Article number 31 needed to be helpful, impactful and relevant. What’s more relevant to landlords than financing investment properties?

My self appointed goal of writing a daily article for a month (go figure I picked a month with 31 days) is coming to a close, so let’s wrap this up with a bang.

Hopefully you’ve found the articles helpful and informative, I’ve received emails, and even a call from someone who’ve commented they haven’t been able to keep up, but have them stockpiled to go through as they are enjoying them.

So finish this up I’m going to talk about financing your properties as this has come up a few times with several landlords over the last month. It’s led to a a consulting call where I walked through ideas for one landlord to expand, to a referral for another new landlord to a local mortgage broker who was able to help him put financing in place and it’s helped provide answers to others at just the right time.

If you’ve enjoyed these leave me a comment, if you have questions or ideas for upcoming articles, again leave me a comment or send me an email and in the meantime I’ll try to come up with more articles and information to help us all become better, more educated landlords.

Onto financing!

Financing Investment Properties

Financing investment properties tends to be a challenge right from the start.

The rules and regulations seem to change and adapt as often as the wind changes making expanding and growing an ongoing challenge.

It seems every time I end up consulting with a landlord and explaining how we did things when we started I need to preface it with, “This is how it used to work.”

Understanding that the rules keep changing is one of the first steps. Being able to adapt as they change is a highly ranked number two!

Getting a loan for a rental property is simply not as easy as getting a mortgage for your home, so you need to prepare differently.

Downpayments For Investment Properties

This tends to be the biggest hurdle for new landlords or those expanding their rental portfolio.

Unlike residential mortgages where you may only require five or ten percent of the purchase price (or zero down when I started!!), for investment properties lenders typically want 20% or more before they even look at you.

And you have to prove you actually have the money by being able to show it’s been available for ninety days or longer!

Yep, it’s not enough that you have the money, you need to be able to show you’ve had it for awhile and that it’s liquid enough you can use it for the purchase.

Now you don’t actually need to liquidate it, but you have to show you have access to it which is an important distinction.

We kept a $100,000 investment portfolio active for the first five years of being a landlord just to show proof of funds.

We typically had money in our accounts that would cover all the downpayments for upcoming purchases, but due to the ever changing hurdles around investment financing it was just simpler to be able to show proof of downpayment from a stable ongoing source over and over and over.

Rules like having the money in your account for ninety days could often backfire as we would use the money in our accounts for flips, renovation projects etc and it would bounce up and down like a golf ball on cement.

So being able to consistently prove downpayments became a major concern, hence the investment account.

You need to think this through as you expand, or start out, and be able to prove consistent funds for purchasing and you should go over this with a mortgage broker to confirm it’s acceptable.

Even if you’re using Joint Venture Partners or other partners to help you fund purchases you’ll need to show there’s actually money on the table, or close to the table, somewhere. So be prepared.

Interest Rates For Investment Property Mortgages

This too is a moving target. For your personal mortgage you may be getting offers of super low rates, special offers and even incentives that it’s crazy not to accept them. After all, who can’t use a new toaster!

With an investment mortgage those offers seem to disappear and the more properties in your portfolio, the fewer options for even basic rental financing seem to be available.

Your interest rates will be higher almost immediately and as you add properties to your portfolio they not only continue to get higher, but the number of lenders who will deal with you will dwindle.

That great lender who was so excited to sign your first investment property usually has a cap on the number of loans or mortgages they will provide a single individual. It might be as low as a single property, or it could be five or even eight but there is a number.

If you’re not aware of this, out of nowhere you’ll hit that number without warning and suddenly find your current lender doesn’t want to play anymore and that there are fewer and less attractive options available than before.

If you know this will be a problem you can talk with your broker, or your bank, in advance so you are prepared for when you have to shift lenders.

As we got into double digit numbers of properties and kept growing past fifteen, twenty and upwards the number of lenders who would finance kept drying up. And along the way we’d see interest rates going up full percentage points plus additional “setup fees” added to the mix costing us even more money.

You’d think as you build up wealth and equity the lenders would become happier and happier with you, but in their inverse thinking the bigger you became the bigger risk they were involved with if you fail.

This is why many Real Estate investors transition from single family home style of investing to larger buildings. In the case of apartments or commercial buildings financing becomes about the building not you.

So be aware of potential higher interest rates and how it will affect your cash flow as you grow.

Debt Servicing

Debt servicing is fancy talk for the ability to pay your bills.

The majority of mortgage underwriters (the folks at the lenders who do all the sophisticated math to determine whether you qualify to have their money) use debt servicing as an indicator of whether you are good with paying money back and aren’t to heavily indebted.

The more indebted you are, the less money you will have to pay back the lender which for some reason they seem to think is a problem…

The challenge with debt servicing is how various lenders calculate this, often with their own in-house rules.

You might think having a $100,000 line of credit or HELOC would show you have adequate reserves in case of emergencies. At one point some lenders were talking about looking at this as an opportunity for you to spend $100,000 and calculate your debt servicing as if you had to pay that interest off every month, even when the balance is zero!

Imagine how that could have affected your ability to pay your debts. It certainly would lower your capability to make a mortgage payment which could affect your ability to borrow.

You constantly have to stay aware of rules changes and how your debt servicing can affect your ability to purchase that next property.

Another challenge they bring to the table is calculating cash flow or rental income. For their protection and to lower risk, many lenders will only take a portion of your actual net cash flow as income.

You may cash flow $1,000 a month from a property after all your expenses, but the lender may only count 50% or even 25% under their rules significantly lowering your debt servicing capabilities.

Understanding your debt servicing and the challenges associated with it are key to being able to expand past a handful of properties.

Working With The Financing System

You need to work with the finance system and within the rules if your goals are to move forward with a larger portfolio.

Sure there are options to get around some of the hurdles, like House Hacking and working with partners, who provide financing or simply moving to commercial mortgages, but a lot of it will come to preparation.

You’ll need to have good solid documentation (hmmm, just like you need documentation for your tenants, this documentation thing seems to be ongoing with Real Estate), good record keeping and a good hand to guide you.

You’ll need to check your credit scores fairly regularly (Equifax provides a free once a year credit check and there are many paid services that can monitor your credit for you on a daily basis). You’ll need to stay on top of your expenses and bills.

You might need to pass on that new vehicle if you intend to buy a new property in the new future as that extra monthly payment may affect your debt servicing. You might need to make smarter decisions about what you’re buying or financing going froward. You may need to focus on paying down a credit card or two as well just to make everything balance.

And you need to expect hurdles and change.

Owning investment property isn’t easy. If it was easy, everyone would do it.

That’s why those select individuals, like you, who make the sacrifices, who take the extra steps to learn and move forward and who are willing to strive for their goals ultimately get the benefit from it.

Financing investment properties is rarely easy, but it’s an important part so understanding what you need to do, understanding what you need to get prepared and moving forward through it are what will help you succeed.

So good luck with your Real Estate investing and your financing!

Did this help you understand financing rental properties a bit more? Was there more info you would like to have read about or that needs further explaining? Have a financing story to share? Leave us a comment!

Prorated rent, before I was a landlord I’m pretty sure I had no idea what it was or why I’d even need to know.

Since then it still hasn’t come up that often, but understanding what it is and how it works and even where I can use it, sure has become handy.

Prorated rent comes into play when you have tenants that need to access your property a few days (or even weeks) before the lease starts or when they need to stay on longer than the lease period.

Since they’re not paying for the entire month, you use some fairly simply math to figure out a daily rental rate.

Prorated Rent Calculations

When it comes to prorating rent there are two ways to do the math.

The least common and rarely used method is to base it on the entire term of the lease.

As an example for a one year lease you would take the monthly rent x 12 months and then divide it by the number of days in the year period (either 365 or 366 depending on leap years).

For a six month lease it would be the monthly rent multiplied by six months then divided by the number of days of each month added together.

The formula would look like this

(rent amount x months of term) / total days of the lease = daily rate

Example: ($1,250 rent x 12 months) / 365 days = $41.10 per day

This method is technically more accurate, but the reality is it’s very rarely used.

The more common method is to simply divide the months rent by the number of days in the month which can vary slightly depending on whether there is 28, 29, 30 or 31 days in the month.

That simplified formula would look like this

(rent amount/days in the month = daily rate

Example 1 ($1,250 rent /31 days) = $40.32 per day

Example 2 ($1,250 rent /30 days) = $41.67 per day

You can see how the daily amount increases on a shorter month in example 2 and obviously for February the daily rate would be even higher due to even fewer days in the month.

How To Calculate Prorated Rent For Early Access

When it comes to determining what to charge a new tenant who wants in early it should be much easier to figure out now.

If you’ve done the calculations above based on the rent you’re charging and have a daily rate determined you simply take that number and multiply it by the number of days they are getting early access.

Note: When doing monthly calculations base the number of days on the days of the month they are moving in. For example if the lease starts July 1st, but they are moving in five days early in the month of June your daily rate is calculated based off of the 30 days in June, not the 31 days in July.

So let’s say they are moving in five days early June in order to move in on a Saturday when they are off and your rent is $1,250 per month like my earlier example.

As June has 30 days, that makes the daily rate $41.67 per day. Multiply that by 5 days and the prorated rent for their early access totals $208.35

$41.67 daily rate x 5 days = $208.35

If tenants need to stay an extra couple days the same method can be used to calculate the daily rate and what they owe you.

When Not To Use Prorated Rent

You’ll definitely want to use these calculations when letting tenants in early, although you can also give away the days for free if you like giving away money or just want to be extra nice.

However, this is really only a one way street and doesn’t come into play when tenants move out early unless you have a very special reason to do so.

And it better be extremely special!!

I’m referring to situations where tenants may want to move out a few days prior to the month ending just to be able to do the move out over a weekend as example.

Just because they are vacating two, three even five days early it doesn’t qualify them to receive the rent back for the days it’s vacant, after all they are renting by the month.

You normally won’t be able to rent it out early to cover those lost days so it just becomes another full month.

Then again, if you do happen to want to let someone in early and you’ve taken the time to calculate prorated rent for them, then it’s only fair to reimburse the former tenants for the days just to have a clear conscience.

So, have you ever had to calculate prorated rent? Or would you just let tenants in early? Leave me a comment below sharing your thoughts and whether this makes sense to you!

A verbal lease… A mutually agreed arrangement with no documentation to back it up, or no specifics about what happens if….

Do you see a problem with that?

Unfortunately many landlords don’t.

I’ve even seen some talk about it as a point of pride, “I’ve been doing this for x amount for years and I’ve never needed a lease!”

Until you do…

A Verbal Lease Is Not OK

They’re not, they leave you too vulnerable . Vulnerable to individuals who knows how to take advantage of your lackadaisical attitude towards paperwork.

And those people are out there.

You’re even vulnerable to generic situations where it’s something as innocuous as the yard maintenance, or smoking or wear and cleaning up when they move out.

With a verbal lease any potential are of conflict degrades down to a he said she said scenario or defaults to generic law for where ever your property is located and you can be pretty sure the generic rules are not designed to benefit the greedy landlords.

And yes I know we’re not greedy landlords, but the laws rarely seem to reflect that, so we need to be aware.

Big picture you want a lease in place that is entirely legal, but manages to still give you control of the situation.

That can only be accomplished by removing the generics.

So What Does A Lease Need?

Obviously it needs to include information about who’s living there (the tenant(s)), the landlord and the address of the property.

But it should also include specifics about the type and length of the lease. How much the rent is along with any deposits or last month’s rent prepayments. Whether it’s a fixed term and if so, how long is the term or if it’s a month to month.

Note: Depending on where you’re located month to month and fixed term have different implications. In many areas month to month gives the landlord control, yet in other areas month to month gives all the control to tenants, so know what works best in your area!

It should also include specific information about pets, smoking and many other issues that can pop up and cause you more work down the road or loss of potential income.

All of course in line with any local landlord tenant laws that could affect it.

It should include information about what happens if there is a disagreement. As in what rules take place. Typically the local landlord tenant act takes precedent, but what if if fits between the cracks? Your lease should address this.

Basically you want your lease to cover any generic issues that could cause problems.

How Long Should Your Lease Be?

Long enough to protect you, short enough to get through it.

I’ve had landlords tell me there lease is just two pages, I’ve heard of others who have a 25 page document.

Personally I think two pages is too little and 25 is far too many.

Two pages doesn’t cover enough and 25 pages goes too far into the minutia which means no one will ever read it anyway.

My lease is eight pages long and actually has a ton of extra material in it that I can easily remove with a big X that both the new tenant and I initial or I can edit out before presenting to the tenant.

There’s really no perfect size and I’ve added and removed phrases and clauses over the years as laws change or my requirements change and as I realize there are better wordings or paragraphs that need to be added, or that I simply missed.

It’s really a learning experience but the important part is you need a solid base to start from.

Where Do I Get A Good Rental Lease?

There are many great places to find a good local rental lease.

From apartment and landlord associations to Real Estate investment groups and even your lawyer.

An experienced Real Estate lawyer are going to be your best legal lease, although the associations and groups often have additional information or clauses they’ve learned through their experiences locally as well.

You might even want to start with a generic local lease and have your lawyer fix it up to suit you.

Of course there are some reasonably good leases you can pick up online through places like LegalNature or LawDepot. Personal self interest plug here as below are affiliate links for both which means I get a small commission from them if you end up purchasing via those links, so thanks in advance…

Wherever you find your lease, you should make sure you read through it every year, or even before every new tenants to see if maybe, just maybe there is anything new you should add or you should update.

There’s no such thing as a perfect lease that lasts forever, you may end up with a great lease that simply continues to evolve as you learn and gain more experience as a landlord.

Where did you get your lease? And how long is it? Or what did you find out you needed to add through your experience? Leave a comment below so I have an idea of what you’ve learned!

In my earlier article I talked about a couple ways to get into your first rental units faster, today I’m adding to that conversation by talking about rooms for rent in your home.

One involved renting out a suite while you lived in the other, but another spin on that involves renting out rooms in your home.

Normally I don’t usually recommending renting to friends or family, but many young people these days have friends looking for an opportunity to get out on their own.

That’s where renting out a room in your residence could come into play especially if you’ve bought a multi bedroom home and have the space.

Or if you’re renting out the suite downstairs and have a spare bedroom or two upstairs you want to use to help pay your mortgage or build up your savings even faster.

Even at $400 or $500 per month with two rooms that generates an additional $8,800 to $11,000 per year of income you could use to pay down a mortgage or use to build up a downpayment for the next property.

Rooms For Rent, Renovations, What Works For You?

As I mentioned in yesterday’s article (House Hacking Your Way To Your First Rental), so whether you want to buy a suited property, live through renovations, or even rent out a room or two in your property there are many ways for you to move forward.

Yes you may have to make some concessions to make it happen, but the sooner you do it the sooner more doors appear in front of you down the road.

Doors of opportunity, or simply more rental doors!

Getting started with rental properties can be a bit of a challenge, but there are ways, known as house hacking, to get started without having to wait ten years.

If I had to start over, one of the easiest ways would be to buy a suited property for my own personal residence. In a perfect scenario I’d rent the upper suite if it was up/down and live in the basement to maximize cash flow.

Operating like this would provide two huge benefits.

As a personal residence I wouldn’t have to put as much down on the property and I could leverage my money better, plus start sooner.

Additionally, with the upper likely covering the majority of not all of my mortgage I’d be able to either increase mortgage pay down to the maximum amount during the first years of owning the property, or quickly build up a new down payment for a second property within a few years.

I’d simply rinse and repeat with another suited property and move there as my primary residence and jump from a single rental to three rental doors with my next purchase.

But that’s not the only way to do some creative house hacking.

House Hacking – BRRR

Another option would be the BRRR strategy or Buy, Renovate, Rent Refinance tactic.

You buy a rundown property at a low price, you renovate it to increase it’s value and then you have the option to refinance it up to the current value and rent it out as an investment property. You could simply sell it and use the increased value as a downpayment on your next property. Or you could simply rent it out.

If you’re moving into it as your primary residence and renovating it while you live there you can even take advantage of additional tax benefits and simply rinse and repeat every couple of years until you find yourself with a portfolio of properties if you simply hang on to them, or a completely paid off property if you just carry the money over to each subsequent purchase.

The Beauty Of Real Estate

That’s the beautiful thing about Real Estate. There is not just one way to make money.

Whether it’s house hacking, fixing and flipping, simply buying and holding or just paying off your traditional mortgage over 25 years, in the long run you simply make money from Real Estate.

Rents late, can’t reach the tenant, is it possible my tenants bailed on me?

Crazy how often you see this pop up in landlord discussions, but it does, far too often!

So what do you do? Can you, the landlord, simply go to the property unlock the door and look around? After all it’s abandoned, right?

As in so many other landlord situations the answer is a firm maybe…

Is It Abandoned? Have My Tenants Bailed?

Or have they moved out and simply plan to come back to clean up like the great people they are?

We know the answer, but due to the complications of the law, the ability of people to abuse the rules and the utter lack of people feeling the need to do what’s right going into your own property to secure it may be the wrong solution.

Under just about every jurisdiction the laws state the tenancy isn’t over until it’s confirmed it’s over which is a rather circular argument.

Sure you could go barging in and confirm it’s vacant and the tenants have indeed bailed, but what if they are only in the process of moving. You’ve now illegally entered the property and you’re the bad guy.

In tenant friendly jurisdictions you’re in breach and you’ve suddenly lost all your rights. You’re not able to retain any deposits, you may have taken obvious junk to the trash that were prized possessions to the tenant (or so they say) and obviously you’re a lousy human being and a nasty rule breaking landlord.

Just more proof that landlords are abusing the system right?

Follow The Stupid Rules

I get that is a stretch, but in these litigious times, we need to protect ourselves by following the rules. And after all, unless you can confirm there is a safety reason to immediately access (you hear running water, see smoke billowing out, maybe on a stretch it’s raining in a window enough to cause serious damage), you can’t access the property without proper notice.

And what’s one more day?

So simply drop off a 24 hour notice of inspection and attach it to the entrances (front. back and side where applicable) and take a few pictures with your phone as evidence.

Now you’re following the rules and can come back the next day ready and able to legally enter the property. Then you’ll be able to take dozens of additional pictures to help prove that it is indeed vacant and that the property has indeed been abandoned.

Just as added followup, it never hurts to text, leave a voice message and even send an email informing them that it appears they have abandoned the property and that you will be doing an inspection the next day at XX time.

It’s a shame we have to do so much CYA, but it’s how the rules have been set up. After all we’re the rich landlord taking advantage of the poor tenants right?

The first rental property is going to be your hardest rental property, I’d dare say even your worst rental property, as it’s where you gain your initial experience.

And hopefully you understand experience often comes from making mistakes.

It’s where you first learn about screening tenants, it’s where you first learn about rental property maintenance, it’s where you cut your teeth on what you should be doing, and you learn what you should never ever do again, like skipping screening.

It Does Get Easier

Once you’ve managed to get through the trials and tribulations, and it doesn’t happen over night, it really does start getting easier.

You’ll learn from your mistakes and your positive experiences and hopefully leverage them to move forward.

Then you’ll eventually get your second property and acquire several new lessons from those experiences.

There will always be hurdles and roadblocks as you continue to move forward, but that’s part of life and a huge part of investing in rental property.

So if you focus on the problems that’s all you see. So rather than focus on the problems you need to…

Focus On Where You Are Going With Your Rental Property

I’ve helped out many landlords over the years and one of the first things I like to ask now is what their goals are.

Is their rental property a one-off, is this something they plan on doing full time, is this their retirement plan? And if so, when does it need to be in place?

When you start focusing on these end goals versus the challenges along the way the journey becomes much more entertaining.

So what are your goals? If you’ve made it past your first (and hardest property), what now? Share your story below to see how many other landlords have similar plans!