We had a great meeting with our potential real estate investing business partner. I wasn’t sure what to expect, but I was pleased with the outcome.
We had a very open and honest discussion about finances, and we have a lot of the same goals and expectations. And because we’re both finance people, we also have a common understanding of how we want to approach valuation and decisions on the properties.
In fact, we even went and saw a property nearby… although, we’ll just say that “needs some work” was an understatement! (We don’t plan to do fixer uppers, rather buy a property that’s ready to rent.)
Real Estate Investing
We’re always working on diversifying our income, and this will be a good complement to our current income sources, which have shifted significantly over the past year.
Readers had a lot great tips and suggestions to consider before taking on the landlord duties:
- You need to make sure you’re financially secure, and that you’re ready to deal with the hassles, even as a secondary owner. – Pete
- Be very careful and understand what you are getting in to. You will get phone calls from your renters to fix things in the evenings and on weekends. Also, you can have problems with how renters treat your property. – Stella
- I’m a landlord. If I had it to do over again, I still would have bought a rental property, but I would have made sure the math worked better. Make sure that the mortgage is no greater than 60% of the expected rent. – MITBeta
- Investing in real estate can be scary, particularly at first. But if you don’t over-extend yourself and take it slow, it’s actually a lot of fun and, over time, very profitable. – Rob
- I had people coming out of the woodwork to discourage me. “Do you really wanna fix toilets?” was the most often posed question. My response was…”No. I don’t want to fix toilets but if I fix one a month and get paid $650 to do it that would be fine by me.” I consider this a part time job/ small business that will naturally require some of my time. By doing this, I was able to create some expectations on the time and money I have to commit personally to this investment. Furthermore, I put in a best case scenario and worst case scenario of owning the property and even a time line with an exit plan in place if I hated it. – Eric
Real Estate Resources
In addition to the helpful suggestions from readers, I’ve found some sites and forums with lots of knowledgeable real estate investors sharing their experiences:
- Mr. Landlord: The site behind the free newsletter I mentioned before.
- Creative Real Estate Online: Very active forums focused on financing.
- Real Estate thread at Fatwallet.
We’re on the MLS mailing list for the rental properties in our area. In addition, we’re keeping our eye on FSBO and Craigslist.
To determine if the property will provide a positive cash flow and decent rate of return, we’re using various spreadsheets, with number obtained from the MLS listing, our electric company, and the seller’s Schedule E. Here are some that I’ve found, in addition to the homegrown one my partner created:
- Property Analyzer Spreadsheet: Great for IRR calculations.
- Investment Property Calculator: Basic Cash Flow Calculator.
If it passes our initial review, has a positive cash flow, and a decent rate of return, we’ll set up an appointment to view the property. We have plans to see a handful more soon.
We found a bank (Bank of America) that’s willing to look at one year of self employment income (with at least 2 years in the industry), so we should be able to secure financing for the residential (1-4 unit) properties through them, with 25% down.
I’m also tentatively planning to apply for the loans in Scott’s name only to keep my credit card arbitrage running smoothly in my name. I usually try to avoid any joint financing when possible, to keep both of our credit reports looking better.
We’re also exploring the possibility of using seller financing, or land contracts, too.
Everything I read, says don’t have a partner. However, I think that there are pros and cons to any situation. I’m not saying it’s going to work out perfectly, but in this situation, it’s worth a shot. We’ve had a professional business relationship for about 6 years, so we know each others strengths and weaknesses.
We’ll have our lawyer draft the partnership agreement with a predetermined exit strategy in the contract. That way, if it all goes downhill, there’s a way out.
This is actually one of the reasons that we’re exploring the partnership. The other party plans to do all the management for a fixed percentage of income. This was the single reason that kept us out of real estate investing in the past… no interest in having to manage it. He’s putting together his outline of duties for us to check out.
We’ll be viewing some of the properties in the next few weeks that passed our analysis. I’ll keep you posted on how it goes…