SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

The Business of Landlording

When Tenants Overstay Their Lease

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Tenants move.  It’s just a fact of a landlord’s life.  As much as we might like them to stay (well most of them), they rarely do.

When they move, vacancies become a major concern.  The cashflow stops but the bills remain.  So, getting the unit re-rented as quickly as possible becomes a priority.

The best case scenario is to have a tenant move out one day and another move in immediately the next day.  Think about how great that is.  It is almost perfect as there will be little if any interrupted cash flow.  We have had the good fortune to have this happen a few times over the years.

But wait a minute.  No matter how well you might think you have things lined up, Murphy and his darned law is always right around the corner.  Things can go wrong and can go wrong pretty quickly.  The movers might be a day late to move your tenant out.  A new job may be eliminated meaning the tenant no longer wants to move.   A car can break down and a whole host of other things can go wrong.  Other times the tenant just does not get it together and actually move out.

What happens then?  What happens if you have scheduled someone to move in the next day?  Things can get sticky real quick.

Imagine for a moment that you are your new tenant.  You are moving from out of state and have all of your belongings in a truck, a truck that has to be returned the next day.  You have scheduled movers, utility connections, satellite TV installation.  Are you supposed to rearrange all of this?  Are you supposed to sleep in the truck?  What about all of the added expenses, not to mention the aggravation.

Your new tenant is going to be looking right at you for answers.  After all, you are the one breaking a contract by not having a place for them to live.  They will want to be reimbursed and accommodated for their hassle.  They will have a strong case and they know it.

Here is what to do.

First, try to leave a day or so wiggle room from move out to move in.  A loss of one day’s cash flow is not that bad and it may just give you the time you need for when Murphy shows up and starts making things go wrong.

Secondly, place a clause in your lease that charges the tenant $100 per day for any time they (or their stuff) stays in the property past their move out date.  In this way you are somewhat protected if you incur expenses due to someone not moving when they said they would.  Plus it really provides incentive for them to get out when they said they would.

The key is to be very clear about this provision when they move in.  Let them know you will charge it.  Get that motivation started the first day they move in.

Finally, apply the pressure to your old tenant.  Let them know they cannot stay and keep on them.  You may have to literally push them out the door.

Honestly, this scenario is hardly ever a problem, but it can and has come up.  So be a smarter landlord and be prepared for it.

 

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If They Legalize It Do I Have To Allow It?

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Social norms regarding the use of marijuana are rapidly changing.  Legalization would have been considered impossible just a few years ago, but it is now occurring to varying degrees all over the country.  To us landlords it brings up an interesting question; if pot is legalized do we have to allow people to use it in our properties?

The answer to that is no.

There are lots of things that are legal to do and or own that we do not have to allow, such as tobacco, pets even waterbeds.  Marijuana, if legalized, would fall into this same type category.

Why is that?

For one thing marijuana is still illegal on the federal level.  Until that gets resolved there are still legal implications.

Secondly, our property is just that, our property.  It is private and we can regulate, within certain limits, what we as private property owners will allow on our properties.

Thirdly, marijuana users are not a protected class.  Nor are tobacco smokers or users of alcohol.  Many a landlord, including yours truly, has banned tobacco use in our properties and we could ban alcohol use as well if we wanted to.

Remember, you as a landlord are not allowed to discriminate against who you allow to live in your properties based upon the seven federally protected classes.  Those classes are age, sex, race, color, religion, national origin and familial status.  But you can and are even encouraged to discriminate in other ways.  Everything else, such as marijuana smokers, tobacco users, motorcycle owners, truck drivers, lawyers and deadbeats is fair game.  You just have to be consistent in your application of those discriminating standards.  Meaning if you discriminate and say no once, you better say no all the time, every time.

But who knows.  As laws and norms continue to change, it may be advantageous and profitable to some landlords to allow marijuana use on their properties.  For other landlords, it will be not so much.  That however is the beauty of the free enterprise system.   There will likely be something for everyone, tokers and non-tokers alike.

Silence Can Be Golden!

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Being a successful real estate investor means being a successful negotiator.   Being a successful negotiator is not easy, but it is a skill that can be learned.

Browsing one of my favorite websites the other day I came upon some valuable negotiating advice and thought I would pass it along.

 

SILENCE

The most powerful words are silent.

I had a dinner with Michael Fishman (cc Monica McCarthy) last week. He said, “if even for one second you are preparing your response while someone else is talking, then you aren’t listening.”

That’s pretty wise, Michael!

My technique is this. Someone talks. I count to two. Then I prepare my response and not before then.

Very valuable advice! 

During negotiations, our minds can race ahead.  We want the deal!  But by not listening we may actually lose the deal.   We will never hear what the other person actually wants or needs and we instead craft the deal to what we think they want or need. 

Give this technique a try.   Your silence can be golden.

It’s Easy To Incorporate (At Least In Tennessee)

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I recently decided to incorporate a new business venture, so I formed a new limited liability company (LLC).  I have written before on whether or not you should incorporate.  Generally, I feel that incorporating is beneficial only after your landlording business grows and increases in complexity.  That said, I wanted to share with you my recent experience in setting up an LLC here in Tennessee.

It has been over ten years since I last formed an LLC.  As I recall at that time there was a lot of paperwork to be filled out, checks to be written and mail to be sent.  The whole process took weeks before everything was finalized.

This is not so anymore.  The internet has made the incorporation process here in Tennessee very easy and very quick.  You can almost do it all right from your laptop.  If you want to form an LLC in Tennessee, here is what you need to do.

First, get a binder and a three-hole punch so you can neatly organize all of the papers for your LLC.

Second, go to the Tennessee Secretary of State’s website and fill out the online form to start a new LLC.  Fill in your company’s name, address, registered agent and a few other questions and pay the filing fee.  Your Articles of Organization will automatically be ready to print and download.  Be sure to print and download a copy of those Articles of Incorporation, they are important.   Also be sure to print out your filing receipt as you will need that later.  Put these in your binder. You are now good to go as far as the Tennessee Secretary of State is concerned. 

Third, go to the IRS website to obtain an Employer Identification Number (EIN).  This number is used much like a social security number and will be the identifying number used when opening your bank account, filing 1099’s and your income taxes.  Complete the questionnaire and print out your new EIN and associated paperwork.   Place the EIN paperwork in your binder.  You are now all set as far as the IRS is concerned.

In less than an hour, you have completed what used to take several days if not weeks.  But there is one more formal step.

You must record your Articles of Organization at your local register’s office in the county where the LLC’s primary address is located.  This means that you physically need to take the Articles of Incorporation and the receipt you printed from the Secretary of State’s website to the Register of Deed’s office.  For example, I am in Shelby County, TN so I recorded mine in the Shelby County Register of Deeds Office.  Driving to and from the Register’s Office and recording the document took less than an hour and cost only $10 (bring cash).  You should get a printout of the book and page number where the document is recorded.  Place that in your binder as well.

Once these three steps are complete, you are ready to go in the eyes of Federal, State and Local jurisdictions.  Easy.

There are of course other documents that will also go in your binder.  You will need an operating agreement along with minutes from shareholders and officers.  I suggest consulting with an attorney on those but they are generally not too difficult to set up.

I hope other states make it as easy to set up a corporation as Tennessee does.  You folks from other states, let me know with your comments.

What Gives The Best Bang For The Buck?

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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 To Do With A Financially Struggling Tenant

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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.

My Tenant Called The Cops On Me

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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.

 

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Investors Are Being Watched

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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.

 

Final Update – Property Reappraisal Challenges 2013

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I began this journey almost one year ago on March 31, 2013.  It started when I received my property reappraisal letters from our local property assessor.  Here in Tennessee, property assessors have to reappraise all properties every four years to adjust values due to fluctuations in the real estate market.

Due to the continuing weakness of the real estate market following the collapse of the bubble in 2008/2009, I was expecting an overall decline in value.  Imagine my surprise and shock when the property assessor actually proposed an overall $500,000 increase in value!

No way was that going to stand!  The assessor was just plain wrong and I was not going to take a $15,000+ hit in property taxes every year because if it.  I challenged the property assessor on many of my reappraised values and I wrote about that process here, here and here.

How did all of that it come out?

It came out well.  That $500,000 increase was reversed and worked out to an approximately $5,000 decline in overall value.  You can fight city hall sometimes!

So what have I learned by going through this?

  • Be Prepared – You have to sharpen your pencil and do your homework to justify your opinion of a property’s value.  You cannot just walk in and say the value should be X without justification.  I saw many do this and just get turned away.  Being prepared means you have to use solid comps of actual sales in the immediate area of similar properties.  If you do not have access to some sort of property sales database, get one.  Also, ask the assessor what comps they used to justify their value.  It is public record, they have to tell you.  Knowing their data can give you a real leg up later on.
  • Take Pictures – Take lots of them.  Take pictures of the property inside and out, adjacent properties, the street view, whatever you think might help your case.  Make copies and hand them out at your hearings.  They really do help explain your position.
  • The Process Will be Frustrating at Times – There will be many layers to go through.  Hearings with this person, meetings with that person, collecting data, phone calls, etc.  You will get frustrated at the bureaucracy.  Keep the goal in mind.
  • Stick to Your Guns – You are a real estate investor; you know what the value of your property is.  After all, we investors have to know what the values are or we would go bankrupt.  Plus, after you have done your homework, you have the data to back you up.  Don’t take any deals.  Stick with it.
  • Persistence Pays Off – Throughout the appeal process, the assessor’s office tried to make deals (which makes me wonder about their original appraisal in the first place but that is another story).  Sometimes they would see things my way and we would agree.  Other times they would suggest meeting me halfway.  No way!  Keep going forward.  Eventually they will often come around.  I only had to take one property all the way through the process (where I won!) so be persistent.
  • It Will Take a While – Remember, I started this process almost one year ago. My last update was on June 23, 2013.  I just finished everything up last week.  They are in no hurry to give you a tax refund and there is nothing you can do to speed the process up.  Just be patient and ready when your time comes. 

Let me wrap this post up by saying that this process was not difficult and I think anyone can do it.  Give it a shot next time you buy a property that you think your local assessor has overvalued.  Finally, let me give a plug to the staff at the assessor’s office.  They were at all times cordial, helpful and never adversarial.  I do appreciate that. 

How Nextdoor.com Can Benefit You

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I’m a millennial. Naturally, I’m registered on at least 6 different social media sites—all for different reasons. Each social media site provides a unique platform. Facebook keeps me connected to family and friends. LinkedIn provides me with professional visibility, and Pinterest keeps track of products that appeal to me.

So, which social media platform is best suited for the real estate investor? Nextdoor.com

Nextdoor is a social media site that connects people within specific neighborhoods. In order to register on Nextdoor, you have to first verify your address to proving your residency in the neighborhood. You must use your real name.

The site allows for neighbors to exchange information about block parties and community clean-ups. Neighbors can buy and sell items between each other, and they can report break-ins and burglaries instantly. Good neighbors make good neighborhoods. I enjoy the camaraderie that this site provides.

While, those are my personal reasons for using Nextdoor, it has benefited me greatly as a new investor as well.

 

Example #1:

I marketed a vacant unit in the area on Nextdoor. Within 24 hours, I had an application submitted based on a neighbor referral. No multiple showings; no craigslist chaos. The applicant is now a wonderful tenant. I would rent to her a million times over.

 

Example #2:

I posted an inquiry about a property, stating that I was a real estate investor. Within minutes, I began receiving messages from other real estate investors in the area. These investors provided me valuable information about the property. Plus, I am now connected to other well established investors who farm in my area. This pool of investors are my competition—as well as potential mentors.

 

Example #3:

I was working in a unit when I discovered that I needed a reciprocating saw. I’m a new investor. I have yet to purchase a ladder, let alone a reciprocating saw. So, I posted on Nextdoor asking if anyone would lend me or rent me their saw. Within 30 minutes, a neighbor was at my doorstep, saw in hand. If that’s not neighborly love, I don’t know what is!

 

Example #4:

Many of my neighbors know of me, even if we haven’t met yet. They know which properties I own, and they appreciate my investment in the area. This neighborhood-wide recognition will undoubtedly add to my credibility as an investor. Recently, the neighborhood association newsletter editor asked me to participate in an interview, which I happily obliged. Companies are told to market their brand. As investors, we have to take advantage of opportunities that allow us to market ourselves!

 

I encourage all new investors to consider unlikely resources, like Nextdoor, when developing your RE portfolio. I also encourage me tenants to register on Nextdoor as well. If my tenants are grounded in the community, surely they won’t want to move. At least, I hope not.