SMARTERLANDLORDING

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The Fire Clause

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On the latest episode of the Smarter Landlording Podcast, my guest Bucky Philip and I discussed clauses that were required in residential leases here in Tennessee.  One of those clauses is a statement demonstrating that you as the landlord are not responsible for the tenant’s personal items in case of a fire, break in or some other emergency.  I call it the fire clause.

We have such a clause in our lease.  In fact, we go one step further.  We highly recommend that tenant’s get their own renter’s insurance and then have then initial next to the clause.  That way if there is ever a problem in the future (let’s hope there is not), the tenant cannot claim they were not informed.

Here is the fire clause we use in our lease.  Feel free to modify to fit your needs.

Tenant’s Personal Property: Manager shall not be responsible for loss of, theft, or damage to, Tenant’s personal property.  Manager shall not provide fire and casualty insurance for Tenant’s personal property. IT IS THE TENANT’S RESPONSIBILITY TO OBTAIN RENTER’S INSURANCE.     

         I/we understand the rental insurance policy:___________ Tenants Initials.

Check out the Smarter Landlording Podcast with Bucky for other information you need to know. 

Also stay tuned for the next episode coming up in a few weeks.

If They Legalize It Do I Have To Allow It?

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Social norms regarding the use of marijuana are rapidly changing.  Legalization would have been considered impossible just a few years ago, but it is now occurring to varying degrees all over the country.  To us landlords it brings up an interesting question; if pot is legalized do we have to allow people to use it in our properties?

The answer to that is no.

There are lots of things that are legal to do and or own that we do not have to allow, such as tobacco, pets even waterbeds.  Marijuana, if legalized, would fall into this same type category.

Why is that?

For one thing marijuana is still illegal on the federal level.  Until that gets resolved there are still legal implications.

Secondly, our property is just that, our property.  It is private and we can regulate, within certain limits, what we as private property owners will allow on our properties.

Thirdly, marijuana users are not a protected class.  Nor are tobacco smokers or users of alcohol.  Many a landlord, including yours truly, has banned tobacco use in our properties and we could ban alcohol use as well if we wanted to.

Remember, you as a landlord are not allowed to discriminate against who you allow to live in your properties based upon the seven federally protected classes.  Those classes are age, sex, race, color, religion, national origin and familial status.  But you can and are even encouraged to discriminate in other ways.  Everything else, such as marijuana smokers, tobacco users, motorcycle owners, truck drivers, lawyers and deadbeats is fair game.  You just have to be consistent in your application of those discriminating standards.  Meaning if you discriminate and say no once, you better say no all the time, every time.

But who knows.  As laws and norms continue to change, it may be advantageous and profitable to some landlords to allow marijuana use on their properties.  For other landlords, it will be not so much.  That however is the beauty of the free enterprise system.   There will likely be something for everyone, tokers and non-tokers alike.

Simple Supply and Demand

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The market is following the demand!

With the ever increasing numbers of renters and booming rents the following headline had to be expected.

Housing Starts, Permits Smash Expectations On Surge In Rental Construction

“…almost the entire surge was led by an almost 40% spike in multi-family units as the ‘rental nation’ grows ever stronger.”

Check out the full article here.

Will they overbuild this time?  If they do, will rents stop soaring, level off or perhaps drop?  Time will tell. 

No Candles Allowed

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This is why there are no candles allowed in our apartments.

“An apartment tenant told firefighters that he was burning candles in his bedroom and then went to another area of his apartment. The candle was sitting on a table and caught nearby combustibles on fire.

The estimated damage to the building is about $75,000, according to the battalion chief.”

We place the restriction in our “House Rules” which is attached to, and thus a part of, the lease.

Yeah, I know, it can be hard to police but we have to try to protect our property and tenants.

 

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The SmarterLandlording Podcast – Episode #3 – The Eviction Attorney

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The SmarterLandlording Podcast – Episode 3 – The Eviction Attorney: An Interview with John “Bucky” Philip on Leases, Tenants and Evictions

“This is certainly in the landlord’s interest.”

 

 

 

 

 

 

 

 

 

 

Need to do an Eviction?  Here is Bucky’s Contact Information

John Philip

Crislip, Philip & Associates

4515 Poplar Avenue, Suite 322

Memphis, TN 38117

901-201-5078

800-335-9613

Bucky’s Website – http://www.crislipphilip.com/

Links and Forms We Mentioned

Tennessee Uniform Residential Landlord and Tenant Act – Click through and then on property.

MemphisInvestorsGroup.com

Release of Rights of Possession Form

Check out all the podcasts at iTunes on the Smarter Landlording Channel. 

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.

Seller Financing – It’s Real!

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When you are new to real estate, and without much starting capital, seller financing is the strategy that gives you hope. With seller financing, you don’t need a bank. You don’t need a hefty down payment. You don’t even need good credit.

I was sure that seller financing was a strategy of fairy tales.

As it turns out though, obtaining seller financing is completely possible. I bought a property with seller financing within 6 months of purchasing my first property. Regular banks would not have financed another mortgage for me that quickly, and I didn’t have 20% of the purchase price saved for a down payment. So, attention newbies and veterans alike, seller financing exists and it’s in your best interest to find it!

So, how did I find a seller willing to finance?

  1. I looked for real motivation. This property was days away from being sold at a tax sale for several years of past due taxes. If the owner hadn’t have sold her property, she would have lost it completely and gained nothing. I did her a service by jumping in with an offer at the last minute. Seller financing allowed us to close in just a few days.
  2. I asked. It’s as simple as that. You never know if someone is willing to carry the note if you don’t ask. In my case, I let her know that the only way this would go through is if she would be willing to seller finance the property. She listened and agreed.
  3. I told her she could foreclose on me if I failed to make payments. That’s right. If I stop making payments, she can take back full ownership of the property—including all of the hard work that I’ve put in and wonderful tenants I’ve put in place. This made her feel a bit more comfortable.
  4. I promised that she wouldn’t have to pay a dime in closing costs or legal fees to transfer ownership. She wouldn’t be financially hurt by agreeing to seller finance.

So, here I have an owner who is willing to seller finance. That doesn’t mean that we agreed on the details. This particular owner was quite stubborn about the dollar figure that she wanted to gain from selling this property. Now, many investors would like to interject at this point and say that she has no bargaining power given her situation. Quite frankly, I was outside of experienced territory and I’ve never been the kind of person to feel as if I was taking advantage of someone. So, I heard her out. There was no way that the property was worth what she wanted, but I listened anyway.

It’s important to remember that this is a people business. We are dealing with real people who are experiencing real problems—and who deserve the respect to at least hear them out. If I had low-balled her, she would have walked right out of the door. It was obvious, given the tardiness of her actions, that there was a part of her that was unconcerned with losing the property at tax sale. I listened.

Then, I told her exactly where I needed to be for this property to make sense for me. That’s right; I put all of my cards on the table. With seller financing, the silver lining is in the terms—because everything is negotiable. Here are the steps of our negotiation process.

  1. I told her that the back taxes owed would absolutely need to be deducted from her asking price—since that would need to be paid immediately. I also explained that the private loan I would need to get to pay these taxes would have a high interest rate. This allowed me to shave off a bit more from the asking price. After all, it wasn’t my fault she didn’t pay her taxes!
  2. Remember how I promised that she wouldn’t pay anything out of pocket for closing costs? Well, I had an estimate of what that would cost me, and dollars add up! I showed her this estimate and explained that this dollar amount should also be deducted from her asking price. She agreed.
  3. I explained the extent of repairs, and what it would cost me. At this point however, she was adamant about sticking to our new—already declining—asking price. She became flustered and kept saying the property is being sold “as is.” OK OK, calm down. Let’s switch gears.
  4. I explained that it wouldn’t make sense for me to purchase a property at the after repair value while ¾ of the property was vacant. It would inhibit my ability to perform renovations. Would she be willing to allow me to start my payments 6 months from our closing date? Yes, in fact, she would. I purchased the property on December 31, and I won’t start making payments until July 1.
  5. Next, I showed her the numbers. I listed the taxes, property insurance, private loan payments, utility expenses and any other expense that I could think of associated with the property. I also told her that I needed to make $200 in profit per unit for this deal to be worth my time. We looked at the numbers and could easily tell how much of a payment I could afford to give her every month. From there we manipulated the length of the loan and interest rate until that monthly payment landed where it needed to be. We shook hands and met at the closing table two days later.

In this case, I bought a quadplex with $0 out of pocket. I gained a 20 year loan with an incredibly low interest rate, and I have time to renovate and rent out the units before I start making payments. Each seller financing deal will be different, I’m sure. Maybe the next seller will be adamant about the length of the loan, the down payment, or even the monthly dollar amount. The beauty of seller financing is that It doesn’t matter. Every inch of the terms are negotiable and you’re the boss.

Go out there and get it.

Silence Can Be Golden!

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Being a successful real estate investor means being a successful negotiator.   Being a successful negotiator is not easy, but it is a skill that can be learned.

Browsing one of my favorite websites the other day I came upon some valuable negotiating advice and thought I would pass it along.

 

SILENCE

The most powerful words are silent.

I had a dinner with Michael Fishman (cc Monica McCarthy) last week. He said, “if even for one second you are preparing your response while someone else is talking, then you aren’t listening.”

That’s pretty wise, Michael!

My technique is this. Someone talks. I count to two. Then I prepare my response and not before then.

Very valuable advice! 

During negotiations, our minds can race ahead.  We want the deal!  But by not listening we may actually lose the deal.   We will never hear what the other person actually wants or needs and we instead craft the deal to what we think they want or need. 

Give this technique a try.   Your silence can be golden.

Another Handy Lease Clause

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Ever have a tenant think their security deposit equals their last monthly rental payment?

We have.

We put a stop to it with this clause in our lease.

“It is understood that the security deposit is NOT an advance payment of monthly rent.  If Tenant tries to use security deposit as last months rent, an eviction will be immediately filed.”

This simple clause seems to work well for us. 

Use it in your lease today!

Want to learn more about what needs to be in your lease?  Stay tuned for Episode 3 of the Smarterlandlording Podcast.  Coming soon!

A Simple Lease Clause To Help You Get Properties Rented

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When we receive notice that a tenant is moving out, our goal becomes getting that property re-rented as quickly as possible.  After all, no tenant means no cashflow.

Our lease requires our tenants provide us with at least a month’s notice of their intent to move.  Most have been very good with that request, giving us plenty of time to market the property and hopefully get it re-rented.  Of course re-renting the property means showings.  After all, how many people do you know that will rent a property sight unseen? 

Showing the property can cause some difficulty.  Your tenant still has possession.  It is their home.  They do not have to let you in to show the property.  They could potentially make you wait until they have fully moved out.

How do we handle this?  As simply as possible.

We have the following clause in our lease which the tenant reviews and signs upon move in.

            “Tenant will allow Manager access to show their apartment with 24 hours notice.”

Problem solved.

Whenever a prospective tenant lets us know they wish to see the apartment, we let them know that we have to give 24 hours notice and that we will get back with them to set up a time.  After contacting the current tenant and providing the notice, we then set up a time to show the property.

This process may seem a bit cumbersome, but it really is for the best.  It protects everyone’s rights and generally leaves everyone happy.

Most of our tenants understand the need to re-rent the property and really appreciate the notice.  Yes, there are a few that grumble every once in a while but we just remind them of the clause in their lease.

Remember your tenants have possession until they move out.   Use this simple clause in your lease to avoid any problems and help you get your units re-rented as soon as possible

It’s Easy To Incorporate (At Least In Tennessee)

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I recently decided to incorporate a new business venture, so I formed a new limited liability company (LLC).  I have written before on whether or not you should incorporate.  Generally, I feel that incorporating is beneficial only after your landlording business grows and increases in complexity.  That said, I wanted to share with you my recent experience in setting up an LLC here in Tennessee.

It has been over ten years since I last formed an LLC.  As I recall at that time there was a lot of paperwork to be filled out, checks to be written and mail to be sent.  The whole process took weeks before everything was finalized.

This is not so anymore.  The internet has made the incorporation process here in Tennessee very easy and very quick.  You can almost do it all right from your laptop.  If you want to form an LLC in Tennessee, here is what you need to do.

First, get a binder and a three-hole punch so you can neatly organize all of the papers for your LLC.

Second, go to the Tennessee Secretary of State’s website and fill out the online form to start a new LLC.  Fill in your company’s name, address, registered agent and a few other questions and pay the filing fee.  Your Articles of Organization will automatically be ready to print and download.  Be sure to print and download a copy of those Articles of Incorporation, they are important.   Also be sure to print out your filing receipt as you will need that later.  Put these in your binder. You are now good to go as far as the Tennessee Secretary of State is concerned. 

Third, go to the IRS website to obtain an Employer Identification Number (EIN).  This number is used much like a social security number and will be the identifying number used when opening your bank account, filing 1099’s and your income taxes.  Complete the questionnaire and print out your new EIN and associated paperwork.   Place the EIN paperwork in your binder.  You are now all set as far as the IRS is concerned.

In less than an hour, you have completed what used to take several days if not weeks.  But there is one more formal step.

You must record your Articles of Organization at your local register’s office in the county where the LLC’s primary address is located.  This means that you physically need to take the Articles of Incorporation and the receipt you printed from the Secretary of State’s website to the Register of Deed’s office.  For example, I am in Shelby County, TN so I recorded mine in the Shelby County Register of Deeds Office.  Driving to and from the Register’s Office and recording the document took less than an hour and cost only $10 (bring cash).  You should get a printout of the book and page number where the document is recorded.  Place that in your binder as well.

Once these three steps are complete, you are ready to go in the eyes of Federal, State and Local jurisdictions.  Easy.

There are of course other documents that will also go in your binder.  You will need an operating agreement along with minutes from shareholders and officers.  I suggest consulting with an attorney on those but they are generally not too difficult to set up.

I hope other states make it as easy to set up a corporation as Tennessee does.  You folks from other states, let me know with your comments.