SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

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Don’t Forget the Oops!

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Rehabbing properties and understanding what a rehab takes is a key part of almost any real estate investment strategy.  Distressed properties that need a lot of rehab are often where deals can be found.  Plus, rehabbing properties after a tenant moves is just a part of the landlording business.

Estimating a rehab job can be tough, especially when you are just starting out.  You want to make sure you estimate accurately so you can budget appropriately.  There is nothing like the felling you get when you are 80% through a job and realize you are out of money.

Newbies are often afraid of larger rehab jobs because they fear that they will miss something, and you know what, they likely will.  They also seriously underestimate the amount of time, labor and materials that will be needed on any job.  Costs overruns can add up quick.  But here is one way both newbies and more experienced landlords can protect themselves.  Factor in an oops into your rehab budget.

The oops budget is designed to make sure you have the money in case you miss something or underestimate.  Depending on the size of the rehab job, I usually will make an oops budget somewhere between 10% and 30% of my rehab estimate.

So for example, if I have a smaller job, consisting of mostly paint and some tile work totaling about $5,000, I will only budget about 10% or $500 for an oops.  I likely did not miss anything and if I did it is not going to break me.

But if I have a serious rehab job, where I might be taking a property down to the studs or doing some foundation work, I might budget as much as 30% for the oops.  I do this because there is simply much more to miss.  I do not know what will be found once we really get in there and tear something up.  An oops budget of $15,000 or more is not unheard of in larger more complicated jobs.

If you do not need the oops money, then you can save it for the next job.  I also sometimes think of extras that need to be done as we go along.  I added closets on one property since I had some money left over.  These closets allowed me to charge a higher rent.   I have done other things such as adding more exterior lighting or improving the landscaping to enhance appearances.

So use the oops, it is a great budget item and real budget saver.  You newbies out there should be cautious and budget for a higher oops.  Trust me you will need it until you get more experience.

They Can’t See Your Vision

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Recently, Jenna wrote a post describing her experiences showing an apartment and getting it in rent ready condition.  She mentioned that she was showing the property before she was finished with all of the repairs and that one person “shared her vision” and signed a lease for the unit.

First, let’s congratulate Jenna on getting a unit rented and then ready.  She deserves it.  This is her first property and I saw it not long after she bought it, so I know the amount of work and time that was put into it.

Now, let’s use this opportunity as a teaching opportunity.

You see, I think it is a waste of time to show the property before it is rent ready because in my experience, most folks cannot or will not see “your vision.”

Yes, Jenna did find someone who saw through the unpainted walls, the missing appliances, the unfinished floors, the wet paint, the drop cloths, the extension cords, the tools lying around everywhere, etc, etc.  So again, let’s give kudos to her.  But I think her experience was the exception rather than the rule and it would have been a better use of her time to focus on getting the unit ready.

Why can’t potential tenants “see your vision?”  I think for several reasons.

  • They have never touched a paint brush much less done a major rehab so they just cannot conceive of “your vision.”  All they see is the mess which screams “RUN AWAY!”
  • They can’t see past the mess.  The mess prevents them from seeing where their TV, bed, sofa, computer, etc. will go.  In their minds, they cannot see this as their “home” because it is not put together.
  • The unfinished nature of the unit will highlight the imperfections rather than the benefits and charm of the property.
  • They do not want to worry about whether or not you will be finished when they are ready to move in.  Will they have time to finish?  Will they run out of money?  They don’t need to worry about that when there is another unit ready to go just down the street.
  • They want to move and be done.  Moving is stressful.  They do not need the landlord coming in to “finish up a few things.”
  • They are afraid you will not do what you say you will do.  They have been burned by other landlords before.  Why go through that again?

Obviously there are exceptions as Jenna has demonstrated.  Some will “see your vision” or will really like the location or some other factor.  But most will not be able to see through the mess.  Why watch them cringe and frown?  Save your time.  Save your energy.  Focus on getting it done, then show.  Your pool of applicants will likely be larger, giving you the added benefit of being choosy.

Real Estate Advice for Rookies

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This past week made me reconsider if I should be blogging about real estate.

Aside from books, blogs, and conversations with investors, I don’t know much about what I’m doing.

I’m great with numbers. I can analyze, budget and prioritize like a pro. Despite my strengths, I have underestimated the time commitment every single time. If you are getting into real estate because you think that it’s easy, please turn back now.

This post is for the rookies.

I set a goal to have the vacant unit rented by November 1. So, I started showing it before it was even ready. I walked prospective tenants through the repairs. One woman bought into my vision and signed a lease. There was no turning back.

We stayed up past midnight all week to make sure that we met our deadline. We bought and installed appliances, hung blinds, built cabinet doors and changed out receptacles. We painted the entire apartment—two coats.

If you had given that list to me 2 weeks ago, I would have said, “no biggie,” with confidence. I had no idea how time consuming it would be. I can’t imagine what it would have been like if I had to do it ALL myself. Luckily, I have an awesome partner and helpful friends.

Truth be told, I’ve received ample advice to add a cushion to cost estimates. I just never knew to do the same thing when estimating time commitments for do-it-yourself repairs. Maybe I’m a too confident for my own good…

If I were to relate this new, hard-learned knowledge, I would recommend that  estimated time commitments be multiplied by three for any first-time endeavor. That multiplier of three should not include the time you spend reading how-to articles and watching you-tube tutorials either.

Don’t feel overwhelmed before you start though. There is a learning curve. I’m confident that I could install a sink and faucet in half the time it took me before. I can vinyl tile a kitchen floor like nobody’s business. And, you should see my putty knife skills. It’s serious.

 

Top 10 Rental Lease Agreement Provisions

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The lease is perhaps the most important landlording document.  It is the legal document granting possession of a property from you, the landlord, to a tenant for a specified price and a specified period of time.

Smarter Landlords take care when drafting their lease.  They have it reviewed by a local attorney familiar with the local landlord/tenant laws.  Be aware that not all laws are the same.  Every jurisdiction has their particular quirks.  Even here in Tennessee the laws change drastically if I drive just 30 miles or so east to the next county.

Despite these local differences, most leases will say essentially the same thing.  So what basics should you have in your lease?  Here are my top ten rental lease agreement clauses:

  1. Amount of Rent and When it is Due – Remember this is a legal document and you have to spell out even the most basic of information especially when rent is due.  After all, how else can you determine if the rent is late?
  2. Lease Term – How long will the lease run?  One year?  Two?  A month?  Will it be renewable?  Will it run month to month?  All items to consider and spell out.
  3. Address of the Property – Seems simple, but simple things are easily forgotten.  Be sure you include where the tenant is going to live.  If you get in front of a judge with a lease without an address you may just be out of luck.
  4. Late Fees – How much are they?  When are they due?  Be sure to check you local laws here.  Most states will regulate how much and when you can charge.
  5. Security Deposits – How much are they?  Where will they be held?
  6. Occupants – You need to list the names of all occupants over the age of 18.  These are the folks who are legally entitled to be in your property.  Anyone else can be accused of trespassing if necessary.
  7. No Alterations – Unless you want your walls pink, black or purple (yes they will paint them black) you need to specify that the tenants are not allowed to do any alterations of any kind.
  8. Quiet Enjoyment – This is a legal terms that means the tenant has a right not to be bothered by you and other tenants.  It also states that the tenant has a duty not to bother other tenants with their loud music, late night parties, etc.
  9. Eviction – You should spell out when you will begin the eviction process.
  10. Attorney’s Fees – Be sure you have a provision that all attorney’s fees incurred to enforce the lease (to evict or otherwise) will be paid by the tenant.  If you do not have such a clause you will not be able to recoup these costs later on.

So there you have it, my top 10 residential lease provisions.  You can use these to form the basis of your lease, but again be sure to have any legal document reviewed by a professional.  A lease can of course contain many other provisions as well. But I will save those for another post.

Top and Bottom Markets for September Rent Growth

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At least Memphis is in a growth market.  The tech sector seems to be booming.

What is your market doing?

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source:  Multi-Family Executive

Read more here.

Ordinary Americans Priced Out Of Housing

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I wonder where all of this “Institutional Buying” of single family properties is eventually going to end up?

“If there was any doubt that the US housing “recovery” is anything but the latest speculative play by deep-pocketed (namely those who already have access to cheap funding) investors, who are now engaged in rotating cash gains out of capital markets and into real estate, on their way hoping to flip newly-acquired properties to other wealthy investors, then the most recent, September, RealtyTrac report will put that to rest.”

Are we creating a nation of renters?  Is that a good thing?

Read the rest here.

Breaking Rule #1 – Update

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Remember how positive I was about our experience with renting to a friend? Well, the old proverb proved to be true after all.

Our tenant friend told us last week that he will need to move out before his lease is up. He’s in nursing school and would like to devote more time to study and less time to work. We shouldn’t worry; he will do us a favor by staying until January 1st.

Grrrr. Thanks—but no thanks.

So, let me recap for you. We have one vacant unit that is rent ready November 1 (later than expected), and now an impending vacancy after a 3-month occupancy. If I don’t get these units occupied ASAP, I could be footing the mortgage with $0 cash flow for a couple of months. No. no. no….

It makes me anxious.

So, I told our tenant friend that we would start marketing the property immediately. He seems flexible enough to move mid-month if I find a tenant with the desire to, but he would need a couple of weeks’ notice to move his things.

Oh, and we have to prep the apartment of course. Remember those custom colors he requested for his living room? What a mistake!

Needless to say, we won’t be renting to friends again. I’ve found that I can’t be blunt or forthright about how this is not acceptable. I’m so friendly that I will most likely refund him part of his security deposit, which of course would be out of the question for the average tenant.

Where is that silver lining you ask?

It could have been a lot worse. He did give us ample notice, and he has taken care of the place. I don’t think I would say that it worked out to our benefit though. Even though we were able to gain cash flow earlier than we would have, we reorganized our work schedule to get that unit rent-ready first. That was probably a mistake—along with buying custom paint.

 

Commence face palm:

  1. Know where your palms are.
  2. Take your palm and move them towards your face. (Speed of contact varies from situation)
  3. Take 10 seconds to breathe and recuperate your thoughts.
  4. Slowly slide your palms down your face.
  5. Give evil glare.

Getting Over the Fear

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It’s Halloween, a time for all things that instill fear and scare us.  The thought of real estate investing for some causes fear.  They are fearful that they will loose a lot of money.  They fear that tenants will destroy their property and contractors will rip them off.  They are fearful that they do not have the right skills.  “Why would anyone ever invest in real estate?” they think, “It is just too scary.”

To tell the truth, I was scared of real estate at one time.  Heck if you are not a little scared about dropping tens of thousands of dollars into a project for the first time then there is something wrong with you.  But I got over the fear.  How?  I did it through education and action.

Fear generally arises from the unknown.  Knowledge therefore erases fear.  The way to gain knowledge is through education.  I spent a lot of time on my real estate education in the early years.  I like to tell folks it was like going to graduate school.  Here is what I did.

  • I turned off the TV.
  • I went to the library and read almost every book they had on real estate.  You can’t beat free and they had a lot of great resources for beginners.
  • I subscribed to and read local and national business journals.  If I was going to be a business person, I needed to begin thinking like one and I needed to know what was going on in my local market.
  • I joined my local REIA group and went to every event I could.  I met folks, made new friends and networked.
  • I read blogs, like Smarter Landlording and biggerpockets.
  • I bought several real estate courses and other books.  They were expensive, but I considered them an investment and they have paid off many times now over the years.
  • I built a team of people that could help me achieve my goals.  These included a realtor, an attorney, other investors, a CPA, etc.  I had folks on my speed dial that I could call whenever I had a problem or situation arise.

Sound like a lot doesn’t it?  Well, it was and it ultimately took several years, but that was the easy part.  The second part, the action, was harder.

Overcoming fear and putting knowledge into action is one stumbling block that many cannot get over.   All I can say here is just do it!  You have to take that first step.  Once you do the second one becomes easier and the third one even easier.  Before you know it, you have taken 10 steps forward and are well on your way.

Yes, you are going to mess up at times.  Yes, you are going to fail at times.  Yes, you will have to take a step back every once in a while.  But the smarter investor learns from their mistakes.  They know failure is part of the process and keeps moving forward.  Remember that every step back can be met with two steps forward which will still keep you going in the right direction.

Don’t want to take a huge step?  Then how about starting small?  You don’t need to buy that 20 unit apartment building right off the bat.  But how about getting a house in your own neighborhood as a rental property?  Or perhaps you could get a duplex and live in one side and rent out the other?  Don’t even want to start that big?  Wholesale a property to another investor for a few thousand dollars.

These are small steps that will help you learn along the way and give you the confidence to do bigger deals later on.  These small steps will lead to bigger steps and with each step that fear will get smaller and smaller.

So enjoy your Halloween.  Eat some candy.  Then get over the fear by learning and doing!

It’s Not As Easy As They Thought

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Being a landlord is no walk in the park.  Yes,  there are many benefits which I have touted here, however, it is not as easy as it first appears.  Looks like the big boys may be about to find this out.

“Most rental houses in the U.S. are owned by individuals, or small, local businesses. Culpepper’s landlord is part of a new breed: a Wall Street-backed investment company with billions of dollars at its disposal. Over the past two years, Colony American and its two biggest competitors, Invitation Homes and American Homes 4 Rent, have spent more than $12 billion buying and renovating at least 75,000 homes in order to rent them out.

This new incursion by hedge funds and private equity groups into the American single-family home rental market is unprecedented, and is proving disastrous for many of the tens of thousands of families who are moving into these newly converted rental homes. In recent weeks, HuffPost spoke with more than a dozen current tenants, along with former employees who recently left the real estate companies. Though it’s not uncommon for tenants to complain about their landlords, many who had rented before described their current experience as the worst they’ve ever had.”

Read the rest here.

Looking At Properties? Take These Tools

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You’ve read the books.

You’ve found the blogs

You’ve networked with investors.

You’re ready to jump in!

There are a few things that you absolutely have to have before purchasing an investment property. These tools will be a resource to you as you analyze potential deals. Keep them in your car because you never know which corner opportunity happens to be hiding behind.

  1. Camera (or phone with a camera and flash). As you look through properties, keep them organized by first taking a picture of the address. Then, make sure to take pictures of each potential repair. This approach will be invaluable. You could look at a hundred properties before you find the right one.
  2. Hammer. When looking at properties, there are going to be some areas you don’t want to touch. Maybe you want to check out the siding or wood strength/malleability. Maybe you smell a dead animal in the walls. A hammer is a good tool to bring along, and also a tool you’ll use again and again.
  3. Tape measure. A tape measure can also serve as a level. If think the floor is sloped, pull out the tape measure and find out. I have 4 tape measures…
  4. Flashlight. I looked at plenty of properties that didn’t have electricity. It also helps when you want to check out those small crawl spaces and underneath sinks. I recommend picking one that you can also wear on your head. Since I do a good deal of rehab after working hours, having a hands-free flashlight is a gem.

It should go without saying that the internet will be one of your best resources as well. Make sure you are searching through the brick and mortar—as well and combing through the paper trail of each property.

 

Kevin—have I left anything out?