SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Kevin

The Voluntary Landlord/Tenant Relationship?

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The landlord/tenant relationship is generally a voluntary one. Person A, the landlord, has a vacant property they wish to rent. Person B, the tenant, needs a place to live. The marketplace brings persons A and B together. They examine what each other has to offer, negotiate a price and decide to make an exchange. Person A agrees to let Person B live in their property for a certain amount time and amount of money. Everyone walks away from this voluntary transaction in a more favorable position, otherwise they would not do it.

Most voluntary business relationships are easy to end. One simply has to stop gong to a particular restaurant or store and that ends it. Or, the owner of the restaurant or store can refuse you service. With residential real estate rentals, it gets a bit more complicated. The landlord/tenant relationship has evolved over the years to remove this ease and actually penalize it. In doing so however, each side generally benefits.

Nearly all businesses, and landlording is no exception, desire stability and continuity. Businesses want to be able to determine the income that will be coming in and for how long. On the flip side, they do not want to lock themselves into a disadvantage if market conditions change. Tenants want some security. They want to know they they will have a place to live. After all, I would hate to have to move every month. These wants from both sides have evolved into the long term lease. Most residential landlords now use a long term lease of at least a year that bind both parties to location and price. Thus creating stability and continuity. Neither party can simply pull the plug on this agreement without some kind of penalty or compensation.

When the lease term expires, either party can usually end the landlord/tenant relationship just as easily as it was started. The tenant can simply move or the landlord can choose not to renew, thus requiring the tenant to move. But what if the tenant does not want to move? What if they really like your property and want to stay? Can they? Can they force the relationship to continue?

The answer is usually no. But, if they refuse to leave after you have asked them to do so, you may be faced with filing what is called a “no-fault eviction.”  In other words, you are filing to force the end of the relationship for no other reason than that is what you want to do. The tenant may be paying you rent. The tenant may otherwise be a model tenant but you want possession of your property. Perhaps you want to remodel. Perhaps you want to sell. Whatever the reason, your wish is to regain control of your property.

As rents continue to rise and the number of rental units continue to decrease in some areas, more and more tenants are starting to balk at being asked to move. They do not want to pay more rent somewhere else and their selection of properties to move to has decreased. In turn, tenants begin to ask politicians for help and politicians offer it by enacting bans or restrictions on no-fault evictions. Such events are happening in California and in Washington State and are forcing landlords into relationships that were once voluntary. Will this trend increase? Stay tuned and stay informed as to what your local politicians are doing.

Any readers try to conduct a no-fault eviction recently and hit problems? Let me and other readers know with your comments.

Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

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What Is An FED?

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FED is short for a Forcible Entry and Detainer Warrant, more commonly known as an eviction. In many states, including Tennessee where I live and work, a landlord has to “swear out” a warrant and sue in court to regain legal possession of a property from a tenant. By doing so the landlord “swears” that they have been wrongfully denied access to their property (not paid) and want that situation remedied.

After a court hearing where the FED warrant is upheld by a judge, the landlord must then wait a specific period of time to allow their tenant to vacate and remove their possessions. If the tenant does not vacate, then the landlord must file for a Writ of Possession. Once this Writ is served on the tenant, often by a Sheriff’s Deputy, then the eviction can proceed.

With an FED Warrant and Writ of Possession in hand, a landlord gains the legal right to enter into their tenant’s home, by force if necessary, in order to remove them and their possessions and thus take back legal possession of the property. This entire process will generally take about a month.

Filing for and obtaining an FED warrant can be tricky and will differ from jurisdiction to jurisdiction. Plus, if you own your property in an LLC, you might not want to do this yourself. Seek competent advice before filing and going into court. For the curious, the form to file for an FED in Memphis Tennessee can be found here. The Writ of Possession can be found here.

Can I Paint My Walls? Dealing With Tenant Redecorating Requests

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Most tenants are quite content to move in, pay their rent, live and be left alone. They understand that while your property may be their home, it is not theirs to do anything with that they please. Most tenants are this way. Others never seem to be content. They always want to change or tailor your property to better “fit” them.  

These tenants will want to do “improvements” to your property. They will have renovation requests such as “Can I paint my walls?” or “Could I plant some flowers?” I have even had tenants ask if they can put up wallpaper or install tile.

At first, these requests may sound reasonable to you. You might think that what the tenant wants to do will actually improve your property, that your property will look better when the tenant is done. In other words, what could go wrong? Lots. Let me dissuade you from these thoughts.

Many people devise grand ideas for things they want to do. Especially when something, such as school, a job or a place to live, is new and fresh. Think of the times when you were in school and said to yourself “I’m really going to buckle down and study harder this year!” Did you? Perhaps you did. But, if you are like most people, other things in life got in the way and as that feeling of newness wore off, often so did the ambition. Or that ambition was re-focused on other new things that arose in life.

Tenants are no different.

Over the years, we have said “yes” more that once to these types of tenant questions.  And 9 times out of 10, we have regretted it. Why, because the wall painting never really does get completed. Or the paint job is so bad that it has to be redone when the tenant moves out. Or they did not use drop cloths and splatter paint all over the hardwood floors. Other times, the tenant lies (shocking I know!) and paints the walls a totally different color than what was requested and approved. Do you have any idea how many coats of primer and paint it takes to cover black or bright green paint? I’ll save you the hassle by telling you at least four.

I have learned from experience that you simply cannot trust your tenants to do what they say they are going to do when it comes to these matters. Plus the picture of the completed job that you have in your head will not match the one your tenant has in theirs. All of this leads to aggravation and drama for both you and your tenant. Best to just avoid it in the first place by saying no.

Be glad however that at least your tenants are asking and not just doing. Hopefully the reason they are asking is because you have strict clauses in your house rules stating that tenants shall not make any property improvements or alterations without your approval. Hopefully you also made this clear when they moved in. If you do not tell them on the front end, believe me that many will just assume that making such alterations are OK.

The bottom line is that saying yes to these types of questions usually just ends up costing you time, money and aggravation.  Most of the projects that tenants attempt to take on have to be redone, and/or constitute a recurring maintenance issue. It is therefore best to make it policy that your property cannot be altered by your tenants.  No, you cannot paint your walls.

Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

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Do Landlords Look At A Tenant’s Cleanliness Whenever They Enter A Tenant’s Home?

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Absolutely!

We even start looking at a tenant’s cleanliness before they move in.

We look at their car to see if it is filled with trash. We look at their clothes to see how well kept they are. We look to see if there is food spilled down the front of their shirt. We look at their overall appearance.

As a landlord, I want tenants who will pay, stay and respect my property. If they do not even respect their own appearance or property, why would I think they would respect mine? Having a neat and clean appearance is one of our rental standards.

Of course appearances can be deceiving and someone who looks well presented may turnout to be completely different behind closed doors. If so, we are not beyond telling them to clean up or even perhaps hiring a maid service.

Keeping More Of What You Make

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Any business is all about the bottom line. If you are not keeping more than you make, then your business is doomed. Keeping more of what you make is not easy. There is always someone trying to get into your pocket. Learning how to keep more of what you make and keeping people out of your pocket begins with learning what is in your pocket to begin with. Keeping more of what you make has to start with you.  

You might have read the title to this post and thought I was going to provide tips about taxes or cost cutting. While those things are important, this post touches on something a lot more basic, knowing what is coming in and what is going out. You might be thinking “well duh”! But you would be surprised at how many I talk to have only a vague idea.

Keeping more of what you make begins with getting your “business house” in order.  You cannot just throw receipts in a shoe box to sort out later, or write checks here and there. The receipts will only pile up, money will keep going out and later will never come. A income and expense record with a filing system is a must. This system does not have to be fancy or complex. The key is to just have one and enter data and keep it organized at least once per week. A simple spreadsheet and bankers box may do the trick, especially when you are just starting out.

Start by setting up a simple spreadsheet for each property. At the top, list the source of income such as rent, late fees, or utility reimbursements. In lower rows, list expenses. Develop general categories for your expenses. The real estate expense categories used by the IRS on Form 1040, Schedule E are a great place to start. Doing so will save you a great deal of time and effort when tax season rolls around. You can always adjust your spreadsheet to fit your specific needs as you grow.

And as you grow, you will need to adjust. The record keeping just gets harder and so complex that simple spreadsheets may not be able to keep up. As you grow, you may want to hire professional help or move towards some sort of accounting software such as quickbooks or quicken. Be prepared however, as this step involves another learning curve. You will either be learning about the software or learning what your professional bookkeeper needs. There are also several property management software packages out there that get better and better every day as far as their functionality goes. We have graduated to using Appfolio, but if you are just starting out, such a system is not worth the cost.

Keep in mind also that as you add to your business, in terms of properties, loans, lenders, partnerships, LLC’s and trusts, you will be adding bank accounts, checkbooks, forms, tax obligations and other paperwork. It will all become much more complex. This complexity will include lots of numbers and data that has to be sorted, maintained and reviewed.  

It can all be quite overwhelming, especially for someone who does not have any accounting or money handling experience. But keeping close track of what is coming in and going out is a must. If you want any chance at all to keep more of what you make, it will start with you and the systems you set up as you begin and grow your real estate business

Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors. Subscribe to Smarterlandlording here. Contact Kevin here.

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Four Tenant Screening Techniques To Use With The Standard Background Check

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I harp on it lot, but tenant screening is perhaps the most important thing a landlord does. Keeping problem tenants out of your properties will save you money, time and loads of frustration.

Most are already aware that effective tenant screening should involve a credit and criminal history background check. We run one on every adult applicant through our property management software, Appfolio. An alternative background check source is RentPerfect.com. In my opinion however, to be truly effective, tenant screening has to go deeper than the standard background check. Effective tenant screening requires a landlord to seek out what is hidden and what may be lurking outside of standard background reports.

To help you be more effective with your tenant screening, here are four tenant screening techniques that we use to dig deeper and avoid those problem tenants.

1. Verify Income – One rental standard that we and many other landlords use is based on income. This standard ensures that your applicant has the income to be able to afford the rent and most other necessities in life. If this standard is not met, your tenant will be making choices on who to pay every month. You very well could be on the losing end of those decisions if they do not have the necessary income.  

Despite the standards you set and advertise, some applicants will tell you anything. The will tell you that they do meet your income standards when they do not. Thus, you simply cannot believe what you are told. You have to verify it. Sometimes a credit report will tell verify or at least offer clues to income, but other times it will not.

When it comes to income, you should contact your applicant’s employer to help verify it. You do not have to be real specific when doing so. Simply asking if Ms. Applicant makes approximately $X per month will do.

Sounds easy and straightforward right? It is not. People do work for themselves after all, so who would you call in that case? Some companies also charge (I’m looking at you FedEx) to verify income. Others will lie, falsify records and set up schemes to try and dupe you. One way to get around these issues is to ask for recent check stubs and bank statements. But, as I said, these can be faked. So make sure names match, employers match, addresses match and dates are correct  

If you decide to make a phone call to either a bank or an employer, it is best not to use the phone number provided to you by the applicant. Who knows who is on the other side of that number? It could very well be the bank or the employer but it could also be a friend or relative helping with the cover up. Instead, Google the name of the bank or employer and call the main number. Then get transferred to the person you need to verify the information.

2. Check Local Data Sources – Yes, a nationwide credit and criminal background check should be done, but local sources of information should not be overlooked. Many local records, such as those from civil and criminal court, property transfers and even utility hookups are online. Those records should be searched by you for info on your applicant. Here in Memphis we use the Daily News. They charge a monthly fee to be able to access their services, but the cost is minimal compared to dealing with a problem tenant.

3. Search Local Sex Offender Registries – Your national criminal and credit background search will likely include a sex offender registry search, but why not check out your local sources as well just to be sure? It only takes a few minutes and sites such as the Tennessee Sex Offender Registry even provide a picture. In that way you can be sure who your applicant is as many names can be similar and mistakes in data entry do happen.

4. Ask Questions Again – A key to uncovering lies and red flags is to ask the same questions over and over again. Not repeatedly and aggressively, but as part of a smooth and general conversation you might have over time. You should for example ask questions when you receive that first phone call. Make note of the answers. Then ask the same questions again when doing a showing and on your formal application.  Ask your questions and then be silent. People hate silence and will begin to babble to fill it up. Listen and look for for inconsistencies. People will often have a hard time remembering the lies they have told. Their attempts to continue to weave the web will often make those lies show themselves.

I wish that everyone could be trusted in this world, but unfortunately a few bad apples make it hard on everyone. Hopefully the techniques I have descried above will help you weed the bad ones out. If you do not weed then out, bad tenants can do a lot of damage in a very short amount of time. It is incumbent on you to do all you can to prevent this before it starts. Just remember to be sure that whatever you do when screening tenants, that it is legal and evenly applied to all.

Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

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5 Questions You Must Ask Every Applicant

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One of the most important things a landlord does is screen tenants. Yes, finding properties, keeping up with the books and property maintenance are also important. But, fail at screening and let a problem tenant in one of your properties and the troubles can mount quickly.

Problem tenants will not only cost you money, they will also create loads of tenant drama for you. Not only might you not get the rent you are owed, numerous other issues come with problem tenants. Problem tenants damage property, generate endless phone calls and complaints, cause your good tenants to leave, bring trash, filth and who knows who and what else with them. As a landlord, your best bet is to avoid these problem tenants all together. And you do that with good tenant screening.  

Tenant screening begins at that very first point of contact with a prospective tenant. During that first phone call, not only do you have the job of selling your property and services, but you must also be on the look out for red flags signaling you that the person on the other end of the line is a potential problem. Asking the right questions will help you do a good job of screening.

What to ask then? Here are 5 questions you must ask every applicant in order to help you see the red flags and screen out potential problem tenants.

  1. Why are you moving? – This open ended question asks the prospective tenant to describe what is going on their life. Why do you want to know? Because whatever is going on will move in to your place. Think about what the following two answers to this question can tell you. First answer. “I have taken a new job in your city.”  Second answer. “I hate my current landlord.” The first answer tells you your perspective tenant needs to move for a legitimate reason. It tells you they also have a job. The second answer is much different and raises red flags. Perhaps they have a legitimate reason to move, but perhaps also their current landlord is just as happy to get rid of them. Each answer needs verification, but the second one is going to cause me to be more cautious.
  2. When do you need to move? – Most people do not and should not have to move tomorrow. Most people are reasonable, understand when their lease is up and begin looking for a new place to live in a adequate amount of time. If you get an answer from your prospective tenant that they have to move tomorrow or even next week, then you may want to cut things off right there. Unless there was a fire, there is really no good reason someone has to move tomorrow. On the flip side, you are also wasting your time if someone is looking six months out. Will you hold that vacant apartment for six months? Not likely. Tell the person who has to move tomorrow that there is no way they can get through your screening process that quickly. Ask the person looking six months in advance to get back in touch a couple of months away from when they are ready to move.
  3. Who will be living with you? – Who will be living in the property? You need to know and keep track of this because every adult living in your property absolutely must go through your screening process. Believe me when I say that people will try and hide the fact that other people, such as boyfriends, girlfriends, roommates, relatives, etc., will be living with them. Why do they trying to hide this? What have these folks done? Find out before it moves in to your property.
  4. Are the properties I have available in your price range? – This question is designed to let your prospective tenant decide if what you have available fits them and thus screen themselves. You should always tell every person who calls about everything you have available, even if they called about one specific property. DO NOT TRY TO STEER THEM TOWARDS ONE PLACE OVER ANOTHER. DO NOT LEAVE ANY PROPETY OUT OF YOUR CONVERSATION. Let the prospective tenant decide what property and rent fits their budget and needs. Then go from there. In this way, you can avoid being accused of discriminatory practices.
  5. Have you or anyone you will be living with been evicted or filed for bankruptcy? – This question is essential. Most landlords will not rent to someone who has recently been evicted or filed for bankruptcy. You probably should not either. So you might as well get this question out of the way as soon as possible. If the answer to this question is “No,” a background check will likely prove if they are lying or not (People will and do lie about this). If the answer is “Yes,” dig deeper. Ask about circumstances. Depending on your market and rental standards, “Yes” may not necessarily mean a “No” from you. But you will surly want to find out more.

Being lax with your tenant screening is something is a high risk action when you are a landlord. It sounds terrible, but you just cannot trust anyone to tell you the truth and you have to develop a keen sense for seeing the red flags. Asking both direct and open ended questions designed to elicit information from your prospective tenant, such as those outlined above, will go a long way towards screening out the problems right from the beginning.

The SmarterLandlording Podcast – A Real Estate Investor Conversation with Landlord Delois Brown

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Download the podcast here.  Or, check out the SmarterLandlording Channel on iTunes

Order Your Copy of Advice From Experience To New Real Estate Investors Today!

Available in E-Book or Paperback

Links You Should Check Out

Shelby County Land Bank

Memphis Investors Group

Rent Perfect

The Section 8 Landlord

Want To Contact Us?

Find Delois and I at the Memphis Investors Group almost every month.  We meet on the second Thursday.  The details are here.  

You can find me at my blog, Smarterlandlording.com

And you can like my Facebook page or connect at Twitter @Smarterlandlord.

Like the Intro Music?  Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!).  They write and play some awesome, original music from right here in Memphis, TN.

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Sometimes Technology Causes New Problems

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I am constantly amazed by technology and the benefits it brings.  As a child of the 1980s, having more than three TV channels along with a source of communication and all knowledge right in your pocket is astounding.  But sometimes I think too much technology can be too much of a good thing. As a landlord, it seems that instead of being helpful, technology sometimes causes new problems.

When you own multiple rental properties, the last thing you want to create for yourself is more potential problems, another maintenance issue or something else you have to keep on top of. We landlords have enough of that already with all of the roofs, yards, accounting and personalities we must deal with.  Technology has certainly made many things better.  Cell phones make communication, scheduling and completing tasks much more efficient for example.  But technology also seems to create its own problems.

Take thermostats.  Yes, I’m talking about the simple device that controls the heat and air conditioning.  They are not so simple anymore. Gone are the days when a thermostat had two switches and a lever to control the temperature.  Today they have batteries, long instruction sheets and need to be programmed.  Sure, there are benefits to these things but batteries die and need to be replaced, instructions get lost and programming gets deprogrammed.  All of which causes a hassle for me and my tenants that I would not have if I had the simple, old style, analog thermostat.

Appliances are another example.  Appliances have always been a maintenance issue. They breakdown, get abused and worn out and must be replaced.  This can be such a problem that some landlords shy away from even providing them.  Technology has made this problem worse.  As a landlord I want simple.  I want indestructible.  I want something that even a small child could figure out and use.  Technology is moving us away from that.  Stoves, washing machines and dishwashers used to have simple switches or knobs.  On was on and off was off.  Not so anymore.  Electronic control boards have changed all of that.  There are now so many circuits, switches and buttons that can break or malfunction to render the appliance useless and in need of replacement.  No longer can one just replace a knob or a switch in a few minutes, now the entire appliance has to be replaced.

Sometimes I feel like I am just yelling at a cloud and turning into an old fogey with these sorts of rants.  Perhaps I am and I guess it will happen to the best of us.  I truly get many of the benefits that technology has and is bringing us.  I like the LED lights that save on electricity and hardly ever need to be replaced for example.  But I do not need or want technology to create new or increase problems for me.  It seems that sometimes the old technology was simply better.

What do you think landlords?  Am I wrong here?  Am I just not keeping up with the times? What technology do you think is great? What just causes you more problems? Let me know with a comment below.

Kevin Perk is the founder and publisher of Smarterlandlording.com. He is the author of Advice From Experience To New Real Estate Investors.  Subscribe to Smarterlandlording here. Contact Kevin here.

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Should You Pay Discount Points?

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In an effort to provide my readers with truly helpful content, I have asked fellow real estate investor, friend and mentor Richard Scarbrough to help out. And thankfully he has agreed. A frequent guest on the Smarterlandlording Podcast, Richard is a wealth of real estate knowledge. His experience in the business totals over 40 years, and it is perhaps best if I let him describe some of what he has done.

“When I started investing in real estate, there was hardly any information available. I had great desire and blind optimism to do a lot of different things such as buying homes, moving them, infill lot development, apartments (8, 24, 40 and 216 unit complexes) buying and selling mortgages. I thought if I could own 100 homes I would be rich, so I bought homes from Northaven to Southaven (communities here in the Memphis, TN area), any type property, anyway I could finance it. I also bought, rehabbed and flipped to retail buyers over 400 homes. Along the way I tried numerous management companies that always seemed to manage my properties in a way that I had no cash flow. Some of the above ventures lost money (which I call “seminars” ). But what was more important and cost the most was the lost TIME, as it took me almost a decade to get to back to even after the “216 unit apartment seminar.”  Now at age 71 looking back at 40 years of investing I realize that about a third and maybe half of my investing time was spent recovering from mistakes, therefore anyway we can educate others to avoid these errors is time well spent.”

So from time to time, I will be publishing some of what I am going to call “Richard on Real Estate.” I hope you will find these posts helpful and entertaining. Let me know what you think or if there is a topic you would like to learn more about by leaving a comment below.

Without further delay then, here is the first in a series of Richard on Real Estate.

SHOULD YOU PAY DISCOUNT POINTS?

Should you pay discount points?  Most advisers say no, but you need to look beyond the initial assumption that it’s not a good idea. When you’re getting a loan from a lender, they usually ask “do you want to pay points?” and most people respond “no”, and that ends the conversation. You might want to consider paying points, especially when you’re refinancing, because they could be rolled into the loan and spread out over the term of the loan. What are points? A point is 1% of the loan.

It’s a math problem for me.  For a real simple example let’s say you’re borrowing $100,000 and the lender asks, “Do you want to pay one point and it will lower your interest rate 1/4 of 1%?”.  Here’s what those words mean, one point is 1% of the loan which is $1,000,  so you pay them $1,000 and it lowers your interest rate 1/4 of 1% per year.  Now if 1% of $100,000 is $1,000 then 1/4 of 1% is $250, so you pay them $1,000 and it will lower your payment $250 a year, divided by 12, or about $21 a month.  So, the question is should I pay them $1,000 to save $21 a month?

I look at the math in two different ways. One, what’s the return on your investment to give them $1,000 to save $250 a year? That’s a 25% return on your investment which is pretty phenomenal. Secondly, how fast will I get my money back? If giving them $1,000 saves me $250 a year, that means I get my money back in four years.  As a bonus, on a 30-year loan I’m ahead for the next twenty-six years!

So, your response to “do you want to pay points?” should be “tell me the choices” and then do the math. You may find that you have two, three, or four choices based on a 70%, 75%, or an 80% loan-to-value if you’re an investor, or terms of 15, 20, 25, or 30 years. EACH possible choice may have three or four options of paying points and reducing your interest rate.

 The main takeaway is you should always respond with “I might want to pay points, what are my choices?” and figure out the math.

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