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What Makes a Solid Lease

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A solid lease is one of the keys to being successful as a landlord.  It will clearly define both the tenant’s and the landlord’s roles.  So what makes a solid lease?  Here are my top ten components

  1. Make sure it is written.  Seems simple enough but I have heard more than just a few times of people not having a written lease.  If you do not write it down, how will you prove to a judge what the terms were?  It will come down to he said/she said.  Have a written lease!
  2. State the monthly rental amount and late fees upfront and in bold.  Have the tenant initial next to these amounts.
  3. State clearly when the rent is due.  Put it in bold and have the tenant initial next to it.
  4. State the amount of the security deposit.  You may want to have another form letting the tenant know what they have to do to get it back in full.
  5. Set a term for the lease.  Will the lease be for six months, a year, two?  What ever it is set the term and then make it go month to month at the end of that term.
  6. Outline who is responsible for what utilities.  Clearly spell out the utilities that the tenant and the landlord are responsible for.
  7. Have a set of house rules about noise, trash, cars on the lawn, criminal activity, etc, etc.
  8. List what appliances come with the property.  You may even want to list serial numbers on the lease.
  9. If your property was built before 1978, have a lead based paint disclaimer and be sure to hand out the lead based paint brochure.  It could be a $20,000 fine if you do not!
  10. Include any clauses that may be required by your state or local jurisdiction.  Laws vary from place to place.  In my location the laws are completely different from one county next door.  Be aware of your local laws and seek competent advice on them!

You may want to take the time to have an experienced attorney look over your lease.  I have and it really helps.  Also, ask folks at your local REIA group if they will share copies of their lease with you.  Everyone’s lease is a little bit different and you can tailor one to fit your needs.

Finally, your lease should be a “living” document.  You should change it as you experience new issues or laws change.  Review it every once in a while to be sure it is keeping up with your needs.

Happy investing and work smarter not harder!

Finding and Keeping Good Tenants

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What is a good tenant?  It is someone who will pay their rent on time and take care of your property.

Finding good tenants will depend on your particular market, your marketing strategy and then your screening process.  Keeping them will depend upon how you respond to their needs.

First, you as the landlord need to put on your marketing hat and understand how your potential tenants want to communicate and find you.  Different segments of the market find their homes in different ways.  Some will read print ads, but fewer and fewer do.  Some will heavily utilize the internet.  Others will have limited access to the internet.  Some will drive around looking in particular neighborhoods because of school or family connections so yard signs are a must.

In my market segment, the internet is key.  Thus, a website and ads on Craigslist are a must.  I hardly ever use yard signs anymore as they just do not generate positive leads.  I know others in different markets that have to use yard signs, do not have websites and even hand out fliers at major supermarkets and do very well.  You will most likely need to try several techniques before you find the one that best works for you.

Once potential tenants find you and your property, you need to check them out to find the good ones.  “Trust but verify” are the key words here.  You start this process when they call.  Ask questions like “Can I show you the apartment after you get off work?”  Or. “This apartment rents for $x, is that something you can afford?”  These types of questions are designed to pre-qualify prospective tenants.  With such questions you can find out if they have a job and if they can afford the apartment among other items.

Continue the process by having them fill out an application so you can verify all of their information through a credit, criminal and work history check.  This is a vital step.  Do not take their word. We once had an applicant that looked and dressed professional, had a decent car and said all of the right things.  He filled out his application and paid the application fee in cash.  When we checked him out, he had the lowest credit score we had ever seen and from what we could tell had never paid a bill in his life.  Even the phone company was looking for him.  If we had taken his word and not checked him out and let him move him, he would have lived in our place up to six months rent free before we could have evicted him!  Another gave us his work info but neglected to tell us he had been fired that morning.

As a matter of fact, simply telling prospective applicants that you will conduct these checks will weed many of the bad ones out, but not all of them.  So check them out!

Once your find them and get them in, you want to keep them.  One of a landlord’s biggest expenses is tenant turnover.  When a tenant moves not only are you not collecting rent, there are expenses as well.  Often the apartment will need to be repainted.  Minor repairs may need to be made and carpets will have to be cleaned.  These items can really add up.  So you need to be proactive on the front end and do what you can to keep the good tenants.

How do you keep them?  It is simple.  You respond to their needs and maintain your properties.  You need to spend a little money upfront to avoid spending a lot more on the back end.  If they need something fixed, fix it as quickly as possible.  If they are concerned about crime, maybe you can offer to put in an alarm system for a few dollars more rent per month.  Reward long term tenants with new ceiling fans or other small amenities.

You should also be professional, respectful and fair at all times.  That does not mean you do not read tenants the riot act if you need to, but that you do it in a professional and respectful manner.  Tenants will appreciate this because so many other landlords can be just plain obnoxious.  They have lived under those landlords.  A professional and respectful manner will get you referrals and sometimes my tenants move back after leaving.

So in sum how do you find and keep good tenants?  Figure out your market and how they want to communicate.  Pre-qualify prospective tenants and have them fill out an application.  Verify all of their information.  Be prompt to requests for repairs or other issues from them and always act in a professional, respectful and fair manner.

Till next time, work smarter not harder!

Dealing With Tenant Drama

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Tenants are the lifeblood of a landlord.  Their rent payments keep us up and running.  Tenants, being human however always bring some drama along with them.  Many times they want to involve you, the landlord, in that drama.

Sometimes it is just petty BS.

“My roommate is driving me crazy and she needs to move out! Make here leave.”

“My roommate did not pay me for this month’s rent so I only have half of the rent.”

Other times it is more serious.

“We are getting a divorce.”

“I lost my job.”

You will get all kinds in this business.  I have had roommates stealing from each other, fall off the wagon, stop taking their meds and start screaming in the middle of the night.  Every year brings a new experience.

You as a landlord need to protect yourself, your property and other tenants from the tenant drama.

Let’s tackle the petty BS first.

First of all, we are clear at move-in, we do not do tenant drama and we do not resolve disputes between roommates.  Renting an apartment is an adult experience and we expect our tenants to act and resolve disputes like adults.

Secondly, you need is a strong lease.  Be sure that every adult living in the property is a signatory on your lease.  Our lease states that each tenant/roommate is “jointly and severally liable” for the payment of rent.  So if one does not pay, the other tenants are each individually liable for the non-payment and we can evict them all.  We also require that we receive only one check or money order for the rent, no matter how many roommates.  You do not want to be chasing down roommates for their share of the rent.  These tips will protect you and give you an out to point towards when dealing with the drama.

When tenants try and drag you into the drama, you need to be cool, collected and firm.  Remember, you do not do tenant drama.  Listen to your tenants, always be polite and remind that they are adults and they need to work out their problems as adults.

Then there are the more serious matters.  You need to have policies in place to deal with these events.

When someone gets a divorce or loses a job, no matter what your lease says, things are going to change.  Your job now is to manage that change as best as you can.  These more serious matters are going to generally require someone to move and many times the breaking of a lease.

Tenants may try to hide things as long as they can, since “denial” is not just a river in Egypt.  Eventually however the problems will surface and you need to be proactive.  Talk to your tenant as soon as you suspect a problem.   Again be firm but polite and listen to the problem.

If there is a divorce and someone needs to move, let them move.  Have policies in place that state the consequences for breaking the lease.  For example we may keep all or a portion of the security deposit depending on the circumstances.  We require a release fee of extra month’s rent if they break the lease.  You just need to say that you understand their problem however our policy is x y and z.  Most people will understand.

When a tenant has lost their job it can be a really serious blow and you have two options; evict them or work with them to move them out asap.  Again be firm but fair.  State that you understand their problem but that they can’t stay without paying and that they will need to find other accommodations soon.

Set a date for them to move out and be sure to stick to it.  You may actually need to help them move along with gentle reminders or you may even want to provide them some funds to move or give their security deposit back upon move out even if the have to break the lease.  You job here is not to stick it to someone who is down, your job is to get your property back in as close to a rent ready state as is possible.  One of your biggest expenses as a landlord can be eviction and the subsequent clean up and repairs.  We try to avoid that at all costs.  You are not going to get blood from a stone at this point, so cut your losses, help the tenant transition out and get your property back so you can re-rent it.

What about the tenant that stops taking their meds and starts screaming in the middle of the night?  When these types of situations arise you need to be careful.  You can try talking to the tenant, but they may not be helpful or may be embarrassed, etc.  In this case you may need to call their emergency contacts for help.

Your rental application should have a section for emergency contacts.  Be sure that you ask the relationship of the emergency contact to the tenant on the application.  Many times the tenant will put a family member, such as mom or brother, on the application.  These types of  situations may be ones where you get in touch with the emergency contacts to discuss your concerns.  Be careful of your tenant’s privacy rights here.  You may just want to let them know that it may be time to check in on their family member.  We have had success using this approach in the past.

As a final note, be sure to check with your own state laws.  If you become aware of drug dealing, spousal or child abuse and do nothing, you may become liable.  So be careful here and take action if necessary.  You can find out about your local laws at your local REIA.

In sum, expect a lot of tenant drama.  Be ready for it with a solid lease, a good application form and firm but fair policies that you discuss with your tenants at move-in.  You can’t predict or be ready for all the drama (we change our house rules every year based on the drama we experience), but you can sure save yourself a lot of aggravation, headache and drama.

 

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Pets or No Pets?

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Everyone has different feelings about pets.  Some can’t live without them.  Some can’t stand pets. There are dog lovers and there are cat lovers.  You know the drill.

No matter your own personal feelings on pets, should you allow them in your rental properties?   That depends upon your own feelings as well as an examination of the pluses and minuses on allowing pets.

 

On the negative side:

  1. Pets will cause more wear and tear on your property.  Untrained dogs like to chew on window sills.  Cats like to mark their territory.  Claws scratch up hardwood floors.
  2. Pets create noise.  Especially large dogs.  Noise leads to tenant complaints.
  3. Pets smell.  Ever step inside that cat lady’s house?  Inconsiderate dog owners leave smelly poop all over the property.
  4. Pets bring in unwanted guests such as fleas.
  5. Pets can make handling repairs difficult, especially if there is a large dog that growls at every stranger.
  6. Could be a legal issue if a pet bites someone on your property.

On the positive side:

  1. Pets can generate more income.  You can require a non-refundable pet deposit and even extra rent.
  2. Many landlords do not allow pets. You can get an edge on your competition if you do allow them.
  3. Pet lovers may be longer term tenants because they cannot find other properties that will accept their pets.  Thus, creating less turnover expense for you.
  4. Many pet owners are responsible and their pets will not cause much harm to your property or other tenants.

I am a pet lover and lean towards the more income side of the equation, so I do allow pets in my properties.  However I do not allow all pets and I have a well crafted pet policy (and you should too if you allow them) that you can read here.  This pet policy requires a non-refundable pet deposit, extra rent; it outlines pet size standards and sets other rules.  I like to remind tenants that pets are luxuries and I do not have to allow them.  So follow our rules and everyone can remain happy.

I also inspect my properties every once in a while to make sure everyone is following the pet policy, thus trying to nip potential problems in the bud (and they told me this would be passive income!).

One last thing, whatever you decide, remember that you have to allow companion animals such as seeing eye dogs.

So until next time, work smarter no harder.

Finding and Making the Real Estate Deal

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Check out my latest podcast where Jo Garner, Richard Scarbrough and myself discuss finding and making the real estate deal. Real estate deals do not just fall into our laps, they are found and made.  Listen as we discuss the best sources for finding deals and then some techniques and tips we have to make the deal work.  Originally aired on WREC AM 600 on April 7, 2012.

 

Does It Pay To Place “For Rent” Ads Anymore?

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There was a time not too long ago when it was a must to advertise your vacant properties in the “for rent” portion of the classified ads in the local daily newspaper.  While local daily newspapers are still around, today thanks to the internet there are many more choices out there that are available to us to get the word out about our rental properties.  Even with all of this competition, the local dailies are often the most expensive venue to advertise in.  Does is still pay to advertise “For Rent” in the local daily paper?

The answer to that question depends on one factor.

 

What is the demographic you are trying to reach?  Who is your typical renter?

Here is a list of your typical tenant types and ways to reach them.

The Young Hipster/Professional – These tenants are young, just going to college, in college or just starting out at their first job.  They want cool, safe places to live in the “hip” parts of town.  They are generally technologically savvy and their first source of information is the internet.  They never read the paper (I teach at a local community college and for many years none of my students say they read a daily print newspaper anymore).  To reach this demographic you need to have a web presence.

You may be big enough to have your own website.  If not, you at least need to be on Craigslist.org which is free.  Another good source to reach this demographic is your local alternative newspapers.  These newspapers are generally printed every week and are available throughout the city for free.  They often highlight the entertainment scene around town and have a classified section.  By placing an ad in this type of paper, you will reach your demographic as they look for things to do on the week end.  But the bigger plus is that the print ad will also get you an ad on the newspaper’s website, where most of this demographic goes to search.

This website feature may also be true of the daily newspaper.  A print ad may also get you on their website which may be good for people researching your area from out of town.  But it is going to cost you, and the first three alternatives, a website, Craigslist.org and the alternative newspaper are what I have found to be most effective in my area.

The Working Class Tenant/Family – This demographic is going to be looking for value.  They can’t afford more upscale places in the “hip” parts of town but want a clean safe place as well.  Often they will be looking in a particular part of town because of a school location or because they have family and friends near by.  These tenants are not going to be as savvy with technology or their access to it may be spotty at best.  Further they also will generally not read the local daily paper.  So how do you find these tenants?  Signs.  These tenants will generally drive a particular neighborhood makes calls from the car from the various signs in the yard.  Here are a few tips for this type of tenant:

    • Have professional “For Rent” signs made with the name of your company and phone number on them.  Do not use the red and white “For Rent” signs that you can get at the local hardware store.  Why?  A professional printed sign makes you look more professional and the dead beats will move on down the road because they figure you will actually check their credit, criminal and work history.  Trust me, these types of signs are not very expensive and will save you a lot of unnecessary phone calls.
    • You may even want to place a separate sign in the yard describing the unit and the rent, for example 3 BR / 1 Bath $750/Month.  This sign will also cut down on the number of phone calls asking about the size of and rent for your unit.
    • You need to have a system in place in working class neighborhoods so that if someone calls about your rental, you or someone else is able to go right away to show them.  If you make and appointment for a later time, 8 out of 10 times they will not keep it because they have driven down the road and called another one that was able to show up immediately.  I know it is hard, but that is the nature of the business.

The High End/Professional w/Family Tenant – These are professional high income people who are looking for higher end rentals in the nicer portions of town.  They maybe officers in the military who will only be around for a couple of years.  They maybe a business professional that has just transferred to the area and wants to rent for a year or so to get a feel for the area.  These folks are looking for safe, clean well maintained rental properties located in good school districts.

They are very technologically savvy and are often a little more old school and will read a newspaper.  So it may very well pay to place an ad in the local daily paper if you are trying to reach this type of tenant, especially if you also get an ad on their website as mentioned above.  However, they will also find you if you have the web presence that I described above.  A professional sign is also advantageous as these folks will also “explore” their new community.

So does it pay?  I think the answer is generally no.  Print is dying and there are just too many less expensive and father reaching alternatives out there.

Please let me know your thoughts and if you have any tools that you have used to find tenants by leaving a comment below.  Thanks for reading.

What is a Real Estate Deal?

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Check out my latest podcast where Jo Garner, Richard Scarbrough and myself discuss the components of a real estate deal. We discuss figuring out the value of retail, wholesale and buy and hold real estate deals. We cover how to determine offer price, repair prices, holding costs, maintenance and a whole lot more! Originally aired on WREC AM 600 on March 3rd, 2012.

 

Spring Break

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Spring has sprung here in Memphis, TN.  It came a little early this year after a very mild winter.  I’m sure a lot of people now have spring fever and want to get outdoors or to the beach for spring break.  For me however spring break has another meaning, spring means repairs, a lot of them.

It seems that whenever the seasons change, things start to break.  In the spring with the March winds and April showers it is missing shingles and roof leaks.  With the rising temps, people start up their air conditioners and some will need recharging while others may not work at all.  All of the landscaping and trees turn green again and need cutting, pruning and trimming.  In short, it seems every seasonal change, with spring being one of the most drastic, brings a clump of repairs.

It is uncanny.   As soon as the temperature changes, the phone calls start coming in.  “My AC is out.”  “There is a leak in the kitchen ceiling.”   So far this spring I have replaced a condenser, a fan motor, recharged several AC units, fixed three roofs with two more to go and removed two trees that blew over.  And it is not even April yet!  So what does a smarter landlord do about all of this?

  • First, just know it is coming and accept it.  Things break and spring is a deluge.  In the winter it is the heat and frozen pipes.  This is just the way it is.
  • Second, save up some funds.  In a previous post I have stressed the importance of budgeting 10% of gross rents for repairs and putting away a little bit more each month for major expenses in reserves.  Trust me, spring break it going to make you (and your tenants) glad you did.  Understand that you will not have 10% worth of repairs every month.  Some months may have no repairs, but averaged out over the year 10% is a good number.  My repairs for all of 2011 totaled 10.14% of gross income.  Almost right on the money.
  • Third, have some skilled contractors on your team that you can call to fix the problem quickly.  You will need a roofer, a plumber, a good HVAC person and a landscaper/tree person.  By having these people on your team you can handle repair problems quickly and thus cut down on an even bigger expense, tenant turnover because you did not fix stuff in a timely manner.  Where do you find these team members?  Your local reia is a great place to start.
  • Fourth, take the opportunity to be proactive and do a little “spring cleaning.”  Now is a perfect time to inspect your properties, both inside and out, for damages and other problems.  Contact your tenants and let them know that you will be conducting an inspection.  Then, check their HVAC units and change the filters (tenants never do it), check their smoke detector batteries, check the plumbing for leaks and check around the outside for other general repairs such as fallen limbs, rotten wood, etc.

A smarter landlord has to be proactive and routinely check on their properties.  I would recommend that you conduct an inspection at least twice a year.  Perhaps once in the spring to check their AC, clean the condensers, etc., and once in the fall to check their heat.  Always look at the plumbing under sinks, around toilets, etc.  I can’t tell you how many leaks I have found that had obviously been going on for months and the tenant says “Oh yeah, I was going to call you about that.”

So there you have it: spring break, accept it, prepare for it and be proactive.

Until next time work smarter not harder.

There Is No “Right Way” In Real Estate

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My last post was about analyzing a good buy and hold deal.  In it I went through many of the criteria that I look at in evaluating if a potential deal is a good one or not.

A fellow investor and friend of mine read the post and we then had an e-mail discussion on a couple of the points.  He pointed out some of the criteria he uses and the logic behind his methods, which were very sound.  I did the same.

He is quite successful and good at what he does and it got me thinking that there just is no “right way” to do this business.  And that is one of the things that make the real estate investing business great.  As an investor, you can mold the business to fit you, or your customer’s needs based upon expectations or experiences.

However, you have to start somewhere.  You can go it alone if you want to, but I don’t recommend it.  If you are just starting out or fairly new to real estate investing here is what I suggest:

  • Read all you can on real estate investing, business and entrepreneurship.  Even if the subject is not real estate, you need to get your mindset to that of a real estate investor and an entrepreneur.
  • Join a local reia to network with other local investors.  The price of admission will be rewarded back to you many times over.
  • Buy a few of the more respected “Guru” courses.  As I said you do not have to go it alone and you should not.  Some of these gurus have already invented the wheel and will provide you a sound base to get started that again will reward you many times over what you initially invest.  Some of the gurus I have invested in include:
      • Mike Butler
      • Alan Cowgill
      • Robyn Thompson
  • Once you do the above get out there and get a few deals under your belt!  You have read the books, bought the courses and attended the reia meetings.  Now do it!  There is no better teacher than experience.
  • Once you get a few deals done, then you can begin to modify and refine the techniques you have learned to fit your particular niche.  You may want to focus on a particular area, or a particular form of real estate for example.
  • As you become more and more experienced, you can begin to write your own business systems for your particular circumstances and who knows, maybe you become the guru.

Whatever you do, remember there is no “Right” or “One” way to do real estate investing.  There are so many different deals in so many different areas with so many different customers that the sky is literally the limit.

Until next time work smarter not harder!

Is That a Good Buy and Hold Deal?

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Buy and hold deals are my favorite kind of real estate deals.  They provide you with monthly income and generate long-term wealth.

 

With buy and hold deals, cash flow is the name of the game.  The deal must generate positive cash flow.  A property is not a deal if it just breaks even.  It is not a deal if you have to write a check to cover expenses every month.  You want to collect checks, not write them!   Do not bet on price appreciation.  Appreciation is a nice benefit to get, but it is almost completely out of your control.

 

So how do you determine if a property will generate positive cash flow?  First, you need to determine how much potential income a property will generate.  Most of the time income equals rent, but there could be other sources of income such as utility and vending income.  For now, let’s keep it simple with rental income.

 

Expenses are more varied.  Let me list those:

 

  • Most of us need to borrow money to acquire the deal (if you do not, good for you!).  So your first expense is your principal and interest payment or the cost to borrow other people’s money.  This is the one major expense that we as investors have control over on the front end.  This control comes in the form of the price we can offer for the property.  Too high a price will skew the principal and interest costs up turning a potential deal into no deal.  Remember you make money in real estate when you buy.  So buy them right on the front end.
  • The second expense is property taxes.  Be sure you include everyone who can add a little piece to your bill.  Where I am today I just pay city and county taxes.  I recall living in Fort Lauderdale, Florida where there were no less than six or seven different taxing authorities.
  • Property insurance is third on the list.  The cost of this expense will vary depending on your location.  These first three make up the major expenses and are sometimes collectively referred to as PITI (Principal, Interest, Taxes and Insurance).
  • Repairs and maintenance are next.  Something always needs to be fixed and there is routine maintenance such as keeping the yard cut, raking leaves, cleaning gutters, painting, etc.  Budget approximately 10% of your gross rents in this category.  In other words, if monthly rental income is $1,000, budget about $100 per month for repairs and maintenance.   It will not always be exactly $100 per month.  Some months will be higher and some will be lower but over the course of time 10% is surprisingly accurate.
  • Vacancy is another expense you will have.  Your rental unit will never be 100% occupied 100% of the time.  If it is not occupied, it is not generating any income and you still have to pay the bills.  So a good rule of thumb is again to budget about 10% of your gross rental income towards a vacancy credit.  Depending on your location and market, this number can be higher or lower.  Use your own experience and expertise and adjust accordingly.
  • Utilities should also be figured into the deal.  There may be house electric meters or it may be common for the landlord to pay for water in your market.  Market conditions will vary, as will rates.  Some properties for example will be charged residential (lower) rates while others will be charged commercial (higher) rates.  Make sure you know your market and your rates.
  • Reserves are an expense that more and more bankers are asking about these days.  Reserves are funds that you set aside for those big future expenses such as roof replacements.  A lot of banks got burned in the real estate bust because landlords did not budget for this (among other things) and left the bank holding a ruined property.  If you are going to borrow bank funds, show them that you are going to set aside 10% of gross rents for future major repairs.  Plus it is nice to have that money there when something major happens (notice I said when not if).
  • Other expenses could include trash removal, homeowner association fees, advertising, professional fees (for lawyers and accountants), license fees and other various taxes.  These types of expenses will all vary depending on your local laws and market conditions.  Sometimes I just throw in a miscellaneous category of about 2.5% gross rents just to be safe.

 

Once you have determined your potential income and expenses for a particular deal, you can then list them to determine the potential cash flow.  Let’s say I am looking at a single family house that will rent for $1,000 per month.  The owner is asking for $50,000.  Is that a deal?

 

I always look for at least $150 per month positive cash flow after all expenses outlined above are paid.  I will also have to pay 7% interest with a 20 year amortization to borrow $50,000.  Those terms make my principal and interest payment $387.65 per month.

 

Let’s outline it.

 

Income (monthly)                                                $1,000

 

Expenses (monthly)

Principal and Interest                                        $387.65

Taxes                                                                    $50

Insurance                                                            $30

Repairs/Maintenance                                        $100

Vacancy Credit                                                    $100

Utilities                                                                 $0

Reserves                                                             $100

Misc.                                                                     $25

 

Total Expenses (monthly)                                 $792.65

So is this property a deal?  You bet it is.  Using the numbers above this property should generate a positive cash flow of just over $200 per month.  Not to bad.  If you buy 10 of these type properties they would generate $24,000 per year in positive cash flow.  What could you do with that extra money?  This positive cash flow is why buy and hold deals are my favorite deals.