Editor’s Note: Thanks for taking part in “Wealth Week 2015.” Over the next several days, Mark’s going to lead us through the best wealth-generating ideas of all time. Yesterday, he revealed the simple strategy that made him $6 million last year. Today, he shows you how to start investing in rental real estate in less than 12 hours…
 |
From Mark Ford, founder, Palm Beach Research Group: Investing in rental real estate has been very important in my financial life. It’s the largest asset class I own (outside of my operating businesses).
So, if you think it could be important in yours, you should devote one hour of each day to building your own rental real estate empire.
Now, I get it. You’re busy. You have a job that consumes the bulk of your productive time. You have family commitments. You have bills to pay, insurance, and taxes to keep up with. You have a stock portfolio to manage.
And you have to read all those good publications the Palm Beach Research Group keeps sending you!
Yes, you’re busy. But you have enough time—or can find enough time—to get into rental real estate. It’s just a matter of revising your priorities.
What follows is a simple, step-by-step, hour-by-hour instruction manual on how to get started.
 |
Step One: Get a basic understanding of how the game is played.
Time Investment: No more than two hours.
Begin by getting a general idea of the sort of property you want to buy. There are many factors to consider in buying rental real estate. But at this point, you should focus only on the most important ones:
- The type of property
- The neighborhood
- The price of the property
- The amount you can charge for it as rent.
You can learn everything you need to know about these four factors by spending an hour or two reading the first two lessons of Rental Real Estate 101, the 10-part introductory course I wrote for the Palm Beach Wealth Builders Club.
|
How to Buy “Right” What does it mean to buy rental real estate “right?”
One of Mark’s rules: Never invest in a property with a GRM above “8.” The GRM (gross rent multiplier) is a ratio that tells you how much you should pay for a property given the amount you can expect to make each year in rent. Here’s the formula:
GRM = Selling Price/Gross Annual Rent And here’s how it works… A house you’re interested in buying rents for $1,500 per month. That’s $18,000 in rent each year ($1,500 x 12 months). Mark’s rule tells you, as an investor, you shouldn’t pay more than eight times your annual rent for the house. In this case, it’d be $144,000 (8 x $18,000). So, if you can’t buy it for $144,000… that’s your cue to say no to the deal. |
 |
Step Two: Contact a bunch of local brokers.
Time Investment: No more than two hours.
Let’s assume you’ve done the research and have a good idea of the kind of property you want to buy. The next step is to compare what you think you want with what’s actually available.
You can do that one of two ways: by pounding the pavement yourself, or by finding a local real estate broker (or two) who you can trust.
I consider local brokers to be experts in pricing because they spend most of their working lives negotiating prices, representing buyers or sellers, and sometimes as landlords and renters.
Any broker who’s been active in the business for at least one year will have ready and reliable numbers to give you—the numbers you need to move forward.
(When you work with brokers, keep this in mind: They can be very useful in helping you find properties and negotiate prices… but NOT in making decisions for you. You are the sole decision-maker in every transaction. Do your own research and stick to the criteria we outline in our courses.)
Start with a Google search for real estate brokers in your area. Collect a dozen or so email addresses, then send each a short letter explaining you’re looking to buy houses in the area, with the specifications you’ve identified. Request a 15-minute phone meeting, preferably in the morning.
You should get, within 24 hours, three or four responses at a minimum. (I did this recently—just to test it—and got eight responses out of 12.)
Total time elapsed so far: four hours.
 |
Step Three: Meet with three of them.
Time Investment: No more than two hours.
Make three phone appointments. Meeting face to face is time consuming and unnecessary at this point.
If you can, schedule all three appointments back to back. Allowing for five minutes between appointments, you can get all three done in one hour.
There are two advantages to scheduling appointments this way.
First, the pressure you’ll feel to finish each meeting within 15 minutes will keep you on topic.
Second, listening to three people answer the same questions, one after another, will help you assess the information you’re getting and decide which broker you like best.
Begin each phone interview by saying: “My goal is to find a broker to help me buy income-producing properties in the area. I’m looking for someone with knowledge, experience, and integrity… someone with whom I can have a profitable, long-term relationship.”
The broker will probably say something like, “Well, I certainly hope I can help you. What particular sort of properties are you looking for?”
You say: “Either single-family homes or small commercial properties I can buy for no more than eight times gross yearly rent.”
He might ask you for clarification. If so, explain the “gross rent multiplier” calculation. Say, “I’ll do a more detailed analysis before I buy, but I’m not interested in looking at anything that has a GRM higher than that.”
Then, ask, “Do you think you can find such properties for me?”
He will probably say yes, with some sort of qualification.
Say, “Well, I don’t want to waste your time or mine, so I won’t look at anything that fails to meet that standard. In fact, there’s a chance if you bring me a property with the right numbers, I’ll buy it sight unseen. I don’t need to see the property to make a decision.”
At that point, he’ll probably say he’ll get back to you. Ask him to give you a definite date. Thank him.
Having this conversation will save you a lot of time. Many brokers like to throw a heap of properties at a client because it’s easier than a more disciplined approach… and because they know there’s a chance the client will spend more than he initially intended (and thus, increase their commission).
Don’t let that happen. Make it clear from the beginning you’re the boss, and the broker must respect your demands.
Another benefit of having this conversation is you’ll eliminate the possibility of falling in love with a property that doesn’t meet your criteria. (Frankly, I have a weakness for properties with “potential”—houses that would be so much cuter with a picket fence, a new kitchen, a different paint job, etc.)
The business of rental real estate is a business of numbers—buying right, but also maintaining and managing right. You have to stick with the numbers. And staying away from the property makes it easier to do that.
Total time elapsed so far: maybe six hours.
 |
Step Four: Pick the right neighborhood.
Time Investment: About one hour.
If your market is reasonably healthy (i.e., active and not overpriced), each of your three candidate brokers will send you property suggestions within 24 hours.
Let’s assume you have a dozen fact sheets in front of you (four properties each in three different neighborhoods in or around your hometown). Now, it’s time to narrow down the 12 options.
First, verify the rental potential of each of the three neighborhoods.
To do that, call or email a rental broker (someone who specializes in rental properties).
Posing as a renter, tell him you’re looking for the kind of property you’ve identified and can pay no more than $X. In this case, $X should be 20% less than the monthly rent you’ve identified as your target rent.
Tell him you’re interested in only three neighborhoods (the neighborhoods you’ve identified). Tell him you’re somewhat flexible with the pricing, but you can’t budge on the kind of property you want—number of bedrooms and baths, etc.
Let him do his thing. And when he gets back to you, pay attention to what he says.
What you’re hoping to hear is he can’t get you such a home for that price in that neighborhood… but he can perhaps get one if you’re willing to pay another 20-25%.
This will tell you the rental prices you’re looking to get are fair market estimates. And by comparing prices and availability in the three neighborhoods, you’ll get a feel for which neighborhood is best for you.
Total time elapsed so far: seven hours.
 |
Step Five: Pick your first property.
Time Investment: One hour.
You’ve narrowed down your 12 options to four. Now, you have to narrow those four down to one. Or do you?
Investors new to real estate sometimes think they should be looking for the one “best” option out there—the one house or commercial property that’ll give them the highest net rent and best long-term appreciation.
In theory, there certainly is one “best” option. But in reality, there’s no way you can possibly determine what it is in advance.
Many factors affect the eventual value of any particular property. Not all are possible to predict. (A major builder may come in and buy up adjacent lots. A municipal project may come into play. Any number of things could happen.)
Don’t worry. Express interest in all four houses. Make tentative offers 15-20% below the market. Then, sit back and let the sellers come to you.
The sellers’ brokers will want you to put money down and sign a contract for one of the houses. Resist them. Push the conversations about pricing as far as they can go.
If you do have to put in a formal bid or include a deposit, you can do so without worrying. If they don’t hit your bid, you’ll get the money back.
The back and forth of bidding may extend for several weeks. But the actual time it takes from your schedule should be very small. We’re talking about a half-dozen two-minute conversations.
Total time elapsed so far: eight hours.
 |
Step 6: Figure out the financing and close the deal.
Time Investment: Three to four hours.
Like the bidding process, finding financing and closing on the property normally takes several weeks. But your time involvement, again, is relatively small.
Filling out some forms and attending two or three meetings of an hour or so each should do it.
This last step is sometimes a bit frustrating, as working with banks can often be. Just keep in mind it’s all very routine, and your broker, banker, and lawyer will be helping you get it done.
Total time elapsed to make your first rental real estate deal: 12 hours.
Reeves’ Note: Mark’s made more than $15 million worth of real estate deals and hasn’t lost a single dime. It’s no surprise real estate is the second largest contributor to his wealth.
It’s just one of the topics he covers in his upcoming—100% free—live webinar: “How to Add a Million Dollars to Your Net Worth—Without Touching Stocks.”
If you’re ready to start collecting those rent checks (median U.S. rent is now $1,584) in your mailbox each month, click here to reserve your spot with Mark.
UPDATE: Mark’s live webinar has ended, but you can still gain access to his teachings inside the Wealth Builders Club. The Club is only open to new members (at a stunning discount) for a few more days…
Mark on his favorite day of the month—the first.