Epic Real Estate Investing - How to Manage Your First Property and Avoid Tenant Headaches (actual passive income) | 1324

Episode Date: August 1, 2024

Are you hesitant to dive into property ownership or expand your real estate portfolio due to fears of the management hassles? You're not alone. In this episode, we'll debunk those fears and reveal how to transform property management from a potential nightmare into a streamlined, income-generating machine. Join us as we explore the essential responsibilities of property management, including tenant placement, property maintenance, financial management, and more. We’ll break down the ROI matrix to show you how real estate investment offers unparalleled returns compared to traditional assets. From maximizing appreciation and cash flow to leveraging depreciation and amortization, you'll see how these profit centers work together to create substantial wealth. But there's more to managing properties than just handling tasks yourself. We'll guide you through hiring the right property manager—someone who can handle the nitty-gritty details while you reap the rewards. Learn the 10 commandments of selecting and working with property managers to ensure smooth operations and optimize your investment returns. Ready to make property management a breeze and focus on growing your portfolio? Tune in to discover how you can enjoy the true benefits of passive income and achieve financial freedom with real estate. Don’t miss this opportunity to get the insights and strategies you need to turn your property investments into a profitable and hassle-free venture. Press play now to get started!   P.S. Whenever you're ready to go deeper and further with your real estate investing, looking into my partner program to help you get your first deal might be the move... take the first step here for free 👉 Here’s the deal, I’ll partner with you on your first real estate deal, and we’ll split the profits. It’s that simple. Learn more about your ad choices. Visit megaphone.fm/adchoices

This is Terio Media. Hey, strap in. It's time for the epic real estate investing show. We'll be your guides as we navigate the housing market, the landscape of creative financing strategies, and everything you need to swap that office chair for a beach chair. If you're looking for some one-on-one help, meet us at rei-aise.com. Let's go, let's go, let's go, let's go, let's go, let's go.

Let's go. Have you been reluctant to own rental property or purchase? just more than you already have because the management is or has the potential to be a total nightmare? I get it. I've been through it. The bad and the ugliest you can think of. But these days, it's all good. And I'll share how I manage property smoothly so you can relax and enjoy the passive income real estate promises. By the end of this, you'll know your basic responsibilities as a property manager, why they are worth every second via the ROI matrix and how to carry out these responsibilities with minimal effort, time, and expense. First, as a property manager, these are your 12 vital responsibilities for running a property effectively, ensuring tenant satisfaction and maximizing returns. Number one, tenant placement. Finding and selecting

reliable tenants ensures consistent rental income and reduces turnover costs. Two, property maintenance. Regular upkeep and repairs keep the property in good condition, prevent costly future issues, and keep tenants satisfied. Three, financial management. Managing finances, including rent collection and budgeting, it's crucial for maintaining profitability and ensuring funds are available for expenses. Four, legal and regulatory compliance. Following laws and regulations, it protects you from legal issues and fines, ensuring smooth property operations. Number five, tenant communication. Effective communication with tenants helps address concerns quickly, fostering a positive relationship and reducing conflicts. Managing a rental property, it can be tough. Finding reliable tenants,

handling maintenance and repairs, and dealing with costly property issues and tenant problems can be overwhelming. When all you really want is for your rental property to attract reliable tenants who pay on time and handle maintenance efficiently so you can maintain the property's value and ensure a smooth, profitable return on your investment. Number six, marketing and advertising. Promoting the property, it attracts potential tenants, minimizing vacancy periods, and maximizing rental income.

Number seven, lease management. Creating and enforcing lease agreement sets clear expectations and protects both landlord and tenant rights. Eight, emergency response. Being prepared for emergencies ensures tenant safety and prevents property damage, maintaining a good reputation. If you find yourself at any time wanting to go faster or get some one-on-one help, take a look at rei-aise.com, answer a few questions and then just pick a time for us to hop on the phone and we'll brainstorm some ideas for those next steps. Number nine, vendor and contractor management. Working with reliable vendors and contractors ensures quality repairs and services, keeping the property in top shape. Number 10, record keeping. Keeping accurate records of transactions and communications. It provides essential documentation for financial management and legal compliance.

Number 11, tenant move-ins and move-ins and move-outs. Managing move-ins and move-outs smoothly reduces vacancy periods and ensures the property is ready for new tenants. Number 12, risk management. Identifying and mitigating risks protects the property and investment ensuring long-term profitability, which is what we all want. And there's a lot here to do as a property manager, as you can see. And this exhaustive list might be just enough to deter you from owning income property at all. But here's the good news.

Managing your property as a real estate investor, this is the lowest and worst use of your time, meaning you don't want and shouldn't be doing any of these things. So we're going to hire someone to do it for seemingly pennies. Wait, you thought managing property was expensive? It can be. But it's relative. Let's separate what's factual that it can be expensive from what's actual,

that it can be so lucrative you don't even notice the expenses. I'll explain how to hire the right person to do all of this for you, but let's next look at how rich you're getting while you sleep. And to do that, let's dive into the ROI matrix and uncover the four profit centers that make real estate, the truly final frontier, where the average person has a legitimate shot at creating real wealth. Real estate, it stands out among all investments available to the average person

because it harnesses the power of leverage. This leverage, it amplifies. the benefits of four very specific profit centers that aren't really available in any other investment, creating a vehicle that leads to real wealth like no other. To demonstrate, let's assume the following safe and conservative scenario. We'll start with this property, valued at $300,000. We'll purchase it with a 20% down payment of $60,000, borrow the balance of $240,000 at 7%, and assume a monthly income of $3,000. So here's the ROI matrix, and profit center number one, appreciation. So over the last 100 years, we can assume an annual appreciation of three and a half percent, of which gives us

$10,500 in the first year. We'll then divide that by the amount of money we invested into this property, our down payment of $60,000, of which gives us a 17.5% return on our investment. Before I continue, a quick check-in. Did your mutual fund or 401k produce that this past year? Likely not. But if so, congrats. However, we're not done. Our next profit center in the matrix is cash flow, the income that the property produces. So from the $3,000 per month, we receive from our tenant, we'll have to pay some property expenses like taxes, insurance, maintenance, vacancy, and property management. Of the 350 units that I've owned over the years, those expenses average out to about 40% of the rent that we collect. So what we're going to do is we're going to deduct that by multiplying

our monthly rent by 60%. And that leaves us with $1,800. With that, we have to pay the mortgage payment on the property. That's $1,597. And that leaves us with a monthly cash flow of $203. We'll multiply that by 12 to give us our annual cash flow, and then also divide that by the amount of money we've invested into the property, our down payment of $60,000, of which gives us an additional 4% return on our investment. Our next profit center in the matrix is depreciation.

Even though the property may actually appreciate and value, it likely will, the IRS allows you to treat it as if it was losing value based on the natural wear and tear. reducing your taxable income and saving you money on taxes each year. Most people, they don't consider this a profit center, but it most definitely is. It's money that would be coming out of your pocket if you didn't own the property. So it's a return. Depreciation for a residential income property, it's calculated using the modified accelerated cost recovery system, M-A-C-R-S, and they do that over 27 and a half years.

And here's how it works. You start with your basis. This is usually the purchase price of the property minus the value of the land, equals about 80% of your total value. That's how the IRS calculates it. So you divide that by 27.5. This gives you the annual depreciation amount. So our property, excluding land cost, is 240,000.

That's the basis. And the annual depreciation deduction is $8,727. The actual money saved from your deduction, it depends on your tax bracket. So if your marginal tax rate were 33%, for example, the percentage of tax that you pay on your last dollar of income, you multiply that, by the deduction. And that gives us $2,880. That's how much each year you don't have to send to Uncle Sam, thanks to your $8,727 depreciation deduction. So again, divide that by the amount of money we invested into this property, our down payment of $60,000, of which gives us an additional

5% return on our investment. So it's all adding up, isn't it? But there's one more to factor. And this one is my favorite. The amortization. This is the paying down of the money that you borrow to purchase the property, where part goes towards the loan principle and part goes towards interest. What makes this a profit center is that the rent you collect from your tenant covers the mortgage payment. So, over time, your tenants are essentially paying down your debt for you. This is why it's my favorite because I'm not even buying the investment. My tenant is buying it for me. This makes the property what we call a self-liquidating asset or its self-liquidating debt as the income it generates reduces the loan balance of the money you borrow to purchase it. Building your equity and

increasing your ownership in the property without you having to put in additional money. The property produces that money. When paying down a mortgage, most of the initial payments go towards interest, with only a small portion reducing the principal. However, as you continue making payments, the interest portion decreases while the principal portion increases. This means that over time, more and more of your payment will go towards actually reducing the loan balance, helping you build equity faster as the years go by. So I did the math up front, and in the first year, $2,649 of your payments were applied to the principal. But this is the smallest this number will be. Each year, it's going to be a little bit more. But for the first year, it is what it is.

So we'll also divide this by the amount of money that we invested into this property, our down payment of $60,000, which gives us an additional 4.5% return on our investment. When you add up all for-profit centers, the total annual return on this one-income property investment, is 31%. Now, if by some freak, active God, your 401k produced that in a year's period, congrats. But as of the recording of this, the highest producing mutual fund over any 30-year period is the American Funds Investment Company of America. Since its inception in 1934, this fund has delivered an average annual return of 11.39%. And that's impressive. But it's not 31%. And this is factual and actual of how real estate is so lucrative.

that in hindsight, done right, you'll hardly notice the expenses and inconveniences of property management. And as promised, that brings us to hiring the right person to take on our management responsibilities so we can focus on the highest and best use of our time, acquiring our next income property investment. So let me introduce you to the 10 commandments of managing property managers. These come from more than 15 years of personal landlord experience. I didn't read these in a book, nor are they regurgitated from some webinar or YouTube video. You're not going to hear these anywhere else. They came straight from the very expensive school of hard knocks. And I paid the tuition so that you don't have to.

All right. So, commandment number one, thou shalt not hire an unlicensed property manager. Hiring a licensed property manager ensures they meet industry standards and legal requirements, protecting you from potential liabilities and ensuring competent management. So do as much due diligence on your property manager as you do on your investment properties. Commandment number two, thou shalt interview at least three property managers, prior to hiring one. Interviewing multiple managers,

it allows you to compare services, fees, and experience, helping you select the best fit for your property needs and ensuring that you receive the best service. Even if you love your first interview, I mean, they just flat out knock you over and they answered everything correctly, still interview at least two more. You'll thank me for that one.

Commandment number three, thou shalt review all property management agreements, leases, and processes with the property manager prior to hiring. Reviewing these doctors, ensures clarity on the terms and conditions, preventing misunderstandings, and ensuring that the management aligns with your expectations and legal standards. Don't skim through this like we typically do with other agreements in life. The fine print, though, in your property management agreements can be very

costly should you need to move on from your property manager for any reason. Commandment number four, thou shalt not steal a property manager's income by over-negotiating their fees. Fair compensation motivates property managers to perform well, ensuring they are dedicated and providing quality service, which benefits the overall management of your property. You see, your property manager is in control of your property's performance, and this is the last person on your team you want to build resentment with, especially if you're dependent on your property's income for your livelihood. Commandment number five, thou shalt give preference to property managers that invest in real estate themselves. You see, managers who invest in real estate themselves, they understand the market and have a

vested interest in property performance, which can translate into better management and investment advice. Commandment number six, thou shalt be firm, but fair, and set clear expectations for your property manager. Clear expectations and fair treatment. It fosters a positive working relationship, ensuring that the property manager understands their responsibilities and performs to your standards. You're the boss. Commandment number seven. Thou shalt hire a bookkeeper to maintain and monitor rent rolls and books. A professional bookkeeper ensures accurate financial records, which is crucial for tracking income and expenses,

preparing taxes and making informed financial decisions. I ask my bookkeeper to call the property manager upon receipt of each month's property management statement to ask a question about the statement. Even if my bookkeeper already knows the answer, you see, the purpose of this monthly call is obviously to get any answers that we may have answered, but more so to let the property manager know that we're watching. Commandment number eight, thou shalt schedule a time once per month to review books. Regular reviews help you stay informed about the financial health of your property, catch any discrepancies early, and make timely

decisions to optimize profitability. My bookkeeper intensely reviews each month's statement and notes anything of interest or concern before sharing it with me so that my time reviewing the books, It's minimal. Done right, and depending on the size of your portfolio, there should be no more than an hour per month to monitor your books and properties performance. You see, passive income? It doesn't mean uninvolved income. You have to participate a little bit to keep it passive.

Commandment number nine, thou shalt diversify property managers. Because diversifying managers can reduce risk and ensure that you have the best team for different types of properties and enhancing overall management quality and performance. I make sure that each property manager knows that they're not the only property manager on my team. Not in a malicious or manipulative way or anything like that, but just to keep them on their toes and indirectly let them know that they are easily replaceable. And since making this a mandatory practice in each one of my markets, I almost immediately noticed performance rise and I saw expenses fall.

Commandment number 10, thou shalt not ask property managers for favors or to work for free. Respecting their professional boundaries, it ensures a healthy working relationship. And that's really important, particularly with this team member, because it encourages managers to provide their best service and maintains their motivation. By following this commandment, this has significantly reduced my vacancy rate. By treating my property managers fairly with respect and fair compensation, I find that when a property does go vacant because it happens, I tend to get the best tenants and I get them quickly. Now you know your responsibilities as a property manager, the value of a social

them and how to delegate them so that the passive income from your rental properties is as passive as it can possibly be. So now that you have much more time to take down your next investment property, that's the highest and best use of your time. Perhaps you want to use that time to get a bigger discount on it by finding real off market gems. I'll see you next time. Thanks for watching. Take care. And that wraps up the epic show. If you found this episode valuable, who else do you know that might too? There's a really good chance you know someone else who would. and when their name comes to mind, please share it with them and ask them to click the subscribe button when they get here

and I'll take great care of them. God loves you and so do I. Health, peace, blessings, and success to you. I'm Matt Terrio. Living the dream. Yeah, yeah, we got the cash flow. You didn't know home for us, we got the cash flow. This podcast is a part of the C-Sweet Radio Network.

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