7 “Golden Rules” That Will Make You Richer with Rentals

0:00There are bumps in the road on every investing journey, but what if you could dodge the most common ones and fast track your success? Today, we're unpacking the seven golden rules rookie investors must know, like correctly estimating rehab costs and tracking key contract deadlines that could mean the difference between just scraping by and building real life-changing wealth. We're going to help you learn and implement these rules early so that your next deal stays on budget, cash flows, and puts more money in your pocket. it.

0:35This is the Real Estate Rookie Podcast, and I'm Ashley Kerr. And I'm Tony J. Robinson. And with that, let's get into golden rule number one, which is always model the full payment. And this is about analyzing deals. I think what we see with a lot of rookie investors is that when they think about their payment, they think about their principal and their interest payment. But as we all know, that's just one part of what we typically pay on a monthly basis because we also have property taxes. We also have insurance costs. And those are things that you want to make sure you include, or maybe even HOA dues, right?

1:11We might tack that in with your monthly payment as well. So making sure that you're accounting for everything, your principal, interest, taxes, insurance, your HOA, maybe even PMI, right? Just making sure all of those are included in your payment. I think another one too is your bookkeeping. If you're not tracking your expenses and the income on the property and you're hiring a bookkeeper to do that, or you're paying for some kind of software to actually track your income and expenses, QuickBooks these days, my gosh, I think it's up to$90 or something a month. So think about that too, your bookkeeping and then your tax preparation fee.

1:49Your CPA will most likely charge you a little bit more because now you have this property. And especially if you have an LLC, they're going to have to do a whole separate return. So I think those are kind of missed too. And then the all-in payment, you're just going to take what they would charge and break it down over 12 months to make sure that you're accounting for that. That's why I like that rookies would use a pre-built tool. So if you head over to biggerpockets.com slash tools, you can see all of the different calculators that we've built out for different investing strategies. And the reason using something like the BP Calc is so helpful is because it's impossible to forget some of these things that rookie investors typically forget because the calculator literally will not process if you don't put something in for these values.

2:33So we talked about the payment, right? But other things that rookies should be considering as they're looking at deals are your reserves. You know, you're having ideally at least six months of expenses. You know, three months maybe like a minimum, but six months of reserve. So six months of that payment set aside just in case something hits the fan. You know, gosh, your utilities costs, if you're maybe covering some of your utilities for your tenants. Vacancy costs, right? Like no property is always booked or always occupied all the time. So at some point there might be some turnover. And can you factor in those costs?

3:09Capital expenditures, right? things like getting a new roof, a new HVAC system, new water heater. Those are all things that will need to be replaced at some point. So just making sure that you're accounting for all of the expenses because the rent price and your mortgage, the difference between that is not your net profit. And I think that's where a lot of folks get caught up is like, oh, I'm going to rent this for 2 ,000 bucks. My mortgage is only 1 ,600 bucks. I'm making$400 net profit every single month. That is not the math you want to use. You want to make sure you account for all the different costs to go into actually owning and managing that property.

3:41All right, moving on to golden rule number two, it's a budget for more than paint. If I had like a nickel for every time I heard a rookie investor say, it's just a super cosmetic fix. Like I just need some touch of paint and then I'll be good. I probably wouldn't need to invest in real estate, right? But I think for most rookies, as they get into it, they realize that to either, if it's a rental, command the amount of rent that you want. If it's a bird to get the ARV that you want. If it's a flip to get the sale price that you want. Typically, there's more that goes into that than what a rookie investor initially accounts for, what they anticipate for.

4:15I think the one thing that we know is that there's always some sort of unknown when you go into a rehab project. And just because we see something visually, as we're doing our initial walkthrough, once you start doing things, opening up walls and exploring what's actually going on, there's a good chance that something else could pop up. I've talked about my deal from hell in Shreveport. And part of what made that deal so challenging for us was that when we made the decision to sell, we ended up uncovering an issue with the foundation. And it had been a rental for us for, I think, two years or maybe like a year and a half at that point already.

4:50And it was fine, but it was during the process of getting it ready to sell that we uncovered this other issue. And it's crazy because we had done the rehab, but either way, we had to fix the foundation on this property that wasn't even being rented. So there's always, I think, an opportunity for unknown expenses to pop up. So make sure you're always budgeting more than what you think a deal might need early on. And I think too, even if it is just paint, there's a lot more that may go into it just on that aspect of if you're going to do the painting yourself and you're just like, it's just paint.

5:23I know I need a five-gallon bucket of paint that should be good or whatever. You need to buy all your rollers. You need to, you know, tape off the windows by your tape, not your, you know, if you want to lay the blankets down or whatever. Like there's so many other expenses unless you're already outfitted to be a painter that you'll need to actually do the painting and to do a good job. So like the first thing you said when it was like, it's just painting, a very common thing that we didn't budget for for a while was new outlets and outlet covers. So like a lot of properties near us have the old yellowish and like the off white.

6:04And now we've transitioned to either like white or like the almond color even. And so like those add up. Like outlet covers are pretty cheap, but like you need how many for each room? And then to actually just if you replace the cover, then your actual outlets aren't going to match. So you need to replace both. Um, but yeah, just like little things like that, that you'll notice as you're painting will really make the room seem better. Yeah, that's true. Even if you're just painting, there's some hidden costs there. I think what I would encourage most rookies to do is that as you're, as you're trying to create your scope of work, right?

6:41The things you want to change or that you feel need to be changed within a home, um, like come with pictures of the comps, right? Of the comparable properties that you, you think yours should be similar to properties that have recently rented properties that are recently sold. and just like literally if you can print them out even better and just walk through your property with those photos in your hand and just compare. Okay, I'm in the living room of our house. I'm looking at the photos of the other living room. What's different? What do I need to change and go top to bottom, left to right, all the way around the room, 360 degrees.

7:11If you do that, you'll have a decent starting spot for your actual scope of work. And I think you might start to pick up on things like, man, these are yellow outlets. Those are white. So we the actual comps as you're creating your scope is super beneficial. You could always ask your real estate agent too. They walk how many properties and they could say, oh, I would recommend changing this, changing this, changing this. These may be little details, but it's something they're consistently seeing in some of the homes that are selling at top dollar, like the landscaping, having that wow factor when you just step out of the car onto the property and you're not even in the house yet.

7:49Okay, you're thinking of how you can rehab the house, but like is there even like the landscaping or different things that you can do but I think having a real estate agent come it's a great idea to have them go through and just tell them like if you were selling this property and hopefully they would be the one selling it in the end give me a list of every little thing that you you think should be done nitpick it go through it and I bet they could come up with a very very detailed list even if you don't end up doing those things you can at least get an idea of what are the actual major things that will move the needle.

8:24And I think the last two pieces are, A, get multiple bids. The more folks you can get through the property to give you a bid, the better. And then second, always add a contingency. I would say for Ricky investors, if you get a budget of$50 ,000 at 20%, so add another$10 ,000 to your budget just to be safe. Because again, you're going to miss things. Things might go over budget, it's almost guaranteed as a new rehabber that something will not go according to plan. So having that budget begin from the beginning, super important. Okay. So number three is going to be prioritizing your cashflow over cute houses.

8:59And Tony, I feel like I'm being personally victimized here in this year because I've definitely been like, oh, that house, I just want that house and try to do everything to make the deal work. But You have to stay focused and realize that even if it's a cute house, what is your goal? What is your strategy? And make sure that that deal fits that specific buy box. I think it's so easy for rookie investors to get caught up in looking at houses that are just cute as opposed to houses that actually support their goals. So let's say you've got a goal of getting to$10 ,000 a month in cash flow, but you also don't want this massive portfolio where you're managing 100 units.

9:39And you say, I feel comfortable managing at most 20 doors. okay, well,$10 ,000 a month at 20 doors, that means you need to get at least$500 per month in cash flow from each door. So with that as your kind of buy box, that should be more important than how cute is this home or how much would I want to live here personally. So I think being able to have a super clear buy box that you can fall back on is much smarter and a more efficient way to build your portfolio than just going after houses that pass the vibe check, that have the acute curb appeal that, you know, it's in the neighborhood that you love and say, well, it's actually going to help me achieve my goals.

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13:35Plus, they have tons of other features like recurring payments, multi-user access, and free wires to save you more time and money. Spend less managing your money and more time growing your portfolio. Ready to automate the busy work and get back to investing? Baseline is giving BiggerPockets listeners an exclusive$100 bonus when you sign up at baseline.com slash biggerpockets. Okay, welcome back. So we've screened the numbers. Now let's protect your downside. Okay, so number four, lock in strong purchase agreements. So rookies waive inspections and miss due diligence deadlines, which this can lead to you losing your earnest money deposit.

14:17So this also goes along with staying organized when starting the acquisition process of your property. Yeah, I think we saw this a lot, especially as the market was kind of going crazy when interest rates were super low, but people were doing all kinds of things to get their offers accepted where they were waiving contingencies and they were buying a lot of property sight unseen and really kind of stepping into contracts that I think would be pretty risky for a new investor. It's different if you're a seasoned investor who's bought and sold dozens of homes in that same area. But if you're doing this for the first time, I think the inspections are there to make sure that you don't get yourself into a position where you do end up losing a ton of money.

14:56So I think there are some must-have contingencies that all rookies should include. And to me, that's your inspection contingency. Part of this gives you the ability to actually get a property inspection, do your due diligence, make sure that everything's working as it should be, or at least you know what the extent of the damage is for anything that's not working. Second will be like a financing contingency, making sure that you can actually get lending on the deal? An appraisal contingency, like what happens if we go under contract at Y, but the property only gets appraised at X, and who's going to help us get that delta?

15:30Clear title, right? I mean, ideally, I would never want to purchase a property with some sort of title issues. Insurance, right? Can you actually insure the property, which is becoming a bigger issue? And then sometimes maybe like a partner approval, depending on the situation of the deal. But I say those are like the core ones. I think the thing that gets more people in trouble is when they start adding like unnecessary contingencies or like contingencies that maybe might make sales a little bit more like nervous or cautious. But those ones, inspection, financing, appraisal, insurance, I think those are all pretty straightforward and standard contingencies to add.

16:05So one of the things that you can do to make sure that you don't forget or miss one of these contingency periods periods is to actually create a timeline and your loan officer can help you do this. Your real estate agent can help you do this and create some kind of tracker. In the BiggerPockets Rookie Resources, we do actually have an acquisitions tracker, which is kind of like a checklist where you're going through making sure you're doing all these things. I don't think it specifically has like your inspection deadline date or things like that, but you can go ahead and you can amend to this tracker and make it specific to you and you could add those things in.

16:44That's at biggerpockets.com slash rookie resource. Yeah, I've worked with them. I worked with the lender once. I can't remember which deal it was. This was a few years ago, but they had some sort of software where I would log in. I would submit all my documents to that software, which was great, but it also had a closing timeline calendar on there as well. And they loaded up into this timeline, all of the important dates from the purchase agreement. I always thought that was super helpful. But even here, I've got an agent in California and anytime that we go on a contract and deal together, his transaction coordinator just emails me like, hey, just so you know, due diligence ends in seven days.

17:19Hey, just so you know, financing contingency needs to be done by this day. And they're just updating you throughout the process. So I think leaning on your lender and your agent is super important because if you miss one of these dates, that could be your earnest money deposit that you end up losing. So keeping track of those is always important. All right, let's move on to our next one here. Golden rule number five is to screen tenants with systems. And I'll, Ash, I'll defer to you on this one. But I think that it's easy to see a person, talk to a person and feel like, man, this is a really great, nice person.

17:50Like I love Ashley. That's not screening someone, you know? So Ash, what is like an actual good screening process look like? I do think it is important to have you or somebody at least get face-to-face with the person. So that's usually the person that's showing, you know, the property and they can kind of give you some feedback on the person. So like I was just talking to a leasing agent the other day and we were kind of comparing stories here and she said, you know, sometimes I'm there forever because they're telling me their whole life story as to, you know, why they should rent this apartment and why we should rent it to them.

18:29And then And other times it's, you know, somebody saying, I've got$2 ,000 cash right now. I'll take it today. You know, like all these different things. So it's good to get kind of an insight to the person. But just remember, like you can't deny someone just because there was a bad vibe or because of, you know, something they said about their story or whatever. So there is proper documentation and proper screening to follow, to follow the fair housing laws. and I highly recommend using some kind of software to do that. If you have a property management software, they usually have built in a lot of this for you.

19:11If you don't, you're just self-managing without any software. I think it's tenantreports.com is one that you can go to where it's strictly you just buy the screening reports and you want to get a credit check. On the credit check, you want to make sure you understand how to read it. You want to see what their credit score is and you want to know what your minimum is. So actually, before you go ahead and do any of this, you should create a list of like what will or won't you accept. So that way, if anybody does come back to you and say, hey, you know, you never said that this was, you know, I wouldn't qualify without this and blah, blah, blah.

19:48And so you're going to have like your minimum credit score is 600. They can't have any collections against them. You know, and you can keep going down through the list and make a list of these things, what they need three and a half times the rent for income to be able to be approved. And then you're going to actually run the reports, get the credit report. And then you're also going to get a background check, which will tell you any kind of, you know, legal activity they've been involved in. And you also need to make yourself aware as to what illegal things will you deny them for? Is it for, you know, if it's a small multifamily, you'll deny them because of a violent history, like armed robbery or something like that, because there's other people living in the property.

20:36Will it be, you know, if they have a drug charge or things like that. But those are the two most important reports you can get. But then you also need to verify the information they're giving you. So their income. It is so easy to modify pay stubs with all of the AI, all of the, you know, I bet I could take a pay stub and I could put it on Snapchat and I could use their little tools that they have in there on just like to post a regular photo to be able to alter it to look like a real pace or, you know, to change the amount. So there is like add-on software you can get where it verifies it for you.

21:19But you can just simply call. Call the number that's listed on the pay stub. Ask to verify their income. You can, you know, email the person. So I think, and also like Google the phone number that's given to you to make sure it like matches with what that company actually is too because they could just be giving you your phone, your friend's phone number. So credit report, background check, and verifying the income, I think, are the three major things that you need to do in your tenant screening system. And I appreciate you walking through that, Ash, because one bad tenant can erase a lot of your cash flow.

21:55You've had the good fortune of having to evict folks. And we know that not only do you get lost rent, but then there's a cost of evicting that person from a legal perspective, any damage that's left over. So spending a little bit more time upfront to find the right person, I think it's better than just like filling a unit with the first warm body. And really that's true for like so many different parts of real estate investing. If you think about hiring a contractor, right? It's like, sometimes it's better to wait for the right contractor. Actually, almost every time it's better to wait for the right contractor than it is to just hire the contractor that can start today without really fully vetting them.

22:30So I think it's the same for all different parts of real estate investing. All right, guys, we're going to take one quick break, but while we're gone, be sure to check out the Real Estate Rookie YouTube channel. You can find us there at Real Estate Rookie, and we'll be back with more right after this. One thing I've learned from studying successful real estate entrepreneurs is that they build systems. The problem is most of us don't have developers sitting around waiting to create custom software for our businesses. That's where Bolt comes in. Bolt is an AI-powered tool that turns your ideas into working apps, websites, and business tools in minutes.

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