Buying your VERY FIRST rental property can make or break the rest of your Real Estate career. How about we get educated in the things you should know.
Listen, if you're subscribed to my channel, at some point you are going to be buying real estate and hopefully doing it the right way and making millions of dollars. If you think you're ready to buy your first rental property, there's seven questions you have to know the answer to because guess what? Today I'm buying this house and I'm gonna tell you right now, I know the answer to these seven questions, so I'm about to make a pile of money.
Today's video, I'm gonna share these seven questions with you, and if you can answer them the right way, you're actually ready to buy your first rental property. One let's, I'm turning in dreams into reality. Yeah, it's, let's go. Are you ready?
Today's the day. Today's the day, my friend. Today's the day when you might be making a pile of cash on your first rental property, and if you've been subscribed for a while, if you've watched my stuff, if you've read books, you might be thinking, you know what, Kris?
I think I'm actually honestly ready to buy my first rental property. I'm ready, I'm ready, I'm ready, I'm ready, I'm ready. But you know what? I got a little test for you. It's a little litmus test for you to actually know if you're ready because in today's video, your guide to buying your first rental property, I'm gonna ask you seven questions and your answer to these seven questions honestly, we'll share and show whether you are or are not ready.
Ah, let's make sure we're actually on the same page. What actually is a rental property? Is this like a a commercial property? Is it a condominium? Is it a townhouse? Is it a single family home? Kris, what do you actually mean by rental? Well, according to Investopedia, residential rental property refers to a home that's purchased by an investor, but it's inhabited by a tenant on a lease or other type of rental agreement.
Residential property is property zoned specifically for living or dwelling for individuals or households. It may include standalone single family dwellings to large multi-unit apartment buildings. Bottom line is you're about to buy some real estate. You're planning on holding it for a while. You've gotta rent it out to a family or for a tenant so that you can actually make some money and hopefully a profit.
Question number one, if you wanna know if you're actually ready for your first rental property, you gotta ask this question. Have you paid down personal debt? You don't have to be debt free, you don't have to have paid off student loan debts, but there's a certain amount of debt that you should have paid off if you're actually gonna go deeper into debt and actually buy residential property. Because when you own a rental, guess what you're doing? You're going deeply into debt and you need to make sure that you don't have too much.
Uh oh, too much. That's too much. Oh, caution is key, my friend. If you're brand new to the game, because if you have student loans, unpaid medical bills or children who attend to college soon, then purchasing a rental property may not be the right move for you. There's a little bit of a mathematical equation that you should do.
However, if you wanna know if your debts are properly aligned, this actually comes from King Harbor Wealth Management. I agree with it. They say it's not necessary to pay down debt if your return from your real estate is greater than the cost of your debt. This is a calculation you need to make. Uh, for example, let's say that you are going to be buying this nice house right here. It's great. It has a roof and it has a front door. You see the lock. This house right here costs $200,000.
You're buying it as a rental. Your mortgage on this property is going to be $1,100 a month. And the question is, should you take on an $1,100 a month liability? Well check it out. You're actually gonna be renting it for $1,600 a month and after you pay property management and some other things, even though it looks like there's gonna be $500 of cashflow, right? I'm receiving $1,600 a month, $1100 goes out the door for other costs, I have $500.
But then you decide that, hey, I've got a property manager and whatnot, I'm actually going to be keeping $330 a month. You might have other debts in your life, but buying this house is actually creating a positive cash flow. You are better off this month for owning this property than not owning this property. And so based on this math and definition, yeah, you should actually buy the house.
However, if you buy this house and there's not really gonna be a positive cash flow and you're straddling other debts, it's probably a bad idea to buy this house. Question number two, are you going to buy real estate in the proper location? Have you ever heard that adage that with real estate, it's all about location, location, location. Well, in the city where you live or where you're planning on buying real estate, you should be aware that there are rougher sides of town.
Sometimes the properties cost the same in both neighborhoods, but guess what? I wanna actually invest in the place where the people make more money, have better job stability, because on average, the more they make, the better they take care of the real estate. So for example, you should be looking at growing population, low property taxes, decent school districts, plenty of amenities, low crime rates, increasing job market.
I've got a document that I refresh every year that basically looks at the 324 markets around the entire United States, and then I say, what are the top five? If I go into those markets, I'm actually gonna make more money because they're going to actually have more amenities, lower crime rates, they're gonna have increasing job markets. That's something important that you should look for when buying a rental property. A lot of people, they get fixated and say, I just want to get a good deal on this house.
I'm just telling you if that house is not in the right zip code or if it's not on the right side of the railroad tracks, I'm not buying it. By the way, if you want to know exactly what you should look for in getting the right market, you can get a free copy of this. Just click the link below and my team will put it in the mail and drop it to you and it will show you exactly which neighborhoods I will invest in and then the ones that I won't.
Question number three. When you buy this house, someone's gotta put some money down to get it. It might be yours, it might be a partner's. Here's the question, have you secured a down payment? I'm not talking about even the loan, like pre-qualifying. I'm talking about there's hard cash that you've gotta put down on the property.
Here's what you should know. Investment properties generally require a larger down payment than do owner-occupied properties. In other words, an investment property requires at least a 20% down payment. A primary residence, you can usually get away with as little as a 3% down payment.
For example, remember this house here, $200,000. I need a 20% down payment if I'm not buying it to live in myself. And 20% of $200,000 is approximately $40,000. So 10 grand, 20 grand, 30 grand, $40,000, this $40,000, where could it come from? Where should it come from? Where shouldn't it come from?
This $40,000 could literally be money under the mattress that you've just been saving for a while. It could come out of a 401K, maybe an IRA. This could come out of the stock market. Um, it might even be a business partner that supplies you with this money.
That's all. Okay? On the other hand, you should not borrow this $40,000 to be a down payment on buying this house over here. Why? There's a cost of money. You see, if you already have this $40,000 saved up where you don't owe any money on it, it's what opens the door to cashflow.
When you put 20% down on a $200,000 house, you don't owe 200 grand anymore. You now owe $160,000 and because you paid that money down, that makes it easier to produce a positive cash flow. Like think of the extreme. Let's say that I gave them $200,000 and didn't even need a loan, then all of the rent would be pure cash flow.
Then I would be getting $1,500, $1,600 a month of cash flow in this example. So it's super important that when you come up with your down payment that you don't owe anybody any money for it because it means that your cashflow that you do have is honest, true, and if you've done it the right way, it's enough.
Hey, Kris, so why? Why even do a down payment? Then? Why not just buy the house outright? Why Not buy the house outright are, do you follow Dave Ramsey? Stupid? Do you follow Dave Ramsey? Stupid? You could say, Kris, I'm actually gonna save up all of my money and I'm just gonna buy houses cash.
Do you know how long it takes the average person to save up $200,000 so many years of their life that by the time they get a house and have $1,500 a month cash flow, they don't have time to keep doing that again and again and again. In other words, you and I, we've got 30 or 40 years to work and we need that time to be spent productive.
And if you're only able to save up enough for like two paid off houses, what is that? $3,000 a month of cash flow when you are envisioning retirement? Where you thinking to yourself, yeah, I would love to retire and spend the next 40 years of my life on $3,000 a month.
Probably not. Question number four, do you have the right interest rate? Listen, you've gotta get qualified from the bank, but not all banks are created equal. They have different programs. Some will say, Hey, we'll give you the loan and the interest rate's gonna be this high and the other bank says they're crazy. I'll give you the interest rate at this level. Well, guess what? Check this out.
The interest rate on an investment property is generally higher than a traditional mortgage interest rate for like your own personal residence. If you do decide to finance your purchase, you need a low mortgage payment that won't eat into your monthly profits. In other words, remember that example, this house over here, the amount of cashflow you have, it's tied to buying a house at the right price. It's tied to getting a good deal, but it's also tied to this. It's tied to the interest rate.
And did you know that interest rates are lower right now than we've seen in the last 50 years? This graph comes directly from Freddie Mac. Check this out here. Your 30 year mortgage rates, were sitting at around 4% and they have dropped all the way down to 2.8% on an investment property. That's gonna translate to maybe a little over 3%. In my world on having done 4,500 homes, that's called free money.
I'm not sure. There's no guarantee that in your lifetime, in the next 50 years that we will ever see interest rates this low ever again. In fact, they frankly, honestly can't go a whole lot lower than maybe like point something percent. Like something really, really, really. So here's what it means. You buy an investment property today, you're locking in the cheapest money that's been available on the planet for 50 years.
And if you're like me, you're thinking, Hey Kris, I do need your guide to buying my first rental property, but more important, I gotta go buy five more. 'cause your biggest regret 20 years from now, I promise you financially will be, why didn't I buy more? You think you're ready to buy your first rental property, but not until you've asked yourself this question, do you have landlord insurance? Kris, what's landlord insurance? In addition to homeowner's insurance, which is required by the way when you buy a property, 'cause like if it burns down, the insurance company has gotta replace it.
The bank requires that. Consider purchasing landlord insurance. This type of insurance generally covers property damage, lost rental income, and liability protection. This is for people that say, alright Kris, I wanna buy this property, but I'm afraid that the tenant is gonna destroy the house. I'm afraid that they might lose their job during the strange economy and they won't be able to pay the rent.
Kris, I'm afraid that something bad could happen on that property. Like what if they have a meth lab or they invite friends over that slip and fall and crack their head and Humpty Dumpty can't be put together again? Oh, not again. I think this is super smart for people that are gonna lose sleep at night. If you're new to the game and paying this extra 20, 30, $50 a month will help you feel better, then do it as long as you have the positive cash flow.
But for me, am I going to spend an extra 30, 40, $50 a month for that kind of peace of mind? I'm not. I call this insurance. This is frankly for people that are scared, they may not actually be ready to get in the game of real estate because if you've been in it, you know that even though these things can happen, it's a part of the game and the amount that you'll pay in insurance will not justify frankly, the positive cash flow that can cover some of these things.
More importantly, if you actually team up with someone that knows what they're doing, you're gonna play the game like a pro, which means you're gonna put the right people in the house and you've got your data that will show you what worst case scenarios can be like. I've got different ways of actually mitigating this.
I am not tearing into my cash flow for this. Two more questions to go to know if you're really ready to buy your first rental property. Here's question number six. Do you know your legal obligations? The moment you put a tenant in that house, you actually have local laws that you need to adhere to.
Check this out. Rental owners need to be familiar with the landlord tenant laws in their state, in their area. These include tenants rights, your obligations regarding security deposits, lease requirements, eviction rules, fair housing, and more in order to avoid legal hassles. For example, there are some states, and there are some districts that are what you might call tenant friendly. And what that means is that if the tenant falls on hard times, they can't actually pay their rent.
Then that local city might say, Hey, we've got an ordinance. You can't kick them outta the house for like six months and if they're a professional renter and file this paperwork, it'll buy them six more months. And all of a sudden you're thinking, you mean that I own this house for a year, this person's living for free because they know like all of the legal loopholes. Yeah, that is actually a real thing. So you should be familiar with the laws of land. I don't want that to like scare you. The reality is you need to be aware, you need to be educated for your area, and then you need to make sure that you are prepared to know how to combat it. Never stop me from investing.
And then of course, there's the most important question of all. Question number seven, do you know your return stands for ROI? Return on investment? You're about to buy property. It's not just about a cash flow. You're about to lay some serious dough out and you gotta ask and know what is coming back to me and is it enough? For example, check this out. See this $200,000 house, I put 20% down, I lay out $40,000. But you know what? Closing costs and, and maybe having like a buffer in my account. Let's say that my total real obligation on this property is $50,000. Now, $50,000 is not a lot. It's not a little, it's just a sum of money.
I wanna know in terms of a percentage, what am I getting back? Check this out. Let's say that you buy this property, you put $50,000 laid out, boom, boom, boom, boom, boom, and all of a sudden you wanna know, how much money am I getting back?
Well, you buy it, you put a tenant in it, and then all of a sudden you get income flowing back, plus you got your expenses. But at the end of the year, guess what? You're left with $10,000 in profit. That means after you paid all your expenses, there was 10 grand left. Over $10,000 is a fraction of $50,000. In fact, it is 20% of $50,000. Your return on investment this year. If I put $50,000 in for this long-term hold and I got 10 grand back this year, that means that I earned 20% on my money. Let's just assume that the next year you earn another 10%. In fact, in the third year, it's another $10,000 and then $10,000.
And then in the fifth year, it's also $10,000. You added up 10,000. 10,000. This all adds up after five years to $50,000. I started with 50 grand. I bought the property and I made $50,000 on top of what I put in. I've gotten a 100% return on my money and it happened over five years. So I need to take a hundred percent, divide it by five, and that means that I've been earning 20% per annum on this property.
Now, by the way, is 20% impressive? I think for an amateur, someone who's a newbie, I think that they deserve an award. What I do that deal, it's not enough money for me. Whoa, whoa, whoa, whoa, whoa. Kris, you wouldn't do that deal. Don't get me wrong. 20% is a good ROI, especially when you compare it to, for example, 7.5% out of the stock market. Or maybe you put some of your money in bonds and earn three or 4%. Maybe you put your money into a 401K or IRA and earn six or 7%.
Yes, 20% is better than that. But at the end of the day, I'm a professional. I've done a billion dollars worth of real estate and I have standards. If I'm gonna do a deal, I wanna earn the most money. So what is my standard when I buy real estate, I need to be earning 25% a year on my money. That means that it compounds at approximately doubling my money every third year. Why do I like that?
Well, if you're like most people out there and you're gonna work for 30 years, that means that if I'm doubling my money every three years, that means I can double it 10 times over 30 years. And if you do that in the game of real estate, you will wind up rich. You should be a multi, multi-millionaire. But a lot of people don't know how to get that standard, which is why I've written for you the real guide.
You see today, I shared my seven questions to help you get ready for buying your first rental property. But if you're gonna do it, you can also do it at a pros level. This document beyond those seven questions actually shows step-by-step where I invest, how I invest, and basically how I guarantee myself at least a 25% ROI. 'cause last year, my actual was a 20% annual ROI, and this year with this crazy pandemic, I'm doing well over 30%. So you better believe that I'm out there in force buying as much real estate as I can.
There's a lot of people who are afraid, they're scared and they're thinking to myself, I should buy some landlord insurance. Instead, you should be saddling up with an expert, a pro, someone that really knows what they're doing. And whether you do that or not, at least get the pro's guide to doing it the right way.
Hey, if you've subscribed to my channel, I'm already your mentor, but you should get your mentor's handbook on how to do real estate the right way. So if you haven't picked up a copy of this, make sure right now you click the link below, grab your free copy. My team will pop it in the mail, and we're gonna help you.
On top of that though, you might actually want to know, Kris, show me an action. Hands-on, what does it actually look like to make a 25% annual ROI? It's pretty dope. And if you wanna see what it looks like, check out this video. I actually take Mr. Rice and his wife by the hand and step by step help them buy five properties over a six month period of time. Let's Just assume for a moment that you're gonna buy this house right here. That's a barn door. One second. Let's try that again.