Cash-out refinancing is pretty common in real estate investing. An investor will cash in on the equity they have on an existing property and then use those funds toward a down payment on their next property. Rinse and repeat.
That complicated process may soon be unnecessary thanks to a new fintech company.
Downpayments, a Miami-based financial tech startup, has come up with a way for investors to tap their existing property equity to buy new properties—no refinancing required. Here’s how it works and what investors need to know about it.
How the Program Works
Downpayments essentially gives investors a loan, which they can use toward their down payment. There are two options:
An interest-free loan of up to 10% of your next investment’s purchase price
A 20% down payment at a “competitive” interest rate (currently 7%)
In both cases, the loan must be paid off within four years of closing.
The program can benefit investors with a number of goals. As the company explains on its website:
Depending on your circumstances, this may mean different things; it might mean preserving your savings or avoiding having to go through a cash-out refinance in order to access the capital, which often means breaking a low fixed-interest rate. It might also mean you can buy your next investment property sooner, or without an equity partner, so you can control your own destiny and have the freedom to grow your property portfolio on your own terms.
Downpayments.com
Of course, nothing comes for free. While using Downpayments won’t require you to refinance your loans, you will need to put your property up as collateral. You’ll also need to use Downpayments’ brokerage services as you shop for your next investment.
As your registered in-house brokerage, Downpayments will curate your listings, provide on-demand showings, comparable sales, and guide you to the closing table.
Downpayments.com
Essentially, you won’t pay Downpayments directly, but it will get a commission from your eventual property purchase (just as any real estate agent would).
We use QuickBooks daily in our rental property business!
It’s used to invoice tenants for their rent, track expenses by property and unit number, and our tax advisor can log on anytime to get information he needs for processing taxes or analyzing our data for goal setting meetings!
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Right now, Downpayments is only available to investors purchasing properties in Florida, but the company says it’s expanding to other states later this year. (No word on what those states will be, though.)
Still, even if the program’s available in your area, think carefully before proceeding. While it’s billed as an alternative to cash-out refinancing, Downpayments doesn’t help you avoid financing altogether. In fact, it just adds another loan to your mix—meaning extra monthly payments to balance and an even further leveraged property.
If you do use it, make sure you’re on a good budgeting system and are prepared to make your payments—on time, every time. As with any loan against your property, there’s a risk of foreclosure if you’re unable to make your payments.
You’ll also want to consider the brokerage requirements, especially if you have an agent you typically use when vetting new investments. Using Downpayments could mean forgoing that agent’s guidance or, potentially worse, doubling down on commissions if you decide to use both services.
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Whether you’re taking your first steps or fine-tuning your strategy, understanding the fundamental language of real estate is paramount. In this post, I’ll cover the top 5 real estate investment terms that are essential for every investor’s toolkit. From cash flow to leverage, these terms form the bedrock of successful investing. I think it is also important to know the right meaning for these terms and many people stretch the meanings or completely change them!
So, let’s dive in and equip ourselves with the knowledge that will shape our journey towards financial prosperity.
1. Cash Flow – The Foundation of Financial Success
Let’s start with a term close to every investor’s heart – cash flow. Beyond the straightforward inflow and outflow of funds, it serves as the cornerstone of financial success in real estate. It is one of the primary metrics I use to make purchase decisions. I also look at how good the deal is and how much value I can add.
Many people will tell you that cash flow is simply the rent minus the mortgage and insurance. However, if you want to know the true cash flow you will need to know all of your expenses. Here is an example of what true cash flow looks like:
Rent: $2,000
Mortgage: $1,100
Taxes: $200
Insurance: $200
Hoa: $50
Vacancies: $100
Maintenance: $200
Property management: $180
One investor might tell you the cash flow is $500 a month but they are leaving out many of the expenses the property will incur over time. The true cash flow would be -$30!
2. Cap Rate – A Metric for Strategic Decision-Making
Cap rate, a metric mostly used on commercial properties and multifamily housing gives an idea of what the property will make without financing and what the property is worth based on the NOI or net operating income. The basic formula is:
net income / price = cap rate
The Cap Rate formula may seem simple enough, but it can be manipulated very easily. Investors may not include all the expenses in the NOI, or they may use projected income instead of actual income. Never take these numbers as absolute without digging into them.
3. ROI – Evaluating Investment Performance
Return on Investment (ROI) serves as the scorecard for your property’s performance. As a pair to cash flow, ROI helps you determine what the property will make based on many factors like loan pay down, appreciation, and value add. Cash flow looks at what the property makes on a monthly basis and ROI looks at the big picture.
ROI is not easy to figure because some years may have a huge increase in value thanks to adding tenants or making repairs while other years may have much more modest returns. You would figure ROI on an annual basis and may want to separate out first-year ROI from the later years’ ROI because of those jumps in value.
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4. Leverage – Maximizing Potential While Mitigating Risks
Leverage is the prime weapon of real estate investors if you are looking to scale quickly. With leverage, you only invest a fraction of the total purchase price, which can cause your returns to be significantly higher than investing in something like stocks. To achieve leverage, you use financing. Financing is one of the most important aspects of investing in real estate. You can make more money with loans than by paying cash.
On this site, I talk about the many different, creative ways you can finance real estate investments.
5. Equity – The Silent Wealth Builder
Equity, an often-underestimated force in wealth accumulation, goes beyond property values, embodying true ownership.
equity = current market value - amount financed
Equity can be built slowly through market appreciation and loan pay down. You can also build equity by adding value and getting great deals on properties. I prefer to use both! Many people may say equity does not matter because it is not cash in hand, but it can become cash in hand by using a cash-out refinance, or selling. You can even use a 1031 exchange to sell and not pay taxes on the profit.
Thanks to leverage and equity, my net worth has skyrocketed to over $10 million just from real estate.
Even better, you can use equity and leverage together to purchase additional properties and scale up your business using the BRRRR method.
Conclusion
This primer serves as a solid foundation for fundamental real estate investment terms. As you navigate real estate, I invite you to explore the extensive resources on InvestFourMore, where a wealth of data-driven insights and strategies await.
Feel free to engage with the community, sharing your experiences or seeking guidance. Here’s to your continued success in the world of real estate investment – stay informed, stay strategic, and keep building your path to financial prosperity!
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Working on real estate investments is challenging enough but what if you are operating a business of owning and managing rental properties with your spouse or life partner?
This episode covers so much from tips on what not to do and tips on how to do this work better.
And let’s face it, much of this information is common sense and many of us already know it…but we may not be doing it.
We polled our favorite husband and wife real estate investment teams and got their take and best advice on what it takes to work with your significant other and they did not disappoint!
So, whether you are already married and investing with your spouse or you hope to do so one day, this is a great episode to listen to.
*This post contains affiliate links. We may earn a very small commission (at no additional cost to you) if you purchase from here. These small commissions are to benefit our business so thank you for your support.
If you’re lucky enough to have a garbage disposal, you know how much easier it makes dinner prep and post-mealtime cleanup. But before you toss everything down the drain and turn on the switch, you should know about a few things that can wreak havoc on the handy appliance.
“While garbage disposals are an everyday convenience for people to quickly and easily dispose of food waste, many homeowners abuse their drains by tossing in several household items that are damaging, like grease and celery stalks, which leads to unwanted buildup in your home’s drain lines,” says Doyle James, president of Mr. Rooter Plumbing, a Neighborly company. These mistakes aren’t just small ones, either—they can potentially affect your home’s entire plumbing system, making repairs extremely costly, says James. Highboy LA House Tour
So you don’t make this mistake, we asked plumbers to share the biggest offenders—and why they’re so harmful.
Bones
Some things are just too hard for the disposal blades to handle, says James. And it should come as no surprise that this includes things like turkey or chicken bones. These items not only dull blades, but can spin and spin without ever getting broken down, eventually getting stuck in your system.
Fruit pits
The same goes for large fruit pits. While a few citrus seeds are no problem, don’t expect your disposal to handle bulkier ones from fruit like plums or peaches.
Eggshells
“There’s a longstanding rumor that egg shells are good for disposals because they sharpen the blades,” says James. “But this rumor is false.” In reality, the membrane layers of egg shells can wrap around the shredder ring, potentially damaging the disposal, not to mention the sand-like consistency of egg shells can cause pipes to clog.
Fibrous foods
James says these types of food are some of the biggest offenders, since they seem innocent enough. But even though fibrous foods—like celery, corn husks, carrots, onion skins, potato peels, asparagus, and artichokes—seem soft, they tend to wrap around the disposal blades, potentially damaging the motor.
Oatmeal, rice and other absorbent foods
Starchy foods like pasta, rice, and even oatmeal can expand in your pipes and contribute to clogs, says Mark Dawson, chief operating officer at Benjamin Franklin Plumbing. They also wreak havoc on the blades of your disposal, since they can develop into a paste that slows down the blades, he explains.
Coffee grounds
While not a problem for the garbage disposal itself, coffee grounds may accumulate inside the pipe and lead to clogging. Toss these in the trash—or better yet, use them to fertilize garden beds.
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LLC reservation of name letter, and
minutes of meeting form.
Form Your Own Limited Liability Company has easy-to-understand instructions, including how to create an operating agreement that covers how profits and losses are divided and major business decisions are made. You’ll also learn how to choose a unique LLC name that meets state legal requirements and how to take care of ongoing legal and tax paperwork.
Never pour frying oil, excess bacon grease, or other fats into the garbage disposal. These can solidify and accumulate, potentially coating blades, clogging your drain, and causing and odors, says Dawson. Instead, use a jar to collect them, then dispose of them in the trash once cool and solidified.
Paint
Paint—both water-based and latex—is not only bad for the environment, but it can also cause buildup over time, says Dawson. While a quick rinse of your paint brush isn’t likely to harm your plumbing system, never pour any paint directly down the drain. Instead, you can dispose of unused paint by letting it harden before tossing it in the trash.
Other non-food items
As a general rule of thumb, never put anything you wouldn’t eat down the drain, says Dawson. This includes twist ties, rubber bands, string, cigarette butts, bottle caps, and plant clippings. These items don’t break down in the disposal, which ultimately leads to clogs farther down in your system, he explains.
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Professional tenants are a landlord’s worst nightmare, the ones you read about in the newspaper. These individuals are notorious for cheating the system and using loopholes, leaving landlords with lost rental income, a damaged property, and a huge headache. They will complain about the smallest of messes and become the largest hassles.
In order to get away with such actions, professional tenants have created some pretty elaborate strategies. Here are the top 5 tactics from professional tenants. If you find your tenant is doing any of the below, then you may have a professional tenant.
Tactic #1: Paying partial rent
Often times, professional tenants will pay only a portion of the rent each month. When a landlord has accepted partial rent one month, then State laws will not allow an eviction for that month. This provides the tenant with more time in the property with overdue rent, and most often, they’ll continue to delay each month. Before the landlord realizes it, the tenant is close to lease expiration with an exorbitant number of past due payments. Don’t accept partial payments and require full amounts on exact dates to avoid these schemes. If a tenant is late, be prepared to start the eviction process right away. Also, never accept partial rent.
Tactic #2: Paying rent before the late fee
Professional tenants understand a landlord is more likely to take legal action for $1,000 of past due rent than for a $50 late fee. These tenants will pay rent before the late fee, claiming the late fee will be paid soon. Guess what? By accepting the rent before the late fee, the landlord is most likely never going to receive the late fee. The landlord becomes emotionally drained as a debt collector and just writes off the late fee.
The lease contract is written to align incentives between the tenant and landlord. A late fee is listed in the contract to set the precedent that rent should not be paid past a certain date. Tenants should not take advantage of the payment terms in the contract. By waiving this fee, a landlord signals that the legally binding contract is “flexible,” and it provides professional tenants with the signal that they may be able to bend other terms in the contract. Don’t become drained emotionally and only accept rent after outstanding late fees are paid.
Tactic #3: Paying in cash
Cash is impossible to track, making it the preferred medium for professional tenant payments. These professional tenants will lie about making cash payments or even go as far as faking rent receipts. As a landlord, avoid taking cash payments that foster these types of actions. When a landlord is in the courtroom, they want to show a track record of traceable payments followed by no payments. Keep in mind that in some states, landlords are not allowed to refuse cash. If a tenant insist on paying cash, you must create and BOTH sign a receipt at the time the cash is accepted.
Tactic #4: Asking for time
Some tenants will approach their landlord and plead for more time to pay rent. This tactic is usually accompanied by a heart-tugging story of the hardships they are currently battling that prevents them from paying. Unfortunately, it is difficult for a landlord to know the legitimacy of these stories and a tough decision must be made. Allowing for a longer payment period will only make things worse. While it might be emotionally difficult to draw a line, a landlord is not a bank that provides loans. When a tenant is late on rent, they should go to their friends, family, bank, or another source for a personal loan. The relationship between tenants and landlords should be strictly professional and real estate related. If a tenant still cannot pay the rent when it is past due, then the next step is an eviction notice. A landlord may want to consider suggesting to the tenant that if they are late on rent, then they will release the tenant from their lease so the tenant can find a more affordable unit. It may be easier for a landlord in the long run to let a tenant who can’t afford rent to leave then to constantly chase the tenant for rent.
Tactic #5: Claiming the rental is uninhabitable
Professional tenants may try to claim the rental is uninhabitable as a scheme to not pay rent. Typically, their process is submitting a maintenance request and claiming it was never addressed. They will withhold rent or break the lease and reference the clause on maintenance and habitability of the property. Every maintenance request should be tracked in a system, providing evidence that the request has been acknowledged and updates have been provided in a timely manner. This type of documentation will save a landlord in the courtroom. While landlords have no power over the judge, maintaining records and photos of your properties can protect yourself from these situations.
When a tenant makes a claim that the property is unfit to live in, landlords must refile with proof of a habitable environment. Tenants will then proceed to trash the property in an attempt to justify their claim. Keeping a running log of property conditions and pictures help prove your case. And, do not forget that tenant damage, beyond normal wear and tear, can be charged back to the tenant. If they are intentionally causing damage to create an “uninhabitable claim,” documentation will help to bring justice in the case.
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Professional tenants are just as good at hiding their identity as they are at evading rent, and thus spotting a professional tenant can be difficult. There are some warning signs however that can help you avoid renting to professional tenants. Be on the lookout for tenants with an eviction history, run ins with the law, or troubles with previous landlords. In addition, professional tenants will ask if the property is “professionally managed” during the initial inquiries as a way to find inexperienced landlords.
How to avoid a professional tenant
Screening is a critical aspect for a property management company that helps prevent renting to professional tenants. While there are various third-party methods for screening tenants, screening tenants yourself is the only guarantee. Items such as reference checks can be faked and false information easily provided. Here are a few simple steps to take for screening tenants:
Have tenants provide a copy of official ID (like driver’s license), if they refuse, they are likely hiding something
Verify employment history to ensure ability to pay
Perform comprehensive screening, from credit to eviction history
Call past landlords and any references listed to assure legitimacy
Keep a record of your property conditions and tenant interactions
For all reference checking, it’s crucial that you know the sources are legitimate and not fake. Some helpful tips to easily authorize a source:
If you are contacting an employer, call their main office line listed on a website (not a cell phone). If this is not available, ask them to send you an email from their company email to provide simple proof they still work there.
If you are calling past landlords, ask questions such as “can you confirm how much the tenant is paying in rent?” It will help confirm that they actually own the property and are not a friend.
Keep in mind, current landlords may be incentivized to get the tenant to move out (because they can’t pay rent, are causing troubles, etc.) and are thus more likely to persuade you the applicant is a good potential tenant. Prior landlords (from two to three years ago) may be more truthful since they are not currently in a lease with the tenant.
Don’t forget to reference check ALL adults who will be living in the unit, not just the main contact.
Even though this process may seem arduous and excessive, remember that a bad tenant can result in 10x more work and therefore it’s worth the upfront work to avoid all of this.
We hope you have found this article helpful to avoid the world’s worst tenants. If you are interested in setting up a more professional appearance to tenants, then try Hemlane for free.
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Did you know that a recent study revealed that the average American loses more money to taxes than they do on food, clothing, and housing combined? That is scary to think about, isn’t it? What’s more scary to know is that most people pay more taxes than they are legally required to by law simply because they don’t know “how” to protect themselves from the IRS.
So how exactly do you know if you are overpaying in taxes? The good news is…there are simple steps you can take to find out. To gauge your risk level of lost tax dollars, we have put together a list of 8 signs to help you measure your risk potential:
1. Record-keeping: Bad sign if you do not have a good bookkeeping system in place.
Ever heard of the saying “What gets measured gets managed”? It is just as important to know how much money you have coming in as it is to know how much is going out. If you are not keeping track of your monthly expenses, you can easily lose out on some legitimate tax deductions! Having accurate and timely financial information not only helps you to manage your finances and grow your wealth…but it is also the foundation for an effective tax savings plan as well.
2. Communication: Bad sign if you do not meet with your tax advisor throughout the year.
For those of us who plan on paying the least amount of taxes possible, proactive planning happens year-round. If April 15th is the first time you are thinking about reducing taxes for last year, you have probably missed out on some big tax saving opportunities. Open the lines of communication with your tax advisor to ensure you are maximizing your tax deductions throughout the year.
Remember: some of the most significant and impactful tax saving opportunities need to be implemented as part of your regular decision-making process for your job, business, and investments.
3. Knowledge: Bad sign if you have to explain your situation to your tax preparer year after year.
Not all tax advisors are created equal. Taxes are a very specialized area and there are specific strategies for specific business industries. For example, there are special tax saving opportunities for people in the real estate business. There are also special tax strategies for doctors, or for those in the manufacturing industry. The strategies that work for those in the services industry may not benefit those who are in the retail industry. Make sure your tax advisor is well versed in the tax saving opportunities in your industry.
4. Compensation: Bad sign if you don’t have a plan on how to tax efficiently take money out of your business or investments.
There are tons of different ways to take profits out of your business and investments and each of them has their pros and cons. For example, if you are a C Corporation, you may save thousands of dollars in taxes by paying yourself a higher salary every year. If you are an S Corporation, the opposite may be true where you can save thousands to tens of thousands of dollars by paying yourself the least amount of salary possible. There are also some great ways for you to extract profits out of your real estate completely “Tax Free”. If you don’t have a plan in place to know “how” to extract your profits tax efficiently, you may be over-paying your taxes.
We use QuickBooks daily in our rental property business!
It’s used to invoice tenants for their rent, track expenses by property and unit number, and our tax advisor can log on anytime to get information he needs for processing taxes or analyzing our data for goal setting meetings!
QuickBooks is the #1 accounting software for small businesses, and today you can take advantage of 30% off your first 6 months of QuickBooks Online using our exclusive Business Affiliate link.
5. Retirement Planning: Bad sign if you are not currently taking advantage of tax deferred and/or tax free opportunities of retirement investing.
Ask yourself: Are you using retirement planning to significantly reduce your taxes currently? In addition to the typical IRA and 401(k), there are so many different types of retirement accounts that are available for us to save taxes today and save for retirement at the same time. If you pay taxes to the IRS and have not used retirement planning techniques in the past, you are probably overpaying your taxes.
6. Fringe Benefits: Bad sign if you have never heard of the term “fringe benefits”.
There are tons of tax free fringe benefits available where your company takes a tax deduction for perks they provide to you as a real estate investor (and it’s not taxable to you). There are over a dozen of these wonderful techniques including company cars, gifts, education expenses, and travel to name a few. If you do not utilize tax free fringe benefits as part of your business planning, you may be overpaying your taxes!
7. Personal and Business Deductions: Bad sign if you do not know what items you can legally shift from your personal bucket into legitimate business deductions.
In this day and age, it has become harder and harder for us to distinguish between personal and business items. How many of us use our personal cell phone for business? How about our cars? iPads? Laptops? All these personal items that you use day in and day out for your investing business may be legitimate tax deductions. If you don’t know how to shift personal items into business deductions, you may be overpaying your taxes!
8. Tax Savings Plan: Bad sign if you do not have a tax savings plan in place to ensure your profits are protected from Uncle Sam.
Incorporating all of the items we discussed above, the question you should be asking yourself is “What is my tax savings plan?” If you don’t know it or if you can’t verbalize it, then you probably don’t have one. Not having an overall plan on “how” you will save taxes is the most common mistake costing taxpayers to overpay taxes year after year.
A good place to start is by contacting your CPA to discuss…
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Accepting physical checks for payment is becoming a thing of the past. Many landlords looking to replace this method without increasing expenses have considered using cash apps such as Zelle, Venmo, or Paypal. However, where these apps make receiving rent very cost effective and convenient, they are risky.
In this episode we are discussing these risks and why landlords should NOT accept cash apps for rent payments.
Of course, we do advise you on what the better options are for you to operate a secure, professional rental property business.
LINKS*
👉 Rent Reporters: According to TransUnion, 70% of tenants are more likely to pay rent on time if their payments are being reported to the credit bureaus.
It’s used to invoice tenants for their rent, track expenses by property and unit number, and our tax advisor can log on anytime to get information he needs for processing taxes or analyzing our data for goal setting meetings!
QuickBooks is the #1 accounting software for small businesses, so take advantage of 30% off your first 6 months of QuickBooks Online using our exclusive Business Affiliate link.
👉 TurboTenant: Is a great option for landlords with just a few doors or for those who may be new to using rental property software.
For the most part, TurboTenant’s software is free to use so they are perfect for landlords on a tight budget.
👉 DoorLoop: Founded by property managers and landlords who wanted to save time, make more money, and grow their portfolio’s.
DoorLoop is perfect for landlords just starting out or fully established with hundreds of units. Basically, any kind of rental property, by owner or property manager, for properties located worldwide.
👉 Hemlane The software that is built to grow with your needs as a landlord.
For a minimal amount, there’s a really good basic package but what we love is the option to upgrade and add 24/7 maintenance management on.
It gets better! If you reach a place where you are ready to hand off management to a property manager, Hemlane has that too under their “Complete” option.
👉 Avail: A great alternative when searching for a rental property management software. Use this link to receive a $50 credit towards your fees!
👉 BiggerPockets: Pro members get the use of RentRedi landlords software for FREE.
👉Help other DIY landlords discover what we have to say… Please leave us a review of our podcast!
On Apple Podcast or ITunes, please scroll to the bottom of our main page (with our logo) and click “Write a Review”.
On Spotify, please click the 5.0⭐ on our the front page of our podcast page.
👉 Join our Private Facebook Group! A space to ask questions and network with other DIY landlords.
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Think big! Accumulate hundreds or even thousands of units. Use economies of scale. Syndicate. Benefit from maximum leverage. In other words: Go big or go home.
Aren’t these the messages we hear so often here on BiggerPockets? Aren’t the biggest and the best the ones with the most cash flow, the most flips, and the most rental units?
Well, I’m here to tell you that bigger is not always better. In fact, in this article and my new book, The Small and Mighty Real Estate Investor, I plan to show you that smaller and simpler is actually better for many of you.
I’m trying to start a new movement. I hope some of you will join me. The motto is “go small or go home.” And the hero is called the small and mighty real estate investor.
Big Isn’t Bad
Life is too complex to say big is bad and small is good. We all have different motivations, don’t we? You aren’t wrong if you have big, large-scale real estate aspirations.
I would say it’s only wrong if you think big is the only way to live a rich, amazing life. There are other, simpler investing options that don’t get enough publicity because, well, they’re too simple.
You don’t have to get big to accomplish incredible financial and life goals. Small-scale real estate investing with even a few properties can do that, too. These mini-real estate models can give you plenty of money, plenty of free time, and plenty of flexibility. And they can help you avoid a lot of hassle and risk that comes with growing a big business. Isn’t that what most of us wanted in the first place?
Unfortunately, smaller real estate investing does have its downsides. You may not get famous with a best-selling book. And I’m sorry to tell you that you probably won’t get an HGTV show contract. But as a consolation prize, you CAN get a life of financial security, simplicity, and freedom that most people only dream of.
To begin exploring my point, let’s look at an interesting story of three BiggerPockets investors.**
A Story of Three Real Estate Investors
One summer, three real estate investing couples travel together to Europe. These investors originally met as beginner investors on the BiggerPockets Forums. They liked each other and helped each other grow. Along the way, they became friends.
Fifteen years later, they each have experienced success with their real estate, and they want to enjoy the fruits of their efforts. They spend 14 days visiting the Mediterranean coast. First, they explore ancient sites in Italy while enjoying amazing food and wine. Then, they continue with a high-quality, Mediterranean cruise to explore stops in Croatia, Greece, and even BiggerPockets author Erion Shehaj’s beautiful native country of Albania.
Could these investors afford a nice trip like this?
The Financial Scoreboard
Couple No. 1, Liz and Tom, are in their 50s. They live, invest in, and self-manage their properties in Missouri. Over the last 15 years, they’ve bought 10 single-family houses, one by one, in good neighborhoods.
Liz and Tom searched hard to buy these houses as fixer-uppers below value, and they used the BRRRR technique to recoup most of their cash on each deal. Then they used the debt snowball technique to pay off their mortgages early. Their houses now produce $7,000 per month, or $84,000 per year, in positive cash flow.
Couple No. 2, Tiffany and Darius, are in their early 40s. They live in New York, and they invest in North Carolina using a property manager. Fifteen years after starting, they now own one 50-unit apartment building.
Tiffany and Darius began with smaller properties and then used 1031 tax-free exchanges to trade up to bigger units until they had enough equity for a down payment on the 50-unit building. They have a solid, fixed-interest, 25-year mortgage on the building, and the property produces $10,000 per month, or $120,000 per year, in positive cash flow.
Couple No. 3, Mike and Lauren, are in their late 40s. They live in Nevada and own properties all over the country. Fifteen years after starting, they now own 500 units!
Mike and Lauren began with their own rentals, but because of their ability to put together great deals, they also began syndicating deals by pooling money from others. As the general partner, they have become multimillionaires, and their portion of the rental income equals $60,000 per month, or over $700,000 per year! Their portfolio produces the most money out of the three couples.
It’s clear to see that all three couples can easily afford to pay for this nice European vacation. This is exactly why all of them began investing in the first place.
But the story gets a little more interesting as they approach the end of the trip.
Let’s Extend the Trip!
By the end of this trip, all three couples have had a fabulous time. It’s been so great, in fact, that couple No. 1 (Liz and Tom) propose that they all stay a few weeks longer to explore more.
Liz and Tom’s rentals are all full of self-reliant tenants who automatically deposit their rent each month. The tenants can email or leave a voicemail with any maintenance emergencies, but this rarely happens. And with no debt or immediate plans to buy more properties, their business schedule is amazingly flexible.
Couple No. 2 (Tiffany and Darius) check their calendars. They have a few community and church functions, but those could be put off. Their property manager is competent and in control of day-to-day issues at the 50-unit apartment building. And because no major financing or remodel projects are looming, they happily agree to stay on as well.
However, couple No. 3 (Mike and Lauren) has challenges. They want to stay and can easily afford the expense of extending the trip. But there are projects looming back at home.
Remodeling contractors are waiting for their guidance on recent value-add apartment purchases. A new property manager needs to be found to replace an underperforming one. Their corporate bookkeeper and administrator need help. And some of their equity investors want to meet with them to discuss some past and future projects.
As a result, Mike and Lauren regretfully need to decline the vacation extension.
The Myth of the Passive Big Business
Mike and Lauren do not have a bad business. In fact, it is financially the most successful business of the three investors. But here are the questions I always ask the Mikes and Laurens of the world:
Did your investment business meet your true goals?
Are you spending your time doing what’s most important to you?
Would alternative approaches have met your goals just as well, with less hassle and risk along the way?
It’s possible that Mike and Lauren are happy with their current situation. If so, I’m happy for them. But my experience has shown that many people in their situation are less than happy. Their extra money has come at a cost.
And I’m sure I’ll get examples in the comments about Shark Tank hosts, famous entrepreneurs, and BP Podcast guests who’ve built big businesses that also check all the goals off the list. It’s fine to provide successful examples.
But the bottom line is, what are your goals? And what’s the best way to achieve them? Are you a Shark Tank host, or are you a regular person trying to free yourself from the 9-to-5 grind so that you can live an extraordinary life?
I know a lot of entrepreneurs and real estate investors. The ones with the most money have big businesses. If that’s your No.1 metric, go for it. But the ones I know with the most free time, the most flexibility, and the least stress have smaller, simpler businesses and portfolios. And interestingly, I don’t see these smaller investors worrying that they have a smaller net worth than the big investors. It seems they’re too busy enjoying life!
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So far, it might seem that I’ve beaten up on the big real estate investing model. But I’ll readily admit that it’s not impossible for you, as the owner of a bigger business, to have it all. You can create systems and teams of people that both produce a lot of money AND allow you to be relatively passive and flexible. It does happen.
But very importantly, it’s a lot harder and more time-intensive to manage a bigger, more complicated business. There are more people involved, more moving parts, and more things to pay attention to.
I think of it like Frankenstein’s monster. Without extreme focus, a business can become a scary, out-of-control creature that takes on a life of its own. And yes, it can even get hungry and eat your money, your free time, and your life!
The Frankenstein business monster becomes the most scary during the business’s growth spurts. Look at this graph of a business life cycle, for example:
The Danger Zones are where business “Frankenstein monsters” attack.
The growth spurts of this graph are the steep inclines. These are the danger zones. This is when you, the business owner, are most susceptible to cash crunches, dramatic market changes (i.e, the 2008-2010 Great Recession), personnel problems, and even personal burnout.
These danger zones are where the Frankenstein monster rears his ugly head. You can win against the monster. But just be prepared for a battle.
Finding Your Business and Investing Sweet Spot
You, as an entrepreneur, have to decide where on the business lifecycle graph you want to end up. You have a virtually endless choice of plateaus that you could aim for. The sky is the limit in our economic system. But again, your choice will depend on your personal financial goals.
And your choice will also depend on your willingness to take on the risk and hassle of the perilous climb up to higher economic ground. The reward at the top better is worth the sacrifice of the climb (and the fights with the Frankenstein monster)! Unfortunately, plenty of people have arrived at the top of the financial mountain to realize they lost everything they really wanted along the way.
The key is to find your personal business sweet spot. As you’ll see in the graph below, I’ve marked two different sweet spots. One is smaller (fewer assets, fewer employees/team members, less money), and the other is bigger (more assets, more employees/team members, more money).
Smaller or bigger business sweet spot? It’s your choice.
Both sweet spots are beautiful, level plateaus where you’ve increased income while also gaining efficiency that frees up your personal time and reduces hassle. The bigger sweet spot has more money earned. But nothing comes without a cost. You must make the choice if bigger is worth it for you.
And that choice may come down to the concept of “enough.”
The Fulfillment Curve & a Place Called “Enough”
One of my favorite personal finance books is Your Money or Your Life by Vicki Robin and Joe Dominguez. In the book, they share a graph called the fulfillment curve. Here’s my drawing of what that looks like:
While the authors shared this as a personal finance concept, it also applies to the real estate investing business. As you move up the curve, you pass milestones like survival, comfort, and even small luxuries that make life sweeter. But you finally arrive at a place called “enough,” the peak of the fulfillment curve.In terms of happiness, it doesn’t get much better than this.
But as you continue moving past the peak of the curve, each subsequent amount of money you earn and spend has diminishing returns on your personal happiness. This occurs because the extra you earn, spend, and accumulate carries with it clutter, complexity, stress, and hassle.
The place called “enough” is different for each one of us. But it’s vitally important as a real estate investor to learn what it is for you. The main point here is that smaller, simpler businesses can take many of us to this place called “enough.” And going past the peak of the fulfillment curve by getting bigger and more complex just clutters our lives.
“But I Enjoy Growing and Staying Busy!”
By this point, I’m sure some of you are with me, and others are completely turned off. That’s what I expected. But some of you may still be on the fence. Perhaps you know you’ve got enough financially, but you’re thinking something like this:
But I like working. I enjoy being busy. If I weren’t continually buying more deals and building a bigger business, I don’t know what I’d do with myself. I’d rather stick with a pattern that satisfies me than risk an unknown void in my life. What if I get bored?
I feel your pain. I’m a model member of the club for the recovering Type-A, job-identifying, workaholics anonymous.
The truth is that, of course, work is fulfilling. It really can provide a wonderful sense of purpose, growth, and challenge. I personally enjoy it, too. And there’s no reason to give up that outlet in your life if you like it.
But would your “work” projects be different if you knew you had enough financially? Would that allow you to negotiate a different approach to work, your investing, and your schedule? You could even keep doing the same basic activities, but you’d do it completely on your terms.
Sometimes this leap requires a little bit of imagination.
What Do You Want to Be When You Grow Up?
You’ve been hard at work for years. Even if you just graduated from college, you’ve still been through years of schooling, which conditions you to constantly perform and check off endless to-do lists.
I’ve found for myself that this hardworking, 9-to-5 grind for many years causes me to lose something. That something is the creativity and imagination of a child. It’s that inner force that caused you to stare off into space as a kid and say, “I want to do [insert your passion] when I grow up!” Adulthood has a way of squashing dreams with the hammer of practicality (under the disguise of money).
In 2009, my wife and I took a sabbatical trip for four months to Spain and South America. During the trip, I finally got a glimpse into my own forgotten imagination. Six weeks in, my uptight, ambitious self finally let go a little bit. It happened after spending several magical hours just sitting with my wife and watching the bay of a Mediterranean fishing village in Cadaques, Spain.
We first watched a sunset, then the arrival of a beautiful star-filled sky, and finally the biggest shooting star we’d ever seen streaking in green across half the sky! During the entire experience, I could physically feel myself relax as a big knot untied itself in my chest.
There weren’t any specific epiphanies at that moment. But I was stunned as I realized how one-tracked and focused my life was. Without that trip, that space, and that slowing down, I may have talked myself into thinking I needed to continue growing and pushing for another couple of decades. It was like I had woken up to brand new, child-like possibilities.
Go Small, and Do What Matters in Your Life
The story I just shared was my specific experience. But I’m convinced that we all can regain our own unique imaginations if we just give ourselves the space. And to create that kind of space, it helps to have a particular kind of real estate investment business. It’s big enough to give you enough financially. But it’s also small enough to give you free time and space to think, to explore, and to do what matters in your life.
What matters. That’s an interesting concept.
On my personal website, I wrote something called the “Money-Life Manifesto” that talks about what really matters to me. Everyone’s life priorities are different, but perhaps this excerpt from my manifesto will resonate with you:
Sleep more. Relax in the morning. Sit in a rocking chair.
Learn something new. Be impractical. Explore.
Visit amazing places. Go on adventures. Hike trails. Ride a bike again.
Unplug from the matrix. Do work you love. Buck the system. Say “shove it” to the man.
Raise your own kids. Play silly games. Help with homework. Spoil your grandchildren.
Plant a garden. Grow your own food. Eat healthy. Exercise.
Slow down.
BREATHE.
Pursue your passions. Volunteer. Listen to people. Make an impact.
Advance your cause. Create your art. Write your story.
Get OFF the 9-5 treadmill.
STOP selling out!
DO what matters!
Henry David Thoreau once wrote one must “live deliberately.” Our businesses should work the same way—because real estate investing isn’t just about real estate, is it? It’s about what matters to you.
I wish you the best of luck in your real estate journey to discover what’s enough financially, to find your investing sweet spot, and to start doing more of what matters, whatever that means for you.
*I heard a variation of the “three real estate investor” story at a seminar at least 10 years ago. I think it was the late Jack Miller who told it. If someone knows differently, please help me give the correct credit.
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Landlords may not realize that, without a proper settlement document over tenant disputes and payments, they may cause headaches for themselves down the road.
The landlord/tenant arrangement is no different than any other contractual relationship.
Disputes often arise with accusations that one party is not living up to their obligations under the contract or applicable laws. Whether, for example, the tenant alleges their toilet wasn’t fixed quick enough or that the landlord unlawfully entered the premises without notice, money often changes hands as a result. The goal of this is obvious: pay money, make the problem go away. Many landlords mistakenly pay their tenants when a dispute arises, doing so through simply cutting a check and, at best, a “thank you” from their tenant. These landlords do not realize that, without a proper settlement document, they may have only caused more headaches for themselves down the road.
Payment of monies to a tenant without an agreement in place as to “why” and “for what” rests on several faulty assumptions: First, that the tenant agrees that they have been fully compensated for that claim or issue; second, that the tenant has no other claims or issues they feel need compensation; and third, that they won’t bring those claims later seeking further compensation.
In essence, the landlord assumes that their payment fully contracts their problems away entirely. If/when their tenant files suit alleging those claims, the landlord is usually shocked to learn that their money was handed out almost for nothing, as litigation costs usually dwarf that initial payment. What should happen, along with that exchange of that money, is the execution of a settlement agreement releasing any claims that may exist.
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The necessity of a document evidencing the agreement is found in principles of contract law. Settlement agreements are contracts, subject to the basic rules of contract law. If you have reviewed a written settlement agreement, they usually contain waivers and releases dealing with any/all claims that exist as of the date of that agreement. As you can imagine, broad waivers and releases (which would protect the landlord) are usually not something non-lawyers discuss during conversations related to compensation. Even if those discussions arguably took place, in my experience, they would likely be denied/rejected by the tenant and disregarded by the court due to the lack of a document evidencing the same. Thus, verbal agreements are rarely enforceable and therefore not recommended.
A basic component of contract law is that the parties’ intent controls. For any release to be valid, there must be both knowledge of the existence of a claim and an intention to relinquish it, in the absence of a specific promise to release liability for unanticipated claims. Without a document evidencing such an intention, there is no evidence that the payment covers/releases every claim available. The court likely won’t save the landlord from the new claims filed by the tenant, barring unusual circumstances, leaving the landlord footing the bill for a fight they likely thought they had resolved.
While it’s easy to throw money at a problem, it’s important to make that money work.
If you have a dispute with a tenant in need of resolution, settlement documents related to these discussions are common. If a tenant refuses to sign any documents addressing the compensation provided, you may want to reconsider that payment until they are ready to properly document the understanding of the parties. At a minimum, you should document your efforts to settle the matter in writing, so that if the issue escalates, it can be helpful in the future.
Without these things in mind, you may be throwing your money down the drain.
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Around 45 million households rent from apartment complexes to single-family units to converted Airbnb investment properties. Of those renters, pet ownership is extremely common. This is because the joy of coming home to a four-legged friend who couldn’t be happier to get a pat on the back and a treat from the kitchen is a fantastic feeling.
The challenge becomes allowing these renters into your properties. That photo of the American classic golden retriever in their application may look harmless at first, but when it comes time for the family to move on, you could be facing urine stains and destruction due to pet boredom. Implementing a pet screening process into your application stages is crucial to avoiding such issues.
This ensures you are targeting the right kind of renters, protecting your investment from unwanted damage, and keeping everything transparent to build trust between you and your potential tenants.
In this article, let’s review a guide to balancing the harmonious living environment your tenants require and safeguarding your property from Fido’s activities.
Creating a Pet Screening Application
Think of pet screening as a background check for the cats, dogs, or other animals you allow into your rental property. You aren’t trying to prevent animals in general. It is more that you’re trying to “guarantee” they will be a good fit for your property and community.
A basic pet screening application should include key components to give you peace of mind that you’ve made the right decision. That can include:
Pet Resume
A detailed pet profile that includes the size, breed, temperament, and age of the animal.
Pet Interview
Your chance to witness the pet’s behaviors in person so they are compatible with the property environment.
Veterinary Documentation
This typically verifies vaccinations, spay/neuter status, chip ID, and general health records.
Pet Insurance
In some rare cases, you can verify the homeowner/renter’s insurance of your applicant concerning specific pets due to their breed or size.
As you design the actual application, keep in mind these components. You want a comprehensive view of what to expect without scaring off your applicants.
You want to mitigate the potential risk of damage to your property or surrounding community, starting with proper pet screening.
Conducting Pet Screenings
Any landlord or property manager knows restricting pets from your properties will place an undesirable limit on the potential applicants you receive.
While every process will vary depending on the property owner, in general, the pet screening steps include:
Step 1: Application Review
Read through all the details provided by the applicant so you can better understand the role, behavior, and makeup of their pets. For example, if they have a therapy animal versus a stray picked up on the side of the road a couple of days ago.
Step 2: Pet Interviews
Yes, you should conduct a pet interview. If you have two applicants left to decide between, and one owns a pet, but the other doesn’t – do yourself a favor and meet the animals. They could be the sweetest dog in the world on paper but a menace in real life. Give your applicants the benefit of the doubt and trust your instincts.
Step 3: Questionnaire
You can include a questionnaire that reviews specific concerns, environmental issues, or size requirements of potential animals in your rental property. Asking things like “Is the pet house trained?” or “Do you understand local leash laws?” helps you avoid uncomfortable conversations down the road.
Throughout this pet screening process, be on the lookout for red flags. If the pet has excessive barking for no reason, endless scratching at their ears, signs of aggression, or obvious health issues, bring those items up with the owner. Any time they cannot respond satisfactorily, you may want to consider other applicants.
Using a pet screening process helps identify any red flags so you can expand that applicant pool without harming your property.
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Handling Service Animals and Emotional Support Animals
On any rental agreement or application, clearly differentiate regular pets, service animals, and emotional support animals (ESAs). This is crucial for your potential tenants and provides you with some legal protection.
Pets are just that – pets. They have had no specific training and are there to be enjoyable family members. Service animals are incredibly different. Traditionally, these dogs have been carefully trained to signal the owner’s health issues or guide them through their day.
ESAs are a bit more unique. They may not have specific training but are there to provide emotional support for the owners who have challenges that become easier to manage due to the pet’s presence.
According to current HUD guidelines, you must accommodate ESAs and service animals with proper documentation as a landlord or property management team. These are legally protected situations that you do not want to get in the middle of litigating.
A good way to nip this situation in the bud so you are more aware of what could happen is to provide clear guidance on your pet screen application that verifies the authenticity of the service animal documentation. As long as you have that information, you cannot deny the applicant based on the breed or size restrictions that apply to pets.
The ESA verification process should include a HUD-compliant verification. Otherwise, your application can be called into question, so it is a bit of a balancing act you’ll want to spend time clarifying first.
Bottom Line
Whatever your reason for implementing an effective pet screening process, the result is to ensure the safety of your property and its occupants and cultivate a harmonious living environment for everyone involved.
The guidelines and tips presented in this article are a fantastic first step to getting your pet screening process under control for better results – even when extra ESA verification is required.
If you want an easy solution, our team at OurPetPolicy provides free reliability reviews for up to three ESA letters. This will help landlords and property managers, just like you, maintain a positive living environment for your tenants while opening up the application pool to ESA pet owners.
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