Buy now? Or is it too late?

Lots of people ask "Is this a good time to be getting into real estate?". As always, it depends...

The housing market right now is wildly overpriced -- in some areas. Therefore the first question is simply "Where do you want to buy?" While an extremely important question, it's not the only one worth asking. The second question you need to ask is "Why are you investing?" which is a subject I'd like to pontificate on today.

While some late-night-TV scam artists will try to convince you that you need only to buy a parcel of land and money shall rain upon you like the allegorical felines and canines, there is a little bit of work and research to be done. Money in real estate can be made in some combination of two streams:

  • Rental Income
  • Appreciation
(While it's true that you can also save some money in tax write offs, no one buys real estate just for the deductions. It'd be a slow and painful route to riches.)

So while you examine your local market, look at multiple things. How much have the houses gone up in your area over the last few years? If it's been in the double digits, then odds are you missed the appreciation train and can't expect tremendous returns through appreciation alone. You can also read up on experts analysis of your area.

According to the sources I linked to, the area Biff and I invest in went up by 27% last year and are currently over valued by 16%. So the outlook of big gains through appreciation over the next year or two look slim, but still possible. Personally I forecast growth of about 6-8% this year, since we lagged behind the rest of the nation in appreciation.

The next important thing to research is rent in your area. Start by simply looking on or or some other similar website and compare rental rates in your area. The type of housing you are interested in (condo, townhouse, etc) and size tends to pull down what sort of rent? Have rents been moving up or down? If you are in a market that has rapidly overpriced recently, it's very likely that rents will quickly rise to match. So if you were looking at buying an apartment building this might be the right time to buy, while rents are still relatively low.

Don't be afraid of the numbers. Learn to love them. What sort of mortgage would you have to take out to get a house? 80%, 90%? How much of your mortgage could be covered by rental income at the current level of rent in your area? If houses have gone up, rents will probably follow, would that put you in the black? Could you survive comfortably until then?

The run-up in housings costs have done two things to the investment property market. It's made it more expensive to get into, and it probably guarantees that a run like this one won't happen again for another 5-15 years. But that doesn't mean there aren't good, money-making deals out there. In some market it might make sense to hold off from buying (for the same reason I'm renting), but in many other the opportunities are there. Just bear in mind that the crazy run-ups of the last 5 years are mostly gone. Real estate investing has gone from wild speculation and insane profits back to a simple, effective way to generate a solid cash flow.

Journalists are a dime a dozen

I know this blog is supposed to be about real estate investing. But sometimes I find something in print that drives me crazy. If you want to read an extremely poorly written article by a paid journalist, then go read this article at MSNBC. Then I'll explain why it's a shame that man pulls a paycheck.

Done reading? OK.

Let's look at this man's "findings" and discuss. First of all let's take a look at the purpose of the article. He's trying to compare costs and savings between single people and married couples. Sounds like a noble goal. But that's where he went wrong.

"We looked at the monthly expenses of three New York City households..."

Are you serious? He's comparing THREE people? Since when does three data points (only one per set) give you any sort of reasonable conclusion? I could do the same thing to make married people look good by comparing myself to Bill Gates. He's married.

Seriously though, the real crime in this article is that he makes a lot of conclusions from this extremely poor starting point. Like my college math teachers taught me "You can have the best proof in the world, but if your assumptions are wrong then it's just a waste of time." But let's continue to analyze his "findings".

"For example, only 9.3 percent of the couples' $14,200 monthly gross income goes for rent, compared with 23 percent of the single person's $7,500 monthly pay"

Remember that we're only comparing 1 married couple to 1 single person. We can look at this numbers really quick and determine that the single person pays $1725 a month for rent while the married couple pays $1320. Why is that? Does the single guy work in a pricier part of town? Does he have a 3 bedroom suite? Does the author really believe that, based on his "evidence", he can conclude that married people pay less rent (not spend a smaller percentage of their income but actually pay less rent) than singles? Do any of you actually believe that? Because his "facts" do.

"The married couple also gets some relief on both federal and Social Security taxes, thanks to the slightly lower tax rates associated with joint filing. They pay out a combined 29 percent of their salaries, compared with the 35 percent the single person pays"

According to this table from the IRS that is completely false. According to the IRS table, both of them would end up paying an effective income tax rate of about 21.7% (the married couple pays very slightly higher). Social Security taxes are a direct 6.2% on the first $90,000 regardless of whether or not you are married (unless you are self-employed).

Marriage can actually cost more during tax season if both partners work. If you look at the table I linked to above, if my fiance and I each make $120,000 a year (I wish) then we are each in the 28% tax bracket. If we get married and file jointly for $240,000 a year, we are well into the 33% tax bracket. Costing quite a bit more come tax day.

"Married couples tend to start saving for retirement early on, while singles generally wait until their 40s. So while wedding bells usually lead to a smoother path to retirement, they produce a more expensive month-to-month life — and they mean less free cash in your pocket."

There's actually two problems here. First the author claims that married couples tend to save more for retirement. Is this based on his highly scientific study of three households? Because he doesn't quote any other sources. If so, then this statement is blatantly misleading you.

But let's assume that he actually did some real research and found this out. He tries to convince us that because married people save more early on they have a more expensive month-to-month life? Since when does saving money lead to more expenses? His final conclusion "less free cash in your pocket" is correct, but just because the money you saved is inaccessble until you are 65 doesn't mean your life is more expensive. Your month-to-month expenses aren't directly affected. It's pure bull-crap.

"While there are plenty of renting couples and home-owning singles, married people account for 77 percent of all homeowners, according to the Center for Politics."

Finally a statistic with an credible source. To bad it's a worthless statistic. 77% of all homeowners are married seems to indicate that married people are more likely to buy a home. But that's what makes this so tricky, and very misleading.

What if I told you that 5% of all homeowners were plumbers? It would seem like not very many plumbers buy homes. But then what if I mentioned that only 1% of all adults were plumbers? Now we can actually take a look and realize that plumbers are far more likely to buy a house than any other adult.

"Add it all up, and Chestnut's married clients shell out practically all of their monthly income on living expenses, scraping to save anything beyond a retirement plan contribution. The single earner, by contrast, socks away more than $300 per month, nearly 5 percent of his or her pay."

Once again we are back to our three families, who can prove nothing on their own. But why stop with one error when you can print two? Not only is the data behind the statistic bad, but the statistic itself is misused. The single earner saves 5% of his income a month while the married couples can only save for retirement. What if the married couples putting 30% of their income into retirement funds? Who's the better saver now? Of course it couldalsos be that the married couple is saving very little, but their marriedneighborss (not included in this huge study) save a considerable amount.

"Once children enter the picture, married couples are really in financial trouble ... The total cost of camps, day care, books, toys and after-school programs? Try $4,000 a month."

Does anyone actually believe that this is normal? I mean at this point the article gets ridiculous.

In any case I think I've proved my point. Just because you read it in print doesn't mean the person who wrote it has a decent head on his/her shoulders. This article is a perfect example of what happens when some nitwit gets his hands on a very small set of data and decides that he can make broad conclusions from it.

and he gets paid to write... I ought to apply to be an author at MSNBC...

Think I'm wrong? Post your comments. If someone can somehow prove that this article is anything other than a embarrassment of journalism, I'll make a full retraction.

Effects of buying houses in different price ranges

In my last post I talked about learning to set a fair rent value for a property. Both Biff's research and the article indicated that the lower the price of the home, the better the return you get on it.

Therefore it seems like a no-brainer to buy cheap homes and rent them out right? Well... maybe. Biff asked me to do a quick rent comparison for investing $400,000 in various house combinations to compare what sort of rental conditions we're looking at. Here's what I sent back to him:

Monthly rent income on a combination of houses with a combined total worth of 400K (approximate).
$2,250 = 1 400k
$2,450 = 1 300k, 1 100k

$2,500 = 2 200k

$2,505 = 3 133k

$2,550 = 1 200k, 2 100k

$2,600 = 4 100k

$2,500 = 4 75k, 1 100k

As it turns out, buying lots of smaller houses does seem to offer you more in the way of rental income. However, there are more factors to consider than just rental yields. In the same e-mail to him I looked at a few other factors, some of which argued against the more/cheaper homes model:

  • Cheaper houses, and thus cheaper rent, can lead to less desirable tenants. In other words, the more expensive the rent, the more likely that the person who can afford it is somewhat responsible.
  • More houses takes more time, from both a landlording point of view and an accounting point of view.
  • Each house will incur closing costs. On the above model it'd take the best 2 house model almost 2 years to turn a great profit than the 1 house model, assuming a $5,000 closing cost per house.
And some which supported buying multiple cheaper homes:
  • More houses increases your chances of vacancy, but lowers the cost of it. If you own one $400,000 house and can't find a tenant, that's one hell of a mortgage you'll have to cover.
  • You can buy as you go. You might not have enough to buy that $500,000 apartment building yet, but instead of plopping that money into savings it might be better to start investing with something smaller.

So which is best? It depends on your business model. Biff and I decided that our goal was to cater to young military families. So we're looking for townhomes with plenty of space in the $200,000 range. Upscale and expensive that we don't get much attention from young bachelor that might treat our property with less care.

What can I take you for? (or: Determining Rent)

Some aspects of landlording are so mysterious that they practically border on the occult. Take setting rental prices, for example. We try and we try and we try, but Biff and I haven't been able to truly quantify fair rent setting practices. When we set the rent on House #1 for the first time, the number was little more than a random fling of a dart at a border of numbers.

If you are setting rent for the first time (or just want some guidance) check out this article from As with almost everything in real estate, there isn't a rule in there that wasn't meant to be broken, but it's a good launching point.

Especially interesting to me was how the more expensive the home, the lower the capitalization through rental income. Essentially, less expensive home have greater yields. This is fascinating to me because it jives with the research Biff did back in summer of 2005. Here's a glimpse at that research.

The blue line is obviously the average, the red dot is House #1. Note that all the calculations are normalized to square footage. Biff believes strongly (and has brought me around to thinking) that the single most important attribute of a rental property after location is square footage.

Biff's conclusion from his research: "Within range of interest ($50k-$200k) trend is nearly linear (i.e., two $100k houses would likely yield only slightly more as one $200k house). Fewer, more expensive properties are better because they're easier to manage and potentially have better quality renters, but more cheaper properties probably have a slight advantage for profit margin and lower financial risk."

One is the loneliest number (or: investing in a group)

Thus I introduce Biff. You've heard his name before (obviously not his real name, but a pseudonym that he himself chose). I suppose that I could take this time to rant on about how we became friends and ended up starting this whole thing, but instead I want to talk in more general terms about owning property with someone other than your spouse.

When I was on a scuba diving trip (you meet people in the most unexpected places) I met a real estate agent/investor who asked me all sorts of questions about my business. When we got to the part where I had a partner he eventually gave me the best bit of advice I've ever received when it comes to investing. "I've been in all sorts of arrangements", he said, "two partners, ten partners, no partners. I've learned that the only good partnership is when each partner needs the others."

Biff and I are successful partners for many reasons, but one of the biggest is simply because we need each other. We're each capable of running the business by ourselves, but the presence of the other adds a tremendous amount of value.

By pure luck we've managed to divide our responsibilities according to our strengths. Biff, for example, is our property manager. His personality type makes him perfect for such a role. He loves tinkering with things and problem solving. I could manage properties (if for a moment we conveniently ignore the fact that I'm over 3 hours away), but it wouldn't be something I'd enjoy.

At the same time I love numbers. I can keep myself happily entertained for hours with some receipts and a spreadsheet. I love putting in all of the numbers and then figuring out what they mean and where we are. I love it so much that many our corporate accounting practices I've incorporated in my own life. Biff does not like this. He's smart enough to run the numbers (he has a Ph.D in an engineering discipline), but it would be a terribly boring chore to him.

In addition, having a partner lessened our original personal risk and increased our combined knowledge base which made a huge difference in even starting to invest. In addition, things that I might slack off in, if I were alone in this venture, (in accounting slacking is never a good thing), I do simply because I know that someone else is relying on me to get my job done.

Recently we've discussed adding a few more partners to our business. These new partners would own minority shares and Biff and I would retain over 60% of the company at all times. The infusion of fresh cash into our venture would be exciting, but we've been hesitant to go through with it. One of the reasons, I've discovered, is that subconsciously we've felt that new partners would have nothing to offer but cash. At some point the cash might be a good enough reason to sell a 10% stake in the business. But for now we're satisfied with the current direction and speed of the company.

So that's my belief on why you should invest with someone else. If you need that partner to be successful, then you have a good reason. Whereas investing with your brother-in-law because it'd make your sister happy is probably not a very strong basis.

Next time I think I'll talk about the next step in the partnership, the agreement. The binding document that defines the rules of the company. Biff and I signed one on the day we purchased our first property (but it was 3 months in the writing).

Rent... and collect rent.

A short while ago I wrote a post about rules I've broken that while I'm investing in rental homes, I actually don't own my personal residence. I rent.

I don't think I've ever read a book or an article that came out and admitted that sometimes it's better to rent than to buy. But I think it's definately true. So here's my reasons for renting.

1) I plan to move, possibly at the end of the year. My fiance and I are considering moving to London in January. However, while an excellent reason to not buy, this has only become a possibility in the past 3-4 months.

2) I live in Washington DC, but buy 3 hours away. A townhouse up here will run a minimum of $300,000 (closer to $400,000). Each of the houses I own were bought for less than $200,000. AND I bought with a partner. Simply put, I couldn't afford a very large down payment on a house here (less than 10%).

3) While home prices skyrocket, rents have stayed low. My rent is only $1205 a month (less actually, since I don't live alone). Since my brother pays $555 I'm left with a tiny bill of $650.

Running some quick number on a mortgage calculator I can see that if I bought a $350k townhome and paid down the $22k I've put into the company, then got a 6% rate for a 30 year mortgage (I have excellent credit, and we'll assume I did this back in January-ish), I'd be paying $1,966.53 a month, just on the mortgage. Add in insurance, property taxes, Home Owners Association Dues (always expensive in townhome communities) and PMI (less than 10% down, remember?) And my bill would likely come to somewhere around $2,500+ a month.

If my brother moved in at the same rate I'd have to pay over $2,000 a month. To be able to afford that I'd have to cut out my 401k and put all my money into the house. Now that I have a fiance that might be a more manageable number, but it would still severely restrict our ability to save.

So instead of buying, I've chosen to buy homes for other people. It's a lot more work than owning your own home (all the same repairs, plus the people skills and extra accounting skills), but it's far less costly.

Keeping your balance sheet... well, balanced

Yesterday I talked a bit about some of the stuff you need to have prepared before you get into investment property. That was a bit of a lie. I didn't bother trying to set up any accounting system until we had already closed on our first house. But that doesn't mean that you can just blow it off. Here's a screenshot of the google spreadsheet that I use to track our expenses.

OK, this unfortunately didn't come out nearly as well as I had hoped, so if you click on the photo it will take you to my Picasa site where the screenshot is actually readable. I kinda felt like the Pentagon as I censored all the references to actual people or locations. Bear in mind as you view this that thes are actual transactions that have occured in our company over the last month and a half. All of the numbers are real.

But now let's discuss what information I include in my Accounting Sheet and why. Each one of these columns has a very specific purpose.

Type - This declares the type of transaction that occurred. An expense is something that we paid money for that is tax deductible. Transfers are when we deposit or withdraw cash in a manner that the IRS doesn't care about (such as putting our own money in the account). Income is something that the IRS wants to tax us for. (You'll notice that mortgage payments get their own category apart from expense. That's because they are handled in a very different way than regular deductions).

Date - for obvious reasons.

Then I have three categories for cash amounts; Expenses, Income, and Transfers. Each of these needs to be kept separate come tax-time and I find prefer to keep them in separate columns soley for aesthetic purposes. As explained above, Expenses is for anything we intend to claim some sort of tax write-off for. Income is for anything we expect the IRS to tax. And Transfers are for events that the IRS doesn't care about

We count our deposits as a transfer, we don't claim income when they are paid, but we don't claim a deduction when we return them. I'm fairly certain that is a legal way to handle those transactions. Of course any interest we pay upon the return would go down as a deduction. Does any one know if this is correct?

Paid By - this category is for determining who paid for what. Usually all expenses are paid by the company with the company credit card. However sometime Biff or I have to pay for something with our own cash or credit. In that situation I mark that expense so that whoever paid it can be compensated.

Description - Again with the obvious. Don't slack on this field. You'll be surprised when, 6 months later, you look back at this sheet and have no idea what you spent your money on.

Property - The IRS, when filling out your taxes, asks that you break up your expenses by unit. This field allows you to more easily assign your expenses and your income according to each property. If you have only one property, this is obviously a moot column. But if you ever expand your business, then you'll find this column can save you a lot of time.

Well, there it is. My entire accounting system. It's awfully simple and anyone could fill out those columns if they had any idea of what was going on. Yet it still contains all the data, easily organized, that the IRS will want from you in April. The hardest part of the spreadsheet is simply the discipline to record data on it on a regular basis.

Thus, one of Biff's more crucial roles in the company. Keeping me honest. This weekend I will unfortunately be out of town and unable to blog. But next week I think I'll start by discussing partners in real estate ventures. Advantages and pit falls.

The Landlord's Toolkit

Getting into real estate, you'll need a lot more than just cash. There's a lot of other tools you'll need before you begin (or at the very least, shortly after). Check out this great article from CNN.

For reference, as the accountant and general financial manager of our company, I started using an Excel spreadsheet to manage out finances. I'm extremely comfortable with numbers and don't feel a strong need to have some program manage that for me. I've only started moving away from Excel about one month ago when I discovered Google Spreadsheets. It's not quite as robust as Excel, but the ability to login from anywhere and update my finances is utterly invaluable.

Maybe tomorrow or the next day I'll go over how I build my spreadsheet to easily keep track of expenses. However I've read in many places that several landlords can't live with out either Money or Quicken, so if you want to go that route you are probably in good hands.

And, for the love of God, buy a digital camera. Both Biff and I each have one and it's been used more times than I can count. We have endless pictures of our properties. Imagine getting a call that your tenants have no hot water. You call the plumber and, as he asks you questions about the house, you pull up your picture of the hot water heater and can answer all of his questions immediately.

Buy a camera. Use it.

I think that later tonight, or maybe tomorrow, I'll talk about some of the paperwork you'll either need or need to become familiar with...

Confessions (or: What I've done wrong)

Here's a quick rundown of the rules I've broken and the mistakes I've made along my way to becoming a real estate millionaire (not there yet, but working hard on it). Some of these are minor variations from the mean, some are major.

- I rent, not own. I live in an apartment with my brother and my fiance (it's an interesting dynamic that someday will bear further examination). I own two houses and live in neither of them.

- I cashed out a 401k. I was in a little personal financial struggle when we bought House #2. I had just financed a vacation partially on credit cards and had also recently switched jobs (two weeks without paychecks seems like no big deal, but it really throws you out of whack). Biff, on the other hand, was flush with cash that needed investing. When we found House #2, to pay for it I chose to cash out my 401k from my previous job. Helllllloooo early withdrawal penalties.

- I accepted, and processed, an application without an application fee. When our first tenant didn't renew his lease (living with his fiance wasn't the dream he had anticipated) we received an application from a young military couple. Biff met them and showed them the house and they were thrilled. Foolishly we decided to process their application immediately (they didn't have the $30 on hand to apply), without receiving their application fee. We ran the credit check, etc. on good faith. They ended up discovering that they couldn't get out of their current lease and withdrew their application. Money lost.

The first two I believe I had my reasons for doing and will defend those decisions. But the last one was just a stupid mistake (luckily for only a very minor loss). My mother always told me "Get into business or get into charity. And keep you business a business, and your charity a charity." It's now dogma within the company that nothing is taken by faith. Both Biff and I take a lot on faith (including the eventual rousing success of our company), but the company itself plays by the book.

Where to call home (or: finding a market to support our ambitious plans)

So once you've decided to buy an investment property, the next question is where?

I strongly recommend buying somewhere easily accessible to you since I DON'T recommend using a property management company (that can be saved for another post). It's almost certainly best for you to manage your properties yourself.

But if you are in a central area (say Washington DC), or there is more than one person partaking in this venture (dealing with more than one person in a real estate venture is also going to consume an entire post at a later date), then you have options. Here's a short list of things to consider when looking for the first property:

- How expensive are the houses? Can you afford to buy in that area? Even more importantly, can you afford to pay the mortgage if your property is vacant?

- What is rent like? Study this for at least 2-3 months. Are rents rising or falling? Look at places comparable to what you want to buy, how close are the rents to what you'd estimate to be your mortgage payments? It unlikely that you'll be able to rent that place out for more than your mortgage payments (although Biff and I got lucky and did just that), unless you made a huge down payment. Can you cover the gap each month?

- What sort of people are living in the area? The type that are looking to settle down? Or is it a more transient population, people who are just here for a few years before moving on? Obviously both populations can co-exist in the same area, but many areas tend to lean heavily in one way or another.

- As an extension of the above question, what was the demographic you would be targeting? Families? Young singles? College students?

- How much money do you have? This is a crucial question. I don't believe for a second that you can buy houses for No Money Down and make a profit on them. I intend to write yet another post simply on saving up for a down payment, but in the mean time I simply believe that to be successful in real estate you need a decent amount of cash saved up. Remember that, even if you buy for No Money Down, you still need a cash reserve for any emergencies (like a leaky roof).

These were the questions that Biff and I asked ourselves when we were starting out. My initial bright idea was to buy in our college town. On the plus side the homes there were relatively cheap (especially compared to Washington DC), we understood the area (I spent 4 years there, Biff was there for over 8), and the constant flow of students in and out each year would always give us a huge pool of potential tenants.

The bad side of the equation was simple. Neither of us lived closer than 3 hours away from said town, and college students can range from simple and quiet to wild and destructive. Such a property would probably require more maintenance than your average place.

I still thinking that owning in a college town can be a great idea, and there's no shortage of non-urban campuses to consider (non-urban implies far more affordable properties). And someday we may further pursue that idea. But at the time Biff trumped my idea with a far greater one.

We decided to buy near Williamsburg, where he lived. Houses were just about as inexpensive as the college town. There were 3 major military bases within commuting distance and several more smaller ones. The military became our target demographic, they move every few years so they are less likely to be interested in buying, the ones who choose to live off-base tend to be very respectful and quiet, and they have salaries.

So before you buy a property, consider the above questions and try to come up with new ones. At this point we're just interested in finding a general location so don't bother asking questions like "Should I buy a townhouse, condo or single family?" unless it directly pertains to your market.

The anatomy of a credit report

Possibly the most devastating step you can make in real estate is selecting poor tenants. Bad tenants can do everything from wreck you house to refuse to pay rent (and then continue to reside on the premises for a couple months while you carry through the eviction process). Needless to say, it's really important to properly screen your applicants.

While there are many things you can look for, one tool that EVERY landlord should use in the credit report. But first you need to know how to read one. Even if you intend to ever be a landlord, this is probably good information to know so you can read your own credit report.

First of all, to legally obtain someone's credit report you need written permission to do so. At the end of the application that I put together a separate page that gives our company permission to run a credit check. If this page isn't signed, the application is discarded. Note that some companies can get around this "written permission" law including credit card companies.

The first thing you need to do is obtain the credit report. You can find any number of sites that offer this service to you by googling the phrase "tenant screening", but here's a few to get you started:
Tenant Verification Services
Certified Tenant Services
American Tenant Screening

Biff and I use TVS, but your mileage may vary. In the end all these services retrieve you the exact same thing. A credit report + score.

So now you have the tenant's credit report. What does this all mean??? Let's break it down. At the top there should be some simple data like Name and Social Security Number to ensure you have the right report. Somewhere below that you should see and area called "Special Messages".



In this example (pulled from a real credit report) we can see that there is a mismatch between the address we provided the credit agency and the address the agency holds. Usually this is not a big deal, especially if your tenant moves around a lot.

We did have one tenant who had been an identity fraud victim, and that was also noted in this section with a warning.

The next section is a very important one (though it might not exist for applicants with no data to report). It's the list of recent and outstanding collections against the applicant. These reports were designed to be displayed on some super wide sheet of paper and so some creative formatting is necessary to make them readable. I've taken some liberties in formatting to make this explanation easier (and highlighted the columns we're most concerned about). (Also note that these lines are begin taken straight out of an applicant's credit check. They are genuine. Of course I've changed all the data...)

COLLECTRITE 08306003 I 09/99 80 MEDICAL O9P

We can see here that a collections agency went after our applicant for an unpaid fee. A little closer examination shows that the debt was from medical bills and was only for $80, and this occurred back in 1999.

679984 05/02 0 PAID COLLECTION

Here we see that in 2002 the amount owed was paid in full and the collection was closed. This is something very imprint to note, as it can show a dangerous history. Most likely, given the amount, it was a bill that was just put aside and forgotten about. Or perhaps there was a dispute between the applicant and the medical company (a hospital?). Let's look at the applicant's current credit state.

Below this (though some reports may vary in order of presentation) you should see a listing of all the applicants account and how much they owe on them.


CITIBANK V 1AC7001 09/01 $ 508 MIN10 111111111111 R01

Looking through the first line we can see that our application has an account open with Citi Bank. That person opened the account in September of 2001 (under the OPENED category) and has, at any one time, had a maximum charge of $508 on it. How relevant is that? Let's look at the next bit of info.

601xxxxxxxxx 01/06A $7000 $ 0 $ 10 111111111111 I

Yes, we do get the account number in the credit report. This is a very good reason to check up on your own credit every once in a while. But the only things we're concerned with here are the credit limit and the amount past due. The credit limit is rather self-explanatory, even though our application has never held a charge of more than $508 on this card, they could charge up to $7000. That's a very good sign for us. An even better sign is found under the PAST DUE column. This is the amount of money that the applicant couldn't pay last pay period. A total of $0 means the applicant paid their bill in full. Very good news.

Finally to the last set of data.

CHARGE ACCOUNT $ 475 48 0/ 0/ 0

All the concerns us here is the applicants current balance. Remember that the more your tenant owes, the less likely they will pay in full, and the more difficult thier cash flow becomes. That's when problems can happen. In this example, with a balance of only $475, it's likely that the applicant will pay this off in full.

The remakrs section can contain various random data, but one important remark you'll often come across is "CLOSED" (or some variation thereof). This indicates that the credit line was paid off and closed, which is usually a good thing.

Now this is just one account listed on the card. In credit report I pulled this example from, the applicant had 20 different accounts. Some were for cars, some were credit cards, sometimes you'll even see mortgages here (one of our current tenants used to own, but sank so much money into the house that it left him bitter towards the entire "owning property thing". While I can't agree with him, this is wonderful for us because he's a great tenant and will keep paying us rent for years to come instead of buying a house and paying the bank.

So what are some things to look for in this section? One warning sign that I watch for are vehicles. Most everyone has a car loan (or, if they are married, two) and so that's not such a big deal. But if those loans seem out of scale with their salary (you did get income information in your application, right?) then they probably are and that can be a warning sign.

Another hazard is the "past due" area. If the applicants don't pay their bills in full that can be bad. Especially if the totals they left unpaid are large. This could indicate that their debt is out of control and you could be providing free housing for a couple of months while you persuade them to relocate (via eviction).

Everyone has their own systems for evaluating risk and determining what a safe tenant ought to look like. The important thing isn't how your system works, it's that you HAVE a system and you evaluate every tenant equally by it. I don't care if that tenant is your nephew, run the credit check. This can save you thousands before troubles begin.

In the next section we can see what many of us have heard about. The "Recent Inquiries" section.

06/01/14 ZNY08986312 TENANT VFC S
05/01/16 NDT93259725 DAIMLRCHRYSL

Here we can see the most recent inquiries into the applicants credit in Year/Month/Day format. This applicant's credit has been rather quiet. You can see that Biff and I ran our credit check on January 14, 2006, and that about a year before that Chrysler ran a check. Looking further up we can see that the applicant did, indeed, end up buying a car from Chrysler and financed it through the manufacturer.

Some people swear that too many inquiries is a bad sign, but I have to come across a situation where there were enough queries into an applicant's credit to make me think twice. As always, your mileage may vary.

Finally we get to the summary of the credit report. The credit score.

M O D E L P R O F I L E * * * A L E R T * * *
*** ALERT: Score: 702: 40 14 13 99 ***

From this we know that the applicant's score was 702. How good is that? In the system the scores range, I believe, from somewhere in the 500's to about 820. Anything near 800 is perfectly flawless credit. Anything below 600 is very high risk.

Biff and I have a general rule that anything above 700 is considered acceptable in our system. If their score is that high they are probably a near-sure thing when it comes to collecting rent. So despite a few misgivings about the applicant's history (including the medical collection) we decided the accept the applicant (the applicant ended up at a different house).

But if an applicant's score is below 700 then we inquire further. It could be that the person just recovered from a medical disaster (but remember, we already know if they currently owe anything) . The gentleman who had a sour experience with owning homes currently has a credit score in the 630's. However Biff and I decided that we would make an exception for him. We haven't regretted it, but we didn't make that decision lightly. We verified his employment, made sure there were no outstanding collections against him, and finally met with him and his family. The lesson here is that every rule can be broken, but make sure you understand why you are breaking it.

Lord of the Land! (or: why blog?)

So what is this blog and why make it?

Two years ago my best friend and I decided that while the stock market is a wonderful investment tool, real estate was where the real money was to be made. At the time I owned no property and my friend owned his own house. Other than his one buying experience, we knew absolutely nothing about houses. But I had just read "Rich Dad, Poor Dad" and the author had stressed repeatedly how simple real estate investing was. "Just buy it and pay someone else to fix the toilets" he proclaimed!

Two years later I'm shocked to look back and realize how naive I was to actually believe that it was that simple.

Through a series of happy accidents, fortunate mistakes, and sheer good luck my partner and I have been able to buy two houses and make them somewhat profitable. We've learned a lot along the way so far, and I intend to explore a lot of what we discovered in this blog. That covers everything from how to find good tenants to how to find good houses, and most importantly of all, how to keep track of the money.

I obviously don't know everything and I'm still learning every day. However you'll hear all true stories here and, possibly more importantly, you'll see all true numbers. By choosing to preserve my anonymity, I can feel comfortable publicly sharing the actual numbers that my company (the partnership consisting of my friend and I) deals with on a month to month basis. And, with any luck, I'll learn more from the you than you from me.