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Being A Landlord Is Not As Easy As They Thought

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I tried to tell them back in October, managing rental properties is not as easy as you think.  Now it looks like Wall Street is finding that out the hard way.  Will we see all of this hedge fund money that has been fueling the rental housing market boom dry up soon?  Time will tell.

Here is the highlight from the Bloomberg article.

“Rents collected on the collateral for the first U.S. rental-home securities declined by 7.6 percent from October to January, according to Morningstar Inc.

Payments declined as expiring leases and early tenant departures left residences backing the bonds of Blackstone (BX) Group LP’s Invitation Homes vacant, Becky Cao and Brian Alan, analysts at Morningstar’s credit-ratings unit, said in a report.”

Don’t Annoy the Landlord – In Fiji

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File under under “Things are much different here.”

 

Tenant annoys landlord

An angry tenant admitted to uttering obscene words at his landlord last year.

Vimal Singh told the court he was guilty of the offence as the magistrate was getting ready to make arrest orders against the witnesses.

Mr Singh was charged with annoying any person.

The police prosecution informed the court that summons for the two witnesses, including one who was a police constable, had been served last October.

The court was told the witnesses had failed to appear and the prosecution made an application for a bench warrant for the witnesses. Mr Singh told the court there was no need to arrest the two men because he committed the crime.

The court asked him if he was doing on his own will. He responded in the affirmative.

The court heard the incident occurred when the landlord told Mr Singh, who was partying with two women at his flat in Samabula, that partying was not allowed.

In mitigation, Mr Singh said he was 41 years old and self-employed earning around $60 a day.

He told the court he was paying rent for the flat and felt his landlord had ridiculed him in front of his guests.

Mr Singh will be sentenced next Tuesday.

Buying Apartments? Use This Form!

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For us landlords, growing our business means adding new properties.  New property additions mean more rental units and more cashflow.  New property additions also mean more tenants.  Sometimes these tenants come with the properties we buy.  I call these tenants “inherited tenants.” 

Inherited tenants pose a special kind of risk to a buyer in a couple of ways.  First, as a buyer you are generally bound by their existing lease agreements.  You cannot just kick tenants out, raise the rent or revise other lease terms just because there is a change in building ownership.  Second, these tenants have not been through your screening process.  You really have no idea about their background or payment history.  100% occupied may not be what it seems.  So if one of these inherited tenants is a rotten egg, you may be stuck with them for a while

One way you can protect yourself as a buyer is to review all of the leases before purchase.  While I recommend doing this, I feel it does not go quite far enough.  I want more protection.  So I use an estoppel agreement as well.

Estoppel is a legal term which means someone is prevented by their own acts by claiming a right on another party.  For those of us buying investment properties and inheriting tenants an estoppel agreement prevents those tenants from making future claims on us after the property is transferred.  The agreement spells things out on the front end before we buy, thus preventing our inherited tenants from claiming something different later on.

Here is what an estoppel agreement should include:

  • Tenant(s) name and who lives in the unit
  • Lease term
  • Renal payment amount
  • Security deposit amount
  • Who pays utilities
  • Who owns the appliances
  • If there are any pets
  • If there are any problems or repairs needed
  • If there are any other agreements with the landlord.

The agreement should also be signed by both the tenant and the current owner once it is completed.

Don’t think for a minute that some unscrupulous tenant will not try to claim that their security deposit was really $1,000 instead of $500, or that they paid six months rent in advance, or that they really do own those window air conditioning units.  An estoppel agreement will stop those claims cold and it will stand up in court.   

Don’t let yourself be taken advantage of during an ownership changeover.  Protect yourself and your business.  Make completed estoppel agreements a part of your purchase contract.  It’s simple and easy to do plus it may just save you a bundle.

Feel free to download the estoppel agreement I use here.

Is The Real Estate Market Healthy?

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“In conclusion, the reason I remain bearish on real estate is that when the noise is filtered out, the market has only survived by means of an unprecedented amount of intervention.  This dependency is not only unhealthy, its stimulating effect is now fading.  If real estate prices cease to appreciate, the market will suffer, same as it did when the sub-prime bubble burst in 2006/2007.”

 

Want more doom and gloom?  Read the rest here.

H/T to zerohedge.com

5 Screening Techniques When Using Credit Reports

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You may think when you are reviewing a credit report as part of your tenant application and screening process that the credit score is the most important piece of information.  If you do I have to gently tell you that you are mistaken.  There is much more to a credit report that a smarter landlord should be looking at when trying to determine if they should hand over the keys to one of their properties.

The first thing you want to check when you pull an applicant’s credit report is their personal information.  Does their name, date of birth and social security number all match up to what you were told on the application?  Is their last known address the same as they reported on your application?  Are they being upfront about who they are or are they lying to you?  Also check to make sure there is not a Jr. or Sr. in the name as that is sometimes easily confused and abused.

Second, examine their payment history.  Are they late with payments every month or is there only one or two over the course of their history?  Obviously you want someone who pays their bills in a timely manner.  If they do not pay everyone else on time they are not going to pay you on time either.

Third, examine how much has been charged off as well.  A charge off is debt that the applicant owned that was written off as .  If you see a lot of these charge offs, the applicant may not be a good risk as they tend to skip out on their debts.

Fourth, determine if your applicant can afford your property.  The credit report will estimate the total monthly amount of all of the applicant’s debt payments.  You can then use that number to determine if they can afford their debts, their proposed rent and other necessities like food and utilities.  If their debt level is too high, they will have trouble and will have to make a cut somewhere.  That cut could be your rental payment.

Finally, you want to look and see if someone had a life altering circumstance.  Things like a cancer diagnosis or a divorce can really side track things to say the least.  This is why the credit score is not as relevant as the rest of the report.  Their credit score is going to reflect these past circumstances but it may not tell you if they are in the process of getting back on track.  The applicant will have to be truthful about what has happened and note that they are getting things back together.  The credit report should demonstrate these items with recent on-time payments, etc.

The credit report is a must use tool for screening potential tenants.  Learn how to use all of it to get the most accurate picture of your applicant.  Don’t just rely on the score.

Pick Up After Your Dog – Or Else!

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Seems some apartment communities are going to extremes in the war on dog poop.  The Jacksonville Daily News reports that:

“When the registry is complete, the DNA of any dog waste found on the property will be tested and matched to the registered dogs, according to information from the company. The matching owner will then be fined.”

Read the rest of the story here.

Does Bad Credit Mean No?

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One thing you need to examine when screening potential tenants is their credit report.  A credit report will give you an insightful history of just about everyone.  But should the credit report be the only thing you consider?  No.  There are numerous other factors to consider as well like criminal history.  But let’s take it one step further.  What if an applicant has bad credit?  Should that be an automatic case for rejection?  I think again the answer is no.

There are certain situations where you may want to consider renting to someone with bad credit.  For some landlords, their potential tenant base will determine if credit is an issue.  Everyone belonging to certain tenant bases may have bad credit.  Other potential tenants may have had their credit destroyed due to extenuating circumstances.  Let’s look at some examples.

If your rental properties are in marginal neighborhoods, you may not be able to find any applicants with good credit.  You may have to rent to people with bad or at least not so good credit. 

So what to do if everyone has bad credit?

  • Look to see that they are telling the truth.  Any false statements on an application should be immediate grounds for non-acceptance.
  • Look for a steady job history.  Look for someone who stays employed.  Hopefully at the same job.
  • Look to see that they pay most of their bills.  These tenants are likely living paycheck to paycheck and a bit beyond their means.  So look to see if they pay most of their bills. 
  • Get good references from the two previous landlords.  Did the tenant leave owning them any money?
  • Look for a steady rental history.  You do not want someone who moves every year.  You want stability.

In other instances, someone’s credit may have been ruined because of forces beyond their control.  Someone may have been through a nasty divorce or they may have been diagnosed with cancer or been in a terrible accident.  These types of situations can easily drain all available funds and bankrupt a person. 

So what do you look for if someone has had their credit destroyed?

  • Again, look to see that they have told the truth.  Your application should have questions about their credit, work, and criminal history.  If they are upfront with you about what you will see and why, that should carry some weight.
  • Look to see if the credit report supports the story you are being told.  We once had a cancer survivor apply for one of our apartments and their credit was devastated from the medical bills.  This person was honest about it and it was obvious from the report what had happened. 
  • Look to see that they are trying to get back on their feet.  Are they trying to pay off the bad debt or the bills?  Are they trying to get a fresh start?  It will be obvious from the report.
  • Check references.  These references should confirm what you have been told and vouch for their character.

So there you go.  Having bad credit may not necessarily be a show stopper.  As an example, our former tenant who is a cancer survivor was one of our best tenants ever.  There was never a missed payment and the property was kept in excellent condition.

You can of course try to reduce your risk a bit with bad credit tenants by asking for higher security deposits or increasing the rent a bit.  Just be sure that you have everything spelled out on paper in your application review policies.

Scarce Rental Units = Higher Rents

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The Wall Street Journal reports:

Demand for rental housing continues to climb more than four years after the recession, pushing up rents and cutting into Americans’ disposable income.
 
The rental vacancy rate, or the share of units that are empty and available for rent, fell 0.5 percentage point in 2013 to 8.2% in the fourth quarter from a year earlier, the Commerce Department said Friday.

After peaking at just above 11% in 2009, rental vacancy has fallen sharply in the wake of the housing collapse and recession. That reflects families flocking to rentals after losing their homes to foreclosure, being blocked from obtaining a mortgage due to tighter lending standards or simply concluding that buying is too risky.

The higher demand and tighter supply of units are enabling landlords to raise prices. The median asking rent for vacant units in October through December was $746, up 3% from $724 a year earlier.

h/t to:  Economicpolicyjournal.com

Flipping Is Back!

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Looks like house flipping is making a comeback.   According to Realtytrac.com:

 

The average gross profit for a home flip — the difference between the flipped price and the price the flipper purchased the property for — was $58,081 for all U.S. homes flipped in 2013, up from an average gross profit of $45,759 in 2012. The average gross profit for homes flipped in the fourth quarter was $62,761, up from $52,746 in the fourth quarter of 2012.

 

 

Let’s just hope we don’t forget what happened the last time (in 2006 or so) we got so excited about flipping houses.