Rental Property Investing QuickStart Guide: The Simplified Beginner’s Guide to Finding and Financing Winning Deals, Stress-Free Property Management, and Generating True Passive Income

Table of Contents

Introduction

An Unexpected Path to Real Estate Expertise

Rental Property? In This Economy?

Rental Property Offers Security in the Storms

Preparing to Win in the Rental Market

PART I - PLANNING TO WIN AT THE RIGHT PRICE

| 1 | INVESTMENT IDEAS

The Only Strategy You’ll Ever Need

Should I Buy Old or New Properties?

The BRRR(R) Strategy

Alternate Ideas

| 2 | HOW TO FINANCE YOUR INVESTMENT

The Power of Leverage

Conventional Mortgages

Creative Financing

| 3 | UNDERSTANDING REAL ESTATE CYCLES

The Four Phases of a Real Estate Cycle

Planning Your Entrance into the Market

| 4 | BUILDING RESILIENT CASH FLOW

Using Comparables to Maximize Profits

Measuring Investment Gains

| 5 | EXITS AND EXCHANGES

Selling Your Rental Property

The 1031 Exchange

PART II - PLANNING TO WIN WITH THE RIGHT PROPERTY

| 6 | RENTAL PROPERTY TYPES

Single-Family Homes

Townhouses

Condominiums

Apartments

Mobile Home Parks

Short-Term Rentals / Vacation Homes

| 7 | MARKET ANALYSIS

Comparing Different Markets

Choosing Your Niche

| 8 | WHERE TO FIND PROPERTY DEALS

Real Estate Agents

Classified Listings

REOs/Foreclosures

Getting Creative

PART III - PLANNING TO WIN WITH THE RIGHT PEOPLE

| 9 | BUILDING YOUR TEAM

The Advantages of a Network

Professional Partners

Personal Partners

| 10 | THE BASICS OF LANDLORDING

Dealing with Tenants

Repairs and Maintenance

Landlord Insurance

| 11 | BUYERS AND SELLERS

Working with Sellers

Attracting the Right Buyers

PART IV - PLOTTING LONG-TERM SUCCESS

| 12 | ONGOING MANAGEMENT

Professional Property Managers

From Hobby to Business

| 13 | LONG-TERM RENTAL INCOME

Building a Resilient Portfolio

Generating a Thriving Rental Income

Conclusion

Looking Ahead

Appendix I

Next Stop, Vegas

Appendix II

Appendix III

Appendix IV

Analysis Tools

Calculators

About the Author

About ClydeBank Media

Glossary

References

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A Special Note from the Author

I am writing this book in the midst of the COVID-19 global pandemic, a disruptive event of a scale the world has not seen for more than one hundred years. The effect on real estate markets worldwide is undeniable. Many of you, despite your interest in this space, are sure to question the extent to which rental property investing remains a viable endeavor.

While the effects and implications of the pandemic may have shocked and shuffled the markets, opportunities in rental property, in my judgment, are not destined to fade away, but rather to transform. Some of the rental property markets that have seen their values plummet will see a robust and vigorous recovery, similar to that of the last recession—the great financial crisis of 2008—where countless real estate investors enjoyed lavish capital gains over the decade that followed. In fact, if you’re interested in navigating the downturn skillfully, then you’ve chosen the perfect time to educate yourself on this topic. Throughout the book I’ll address some of the pandemic-related challenges, changes, and opportunities presented by these unprecedented times.

Big, disruptive, unforeseen events do more than just damage markets. They also naturally create shifts in behavior. Your challenge as a rental property investor is to learn how to spot those shifts and match them with emerging opportunities both now and in the future. It is my sincere hope that you will use the lessons of this book to equip yourself with the tools you need to survive and thrive in the coming years, aided by a strong portfolio of income-generating properties. You can do it. I’ll show you how.

Introduction

This book is for the answer-seekers, those who are curious, skeptical, or admittedly ignorant about rental property investing. Maybe you’re unsure of how much money you need to get started or whether you’re ready to be someone’s landlord. Maybe you’re not sure whether you have the chops for negotiating great real estate deals and managing properties. There are many competing and often contradictory voices out there, shouting their opinions as to what you should think about rental property investing. From reality TV shows to news stories to the personal and hearsay accounts of family members and friends, I’ve found that such anecdotal accounts are more apt to obscure than to illuminate the essential truths of rental property investing. The way a property is acquired and made rent-ready, when depicted on television, rarely lines up with reality. News stories and personal accounts tend to focus on the most extreme, atypical, and negative situations, often involving the nightmare tenant or the evil slumlord. Again, such dramatizations are removed from the day-to-day realities of rental property investing and management. My aim in writing this book is to provide a reliable and realistic source of information on the subject, one based on my own fifteen years of experience in owning and operating rental properties. This type of investing and wealth-building through rental properties is a subject I’m fiercely passionate about, and I gain enormous personal fulfillment from bringing my knowledge and experience to others. Over the last seven years I’ve engaged and tutored over 350,000 students in 180 countries on this subject. With this book, I aim to expand my reach to an ever-wider class of real estate entrepreneurs.

You should commend yourself for taking interest in such an exceptional entrepreneurial pursuit, one that has the potential to transform your life. Unlike many other wealth-building endeavors, success in rental property investing can be achieved irrespective of a person’s education level or how much money they currently have in the bank. Many of the concepts I present in this book are meant to take you from zero knowledge to your first investment. That’s where the hardest challenge lies. And when you have your first investment, the fun part is imagining, dreaming, and planning what it will take to go from one property to a whole portfolio of ten properties and more. If you’re willing to work hard and stay focused, then you’ll find this business has a way of taking good care of you. If you don’t quit easily and you know how to roll with the punches as they come, then you’ll discover that there are invaluable lessons behind every setback and that each obstacle and hardship you encounter is in fact a crucial stepping-stone on your road to success. I’m looking forward to sharing my knowledge with you in the pages that follow, but first, allow me to share some of the highlights of my own journey in rental property investing.

An Unexpected Path to Real Estate Expertise

I earned my MBA at Stanford after receiving degrees in both computer engineering and economics from UC Irvine. After school, I was hired by a private equity firm to work on commercial real estate acquisitions without any prior background in real estate (we all start with no experience once, even me!). This was a baptism by fire for me, as I was quickly immersed in a new and unfamiliar world, one with its own rhythms and rules, and even its own language. Terms like asset class, rental yield, and internal rate of return soon became part of my ever-growing lexicon. After participating in more than $500 million worth of commercial real estate investments over five years, I jumped at the chance to move back to my hometown of Los Angeles to join the Panda Restaurant Group (PRG) in a supporting role for new store openings and market expansions. There, I continued to build upon my real estate investing experience, ultimately becoming responsible for the evaluation and acquisition of commercial properties for the various subsidiaries of PRG, such as Panda Express, Panda Inn, and Hibachi-San.

It was during my tenure at PRG that I was approached by a few of my colleagues and asked to join a group of like-minded investors. The group included several other Panda employees as well as several associates from outside our organization. Because we all worked full time, we called this ragtag bunch the Weekend Fund. Seeing as I had experience in locating and analyzing commercial properties, I was tasked with building the framework of our investment process. I became the analyst, the trusted member of the group who searched the markets, evaluated risk, and determined our potential profits. Although we all worked to locate potential investment deals, it fell to me to assess those deals and give the ultimate green light for the investment. If I said yes, we would invest.

In just a few years, we located and invested in over thirty rental properties throughout Texas, California, Arizona, and Nevada. My professional experience up to that point in my career had been primarily in commercial properties—those intended for business use—but the Weekend Fund venture turned my attention toward single-family home rental properties. I learned the ropes of the residential property investment universe, and I loved it. I even decided to begin building my own personal portfolio, outside of the pooled resources of the Weekend Fund. Fast forward to today: I have invested in more than 150 properties, many in pooled investment funds, while several others are traditional direct investments that I continue to operate on my own.

In my quest for higher investment returns, my interest in residential properties naturally opened my eyes to the brave new world of short-term rentals. Over the last several years, these rental opportunities, often found on platforms like Vrbo or Airbnb, have captivated the imagination of the real estate investing community. In response to the budding interest in the topic, I started one of the earliest blogs on the subject, www.learnbnb.com. I also coauthored Airbnb For Dummies to help other investors explore the fascinating world of short-term rentals—more on this topic in chapter 6.

From Expertise to Expert?

Amid all the analyses I was conducting for my investments, I was also analyzing potential deals for friends and acquaintances seeking advice regarding their investing endeavors. I was happy to respond to these requests for a time, but once word spread that I was an expert in the field, those requests flooded in. Was I an expert? Did I have wisdom that people wanted to hear? Maybe. To test the waters, I launched an online course, designed to educate anyone about the field of real estate investing. This course, I reckoned, could become a new venture, a business opportunity I could develop alongside my greater investing journey.

As I began to develop more course material and acquire more and more students, I noticed that two distinct questions were on the minds of most prospective rental property investors:

1. Can I do this?

2. If yes, then how?

Answering the first question is easy. Yes. Property investors come in all shapes and sizes and hail from vastly diverse backgrounds; personality-wise as well, they are not all cut from the same cloth. Common perceptions of the investor, that he is a member of an exclusive club, ranking among society’s elite—all of this is nonsense. Being a coach and tutor, I’ve had successful students of many different stripes who have achieved success in this field, often taking very different approaches. In fact, you’ll hear from several of them directly as you proceed through these pages.

If you apply yourself and remain committed to the process, the results will come. Mine is not a get-rich-quick scheme. The process I teach is easy to understand in theory and can be learned and repeated. It doesn’t involve complex mathematics or exotic data analysis. It does, however, require commitment, persistence, and hard work. My successful students are those who intrepidly embrace new challenges, trust in themselves, and never quit. If you can work through the frustrations and failures—better still, if you can learn from them—then you are going to succeed in the end.

The answer to the second common question—how do I invest in rental property?—is more nuanced. It’s this very question that led me to write this book. In the pages that follow, I will attempt to provide you with my best answer. I will present the principles and processes involved in locating, purchasing, and operating a rental property investment. As with all QuickStart Guide™ titles, the teaching approach I take in this book is suitable for a pure beginner. Many of the concepts and terms presented here may be new to you. Moreover, I might contradict some of the opinions you’ve previously formed about this topic. All I ask is that you keep an open mind. Stay with me. Follow the examples I provide. By the end of this book, I will have answered the second question and provided a path for you to reap the returns of your first healthy, profitable rental property. After that initial goal is accomplished, the sky’s the limit.

Rental Property? In This Economy?

As I’m writing this book, we are in the midst of a global pandemic that has registered nearly 65 million confirmed cases and claimed 1.5 million lives. Unfortunately, it appears we’re still only at the start of a major winter wave in the Northern Hemisphere. Schools are closed. Travel is restricted. Thousands of businesses have closed their doors for good. Millions have lost jobs and are unsure if unemployment benefits will be extended. Our world has changed. Our lives have changed. As a caregiver to my immunocompromised mother, I understand firsthand what that means.

Although it is difficult, we must look beyond the immediate impact and examine the long-term implications of this massive disruption. The job market may take several years to recover, and as incomes get stretched and people worry about having enough to pay their bills, this uncertainty spills over into the real estate arena. Despite these troubled times, I continue to see rental property investing as a powerful investing and wealth-building tool. In fact, there are other factors, beyond even the reach of the pandemic and its ensuing economic fallout, that make rental property investing more relevant now than it’s ever been before. Here are two reasons that the demand for rentals is increasing and should continue to increase: (1) the persistent urbanization of the country’s population and (2) the lifestyle choices of the millennial generation.

In the 1970s, around 70 percent of the population of the United States lived in high-density cities. In recent times, that number has climbed to over 80 percent. The trend of migrating away from rural areas into urban ones is not slowing down, as you can clearly see in figure 1. People want to live in the city. They want access to more vibrant job opportunities, increased local amenities and attractions, and a lifestyle on the vanguard of the hip and modern. To achieve their dreams of living in the city, people rent out of necessity, because buying property is prohibitively expensive.

The steady increase of the urban American population

In addition to greater rental demand resulting from urbanization trends, the lifestyle choices of the millennial generation also push rental demand higher. Millennials have radically shifted away from the trends of previous generations. They are delaying marriage. They are choosing to wait longer to have kids. And they are forgoing the tradition of buying their own home. In 2016, when the median age of millennials was approximately twenty-eight, only one third of millennials owned their own homes. Compare this trend with that of the previous two generations: half of all baby boomers and Gen Xers owned their own homes by age twenty-eight. While economic factors such as mounting student debt and increased property values undoubtedly influence the decisions made by millennials, there’s more to the story. Beyond economics, the millennial generation is expressing a profound cultural shift in values and norms. They reject the traditions of the past in favor of new lifestyles, which often do not involve getting married and owning a home in the suburbs. They are more transient, shifting jobs four times, on average, in their first decade out of college. The bottom line is that fewer and fewer homeowners means more and more renters.

This optimistic take on the rental market’s growth prospects may contravene the stories you’ve heard. In the wake of the COVID-19 pandemic, the media is rife with overly pessimistic perspectives on the real estate market and its near-term outlook. My advice: don’t despair. We’ve been through economic crises and downturns in the past and the market reliably recovers. The 2008 recession (and subsequent recovery) provides us with lessons on how to navigate these difficult times.

After the great financial crisis of 2008 and the ensuing recession, there’s no doubt the real estate market changed. No longer were lending institutions willing to offer mortgages without significant down payments supplied by the borrower. Minimum credit scores and solid employment requirements replaced the No Income, No Asset (NINA) loans that once were so easy to find. But even though the real estate market was radically altered, the rental market improved. From 2008 to 2018, the average rental price in the US jumped from $824 to $1,012 per month, a nearly 23 percent bump. And the phenomenon is not restrained to this country. Canada’s average rental price increased similarly, from $802 to $1,002 CAD.

The ten-year rental market recovery after the 2008 recession

The numbers cited in figure 2 reflect the average rent across the specified country at large. Certain specific markets experienced much quicker recoveries in their rental markets. For example, look at Manhattan, where it’s not uncommon for renters to pay upwards of $4,000 per month for their apartments. Rental property owners across all tiers of pricing saw a tremendously quick recovery, with prices bouncing back to pre-recession levels within just three years (figure 3).

StreetEasy Rent Index data

The speedy three-year recovery of rent prices in Manhattan was consistent across multiple price tiers.

Knowing what we do about the fallout of the 2008 real estate market, we can consider it likely that the pandemic will have an effect, even a profound effect, on the future real estate market. But history assures us that rental prices will continue to do what they’ve always done: recover and thrive. It’s important for investors to understand real estate cycles, to expect them and not fear them. I’ll teach you how to do this in chapter 3.

Rental Property Offers Security in the Storms

Sudden economic downturns, such as those experienced during the 2008 recession and the COVID-19 pandemic, can leave a serious crack in your financial foundation—your salary may be at risk due to the threat of layoff, and your savings may be at risk due to market volatility. Many economists anticipate that a significant proportion of pandemic-related layoffs, maybe upwards of 40 percent, will be permanent. And even the jobs that do return may not do so for some time.

Not to be overly alarmist, but some epidemiologists predict that we will see one or two global pandemics on the same scale as COVID-19 within the next fifty years. That may sound bleak, but it should serve as a reminder that in addition to protecting our health, we also need to find a way to protect our income and investments.

One of the advantages of rental property investing is that it enables you to invest in a resilient asset that reliably appreciates in value over long time horizons and can be less reactive to adverse market conditions and major economic shocks. Mind you, this is especially true if you are able to pick the right markets and properties. Some experts claim that the stock market, despite being more volatile, does outperform real estate in terms of appreciation. If we look at historical returns of the S&P 500—an index that includes 500 different companies—over the last ninety years, the average return is almost 10 percent, 9.8 percent to be precise. In that same period of time, the median housing market in the US appreciated by just 3.5 percent. At a glance, investing in real estate doesn’t look like the most solid investment plan. But if we take a closer look, we’ll find this comparison to be disingenuous in several ways; it’s not exactly apples-to-apples.

First, that magic 10 percent figure for equities is an average and not indicative of what you can expect every year. Imagine that you had $10,000 invested in a stock market. In year one, you make 100 percent returns, and your portfolio is now worth $20,000. The next year, it loses 50 percent, and your portfolio’s worth returns to $10,000. In year three, you make another 100 percent return. And in year four, it loses 50 percent of its value again. Though the average return of this stock market is 25 percent over those four years, what is your actual return? Zero. After four years of riding this wave, you still have only $10,000. Though this is an exaggerated example of the more volatile nature of investing in the stock market, the average return metric hides a larger issue, which is the actual return that you can expect in any given year. If you look at the S&P 500 Index, you can find several instances where the annual returns were minus 10 percent or even worse (figure 4). During the crash of 2008, the S&P 500 Index fell by more than 40 percent from its 2007 highs. What would you do if you caught an unlucky streak just as you were about to enter retirement?

The S&P 500 year-to-year performance over the last 90 years

The advantage of owning a rental property investment is that you have control over your appreciation. When you invest in stocks, you pay your money and hold on for the ride. You have no say in how the company operates. You simply have to trust it will make responsible decisions that lead to an improved value over time. In rental properties, however, your hand is on the steering wheel. If you can buy your property at a market discount (I’ll show you how to do that in chapter 4), then you can make renovations and improvements to force an increased appreciation sooner. You’re not at the mercy of some unknowable force with a rental property. You have full control over how well your property appreciates.

The second problem in comparing rental property investing to investing in equities is the income, or yield. Rental properties can provide a remarkably reliable source of income, especially if you have a diversified portfolio of rentals. Every month, you collect rent from your tenants, a factor that is not considered in many investment comparisons. These rental returns will make up the bulk of your total gains. When you factor in rental income as well as the average appreciation value of a property, your rental property investments may outperform equity investments. What about dividend-paying stocks? Do they not count as income-producing assets? Of course they do, but even still, they can’t compare with rental returns.

The returns gained by rental property investors purely through rents collected (irrespective of asset appreciation) are more noteworthy than you