First Rental Property

Personalized hand written notes are an effective sales tool that are utilized by business owners in order to create rapport with their customers.

Businesses that have a good understand of effective relationship management techniques will effectively use these notes in order to win over their customers.

Have you ever bought something or received service from a business, and then subsequently received a personalized thank you card in the mail? Was the card hand written? I am willing to bet that it was. If this card was handwritten, it was not by accident. The business owner does this intentionally in order to foster a stronger relationship with you. Their intention is that you become a satisfied customer, willing to refer other people to their business, or that you become a loyal customer, that will come back and buy their product or service.

Here is an example of this relationship management technique in effect. I once took my car in to my car dealership in order to get some scheduled maintenance. There was nothing special about my scheduled appointment in terms of customer service. The dealership completed the required maintenance, I paid, and then I left. About a week after my maintenance appointment, I received a letter in the mail from the Service Manager thanking me for my business. I thought that this was a noteworthy gesture, and I made a mental note of it. When it was time for my next maintenance appointment, I ended up taking my car back to the dealership for the required maintenance. I could have taken my car to another service dealership that was a bit cheaper, however, I decided that I would take my car back to my original dealership.

Perhaps their personalized hand written note worked, and resulted me in becoming a loyal, repeat customer. I don’t think there is a measurable way of knowing what effect that hand written note had on me or any other of their customers for that matter. For whatever it’s worth, I am still taking my car to that dealership for maintenance, despite it being a little bit more expensive than other service locations.

Hand written notes are used all of the time in the world of real estate investment. They are used for many of the same reasons noted above. As such, I would like to share with you how writing hand written notes as a real estate investor, can positively impact your real estate investing career. For the purpose of this article, we will focus on the benefit of using hand written, personalized cover letters.

There are select, experienced real estate investors who always use personalized, hand written cover letters whenever they are submitting an offer to purchase a rental property.

If you are looking to purchase your first rental property, I strongly recommend that you adopt this strategy. Here are some reasons why you should use this strategy:

1) Very few people use this strategy

When I say, ‘very few people’. I should actual being saying, ‘hardly anyone’. Because hardly anyone uses this strategy when putting in an offer on a rental property, you will, and your offer will stand out from all of the other offers, if there are any. This is a good thing because with increased attention on your offer, chances are that the seller of the property will want to at the very least enter into some sort of negotiation with you.

2) You are adding a personal touch

A personal touch also helps you to stand out from the crowd. In your personalized cover letter that you send to the seller, include things such as who you are and give a little background and some of your experience. If you like the house that you are putting an offer on, comment on some of the features of the house that you like, and why you like them. If you compliment the seller in the personalized cover letter, this can go a long way. People generally like to be complimented, and as such most people who are complimented will take a liking to you, and your offer, despite the fact that they may have never met you before.

3) It opens up a communication channel

In your personalized cover letter to the seller, you can also add any questions that you may have for the seller. For instance, you can ask the seller if they know of any defects in the property. Although, this is a simple question to ask, it can have a very powerful effect. If there are any problems with the house, at this point, because the seller has been asked directly by you, they may be willing to disclose this information.

I have been using personalized, hand written cover letters for 5 years, whenever I have purchased a rental property. Every cover letter that I have used has resulted in opening up a communication channel with the seller. With these channels I was able to obtain information from the seller that probably would not have been disclosed to me otherwise.

More often than not, when the calendar year is coming to a close, we think ahead to the next year, and all of the goals that we want to achieve during the following year.

Why not take some time between Christmas and New Years day to establish some goals to achieve before the end of the current year?

This essentially will give you 7 days, December 25th through December 31st, in order to set some goals and take action on achieving these goals.

If you are looking to purchase your first rental property, there are a few key goals that you can establish and achieve before years end. Here they are:

1) Determine what area you are going to invest in

If you have already started your research as to what geographical areas you want to invest in, now is the time to make up your mind. Pick an area that has strong economic fundamentals and stick to that area. Don’t flip flop with your decision. When I was first determining what geographical area I was going to invest in, I did a lot of flip-flopping myself. I had about 3 different cities that I was looking at where I wanted to buy a rental property. One day, I finally made up my mind, and stuck to my decision. This is important to do. Make up your mind and stick to that area if it a strong city or town with solid economic fundamentals.

2) Determine where you are going to obtain your financing

For the financing on your rental property, you are either going to get your mortgage from a bank or through a mortgage broker. If you are opting to go through a bank, pick the particular bank that you are going to deal with, identify what branch or location you will visit. Furthermore, if you can establish who at your branch location will be taking your mortgage application, even better. Once all of this is determined, you have a definite plan of attack and you know what your next steps are.
If you are using a mortgage broker for your financing, finally pick which mortgage broker you are going to use, if you have not done so already. If you do not know a mortgage broker, talk to a friend or family member that may know one. Here, I highly recommend that you use a mortgage broker who is knowledgeable in working with real estate investors. Not all mortgage brokers are created equally, as some are much more knowledgeable than others.

3) Determine where your down payment is going to come from

Know for certain where your down payment is coming from for your rental property purchase. If your down payment is coming from a Line of Credit, great. If you are speaking to potential joint venture partners over the holiday season, and you know that they are going to be the money partner who are going to provide the funds, excellent. If you are using your own personal savings, good for you. The point here is to have this planed and mapped out. You have to be crystal clear as to where the funds for your down payment are coming from. When you are crystal clear, you have a clear action plan and can move forward to achieving your goal.

4) Determine how you are going to find a rental property

If you do not have an existing relationship with a Realtor, now is the time to forge one. Since many people and Realtors are off on vacation between Christmas and New Years, perhaps you won’t be able to get in touch with some Realtors. This is okay, as you just need to have a clear sense of which Realtor you are going to work with to find a rental property. If need be, contact them when they are back from vacation. However, also note that a lot of realtors do not take vacation during the final week of the year. Now could be a very good time to contact them. If you do not know any realtors who are experienced in working with investors, you can ask family or friends if they know any that they would recommend. If this doesn’t work, I recommend the following strategy. You can call the Broker of Record or the Broker Owner of a real estate company, and have them refer you a realtor who has experience working with real estate investors. To get in touch with these Brokers, you simply just need to call into the real estate company that you are dealing with, and ask to speak to the these specific Brokers. This is a good strategy that I have used before. The Broker Owner or the Broker of Record should have a vested interest in referring you the appropriate Realtor. This is because if the Realtor that is referred to you eventually succeeds in finding you a rental property that you purchase, the real estate company, namely the Broker Owner and Broker of Record win as well.

5) Establish a time frame for your purchase

This last point is an important one. Establish when you are going to purchase the rental property. Be as specific as you can. The more specific you are, the more likely you are to follow through with this goal. For instance, you can tell yourself that you will be putting in an offer on the rental property on January 15th of the following year. This goal setting of determining an actual purchase date is a very powerful practice. Using this method can actually force you into taking action.

One of the greatest benefits of a low interest rate environment is that the cost of borrowing money is cheaper compared to a high interest rate environment. A low interest rate environment can be an encouraging time for real estate investors. It is often during these times when first time real estate investors take the plunge and purchase their first rental property.

People feel more confident to get into the real estate investing game because payments generally can be lower in a lower interest rate environment. If an individual has a variable rate on a mortgage, this rate is linked to the Central Bank’s prime lending rate. As such, when the prime lending rate is low, or is decreasing, so too is the rate on the variable rate mortgage.

Despite the great benefits, low interest rate environments can also be very dangerous to novice investors. Since people feel confident to buy rental properties in low interest rate environments, they sometimes forget to take into consideration a number of important variables.

For instance, when interest rates start to rise, the investor has to make sure that they are able to financially survive the rise in rates, thus continuing to meet their payment obligations.

There are a number of ways that a real estate investor can exercise due diligence in order to avoid disaster in a rising interest rate environment. Here are some of the ways:

1) Buy for Strong Cash Flow

Whenever a real estate investor purchases an investment property, they must make sure that they have a positive cash flow being generated from the property each month. Therefore, as interest rates rise, and if the investor is in a variable rate mortgage, they should be able to withstand the increased cost of their mortgage payments. In short, the investor should still be generating monthly cash flow from the property, even after interest rates go up. If the investor finds himself or herself in a position in which they are not generating monthly cash flow after interest rates go up, then they are not in a good position. This concept of testing the future cash flow of a rental property, once interest rates rise is referred to as…

2) Stress Testing Your Portfolio

Stress Testing your portfolio is the act of calculating current payments on your rental property today, and determining today’s cash flow. In addition to determining today’s cash flow, the investor would also calculate the cash flow on their property, by using inflated numbers for their interest rate. The inflated numbers used, should represent the figure in which the real estate investor believes interest rates will rise to. By doing this exercise, the investor will be able to easily determine how much they are cash flowing their rental property today, and how much they would be cash flowing the property in an increased interest rate environment. Other than buying for cash flow, this is one of the most important activities a real estate investor can take when running their numbers in order to determine if the rental property is a good buy.

Here is an example of how to stress test your portfolio. Let’s say for instance that you are planning on buying a rental property valued at $100,000. The mortgage that you will have on this property is $75,000. The interest rate for this mortgage is 5%, you are going to make monthly payments of $436.21, and the mortgage is amortized over 25 years. The property taxes on this property equal $100/month and the property insurance is $25/month. The monthly rent that you collect is $1,000/month. If we add up all of our monthly operating expenses for the property ($436.21 + $100 + $25) this equals a total monthly operating expense of $561.21. Therefore, if we take our monthly rent of $1,000 and subtract our monthly operating expenses of $561.21, we get a figure of…$438.79 monthly positive cash flow. This is a good thing, as we are in a strong positive cash flow position.

If we believe through credible sources that interest rates are scheduled to go up over the next few years by 3%, we need to run new numbers. We need to now calculate what our monthly operating expenses would be on the property if the interest rate rose to 8% (5% + 3%). Therefore, the value of our property is still $100,000. The mortgage amount is still $75,000. The interest rate is now 8%, which means that our monthly mortgage payment on the property is $572.42. Our revised figure now for our total monthly operating expenses is ($572.42 + $100 + $25) which equals…$697.42. Therefore if we now take our monthly rental amount of $1,000 and subtract $697.42, this gives us a new figure of… $302.58. Therefore, we now know that if interest rates rise from 5% to 8%, we will still be cash flowing this property monthly. Therefore, we know that this is a good purchase, and if interest rates do in fact rise, we will not find ourselves in a compromising financial position.

3) Have a realistic idea of the future trends of interest rates

Most people live in a state of paranoia. They buy into all the negativity that the media feeds them. One day they might hear on the news that interest rates are anticipated to be on the rise. With this news they become scared of the potential financial consequences that may result. Further, they become so scared, that they take no action and end up doing nothing at all. This happens all the time, and I often witness this on a daily basis. The good news is that there is a solution to this. The solution is to only listen to credible sources. Don’t just listen to the news and advice from uneducated people or questionable sources. As a result, in this particular case, the best people that would have a pulse on the future trends of interest rates would be Economists, top Mortgage Brokers, and Central Banks. These are credible sources. Pay close attention to what these individuals and institutions are saying. Compare and contrast the information from these sources. If you do this, you will be much more educated than the average person regarding the future trends of interest rates.

When you are looking to buy your first rental property, the first step you must take is to find a mortgage broker that you will be able to work with. When it comes to financing your rental property, financing can be obtained either through a mortgage broker or a bank.
I am a fan of doing your financing through a mortgage broker, as good mortgage brokers have an ability to put often times complicated deals together. Sometimes dealing with banks can be restrictive, as they do not have the same flexibility in finding solutions as a mortgage broker might have.

However, not all mortgage brokers are created equal. There are some very good ones, and there are some very bad ones. I have outlined 4 useful tips for you for when you are in the process of selecting your mortgage broker. Here they are:

1) Your mortgage broker should be a real estate investor

You want to be working with someone who is experienced in the field that you yourself are trying to get into. If your mortgage broker is a real estate investor, then he or she has experience in purchasing rental properties, and they have inevitably at some point purchased their first rental property. Since they are investors themselves, they would be able to offer you advice along the way. Make sure that your mortgage broker is a real estate investor. Experience counts!

2) Your mortgage broker must know your five-year investment plan

At the very least, your mortgage broker should know what your investment plans are over the next 5 years. This is very important because you are looking to build a long-term relationship with this individual. They (your mortgage broker) is going to be a very integral part of your real estate investment team. By knowing your five-year plan, they are able to advise you accordingly every step of the way. For instance, if your plan is to only buy one investment property over the next five years, they need to know this. This is because, the terms of the mortgage, would differ if you had plans of purchasing more than one rental property over the next few years. With mortgage financing for rental properties, good mortgage brokers are looking at how you can obtain financing for not just your first rental property, but also your second, third, or maybe even your 20th rental property, if that so happens to be your goal. Your mortgage broker must know your five year investment plan, as such they can set you up with the appropriate financing on your first rental property.

3) Your mortgage broker must keep up to date with what is happening in the mortgage industry

The mortgage financing world is ever changing. Interest rates often times change, and so too do the offerings from Banks and Lending Companies with respect to mortgages. Since there are so many changes, this creates opportunity for an individual looking to purchase their first property. When a good offer comes along from a Bank (such as a nice low interest rate), your mortgage broker should be up to speed of the changes as soon as they happen. That way, they can make you aware right away of all of the competitive offerings in the marketplace.

4) Your mortgage broker must have experience providing financing for other real estate investors

Often times, the more real estate investors that your mortgage broker works with the better for you. This is good for you, because your mortgage broker will have lots of practice in putting together deals for real estate investors. They will be proficient at this task, and will be able to deal with any roadblocks that are thrown in front of them. For instance, the reputation of your mortgage broker goes a long way when they are speaking to and negotiating with the mortgage underwriters at the banks or Lending companies. The mortgage underwriters are essentially the people who would review the particulars of your mortgage application. If the underwriter had any questions or concerns, they would converse directly with the mortgage broker to get the answers. If your mortgage broker has a solid history of putting together good deals, having a good relationship with the underwriters and the banks and Lending companies, then you are in good hands. The reputation of your mortgage broker is significant. They must have a track record of working with and putting together mortgages for other real estate investors.