5 Start Up Costs for Real Estate Investors

We’ve discussed the regular expenses you should account for as a real estate investor, but what should you expect when you’re just getting started? There are a few start up costs you will incur when you begin investing in real estate.

The types of properties that we provide at Morris Invest are single-family homes in the Midwest. These properties are typically in the $40-50k range. For this kind of investment, there are a few costs you should expect when you’re getting started.

  1. Setting up your business entity. Typically, this will be an LLC. There are a few ways to do this, but I typically recommend going right to the source—the department of state website where your property is located. In some states, you may need to use an attorney. To set up an LLC, you should expect to pay anywhere from $100-300.
  2. Insurance on your rental property. This amount can vary, as it depends on your location and coverage. Typically, I pay anywhere from $400-600 per year for rental coverage and liability insurance.
  3. Setting up a business checking account. You’ll need to have a business checking account to collect rent every month. Some banks charge a monthly service fee as well as minimum opening deposit. Local banks may have free accounts, so shop around.
  4. Closing costs. When you purchase your rental property, the title company will charge fees. A good rule of thumb is anywhere from $300-500. This amount accounts for running a title search and recording the deed.
  5. Landlord license. This cost is not applicable in every state, but some states do require a landlord license. If your property is located in a state that requires a landlord license, you can expect to pay $100-150 on a yearly basis.
We’ve discussed the regular expenses you should account for as a real estate investor, but what should you expect when you’re just getting started? There are a few start up costs you will incur when you begin investing in real estate.

Evaluating What You Own Vs. What You Owe

Leveraging means taking what you own, and using it as collateral to make further purchases. In real estate, leveraging is how successful investors are able to quickly and effectively grow massive portfolios. 

If you've seen our video on the BRRRR Method, you know how powerful this strategy can be! But it rarely just falls into place, it's something you should strategically plan. You never want to be over leveraged or acquire crushing debt.

In order to leverage well, it’s imperative that you know where you stand. The first thing you should do is assess all of your liabilities. This includes all of your debts. Include the remaining balance on your mortgage and car loans, any credit card debt, a HELOC, etc.

Then determine what your assets are, and how much they are worth. Include your real estate investments, cash accounts, stocks, and 401k. Other assets could be college savings accounts, vehicles you own, and art. Include anything that is cash, or could be sold for cash.

The next step is to subtract your total assets from your total liabilities to calculate your total net worth. In our family, this is something we do often to ensure we are on track to meeting our goals.

Personally, we follow the advice of Natali’s dad, who recommends that you should own up to 30% of your portfolio, and be no more leveraged than 60-70%. To hear more about how we balance assets vs. liabilities, check out episode 106 of Investing in Real Estate! 

Leveraging means taking what you own, and using it as collateral to make further purchases. In real estate, leveraging is how successful investors are able to quickly and effectively grow massive portfolios. But you've got to know your net worth to do this effectively.

5 Crucial Tips for Communicating with Property Management

Working with an experienced, qualified property management team is paramount to a real estate investor’s success. A property management company finds the right tenants, collects the rent, and does all the legwork so you don’t have to! It’s important to remember how valuable your property management team is, and to treat them with respect.

Occasionally, it seems that certain investors get a big head when it comes to dealing with property management. They fall prey to the mindset that they are in charge, and the team works for them. This is not good business practice, and it’s certainly no way to treat people.

It’s important to be kind, and remember that the property management team is comprised of human beings. We as landlords should treat our property management companies as team members. Without their hard work and dedication, we would not be able to do what we do. With the help of my property management teams, I’ve compiled a list of five things you can do to collaborate with your team and make their job as easy as possible:

  1. Fix the things they ask you to fix. This one is really simple—when they contact you regarding a leaky faucet, rattling heat vent, or a broken toilet, give them the green light to fix those issues. It might seem like some of these complaints are small to you, but to your tenant, the little things compile. When you anger your tenants, you make your property management team’s job harder.
  2. Let them do their job. You hired this team because they’re qualified to screen the tenants, and collect rent. Don’t try to micromanage them. Don’t come to them with a list of additional demands or tasks. They know what to do, and how to do it!
  3. Don’t be greedy with pricing. Your team is already established in the market, and they know what price is appropriate. Trust their judgment and experience.
  4. Get your account numbers right, and don’t change them last minute. Most property management companies will pay your rent via ACH. If you decide you need to change the account where your rent is deposited, give plenty of notice.
  5. Take care of all paperwork in a timely manner. When you onboard with a property management company, they’ll send you a packet of paperwork to complete. This stuff is important! It’s how you receive your payments and important tax documents.

Want to know more about dealing with property management? Check out our list of 5 questions you should ask a property management team! 

A property management company finds the right tenants, collects the rent, and does all the legwork so you don’t have to! As a real estate investor, it’s important to remember how valuable your property management team is, and how to work well with them.

Is Real Estate Investing a Get Rich Quick Scheme?

I recently heard the criticism, “real estate investing is a get rich quick scheme!” Initially, I vehemently defended it. However, the more I thought about this idea, I realized it was true. Real estate investing IS the fastest way to build wealth!

Okay, so I wouldn’t call it a scheme, but it’s certainly a mode of getting rich quickly. There is no other investment vehicle that can enable you to reach financial freedom in a short period of time.

First of all, appreciation of properties builds wealth. Residential real estate appreciates on average 4-5% each year. When your properties appreciate, your net worth increases. 

Additionally, each rental property brings in cash flow every month. When your tenants pay their rent, you’re building wealth. A real estate investor can bring in passive income while they’re on vacation! That is real wealth.

If you have loans, each payment pays down the principle on the mortgage. And when the principle decreases, you’re building up equity. More equity = higher net worth!

Lastly, the tax benefits are incredible. In real estate investing, the deductions and write-offs seem endless. Not to mention, real estate investing offsets overall income tax, and you can claim property depreciation.

I recently heard the criticism, "real estate investing is a get rich quick scheme!" Initially, I vehemently defended it. However, the more I thought about this idea, I realized it was true. Real estate investing IS the fastest way to build wealth!

4 Traits of an Investor Friendly City

When you’re looking to make a solid real estate investment, the ultimate goal is cash flow. You want your cash flow to be largely hands-off and passive, and that’s why it’s pertinent to do your research about your rental markets.

Once you identify a potential market, you should consider if the city meets the following four requirements that make it conducive to buy and hold investing:

  1. The first thing you should examine is how permits work in that particular market. For example, in some states or cities, it can take seemingly forever to obtain the correct permits. Pulling permits is part of the process; we do it on every house we renovate, so you want that to be an easy and seamless procedure.
  2. Also, you should ask if utilities companies will be friendly to investors. It’s common to be charged a fee to put a utility bill under the name of your LLC, but some companies ask for much more. For example, we once had a utilities company want us to meet in person. And since we live out of state, they demanded that we notarize our application.
  3. Another thing to consider is rental licenses. For some reason, some states charge a fee for you to be a landlord. Not all municipalities charge this. In fact, most don’t. However, you need to be prepared and do your research ahead of time.
  4. Lastly, you should consider if the state itself is landlord friendly. This means, how do they handle evictions? What are their laws like surrounding security deposits? Again, this is just another thing to consider.
Once you identify a potential rental market, you should consider if the city meets the following four requirements that make it conducive to buy and hold real estate investing.

The Best Long-Term Real Estate Strategy

One lesson I learned early on as a buy and hold investor is how important it is to continue purchasing properties. When I started attending real estate meetings, I would ask experienced investors what their biggest regret was. They would always answer, “I regret selling rental properties!”

Typically when investors sell their rental properties, they do so in a panic. Maybe they’re scared about the outlook of the market, or just generally nervous and fearful. Doing so is a mistake; it relinquishes all the benefits of receiving cash flow.

Certainly it’s beneficial to assess your portfolio periodically. If you find there is a particularly weak link, perhaps you should consider selling it. Let’s say the cash flow isn’t working, or the city raised the taxes through the roof, then you might want to sell.

But overall, you shouldn’t be trying to sell properties regularly. In fact, I find there are very few instances where it’s appropriate to sell a property. I learned early on that very successful investors keep their properties until the end of their lives, and then pass the investments down to their children or other heirs.

Not only that, high-level investors continue to buy nonstop! If you stop purchasing properties, you forfeit all of the incredible tax benefits that come with being a real estate investor!  The deductions that come with purchasing rental real estate are incredible.

So when people ask about my exit-strategy, I inform them that I don’t have one. I plan on buying until I die, and you should consider doing the same. 

One lesson I learned early on as a buy and hold investor is how important it is to continue purchasing properties. Here's why.

How to Fight a Bad Appraisal

Getting a low or bad appraisal on a rental property can often stop a deal dead in its tracks. It sounds intimidating, but there’s good news! There are a few key ways to fight a bad appraisal, which is also known as a reconsideration of value.

There are many factors that an appraisal contains, so you’ll need to do your homework before challenging an inaccurate report. If you follow these five strategies, you’ll be able to make a strong and concise argument.

  1. Write down your specific argument. Write a paragraph explaining why you think the appraisal is wrong, giving details.
  2. Check your emotions. It’s important to remove the emotion. Don’t point fingers or get angry; focus on the facts and be polite.
  3. Include comparable properties. This is important because it is the detail that most appraisals hinge upon! Find three recently sold similar properties to include with your document.
  4. Consider adjustments. Adjustments are metrics that influence the value of the home. There may be a reason the appraisal is lower than you expected. For example, if the home is on a busy street or close to a gas station, it’s possible that the appraiser adjusted the value accordingly.
  5. Keep it simple. Write an opening paragraph, bullet points of your argument, and a closing paragraph. An appraiser doesn’t have unlimited time to read a novel.

If you are able to compile a clear and detailed argument after an inaccurate appraisal, chances are you can have your property reassessed. Appraisals will vary, but with this strategy you can ensure that you’ve done everything in your power to make sure the report is correct. 

Getting a low or bad appraisal on a property can often stop a deal dead in its tracks. It sounds intimidating, but there’s good news! There are a few key ways to fight a bad appraisal, which is also known as a reconsideration of value. | real estate investing | rental property