Residual Income Through Real Estate

Content
Part 1, 2	Disclaimer, Introduction
Part3	Getting Rid Of Expenses And Debt
Part 4	Buying Discounted Mortgages
Part 5	Buying Foreclosures
Part 6	System for Picking Foreclosures
Part 7	What You Can Expect on Your Investment
Part 8	Tax Liens
Part 9	Rental Income
Part 10	Tax Implications
Part 11	Online Real-Estate
Part 12	Selling Your Home
Part 13	Start Your Own Online Real Estate Company

Part 9

Rental Income

Another way to produce residual income through real estate is as an investment property. The two biggest values of rental income are the actual cash flow from the rent and the fact that property values increase.

How to Find the Property

To use this method, you buy a property with income. By income, I mean a POSITIVE cash flow. I am sure you realize that asking the owner of the property whether it has a positive cash flow may not yield the whole truth, particularly if the answer is no! So, how do you find out the truth?

If they don’t have them or won’t show them to you, simply walk away from the deal. If they do show you the records, you simply add up the income per year to get net income and add up the expenses per year to get the net expenses. Subtract the net operating expenses from the net income to give you the net operating income. Now subtract the debt service fees and that gives you the cash flow.

Just as in foreclosures, you need to be known as “the buyer”. Get known by the CPA’s, attorneys, real estate brokers, mortgage companies, refinance companies, and anyone else that may be “in the know” about rental properties before these deals get out to the general public. Essentially, you need to have these “plump” deals referred to you.

Example:

Let’s take a look at a real life example. I have a friend who found out about a Co-op in the same neighborhood with the United Nations. The Co-op was 300 sq ft and going for $100,000. That is not a misprint! Trust me, this is prime real estate!

She financed $79,200 and since she had at least 20% down, she didn’t have to have personal mortgage insurance (PMI). The debt service costs her $6403 per year. During her first year, she made $1107 or 4.5% return. During her second year, however, she didn’t incur any closing costs, so she had $5683 or 22.9% return. As the years went along, the rental prices increased somewhat and she went from a 25.3% return in year three to a 30.6% return in year 5. Her five-year pretax average return was 22.2%!!

If you had one of these deals each year for the next ten years, you would make $7500 cash flow per year per deal. That means that after the last deal, you would have a positive cash flow of $75,000. Now, let’s assume that you do not wish to be the one who maintains these ten properties. You can hire a general repairman for $30,000 and still make $45,000 with no hassles!

Insurance

You, as a landlord, should double-check your insurance policy's fine print to ensure you're covered for common tenancy mishaps. Many landlords have taken out a building policy, often called a 'landlord' product, and assume they're covered, only to find out later the cover is severely limited. Standard building insurance offers some protection for landlords, but often contains clauses excluding malicious damage by a tenant, accidental damage, legal liability and cover for the loss of income. But as the owner of an investment property, these are the very reasons why you would make a claim.

The level of cover and premiums charged for landlord insurance differ from broker to broker.

Before signing up for 'landlord insurance', check that it covers the following risk factors:

• Malicious damage by a tenant - This includes everything from holes punched in walls and kicked-in doors to intentional damage to carpets and floors.
  
  
• Accidental damage - This covers unintentional damage to a property. Accidental damage also covers the actions of small children, but excludes gradual wear and tear.
  
  
• Legal liability - Includes expenses incurred for any lawsuit that arises as a result of a tenant suffering bodily injury or property damage or loss.
  
  
• Loss of rental income - In instances where malicious damage has been caused to a property, a loss of rental income may result while the property is repaired or cleaned. Loss of rental income also can result from absconding tenants, defaulting payments, death of a sole tenant, failure to give vacant possession or a court awarding a tenant a release from lease obligations due to hardship

Additionally, if you live on the property, you should obtain mortgage disability insurance as well.