Buying Rental Property

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No doubt about it, now is the time to make preparations to invest in real estate, especially rental properties. With the mortgage market plummeting and buyers going into foreclosure, there has been a shift in demand. More people are going to be looking to rent, and more houses are going to be coming up for sale. Further, mortgage rates are decreasing. My prediction is that over the next 1-2 years there will be more easy deals than many years past. So the problem is not going to be finding good deals, it is going to be buying into them. But hopefully, these few pointers will get you going in the right direction.

Stopped being Scared and Take Action!

This is the single biggest reason why people don’t ever become more than average. Everyone is afraid of losing money, or being destroyed financially, and just won’t take the risk. You have to just decide that you are going to make a bold move and step out there to make something happen. As I said before, the next year or two is going to be the perfect opportunity to begin buying rental property. Stop over-researching and mulling over the what-ifs and start taking steps to making it happen.

Shoot for 1%

In any deal you are looking at, be sure that however much you put into it initially, that the rent will equal at least 1% of that amount. I don’t just mean the purchase price, I mean all up front fees to purchase, close, and make any repairs to the property. You will find with vacancy, maintenance and hassle it just won’t be worth it to do a deal for any less.

Start Small when Buying Rental Property

Small house always rent easier than large houses. Look for 2/1 houses in good neighborhoods. Small houses plus the right location and price equals rental profits. I own and/or manage several houses, and the small ones are always easier over all. And you tend to make similar money. Maybe not quite as much as the larger houses, but compared to the risk, it is a much better deal.

Buy Rental Properties One by One 

I’m not suggesting that you don’t buy a two property deal if it is really sweet, but don’t use all your time looking for the next deal when you have one in front of you already. This is especially true when you are just starting out. Real estate investing is risky, and you need to take it slow in the beginning, while you are learning the ropes. Often the people you are buying from or renting to will attempt to take advantage of you, and you need to be cautious. Going slow is the best option when you are starting out to learn, and see just what it takes to get a deal off the ground and producing.

Establish Industry Relationships

This one is huge. You really, really need a quality real estate agent and banker for starters. You need them to make sure your property fits the rental model you are looking for, how good the neighborhood is that you are looking to invest in, and securing the best deals. I highly recommend taking these professionals to lunch, to show them you are serious and want to to have a relationship with them, not just get the best deal possible and then go with someone else that shows a slightly better rate or terms. These relationships will pay off with referrals, and deals you didn’t even know were on the market down the road. Also, join the local real estate investor club in your area. You may learn something you didn’t know, but more importantly, you will meet people that can help you down the road.

Establish Tenant Relationships

Doing right by your tenants can get you in position to extend contracts, and even get referrals for new tenants in other properties you may have. I just recently had a call where one of my tenants asked me if I had housing for a friend of theirs. Relationships, relationships, relationships. They pay off in the long run.

Don’t Get Emotional

This can really cause serious damage to your business. If you let angry, grief, or any other emotion sway your decision making, you are in for a long, hard ride to poorville. Sometimes tenants can be so aggravating, but stop and ask yourself, “Will it really do any good for me to get mad and yell at them?” In almost every case, it just makes matters worse. Work with the tenant as much as possible, and if worse comes worse, write the eviction letter. But do your best not to burn bridges.


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New Texas Real Estate License Requirements

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I am irate at the governing bodies as to how licensed individuals are being treated. We are being treated like criminals. Not only does a new licensee have to get 60 hours of SAE training before being allowed to renew their license after the first year, but I just recently found out that I have to provide fingerprints so that the FBI can do a criminal investigation on me! And what’s more, I have to pay additional money for the education, the fingerprints, as well as a renewal fee to TREC! What has our country come to! Even though I have completed my education and paid the TREC renewal fee, I am probably going to miss my renewal date of 2/29/08, and have to pay a late renewal fee in addition to the ridiculous fees I have already paid. But let me just give you a quick rundown (be sure to check TREC’s website for the current requirements) of the new licensing requirements. These requirements apply to anyone renewing or applying for a salesperson or broker’s license after January 1, 2008:

  • Take a least 60 hours of SAE education (I used AbsoluteCE for mine, which was the cheapest I could find, however it still cost me $199)
  • Pay a renewal fee to TREC (I paid $51)
  • Find an IBT location and setup an appointment to get your fingerprints taken (this is the worst one, they are forcing me to give them fingerprints, which is against the constitution as I have committed no crime, nor have I been charged with a crime, as well as charging me $44.20)

One more thing, make sure to get all this done 10 days before your renewal date, or you could risk getting slapped with additional fees. Can you believe it? I can’t, these agencies are absolutely criminals! Our forefathers would be completely ashamed. I go in tomorrow to get my fingerprints done, and my renewal date is tomorrow. We will see if I get slapped with more ridiculous fees. Please leave your feedback at the bottom of the page.


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Multifamily Property Management Plan

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If you have decided not to Market Your Multifamily Property After the Purchase, or if you have marketed your property after the purchase, but later you moved away for another job or something, then you’ll need to consider utilizing a property management company. You must be wise about choosing the right property management company, because many of them out there do not do their clients justice. You are going to need someone that will do a little more than stick a sign in the yard and an ad in the paper, then do nothing after finding a tenant. As a minimum, you should check the following when seeking out a property manager for your multifamily properties:

  • How long has the company been in business?
  • How many properties are they currently managing?
  • What is their plan for marketing your property?
  • How do they screen potential tenants?
  • What are their fees (including any setup fees, maintenance fees, etc)?
  • How often do they check on the property (at least drive by it)?
  • What happens if the tenant stops paying?
  • What is their typical turnaround from beginning to market the property, to getting it rented?

There are more questions you can ask property management companies, but at least start with the ones just mentioned. Also, I would meet with the actual person that will be handling your property, and get a comfort level with them before signing anything.

If you decide that you are going to manage the property yourself, I recommend this one thing:

Be near the property!

I know it sounds elementary, but this is the single most important thing for managing a property. You need to drive by it occasionally, and be able to handle any maintenance requests. Also, if you can take a few free courses at your local Home Depot or Lowes about toilet repair, and some other basic things, it will save you a great deal of money in the long run. Check with your renters on occasion about changing the air conditioning filters, water filters, etc to keep the expensive maintenance calls to a minimum. General checking on the property from time to time is going to yield the highest profit over time.

Well, there you have it, from finding a multifamily property, all the way to finding a tenant and managing it, you should have all the basic tools to getting started in multifamily. If you liked this series, sign up for my RSS feed to get all future updates from Personal Finance Resources automatically and free.

Other Articles in this series:

Make Money in Multi-Family
How to Find Multifamily Properties
How to Buy Multifamily Properties
Multifamily Property Financing

Marketing Your Multifamily Property After the Purchase


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Marketing Your Multifamily Property After the Purchase

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There are oodles and oodles of methods to cover when marketing your multi-family property. But I wanted to keep the list short today, so I am going to cover some of the methods I use, and some other time tested methods that are cheap to implement. Have you ever had to sit on a property? Here’s some good ways to get low cost exposure for your properties:

  • Direct Mail:
    One of the oldest, but one of the best methods to shotgun your message to a wide audience of people. I would focus to areas that are prone to renting, such as areas where apartment complexes are, and other multifamily properties. Give a strong message as to a better place to live, an upgrade, and make sure there is some sort of call to action in your mailings. Whether you ask them to call you, go to your website, or email in, you want to be sure to give yourself the best chance of getting contact from them. Don’t give up if your first mailing doesn’t yield results, send more mailings to get the message in front of them multiple times. There is so much advertising out there today, that if people don’t see your message often, they are likely not to do anything with it. It’s just too easy to trash or ignore.
  • Internet:
    This may be the standard in the near future. Many, many people, especially in the larger cities, go to the internet first to seek out available properties. They like the anonymity of surfing the web, and they don’t want to be “bothered” by pushy salesmen. That isn’t to say that you would push them, but the perception is there. So you need to have some kind of web presence for your business. I have a simple website for my local real estate business - http://beltontemplerealestate.com, which took me about an hour or two to construct, and I have done minimal effort on it, and have already been contacted through it. The system I utilized was Open Realty, and open source listing software for the internet. Easy to install and a great admin panel, it was an easy choice.
  • Newspaper:
    A little more costly than the previous two, but still a cheap method to get your message out there. Try to use something that your competitors aren’t using, such as asterisks, or a simple logo, all caps for part of the listing, anything to make your listing look different than the ones around it. This will help people see your listing before the others.
  • Endorsements:
    Can be costly, be if you can offer something of value in return for an endorsement, it can really get the message out there quickly. Find out who the local radio stations host, and what people listen to, and try to arrange meetings with the appropriate individuals. Someone in the public eye that people trust is a great way to provide instant trust for you and your business.
  • Business Cards:
    May sound simple, but leaving business cards at places you go, like to eat, shop, and other business activities you do will provide results with time. When you meet people, or go out with friends, be sure that they have your business card so they can easy give people they know the pertinent information.
  • Fliers:
    Fliers are a very cheap way to get exposure for your property. With multifamily, I would try to get fliers around areas of the local university, or other place where you people live. This will target the audience that is most likely to live in multifamily properties. I am not discourage putting your fliers up in grocery stores, convenience stores, or other places, but targeting your efforts has merit.
  • Sign in the Yard:
    This is a no-brainer. You must have a sign in the yard to get the occasional passing traffic and to allow people to easily find the property. If there are many signs on the street where you are marketing your property, do something different with your sign, such as putting flags on the corners, or streamers, or anything that will set your sign apart from the others.

Again, these are just a few ways to market a property, as well as your real estate business. The main thing is implementing something to get the word out about your multifamily property. If you have a property in a good area of town, if it is in good condition and you have it priced right, then you just need to implement a few of these actions and you should be able to rent that piece of property, especially with the shift in today’s market as more and more people are losing their homes, and having to rent.

Other Articles in this series:

Make Money in Multi-Family
How to Find Multifamily Properties
How to Buy Multifamily Properties
Multifamily Property Financing

Multifamily Property Management Plan


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Multifamily Property Financing

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As mentioned previously, there are many ways to financing a multifamily property. If your credit is good (if you are an investor I hope that it would be good) then the traditional financing methods are going to work the best. But let’s look at some different ways to finance a multifamily property.

The Blanket Loan

This one I especially like. This is the way we financed the latest 4 unit deal that we did. It was two duplexes on two different streets, but the loan was for one sum of money, and included both properties. The loan includes a balance point that will release title to one of the properties when reached. This is significant because it reduced our financing costs. One loan means one set of closing costs, one application fee, etc. One more note I need to make here is the importance of establishing relationships with bankers. In our case, we have started a good relationship with a local bank vice president, who will be able to help us in the future. He didn’t charge us any origination fees, and our closing costs were minimal.

Commercial Loan

Many times, if you are operating under a corporate name, LLC, or some other business entity, the commercial loan is going to be your easiest option. The commercial loan will allow you to borrow money in the name of your business, and put your business’ name on the deed to the property. It is usually a fully amortized loan, but generally has a shorter maturity than a traditional mortgage. I usually see something like a 5 year maturity (which can be renewed at the then market rate of interest) with a 10, 15, or 20 year amortization schedule. So the payment will be a little higher than a traditional 30 year mortgage, but the financing is much easier to obtain, and again, you can put it in the name of your business.

Traditional 30 Year Mortgage

You can go out and get a traditional mortgage, but the rate for an investor loan is going to be higher, and getting approved for the loan is more difficult. Further, investor mortgages are going to be in your name, exposing you to greater risk. Also, mortgage companies have limits on how many loans you can have in your name, so at some point, you will not be able to buy any more properties. The advantage is, you can get the 30 year amortization, make a smaller monthly payment, and pocket more of the difference between your rental rate and your payment.

Adjustable Rate Mortgage (ARM)

Getting an ARM is an option, but frankly, not a very good one when you are looking to invest for the long term. Especially with rates as low as they are in today’s market, I would stick more to a fixed rate mortgage. The ARM really only has merit if you are looking for a short term mortgage, with the intent to sell the property before the initial interest rate period expires.

Hard Money Lenders

This is what I like to call the wild west. Anything goes here, and it is all about relationships. If you are just getting started, expect to pay quite a bit more in interest and fees when using hard money, but develop a relationship with an investing group, as it will pay off later. Once they do a couple of deals with you, they will be more inclined to offer you better rates and fees.

In closing, there are many different ways to finance a multifamily property. But the important thing is, and what I want you take away from this is that it is all about relationships. You must get out there, meet some people in the business, get to know them, and start small. Do one small deal to test, and let them gain a comfort level with you. As you go down the road, your deals will become much more profitable, and your relationships may even send deals your way.

Other Articles in this series:

Make Money in Multi-Family
How to Find Multifamily Properties
How to Buy Multifamily Properties
Marketing Your Multifamily Property After the Purchase
Multifamily Property Management Plan


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How to Buy Multifamily Properties

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In the last article How to Find Multifamily Properties, we focused in on the search and targeting of markets near you. I stress the importance of finding properties near you, because getting involved in properties out of town or in another state is extremely costly and difficult to manage. But after you find a potential property, now what? Sometimes putting an offer together and negotiating is not so easy. Here’s my approach to negotiating a purchase of a property:

  1. Zero Emotion
    This is a hard one for some people, as they get caught up in the emotional game of negotiating, and once they get entrenched, they will do anything to close the deal. Their thought process is that they have spent so much time on the deal, that they don’t want to “lose” their time investment, so therefore they “pay” to recapture that time investment. Doesn’t make any sense does it? Exactly. Getting yourself into a bad deal to save your time investment is not a smart idea. So just put off emotion completely. This is business.
  2. Calculate Your High Water Mark (highest price point)
    This is the absolute maximum you will go when buying the property. When buying multifamily properties to be used as rental properties, you want to make sure that the rental amount you receive will be at least 1% of the purchase (e.g. if you can rent 2 units of a duplex for $700 each per month, that is $1,400 per month, thus your highest possible price is $140,000). Personally, I like to be closer to 1.5% or even up to 2% due to vacancy issues and maintenance. However, working those high profit deals gets pretty tough. This number needs to be an all in number, in other words, this number should include in fix up costs, closing costs and other up front expenses.
  3. Low Ball the Offer
    Your first offer should be considerably lower than your high water mark. Showing the seller a pre-approval letter for financing or offer to buy with cash always makes a low ball offer look better. If and when you talk to the seller about your offer, mention fallacies with the property, and other reasons why the property isn’t worth as much as the seller thinks its worth. If you have access to the MLS, run the comps, and if they lean more towards your number, than show that to the seller as well.
  4. Make one or more increases in your offer, before ending at your high water mark
    Always seem pessimistic about increasing your offer, and never seem eager. Again, zero emotion, this is all business to you. When push comes to shove, the last offer should be yours (unless their number comes in at or less than you high water mark).
  5. Make your final offer
    End with your high water mark offer. I recommend something other than a whole number. For instance, if your high water mark is $125,000, then offer $124,823, or something off like that to give the perception that it is a calculated number, and you can’t go above it. Most sellers haven’t seen an offer like that, and it will sure get them thinking.

One final thought on how to buy a multifamily property. THERE ARE OTHER PROPERTIES OUT THERE! Just because you can’t come to terms with a seller doesn’t mean the sky is falling. This goes back to point number one, and the most important point, do not give in to emotion. Be patient, submit several offers to different sellers, and wait for the “Yes” answer to a golden deal. I have submitted many, many offers in the past, and have only closed a fraction of the deals. But the deals I have closed have been very good deals, greater than the 1% you should shoot for.

Other Articles in this series:

Make Money in Multi-Family
How to Find Multifamily Properties
Multifamily Property Financing
Marketing Your Multifamily Property After the Purchase
Multifamily Property Management Plan


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How to Find Multifamily Properties

Real Estate Investing 2 Comments »

As aforementioned, this is the hardest part of investing in multifamily properties. Regardless of what kind of real estate investing your are interested in, you must find properties at a discount. Unfortunately, in the multifamily property world, that aren’t many foreclosures, as most people that buy into multifamily properties are investors. So the trick is to find an investor that needs or wants to dump their multifamily property. I’m going to give you some insider tips to finding those owners who need or want to sell.

Method 1 - Farming markets

This one is very simple to understand, but takes a lot of diligence and work to produce results. You will need to identify target neighborhoods where you want to buy properties. Obviously, you’ll want to be in areas that include multifamily, but I have found that mixed neighborhoods that are nice areas works really well. People like the feeling of being in a “family neighborhood” and not feeling like they are in an apartment complex. The potential tenants that are interested in multifamily properties are looking for that family/neighborhood feeling, otherwise they would just rent an apartment.

Once you have identified several target areas, you will need to drive them, and look for signs. For sale by owner signs are going to be the most promising leads. Usually when realtors are involved, you will likely not get the price you need to make money in the property. I would drive the markets maybe once a week, and look for those signs.

Method 2 - Developing Relationships with Top Realtors

This may sound like I am contradicting myself, but just give me a minute. There is a difference between a realtor, and a realtor who understands investing. Most realtors don’t know squat about creative financing, investing or anything else. All they want to do is sell retail homes for a 6% commission. But, if you can find a realtor who knows a little something, and also works with several investors, now you have a resource.

The best way to make these contacts is the old fashioned way. Talk to a realtor you already know, or look in the paper for the most prominent realtors, and give them a call or show up at their office. Ask them if they work with investors on a regular basis, and offer to take them out to lunch. Build a relationship, and if they see that you are serious, they will call you when one of their investors wants to get out of a deal.

Method 3 - Become a Realtor

This is one of the best methods of all. I got my realtor’s license in February of 2007, and wouldn’t give it back for anything. Access to the MLS as well as working under a broker who understands investing and has put me on to a few clients she doesn’t want to deal with is a gold mine. Also, you can talk to your broker about getting all the necessary forms to conduct business with your clients.

Use the MLS to the max. When you are in the buy mode, checking it every day is a good idea. See what new properties come up on a daily basis. Real estate investing is very competitive, and you want to be the first one to jump on a deal if it comes up.

Just a note - you do not have to push hard or work full time as a realtor. You can get your license and work with a broker on your schedule. I don’t do much retail home sales, mostly I do property management and investing, I don’t even go in to the office most days!

In conclusion, you can always use standard methods like looking at newspaper ads or for sale by owner websites, but the 3 methods mentioned above have a lot more power and will enable you to find properties before others find them through the traditional means.

Articles in this Series:

Make Money in Multi-Family
How to Buy Multifamily Properties
Multifamily Property Financing
Marketing Your Multifamily Property After the Purchase
Multifamily Property Management Plan


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Real Estate Investing Light Friday

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Hey guys, I didn’t get the time to produce the first wave of the “Make Money in Multi-Family” series, but I promise it is coming Monday. I just wanted to give you a state of the union on my current real estate activities. I have a mid-sized house in a good area of town that I have been marketing for a cousin of mine, and today we struck a deal for a lease option/purchase with a nice couple here. The deal is subject to the screening process, but I already have their credit report and application in hand, and what I have verified so far has checked out. Their credit is good, and the job history checks out. Monday I will follow up on their rental history and make sure they are good tenants.

The deal is a good one for the owner. It is a three year lease option, with good down money, and we also negotiated to allow $50 per month of the payment to be credited toward the purchase of the house. So really, this contract is going to be a hybrid between a residential lease option and a residential lease purchase, in that we are taking a substantial amount up front for an option payment, but then also allowing part of the rental payments to be credited toward the close.

So keep your heads up, ask questions of me as you need assistance, and go make some money!


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Make Money in Multi-Family

Real Estate Investing 5 Comments »

This will be the first how-to article in a series covering ways to make money in multi-family properties. This episode is just introductory, and will just skim the surface on the major steps involved in acquiring and profiting from multi-family deals. If you are just getting started in real estate investing, and want to maximize the risk on your investment, multi-family housing is the way to go. Alright, let’s get the overview and make some money:

  1. How to Find Multifamily Properties:
    This is the most challenging step for the real estate investor. If you are going to invest, you must learn The One Key to Real Estate Investing - buying right. I preach this a lot, and I cannot emphasize the importance of it. If you buy at or near market value, YOU WILL LOSE. The only way to win buying at market value is to hang on to the property forever, and pray it goes up in value over time. The savvy real estate investor knows that the property will not rent or sale for greater than market value, thus the only way to win is to buy at a significant discount.
  2. How to Buy Multifamily Properties:
    After you find the property, you will need to be able to negotiate down the price. Rarely will you find a deal that is already priced at a level that will produce the necessary income to take on the risk. You will learn how to negotiate with sellers to get the necessary price.
  3. Multifamily Property Financing:
    There are a zillion ways to finance any kind of property, but alas, financing a multi-family property is a little tougher than financing a primary residence, just due to the nature of property. It is investment property, even if you live in one of the units. Lining up commercial financing or finding hard money lenders is one of things you will be learning throughout this series.
  4. Marketing Your Multifamily Property After the Purchase:
    You will need to know the prevailing methods to effectively find tenants that are willing and able to rent the property. I will take you through advertising, showing, and properly screening your potential tenants. I have had some trouble with a few tenants that I taken chances on, but in the end, it has all worked out so far.
  5. Multifamily Property Management Plan:
    Someone is going to have to manage the property. I manage several properties here in the Belton/Temple area of Texas, and will show you how I manage my properties. It isn’t difficult from a theoretical standpoint, but you must keep emotion out of the game, or you will just get killed out there. People are masterful at convincing others of how bad there situation is, and how they can’t come up with the rent. I will give you some personal stories of how I dealt with such matters.

So sit back, relax, and hang on in the coming days as we plow through the methods and ideas for getting your multi-family empire started. But before you leave, make sure and sign up for my RSS feed, and get this great free information delivered directly to you automatically in a medium of your choice.


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Large versus Small Property Investing

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Operating in the small market of Temple-Belton, TX over the last several years has taught me much about the most profitable, the fastest to rent, and the least amount of risk possible when investing in real estate. The following is a simplified side by side breakdown of a small investment property, a mid-sized investment property, and a large investment property. Bear in mind that although these numbers are approximate, I manage at least one property in each one of these categories, and these figures are very close for this market. Let’s take a look:

Small Property Mid-sized Property Large Property
Value 50,000 90,000 150,000
PITI (PMT) 400 700 1,200
Rent 600 900 1,400
Income 200 200 200

So as we can see from this table, the incomes are all the same. So in this example, it becomes easy to see the type of property you should be investing in, small houses or multi-family properties are the way to go. Here’s why:

  1. Less Risk
    It is easy to see as you move up to the larger properties with higher payments, if they sit vacant then you are losing far more money than if the small house is vacant. Also, potential tenants for higher end houses typically demand more, e.g. a little bit of touch up paint or something probably won’t be a problem for the renter in the small house, but in the larger house, it becomes an issue.
  2. Larger Market
    Small houses rent cheaper, and therefore are in reach of more potential renters. Further, folks that make less money tend to want to rent versus folks that make more money. Bottom line, the cheaper the rent, the easier it is to keep a renter and a low vacancy rate.
  3. Same Money
    As the table shows (and assuming you are following the One Key to Real Estate Investing - buying right), the earnings are about the same. So in essence, you could buy 3 small properties for the price of one large property, and make 3 times the amount of money.

So there you have it, stick to small properties and multi-family dwellings, especially if you are just entering into the real estate investing game. I started with a 2,600 square foot monster that I tried to flip, and ended up losing about 2 years and $8,000. Now have a couple of my own investment properties, as well as managing several others, all producing nice returns. If you have any comments or suggestions, please leave them at the bottom of the page.


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