SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

The Business of Landlording

The Importance of Networking

by

Smarter Landlords always take the opportunity to network.

Networking is simply meeting and greeting different people, telling them what you do, exchanging business cards perhaps and basically establishing a professional relationship.

You might think that networking is not very important for the buy and hold type investor.  But it is.  Because you never know where a deal might be or when it may pop up.

Here is an example.

Someone you briefly met last year and exchanged business cards with has just inherited a house he does not want.  He remembers you buy real estate, finds your card and gives you a call.

You may have just gotten a great deal on a rental property.   But what if it is not in an area you want to invest in?

Well, because you have been going to your local REIA meetings, you know folks who do invest in that area.  You make a few phones calls.

Another investor says he will purchase the property.  You put the two together.  He buys it, fixes it up a little and flips it to another buy and hold investor.

You get paid a finders fee.  Your fellow investor makes money from a flip.  Another investor has a cashflowing asset and the original property owner is glad to be rid of something he saw as a problem.  Everyone is happy and a little bit better off due to a little bit of past networking.

Networking works!

Your networking goal is to let as many people as possible know you are in the real estate buying business.  It does not matter if they are in real estate or not.  Let them know what you do and how to contact you.  Your networking strategy should involve many approaches.

Always carry business cards and hand them to everyone you meet.

Attend local REIA and other professional group meetings.  Our local REIA has a time and place specifically set aside for networking.

To the new guy, networking is not always the easiest thing to do.  You have to force yourself to get off the wall and get out there and talk to people.  I had to learn this myself and I am still learning it today.

Smarter Landlords remember that real estate is really a people business, and the more people you meet, the more they can help you.  This is the power of networking, you helping others and others helping you.

5 Traits of an Effective Landlord

by

What makes an effective landlord?  Here are my top five traits.

  1. Effective Landlords are Sagacious.  Yeah I know, sagacious is a rarely used word but I think it really works here.   It means that effective landlords have a keen mental discernment and good judgment.  In other words, we have good BS detectors. This trait is important because being a landlord means that you have to shift through a lot of BS to get things done or get to the truth.  Being sagacious means we can see which real estate deals are truly deals, we know which gurus are full of it and can tell when our tenants or potential tenants are not being wholly truthful.
  2. Effective Landlords are Reliable.   To be effective in the landlording business you have to be reliable and be perceived as being  reliable.  You have to be a person of your word and do what you say you will do.
  3. Effective Landlords are Persistent.  Someone is always going to be throwing up some sort of obstacle to attempt to derail you or trying to get further into your pocket.  It could be family naysayers.  It could be the local utility company or city, it maybe your tenants or your insurance company.  Whoever it is, you have to be focused on your goals of being an effective landlord and keep fighting to achieve your goals.
  4. Effective Landlords are Confident.  To be effective you have to be confident in yourself and your ability to do the job.  That confidence comes from training and on the job experience.  Get yourself educated on landlording basics by joining a local reia group, reading this blog or finding a mentor.  Make that first step and acquire your first property.  Yes you will make a mistake or two, but nothing breeds confidence like a little success.
  5. Effective landlords are Creative.  To be effective you are going to have to find ways to get things done.  You will need to find properties to buy and hold.  You may need to renovate those properties.  You will need to find tenants before your competition.  You will want to retain the good tenants.  You will want to set up effective business practices.  You will want to do all of this while the forces in number 3 above are working against you.

These are in my opinion the essential qualities that differentiate effective and non-effective landlords.  I am sure there are others and I am sure others will have different opinions.  But if you are sagacious, persistent, reliable, confident and creative, I believe you will be successful.  The good part is, all of these qualities can be acquired.  Education and experience will make you a better BS detector, and give you confidence.  Reliability and persistence can easily be acquired.  Just start now!  Creativity will come as you learn and experience more and more about landlording.

 

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

What’s In Your Rental Application?

by

The rental application is one of the most important documents that a landlord uses.  It is the tool that is used to verify everything that a potential tenant has told us.  The application should give you the authority to check an applicant’s credit, criminal, work and housing history.  A good application for should do three things:

  • Positively identify the applicant (yes, some do lie here.).
  • Determine if the applicant can afford the rental unit.
  • Provide enough information so you can rank the applicant according to your application standards.

You application form needs to be clear, easy to read, and easy to complete.  At a minimum it should ask for the following:

  • Legal Name
  • Current Address
  • Social Security Number
  • Phone and E-mail
  • Addresses for previous 5 years
  • Employment Information
  • Income Information
  • If the applicant has ever been evicted
  • If the applicant has ever been convicted of a crime
  • If the applicant has ever filed bankruptcy
  • If the applicant has pets
  • Who will be living with applicant (adults and children)
  • Where they bank
  • Credit references
  • Emergency Contacts
  • A space for comments and explanations
  • Authorization to check references, call employers and pull a credit report.
  • A place for their signature.

All of this information should be enough for you to determine if the prospective tenant can afford the property, meet your rental criteria and will be a decent tenant.

Keep it simple and straightforward.  Also be sure to keep your application form neutral in regards to the 8 federally protected classes, which are race, religion, color, national origin, age, sex, disability and familial status.  Determining your applicant’s ability based on any of these criteria is just plain wrong and will land you in hot water.

Next time I will take a look at some criteria you can use to rank your applicants.   Untill then, have a happy new year!

Do Friends & Family Mix With Your Rentals?

by

The other day on the radio with Holly Swogger and Jo Garner we were discussing some landlording basics.  One of the topics of discussion touched on renting to friends and family members.  Here is the main point and conclusion of that discussion.  Do not rent to friends or family members!

Renting to friends or family members seems like a good idea at first.  You know them.  You do not have to do a background check on them.  You know where and if the work.  You “know” they will make a good tenant.  And just possibly, they might.

But, what if they loose their job?  What if they just stop paying the rent?  Are you prepared to kick them out?  Are you prepared to take them down to eviction court and then set their stuff on the street?  If so, what do you think will happen to the relationship between you and your friends and family?   Who will end up being the bad guy in this situation?  You will.

The best way to avoid the above situation is to simply not get into it in the first place.  Do not mix your friends and family with your real estate business.  It can lead to some real disasters.  My fellow radio hosts and I have all talked with people who own rental properties they want to sell.  When we ask what they are getting in rent the answer is often $0 because the tenant is their son, daughter, niece, whatever and they can’t bring themselves to kick them out.

Is that a position you ever want to be in?  I don’t think so.  So avoid it on the front end.  Be a smarter landlord and avoid renting to friends or family.

Podcast – Landlording 101

by

Check out my latest podcast where myself, Jo Garner and Holly Swogger, President of the Memphis Investors Group, discuss landlording basics such as leases, screening tenants, security deposits and more.  We also discuss how you can increase your cash flow by using some of the many mortgage options available to landlords for their rental properties.  We have never seen rates this low.  If you can refinance now is the time to do it.  Put some more cash in your pocket today! 

Landlording 101 and Reducing Your Mortgage Payment (55:00)

Download the MP3

Date: September 01, 2012

By: Smarter Landlording

Description: Aired on WREC on 9/1/2012, Kevin Perk, Holly Swogger and Jo Garner discuss landlording 101 and reducing your mortgage expenses. Many people today are being thrust into the landlording business because they cannot sell their homes in the sluggish real estate market. This show discusses some of the main topics people should know about landlording. We also talk about the many mortgage products currently out there than can be used today to reduce your monthly payment and thus increase your cashflow.

 

 

 

 

 

 

 

 

 

Finding and Keeping Good Tenants

by

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!

Pets or No Pets?

by

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.

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

by

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.

Choosing An Investment Strategy

by

There are essentially three ways to invest in residential real estate.  You can wholesale, retail or buy and hold.  Each has its pros and cons.   Let’s go through each one.

Wholesaling

Wholesaling is acquiring a property for a quick turnaround to another real estate investor.  This strategy is sometime referred to as “flipping.”

Pros

  • You are in and out of the deal quickly.
  • You do not need much capital to get started.  Since the object is to quickly turn the property to another investor, often very little cash is needed, especially if you can just assign your purchase contract to the other investor for a fee.
  • You can earn a quick $1,000, $5,000 or even $10,000 per deal.
  • You do not have to worry about rehabbing the property.  The Rehab is the next investor’s problem.  You may however need to do a little clean up to make the deal work.
  • You do not have to deal with tenants.  Tenants are also the next investor’s problem.

Cons

  • Requires a lot of marketing to both find and sell the properties.  Developing the tools to get sellers calling you and developing a reputable buyers list takes both time and money.
  • Those quick $1,000, $5,000 and $10,000 chunks of cash are considered active income by the IRS and are thus subject to Social Security and Medicare taxes and well as standard income taxes.  So put some aside from every deal you do.

Retailing

Retailing involves acquiring a property to fix up and sell to a retail buyer.  These are generally only single family homes.

Pros

  • The main pro is the big chunks of cash.  The average retailer can shoot for a profit of between $20,000 and $30,000 or more per deal.
  • The pride and satisfaction of fixing up and getting someone setup in a home.

Cons

  • You will need capital to purchase, fix-up and hold the property until you can sell it to a retail buyer.  Holding costs, such as utilities, insurance and property taxes need to be figured into the deal accordingly.
  • You will need contractors to help you rehab the property.
  • Dealing with retail buyers can be tricky.  They can be very finicky and you may have to wait a while for the right one to come along.
  • You will generally need to use a realtor and that adds commissions to the costs.
  • You need to know your retail market backwards and forwards as well as the neighborhoods you are investing in.  Talk to the neighbors and analyze comparable sales as much as possible.
  • Those big chunks of cash are taxed in the same manner as above in wholesaling.  Be sure to set aside some of the profits for Uncle Sam.

Buy and Hold

The buy and hold investor is a landlord.  He or she buys and holds properties to rent for the long term.

Pros

  • This strategy is a huge wealth building machine.  The other strategies provide chunks of cash but this one builds long term wealth.
  • It provides a monthly income from the rents.  You do not have to wait for a buyer to come along to get paid.
  • You are buying a real asset.  You can fix it up and improve the value.  Try that with Exxon stock.
  • Perhaps the best pro is the tax breaks.  Rental income is considered passive income by the IRS.  As such, there are no Social Security or Medicare taxes.  You also get the benefit of depreciation which can significantly reduce active income and thus the tax you pay.  To learn more, pick up this smarter resource.

Cons

  • One word, tenants.  Proper screening can however eliminate many headaches.
  • There are repairs.  Always set aside at least 10% of your gross monthly rental income for future repairs.  Trust me, you will need it.
  • Management is also an issue.  You have to manage your properties in order for them to produce for you.  You need to check on them once in a while and make sure all is ok.  And if you think you can eliminate management with a management company think again.  Now you need to manage the management company.

Which strategy is right for you?  That depends on your personality and what your goals are.  I have done all three but I am generally a buy and hold guy.  I like the monthly income, I can focus on one specific area and I dislike waiting for a retail buyer.

If you are just starting out and need to acquire some cash per haps wholesaling is the right choice for you.  Have cash to invest?  Maybe a couple of houses to hold and rent is the right choice.  Many investors do a little bit with all three.  They like the large chunks of cash, the monthly income and tax breaks from landlording.

Whatever you do, decide to do one of these three strategies today.  You will not regret it.  And if you need to learn more about real estate investing, check out your local REIA group.

 

 

 

 

 

The “Right” Business Structure

by

Real estate comes in all shapes and sizes and there are numerous ways to invest in it.  Smarter investors look very closely at how their real estate business is structured because the wrong structure can cost them a lot of time, effort and money, while the proper structure can save and protect their hard earned assets.

There are three basic types of business structures, the sole proprietorship, the partnership and the corporation (including limited liability corporations or LLCs).  Each of these structures, like everything else in this world, has pros and cons attached to it.  Let’s look at each one.

Sole Proprietorship

The sole proprietorship is just what it sounds like, you, the individual investor conducting your real estate business.  Usually individuals set up a business name, such as ABC Properties, and then set up their accounts to read as Joe Investor, doing business as (DBA) ABC Properties.

Pros

  • It is easy.  Pick a name and you are in business.
  • It is simple.  Set up a separate DBA bank account and off you go.  Plus the income tax returns are just included with your personal  1040 form.
  • It is easy to end.  Just stop it.

Cons

  • There is no liability shield.  Everything good and bad passes through to you.
  • You are visible as the owner.  There is no anonymity.

 

Partnerships

Partnerships are created when two or more people get together for some sort of business venture.  In real estate investing, partnerships are usually formed because one or more partners have some sort of specialized experience needed for the particular deal.  Or, one or more partners may be bringing their money to the table to fund the deal.

Pros

  • They are easy to set up and start.  No public documentation is generally required.
  • They can be easy to dissolve and can even be specific to a particular deal.
  • Partnerships can bring together people that will make an otherwise unworkable deal workable.  One partner may have money, rehab experience or a list of potential buyers for example.

Cons

  • No liability shield protection.
  • Enhanced level of bookkeeping and federal income tax knowledge needed.  The IRS Partnership Form 1065 is needed for example.
  • Partnerships can get messy.  A partnership operating agreement is a must and it should be reviewed by a qualified attorney.

 

Corporations and LLCs

Corporations and LLCs are legal entities.  They are separate and distinct from you the individual.

Pros

  • Liability shield is in place between you and your investments.
  • They are fairly easy to set up.
  • They can provide you with a more professional image.
  • They can help maintain anonymity.
  • Depending on your business, they can provide various federal tax benefits.
  • Can be a good way to raise funds.

Cons

  • Require paperwork to be filed with the state along with initial and annual filing fees.
  • The laws and rules governing corporations can be complicated.
  • There are annual paperwork, meeting and filing requirements that must be completed.
  • You will often need to pay for professional legal and accounting advice (In Tennessee for example, a corporation or LLC must hire an attorney to represent it in court for example)
  • There are increased bookkeeping and tax reporting requirements.  You must keep all monies separate if you wish to keep that liability shield in place.
  • Banks will not lend to newly formed corporations.  In general, a corporation must be in place for at least three years before a bank will consider lending to the corporation.  So you will not be able to put your investments in the corporate name anyway.

Which one is right for you?  That depends on what you are doing and what your comfort level is.  For those just starting out in real estate investing, I would keep things simple with a sole proprietorship or a partnership.  Don’t over complicate your life when you are just starting out.   If you are worried about getting sued because you do not have a liability shield (and you should be!), just be sure to get a liability insurance policy of at least $1 million to $2 million.

As your real estate business grows and expands, you may want to consider an LLC or corporation, you may even want to consider having several of them.  Why?  Because it is more advantageous tax wise to put long term holds into an LLC and it is more advantageous to use an “S” corporation if you do a lot of retail and wholesale flips.  So if you do both in your business, you may want both types of structures.  Plus as you continue to read this site and become larger and more prosperous, you will become a bigger target and may want the protection a corporate shield offers.  If you own a lot of properties, you may want several different LLCs to “split up” the properties into different entities for asset protection purposes.

Again, it is all up to you and what you want to do and what your comfort level is.  I know investors with layers of corporations and I know investors who have done hundreds of deals and own dozens of properties as sole proprietors.  It just depends on the individual.  In the end, there is no “right” structure.

Whatever you do, don’t just take my word for it.  Do your own research.   Check with and talk to a qualified attorney and accountant in your local area about these issues.  There are local rules and regulations that may make your situation unique.

Until next time, invest smarter!