SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Everything

Keeping The Utilities On

by

Landlords cannot always trust tenants with their property.  Even the best tenants can and will do the seemingly unreasonable.  One such thing they can do is leave in the middle of a lease term without telling you they are doing so.  They can and will pack up their stuff, leave and turn off the utilities.  Your property, unbeknownst to you, can be left in the dark and cold.  Keeping the utilities on and our properties protected is an issue we landlords have to deal with

Having your tenant leave in the middle of the night is one thing, but having them turn off the utilities without your knowledge is another.  It may not sound like a very big deal but what if it is in the middle of winter?  The cold could very well cause your water pipes to freeze and burst.  Reconnecting the utilities can also cost you money and time.  Surly you have better uses for re-connection charges and for the time you have to spend waiting for the utility technician to show.  In short, having the utilities turned off without your knowledge can at a minimum be a pain or possibly cause thousands of dollars in damage.

Your Local Utility May Be Able To Help

To help you, your local utility company may have a program that can prevent the utilities from being turned off.  Here in Memphis, the utility has an apartment owner’s re-connect program.  The program will automatically switch the utility connection back to our company anytime the tenant turns off the utilities or even if they fail to pay.  It helps us to ensure that the utilities do not get turned off in the dead of winter.   It also helps  us not waste time and money on re-connection fees and meeting technicians.  This program has saved our butt more than once.

The Catch

The catch however is that you need to stay on top of this program.  Generally, the utility company will send you a written notice when the tenant has turned the utilities off or is behind on their payments.  These notices can easily be lost in the shuffle of all the paper that being a landlord generates.  Beware that less scrupulous tenants know of this program and may try to use it in hopes that you will not notice and thus pay their utilities for a while.

Watch For Notices

Those notices from the utility thus become very important.   They can also be an advance warning to potential trouble.  Especially if a tenant is getting behind in their utility payments.  But, if you have a lot of properties, the notice can be easy to miss or forget about.  The smarterlandlord therefore sets up some type of system to double check the status of their property when such a notice is received.  A simple phone call or a property drive by could head off trouble.

These re-connect programs can be quite helpful, like anything else they can be abused and need to be monitored.  Use them to help your business, but do not abdicate your responsibility to stay on top of things.

Arkansas Looking At Landlord/Tenant Law

by

Just a quick shout out to my neighbors in Arkansas or anyone who might own rental property in that state.  It is that time of year again, the time when laws are made and changed.  The legislature is looking at Arkansas landlord tenant law.  Y0u can read the proposed bill here, and listen to a local news report on the proposed bill here.  Landlords have to stay on top of what their local legislative bodies are doing that may affect their businesses.

The Highest Bid Does Not Always Win

by

Investment properties can be tough to come by right now.  There is a lot of money, big money, chasing almost every property that comes on the market.  Getting outbid is almost becoming the norm.  But, the highest bid does not always win.  There are ways we smaller investors can tip the scales in our favor.  Learning how can help you get more properties.

Money Is Not Everything

Sure, everyone would like the biggest pile of money they can possibly get for their property.  That is just human nature.  But sometimes other factors, especially speed, can be more important.  Time is money.  If you can close quickly, and I mean really quickly, like within 48 to 72 hours, you might just beat out everyone else, even if they bid more than you.

You may not think you can close that fast, but it can be done.  To close quickly you need three things.  One is financing that is ready to go.  The second is a good knowledge of rehab expenses.  The third is a title search.

Traditional bank financing is not speedy.  You are not going to have time for appraisals and other paperwork.  Fast money comes from private lenders, lines of credit and even hard money lenders.  These sources of funds need to be developed now, before you make any offers.

The financing types needed to make this quickness work need to be developed well in advance of any offer.  You need to have private lenders or other types of funds lined up and ready to go once you make an offer.  There will be no time for lengthy explanations once the trigger is pulled.

Secondly, you are likely to only get one shot looking at the property.  You will not have time for any later inspections.  Actually, the fact that you do not require inspections is what will make your lower bid offer tempting.  Make the time you do get to examine a property count.  Learn how to estimate a rehab.

Lastly you will need a quick title search.  This can generally be done by a reputable title agency.  Have a relationship lined up before you make any offers.

Put It All On One Page

All of the above can be said on a one or two page purchase contract.  Keep things simple.  Lots of words and clauses can create confusion.  A confused mind will often say no.

Contingencies?

I am not a big fan of signing anything without a way out, but sometimes it might have to be done, especially in this seller’s market.  You can often lure a seller if you offer a contract with a speedy closing and NO contingencies.  No appraisals.  No Inspections.   Nothing.

Be careful here.  But if you know what you are doing and are confident of your numbers, then go for it.

I’m Local

You might be surprised, but sometimes sellers feel better about selling to someone local.  During negotiations, I always try to somehow thrown in that I am a local buyer.  You never know, it just might give you an edge.  I know that it has helped me a time or two in the past.  Try it.

Someday the market will swing back towards us buyers and the money that is out there will dry up.  But for now, we smaller buyers may have to pull out all of the stops if we want to keep growing and acquiring properties.  By doing so we may just find an edge over those deeper pockets.

Finding Property Owners

by

Finding property owners sometimes takes a bit of detective work and persistence.  Pablo Pererya in the last episode of the SmarterLandlording Podcast talked about doing so with his Greatest Difficult Deal.  Property owners can, willfully or not, make themselves scarce.  When they do, what are some tips to go about finding property owners?

One Of Our Many Hats

Finding and negotiating with the property owner often affords the real estate investor the best chance to acquire a property.  At first glance you might think that finding the owner would be easy, just look it up on the local property assessor’s website.  Most of the time, doing just that will work.  But what if it does not?

One of the many hats you will wear as a real estate investor is the Deerstalker.  You sometimes have to be a little like Sherlock Holmes in this business.   Sure, you can send letters to the address listed on the local property assessor’s website.  But your competing real estate investors are doing the same thing and often those letters are just stacking up in the mailbox or being returned.  To get a good deal, you have to be better than that.  You have to get ahead of your competition and be a detective.

So where to look?

Property Records

Public property records are the first place to start.  Sometimes property owners list the property address as their own, when they actually reside somewhere else.  Any letter you therefore send will just be delivered to a vacant property and not seen for perhaps weeks if ever at all.  If you find this to be the case, search public property records for the name of the owner and you just may find another property listed.  That may be the owner’s true residence.

Property Tax Collector

Property taxes are often somehow get paid.  Who is paying them?  Who is writing the check?  Go to your local tax collector’s office and ask to see the records.  Do not assume that the office that records addresses (the right hand) and the office that collects the taxes (the left hand) know what each other are doing.  When you investigate here, you might just get a lead.

Neighbors

Neighbors can be a great source of information.  Get out of the car and knock on doors.  Many neighbors will be happy to help you because they want to be rid of that eyesore next door.  It is amazing what neighbors, especially long term neighbors, can tell you.   At the very least, leave the neighbor a business card and ask them to pass along your info or call you if they learn more.  Many will do just that.

The Police

This was one of the sources Pablo discussed in the podcast interview.  I know you might be intimidated by the police, but get over it and go ask. They are not going to arrest you.  The worst they will do is scowl and tell you no.  On the other hand they might be very happy if you can help rid them of one of their problems.

Heirs

Heirs might not even know they own a property (yes, that happens!).  Many heirs will often be happy to work with you because they see you as a paycheck and they live far away.  One great source to locate heirs is findagrave.com.  Use this resource for sleuthing and to make connections to heirs.  Yes, it is a bit ghoulish but it works.  This site is also a fantastic genealogy resource.

Just Google

Don’t forget to just Google the name.  Pair your property owner’s name up with any other information you may have such as the address, date of birth or death, whatever.  Dig past the first few hits.  It is remarkable what is out there on the web.  You may find a clue that will lead you to the property owner.  Heck, you may even get their phone number.  Try Google and then give them a call.

It has never been easier to find property owners that it is now.  What used to take a trek downtown to government offices and hours going through reams of paper can now be down with a few clicks from your home office.  A little legwork with neighbors or the local police department can also yield results.  I find wearing this hat as a real estate investor to be one of the most fun, interesting and profitable.  With a little practice, you might as well.

Have you used any unique sources to find property owners?  Please share your experiences with a comment.

The Great, Difficult Deal

by

One of the best things about real estate investing is putting the deal together.  Doing so however often takes a lot of persistence.  Check out this short video clip taken from Episode 13 of the SmarterLandlording Podcast where Pablo Pereyra and I discuss the Great Difficult Deal.  Pablo’s persistence got him the deal.

Persistence pays off folks!

How Long Until You Do Your First Deal?

by

So you have discovered real estate investing.  You have given it some serious thought and you think that real estate investing could be the key to a better future.  It is perhaps the answer that you have been searching for.  You just need to get out there and get your first deal and then the sky is the limit.  But how does it take to go from 0 to 60?  How long until you do your first deal?

In my case, it took me almost two years from the time I first learned about the power of real estate investing by watching a show by Robert Kiyosaki and buying my first investment property.  Why so long?  Well, the honest answer is that I was scared.  Real estate costs a lot of money and I was heading into uncharted territory.  While exciting, it was also just plain scary and being cautious by nature I was going to take my time.

Much To Learn And Do

One of the first things I found out after discovering the possibility of real estate investing was that I had a lot to learn.  The learning curve was steep and I know that if I dove in head first without first learning how to swim I would end up in trouble.  Big trouble.

So I took my time and studied.

I studied everything about real estate I could get my hands on.  Back then, the world wide web was still sort of new with limited amounts of information.  So that meant I went to my local library and checked out every book they had.  Surprisingly, there was a lot to be found.

Then I networked.

I went to real estate seminars in the evenings and on the weekends.  Then I discovered that there were groups called real estate investor associations, reia’s for short, in just about every major city across the United States.  I found a local one and started going.  It was at these seminars and reia meetings that I met successful real estate investors and made connections.  I took people to lunch to pick their brains.  I went to visit them as they were working on their properties.  Absorbing as much as I could.  I also found people like attorneys, accountants and contractors, who would help me when I was ready

At the same time I learned about my market.

Real estate investing means understanding the real estate market.  Before starting to invest, one has to know what properties are selling for and the amount of income they will generate.  There is no way to determine if a property will be a good buy without that knowledge.  And since all real estate is local, learning your market takes specialized knowledge, knowledge that is gained only in talking with and studying local sources.

That all took about a year.  After a year of studying, networking, meeting people and looking at real estate, I felt I was ready to find and purchase my first investment property.

I Had To Start Over

Then I moved halfway across the country.

Upon moving, I had to start a lot of things all over again.  I had to find a new reia.  I had to find new team members and I had to learn about a whole new real estate market.  After another six months or so I was again ready and I bought my first investment property.  It is a duplex which I still own to this day.

How long will it take you to buy your first investment property?  Hard to say but I think at least six months of research, learning, networking and looking at properties is about right.   Unless of course you move in the middle of your learning curve like I did.

Only you will know when you are ready.  You are not in a race with anyone else so do not jump before you feel confident.  But once you have a good feel for real estate investing from reading and listening, once you have found people to help and support you and once you have learned your real estate market, you will know when you are ready.

So how long did it take you to go from 0 to 60?  How much time did you spend researching, learning and looking at properties before you bought your first investment property?  Let me know with your comments.

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Estimating Rehab Costs – A Checklist To Put It All Together

by

My last post was about the importance of accurately calculating rehab costs.  In it, I demonstrated how important these rehab estimates can be to our bottom line.  They can change a potential deal from good to not so good, or prevent us from getting a potential deal.  In this post I want to share a checklist that you can download and use to help you put it all together and accurately estimate rehab costs.

Inspecting Potential Properties

As real estate investors, our business means examining properties.  However, the opportunity to examine a property can be limited or hindered.  For one, there may not be much time to look at a property.  Secondly, there are often a variety of distractions.  These distractions are often other people.  It could be the seller or a Realtor or other investors who are at the property the same time you are.   Because of these time distractions and other people, it can be very easy to overlook or miss something when you are inspecting the property.  The best way to stay on track is to use a checklist.

The Rehab Estimation Checklist

Every time I visit a potential property, I take and use my Rehab Estimation Checklist.  I developed this Checklist over the years through trial and error after visiting numerous properties.  It is simple and straightforward and allows you to make quick notations.

The checklist is a directory of the main components of any property rehab.  It starts on the outside of a property and works its way inside.  When visiting a property, all one has to do is follow the list and check yes or no next to the component.  Marking yes on the checklist shows that the component will need to be rehabbed.  There is also a space for any comments that you might wish to add.

It should take you no more than 15 minutes to a half-hour to completely go through a single property with this checklist.  Once completed, you can return to your office and add costs next to the components you think will need to be rehabbed.  So for example, if you note that the property needs a new roof, you can then use the formula noted here to determine the cost.  If you not that the property will need interior painting, you can use the formula described here to estimate that cost.

Keeping On Track

This checklist serves several purposes.  First, it organizes my thoughts and calculations.  There can be a lot of moving parts in a rehab job.  Being organized right from the start will help tremendously.

Second and more importantly, the checklist ensures that I do not overlook anything.  As I said above, there can be a lot of distractions and it can be easy to miss something.  Having a list ensures that I do not forget to check the water heater, the electrical panel or under the sink.

Third, if there is someone distracting me, the checklist helps stop it.  Sometimes properties are vacant and you will be alone when you see them.  But often there is someone else around and they will, wither purposefully or not, distract you.  Trust me, people just do not seem to know how to leave you alone and let you look over the property.  They will want to show you around.  Having a checklist enables you to hold it up and say something like “I just need to look at these items on my list if you do not mind.”  That will usually get them out of your way.

Download The Checklist

Checklists are an important part of any business.  They help keep you on track and focused.  With potentially expensive rehabs, a checklist is vital to your success.  Download my Rehab Estimation Checklist here.

How Rehab Costs Affect Cashflow

by

Accurately estimating the costs of a potential rehab is a vital part of a real estate investor’s job.   Not being able to do so will affect your cashflow and your bottom line.  This is because most real estate investors, myself included, generally need to borrow rehab funds along with those needed to purchase.  Since we have to pay those funds back, the increased payments affect your bottom line for years to come.  An example of how rehab costs affect cashflow will help to demonstrate my point.

Before I get started, I am assuming you know what cashflow is and how it is calculated.  If not or if you need a refresher, I discussed cashflow and how to determine it here.

The Best Deals Need Rehab

Many of the properties that you will purchase as a real estate investor will need significant amounts of rehab.  Yes, every once in a while you may find a cream puff that is in almost perfect condition, but these cream puffs are few and far between.  More often, we investors find properties that are outdated, functionally obsolete or just plain run down.  It is with these types of properties that we often make the best deals

Accurately estimating how much it is going to take to get these properties functional is thus a big part of our job (see here and here for tips on estimating a rehab).  Underestimating the costs will likely lead you to pay too much, while over estimating the costs will cause you to potentially lose out on the deal since another investor will offer the seller a better offer.  Messing up the rehab amounts will either cost you money or cost you potential deals.

How Cashflow Is Affected

You find a listing for a four-plex offered at $200,000.  In our example here, let’s assume each of the four units rent for $650 per month or a total of $2,600.  Let’s further assume that property taxes average $300 per month, while insurance costs $100 per month.  Finally, let’s assume further that 90% of the purchase price can be borrowed at a fixed rate of 6% and aromtized over 30 years (Google “mortgage calculator” to find and play with the payment amount).

Let’s put all of that together and look at the initial cash flow numbers.

 

Monthly Income                                                  $2,600

Monthly Expenses

Principal and Interest Payment                       $1,079

Property Taxes                                                     $300

Insurance                                                              $100

Repairs and Maintenance                                  $260

Vacancy Credit                                                     $260

Reserves                                                                $260

Total Monthly Expenses                                   $2,259

Monthly Cash Flow                                            $341

 

Not a bad but not a great cashflow either.  There is a potential deal here with a bit of negotiation.  However, this example assumes that there is no rehab needed and no rehab costs are included.  While such a scenario is possible, the more likely scenario is that there is a significant amount of rehab needed.  In fact, it is often the case that some of the units may be vacant due to lack of repairs.

Adding In Rehab Costs

So let’s re-examine our example and assume there is $50,000 in rehab needed.  $50,000 you say!  That seems like a lot.  Well, it is not really.  Sprucing up kitchens and bathrooms, painting walls and installing new flooring does not come cheap.  It is easy to spend $10,000 to $15,000 when rehabbing a dwelling unit (I have not even gotten into systems like HVAC and electrical).   These numbers are entirely plausible.  So let’s add these rehab costs to the amount you need to borrow.  You will note that the principal and interest payment has increased.

 

Monthly Income                                                 $2,600

Monthly Expenses

Principal and Interest Payment                       $1,349

Property Taxes                                                     $300

Insurance                                                              $100

Repairs and Maintenance                                 $260

Vacancy Credit                                                    $260

Reserves                                                               $260

Total Monthly Expenses                                   $2,529

Monthly Cash Flow                                            $71

 

There is still positive cash flow, but it significantly reduced due to the increased amount financed.  To me, the cashflow is just not enough to take on the deal.  There has to be more cashflow as the margin is just too tight.

Reduce The Price

The best way to increase the amount of cashflow is to reduce the principle and interest payment.  There are a number of ways to do that, including seller financing or putting more money down.  But, the logical step however is to negotiate with the seller and reduce the price you pay.  A $20,000 reduction in price and the amount financed will increase the cashflow over $100 per month.

New real estate investors have to learn how to calculate cashflow and estimate rehab costs.  This example demonstrates why it is so important to do so.  It all directly affects our bottom line.

 

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Rent Report For February 2019

by

Zumper.com has published a compilation of average rents for one and two bedroom units from across the United States.  How is your location doing?  Memphis, TN experienced a dip in overall rental amounts for these units, but it is the slow time of the year.

From the report:

“While most of the top markets had another flat month, there was some movement toward the bottom of these 10 cities. Miami fell out of this group, being replaced by Santa Ana, so now 6 of the 10 most expensive rental markets are in California (again).”

Read the rest of the report and check out the data on rent amounts here.

 

What Is Rent Control?

by

When I looked ahead to 2019 to see what was perhaps in store for the real estate investing business, one of the things I saw was misguided calls for rent control and other restrictions upon landlords.  I did not have to wait long.  Oregon seems set on passing SB608 which will enact rent controls state wide.  In this post I want to examine what is rent control to provide landlords a basic understanding of rent control and its repercussions.

Rent Control Defined

Black’s Law Dictionary defines rent control as “Laws or ordinances that set price controls on the renting of residential housing.”  What is meant by price controls?  Price controls in this context set the maximum amount of rent that may be charged on a rental property.  Rent control laws set a price ceiling.  In effect, the government tells the landlord how much they can charge the tenant in rent.  Rent control laws can go by an assortment of names, including rent stabilization, rent regulation and rent freezes among others.

There are many jurisdictions across the United States that have some form of rent control laws on the books.  New York City and San Francisco are two of the more well known examples.  But other locations in California, Maryland, New Jersey and Washington D.C. have rent controls.

Rent controls are enacted by local governments because an increase in the demand for housing drives up the price (rent).  In New York City for example, rent control laws were enacted just after World War II because so many people were returning home or looking to restart their lives after the war that demand for housing far outstripped supply.  Thus the price for housing rose and the government enacted a rent control price ceiling to make housing “more affordable.”  While a few may reap that benefit, the effects rent controls have on landlords, tenants and the housing stock are counter-productive and substantial.

What Rent Control Does

Landlords under rent control are prohibited from charging market rate rents.   They can only charge the controlled, “more affordable” price.  Most rent control laws also prohibit landlords from raising the rent above a certain amount every year, allowing only perhaps a two or three percent increase every year.  What is more, many rent control laws, including the proposal in Oregon, prohibit landlords from using a no fault eviction.  Since most ordinances allow a landlord to raise rent to a market level once a tenant moves, this ban on no fault evictions is done to prevent landlords from evicting existing tenants in order to do just that.

Rent control also has effects on tenants and the housing supply.  These laws distort and change economic incentives.  By legislating a price ceiling or maximum price, these laws dissuade landlords and other entrepreneurs from investing in housing.  This lack of investment actually compounds the problem the rent control laws were trying to fix.  The incentive to create new housing (increase supply) and maintain existing housing is removed.  Supply is thus often further restricted which in turn further drives up market prices (as long as demand remains steady).

Rent controls also restrict the housing supply in another way.  By prohibiting market increases in units that are already rented (rent stabilized), these laws incentivize existing tenants to stay put.  Why move if it will cause your rent to drastically increase?  These laws therefore remove housing stock from the market that might have otherwise been made available.

Finally, rent control laws can take what is often already a potentially adversarial landlord-tenant relationship and make it worse.  Just as there is no incentive for the tenant to move, there is no incentive for the landlord to maintain or fix-up the property.  Thus disrepair, blight and antagonism become the norm rather than the exception.

Long Tern Effects

Rent control once enacted, tends to never go away.  It also tends to increase the size and scope of both government and government regulation.  New Your City for example is using rent control laws enacted to protect returning soldiers over 70 years ago.  Since rent control laws create new incentives and distort others, landlords tend to get creative in order to make up for lost rent.  They do so by charging for “furnished” units or large key deposits.

These creative endeavors by landlords then create a ratcheting up effect of laws to prevent such things.  This in turn places enormous burdens on the courts, city budgets, landlords and tenants as they all try to enforce or grapple with ever escalating rules.  New York City, again for example, has had to set up a specific court just for housing related complaints.  This housing court has 30 judges which handle over 300,000 cases per year!

Going Forward

We landlords must constantly remind people that we are not just sitting around enjoying the income that higher rents bring.  Landlords also have increased costs in the forms of more expensive materials, taxes, insurance, utilities and everything else.  We also need to make sure that the understanding of the effects of rent control is clear.  Rent control, while sounding good and holding much appeal is simply devastating.  Rent Control reduces total housing stock.  It reduces the quality of existing housing stock.  It creates perverse incentives.  Rent control also increases both the size of government and the amount of government regulation thus increasing costs on the whole of society.   To demonstrate these points, I end this post with a quote from economist Assar Lindbeck.  “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”