As Homeownership Rate Plunges To 19 Year Low
“Long live the New Normal American Dream: Renting.”
Everything
What Gives The Best Bang For The Buck?
Uh Oh! Looks like I might have some in house competition 🙂 Check out this story in Investor’s Business Daily which interviewed my lovely wife Terron as well as other landlords about things that give landlords the best bang for their buck.
What Will $1 Million Buy You Around The World?
Time to dream a bit!
I thought this was an interesting article comparing how much space you can buy for $1 million bucks in different cities around the world.
Would you spend $1 million to live in 161 square feet? Apparently somebody will. It all depends on the three most important rules of real estate. Location! Location! Location!
What To Do With A Financially Struggling Tenant
Have you noticed the rising prices lately? I have. Gas, food, just about everything seems to be getting more and more expensive. Rents have been following this trend, and while that may be good for us landlords, it is not so good for many tenants out there.
I have a feeling many tenants are getting squeezed more and more. Not only do they have to pay increased costs for housing, food and fuel, think about those student loans and other debt burdens many of them have. While we can debate the causes and solutions to all of these issues, the fact remains than a lot of people are living paycheck to paycheck and barely scraping by.
Tenants can therefore find themselves between a rock and a hard place. Their paychecks are just not going as far as they used to and this past winter was brutally cold in many areas causing higher utility bills. One step back, say a broken down car or an illness which causes lost work, can cause tenants to have to make tough choices. Should they fix the car, keep the heat on or pay the rent?
Let’s be honest here about this situation, paying the rent is likely to be dropped down the list after getting the car fixed and keeping the heat on. On the one hand they have to get to work to earn the money to pay the bills so the car will get fixed first. On the other hand you as the landlord also have bills to pay. There is nothing I can say to the bank for example that will allow me to delay my mortgage payment. So what should you do with a financially struggling tenant?
To answer that question, we have to back up a bit first. We have to go back to your lease signing and move in process. Hopefully at that time you set up a decent landlord/tenant relationship. You were firm but fair in noting when the rent is due and what the consequences would be regarding missed or late payments. Hopefully you also encouraged your tenants to discuss any future concerns or issues with you. You told them not to stick their head in the sand if they ran into trouble, but to communicate with you about the situation.
So let’s assume they are communicating with you, then what?
Be Nice – Being a jerk is not going to help the situation. Your goal is to ultimately get what is owed in the easiest way possible. It is much easier to do that at this point with kindness and understanding. You can reiterate your policies and concerns, but do it in a non-confrontational manner.
Determine the Nature of The Problem – Is the problem a onetime occurrence? Will the tenant be able to catch up rather quickly? Or have they lost their job with no immediate prospects. The nature of the problem should determine your next steps.
Move Quickly and Decisively – Once the nature of the problem has been determined, you need to move quickly to resolve it. If you think the tenant can get things worked out, perhaps setting up a payment plan is the way to go. At least get a verbal commitment, better yet get it in writing through an e-mail. Hopefully the issue is now resolved.
Move the Tenant Towards Action – If it appears the tenant is in a bad position with no end in sight; your best bet is to begin to cut your losses. After all, you are not going to get blood from a stone so to speak. Discuss with the tenant how they are going to resolve the situation. Ask the tenant if they have somewhere else to go. Ask if they can get a loan from their parents, friends or church. The point here is to get them thinking of alternatives with the understanding that they are not going to be allowed to stay without paying rent.
Let Them Go – If their situation is truly bad, your chance of getting paid is tiny. If the tenant can quickly find someplace to go, let them out of the lease. Again your goal now is to cut your losses and get you property back and cash flowing again as quickly as possible
If They Will Not Leave – Perhaps offering some cash for keys will be the motivation they need. Many times these folks are simply out of cash and cannot even afford a moving truck. Why not rent the truck for them? Why not give them a couple of hundred bucks to go? It is much cheaper than going to court and much less adversarial as well. If they take your offer, be sure to get a signed release to the rights of possession.
Still Won’t Go? Then Set a Deadline – Sometimes no matter what you do, the tenant will just stay in denial and decide not to decide. This tenant will need the ultimate push, a firm deadline after which you will file for eviction. Sometimes, the tenant will leave right before or after the eviction is filed.
If You Have To, Evict – I hate to do it. It is an absolute last resort for me as it is expensive, messy and confrontational. But sometimes there is just no other way. However, we have rarely had to use this route, as the steps I have outlined above will usually resolve things.
Unless there is a drastic change in the economy in the near future, I expect everyone to keep getting squeezed more and more (including me). I would bet therefore that dealing with financially struggling tenants is going to become a bigger part of the landlording business.
The Smarter Landlording Podcast: Episode #2 – The Expert Landlord
The Smarter Landlording Podcast – Episode #2 – The Expert Landlord: Lessons and Advice from 40 Years, 400 Houses and 200 Apartments.
“I feel like I have lived 200 years with everything I have been through.”
Books We Talked About
How to Wake Up the Financial Genius in You by Mark Haroldson
Strengths Finder 2.0 by Tom Rath
Links We Mentioned
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.
My Tenant Called The Cops On Me
Landlords often hold the mistaken notion that they are the “lords” of their properties. In many ways they are the lord, but in some very fundamental ways they are not. Once a lease is signed with a tenant they gain certain rights and acting like a lord may just get the cops called on you.
Here is why.
Your lease grants the tenant legal possession of your property. Your property is now their home and their home is their castle so to speak. So just like a homeowner, a tenant has rights in their home. They have the right to be secure and to privacy for example. They have a right to their possessions and they can expect that you as the landlord will keep the property safe and habitable.
What does this mean for landlords?
It means that you cannot just go in a tenant’s apartment at any time. If you do, a tenant can call the cops and potentially have you arrested for trespassing. Smarter landlords always try to give their tenants at least 24 hours notice before entering. Most tenants will understand that you need to do routine maintenance and checkups and will have no problem allowing you in with proper notice. But they may get really angry if they come home and just happen to find you there. Of course if there is an emergency such as gushing water, a landlord is permitted emergency access to prevent property damage. Otherwise, respect your tenant’s home and give proper notice.
A landlord also cannot deny access without going through proper legal procedure. Remember, the tenant has legal possession. Do not lock them out for any reason, even non-payment of rent. Every state has a procedure in place to regain possession of the property. It is called eviction. If you do not follow this process, it is you that may end up on the wrong side of the law.
As a landlord, you can’t just remove their belongings either. Even if you think they have abandoned the place and moved somewhere else, there is usually a legal procedure in place regarding a tenant’s possessions. Here in Tennessee for example, If you suspect a tenant has abandoned the property, landlords have to wait and give notice before they can remove the tenants stuff. Then the stuff has to be stored for another thirty days. Removing anything belonging to a tenant before you gain legal possession of the property can get you caught up in a nasty lawsuit or even arrested for theft.
Finally, don’t think turning off the utilities will solve your troublesome tenant problem. You as a landlord have a legal duty to keep the property in a habitable condition, and a lack of utilities is generally going to be deemed inhabitable by legal community. Will the cops arrest you for this? Not likely. But they will institute further legal actions by getting code enforcement involved.
Remember, your tenants have rights. You as a landlord need to know what those rights are and respect them. If you fail to do so, your tenant may call the cops and you may find yourself on the wrong side of the law.
Investors Are Being Watched
We should all be aware by now that serious Wall Street money has gotten into the landlording business. Hedge funds have been buying up thousands of foreclosed homes all over the United States and placing them on the rental market. I have been watching this process take place here in Memphis, TN and have wondered how it is all going to shake out in 5 or 10 years. Looks like others are starting to watch and wonder as well.
This article from the Memphis Daily News takes a look at the impact investors have made on the Memphis real estate market over the past few years. The article notes that according to Jim Reedy, who owns Reedy & Company here in Memphis:
“Memphis is a 50 percent rental town now and I expect that to go to 60 percent, possibly 65 percent.”
What will the impact on the city be upon loosing so many homeowners? The article goes on to say:
“The role of investors is growing and the impact on different kinds of neighborhoods is largely unstudied and unknown.”
People are watching this process develop however. Some, like the Center for Community Building and Neighborhood Action (CBANA) at the University of Memphis are watching rather closely.
In a rather detailed 2010 study of lending patterns in Memphis which examined the roles of some of this City’s largest investors and turnkey providers, CBANA concluded that:
The significance of the investor-driven market, however, has been anything but clear.
While CBANA can’t say that all of this investor activity is bad for neighborhoods, one can tell from the tone of their reports that they do not think it will turn out very well.
So while none of us may know what the future holds, here is the moral to this story. With folks like CBANA and others watching us investors, we investors need to be sure we are keeping an eye what CBANA and others like them report. Why? Because at the first sign of trouble it will be folks like CBANA calling for new regulations, restrictions and registrations.
And it will not only happen here in Memphis as there are similar situations in cities all over the country such as Atlanta, Dallas, Indianapolis. Landlords and real estate investors of all types need to keep tuned into what is said and make sure their voices are heard as well. Their business may depend on it.
Newbie Fails
Remember how I spoke about feeling like a newbie?
Well, it didn’t end there. In fact, I’m constantly reminding myself that I’m an amateur. In an effort to encourage those of us who are completely green to real estate investing, I’ve shared a few of my most humbling mistakes below. Hopefully, you will be able to avoid some of these same pitfalls. Please share some of your novice blunders too!
- I learned pretty early that easy work can be made hard if you don’t have the proper tools. When we started building our RE toolbox, we thought it would be easy and cost effective to buy a Mr. Seven Hands instead of multiple screwdrivers. Boy, were we wrong. This thing is a mess. It’s easy to keep handy, but it’s hard to use in tight places. It tries to fold when you are using it, which is annoying! To be honest, I’m just plain embarrassed at even owning the thing. Can I still call myself a serious investor?
- During our first phase of renovations, we felt like complete idiots when we realized how much trim needed to be painted. Our 1920’s triplex is filled with beautiful crown molding, floor molding and tons of detail. After we got a good dose of the time-consuming nature of any paint job, we stopped and looked at our trim work and almost wept. Newbies just don’t know! Paint Lesson #1
- Is it a beautiful rainy day outside? If so, do not paint a room with windows or doors open. Paint will bubble when introduced to moisture and humidity. We spent more time scraping and sanding than we did painting on this one. Paint Lesson #2
- If you are like me, you aim to get the job done regardless of the circumstances. I get tunnel vision towards the end of a project. So, it’s no surprise that I stubbornly continued painting the exterior of my house, even though temperatures were dropping. Paint Lesson #3, paint peels when it dries during low temperatures. Scrape, sand, and paint again.
- I had the electrician over one day to fix a fan, which had apparently given out. So, I ran to Home Depot and picked up a new one. Being the frugal gal that I am, I bought one of the cheapest ones available. Looking back, I’m surprised that the electrician didn’t laugh and walk off the job. Instead, he politely said, “This is for a bathroom. You’ll need to go back and buy one with a fan blade of at least 52 inches…” Duh.
- How many of you can install your own appliances? Well, I’m learning. I had to order an extra-long dryer cord not long ago. I wanted to make sure the length was long enough before installing it to the dryer. So, what did I do? I plugged it in the outlet—ungrounded. It tripped all of the breakers in the house and blew a hole straight through the shirt I was wearing, charring my undershirt. Sheesh! I should have known better. I’m turning red just thinking about it. Electrical Lesson #1
- I hate popcorn ceilings. So, here I am in the bathroom spritzing the ceiling with water when all of a sudden the exposed light bulbs explode sending shards of glass everywhere! It nearly scared me off of my step stool. Every idiot knows that cool water and hot glass don’t mix, but sometimes I’m brainless. Electrical Lesson #2
- Our most recent building purchase has fuses instead of breakers. This is new for us. So, we are tinkering with the fuse box trying to figure out why some of these Edison fuses don’t fit. Then, it hits us. Part of an old fuse is stuck in there! So, my partner goes to work trying to pry that old fuse out… only to realize that we are buffoons. That particular spot required a small-base fuse, not an Edison. So, we had to call the electrician out to fix the mess we made. Electrical Lesson #3
- We went from being renters in June to owning 7 units in January. That means that we have 7 house keys, a cellar door key, a storm door key, and a rent box key. Throw in the fact that we have 2-4 copies of each key, and you can see that we are confused! Can you imagine how embarrassing it is to bring a contractor over and then fumble with key after key? It is one thing to feel like an amateur and it’s something completely different to feel like an amateur in front of a professional.
You can bet that we’ve learned from these blunders and made appropriate adjustments. Please tell me I’m not alone. If you are a know-it-all, expert real estate investor, I encourage you to pull from your past. Enlighten us with your former fumbles. It can be humbling for you—and encouraging to us all.
Perhaps Not The Best Way To Collect Rent
Trying to collect rent with a chainsaw is not going to end up well for someone. Landlords, don’t do this. Not even for $17,900.
Self Directed IRAs – A Smarter Wealth Building Tool
One of the first things I learned about when I was considering getting into real estate investing was the self-directed IRA. If you have never heard of such a thing, a self-directed IRA is very similar to the more “traditional” IRAs that most associate with their jobs. The main difference is your investment choices are not limited with a self-directed IRA. With a self-directed IRA, the sky is almost the limit.
A self-directed IRA is just that, self directed. You make the choice of where to invest your money. If you wish, you can go the traditional route and invest in stocks, bonds or mutual funds or you can buy real estate, make loans, purchase options or notes and a whole host of other things. Like I said, the sky is almost the limit. This sounded great to me, so I opened one up and have been using it to invest in real estate ever since.
When I was still in the “working” world, I had several of the more traditional type IRAs with investments in stocks and mutual funds. And they were doing OK. Before I went into full time investing, I set up mu self-directed IRA and began contributing immediately. There were a couple of reasons for that:
- It is easier to set up when you have a job and job related income.
- Once I quit, I could no longer contribute rental income towards and IRA (rental income is passive income and is not allowed to be placed in an IRA). So I was able to build up a little bit of a slush fund so to speak.
After I went into investing full time, I discovered another advantage. Since I was no longer employed, I could now roll over all of the funds from my other, job related IRAs into my self-directed IRA. This action created a nice lump sum for me to invest with. But be warned, the companies managing your IRAs do not like to let you leave. They erect many barriers and roadblocks. Just be persistent and you will win.
Today I have several rental properties held by my IRA. These were purchased with the cash I had saved and rolled over. I looked into leveraging this cash by getting a loan, and while it is possible to do, you may shoot yourself n the foot due to something called Unrelated Business Income Taxes (UBIT). So talk with a trusted CPA before you do that.
I strongly recommend any real estate investor look at the potential of a self-directed IRA. The returns can be phenomenal and potentially tax free! You just need to find a custodian to help you get set up. I use Equity Trust and have been very happy with their service. But shop around as there are several custodians out there.
If you do set up a self-directed IRA (and I hope you do), here are some tips for you:
- Keep some cash inside it for repairs and maintenance. You cannot co-mingle your own funds with IRA funds. Any repairs needed to a property held by your IRA must be paid for by your IRA.
- Invest jointly with your spouse. You can, for example contribute 50% towards a property and your spouse can do the same out of their IRA. It is a good way to make your dollar go a little farther.
- Mix things up a bit. Buy some rental properties. Make some loans. Purchase an option. Spread out the risk.
So look into a self-directed IRA. Trust me; you will be glad you did.
Anyone got a good self-directed IRA story out there? Had a huge tax free return or score a big deal? Let us know with your comments.
