https://www.youtube.com/watch?v=qgv9LjYlgME
Today, I want to talk to you guys about buying a rental property. Um, buying a rental property is something I'm hearing a lot about right now. I'm getting tons of calls from people who are like, "I want to buy an investment property, you know? Here's my goals, blah, blah, blah," and I think it's really important that we have a serious conversation about it because I'm having this conversation every single day. And I think that buying an investment property can be an amazing way to build a real estate portfolio, as well as have, you know, we're always thinking about income streams for when we retire. I know I am. I am terrified. I am so scared of retirement, guys. I am so worried about where money is going to come from that I get it. We're all thinking of streams, right? And if you have a renter paying a mortgage, the goal is to have them pay off the mortgage before you retire. And then you've just got another stream of income, right? Great, okay. Sounds amazing. Rates are so low. There are some cheap houses in the United States in certain pockets. Time to become a landlord. Not so fast. Not so fast.
So, before you guys even start to think about like the mortgage part of it, okay, I want you to do some math. Yes, math. I know. No one does math anymore. I mean, the basic conversation I hear goes like this: "Oh my god, I found the cheapest house, I'm gonna buy it and rent it out," and I go, "Okay, cool. How much is it gonna rent for?" "Well, I don't know." Okay. So, how much do you have in savings right now? You know, and it can be a couple of different things, but a lot of times it's people who don't quite have a lot in savings. They might have enough to put down a down payment, but not much more than that. And the one thing that I can tell you, being a landlord is, guys, you've got to have money to put down. You've got to have money for closing costs, and you need to have extra money for two big things: What if the tenant doesn't pay you? And repairs. Repairs, maintenance. I mean, you'd be surprised the stuff that happens the moment you rent out the house. I had a house, um, recently that I've been living in while my house was being remodeled, and when I left, I rented it. About the moment, and this is an amazing tenant, like, oh my god, fantasy tenant. Everything started breaking. It was like, "Oh, there's water coming in through the wall," and I'm like, "What? What the cow?" And thankfully, I had money set aside. Had I not had money set aside, I could have been in a big issue. And that's what you guys need to talk about and think about. So let's talk about the things that I always come back to when people talk to me about being a landlord and buying investments. Things to consider.
Okay, so number one, how much money do you have? If you guys have enough for the down payment and nothing more, I urge you. I urge you. First of all, you're gonna have to save more because as a lender, we require reserves. Yes, reserves. What reserves are is your principal, interest, taxes, insurance, if there's HOA, all of that, the monthly payment, and depending on the loan program, it's anywhere from two to six months for every property you have. Okay, so you've got to have some money sitting aside in the bank. Can you use your 401k as reserves? Yeah, generally, but it's not dollar for dollar. So, first of all, down payment plus reserves. Okay, how much down payment? Well, if you're doing a real investment, guys, it's a minimum of 20% down. I'm generally recommending 25% down because the rate spread is so different. But if you're trying to get in with 20%, like I always talk about buying points, we get really in the weeds on that. So, key thing, you've got to have at least 20% down, and you need some reserves. Okay, now the second thing is, who are you going to rent to? And what are... Can you hear my dog growling? Really? She just sits in my office all day long and growls, and it's like, I don't know. Okay, where was I? Um, now I've got to go back because I was distracted by the dog. Um, okay. Oh, local laws, local and state laws. Look them up. Look them up, guys. You gotta look up these laws before you buy anywhere right now as a landlord. And the reason is what we saw when COVID hit, uh, Google California, Google New York tenant laws, and what the governors did. There are a ton of landlords that couldn't... They didn't have any... like if the tenants didn't pay, they got no money, guys. And it was okay. It was okay because there was additional state laws put into place that protected tenants, which is great for tenants, terrible for landlords. If they wanted to sell the house, let's say that the landlord lost their job, right? The landlord, let's say they have a business. They lost their job. They're like, "Oh my god, I need some cash. You know, I've got to keep my everything." They couldn't sell their house because there were laws that you couldn't sell the house out from underneath the tenant during COVID. So, you really want to check those state laws because you could end up in a position where the person you're renting to can actually pay the rent and chooses not to and uses these types of laws to protect them from you. Seriously, you have no idea the stuff I've seen this year. It is dark. It is gross. Like, I gotta tell you, I am so over people just taking when they don't need to take. It's like, if you're in trouble, take. If you're not in trouble, and you're just taking for the sake of taking, you're a bad person. There's going to be bad karma that comes to you. And we saw so much of that with landlords and tenants. So, you really want to be aware of what are the state, the local, the state, and the local laws and legislations when it comes to tenants, okay? Now, another thing to consider is a lot of people are like, "Oh, well, I want to do an Airbnb. I'll make so much money doing an Airbnb." Two things: Are you locally allowed to do an Airbnb? If so, for how many days is the minimum? And once again, COVID, a lot of those areas got wiped out, and everyone who had an Airbnb was not allowed to rent it at all. Yeah, serious, guys. So, that's why the conversation I'm having a lot with people is, "Hey, look, if the tenant can't pay the rent for six months, can you? You know, without tapping into your reserves because I never want anyone bankrupting themselves to keep a house. Like, can your income support that rental payment? If your income can support that rental payment, cool. If not, you guys gotta be really, really careful."
Okay, now here's another thing: If you're buying out of state... Sorry, guys. This is gonna be a long video, but if you're looking at a rental property, you need this video to counteract all the videos on YouTube that are telling you how to buy 20 investment properties. So, if you're buying out of state, who's going to manage the property? How much are they going to charge you to manage the property? How does that affect your cash flow, right? If your mortgage payment is $700, and you're renting it for $800, like that's what you're seeing as the local rents. You may think, "Oh my god, cool, I'm going to make some money." Really? What if you have a property manager? You're going to need a property manager if it's out of state because who's going to go by to make sure the tenants aren't tearing it up? And I have seen a lot of that where the clients are like, "Oh my god, you'll never believe what these tenants did to my house." And I see the pictures, and I'm like, "What?" And it's like, "Cindy had... His is spelled like 'hs' and it's like, 'F Cindy,' and it's like spray painted on the walls." And you're like, "What happened here?" And the landlord's like, "Oh, apparently he cheated on her with Cindy, so she, like, got real. There's, like, baseball bats. I could beat in the walls in there was... It was insane. It was insane. And that landlord got to spend about $1,000 fixing the work. What's he gonna do against that tenant, right? The tenant has a security deposit of what, $1,000? That's not going to pay for it. Is he going to take the tenant to small claims court? I mean, based on this situation, the tenant had no money and was barely scraping by. So, once again, the landlord is stuck with the bill.
Okay, so here's the deal. It's very... It's a great idea to buy rental property as long as you can afford the problems. If you are taking every penny you have, stretching to buy a rental property, you're putting your own financial health at risk. And I know there's so many videos that are like, "Just stretch. Just scrape. Just... You can do it, guys." You have to make sure you're protecting yourself and your family first. You need money to make sure that you guys can eat and pay for the roof over your head before you start dealing with other people paying for roofs that you own. Because there is a very good chance, especially right now with what's happening in the market, that they're not going to get paid. They're not going to pay, and you're going to get stuck with the bill. So, pay attention. If you are looking at investment properties, the areas that you're looking at buying in. I love military towns. I think they're amazing because I really enjoy people in the military because they're so nice and respectful, but they pay, right? You know, the military, the jobs, even if we hit a recession, we still need the military. Like, the need for protection for our country is not going away. I love those towns. College towns used to be ones that I was a big fan of, but now that all these schools are online, all those landlords are hurting right now. They were used to the students coming in and paying exorbitant rents. Those students are now online. So, you really want to think about, okay, this area that I'm looking in, what are the local industries? Who's going to pay the rent? Who's my tenant? And how safe is my... my mortgage payment that I'm counting on this other person to pay from outside factors, such as COVID, job loss, all that stuff? And it's... It's a hard gamble, guys, but I've got to tell you, you really need to be careful.
And one last point, although I think this might be 14 minutes. So, I'm really sorry. I've got to get a volleyball. Um, like that Tom Hanks movie that I talked to. Okay, um, one more point, which I forgot. It's gonna come to me in two minutes. This is why I should actually write a script, but... Oh, god, guys, I lost it. And the dog's growling again. We'll have to do a follow-up. I'm so sorry. I forgot the last point. It was super important, but I have already lost it. So, thank you for watching. I hope this answered some of your questions. And yes, there will be a follow-up to this video because I'm sure in 10 minutes, I'm gonna go, "Oh, that's what it was." So, thank you for watching. Uh, subscribe, like, hate. However, you feel, be real.