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Session 8: Real Estate Investing: Buying then Renting For Profit |
Rental Properties:
Getting into real estate can start with simple stuff. You can read books or watch shows about buying and selling properties. You can talk to people who own homes and ask how they did it. But, to make money in real estate, it always comes down to this…..the numbers. If you are borrowing money (a mortgage) for the investment home, you’ll need to make sure the RENT that you charge your tenant will be much more than the monthly loan/mortgage payment.
But it’s not only about collecting money. You also become a landlord. Being a landlord means taking care of the building and addressing your tenants' needs. Sometimes it’s not easy, but it’s worth it! The money you could make could be substantial if you’re smart with how you buy your property. Let’s talk how to get into the real-estate game.
There are three ways to buy a property:
Option 1. Paying for it all upfront (most people don’t have 300k sitting in their banks).
Option 2. Applying for a special mortgage that will pay for the property in full (which is possible but difficult) No Down Payment loans are tough to get.
Option 3. Using a bit of your own money (to pay other fees like the down payment) and also taking out a loan.
Do you remember what a downpayment is? Who can tell me?
Option 3 is the most realistic and probably the easiest to qualify for at the bank! But don’t take my word for it! You should always ask different banks if there are other ways to buy a home with no money down. There may be special mortgage programs available.
Qualifying for a mortgage can be tricky. Having a good paying job is a great start but remember also having a good credit score is very helpful. This will keep your monthly payments lower because you will be given a lower interest rate! While you are young and preparing to become future property investors, be smart with how you use your money and make sure you always pay back your debts.
You may be too young to buy a house now but start preparing for your future by thinking about a job or career where you can earn money to save up for investments. You should start saving money NOW! This is an awesome goal. Remember that many of the richest investors in the world started with just one property. When you buy your first property and then rent it, you can use the profits to save for another investment property And this process can continue.
So let’s recap on the 3 things you’ll need to start applying for mortgages to buy properties. You’ll need a good-paying job, good credit, and some money to buy the property (downpayment and closing costs). Plus you may need some money in the bank to make repairs or minor improvements on the houses that you want to buy. Investors can make a great profit BUT again, you need to start with a property that you can afford monthly, even without tenants. It could take months to find a perfect tenant. Your realtor can help you find tenants for your property.
You also have to make sure you can make money when you rent it out. For instance, if the 3 bedroom and 2 bathroom home is $300,000 and the mortgage is $2,500 per month, you need to check FIRST rental prices.
If 3 bedroom 2 bathroom homes are renting for $3,500 a month, this is a GREAT deal! But what if they are only renting for $2,500? You will certainly lose money. Remember, as the landlord you’ll need to pay for repairs and other things that could happen to the house. These are “expenses.” So if you are paying the mortgage company $2,500 but only receiving $2,500 from a tenant, you won’t make any money and it will just be a headache.
Class Activity: Finding Your First Property to Rentl
Let’s change things up a bit. You now have $100,000 available for your initial investment in a property. This means you have $100,000 in your bank that you can use for the down payment, which will help reduce your monthly payments, or for any improvements you might want to make on the property. In this scenario. We'll assume that the bank won't require your job income to cover the monthly payments. Instead, we're aiming to find a bank that will consider future rent from your tenants to cover these monthly expenses. Your goal is to find properties to purchase and then check what similar homes are renting for!
For example; If you find a 3 bedroom 2 bathroom home for $250,000 with 1300 Square Feet, then you should check the RENT part of Zillow for homes that are similar in that same area/town. Check the mortgage calculator for the monthly payment on the $250,000 house (remember to add the down payment) and then compare it to the RENTALS.
Zillow Tutorial: Finding Profitable Rentals
Your objective in this activity is to earn at least $500 a month in profit. You may earn a little less or you may earn much more. Real Estate in every area, town, and city across the country is priced differently. Calculations that work in Little Rock, Arkansas may not work in Montclair, New Jersey. So If one area isn’t working, try searching in other areas across the country. This is a great exercise to see what homes are selling/renting for across the country. Let’s start looking.
Search Notes:
Where are you looking (which town/city and state)?__________________
What is your price range?__________________________
Type of properties are you looking at? House, Condo, Multi-Family Apartments, Townhouse)
How many Beds/Baths/ and Square Footage?________________________
Your Search Results:
Address of the property you want to buy:______________________
Type Of Home:_____________________________
Beds/Baths/ and Square Footage:_______________________________
Price Of Home:_____________________________
Taxes Estimate:_________________________
Monthly payment according to Mortgage Calculator:____________________
(Did you enter your down payment amount from the $100,000)
How much out of the $100,000 are you holding onto for home repairs/renovations_____________________?
What would you like to update/change/repair/or fix on the home if anything:______________________
(for example, does anything look broken in the pictures)
If you see something that you may want to update/change/repair/or fix, do a quick Google search to find out approximately how much it would cost.
Class Activity: Home Repairs/Updates
Your home needs a new ROOF. Search on Google the average cost to replace a roof. Enter the square footage of your house. = $_________________
Your home needs a completely new KITCHEN. Search on Google for the average cost of a new kitchen. =$ _______________
The interior of your home needs to be REPAINTED: Search on Google how much it would cost to repaint the interior of your house=$________________
Your home needs new FLOORS. We’ll assume vinyl floors are the most popular and most cost-effective. So make sure you enter that in on your Google Search and put in the square footage $________________
Your home's FURNACE just busted. How much to replace that before a tenant moves in? $____________________
These are things that may not need replacing now, but they may need to be fixed or replaced in the future. It’s important to save at least half of your profit for expenses like this. This is the 50% rule of investing. Let’s figure out how that works.
Example:
You buy a home and the mortgage payment is $2,000.
Your tenant is paying you $2,800.
How much profit are you making per month?
Right! $800 a month! That’s awesome.
Out of the $800, $400 of that should be stored away for home repairs/emergencies. The other $400 you can save or spend as needed.
YOU’RE GETTING IT! You are now thinking like a true property investor.
Let’s bring this home!
On the property you want to buy, what is the monthly payment $______________
How much do you think you can rent this home for?
$________________
What is your monthly profit?
$___________________
Hopefully, it worked out and you are making a nice healthy profit! If not, let’s look at other areas or even other states. Remember the real estate market is different all over the country.
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