become more educated and more aware of how your investment will carry you through the uncertainty that will be unfolding over the next little while and the uncertainty of the future.

 

Buying Your First Rental Property – Financing Part 3 – Financing Strategy

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Rental Property Financing Strategy

financing strategy for rental propertiesBefore we get too deep into talking about some financing strategy for your rental property I need to point out the obvious.

Mainly because what should be obvious to everyone only seems to be obvious to a few…

So what’s obvious about this topic?

Well, how about what works for one person may not work for the next? Perhaps just because this works for someone in their fifties with a high paying job, maybe someone in their thirties’s making less money should have a different strategy.

There is no single strategy in Real Estate that works for everyone, YOU, yes YOU, must find what fits your individual time and circumstance.

You need to realize you must to have a plan in place that works specifically for you and depending on your current job (or lack of a job), your current age (young or old) and your current long term plan that strategy can vary drastically.

If you didn’t read the first two articles about financing rental properties, you can find them here, Buying Your First Rental – Financing Basics and Buying Your First Rental – Financing Terminology.

Now that that’s out of the way, let’s talk about the main strategies investors look at with their investments.

The Main 2.5 Strategies With Rentals

There are really two main strategies that Real Estate investors seem to focus on with their rental properties. Yes, I’m ignoring the long term play of property appreciation for several reasons.

One of those is inflation will do most of the heavy lifting for you in this department as the overall cost of everything rises and two, we’re talking about financing which is more of the here and now and less long term. Although it does come with long term implications. I’m also throwing in a half, because there is also a combination of these, which should make sense one we get a bit deeper into this topic.

Over the next portion of the article I’ll talk about these two main strategies and then I’ll explain some financing strategies to help provide ideas that can move you in the direction that best fits your needs.

So, let’s do this logically and start with strategy number one, which is cash flow.

Cash Flow NOW

As I’ve said before, Cash Flow Is King. With good cash flow a landlord has so much more flexibility than if they bought a property that was breaking even or worse losing money.

When the market slows down the extra cash flow gives you wiggle room to lower rents and when times are good the extra cash flow can be squirrelled away for reserves.

Cash flow can also be extremely important if it’s your source of income and that’s the goal of many investors, to have their rental income replace their job income. As quickly and as closely as possible so that there is little change in lifestyle.

So does that sound attractive to you? Stop for a second and think about it, what if you didn’t have to go to work anymore, at least at your day job? You could stop dreading Mondays and every day could feel like the weekend.

Now to be fair, some people love their jobs, but many don’t and they want out as fast as they can making the thought of enough cash flow to escape the 9-5 the ultimate dream.

Being in this situation can change your outlook on life. No more stressing about work, the freedom to sleep in, to stay up late, to paint, to go on vacation and to pursue your hobbies whatever they may be.

The Challenge of Cash Flow

The challenge you run into when focusing on replacing your job income is being able to realistically get enough income coming in to replace your wages.

If you’re currently earning $60,000 per year, that means you need to conservatively make $5,000 per month of rental income ($5,000 x 12 = $60,000). If you’re not working full time you will be saving money on transit, work clothes lunches etc, but you may also have to pay additionally for health insurance, travel expenses and more so it does become a balancing act.

If we’re working with the number $5,000 and your current rental property is cash flowing $500 after all your expenses and reserves, you only need to replicate this ten more times!!

TEN MORE TIMES……Ouch.

Now you need ten more down payments on properties, ten times more work and don’t forget, if you end up spending time traveling you’ll likely need a property manager who will charge around 10% of your rents. Suddenly you need eleven properties!

OR, you can focus on increased cash flow.

What if you were getting $1,000 per month cash flow? Now you’re down to 5 properties, what if it was $1,750 per month? Now it’s three… $2,500 and it’s only two!!

Al right maybe the $2,500 is getting a bit crazy, but we can all dream and there are some scenarios where it’s possible. More realistically though $1,000 or even $1,500 may not be out of line either though.

So how do we get more cash flow from properties?

Increasing Cash Flow

Increase Cash ReservesThere are only two ways to improve your cash flow on any property. Either increase your rents, lower your expenses or do a combination of both.

As landlords we’d all love to be able to increase our rents (if you’ve never increased rents you may need to rethink that as even minor increases help you offset increases in taxes and insurance) but the reality is often the market won’t support it, but that still leaves many of us do have the option of lowering our costs.

One of the main ways to do this is to reduce our biggest monthly expense, our mortgage, which leads me to a couple mortgage strategies. Now both of these strategies have a significant plus (increased cash flow), but they also come with some negatives (risks, more overall debt), so go into this with your eyes wide open.

Option One

The first option is to extend the amortization period. If you recall from our last financing article, the amortization period is the entire length of the mortgage. By stretching a 25 year mortgage out to a 30, 35 or even 40 year mortgage where available, you can see cash flow increase significantly each month due to stretching the payments out over a much longer term.

Take a look at the image below to see the differences in both monthly payments, and total payment amounts for the 25 year amortization term on the left versus the 40 year on the right.
dealing with financing

The difference is an increase in cash flow each month of $232.45. If you did this across four properties, that’s slightly under $1,000 extra cash flow per month ($929.80 to be exact) , that’s the plus side.

While this increases the cash flow, it also increases the amount of interest you pay out over the longer term. Depending on the mortgage amount and the term this could be tens of thousands of dollars more or even hundreds of thousands of dollars more.

In the example above the total interest paid jumps from $84,527 up to $143,685!!

The important part to remember about this is that none of this money comes directly out of your pocket, as the tenants cover it with their rent, you just end up stuck in the mortgage longer.

By switching to a longer term you’re adding five, ten or even fifteen years to pay off the mortgage, so if you have a very long term plan this also works well. If you’re targeting equity in the property as retirement funds in the next 10-15 years this wouldn’t work as well.

It’s very important for the educated landlord to understand the ramifications of both the good and the bad when making these decisions.

Option Two

Now, option two is a lower interest rate and similar to how we’d like higher rents, we’d also like lower rates and lenders don’t typically help us out in this scenario. Unless of course we look at other products than standard fixed term mortgages.

In this case I’m talking about variable rate mortgages. Variable rate mortgages tend to be lower than fixed rates by as little as .5% to as much as 2% lower. This can make a huge difference to cash flow, but it too has it’s dangers!

You’d want to go over the options with a qualified mortgage professional to see how a lower rate could help your monthly payments. Just be aware rates can change fairly fluidly as the markets change, so what may work well at one point, may be a poor option with a market where interest rates are rising rapidly.

And that’s the danger of variable rates.

If rates do start moving upwards it doesn’t take too many increases to wipe out any savings you have from the initially lower rate and you could even find yourself looking at a higher rate than you would have been able to obtain with a fixed rate mortgage.

So understand the risks, do your homework and see what works for you.

Now is also probably a good time to point out you also need the right type of property to achieve the goals you have set out.

One student of mine owns multiple properties that each have two suites and an external garage that gets rented out. That is the type of property he targets, because he knows it works and it gets him to his goal.

The majority of those properties generate in excess of $1,200 per month cash flow and during low vacancy periods he’s seen cash flow well above $1,500 per month.

How many properties like that would it take to replace your job?

For this fellow cash flow is key as he has several children attending college and the leftover cash helps support his lifestyle, so always know your goals and have a plan!

Another example is my rooming house property portfolio. My rooming house properties provided huge cash flow and changed all the rules for me. I had several rooming houses that provided $2,000 per month cash flow after all expenses and one larger property that was closer to $3,500 per month so you could see the appeal.

Just keep in mind that huge boost in cash flow also came with much more management!

Bottom line though, each individual needs to have their own plan so they can make decisions accordingly

Are you ready for strategy two?

Cash Flow Later

Strategy two involves a longer term goal of getting your property or properties paid off in time for retirement or even early retirement. This is ideal for someone who loves their work, but wants to supplement their retirement or even someone looking to cover their bases as they approach retirement.

Or maybe they just want a larger stream of cash flow once they quit work so they can finally travel and have all their expenses covered.

Imagine owning a property with $2,000 or more of gross income coming in and having the mortgage paid off. You’d still have insurance costs, some taxes and maintenance bills to save for, but a majority of that cash flow would go directly into your bank account. How freeing would that be?

The goal for this strategy is to put as much of your extra cash flow (and possibly extra earned income) back into the property to pay the mortgage down as quickly as possible.

financing strategy for your rentals - longer amortization to increase cash flowThis is where a couple simple strategies can pay huge dividends and the first one to talk about is switching to bi-weekly payments from a single monthly mortgage payment. Note I said bi-weekly versus bi-monthly which is a big difference.

The difference being two extra payments against the mortgage per year (bi-weekly is every two weeks, so 26 times per year (52 weeks /two) bi-monthly is only 24 payments (12 months x two)). This by itself makes a small difference and as per the image it can take three years off the mortgage amortization term. To accelerate that even faster, by increasing those bi-weekly payments by as little as 10% you can shave as many as eight years off a standard 25 year mortgage.

If you’re able to increase those payment amounts by 20%, you can get to that nirvana of being mortgage free that much quicker! And don’t forget you may also be able to make an annual bulk payment each year allowing you to accelerate to your goal even faster.

Now the caveats. Not all mortgages and/or mortgage products are created equally and not all lenders treat additional payments the same.

Many mortgages only allow you to pay a certain additional percentage towards the mortgage each month and/or year. This can be as low as 5% or much higher for some mortgages. On top of that, you need to ensure the additional payments go towards the principal and not towards the interest owing.

I’m mentioning this because while the majority do this by default, you need to ask just to be sure or you could be in for an unpleasant surprise when you look at your statement at the end of the year and see no change. In the end, if your goal is to be at mortgage amount zero as quickly as possible, making sure you have a product that allows you to do that is paramount to your success!

I can’t stop hammering this part enough, but part of ensuring your success with either of these strategies is having a long term plan. If you have this and are able to share this with your lender when shopping for a mortgage it will help you avoid any ugly surprises like not being able to make these extra payments.

The .5

I mentioned 2.5 ways, well the .5 is a combination of both of these ideas. Sort of a mix and match!

If you know you need increased cash flow in five years, but right now you have strong income from a job it could be hugely beneficial to pour as much money as possible into the principal on your mortgage for those five years.

You could make the extra payments on top of the normal payments, you could pay bi-weekly and then throw extra money on the principal again each year for five years. Then once you hit your five years, if cash flow is the priority, you have a huge amount of principal pay down in place and could reverse strategies.

You can switch back to lower monthly payments increasing cash flow, you could refinance and extend the amortization period and suddenly your cash flow is way up. The extending of the amortization prospect may set you back time wise, but again, it depends on your ultimate plan.

If your need for lots of cash flow in five years is the priority, this allows you to get there strategically, which is what smart investing is all about.

Wrapping It Up

There is no one size fits all solution for your financing strategy with your investment properties. There is only what works for you, or what you let happen to you when you don’t plan ahead.

If you understand your upcoming needs, your future goals and what you want your properties to do for you it becomes a much more freeing proposition rather than just accepting the standard fixed rate 25 year mortgage.

The real message from this article and the previous articles is to show you there are options, to educate you about some of those options and to inform you that you can make some real strategic decisions that can benefit you, yes YOU, going forward.

Now, I want to hear from you.

I would like to have you comment below and let me know if this helped, if you’re going to be talking to your broker and if you’d like more “strategic” thinking articles like this or just want me to stick to the basic stuff?

If you don’t make your voice heard you end up just accepting what you’re given, so I look forward to your thoughts. And don’t forget, if you found it helpful, be sure ot share it with your mortgage broker, other landlords and other investors so we can help as many people as possible.

Buying Your First Rental Property – Dealing With Financing Part Two

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Welcome to Part Two Of
Dealing With Financing of Your Rental

So just to continue on with part two of dealing with financing and how it applies to your Dealing with Financingcurrent or future rental properties let’s jump right in.

In the first article on the topic we touched on “Why The Basics of Financing Aren’t Basic” and “Why The Bank May Not Be Your Best Option”.

In this article I want to explain some terminology all investors need to know about mortgages and differentiate several mortgage types that are available,  some of the pitfalls of them and then some options to consider with your financing. Before I get there though, I’ll jump into terminology so the rest of the article makes sense

Much of this will be the basics for some of you, so if you’re already familiar with much of this it may seem a bit repetitive, but I’ll try and include some advanced tips in here as well, so hang in there.

 Mortgage Terminology

So much to learn, so little time! I’m going to go over a several important terms to start with and from there we’ll move into the actual types of mortgages.

To start with let’s talk about the different between a mortgage’s amortization period and a mortgage’s term. These two items seem to cause a lot of confusion amongst people and often get misused so hopefully after this you’ll not only know the difference but be the life of the party by being able to correct people when you’re out and about…

So let’s start with amortization!

Amortization or Amortization Period – When it comes to mortgages the amortization period is the length of time it will take to pay off the mortgage. Most mortgages are based off of 25 year amortization periods meaning they will be paid off in full after 25 years if the regular payments are made.

Now while 25 years is typical, you can also find shorter amortization periods of ten or even five years (note depending on the size of the loan these payments will be considerably higher versus spreading it out over 25 years).

Alternatively many investors often look at 30 or even 40 year amortizations where available. Investors often prefer these longer periods as it lowers the monthly payment which in turn increases cash flow, but it comes at the expense of paying much more interest over the entire mortgage.

dealing with fiinancing and understanding how amortization affects your payments

Above you can find a simple example of how these differences can affect your payments and overall interest paid.

The simplest explanation of amortization period is it’s the full length of the entire mortgage.

Now that you have a grasp about what amortization is, let’s mix it up by introducing terms.

Mortgage Term or Term Period – While the amortization period is the full mortgage length most mortgages these days are broken down into smaller mortgage terms or term periods.

These terms usually consist of three to five year terms, but can also be as short as six months or up to ten years. Thirty years ago and prior the mortgage term was typically the same as the amortization period, but lenders have discovered the longer terms cost them money and they started changing the rules.

By creating shorter terms they are able to usually add some additional fees into the mix, additional mortgage penalties for breaking the term through refinancing or selling of the property and some of the products often tie clients in longer.

While there are additional costs with much of these changes, if you understand how this works, you can also make it work for you. For example, if you know you need to draw some equity out of your property in three years for perhaps a child’s college education or as part of your retirement planning you need to sell the property, you can align your term to fit that timeline.

By reducing the term length to fit your timelines you not only reduce penalty amounts you might incur for breaking the mortgage early, but you often also get slightly lower interest rates.

By default many people simply choose five year terms as they are the most common and they reduce the guesswork of you having to determine if rates will go up or down over the next half decade.

Now that we have mortgage term and amortization under control, let’s talk about open versus closed mortgages.

Open & Closed Mortgages – Open and Closed mortgages refer to your ability to pay the mortgage out without any additional fees or penalties being charged to you if you don’t carry it to the full term.

With an open mortgage you are open to paying it out at any point of the mortgage term. These are ideal for situations where you intend to sell, you’re waiting for additional cash influx from an inheritance, you may be expecting a job transfer out of your current area or you’re expecting a windfall of cash that you wish to attach to the principal of a mortgage or even when you’re waiting to get other finances in order allowing you to qualify at lower rates in the near future.

The trade off for this flexibility though is a much higher interest rate. It’s not uncommon for it to be several points higher or during these very low interest rate periods even double the rate of a closed mortgage.

Closed mortgages have limited options for you to break the term without a significant penalty being imposed. This allows the lender to charge a much lower interest rate as the money is locked in for the duration and if it’s not they get rewarded with the bonus of the penalty.

Closed mortgages are ideal for homeowners or investors with long term plans. You’re trading the higher rates of a open mortgage to staying committed for the mortgage term.

Now that you’re armed with some of the basic terminology regarding mortgages, it’s time to address the two main types of mortgages. These are fixed and adjustable rate mortgages (ARM’s) which are also known as variable rate mortgages in some areas.

Types of Mortgages

Fixed Rate Mortgages – Fixed Rate Mortgages are exactly like the chart I used above with the 5% interest rate. With a fixed rate of 5% (or whatever rate is negotiated) the borrower knows exactly how much they will be paying each month for the term of the mortgage.

This can provide a level of safety and surety for the mortgage holder as they understand exactly what there financing costs are and it allows many of them to sleep very well due to this certainty.

On the other end of this certainty is the next type of mortgage, adjustable rate mortgages.

Adjustable Rate Mortgages (ARM’s) or Variable Rate Mortgages – ARM’s or variable rate mortgages are exactly what they sound like, they are mortgages where the interest rate adjust or varies over time.

Normally ARM style mortgages have much lower interest rates than fixed rate mortgages, but they also come with some additional risk.

These interest rates are usually tied to a schedule which has lower initial interest rates which accelerate later on (these types of mortgages were part of what fuelled the collapse of the US housing market) or to an external rate such as the federal bank rate.

In our current low interest economy this works out as an advantage for investors and homeowners, but if the economy suddenly picks up the federal interest rate could spike upwards causing the monthly mortgage payments to jump as well.

This schedule can be an index fund, Treasury Securities or even a lenders own internal fund. Knowing which fund they are based off of can make a huge difference in how you react if rates do start to change as some indexes or funds will change faster and higher causing you to get hit with much higher payments.

This uncertainty causes a certain spectrum of investors to shy away from these types of mortgages while the lower interest and accompanying payments attracts another breed of buyers who can accept the tradeoff.

Many homeowners and investors hedge this risk by making higher than required payments which go directly towards the principal and if nothing changes help reduce the overall amortization payment often by years!

If rates do go up they are already used to larger payments and also have the option of breaking the term, paying a penalty and locking in a fixed rate albeit perhaps at a higher rate by then.

Now you do need to understand the specific terms relating to the specific mortgage product you’re looking at, but personally I prefer variable rate mortgages where available (and not all lenders provide these on rental properties), as long as the penalties for breaking the mortgage aren’t too drastic.

If the low interest period we’re going through did appear to be about to change my perspective would also change, so be aware of current economic conditions when reading this article.

Your risk and my risk tolerances can be very different and what works for me, may cause many sleepless nights for you! Basically, what works for me may not work for you so consult with qualified professionals, do what makes you comfortable  and don’t blame me if it doesn’t work for you 8′]

This leads me to the final category of mortgages, Hybrid mortgages

Hybrid Mortgages – A Hybrid mortgage is a combination or hybrid of two or more types of mortgages. Usually a hybrid mortgage consists of a lower initial interest rate like an adjustable rate mortgage and after a certain time frame, which can vary from six months to five years, it then adjust to a fixed rate mortgage.

Other variations can be mortgages that combine a Line of Credit (LOC) and a mortgage and as the mortgage principal gets reduced the Line of Credit amount increases.

These can give investors flexibility by providing access to funds via the LOC when needed for items such as repairs. They also tend to lock people in as they are more expensive to transfer out of as they are registered as two debts on the title or deed and each has a cost to remove versus a single cost for a mortgage.

They can also have  expensive increases over time in some cases, so be sure to read the long term affect on your payments and rates!

The important part to remember is each different type of mortgage and it’s variants have specific ways in which they work and they may, or may not, work for your individual situation.

Closing Up Part Two

Again I thought I could wrap everything up here, but it looks like I will need one more article to close up this series.

In the final series I’ll go through some options for investors based on a couple strategies. These will include going for higher cash flow and a second strategy to pay your mortgages down quicker.

interest versus principal paydown over time

Just to close up, I’m including a graph to show you how mortgages are very interest heavy. As you can see in the graph for the first portion of the mortgage the majority of the money you pay for the first third goes towards interest (the orange section of each year) which benefits the lender.

Then in the latter portion the majority goes towards your principal (the green portion of each year), which benefits you! This shows why holding onto a property long term starts benefitting you more and more! Next article we’ll talk about those befits and how you can maximize them even more!

As always, if you have feedback, leave me a comment below and if you found this helpful be sure to share it!

Part Three – Financing Strategies is now up. You can go to it here,

Dealing with Financing – Financing Strategies

Buying Your First Rental – Dealing With Financing Part One

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Financing Rentals

financing your rental propertyWhen you first start buying rental property one of the biggest challenges you’ll have is dealing with financing.

It seems simple enough (or at least the way they portray it on TV or in slick Real Estate seminars makes it appear simple), put some money down, put a mortgage on it and away you go, but that’s only at first glance.

And on TV..

But in the real world…

Well, if it was that easy in the real world then anyone could do it!

That’s why I’m going to talk a bit about the basics of financing here.

I won’t tell you whether getting the lowest interest rate is what you need (often it isn’t), I won’t tell you whether you should be getting fixed or variable rate mortgages (I have a blend of both and it depends on my plans with a property) and I won’t tell you it’s best to put more down (it usually isn’t, but it’s a case by case situation).

I will however warn you about some potential traps you may fall into with your first property and those warnings are worth the price of admission, which is free so it’s very worth it!

Why The Basics of Financing Aren’t Basic

Part of the challenge we face as Real Estate investors is we get bunched into a different class of borrowers by the lenders, so we also have to typically follow different rules.

Of course these rules also vary depending on where you live, so make sure you have someone who can help you work through them properly and legally!

One aspect that does seem to be consistent where ever you live is investors tend to have to jump through more hoops to get financing for rentals versus a regular home purchaser. If you understand this before you get to far it does take some of the stress of acquiring financing out of the equation.

Some of these hoops and challenges could mean higher down payments, less flexible payment terms and as your portfolio grows less flexibility with lenders. So be ready and also be preparing for the future!

Now the question many new investors have is why is it so much more work? Well, according to statistics landlords are simply higher risks than home owners!

Whether it’s because so many are uneducated about the process or whether it’s easier to give up on a rental than a personal residence I can’t answer for you. It’s just how it seems to end up and as they fail, the extra burden falls on the current and upcoming investors.

I know it’s true that some investors simply get overwhelmed or taken advantage of and ultimately end up losing the ability to pay their mortgage debt which leaves them few options but foreclosure. But that doesn’t mean it’s our intent!

It’s this danger, or higher statistical danger, that causes extra hurdles for those investors who simply want to do it right.

But if you’re here and you’ve been following me for any period of time hopefully my articles and videos are helping you to avoid following into some of those situations of overwhelm or of being taken advantage of, right?

Hopefully you did say right and if you did, let’s move forward and talk about one of the first warnings.

Why The Bank May Not Be The Best Option

financing with banksWelcome to the first trap/warning/mistake that new investors make with financing!

OK, perhaps it’s not a trap, but it is a misconception that your bank is out to help you. They’re advertising says it’s true, but we are far gone from the days where bank loyalty really helped you out.

I’m probably a little jaded with dealing with banks, but they do so many little things that annoy me.

Like trying to break down relationships with their main staff. There’s a reason banks tend to transfer managers so often, it’s not to provide upwardly mobile career paths. It’s meant to break up any potential relationships that could cloud sound financial practices.

I’ve had it happen to me where I’ve had great relations at the front counter, know the tellers kids names, I’m up to date on upcoming staff weddings and I even took extra steps to be remembered, like bringing in donuts on the 1st of the month when I would do big deposits.

We all like to be remembered and this went a huge way to helping us stand out from their regular memorable clients. It also helped me with little things like getting a fee for a bank draft waived or perhaps an overcharge getting wiped out, but when it comes to big manager level issues suddenly it’s all business.

My real life example of this was a bank we’d been dealing with for many years, that we had multiple accounts through and that had handled hundreds of thousands of dollars worth of transactions for us. 

We discovered we were paying a ton of extra service charges for all the accounts and I inquired with the teller if there was a chance to get the fees reduced. Due to the great rapport I was informed it shouldn’t be a problem, especially due to our high number of transactions (and likely the donuts), but I’d need to talk to an “account manager”.

This too went great as I was recognized by her and was again informed it shouldn’t be a problem, again due to our high volume, but they did this all the time for customers, she just had to get it approved by the manager…

Two days later, I was simply told no the manager wouldn’t approve it… Welcome to the world of zero relationships and all business. And yes I did move all my accounts within sixty days, so now they moved from $800 per year worth of service charges to zero, and I quit delivering donuts!

Part two of the problem is banks also like to cap their risk. They don’t like over extending themselves to any one individual (note this doesn’t qualify to those that don’t need to borrow money, banks love to loan those people even more money!).

This results in you potentially having an easy time getting your first rental property mortgage. Then for property number two the hoops become more varied and tighter to get through.

Finally somewhere between property three and five they simply tell you that you’ve reached your capacity with them and they won’t loan you anymore money.

Now, you have all your properties tied up with one lender and no leverage. they control all your options so you have to start fresh somewhere else.

That’s Why I Recommend…

It’s due to those types of issues that I recommend you look into dealing with a mortgage broker if you’re serious about investing in Real Estate, oh and not just any mortgage broker.

You’ll want to find a broker who is familiar with Real Estate investors and dealing with financing of rental properties.

If you’re not familiar with the role of a mortgage broker the easiest way to explain it is to think of them as someone who deals with many lenders and banks, versus a bank who traditionally only offers there in-house mortgage products.

This can open the door to a variety of different options and products involving your mortgage and a mortgage broker who is experienced with investors can warn you in advance which products fit your needs best.

An example of this is variable mortgages versus fixed rate mortgages. Variable rate mortgages fluctuate with the bond market while fixed rate mortgages stay at a fixed rate for the term of a mortgage. Both are important, but they also have different applications depending on your investment plan.

If you’re in a market where values are increasing quickly variable mortgages give you more flexibility with less penalties typically if you decide to break your current mortgage early and refinance or sell to acquire some of the equity for another purchase.

Sharing your investment plans with a knowledgeable broker can ensure they fit you with the products that save you money not just up front, but on the back end too!

dealing with financingAnother bonus of having access to a broader width of lenders is more flexibility if you continue to expand.

You’re able to have your “eggs” spread to multiple baskets.

Now if you start having challenges with one lender it’s not quite the deal breaker anymore and you’re not feeling quite as locked in anymore.

Trust me, this can be stressful as I’ve run into situations where one particular lender changed their policies a couple weeks before a renewal. This forced me into a situation where I had to sell the property and since I dealt with a broker, I was able to let my broker know I wouldn’t deal with that lender anymore.

With a large portfolio tied to one lender, this would have been a major headache.

Dealing With Financing Overwhelm

I’d really hope to provide a nice concise article about financing, but I find my self explaining more than I anticipated (might be due to the amount of information I need to cover!) and including more and more information.

All this financing stuff can really get overwhelming!

So I’ll stop here and make this part one of my financing series versus article.

While you’re waiting for part two (and possibly part three), why don’t you leave me a comment with some of the challenges you have faced with financing, or with banks!

Also, let me know if you’re currently using a broker or dealing directly with the bank and the experience it’s provided you with!

Looking forward to your feedback.

Part Two & Three Of This Series Is Up!

You can find it here,

Dealing With Financing – Part Two Terminology

Dealing With Financing – Part Three Financing Strategies