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Is Your Rent Increase Legal?

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Rents seem to be on the rise in most areas of the country right now.  Some are predicting this trend to continue for a few more years.  As landlords we obviously want to maximize our rental income to increase our cash flow and increase the value of our real estate holdings. But you can’t just go and increase rents across the board at any time.  There are certain steps and rules one must follow for it to be legal.

First, you have to remember that your lease is a contract between you and your tenant.  This contract spells out, among other things, the amount of rent to be paid, when the rent is due and the term of the contract.  If your lease is like most residential leases out there it has a specified term, often for one year.  That term generally sets the clauses of the lease in stone meaning that you cannot raise the rent without the consent of the tenant during term of the lease.

So unless you have specifically put some type of language in your lease allowing you to increase the rent during the term of the lease, you cannot raise the rent until the end of the lease term.  Can you put special conditions in your lease to allow an increase in rent?  Sure, if local laws allow it.  You could for example state that the rent will increase if property taxes are increased.  Your tenant would have to agree to it beforehand however and that is not likely.

Once the term of the lease is completed or just before completion, you can begin to renegotiate new terms for the lease.  Now you can increase the amount of rent.  To do so however you usually have to send notice to the tenant stating that the terms of the lease will be changing and what those changes will be.  This notice usually has to be sent at least 30 days prior to the time the rental increase is to go into effect.

For example, if you want a rent increase to be effective on May 1, 2014 you need to send a notice to your tenant no later than April 1, 2014.  This notice is nothing more than a letter from you to your tenant spelling out the terms of the rent increase.  At least that is how it works here in Memphis, Tennessee.  Local laws can differ greatly.  The City of Seattle for example makes things much more complicated.  So be sure and know your local laws to make any rent increase legal.

A word of caution is necessary however.  I would not go hog wild raising rents unless you are in a particularly hot market.  Raising rents to much might cause many of your tenants to leave creating lots of tenant turnover.  And tenant turnover is the biggest cashflow killer out there.  Think about all of that new paint and carpet along with all of the other repairs that will need to be done once a tenant leaves.

So don’t shoot yourself in the foot by raising your rents to high or too fast.  Give careful consideration to rent increases.  Perhaps gradually and gently is a better way to go.

 

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

Getting a 203K Loan? Expect Trouble!

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Yeah, I said it. The 203k loan is troublesome.

But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.

There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.

Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.

That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.

Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.

For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.

The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.

Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.

With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.

Plus, my other property acquisitions should feel like smooth sailing after that—right?

 

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

Why Are Your Tenants Moving?

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Apartments.com just did an interesting survey of over 1,500 renters.    The survey examined the major reasons renters were and were not moving.  For example, here are the top five reasons survey respondents said they are moving in 2014:

 

 

 

  1. Shopping for a less expensive apartment: 24.6%
  2. Wanting to live in a different neighborhood: 13.6%
  3. Looking for a bigger apartment: 12%
  4. Change in marital status: 11.6%
  5. Looking for a smaller apartment, or to live alone: 10%

There are several other bits of interesting information from the survey.  You can read the rest of the article here.

Information from surveys like this one can be important to your landlording business.

Tenant turnover is probably the number one killer of positive cash flow.  If you can figure out the reasons your tenants are considering a move and can address their concerns you can save yourself a bundle of both time and money.

Always ask your tenants why they are moving when they give you notice of a move.  Perhaps some minor upgrades will encourage them to stay.  Perhaps you can provide them with a larger or smaller unit.  Perhaps you have something available in a different location.  If you have a decent tenant, try your best to keep them.  Good tenants can be hard to find.

Landlords – Don’t Do This Either

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Unless you want your mug shot posted all over the news too!

Landlord forged judge’s signature to evict Cortlandt tenant, police say

Landlords – No Dirty Tricks!

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One of the worst things for a landlord is a non-paying tenant.  It creates a crisis in your business as the revenue you need to pay for the mortgage, insurance, taxes, repairs, etc stops coming in.  In years past, landlords had all sorts of dirty tricks to deal with non-paying tenants.  Tricks you had better not even think about doing today.

Tricks like:

  1. Taking off the Front Door – This is one of the older more creative tricks landlords used to use.  If a tenant fell behind or did not pay, the landlord simply removed the front door, leaving the unit and the tenant’s possessions out in the open
  2. Changing the Locks – The ultimate in “no pay – no stay.”  If the tenant wanted the new key and access to their stuff, they would have to pay up.
  3. Shutting off the Heat – This worked especially well in the colder months, but the landlord ran the risk of frozen pipes.
  4. Shutting off the Water – How long would you live in a place with out a flushing toilet, or the ability to take a shower?  The hope of many landlords was not for long.
  5. Blocking Up the Sewer Line – Taking a 2×4 and jamming it in the sewer clean out line was another tactic.  It did not take long before the toilets stopped flushing and the showers stopped draining.  Can get pretty smelly fast.  Of course once the tenant is out, the landlord was left with a mess.

Like it or not, a landlord can get in a lot of trouble if they use any of the above tricks.  There are just too many lawyers out there waiting to sue you to take the chance.  Can you imagine what a judge would say in this day and age if they heard you shut off the heat on a family in the middle of winter or that you had removed their front door?  Instead of solving your problem and getting the tenants out, you have created a huge pay day for them, plus they get to stay.

Don’t let that sense of crisis you feel because you are not getting paid allow you to succumb to bad advice or do something stupid.  In years past, landlords had a lot of dirty tricks up their sleeves that they could get away with; some are still using them.

Today however, the best alternative when dealing with a non-paying tenant is to offer cash for keys.  This technique gets them out as quickly and as cheaply as possible with little or no mess to clean up later (or doors to put back on). Proper screening will also solve a lot of these problems.  Learn these two important techniques rather than resorting to dirty tricks.

 

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

Landlords – They Are Changing The Laws

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Where the landlord laws are made.

I have written about this topic before but it is important so I will say it again.

Landlords need to keep up with what their state legislatures are doing. 

Most landlord/tenant laws are written at the state level.  So it is important to keep up with what is going on in your state capital. Every year they try to change the state laws that outline how you run your business.  For example, many state laws dictate:

  • If you can charge a late fee
  • How much that late fee can be
  • If and how much of a security deposit you can take
  • What clauses should be in your lease
  • When you can evict
  • When you cannot evict
  • How difficult it will be for you to evict if you have to
  • What to do if a tenant abandons your property.

The list goes on and on.

As a landlord, would you not want to know if someone is proposing a law to make it more difficult to evict someone? How about if a law is being proposed to restrict how much a security deposit can be?  Would you not want to know about any law that will make you job as a landlord more difficult, like this one proposed here in Tennessee (Does a tenant who has been legally evicted really need another 48 hours)?

Of course you would.  These laws directly affect your business and you would likely want to voice your opinion on those proposed laws.

On the flip side, perhaps a law is being proposed that will make your job as a landlord easier.  Sometimes laws are proposed that might actually help us out, such as this one here in Tennessee which shortens the eviction appeal process.  Would you not want to know about and perhaps voice your opinion on those as well?  Of course you would.

As landlords, part of our job is to watch what those folks in our state capitols are doing, because what they do or do not do can really have an impact on our business.  Of course I would much rather focus on my business but every year I have to devote a little bit of time to watching what is going on in Nashville because my business could depend on it.

Where can you find out about these proposed laws?  I think the best place is your local REIA.  Most of the time someone there is focused on the state legislature and will report what is going on.  Plus, as far as lawmakers are concerned, numbers matter.  So get informed and watch what those legislators are doing. Your business may depend on it.

Where Do The Super Rich Invest Their RE $?

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Here is an interesting story on where the super rich have been investing in real estate.  Seems they have been increasing their holdings quite a bit in recent years.

 

 

 

 

 

 

 

 

 

 

h/t to EconomicPolicyJournal.com

Do Not Enter – Respect Your Tenant’s Home

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It can be difficult to find good tenants.  It takes time to show your property, take applications and screen out the bad guys.  Then there is the lease signing and move in processes.  After going through all of that, you want to keep the good tenants for a while right?  Of course you do. So don’t do things that will drive them away such as not respecting their privacy.

Once you find a good tenant, sign a lease and let them move in to your property you have given certain legal rights of possession to your tenant.  You have provided them with a home and as they say “a person’s home is their castle.”  You as the landlord have to respect that, even though you own the building you cannot just go into to a tenant’s apartment any time you fell like it.  If you do, not only are you a sloppy landlord (and kind of a jerk) you could be charged with a crime.

Check out this recent news story headline.

Tenants claim landlord broke into apartment overnight, heat still not on

The story continues:

Sievert rents an apartment for her daughter at a complex in Muskego near Woods Road and Racine Avenue.  She says Wednesday morning the landlord came by unannounced…

“He broke into my apartment.”

Sievert locked the doors to her apartment Tuesday night when she left.  When she came by to get her car this morning, she saw locks were broken.

“We noticed that doorknobs and locks were removed. The screw that we had screwed the door shut with was broken in half. The chains ripped off. The door was broken.

Muskego Police are involved and might give the landlord a municpal citation for criminal trespassing. But they want his side of the story.

“He’s sneaking around. He’s hiding his car in the garage.”

Certainly there is a lot going on in this story such as non working heat, code violations and a hiding landlord.  Plus why did he not have keys to his own property?  Who knows? But the story demonstrates my point.  A landlord can get themselves in trouble by “just going in” a tenant’s apartment.

But, what if there is an emergency such as busted pipes?  If there truly is an emergency, then yes, you are going to be permitted to go in unannounced to protect your property and fix the problem.

Otherwise, your local laws are likely going to dictate when you can and cannot enter a tenant’s home.  Here in Tennessee, the Uniform Landlord Tenant Act does just that.  Section 66-28-403 specifically addresses access by the landlord.  It states in part:

 (e) The landlord has no right of access to the premises except:

   (1) By court order;

   (2) As permitted by this section, § 66-28-506 and § 66-28-507(b);

   (3) If the tenant has abandoned or surrendered the premises;

   (4) If the tenant is deceased, incapacitated or incarcerated; or

   (5) Within the final thirty (30) days of the termination of the rental agreement for the purpose of showing the premises to prospective tenants; provided, that such right of access is set forth in the rental agreement and notice is given to the tenant at least twenty-four (24) hours prior to entry.

Your local rules may be completely different.  Local differences such as these are one reason it is so important to find a local REIA and understand your local laws.

Sure, there are other times when a landlord can have access to the property, such as to do a quarterly inspection, for a property appraisal, for insurance purposes, or if the tenant has requested maintenance.  But a good rule of thumb is to provide at least 24 hours notice and spell out when, where and why you may come into the property in your lease.

So be a smarter landlord and respect your tenant’s privacy.  After all, would you want someone barging into your home unannounced?

Real Estate Tax Benefits – Are You Ready To Claim Yours?

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Real estate investing, especially landlording, can provide you with many tax benefits.  Are you ready to claim yours?

For example:

  • Do you use the internet to search for properties?  Do you read the classified ads in the local paper?  Do you buy notepads, folders, pens, etc?  These are all business expense deductions.
  • Do you work out of your home?  You may qualify for a home office deduction.
  • Do you “drive for dollars” with your car?  Do you travel to and from your rental properties to show them to possible tenants or do maintenance?  You may be able to claim the car mileage deduction.
  • Did you need to make some repairs?  Of course you did, you are a landlord!  Those repairs are likely deductible.
  • Rental income for the most part is not subject to self employment (social security or Medicaid) taxes.
  • Plus the biggest bonus of all, depreciation. 

All of these deductions came before you even take your standard deduction and other exemptions, significantly reducing your adjusted gross income and the amount of income tax you owe. 

There are many more tax benefits that real estate investing offers.  These can include such things like “real estate professional” classification and cost segregation.

Taxes however, make a lot of people nervous.  But they should not.  Taxes are not rocket science.  Taxes are really are just some basic accounting along with some addition and subtraction.  I have done my own taxes and while they are time consuming they are not that difficult to do.

Two things have really helped me understand taxes.

  1. I am no CPA, but I have one that I can call upon if I hit a road block.  She has experience working with real estate investors and understands my business.  Where did I find her?  At my local REIA group.
  2. This book has been a great help.  If you are new to landlording, have a couple of properties or a couple of dozen, Every Landlord’s Tax Deduction Guide can really help you.  It is written for you, the investor, not the accountant.  It will help you make sense out of income taxes.  I cannot recommend it enough.  Click on the link and order it today (I do get a small commission on every order, just so you know, but I really do think the book is worth every penny)!

 

Better hurry though.  April 15th will be here before you know it.  Are you ready?

The Biggest Obstacle to New Investors – It’s Not What You Think

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I spent 2 years researching real estate and speaking with investors before I jumped in. I saved vigorously because I was convinced that capital would be the biggest challenge to my real estate goals. While capital is still a challenge, I’m not sure that I would call it my biggest challenge.

The biggest challenge to part-time investing is working full-time.

Luckily, I have a job that gives me almost constant access to the internet—not to mention an incredibly flexible schedule. However, those perks come with the understanding that I will most likely be working more than 40 hours a week.

It feels like I’m working all day, every day. It’s a good thing that I really enjoy real estate investing! I can see how new investors could become burnt-out fast. My philosophy at the moment is to maintain the bare minimum of work/life balance that is needed to keep me moving forward. I’m motivated at the thought of a having a more satisfying work/life balance in the future. Fingers crossed that this all pays off!

So, for all of the newer investors out there who have yet to realize your dreams of quitting your day-job and achieving financial independence, this post is for you. These are a few of the things I do to help me get  through a day of work and real estate.

1. Organize Yourself. I use lists for every part of my life and I include ever minute task that needs to be accomplished. If possible, use a list aggregating app, like Out of Milk, so that you aren’t making multiple trips to the store or a rental property.

2. Prioritize Tasks. Decide at least the day before which tasks warrant priority for the day. Are they work-related are real-estate related? Maybe it’s a church commitment that demands your time. Either way, schedule it in and get it done first! If you spend time checking emails and sorting files, you could very well waste the time you had to devote to important obligations.

3. Learn to Say No. I’m no good at this one, but at some point you have to start turning down outside requests. Hopefully you won’t have to turn down a killer deal! Weigh the reward for each request that is asked of you and then make sure you’re able to politely decline if doing so would detract from other high-reward action items. Staying focused on high-reward action items will keep you motivated and energized!

4. Maximize Your Commute. If you are spending all of your time working, your family may begin to worry. Use your commute to and from work to touch base with close family and friends. Even short conversations can boost your energy. I also recommend using your commute to listen to podcasts and audio books about real estate. It will educate you and inspire you to keep going.

5. Schedule Housework. I don’t know about you, but if my house is a mess, my anxiety level is through the roof. If I don’t set aside a specific time to clean house and prep meals, then I will never get around to it. This is an important component for me—one that I intend to devote more attention to in 2014.

6. Blend Work and Play. Any time you can knock out two things at once is a major win. I seriously hate painting. However, I’ve found that inviting friends to paint with me (with promises of wine, beer and pizza breaks) can take the edge off. This way I feel like I have a smidgen of a social life and the daunting task of painting all by my lonesome is lessened.

To new or experienced investors, please comment with recommendations that have helped you. This is a very real struggle for some of us. Sometimes a small suggestion can make all of the difference! These tips sure have.