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Your Cash Flow MultiplierYour Purchase of this program gives you an individual license to use these materials as described in this program. Your license does not extend to you the privilege to share or resell any of the program contents with others.

Published by:Dean Enterprises, LLC 1-866-510-8060

DISCLAIMER AND/OR LEGAL NOTICES:

This program is designed to give the reader accurate information on the investing methods and process of attracting prospective real estate investment opportunities. It is offered with the understanding that the authors and publisher do not guarantee any specific results, or any guarantees of income. While all attempts have been made to verify information provided in this package, neither the Author nor the Publisher assume any responsibility for errors, inaccuracies or omissions. Any slights of people or organizations are unintentional. If advice concerning legal or related matters is needed, the services of a qualified professional should be sought. This package is not intended for use as a source of legal or investment advice. Although unlikely, some suggestions made in this program concerning strategy and promotion, may have inadvertently introduced practices deemed unlawful in certain states and municipalities. You should be aware of the various laws governing business transactions or other business practices in your particular geographic location.

PRINTED IN THE UNITED STATES OF AMERICA© 2011 Dean Enterprises, LLC.

ALL RIGHTS ARE RESERVED. This course may not be reproduced or transmitted in it’s entirety in any form or by any means, electronic or mechanical, including photocopying, recording or by any informational storage or retrieval system without express written permission from the publisher.

Introduction

Why Real Estate?

Self Assessment

Leverage Lessons

Mortgages

Alternate Funding Options

It Takes a Team

Know Your Market - Top to Bottom

Where Do You Find Great Investment Properties?

Know Your Market

Like the Numbers - Not the Property

Market, Property & Leverage Decisions

Where You Find Properties

Repairs, Renovation and ARV

Buying Your First Property

Tenants – Attracting, Interviewing & Management

Property Management

Cash Flow Compounding Through Sustainable Growth

Compounding Cash Flow

TABLE OF CONTENTS

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Introduction

What do you think of when the term “compounding” is mentioned? Investors immediately think of interest in savings accounts, compounded at regular intervals, and growing the value of the account faster than simple interest. If you’re going to live large on interest from normal investment accounts, you better start with a large balance or make very regular deposits over a very long period of time.

What if you don’t have that much time? Or, what if you want to live “more than large?” How can you use compounding to make this happen at a faster pace and with an amazing end result? Real estate is the answer, but not just buying and selling, or even just buying and holding rental properties. It’s critical that you have a plan and an organized approach, as you become the “compounding” driver in your real estate investing.

This report will be your plan and step-by-step approach to create wealth with real estate through rental property cash flow. Once you learn how to create excellent cash flow from one property, it’s just a matter of replicating your efforts and using leverage intelligently to build on that cash flow. Compounding your returns in far greater magnitude than any savings account will create wealth and provide that “more than large” lifestyle.

You’ll be able to take what you learn in this report, create your plan, and immediately get started in cash flow compounding.

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Your Cash Flow Multiplier

Why Real Estate?

Why does this report suggest only one investment vehicle, real estate? Why not buy gold when the world is fearful? Of course, gold doesn’t get any heavier over time, so you’re only going to make money if gold’s price rises, and there’s no compounding.

How about plowing your money into the stock market? If you buy right and cross your fingers, you may grow your portfolio quickly ... or you could go through a correction and be starting over. Bonds aren’t the answer if you’re in a hurry, only if you want safety and low yields. Maybe you could become a mega-marketer on the Internet, raking in profits buying and selling on eBay. One out of 100,000 who try actually make a little money, but it doesn’t compound or make them rich.

This report is written for the serious investor who wants to put their money to work safely, but with more potential than other investment opportunities that are available to them. Let’s look at why real estate is the way to go, and why real estate investment can be both relatively safe, and also quite lucrative.

There’s Plenty to Go Around

With more than 150 million homes in the U.S. and Canada, there is plenty of property available to the investor. It changes hands frequently, with the average U.S. owner staying in a home only eight years. This makes it relatively liquid, though our strategies in this report don’t rely on liquidity and turning over of properties. We do know though that there are plenty of homes for investors, so your portfolio is very scalable. Starting with a single property and growing your holdings is no problem with the volume of inventory available.

There’s No Exclusive Club

Anyone of legal age can buy real estate. You’re not going to be locked out of opportunity. Individuals, companies, or institutions can own real estate. All you have to do is to jump into the market, but you don’t want to do that without a well thought-out plan and the knowledge to make it work. That’s what this report is for.

Appreciation in Value

While real estate has its up and down periods like other investments, throughout history the trend has always been upward for prices over the long term. It’s a finite commodity, and the population keeps growing. Without increased supply, rising demand will raise prices.

Rentable

People will pay you well to use your real estate. Sure, you get paid by a bank to use your savings as well, but most of the time the return is a tiny single digit percentage. Renting out real estate provides double digit returns. Stocks, unless they pay dividends, don’t provide cash flow. Bonds do, but the tradeoff is very low returns.

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Hedges Other Asset Classes

“Diversify” is the mantra of investment advisors, and for good reason. Unfortunately, this advice is usually given within the context of stocks and bond investment. Buying baskets of stocks in different industries is diversification, and bonds hedge your stock holdings.

The problem is that both stocks and bonds are threatened by some of the same situations, especially inflation. While inflation can be taking a heavy toll on your stocks and bonds, it has far less of a negative impact on real estate. In many cases it can actually increase real estate values because the price to build increases with inflation.

Leverage is Realistic and Scalable

Using OPM, Other People’s Money, is definitely a tool for investment leverage. And, you can use it in a small way with margin trading in the stock market. However, leverage in real estate is a bigger ball game, and done intelligently, it can dramatically grow your portfolio and compound your cash flow. As property equity grows, your ability to use that equity to reinvest grows as well.

You Can Add Value

When you buy stock shares in a company, you are dependent on the company’s management and board of directors to build value and grow your investment. When you own rental houses, you can make improvements that will have an immediate impact on value. You’re in control.

Tax Benefits

Besides the normal and excellent tax advantages of owning a business, real estate ownership provides a list of tax breaks, including capital gains, property tax deductions, depreciation, expense deductions and more. When we talk about cash flow compounding, part of the process and value increase is enhanced by these tax advantages.

Sleep at Night Stability

You’re not going to turn on CNBC tomorrow morning to hear that your rental house value doubled overnight on takeover rumors. However, far more stock market investors have received the opposite type of news, so stability is important as well. Real estate rarely doubles in value overnight, unless they find oil under it. But, it does increase in value over time, and it doesn’t plummet overnight either. You won’t be losing sleep over what’s happening in foreign markets overnight that could torpedo your investment.

Everybody Must Live Somewhere

With the world’s population expected to be approaching 9 billion people by 2045, we can be assured that the demand for a place to live will rise as well. More people will need more housing, both as purchases and as rentals. Interestingly, holding real estate for rental can be highly

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profitable in both up or down markets. When people are soured on buying real estate, investors can pick up great bargains, and they will enjoy an increase in demand for rentals. If everybody’s wanting to buy, then prices will rise, rental property equity goes up, and investors can use leverage to prosper.

You Can Learn This

Unlike playing the flute or painting with oils, there isn’t some great talent required to be successful in real estate investment. You don’t need advanced degrees or an apprenticeship. You can learn everything you need to know, and you can do it in weeks to months, not years. This is your start on that short learning curve. This report will get you moving toward cash flow compounding.

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Self Assessment

Now that you know why real estate will be the vehicle that carries you to your investment goals, let’s take a look at your current abilities and financial capability. What’s your starting point, and how are you suited from a risk perspective for real estate rental property investment?

Tolerance for Risk

Don’t get intimidated by the word “risk.” Any investment carries some risk. There are opposing forces at work, with greater risk usually providing greater potential reward. So, buying bonds is less risky than owning stock shares, but the tradeoff is lower returns.

Real estate, just like all other investment activities, carries some risk. However, as mentioned before, it’s more stable than stocks, less threatened by inflation than bonds, and has always risen in value over the long term. The good news is that no matter what your tolerance for risk, you can be successful in rental property real estate investment.

Low Risk Tolerance

You’re very cautious with your money. You realize the return is very low, but you sleep better knowing that your savings account is insured. You realize that it won’t make you rich, but it’s nice to know that it’s pretty safe. Despite your aversion to risk, this report could very well be more valuable to you than to people more comfortable with risk.

The fact that you’re very risk-averse in investing means that you would normally never put your money into any investment that has the potential for great returns, simply because the risk would make you nervous. Once you learn the ropes in this report, you’ll be ready to dive into real estate. You’ll probably stick a toe in the water first, but you’ll learn that you can enjoy double digit returns and cash flow compounding and still sleep well.

Normal Risk Tolerance

This is the group most of us fall into. If you do as well, a little risk isn’t too scary. In fact, it adds a little spice to life. You’ve probably dabbled in trading stocks, and you’ve probably won on some and lost on others. But, win or lose, you will not rule out some more trading. You never dump large amounts of money into any one stock, and you try to diversify a bit.

You’ll progress faster than the risk-averse person with the material you read here. You’ll even consider leverage, but you’ll want to have a clear picture of the risk vs. reward ratio. What you learn in this report will get you excited, and you’ll jump in with both feet, but enough caution to assure success.

High Tolerance for Risk

If you’re in this group, you enjoy the stock market. You may have even done some stock option trading, and don’t consider it nearly as risky as many make it out to be. You may even have dabbled in commodities, higher risk, but great rewards if you make the right choice.

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Before you’re halfway through this report, you’ll be envisioning yourself on a beach, sipping a cocktail with not a worry in your head about tomorrow or money. You’ll be mentally retiring before you finish reading. And, you can be extremely successful with rental property investing. Your only challenge will be to slow down, learn what we’re teaching you here well, and avoid taking unnecessary risks.

What You Know Now

We’ve already stated here that you can learn how to invest in real estate successfully. So, whatever you know or don’t know at this moment is really unimportant. However, assessing your current knowledge will help you to set goals and a timetable for starting and growing your business.

Have you bought or sold homes for you and your family? Do you know about property valuation, title insurance, real estate contracts, appraisals and surveys? Take a moment to sit down and make a few notes about your past real estate experience and areas where you feel comfortable with your knowledge, as well as where you know you need to learn more.

It doesn’t matter where you are in the knowledge curve, you’ll know what you need to know to get started when you finish this report. It just helps to have a clear picture of the present when you’re projecting your progress into the future.

Financial Assessment

Let’s start out by clearly stating that you don’t absolutely have to be sitting on a pile of cash to start investing in real estate for cash flow. It helps of course, but there are ways to finance your purchases, and you’ll learn about them here.

It is going to help you to make plans and set goals if you have a clear financial picture and know what you have available to you in the way of cash or borrowing ability. If you’re in business, you’re familiar with a financial statement or balance sheet. You can do one for you personally now to see where you may have cash available for investing.

cash in checking and savings accounts•certificates of deposit•stock market accounts, or bonds you can liquidate or borrow against•savings bonds•retirement accounts, IRA, 401k, etc.•equity in real estate you own•

For the time being, develop a spreadsheet or chart of the money you can make available to your new business. It’s OK to be in a position to only purchase a single rental home. We’ll show you ways to use other funding resources later in the report.

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Leverage Lessons

Using OPM, Other People’s Money, is leverage. Whenever you can use other people’s money to purchase rental properties and create positive cash flow, you’re using leverage. Leverage is how the vast majority of rich real estate investors get that way. The only other way is to be rich already.

Leverage isn’t a bad thing. Even the very richest in our society use it. Why would a millionaire pay cash for a small home to rent out when it can be financed, allowing them to invest their cash elsewhere. Leverage can be used poorly, increasing risk, and it can even lead to foreclosures or bankruptcy. There isn’t any trick to it. It’s just about being careful, doing your due diligence, and not taking on risky deals.

Paying All Cash

Let’s say that you’re able to cash in some other investments, and you can buy a $100,000 house with all cash. After taxes and insurance, you can net $650/month each in rent, so $7800 over 12 months. What’s our ROI, Return On Investment? We want to know our return on the “cash” we have invested.

$7800 / $100,000 = .078, or 7.8% Return on Cash Invested

Buying 2 Houses With Leverage

You decide to see how your investment would look if you bought two houses with that same $100,000, putting $50,000 down on each and taking out mortgages. With the current interest rate, your payments would be $276/month each. And, we can net after taxes the same $650/month each, or a total of $15,600/year. Mortgage payments total $6624/year.

$15,600 - $6624 - $8976/year profit

$8976 / $100,000 = .09, or 9% Return On Cash Invested

This investor is putting an extra 1.2% in the bank every month, not bad when some savings accounts are paying about that in total interest for the entire year. 9% is an excellent return on their cash invested, but there’s more. Now they own two houses instead of one. They have extra tax advantages, and will participate in appreciation doubly.

Leverage Risks

When used prudently, leverage is the way real estate investors add to their inventory of rental properties and compound cash flow. Every property generates positive cash flow, so adding more inventory compounds your return on investment.

Leverage has taken investors down as well. Every deal must stand alone, and every rental home should have been purchased and rents set with some expectation of vacancy and credit losses.

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There must be a cushion to allow mortgage payments to continue if a down market brings higher vacancies or people are failing to pay rents on time. Things to consider and allow for to avoid problems include:

Rent trends - when tenants are scarce, sometimes rent specials are the only way to fill units. •If you don’t allow for rent reductions, you could end up with negative cash flow. Too long and too negative, and you may not be able to make the mortgage payments on that house. In bad markets, a domino effect can take investors into multiple foreclosures.Vacancy - if rent reductions aren’t working, and you experience longer vacancies between •tenants, you can end up in the same situation.Increased costs - whether it’s taxes, unexpected major repairs, or insurance, expenses can go •up. Too high, and you can end up with negative cash flow as well.

These aren’t things that should scare you, as you can allow for them in advance, and make it through rough patches without adverse financial results. If you experience none or few negative factors, your allowance on the front end will simply mean higher cash flow and profits.

Like the Numbers, Not the Property

Leverage can be used wisely and make you rich. Just approach every deal with the tools we’ll give you in this report to evaluate it objectively, pay the right price, set rents, and allow for problems along the way. If you’ll run the numbers correctly, and if you’ll like only the numbers, not the house, you’ll stay out of trouble and keep taking those checks to the bank. Investors don’t fall in love with kitchens or houses. They fall in love with the numbers.

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Mortgages

Now that leverage has been discussed, the normal way in which leverage is applied is through a mortgage. There are other methods of financing long term rental property purchases, and they will be explained in this report. However, for now, the various mortgage types will be the subject.

The investor purchasing property for rental has a great many evaluative processes to complete to make sure that the property will generate a positive cash flow and hopefully appreciate in value as well. The mortgage is the largest cost item in the deal other than the purchase price. The interest rate will determine the monthly payment, and the rents must offset that payment, pay some expenses, and leave a profit.

30 Year Fixed Rate Mortgage

This is by far the most popular mortgage choice for consumer buyers. It provides a fixed rate of interest over the entire 30 year period, and payments can only change with changes in taxes and insurance that are escrowed. The loan can always be refinanced if interest rates go low enough to offset finance costs and lower the monthly payment.

In going over these mortgage choices, let’s ignore taxes and insurance to make the comparison simpler, just principal and interest. The house will be a 3 bedroom 2 bath home with a purchase price of $250,000, and the buyer has $50,000 for the down payment. We’ll also ignore closing costs, as the comparison is to illustrate the difference in principal and interest payments only.

We’ll also use interest rates that are reasonable, but not abnormally low, and their relationships will come from online interest rate quotes. So, for the 30 year fixed rate mortgage, we’ll use 6% as the interest rate. We’ll be financing $200,000 in every example, as the $50,000 down payment doesn’t change.

30 year monthly payments at 6% will be $1199.10

Once taxes and insurance are taken into account, if an investor were financing this property with this loan, they would probably need to see rents in the $1750 to $2000 per month range. And, that could be very possible depending on the home and where it’s located. The rents could even be better than that.

15 Year Fixed Rate Mortgage

This is the same fixed rate situation as the 30 year mortgage, except it pays off in half the time. It doesn’t double the payments though because you’ll get a lower interest rate. When the 30 year rate is at 6%, it should be no problem to get a 15 year loan for .75% lower at least. Using that number, this loan would carry a rate of 5.25%, so:

15 year monthly payments at 5.25% will be $1607.76

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The consumer buyer would have an interest in this type of loan because they want to cut their overall interest cost way down over the life of the loan. They may also be approaching retirement and want to get the home paid off sooner.

Lenders cut the interest rate because their money is locked up for a shorter period, thus making a lower return a good decision.

This type of loan normally wouldn’t interest the rental property investor due to the higher payments, usually making positive cash flow from rents impossible. If the investor bought at such a bargain that they could still rent it for a positive cash flow, this would build equity faster though.

5/1 ARM, Adjustable Rate Mortgage

There are 3 year ARMs, 7 year, and even 10 year. We’ll only look at one example here, the 5 year ARM. However, typical discounts to the 30 year rate look like this:

7 year ARM would cut rate by about 1.25% to 4.75%.•5 year ARM would cut rate by about 2.0% to 4.0%.•3 year ARM would cut rate by about 2.5% to 3.5%.•

In each case, the rate is set for the initial period, 3, 5, or 7 years, and it can then adjust every year after that. There are all kinds of ways that banks quote these rates and adjustments, but we’re only going to look at the initial period here and the difference in the monthly payments as we did above. And, we’ll use the same house and numbers.

The rate is reduced as the time period shrinks because the banks can then adjust the rate later to continue profitably if rates go up. We’re only going to look at the 5 year ARM here. While a 3 year would cut the payment even more, it puts more risk on the investor, as their payment could go up significantly in the fourth year, and they may not be ready or able to refinance or sell the house. The 7 year might be best, as it stretches the time out more than double, but this investor wants a better rate for cash flow reasons, and is planning on selling or refinancing in five years. So, let’s take that 2% discount, and finance the house on a 5/1 ARM at 4%.

1st 5 year monthly payments at 4% will be $954.83

That’s more than a $240/month savings, an extra $14,000+ in cash flow over the 5 years. It could also make the difference in whether the deal gets done or not. If the investor can’t reasonably count on a cushion and rents over about $1700/month, then going to the 5 year ARM would generate great cash flow at the lower expected rents. If the investor expects to be able to adjust rents upward over time, it makes this type of loan look better as well.

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Allowing for ARM Adjustment

The prudent investor will not rely on this lowest ARM rate entirely. If there’s a chance they’ll hold the property past the first adjustment, the investor will look at rents, the history of rents in the area over time, and anticipate what the rent would be at the end of the five year period. They would then run the numbers again with the maximum first year adjustment to see how the cash flow would look. If it wouldn’t be a good deal if done five years from now based on those numbers, they probably wouldn’t do it now.

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Alternate Funding Options

There are all kinds of ways to fund real estate deals, and many of them can work for the long term rental property investor. These are other places where you can get money for longer periods of time. Some of it you already have, but don’t know that you can safely and legally access it.

Your Own Investment Accounts

If you have investments in stocks and bonds in a regular non-retirement account, you can access those funds either by selling the investments or by borrowing against them. If you have a significant amount of money tied up in stocks and bonds, and you don’t want to sell them, talk to your broker to see how you can access some of the equity for real estate investment.

IRA or 401k Accounts

It isn’t illegal or against the rules to invest in real estate in a self-directed IRA or 401k account. It’s just usually against the rules of the custodian holding and managing your account. Large companies like Fidelity and Merrill Lynch do not want the hassles that go along with managing real estate transactions in retirement accounts, so they don’t offer the service.

However, if you’re tired of tiny single digit returns or worse in your retirement accounts, there are places where you can move them that specialize in giving you the ability to buy, sell, hold and rent real estate in your account. The fees will be higher, but it could be the ideal solution for you and your retirement account. The rules are very stringent, so work with a custodian that knows what they’re doing.

HELOC, Home Equity Line of Credit

While many lenders stopped doing these type of loans after the troubles beginning in 2007, this type of loan is still available. If you have significant equity in your home, you may just be able to make that first rental property down payment with funds from a HELOC loan.

Family or Friends

It’s interesting when a group of people attend a real estate investment seminar and the concept of financing from family and friends is introduced. The general feeling is that you’re going to these people with your hat in your hand and asking for a loan or gift. It’s really quite different. Once you learn how to use the techniques and strategies introduced to you in this report, your family and friends will actually wonder why you would go out and scare up financing from other sources. They will want to convert their 1% bank savings yields into 8+% real estate yields. They will look on your approach as helping them, not asking for help.

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Private Lenders

Along those same lines, there are a great many people out there, some very successful in their business, doctors, lawyers, and store owners. They are sitting on large sums of money in savings accounts, Certificates of Deposit, and in low yield bonds. Once they are introduced to funding of rental properties with a note and mortgage for protection, they respond aggressively. Wouldn’t you?

If you were a successful business person, and you had a couple of hundred thousand dollars earning 2% to 3%, how would you react to the opportunity to invest that money in real estate guaranteed by a mortgage, and at double or triple the return?

Either by you introducing them to the concept or through you joining investment clubs and other groups where you can meet them, you can build a group of eager lenders who are ready to fund your deals. And, it isn’t always in the form of a straight loan. You can also partner up on deals, with the interest rate for their funding reduced or even eliminated in return for a portion of the rents. There are all kinds of ways to work with private lenders to get money for rental property purchase.

Subject-To Mortgages

There are a whole lot of homes out there with equity and owners who want to sell. In slower markets, they find that they can’t sell for the price they want, and they can be enticed to sell by allowing you to take the home subject to their current mortgage. You take over their payments, but it’s not an assumption.

You just start making their payments. Sometimes you’ll have to come up with some cash to buy some or all of their equity, sometimes not. You then put a renter in the home paying enough rent to offset their payment and all costs, with a profit on the top.

Owner Financing

Many people don’t realize that fully a third or more of all homes in this country are owned free and clear of any mortgage. They owe nothing on the home, but that doesn’t mean that they can sell it when they need to. Also, some of these are in estates, with the heirs wanting to sell. Others are are owned by tired landlords who simply don’t want to own the home anymore.

There are investors out there who are approaching these sellers and getting them to offer owner financing, sometimes at as low as zero percent interest just to get out from under the home and the taxes. It’s a great way to buy a bargain and at a low payment that guarantees great positive rental cash flow.

When there’s a will to get something done, there’s generally a way. One or more of these funding options may be right for you.

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It Takes a Team

We’ll get into specifics soon, but in order to avoid stressing you out with the details of successful rental property investing, let’s show you how to build your team and how they’ll take on most of the load for you.

Mortgage Broker

You want to develop a relationship with a conscientious and aggressive mortgage broker to fill two roles in your business. First, you want the broker to be good at getting you into mortgages financing the properties you will own and fill with renters.

When you first start out, you may find that you don’t command a lot of attention from mortgage brokers you approach. That’s understandable, as they don’t have any history with you, and they want to see some deals before they get excited.

The second role the mortgage broker will fill isn’t as critical, but will be very valuable in the future. When you decide to sell houses you own, you’ll want a mortgage broker who will be good at getting loans for your retail buyers. First time home buyers and the retail buyer in general will pay higher prices, so they’ll be your target buyer.

Because both of these roles are important, when you talk to brokers, ask about the types of mortgages they handle, and the lenders they work with. You want a broker who works with all types of mortgages and with many lenders.

Real Estate Agent

When you’re active in locating the best deals for your rental property purchases, you’ll be using many resources and contacting owners and sellers directly, as well as offering on bank owned properties. Many of the properties you’ll be considering will be listed by real estate agents. Working with a great buyer agent, and maybe even a different listing agent will be important to your success.

When you’re ready to sell a home, a listing broker relationship will be quite valuable. But, there can be great value in knowing a popular area listing agent at any time. Real estate listing agents are approached daily by house owners who want to sell. Some of these would-be sellers have issues that preclude them from listing. It may be that they owe too much on the house and can’t sell it for enough to pay the mortgage and the real estate commissions. There could be other reasons why the agent doesn’t feel that they can list the home. When you and the agent have a relationship, they’ll contact you and tell you about these people, providing opportunities.

On the buyer agent side, you definitely want a strong connection with an agent. They can provide you with automated reports from the MLS about new listings, particularly foreclosures. They can handle your offers to purchase. Even better in some cases, they can bring you prospective tenants who would like to buy but can’t. They’ll make great renters, and even tenant buyers if you want to

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use the rent-to-own approach in renting and selling a home.

Insurance Agent

This isn’t a team member selection that needs to be on the front burner, but start thinking about it. You’ll need insurance for your rental properties, and the right agent can help you to purchase wisely, and not over or under-insure. You may be able to get recommendations from real estate agents and mortgage brokers for good insurance agents.

Real Estate Attorney

In the course of a rental property real estate business, you’ll be involved in contracts of all sorts, buying, selling, leases and more. Especially in the case of leases and tenant applications, you’ll want to have a good real estate attorney on your team. Whether you ever need to evict a tenant or not, you’ll want good advice and approval of leases and contracts.

Home Inspector

When you find what appears to be a great property at a bargain price, you’ll want to be sure that there isn’t some hidden condition problem that is the reason for the “good deal.” A home inspector that you know is both competent and looking after your best interests is the person you need.

Title/Escrow Company

While you may not always be able to use the title or escrow company of your choice, you will have that option a lot. You’ll want a thorough company that is responsive. They can also help you a lot by providing property records and information for homes you’re just considering and haven’t offered on yet. You will become a valued customer, and this can put you in a position to negotiate better closing fees.

It’s probably difficult at the beginning to envision a large business with team members. However, you’ll only become a large business if you build an effective team to take over the things they do best and leave you with the time to locate good deals, buy them and fill them with tenants for cash flow compounding.

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Know Your Market - Top to Bottom

You’ve heard it before: “Real estate is local.” That’s a very true statement. The factors that have the most direct influence on real estate prices are almost always local. However, ignoring larger influences, like national real estate trends isn’t advisable.

Take a top-down approach to your real estate market education. The more you know about the big picture and drill down from there to the local market perspective, the better your investing will go. So, keep up with the national economic and government activities that influence real estate and prices.

If you’re into computers and the Web, you can subscribe to news and blogs that will keep you posted on real estate markets and federal government initiatives that influence real estate sales and prices. If you’re not into the Web for news, subscribe to newspapers or magazines or watch TV channels that focus on economic news.

Then move your focus to the state level. States can have a huge influence on local real estate markets through tax and business incentives to bring jobs. If you keep up with the news, you will know about the new major tech employer being lured into the area by state and local tax incentives. This is valuable information, because it will put upward pressure on prices as well as bring in renters.

National Market Information

Just a few minutes a month can keep you on top of national home price trends. Just subscribe to email alerts from two sources:

FHFA, Federal Housing Finance, House Price Index•S&P Case-Shiller Home Price Index•

These are the two most widely followed indexes of home price movements in the U.S. They use somewhat different methodologies, and they’ll diverge in area trends from month to month, but they’re both of value. You can get the reports emailed to you every month and it will only take minutes to know what’s happening with home prices nationally.

Other than these two reports, you should follow interest rates and mortgage trends in general. In under an hour a month, you will have a better picture of the U.S. housing market than many investors.

State & Regional Market Information

As mentioned before, keep up with state government announcements of incentives for industry and commerce. Getting on the front end of a plan to lure major manufacturers to your area can let you target specific neighborhoods for rental properties.State and regional chamber of commerce news is valuable for investors who want to know who

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is doing business and where. Where business goes, jobs go, and people follow. Again, no more than a couple of hours a month in keeping up with state and regional news will make you a market expert in comparison to other investors.

Hyper-local Market Information

While the national to regional focus doesn’t require a lot of time, you should spend whatever time necessary to really understand your local market. There are so many ways in which to monitor local market trends for good decision-making in purchases and rentals.

Drive the Area

Driving around, though it seems simple, is a major information tool. You’ll spot trends early for neighborhoods where homes are being built, renovated, or they’re deteriorating. You can get building permit information, but seeing it firsthand is better.

You’ll also be getting information about active real estate agents in each neighborhood from their signs. You’ll see how many homes are for sale and where, which helps you to determine how much clout you have as a buyer based on the for-sale competition.

Use Real Estate Agents

Real estate agents can provide you with huge amounts of information and data about sold homes and current listing inventory. With the computerized MLS software today, a few minutes invested on the front end can create automated email reports that can tell you:

about new listings the day they come on the market.•the recently sold prices for homes.•listings expiring and leaving the MLS.•

These reports can be filed away, and used to select comparable properties for price valuation, as well as to provide leads for motivated home sellers.

Title Companies & Appraisers

Title companies can provide you with a great deal of market information. Their records are very detailed and include information about properties from the public records as well as sold prices and mortgage info.

Developing relationships with appraisers can give you a resource to check your valuations when you’re not quite sure about a property’s value. Perhaps you’ve expanded your investment area, and you don’t know a lot about a new neighborhood where you’re considering buying a rental property.

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Join an Investment Club

Join a Real Estate Investment club. You’ll meet other investors, appraisers, contractors, property managers and people involved in the business. They typically invite in guest speakers with valuable information. You’ll also have an opportunity to meet with flip investors who regularly sell quality rental properties to long term investors.

“Real estate is local” is a saying that’s been around for a long time because it’s true. Keeping up with local, state and regional trends is important, but in-depth hyper-local information is critical to your investment success.

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Where Do You Find Great Investment Properties?

Any time you’re looking, there are a number of great ways to locate viable houses for investment. However, now is a time when the opportunities are truly amazing, with high foreclosure inventories, easing of short sale restrictions, and government involvement in property liquidations.

The MLS, Multiple Listing Service

More than 80% of all homes sold in the U.S. are sold through a local MLS. The real estate agents who make up the MLS membership share their listings and commissions to maximize efficiency in matching buyers with sellers.

As banks also end up listing most of their foreclosures, the MLS can also be an excellent resource to locate and buy foreclosure houses. Watching the MLS, keeping up with the time on market for foreclosures, and making offers when properties have become stagnant will get you some great deals.

FSBO, For Sale By Owner, Websites

Sites like trulia.com, zillow.com and forSaleByOwner.com are a few of the places where you can find homes for sale by their owners and not listed in any MLS. Dealing directly with the owner can be either good or bad, depending on their urgency and motivation. But, you have to find them before you’ll know.

Foreclosures and Pre-foreclosures

While foreclosure properties ultimately usually end up listed on an MLS, they can be located early on websites like realtyTrac.com, foreclosure.com and foreclosures.com. You can locate foreclosure homes, many times before they are listed in the MLS. There is a delay while banks clean up the properties and get Realtor valuations. Some investors call the banks before the listing, find out who their Realtor is, and make offers before the competition even sees the house on the market.

Short Sales

In the years from 2007 through 2010, the real estate and mortgage markets were in chaos. There were plenty of opportunities for short sale deals with highly motivated sellers. However, the banks and lenders simply weren’t ready for what they had to handle. They dragged their feet, made multiple demands for documentation that they lost, and they held out for prices that were unrealistic. In short, it wasn’t good for short sales. They would drag on for months until buyers gave up.

Things began to change in early 2011, with HAFA, the Home Affordable Foreclosure Alternatives Program, provides incentives for both lenders and homeowners to get short sales done in lieu of foreclosures. Banks and lenders have also initiated their own programs, now actually soliciting owners to try a short sale before they get to foreclosure.You can also advertise for short sale opportunities via those “I Buy Houses” signs, and newspaper

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and Craigslist ads. Anytime you can get in front of a distressed homeowner before the foreclosure action, it’s a great opportunity for a short sale.

Probate Investing

The first misconception about probate investing is that you’re going to be dealing with bereaved relatives. This isn’t the case. You’ll be dealing with a Personal Representative previously appointed by the deceased, and tasked with disposition of the estate.

As the real estate is usually the highest value item in the estate, emphasis is placed first on selling it to pay off debt. Getting in front of the Personal Representative before the house is listed in the MLS will result in the best deal opportunity. You can do this by researching courthouse probate records, and getting property tax info.

Fixer-Uppers

In your driving around, you will see homes that are in pre-foreclosure or foreclosure and in poor condition. You may also come across them in your advertising for motivated sellers. If you have a knack for repair and rehab of houses, you can make some great purchases and add value through the repairs.

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Know Your Costs

Rental property investment has created a lot of wealth and a great many comfortable retirements. However, just buying right and finding tenants isn’t going to do the job. You must know your costs in buying, holding, managing and selling rental properties.

Let’s take you through the lifecycle of a rental property investment from purchase through liquidation. We’re not going into detail on these cost items, as you can get these details in each deal, and many are moving targets.

Purchase and Sale Costs

Of course, item one is the purchase price. And for cash invested calculations, the down payment comes into play. Let’s look at other costs related to purchase of real estate. Some of these are paid by the seller, some by the buyer, and all are negotiable. However, if you’re not paying on the buying end for things like surveys, you’ll likely pay on the selling end.

Mortgage related costs•Origination fee•Credit & mortgage application fee•Processing fees•Appraisal•Re-appraisal or appraisal review fee•Mortgage servicing and escrow fees•

Property related costs•Survey•Title Insurance & Binder•Inspections•Legal documents, recording & misc.•

If you’re not paying some of these when you’re buying, you’ll probably end up paying some on the selling side. They’re definitely costs most investors see in their businesses.

Holding & Management Costs

The costs to hold and rent out property are varied and significant. Let’s look at the main categories that are involved in almost every rental property situation.

Taxes

Property taxes are a big item. And, they’re not fixed, always rising with property values and rarely falling when values drop. Contact the tax assessor’s office to learn how taxes are calculated in your area. Understand how much they can rise and how often.

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Insurance

Here’s where a good insurance agent can be worth their weight in gold. You want to protect your investment, but over-insuring is costly and leads to reduced cash flows and return on investment. There is also insurance for your business, liability and possibly office insurance.

Management

Even if you start out to manage your own properties, you can’t take full advantage of cash compounding strategies if you continue doing it after you’ve added to your inventory. While you’re self-managing you should be paying yourself, so there is a cost. Factor it into your cash flow calculations, or factor in what you will pay a property management company to handle it for you, because they will be hired at some point. You don’t want to add costs later that you didn’t plan for.

Legal & Accounting

In all phases of your business, you’ll need qualified legal and accounting help. You will need advice in drafting leases and properly handling tenant management and applications. You’ll need legal advice in the formation of your business, as well as help from an accountant for the same purpose from a tax perspective. When you’re using 1031 exchanges to grow your cash flow and portfolio, you’ll need that accountant’s help as well.

Maintenance & Repair

Real estate, unless it’s just land, is going to have repair and maintenance issues. Just ask landlords about the many varied things they’ve paid plumbers to fish out of toilets and sewer systems. You simply can’t ignore the fact that you’ll need a maintenance and repair budget. Factor it in from the beginning, and set aside money for emergencies. If you leave it out of your cash flow calculations, that nice positive cash flow can end up going the other direction in a hurry.

Vacancy & Credit Loss

While some landlords have enjoyed 100% occupancy for short periods, it just isn’t a possibility for the long haul. You need to factor in vacancy as a cost of doing business. You may be able to get local figures for average vacancy rates, but develop your own ongoing percentages to help you in the future. Allow not only for loss of rents during the vacant period, but for rehab to get the unit ready for the next tenant as well.

Credit loss is at least somewhat in your control. While you can’t control loss of a job or emergencies that hurt your tenants’ ability to pay their rent, you can employ good marketing, interview and investigation techniques to make sure that you’re putting the most reliable tenants into your units. In some way, from the beginning, factor into your costs a percentage for vacancy and credit loss.

Every business has costs of operation, and real estate rental property investment is not an exception. The key to cash flow compounding is to know these costs up front and build the cost structure into your plan.

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Like the Numbers - Not the Property

Cash compounding with very low risk is not rocket science, but it is very much mathematical analysis. It’s not math that you can’t do, as we’re going to tell you how to do it. And, it’s not abstract, like trying to calculate the weight if an atom which you can’t even see. This math is related to very visible factors, and you’ll actually come to enjoy it. That’s because “running the numbers” properly will give you a wonderful comfort level and let you sleep at night while your profits roll in from cash flow compounding.

The CMA, Comparative Market Analysis

The CMA, or Comparative Market Analysis, done by Realtors to value properties for their buyers and sellers isn’t a difficult math problem. It’s very much more about selecting the right comparable properties to make your math match the true market conditions.

When you’re trying to value a property for purchase, the CMA is one way to determine the property’s market value, more or less. Successful investors will tell you that, even if cash flow down the road is a major goal, you should make your profit going into a deal. In other words, you want to buy this rental property at a bargain price that locks in equity from the first day of ownership.

You are actually going to want to do two CMAs. One will use comparable properties recently sold in the area. The other will compare properties currently listed in the area to look at the competition.

What Makes a Good Comparable Property?

There are several characteristics that make a property a good comparable for use in your CMA.

if for your sold CMA, sale must have been as recent as possible, preferably less than 3 months •in the past.characteristics of comps must be as similar as possible to your subject property; bedrooms, •baths, square footage, etc.comps should be in the same neighborhood or as close-by as possible.•if a current listing for the competition CMA, comp properties should not be foreclosures or have •other non-normal factors that can significantly influence value.

When you’re doing a CMA, the goal is to select the very best comparables, and three to six of them if possible. Because the sold properties are by nature past events, there can be a number of market variables that have changed. The current listings market CMA is a snapshot of the market right then, and allows you to accurately view your subject home’s price position among comparable listed homes.

Adjustments for Differences

What if you can’t find enough comparable properties that have the same number of bedrooms and baths and similar square footage sizes? You can adjust the sold and listed prices of your

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comparable houses by the value of the differences, but it can be tricky. In other words, if you’re evaluating a 3 bedroom house, and you must use a 2 bedroom comparable, you’ll have to add to the price of the comparable to raise the sold or listed price by the value of an extra bedroom.

There are online and book resources to help you to determine the value of features and amenities in your area for these adjustments. It would be good to also develop a relationship with an appraiser for advice when you need it. As far as adjustments for long periods on the market or area differences, it’s difficult, so avoid selecting those comparables if possible.

Number-crunching for Investors

There are a great many calculations used by real estate investors to compare the value of properties and to determine if an investment meets their requirements. We’ll go through a few of the most popular here.

GRM - Gross Rent Multiplier

This calculation is a quick tool used mostly by apartment investors, and has limited value in evaluating single family homes. It is mostly used as a quick comparison of properties when there are many available and the investor wants to narrow down choices for closer scrutiny. It divides the Market Value (can be a sold price or price it’s listed at for sale) by the gross anticipated rental income. We’ll use a $120,000 price at which a property was sold, and expected annual gross rent of $9200.

Market Value / Gross Anticipated Income = GRM

$120,000 / $9200 = 13 for a GRM

This property is listed for sale at 13 times rents. So, if the investor has many properties to consider, finding some with lower GRMs might be better. If a property getting the same annual rent $9200, but is listed for $100,000, the GRM would be 11, probably a better deal, all other things being equal.

Cash Flow

This report is about cash flow compounding, so we certainly need to know what cash flow is all about. It’s very simple, the result of subtracting all cash out from all cash in. It has nothing to do with things like depreciation or deductibility. It’s all about cash. If you spend money on it, then it is subtracted. If you receive cash, then it’s added.

Cash In - Cash Out = Cash Flow

Cash coming in is normally just rents. However, there can be cases where you may be earning interest on some money loaned out. If it’s related to this property, then it’s income and the cash would go on the income side.Cash out is every expense that’s paid for. While you can deduct depreciation for taxes, it isn’t a

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cash outlay. So, add up all expenses, including mortgage payments, insurance, property taxes, utilities, maintenance, repairs, homeowner/condo fees, and management costs. Subtracting the total of all cash paid out for these and other expenses from the rental income and any other cash coming in would give you cash flow.

ROI - Return on Investment - Cash Invested

Real estate investors have other investment choices. You can put your money into stocks, bonds, or even into a business. You have a finite resource, your cash. You may get this cash from your own accounts, or you may borrow and use leverage. However, decisions about where to invest are made based on the return you expect.

ROI on cash invested, or Cash on Cash Return, is the annual cash flow divided by the cash you have invested.

Annual Cash Flow / Cash Invested = Cash on Cash ROI

The annual cash flow is the cash from rents minus the expenses. Using the example from above, our $9200 gross rent, let’s assume $4400/year in expenses, leaving $4800 (our cash flow), or $400/month in positive cash flow. Though we paid $120,000 for the property, we used 20% down and a mortgage. So, we only invested $24,000 cash in this house (ignoring closing costs for this example). So, our Cash on Cash ROI looks like this:

$4,800 / $24,000 = .20 or 20% C on C ROI

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Market, Property & Leverage Decisions

Once you’ve run the evaluation numbers, there are still some financial decisions involved. Using your risk tolerance perspective and financial situation, you will want to think about leverage. You’ll need to look at the rental market and determine expected rents, even if there is a rent history.

The Property

You want to buy the property as-is, but there is a component of good investing that involves identifying potential. You want to evaluate the property and your expected cash flow based on the way that it is at the time of purchase. However, recognizing things that you can do to enhance the value of the house is smart and will add to your long term profit.

Does the property present the potential for upgrades that will raise the value more than their cost? Is it a large house that can possibly be divided and a separate entrance installed to create two rental units? Is there a large lot, so that it be divided and a portion sold off? Examine every property for its current potential, but keep a checklist handy to prompt you to notice things that present future potential.

Rental Evaluations

If you’re buying a property already in rental service, you obviously have a firm number for rent that is being charged. However, is it rent that you can continue to charge? Is it too low for the current market, or too high? You must know your local rental market.

Survey the competition, both apartments and single family homes. Find out what’s being charged for similar properties. You’ll not be required to be an investigator, as your competition will be advertising their rents and any incentives they’re offering to fill units. Call around and do a rental CMA. Compare similar properties, features and amenities.

This is especially important if you are buying a property without a rental history. You must know how it stands in comparison to the competition in the local rental pool. If it does have a tenant in place, are they paying market rents? Too high or too low changes the value of the property.

Leverage - Down Payment or Cash Flow

There is a risk component to leverage, but there is also a way to use leverage prudently to increase cash flow and appreciation potential. Here’s an excellent way to illustrate one way in which leverage can be used.

Should you buy one $100,000 house with 20% down, or four with 5% down each? Of course, there are a number of variables involved that we’re not going to consider here. Those variables can easily change the choices you might make.

The investor putting $20,000 into a single house purchase, at current market rents and mortgage

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interest rates, would realize around $285/month in cash flow. Another investor in the same market, buys four $100,000 homes with $5000 down for each, and a total of $752/month in cash flow (less than four times the single house due to higher mortgage payments on higher amount financed). This investor also controls four times the property value, which could result in four times the long term appreciation in value. One house may be the best decision, but many times it will be somewhere between that one and the outside example of four. You may not be able to get financing with 5% down, so that factor may make your decision for you.

With the information so far in this report, you can now make a very intelligent decision as to the relative values of properties and their rent potential. You will be able to calculate your cash flow and ROI going in. You can determine the leverage you want to use and balance that with your tolerance for risk and your long term goals.

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Where You Find Properties

Excellent rental properties are all around you. You may not recognize some of them as viable candidates, as you have your own preferences and abilities to consider. There are three primary ways in which you can purchase rental houses. We’ll talk about each, including the profit potential of each, as well as the hassles and risk.

Buy Ready-to-Rent at Retail

These are houses that are in good to excellent condition, need little or no work done to make them rent-ready, or could even already be tenant occupied. Many rental investors find that they can work with a Realtor and buy through the MLS, Multiple Listing Service. A property that’s listed is out there for the world to see, increasing competition, and you can end up paying top dollar for it. If the numbers work, then it’s great, but the numbers must work.

Watching the MLS for listings that have been on the market longer than normal can bring better results. However, the fact that they haven’t sold generally means that they are over-priced. So, getting them cheaper after a few months on the market may just mean paying normal retail value.

You can also advertise for motivated sellers. All of those “I Buy Houses” signs are out there for a reason. You can advertise in newspaper classifieds and in Craigslist. Locating a motivated seller before they list their property, or after they’ve given up on selling it can bring you a bargain.

Don’t overlook short sale opportunities. A short sale is when a bank takes less for a property than the mortgage balance, thus they are short the balance. Toward the end of 2010, banks and lenders began to loosen up their requirements and move short sales along a little faster. You will need to “learn the ropes” of short sales, or work with a real estate agent who specializes in this market niche.

No matter how you find them, these houses are pretty much ready to rent. If you have done a good job of evaluating the market, have a reliable estimate of the rent you can charge, and can buy the house and generate a positive cash flow, it should be a good investment.

This is normally the least profitable approach, but it is also generally the least risky. You’re seeing what you’re buying, and you’re not tying up money in work on the property.

Buy From a Rehab Investor

There is a whole group of very savvy real estate investors out there, and their role is to buy junker houses - houses that need significant repairs and rehabilitation. They then do the work on those houses and resell them to long term rental property investors.

There are even some groups that have formed to take a house through the rehab process, find and install a tenant, and sell the house with a tenant in place with positive cash flow. They know the market and the numbers that work for their customer, the long term rental property investor.

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You can contact these investors in a number of ways. You’ll definitely meet them at real estate investment club meetings. They go there to meet long term investors. You can also find them by calling on the “We Buy Houses” ads and signs. They’re buying and rehabbing, and you can be on their list to contact with good deals.

This approach is usually more profitable than the retail purchase. The rehab investor who is supplying your inventory is well aware of what you want and need, and they will try to supply it at a bargain price.

You Become The Rehabber

This is the most aggressive approach, and the most profitable if done properly. You locate houses in need of work, many times a whole lot of work. You buy them, get the work done, remodel or whatever is necessary, and you then rent them out. There is more profit in this approach, as you’re getting the profit that would have gone to the rehab investor.

It’s more profitable, but there is more risk involved as well. You must know what you’re doing when determining the ARV, After Repair Value of the house. If you spend too much in repairs and rehab, you’ll end up paying too much for the house and equity is out the window. It will also lower your return on investment. If you are borrowing the money to do the work, not staying on schedule can wipe out a lot of profit as well due to the short term financing interest you’re paying.

Where Do You Find Junker Houses

Renovation isn’t always just about fixing stuff that’s broken and replacing items missing after foreclosure. It can also be about changes to the property to increase value and rent-ability. Let’s say that there is a large formal dining room off the kitchen. Knocking out a wall and creating a large kitchen for entertaining may be an inexpensive thing that will increase the value of the house, and it can attract tenants at higher rents.

So, you’re out looking for houses in need of work, houses that the retail buyer isn’t able to purchase, so your competition is only other investors. You’ll locate these homes in a number of ways. You can find them listed in the MLS, as banks normally end up listing their foreclosure properties.

You will also find them online at websites like realtytrac.com. There are other foreclosure and pre-foreclosure websites as well. While locating houses in the early phase of foreclosure may not allow you to make an offer at that time, you can watch them and catch them early, hopefully beating out the competition.

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Repairs, Renovation and ARV

Let’s talk about ARV, After Repair Value, first. You learned about doing a CMA earlier in the report. You will be comparing the house you’re considering buying and rehabbing to similar houses that sold in the past and others currently listed.

The difference in this CMA is that your house is still in junker condition. You must do the CMA as if the house has been fully repaired. The value you arrive at is the ARV. Then you’ll know what it will be worth, but there’s a very big piece of the puzzle still not in place. What’s it going to cost to get the house to that after-repair condition?

What’s Involved?

Since a house can require repairs or rehabilitation from simple repainting to knocking down walls and re-roofing, there’s a lot to consider. Items and activities necessary can include:

painting•carpentry•heating and air conditioning•appliances•flooring•roofing•electrical•plumbing•room additions•foundation work•cabinets•countertops•doors & windows•lighting•

Unless you’re also a general contractor, you’ll be relying on others to make all of this happen. You’ll need to work with good contractors and know that they can and will perform inside of budget and project time frame. Hopefully, you will develop relationships that will make it possible for you to get reliable quotes from them for work to be done.

You’ll also want to develop your own rules of thumb and fast calculations to quickly come to a reasonable estimate to rehab a home. This will allow you to spend your time on the best candidates.

Either work with your contractors to put together a spreadsheet that will allow you to quickly fill in the blanks, or go to websites that specialize in online estimation of repairs and remodel. Many will adjust them for the area in which you do business.

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www.homerenovationestimate.co• mhttp://cgi.money.cnn.com/tools/renovation/renovation.html•www.remodeling.hw.net/facts-and-figures/cost-vs-value-report• /www.quickcontractors.com/qc-consumers/cost-estimator.asp• x

If you’re more into a book to carry around:

F. R. Walker’s Remodeling•R. S. Means Construction Books•Affordable Remodel: How to Get Custom Results on Any Budget•Sweet’s Repair and Remodel Cost Guide•Dodge Repair and Remodel Cost Book•

You’ll make more money doing rehab, but be prepared to use your team and take on some added risk. If you’re using OPM, Other People’s Money, you’ll add interest payment risk for projects that don’t complete on time.

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Buying Your First Property

You’ve got your number-crunching down pat, and you’ve gone out and located a great deal. Buying this property and installing a tenant will generate a nice cash flow deposit every month. Now all you have to do is buy it. Let’s take you from your first offer, through negotiations, funding and closing.

The Offer and Negotiations

How Much to Offer

You know that it’s not about liking the house. You like the numbers. They work, and you’ve done the research to prove it. So, what does this first offer look like? Let’s use an example home to illustrate the process.

The home is listed at $150,000. You have 20% to put down, but your number-crunching indicates that you can’t pay more than $140,000 to realize the cash flow you want. You’ve done a lot of research, and you’re discussing the deal with your real estate agent.

The home has been on the market longer than average, a good sign for a lower offer.•There was one price reduction, but it’s been more than a month since that reduction.•The home is in good condition, and will not need significant repairs.•The current list price is in line with area comparables, so you will be getting a reasonable deal •and locking in a little equity if you can get it for the $140,000 target price or lower.Your rental market research shows that you can conservatively set the rent and realize your •targeted cash flow.Searching recent sold properties in the MLS indicates that, on average, purchase prices are •running 4% below list prices, which would be $144,000 for this house.A check at the courthouse shows that the mortgage at the time the current owners purchased, •six years before, was $100,000. You can assume that they owe something less than that now. It appears that they can pay the commissions and closing costs and keep some equity at your •desired price of $140,000 or lower.

With all of this information in hand, you might make an offer around $130,000 to $135,000, and be working toward a negotiated final price at or below $140,000.

That’s a pretty good example of how you pull together the facts and numbers and work toward a first offer price. Of course, if it’s a short sale situation, then you’re negotiating with the bank, and at lower numbers than current value, but the process is very similar.

In our example, we’re working with an owner/seller, and they’re not in distress, so our offer is made with these facts in mind. However, if they owed a lot less on the mortgage, and especially if they are in a distress situation, you might lower your first offer. Lowball offers aren’t necessarily a problem, but they should fit the situation.

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The Purchase Contract

In most cases you’re working with a Realtor, and they almost always have purchase contracts developed by their association in cooperation with attorney members. These contracts are designed to be fair to both parties. Especially when you’re new to this business, have the Realtor explain the entire contract to you.

There will be many document delivery and inspection deadlines in the contract, and “time is of the essence.” Make sure that you stay apprised of all deadlines and due dates. Once you build a strong relationship with a very efficient real estate agent, you may be able to relax in this area, but always be aware of the importance of meeting all due dates.

Contingencies

A contingency is something that, when and if it happens, it brings about a certain result. Contingencies exist in all contracts, and can relate to everything from how money is handled to inspections and financing.

additional earnest money could be required at certain stages of the process.•certain items being included in the sale.•certain disclosures may be required, and depending upon what they say, certain actions may •be required.inspections are contingencies, and based on the results, certain things must happen.•repairs could be a contingency.•homeowner insurance is a contingency.•mortgage financing is a contingency.•title insurance and surveys have contingencies.•

Any contingency brings the possibility of killing a deal or changing its course. They’re important and should be carefully monitored.

Disclosures

Different states have different requirements and laws about disclosure of defects or problems with the property. In addition, there are federal requirements related to hazards such as lead base paint and environmental hazards. When disclosures are required and delivered, there will be remedies prescribed for the buyer if problems are disclosed.

Offer and Counter Offers

Once you’ve made your offer, it will be presented to the Seller. They will consider not only the price, but earnest money amount and all contingencies. Either they will accept your offer as-is, unlikely, reject it out of hand, possible, or come back to you with a counter offer.In different states, counter offers take different forms. You may then go back to them with a counter

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to their counter offer. This can go on for a while, and some deals result in a great many counter offers bouncing back and forth. Some items may be rejected in one counter and then given back in another, as the price may be changing in all or just some of the counter offers. Anything can be negotiated, so this can be an interesting process.

The mortgage is a contingency, and you should have submitted a pre-approval with your offer. Sometimes even the amount of your down payment could end up being negotiated in counter offers. However, early in the process, the Seller will want to get as much assurance as possible that you’re going to get your loan.

Using Tenants to Get Financing

In some cases, you may be able to get a pre-closing letter of “Intent to Lease” from tenants for the property. This tells your lender that you are going to have an income from the lease, and how much. If they’ll consider it at all, this can help you to get the mortgage.

From the Deal through Closing

The big negotiation is over, but there’s a lot more to do. And, some of what’s left could result in follow-up negotiations which can kill the deal. Let’s take an overview look at what’s going to happen between the purchase contract signing and the closing.

The Title Insurance Binder/Commitment

One of the first things the Seller’s broker will do is to present the documents to the title company, called “opening title.” The title insurance company will do a thorough search of all public records. They’re looking for liens, encumbrances, title problems, claims to ownership, recorded documents impacting the title, subdivision covenants, and anything else recorded in relation to this property.

Once they’ve completed their search, the title company will issue a binder or commitment to issue a title insurance policy at closing. There will be two major components of this binder, the “Requirements,” and the “Exceptions.” Let’s talk about these.

Requirements - • the title company will want some things done in order to make their binder effective. They will want things like:

payment of all outstanding utility, water and trash bills.•a valid deed conveying title.•possibly a quit claim deed in a divorce situation to have one spouse quit claim their interest •in the property to the other.payment of all back taxes. •

Exceptions - • there can be a number of things in the public records that impact the property, and the fact that they’re recorded and may pass along through the title chain of ownership means that whatever they say stands. So, the title insurer will not be able to insure around them. An example might be subdivision covenants that say you can’t park your boat in the front

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yard. If you later want to do that, the title insurer will not be able to work on your behalf to get you that right. Another example would be easements. Read and understand all exceptions, and if you can’t live with one or more of them, you may have to pass on the property.

Survey

After the binder is delivered, there will be either a survey, or an abbreviated form of a survey. If there has been a survey in the not too distant past, say within the last 10 years or so, then an abbreviated survey, sometimes called an Improvement Location Report (or ILC - Certificate), sometimes called the ILR. The purpose is to locate the improvements on the lot, as well as to turn up any encroachments, such as the neighbor’s storage building being one foot across the line. The ILR is less expensive, but can’t be used by the Buyer in any other way. It’s for the title insurer so that they know what’s there and what they’re insuring title to.

Mortgage and Appraisal

If you’re getting a mortgage, you start early in the process, right after the purchase contract is signed, in getting information and documents to your lender. They’re going to be reviewing the title insurance binder and the survey as well. They’ll also be continuing to investigate your financial status, debts and income.

The lender will send an appraiser to report on the value of the property. Though you’ll pay for this appraisal, they’re working for the lender. If their value comes in too low, there will have to be another negotiation to bring down the purchase price to or below appraised value.

The Closing

Once all of the loose ends are pulled together, the mortgage is fully approved, and all contingencies are satisfied, then you can go to closing. Buyers and Sellers don’t necessarily need to close in the same room, or even on the same day. You’ll sign your loan and other documents. Once the documents are fully executed, the lender will wire the funds, the Seller will be paid, your deed will be recorded at the courthouse, and you’ll get the keys.

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Tenants – Attracting, Interviewing & Management

We’ve discussed the costs of doing business, with vacancy and credit loss as important cost components. The quality of your tenants will have a direct bearing on both of these cost items. If you attract tenants with good marketing, you’ll have more of them to interview, which should help you to select the very best and most reliable tenants.

Marketing

Newspaper Classifieds

Classified ads in local newspapers are still reliable generators of interest in rental properties. Running a simple and short ad can bring you calls and tenants. It can be as simple as:

”Great homes for rent in the best neighborhoods. Call ###-####”

The key to effective classified advertising is running consistently in the same area of the paper. If you’re running this ad under “Rental Homes,” keep it there every week or as frequently as your budget dictates. People who don’t need it today will become used to seeing it, and they’ll come back to it when they become a prospect.

Craigslist

This is the online equivalent of the classifieds, and it’s free. You’ll be using it in a couple of ways. You’ll run the ads to market your rental property, much like we just talked about in the newspaper section. The best thing about Craigslist is that the online medium is searchable. Your prospective tenants will be able to find your ad with a search. So, because it’s free, more words works better. Using keywords, like the subdivision or neighborhood and “rent, rental, house, home, etc.” will allow renters to find your ad.

However, there’s another way to use Craigslist to your advantage. Renters run their own ads, looking for houses to rent. So, you can do your own searches to locate ads they’ve placed looking for rentals.

Bulletin Boards

Rental houses in college towns or near major employers can be effectively advertised on bulletin boards in the area. Some employers will allow you to place your ad on their in-house bulletin boards, and local stores and the college buildings may do the same.

Social Networking

You can’t ignore the amazing growth of social networking, especially Facebook and Twitter. Since it’s free, why not take advantage of it. You can build a Facebook page for your rental homes, with images and descriptive text. Facebook and Twitter can work together to advertise your properties.

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Encourage your happy tenants to post good comments on the Facebook page, and when you make improvements, you can announce them there as well. Running a rent special can be announced on Facebook and Twitter too.

Website

Once you’re adding to your rental home inventory, you’ll want to consider a website of your own. You can just stick with a Facebook page, but Facebook is known for changing policies frequently, and you may find that you can’t maintain the presence you want over time.

A website can now be designed very simply and at a very low cost. There are multiple resources, some with site templates for rental properties. A website allows you to market your properties with unlimited photos and descriptive text. Place the website on all of your marketing materials, in classified ads, and on business cards. When you get an email inquiry from Facebook or elsewhere, you can just send them a link to the website or a specific property.

Property Showings & Tenant InterviewsPart of your advertising can be for properties you don’t even have available when you run the ads. It allows you to build a tenant prospect list, learn what they’re looking for and use that information in locating houses to buy. You’ll also get interest on properties that are already rented, so you’ll want to place those prospective tenants on a list as well.

However, if you’re talking to a prospective tenant, and there is a property available, you’ll want to be careful in your first conversation. Learn the laws as regards housing and equal opportunity, and don’t ask questions that are illegal. Be friendly, but use a list of questions, perhaps approved by your attorney, and don’t ask in writing or on the phone questions that may be illegal or discriminatory.

You may be discussing a property that was advertised with a specific rental amount, or not. You’ll need to discuss the rent and utilities costs in this first conversation, as you don’t want to show a property to a tenant who can’t afford it. Once you’ve determined affordability, you’ll want to schedule a showing.

Don’t set up a multiple prospect showing. You don’t want more than one tenant prospect there at the same time. You can schedule them close together to make the best use of your time, but avoid taking a group through. You might think that it will spawn competition, but it really doesn’t help as much as it creates distractions.

Point out the features of the property, but don’t hover. If they prefer to go through without you, that’s fine. Some people want to discuss it while onsite, and they don’t feel comfortable commenting on rooms and features with you present.

The Interview & Application

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Your interview begins at the showing. Ask casual questions, just getting to know the prospective tenant. If things are going well at the showing, you may be able to sit down at the house or in a coffee shop and begin the more formal discussions. You need to tell them that you’ll be checking credit and references, and about any other checks you’ll make on their background.

Your application form should get as much information as legally allowed. You want full name(s), social security numbers, their approval signature to check their credit and backgrounds, and contact information for family and friends. Rental references, employment and income information are also necessary.

Again, clear the questions you’re going to ask with an attorney, and have a list prepared that you can follow so you don’t add or forget anything that can get you into trouble. Once you’ve done your checks and the tenant(s) meet your requirements, it’s time for the lease.

The Lease

You can buy a standard lease form in many office supply stores, and it may basically meet your needs and be legal in your state. However, you need to make sure that it is appropriate. You can also order a lease form online. Either way, take the form you’re considering to your attorney for approval, or have your attorney draft a form from scratch. You must make sure that it’s legal in every respect for your state and that it protects your interests.

Components that make a lease effective, not necessarily all legal things, include:

clear statements of the amount of rent and when it’s due•how rent is to be paid and to where•procedures if rent is late, amount of penalties•amount of deposits, how they’ll be held, if interest will accrue•rules for deposits and refunds•“wear and tear,” and “damage” defined and how costs will be withheld•timing of refunds of deposits•how and to whom tenants report problems•move-out and cleanup rules•permissibility and rules for sub-lets•

Your attorney can help you with other items that should be in the lease. You’ll also want a check-sheet for condition. Before they bring in furniture, you and the tenant go through the property. They should check off the condition of the property. Any minor damage you might have missed in the refit for a new tenant should be noted on the form so this tenant will not be held liable. On move-out, the same checklist is used, and you and the tenant go through the property again to note any damage or repairs that are needed. They should sign and date the checklist both times, and you’ll be able to use this sheet to determine damages and any money to be held back from deposits.

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Property ManagementOnce you own rental houses and have tenants in place, you’ll enjoy those monthly bank deposits. To make sure that you keep them maximized, you’ll want to be efficient in managing your properties. Whether you’re self-managing, you’ve hired a management company, or a little of both, here’s what’s involved.

Management

Everything here falls under the general category of management. However, this is about the costs of the personnel and procedures to manage your properties. If you’re doing it yourself, still budget some type of salary for it. One way to determine the amount is to check with property management companies to see what they charge. You’ll probably end up using them anyway. So, if they charge 9% of rents, then budget that in as your management salary. Later, when you grow and you’re enjoying cash flow compounding, you’ll want to end the compounding of the hassles and hire out the management.

Repairs & Maintenance

To put it simply, stuff breaks. And, when it’s a rental property, stuff seems to break more often. The nature of renting is that tenants do not take ownership responsibility for the property, which can lead to less preventive maintenance and more breakdowns.

Even the best of tenants will have things go wrong in their units, sometimes their fault and sometimes not. It’s the landlord’s responsibility to maintain the unit in livable condition, with fully functional comfort systems, heating, air conditioning, plumbing and electrical. Budget for this. As you build experience over time, you’ll be able to construct pretty accurate maintenance budgets for your properties.

It’s not all just repairs either, as you’ll want to budget for periodic preventive maintenance, with visits to check out heating and air systems and major appliances. Preventive maintenance can reduce repair costs, prolong equipment life, and maintain efficiency.

Tenant Relations

Vacancy costs money. Not only do you lose the rents for the vacant period, you must rehab the unit to make it ready for a new tenant. Minimizing vacancy costs is a major contributor to ROI. Maintaining your properties in good condition, and responding promptly to tenant requests and problems goes a long way toward retaining them in occupancy.

If you’re coming up on a lease expiration, you’ll want to run the numbers again and look at current market conditions. If your current tenant has been a good one and has paid their rent on time, your best option is usually to keep them. If local rents have escalated, that may be difficult if you raise the rent. If rents have been stable or have fallen in the area, you may want to offer them an

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incentive to sign a new lease.

Compare your costs to refit a unit for a new tenant to any possible rent incentive you may want to offer the tenant to stay. If they like their home and you’ve maintained a good relationship, they may just renew without any coaxing or incentives. Unless you have a good demand from new tenants and can raise the rent and guarantee occupancy, it’s best to keep the current tenant in place.

Utilities

These are costs of ownership, but it’s best to pass them along to the tenant. With single family residential properties it’s not a problem, as they’re separately metered for that residence. You should give your new tenants a complete instruction kit with phone numbers so that they can change the utilities over to their names effective on the first day of their lease. Check to make sure that they do it. This will make them more cognizant of their usage. If you’re paying the bills, they will be less careful about what they consume.

Insurance & Safety

You’ll be maintaining insurance on the property, and you’ll want to purchase good coverage, but not over-insure, as it will reduce your cash flow. You’ll also want to take any discounts available for things like security systems, fire alarms, and other safety features.

It’s not just a cost consideration. Your tenants will appreciate your efforts to keep them safe. They notice and appreciate these safety items. The benefits pass along to cutting vacancy rates.

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Cash Flow Compounding Through Sustainable GrowthCompounding cash flow when you own rental properties is all about owning more properties and maintaining profitable cash flow for all of them. We’ve discussed leverage, and using OPM, Other People’s Money to facilitate the purchase of properties. Let’s bring everything together, along with some growth and management considerations. Let’s see how you’re going to grow sustainably, and compound cash flow to levels you can’t imagine until you see it happening.

Property Types

You can just set your sights on single family homes, but this can limit your growth. Other types of properties can provide options and economy of scale opportunities. The focus of this report isn’t large apartment complexes, but there are opportunities for scaling your business that stop short of that many units in one place.

Condominiums

Earlier in the report we discussed condominiums. Purchasing two or more in a complex can be a good decision, as you get some economy of scale. You can visit and monitor two or more properties in a single location much easier than driving around to multiple addresses. However, be aware of lender restrictions, as there are some related to too many units in one complex owned by a single buyer and rented out. Keep the percentage below the restrictions, or it will be difficult to sell later, as the buyer will have a tough time getting a mortgage.

Single Family Homes

This is the main focus of this report, and you’ll do quite well renting out nice homes in neighborhoods where tenants want to live. Since the housing and mortgage crisis that began in 2007, there have been many more opportunities to purchase homes in nice areas at great discounts from foreclosure inventories and through short sales. The main advantage that condominium ownership holds is in the common areas, like clubhouses and swimming pools for the use of your tenants. You won’t have this with single family homes unless they are provided by the subdivision or neighborhood.

Duplexes, Triplexes & Four-plex Properties

These type of properties can be some of your very best investments. By having multiple units in one location, you pick up some economies of scale. You can negotiate better deals with landscapers, repair people and others, because they can do multiple things in one place. You can monitor these properties more efficiently as well. One roof is less expensive to maintain than four as well.

Many times properties of this type will not command rents as high as comparable square footage in single family homes or condos. However, the difference can be partially or fully recouped by having the units concentrated in one small area.

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Geographic Location

Sustainable growth in this business is partially controlled by the area in which you operate. You’ll want to limit your property holdings early-on to areas close to where you live so that you can monitor them. Choosing properties in close-by areas that have different characteristics and rent points is a good idea. You may own properties in an area preferred by young professionals, and these might be primarily two bedroom units. You may also move into a more family oriented area with larger homes. This is diversification that can help you to weather drops in demand in certain areas over time.

As you grow, you can expand your area of operation. This is especially true after you reach the point of hiring out management functions. Once you’re using a property management company, they take care of a lot of your management tasks. This will allow you to expand your area, even operating out of your city.

Cash Flow Types

Our focus in this report is primarily on long term rental property cash flow. In the course of your real estate investment activities, you will come across other opportunities. You may also find that you must sell one or more properties in order to purchase other better investments. So, you may be doing a property flip, a purchase and rehab, or just selling to roll into other more profitable investments. The three most common types of investment opportunities are:

Cash flow rental – 1. this is cash flow from multiple properties you own and rent out. It’s the primary focus of this report.Rental property flip –2. suppose you use the strategy discussed earlier in this report to buy a fixer-upper and rehab it to rent it out. However, you’re well into the rehab and find that you can sell it to another investor immediately for greater profits than you’d realize in the first two or three years as a rental.Future development potential –3. you purchase the property with an acceptable cash flow. However, part of your purchase decision involved recognition of the ability to add on or remodel the property to increase the rent it will generate. Or, you could buy a property on an oversized lot and divide it for sale of the excess portion.

Item #3 could also be your purchase of a property that you know is in an area that’s about to experience growth and appreciation. If you are able to buy in an area into which a huge company is going to relocate and bring jobs, you could be ready for resale at a nice profit soon.

Manage Leverage – Both Personal and Financial

Growth with sustainability is dependent upon your ability to grow without exceeding your ability to manage your business, and your financial capabilities. Over-leverage in either of these areas will result in limiting growth or outright failure.

Over-extending Yourself

It’s easy to become addicted to real estate and watching your “empire” grow. Keeping all

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management tasks and adding unit after unit can wear you out. You can find that your properties and cash flows are suffering because you can no longer maintain effective control.Growing too fast, past your personal abilities and control, is a mistake. Continually assess the way you spend your time, and how your business is growing. How much time do you have to enjoy life? Are you working all of the time and just building cash flow without using any of it for personal fulfillment? Move to an outside management solution to improve the situation and help you to grow without further stress. If you’ve budgeted for it as we discussed previously, it will not have a negative impact on your growth.

Control Financial Leverage

As you build cash flow, don’t use it all for fun or growth. Build a cash reserve. You need a reserve to help you to weather economic downturns and get through periods of higher than expected vacancies or lower rents to maintain occupancy.For your first few years in the business, buy just one property at a time. this might be a triplex, but it’s still one deal with one mortgage or financial leverage component. Try to avoid working two or three deals at the same time, as this could be an addictive habit that will cause you to over-leverage your financial abilities.

Keep Your Job

You’ve likely started your investing while employed or still running a business of your own. Don’t get excited after you get a few properties in your inventory and quit your job. Whether you like it or not, your job provides a stability to your income flow that you don’t want to cut off too early in your growth cycle. Doing so could destroy your business if there’s a setback due to the economy or rental demand. The time to consider quitting your job is when your investments are generating more income than your job and you’re missing opportunities to grow because of your job requirements.

Manage What You Have Before You Add Properties

Never stop evaluating costs, and never stop improving your management practices and attempts to cut costs. Always be improving your marketing, and your properties, trying to increase rental income to go along with cost cutting and efficient management. You can easily lose more in cash flow on the back end if you lose sight of management tasks because you’re adding inventory.

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Compounding Cash FlowThis report has introduced you to all of the critical information you need and the steps to take to create cash flow from real estate investment. There are more millionaires out there from real estate than from most any other business or investment activity. Retirees are enjoying luxurious lifestyles in exotic places paid for by real estate cash flow.

What you’ve learned in this report is the process for locating and buying the house, marketing for tenants, and managing the properties. We don’t have to tell you how to deposit those rent checks!

So, compounding your cash flow is simply replicating this efficient and profitable process, and adding properties. Each should be carefully selected and purchased with a positive cash flow result. Using leverage, you can purchase additional properties, compounding the results. Additional leverage and compounding will become easier the longer you own properties, as you’ll be paying down mortgages. With appreciation in value and a paying down of the mortgage balance, you’ll free up equity and increase your net worth. This will allow you to use the equity in the properties to finance others.

The information in this report has changed many lives for the better, and funded many luxurious retirements. Use it to do the same for you.

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