Every now and then a real estate investor will think about becoming a landlord.  Is it worth it?

Many real estate investors will think about becoming a landlord, with your own rental property, from time to time.  It seems like an easy way to bring in a regular monthly income on a long-term basis.  Plus, you don’t have to spend a lot of time each week looking for new properties to invest in. 

However, a lot of investors will caution you to avoid the tenant business.  It’s got a lot of drawbacks and can actually raise your blood pressure!

Holding Costs are High!
When you become a buy and hold landlord your holding costs skyrocket.  Many landlords end up waiting between 3-6 months for a new tenant to move in.  So in that time while they are waiting for the tenant, the landlord has to keep up the property and pay the electric, gas, and other utilities. 

Re-renting Fix-up Costs are High!
As a typical landlord you also end up paying a lot to get the apartment or home ready for a new tenant when the old one moves out.  This means you’ll be paying to get new carpet, paint the walls and so on to make that place look good for a new renter.  A deposit won’t cover the costs to get that done.  In any case, you aren’t supposed to use the security deposit each tenant brings in, to cover the costs of regular wear and tear on the rental between tenants.

Short Leases Equal High Turnover!
A typical lease agreement between the landlord and a tenant lasts about a year.  A good number of your tenants will end up moving at the end of that year instead of renewing the lease with you.  Not all of them, but more than a few.  This high rate of turnover increases your costs as a landlord because you’ll have more holding costs between tenants and you’ll have to prepare that rental for new tenants each year. 

Lots of Complaints from Tenants!
A part of being the typical landlord involves getting complaints from your tenants.  Most often this concerns maintenance issues.  The drains get clogged, the air conditioner conks out, or the garbage disposal stops working.  These are all the landlord’s responsibility to maintain so the tenant has a livable home.  You would have to deal with getting the tenant complaints fixed in a timely manner and absorbing the cost of fixing problems with the rental property.

The Solution!
You can own rental property after a manner by leasing out the properties instead.  A lease with the option to buy the property can have many benefits.  You’ll be able to put the responsibility for fixing-up and maintaining the property into the hands of the lessee.  Leasing property also means you can place the tenants in the property for an extended amount of time.   The length of your average lease can be about 3 years or even 5 years.  So, you’ll have a lower rate of turn over and few holding costs on that lease property. 

You may feel that you need a lot of capital before you can start investing in mortgage notes.  However, it’s possible to use someone else’s money to make the deal go through and still get your profits!

Mortgage notes are a great way to invest in property and make an even higher return that with other types of property investment.  Plus, there is a way you can buy a homeowner mortgage using someone else’s money.

How to Find the Money
When you are working as a property invester with a mortgage owner to buy their mortgage from them, you’ll have the owner sign a “Note Purchase Agreement” to lock them into selling you the mortgage to a property for a certain amount of money. 

In this note purchase agreement, make sure that you include a certain period of time for due diligence.  This is to allow you to get your trait report and head down to the court house to check for any other liens on the property.  Make sure that your due diligence period is between 45-60 days to give you plenty of time.

While you are carrying out due diligence, you will also be looking for another real estate investor to give you cash to buy that mortgage note.  There are plenty of places to find investors, one mortgage investor in particular goes to her local real estate investing club.  Here she gets a chance to present potential mortgage note purchase deals and get investors. 

So, you attend your local club and meet a real estate investor who is looking for a 14% percent return on her investment. 

Quick Tip:  The investment and the return are inversely proportional.  The less money you invest, the more money you make on your return. 

How it Works Out
Say, you are buying someone’s $87,000 mortgage note for $70,000, that means you’ve just earned $17,000 profit in the long run.  That’s about a 24% return on your investment.  All you need to do to continue making money without spending your own is find another real estate investor who is looking to invest their money and get a slightly lower rate of return.

At the real estate club, you meet just such an investor.  She only wants a 14% return on her money investment for the property mortgage. 

So, you buy the mortgage note from the owner at $70,000, then turn around and sell it to the investor for $74,820.  That leaves about $4,000 in profits for you to pocket from your involvement in the deal.  The investor is going to make a profit too, because her mortgage note is worth $87,000 even though she only paid about $74,000.

By looking for your own investor for your mortgage note purchase you can still make money on the differences in percentage.  You’ve got to pay careful attention to the percent of return for yourself, the mortgage owner and your investor, but you can make money by setting up the sale!

One of the most important tools for professional real estate investors is to build up lists of people you can partner with to help get the work you need done. 

You may have heard that one of the best ways to make yourself truly wealthy is to become a private real estate investor.  While it is true that the millionaire real estate investor does exist in every state in the nation, it can also be a difficult way to begin to build up your own personal fortune.  There are more books written and sold each year, on how to become a real estate investor, than on many other topics in business and self-employment.  The main reason that the real estate investors get singled out is because their money tends to come in either; large immediate chunks, or as passive income over a long period of time.  And as investment strategies go, both of these options can be great. 

One of the most important parts of becoming a private real estate investor is the process of networking and building resource lists of professionals such as lenders, bankers, seller’s agents, buyer’s agents, real estate investor agents, carpenters, plumbers, etc… who you can call on to help make your transactions run more smoothly and who can answer any questions which you might have from time to time.

Nothing is more important to your business than making good contacts in the lending industry.  Whether you work with banks, direct lenders, or mortgage brokers, you need to have lenders available to work hassle-free with you to help finance your deals. 

One of the best things you can do if you will be looking to expand into other geographic areas with your real estate investment business, is to find other real estate investors already working in that particular area, generally those who simply rehabilitate the properties to flip or hold as rentals.  Finding them is as simple as placing an ad in the local newspaper and screening out the callers who are looking to work with you rather than purchase a home from you. 

Once you have some potential joint venture partners for your real estate investment business, then it is time to partner with some of those other investors when it is appropriate for both of you to do so.  You can even ask your new partners to do much of the legwork there in their own area, and for their compensation they will be paid out of the escrow from the deal.  If you are able to find other quality professionals to work with, then you really can have a win-win relationship working together.

It is also always a good idea to network with all of the real estate agents in the areas which you will be investing in property.  Every private real estate investor should have realtors out in the field who will let them know about available property – even those not yet listed in the MLS.  Once a realtor knows what you are looking for, and what kind of deals you prefer, they will call you when they know about a property which you might be interested in. 

One of the most important tools for professional real estate investors is to build up lists of people you can partner with to help get the work you need done.  By having lists of people you trust and can work with when you need to, you can be ahead of everyone else in your area.