Hey everyone, I'm planning to purchase my first rental early next year and am in the process of educating myself. Below are my selected quotes from Long Distance Out of State Investing by David Greene. I have to say this book is very eye-opening, both in investing mindsets and how Greene operates his business. 

INVESTING MINDSET

✪ What I’ve found through every profession, game, challenge, or undertaking is the longer you consistently seek to understand the process, not just the result, the better you will be at understanding patterns that emerge.

✪ There is a very powerful core truth wrapped up in the idea of investing in your own backyard, but the real wisdom is that you understand the market where you’re investing. It doesn’t matter that the area itself is near you; it just matters that you know it!

✪ You want to be one of these successful people. You want to be in business for long enough to benefit from this. When you first start off in real estate, it is all about hunting for deals. Once you master that, you’ll find that a lot of the deals start coming to you. Investing becomes a lot more fun when you aren’t doing so much work to find each property. If you want to get to this point, you need to be around for a while. If you want to be the one to whom people, including agents, are bringing the deals, you need to make sure you are treating them well.

✪ The key to good negotiating, good businesses, and good relationships is to overcome your first instinct and think of the needs of others first. If you want to negotiate well, put yourself in the other person’s shoes. If you want to influence others to help your business, you need to set the tone in that direction from the very beginning. If you want to negotiate better terms, think first about what you can offer. Odds are, what you are offering might not cost you anything anyway.

✪ As I’ve grown as an investor, I’ve stopped looking for deals and I’ve started looking for the people who have them.

✪ When you buy a property correctly, you don’t need to fear what the market does. You just need to know what your options are for when it shifts.

✪ We want to understand the business really well while eventually distancing ourselves from it.

✪ The hardest time is the first time—each step gets easier after that. If you quit before you’ve established a system, you will have done all that hard work for nothing. Don’t let that be the case! Remind yourself daily that the hardest day was yesterday, and you’ll find the encouragement to keep going. Building a system takes time and hard work. Maintaining a system is much, much easier.

COMMON RULES

✵ The 1 percent rule is the one I most commonly use for a few reasons:

       ☞ You can readily find properties that are cash-flowing positively.

       ☞ Tenants are accustomed to paying more for rent than it would cost to own and have accepted this fact.

       ☞ The properties are not in such dangerous, hazardous, or poor condition/areas that owning them could create a huge headache or result in conditions contrary to successful buy-and-hold investing (these are typically 2 percent rule properties).

✵ The 70 percent rule: purchase price = (ARV x 0.70) – rehab costs

✵ The 2 percent rule: Typically entered into by the naive, novice, or “theoretical” investor, these properties can be more like buying a job than buying an investment property. Though the numbers can look like spreadsheet magic, keep in mind that properties like this tend to be high maintenance and high risk. If you’re just starting out, don’t tackle a 2 percenter unless you have help from someone else who has had success—things can get out of hand very fast.

✵ The 50 percent rule: You can count on 50 percent of the income that the property generates to go toward repairs and holding costs other than those associated with debt or the mortgage. Though many investors really like this rule, I am not a fan because it’s too general. You would never want to buy a property based solely on whether it meets these criteria, but you can quickly determine which properties are worth more of your time and which are not. When you’re trying to determine where to start putting an out-of-state operation together, consider using the 1 percent and 2 percent rules as measuring sticks to help save you time.

BUILDING YOUR TEAM

➠ Agents:

The first thing you want to make sure you address is whether the agent has experience working with investors.

There is no substitute for experience, so don’t be afraid to ask whether the agent has ever owned any rental properties or currently owns any. If he or she has or does, ask where they are and what kind of returns the agent is experiencing. Ask how the agent found the properties, what kind of analysis was used, and what drew him or her toward buying them in the first place.

Another important question to ask an agent is what kind of support he or she can provide. You want to know whom your agent knows. As I’ve already explained, good real estate investors have teams of support they lean on to do the jobs they cannot. Since most of your business will be done by other people, they are pretty important to your success. As your deal finder, your agent will be the foundational piece of your business and the most influential in pointing you toward the right people to hire as support staff.

➠ Lenders:

DTI is a simple equation that compares how much money you are obligated to spend every month to cover your debts with how much money you are bringing in. The lower the number is, the more attractive you become as an option to lend to.

From a bank's perspective, the lower an LTV is, the safer the investment will be. Interest rates are often based on a direct relationship to the LTV.

When a bank gives you a loan, it is not very likely to collect the loan payments from you the whole time you are making them. Most loans originated in this country are sold to other banks or packaged up as mortgage-backed securities (MBSs) and sold through the stock market or other means.

In America, the majority of loans are insured by the government. When the government insures a loan, it gives banks more confidence to make more loans with less fear of losing money. This in turn encourages more loans to be made, which pushes more money into circulation and theoretically helps the economy. The two biggest government-sponsored enterprises (GSEs) responsible for insuring these loans and helping to repackage them as MBSs are the Federal National Mortgage Association (FNMA, a.k.a. Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC, a.k.a. Freddy Mac).

In addition to mortgage brokers, there are also credit unions and savings and loan institutions. I have found these to be extremely useful institutions when it comes to working with investors like myself. Credit unions are more likely to keep their loans on their own books, banks. Because they are often smaller, community oriented, and in so they won’t have as many overlays or requirements as national individually managed, I’ve found they have so much more flexibility than large corporate banks. Expect a high-touch relationship with these institutions, with in-person meetings and phone conversations.

If you know these places are primarily interested in developing a relationship with you, you should immediately begin thinking about what you can do to strengthen this relationship. What if you tell the institution that if it is willing to work with you on giving you the loan you need, you are willing to put a large amount of money on deposit with it? What if you furthermore say that once it gives you that loan, you will then take that money and put it right back on deposit with the institution until you need it for the next property? What if your doing this just solved both sides of the problem at the exact same time… This is a great way to prove your worth to these lenders and take big strides to strengthen your relationship. By applying for a loan, you are giving them business. By putting money on deposit with them, you are enabling them to continue giving loans. You are showing that you are not just about yourself and your own needs; you are also about theirs.

SUPERCHARGING YOUR EQUITY GROWTH, THE EASY WAY

✤ If you continuously make extra payments toward the principal of the loan, you not only pay the principal down faster through the extra payments, but you also ensure a larger percentage of your next payment goes toward the principal. If you consistently make these extra payments, you can pay thirty-year loans down much, much quicker than thirty years. This can save you quite a bit of money you would have lost by giving back to the bank in the form of interest.

✤ Make half of the monthly payment every two weeks as opposed to one payment a month. If you make one half payment every two weeks, that is the equivalent of making one half payment every twenty-six weeks. This would be the same as making thirteen full payments in the year.

✤ To speed up the early payoff of the loan (as well as save on the interest you’ll by paying), you can simply increase the amount you pay each month and have the difference go toward the principal on the loan. If you want to supercharge this technique, consider making one half payment every two weeks and adding a set amount to the principal payment every month. This can really speed up the rate at which you pay off the loan. I use this method myself and typically round the biweekly payment up to a round number. This gives me the advantages of making an extra payment a year as well as the advantages of making extra payments toward the principal. While the argument against this is that it reduces your cash flow, I would argue that the exponential benefits you gain by paying a loan down faster can be worth more to many investors than extra cash flow.

WHAT TO ASK BEFORE HIRING A PROPERTY MANAGER

This may come as a surprise. For most people new to the business, the first thing they want to know is what percentage they will be paying in rent. While this is usually the most striking number, it is rarely the most important. New investors don’t realize how much money gets poured into properties for things other than property management fees. Understanding where your big hits are going to come from is a big part of minimizing your operating costs and increasing your profit. 

When I interview property managers, I like to get a feel for how they run their company. I want to ask them basic questions like what experience they have managing rentals personally, how many doors their company manages, how long they have been in business, and what they feel their company’s strengths are. I also want to ask them how they collect rent, how they enforce late fees, what systems they have in place to make things efficient, and how long they have worked for their current company. 

These are all basic questions you want to ask any team member you are considering working with, and the way they answer these questions will either help you feel more comfortable or leave you with more questions than answers. Once I have a good idea for the basic way the company is run, I start asking more about the specifics. The main questions I’ll want answers for are:

1. What is the monthly percentage of rent they’ll take?
2. What other fees are assessed to owners? (Half of first month’s rent for new tenants, advertising fees, yearly walk-through fees, callout fees, and so on.)
3. How often will the property be inspected each year?
4. How will maintenance/repair calls be handled?
5. How will evictions be handled?
6. What is your average turnaround time for vacancies?

Let’s say I ask the property management company the most important question—number four. I want to know how it will handle a maintenance request from a tenant. I usually pose this question with an example like a tenant who has called in to complain about the hot water not working in the shower.

The trick is, there are some problems that can be solved by skilled individuals who are not licensed. These are the people I want my property manager to be looking to first. What I’m hoping to hear this property manager tell me is he or she would first ask the tenant to check the pilot light on the water heater in the garage. I will start feeling really good about this manager if the he or she is shrewd enough to recognize this problem might have a simple fix, and skilled enough through experience to walk the tenant through the process of relighting a pilot light. This would be the ideal solution and would solve the problem in the fastest way, costing me the least amount of money and training the tenant to start solving these kinds of problems on his or her own.

The next-best answer I could receive would be the property manager’s telling me he or she would send the handyman to the house to see if he can fix the issue. Paying a handyman $15 an hour is much, much more appealing than paying a plumber $150 an hour, and a skilled handyman would be able to resolve this issue by checking the water heater to see whether it is operating properly, then checking the plumbing for other parts of the house to see whether they are op- erating properly as well. A skilled property manager will have been actively looking for skilled handymen like this one to save a client’s money. If the answer I get is the easy, noncreative, easiest-for-the-property-manager-but-most-expensive-for-me type, I am going to look for a way to end the interview and move on.

The thing I want you to understand is, I don’t care that the property management company will work for 5 percent of the rent when everyone else wants 8 percent. I don’t care that the company will do the yearly inspections for free. I don’t care that the manager won’t charge me for advertising. If the property manager isn’t looking for ways to actively save you money, you don’t want to hire that company.

Any companies that are willing to work for so much less than their competition are probably desperate for business and just trying to scale up in volume to a point where they have a chance to be profitable. If they aren’t already profitable, you run a much higher risk of being ripped off by them when they need to pay the bills and the ends don’t meet. If they are willing to do quarterly inspections for free, there is a good chance they won’t be doing them at all when that time comes and they are busy with the other aspects of their business. If they are willing to avoid charging me for advertising, it may be because there is a good chance they won’t be doing any. You’d be amazed at how many property managers have “marketing plans” that consist of taking some pictures with their phone, putting them on Craigslist and Zillow, and waiting for the phone to ring. This is not how you should be running a business.

Another important question I ask all property managers is what they are going to do about properties in less-than-desirable areas. This may seem like an odd question, as one would assume the job of a property manager is to manage a property regardless of where it is. I’ve come to find this is not the case, and you should be reluctant of any property managers who tell you they will.

One way to get started right with a property manager is by appealing to his or her pride by asking whether it was OK to have him or her approve any properties you are considering. This is a strategic question and a huge part of running a successful out-of-state investing campaign. If you are buying in somebody else’s backyard, you had better make sure you have some advisers on the ground who can tell you which areas are the best for you. The numbers may look good when you evaluate a property from afar, but the locals are much more likely to know whether that area suffers from problems you might not see.

Property managers know which properties the very best tenants want. They know which school districts they want. They know which size of a house, the age of a house, and which streets these tenants want to live on. More important, they know all the same information for the tenants you want to avoid.

I would absolutely, hands down, no way around it, never do this if I didn’t have local property management not only managing my rentals but also advising me on which properties to buy as well.

INTERVIEWING CONTRACTORS

◈ Good contractors are very rare and very elusive and a secret that is very well kept by others. A good contractor is a treasure other investors are loathe to share, and for good reason.

◈ The first trick you need to know when managing an out-of-state rehab is to ask for the scope of work to be itemized. 

◈ Another important thing to keep in mind when hiring a contractor: You are very likely going to go through several of them. The odds of your finding a great contractor to grow with on your very first try aren’t very high. In general, it’s wise to expect others to overpromise and under-deliver until they have proved otherwise, and contractors definitely fit this mold.

◈ If you’re looking for a good contractor, you really do need to rely on word of mouth. Whether it comes from online reviews, other investors, or trusted team members. Ask the referrer how many times the contractors had to go back to fix mistakes they made, how proactive they were on solving problems, how well they stuck to the schedule, and how many good suggestions they provided. You want to get a really good idea of what kind of experience these people had because there is a very good chance you are going to have a similar one.

◈ A contractor who sees a potential problem and reacts with “What would you like me to do about it?” is not as attractive as one who says, “This popped up. We can do A, B, or C. A will be cheapest, C will be the most expensive and thorough, and B will be a healthy combination of the two.”

INCENTIVIZING CONTRACTORS

People respond more strongly to the removal of adverse stimuli than they do to the addition of pleasant stimuli. If you want to motivate someone the right way, include elements of both. I offer contractors a bonus if they finish on time and impose a penalty if they finish late. Once they’ve told me how long they will need, I usually add a week to this number to be extra careful and then write this time frame down on the itemized bid. I type in a clause that says something along the lines of: “Full scope of work to be finished and approved by owner in [however many] weeks. If the project is finished ahead of this deadline by a certain number of days, contractor will be paid a 5 percent bonus based on the total job. If the work runs past this deadline, contractor will be assessed a 5 percent penalty for the first week. If the job runs longer than a week over schedule, contractor will be assessed an additional 5 percent penalty. Owner to retain final rights of approval for quality of work completed.”

UNDERSTANDING MARKET

❏ For most investors, it is unwise to speculate on rising home prices (buying a property that does not cash-flow positively on the hope or gamble that it will continue to appreciate so you can sell for more later).

❏ If you aren’t trying to understand what is happening in different markets that will lead to rising home values, you aren’t trying to master real estate.

❏ Real estate is cyclical, and this means prices also sometimes drop. This can happen gradually or sometimes rapidly and violently. When prices are dropping, you want to be in a position to buy more property. Often this means liquidating what you have so you can be in a position to acquire more at lower prices.

❏ When property values are falling, you’ll be faced with a unique set of circumstances and challenges. It’s not enough just to know what prices are doing; you also need to determine why they are behaving this way. Knowing the underlying forces behind why markets are adjusting allows you to capitalize on opportunities before others do and to recognize market shifts before they happen and exit expeditiously.

RENTAL RATES

❏ The most accurate method is to contact a property manager and obtain his or her professional opinion. Once you know what rents to expect, the next step is to know why the rents are where they are.

❏ If you’re a buy-and-hold investor, one of your goals is to locate the areas where you believe demand is going to increase. While it’s rarely wise to plan on appreciation, it is still wise to make every effort you can to find areas where it can reasonably be expected to occur.

❏ I would find the best property manager I could and begin asking as much as I could about the state of the local economies. Metrics like where are most of the jobs moving, where are the best schools, and where is the tenant demand greatest would all be incredibly useful for me to know. Understanding where the students in the local universities are living, and for how long they are living there, would be beneficial as well. Find out who needs to rent a property, and then find out what that person wants and whether that type of tenant is one you want to rent to.

❏ By asking your property manager what upgrades tenants are paying more for, what level of materials are expected, and what your competition is offering, If all the other homes for rent in your area have two bathrooms, you don’t want to be the person with one.

❏ Checking with your property manager every quarter and asking whether he or she is seeing more people falling behind on their rent, more people unable to handle rent increases, or a decrease in tenant demand.

DECREASING THE HEADACHE FACTOR

If you want to make your portfolio grow, you need to be focused on finding and acquiring properties, not working out a payment plan with a struggling tenant. You are better off developing new relationships with great deal finders than fixing broken roof tiles. There is no way you can do that if you’re constantly being contacted by the property manager about a new late payment, a new eviction, or a new vendor that needs to be sent out to repaint your newly vacant property.

Greene' personal story as an example: 

When I first began investing, I was investing only in B+ properties. I knew this was a good long-term strategy, and it ended up being true. My problem was I didn’t get to reap the benefits of investing in B+ properties because I was too busy trying to micromanage them. While the issues that came to my attention were very easy to solve and should have been left to my property manager, I felt I needed to be involved in the entire process.

My property managers must have hated me. I wanted to know every single detail that was going on in the homes. How the grass looked every month, what the outside deck looked like, how many times tenants had guests over, how many cars were parked in front of the house, all of it. I thought managing a property meant micromanaging it, and I was the worst. I quickly found that owning rental property was no fun. Every bit of bad news had the power to ruin my entire day. This all led to my eventually hating real estate and wanting to get out but feeling trapped and as though I couldn’t.

It wasn’t until I let go of my self-imposed expectations of perfection that I finally started to enjoy this whole business. It came to a boiling point one day when a drunk driver crashed into the fence of one of my properties. My insurance company originally told me that it would be paying, then that the driver’s insurance would be paying, and then that nobody would be paying. This got me pretty upset. I caught myself thinking about how I should have prevented this, and I was a fool for buying a house on a corner lot. Of course this happened—look how easy a house on a corner lot can have a car run into it.

As soon as I heard myself think this, I realized the absurdity of my thoughts on this topic. I quickly realized I had been doing this the entire time, and it had been creating a horrible experience for myself. I had been holding myself accountable for things I had no control over and ruining the entire experience for myself. Every time a water heater needed a pilot light relit or a spray for pests was needed, I was blaming myself for buying the wrong property.

Once I realized no human being could reasonably be expected to anticipate the problems I was having, I quickly adjusted my expectations. At that point, I just started to budget for unforeseen problems and accepted that things could be expected to be found broken or to need repairs after I closed on a property—especially during the first year. It was time for me to adjust my expectations to account for that. Once this happened, it changed my whole experience. Rather than feeling like a failure when my property manager called, I just shrugged it off and let him work it out. As real estate investing became more enjoyable, I started to get more and more excited about searching, analyzing, and offering to buy more houses. These were the beginning steps of when I fell in love with the whole idea of being a real estate investor.

THE UPGRADE HACK

❀ Upgrade Hacking occurs when you already have to replace an entire item (countertop, floor, shower, and so on) or make some form of change on your property that is going to cost you money.

❀ If you can change only one thing on a house, it should usually be the paint. Paint is almost always the most bang you’ll get for your buck. consider going two-tone.

❀ If you want to Upgrade Hack your flooring, there are several ways to do it. One of the very easiest is to use beautiful, amazing, high-quality products whenever you have a small portion of space. This creates the appearance of massively high value but doesn’t cost you much money. The trick is that flooring is purchased at a price per foot. If you can buy expensive materials but need them only in small quantities, you can make an incredible impression at an affordable price.

❀ In my experience, most investors don’t fully understand the impact a beautiful shower can have on a home buyer or a tenant. Some buyers make up their minds to buy the home as soon as they see the master bathroom. While showers can have a huge impact on a buyer’s or tenant’s emotions, they don’t always have a huge impact on your budget! The secret is that most showers aren’t very big.

❀ Another great idea that is surprisingly cheap when you Upgrade Hack is to add a rainfall showerhead.

❀ As a buy-and-hold investor, you will almost always find that if the cabinets are still in serviceable condition, it is better to reface them. Freshly painted cabinets (dark paint works best for this) can make a kitchen look a thousand times better.

❀ If you already have to remove old, molded, or out-of-style countertops (such as Formica or laminate), you may be surprised at how cheaply you can purchase granite countertops. A simple and easy Upgrade Hack is to find granite on sale at the store for your rentals or purchase nicer granite for your flips. In many areas, I’m able to buy the granite for an entire kitchen for $1,200 to $2,500.