SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

The Business of Landlording

Four Questions For That First Call

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Congrats!  People are calling to rent your property.  You have advertised well.  Now the hard part begins, selecting a tenant.  The first phone call from a potential tenant can be awkward for some, but we landlords need to remember that it is a very important call.  It can save us a lot of hassle.  How?  Simply by using these four questions for that first call.

When Are You Looking To Move?

This question can be a real time saver for you.  Believe it or not, some folks begin looking for a new place 4, 5 even 6 months before their current lease expires. Sure, they could have a good reason such a hot market or a job transfer, but they often also expect you to hold that unit for them until, for free!  Are you willing to lose 3 or 4 months worth of rent?  I’m not either so we often ask them to check back closer to their move date.

What Is Your Income?

You should get this question out of the way early on.  If a prospective tenant cannot afford your unit, than both of you are wasting your time.  There are many ways to ask this question.  Perhaps the best way is something along these lines.  “That unit rents for $1,000 per month.  We require income to be three times the monthly rent.  Is that within your income range?”

How Long Have You Been At Your Current Job?

The goal of every landlord must be finding tenants who pay, stay and respect your property.  When asking about work history, you are asking about their stability.  Will they stay?  Ideally, you would like someone who has been at their current job for several years.  Be cautious about someone who job hops a lot.  They may just hop out of your place as soon as they can.

How Long Have You Been At Your Current Residence?

Again, the goal here is stability.  The last thing you want as a landlord is lots of tenant turnover.  Tenant turnover is a cash flow killer.  Ask your first time caller how long they have lived at their current residence.  Then ask how long they lived at their previous residence.  If you keep getting answers of a year or less gently let them know that you cannot do business with them as they seem to move too much.  Trust me; the likelihood that they leave you behind in a year is very high.

So there you have it.  Four questions to ask on that first phone call.  A final word of caution is necessary however.  To avoid appearing discriminatory, ask everyone who calls, the same questions, all the time, every time.  There are fair housing testers out there and you just never know who is on the other end of the line.  To avoid any issues, be consistent with your questions.

What do you like to ask first time callers?  Please share with a comment.

 

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The Taxpayer Roadmap

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The Taxpayer Advocate Service of the IRS has developed a pictorial representation called the Taxpayer Roadmap depicting just how complicated tax compliance can be for the average US taxpayer.

As you can see, there are a lot of twists and turns through this maze, especially if you disagree with a finding made by the IRS, or worse, they make a mistake.

Now, repeat this map again and again for items that we real estate investors (and other business owners/operators) will have to navigate, including LLC returns (Form 1065) and S corporation returns (Form 1120S) before we even begin to “gather data” for our personal returns.

Having done both my personal and corporate returns, this map does not feel quite Byzantine enough.

I wonder how how many hours and taxpayer dollars were spent by our “advocates” to produce this roadmap?

To get a high resolution version of the map, click here.

Do you do your own tax returns?  Ever been through an IRS audit?  If so, how does this map look to you?  Please share your experiences with a comment.

 

H/T to Real Estate Investing Today

Thoughts on Cash for Keys

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Some agree that Cash for Keys can be a good option to use.  Others however argue that it is the stupidest thing they have ever heard and something they would never consider doing.  Do these dissenters have a point?  Yes, they do.  In this post I want to look at Cash for Keys in a bit more detail.

First off, I want to make sure everyone understands what Cash for Keys is.  I have written on it before.   In a nutshell, if you have a tenant that you need to go away, instead of evicting them you pay them to give you the keys and leave.

A key point made by several who were against using Cash for Keys is the use of strict tenant screening procedures and a tough stance when it comes to your lease, rules and policies should preclude the need for such a thing.  I could not agree more.  Proper tenant screening will eliminate most of your problems.  Being firm and strict when it comes to your house rules will help even more.

However, even the best tenant screening and the strictest landlord will not always prevent the need to get rid of a tenant.  This does not mean that the landlord was duped or scammed by the tenant.  It more often means that sometimes bad things happen to otherwise decent people.

What Bad Things?

Have you ever had a tenant fail to pay you because they were diagnosed with cancer and exhausted their resources?  I have.  Have you ever had a tenant fail to pay you because they were involved in a horrific accident that was not their fault and made them unable to work?  I have.

When these bad things happen, these otherwise good people can put their head in the sand in hopes that the problem you present will go away.  Unfortunately, I cannot be a charity.  After all, the bank is not allowing me to stop my payments to them.  I can however cut these folks some slack. I do not have to pile add an eviction to their list of problems but I do need them to realize the situation and make arrangements to move on.

Sometimes all that takes is a little cash for a moving truck.  Other times it could be a little cash for a deposit at a less expensive rental or to move in with someone.  I am going to have to spend something to get them out of the place, why not nudge instead of force.  Force can lead to some negative consequences.

It Is About Incentives

Another argument against Cash for Keys comes down to incentives.  Many argue that Cash for Keys rewards bad behavior.  Landlords should instead “Teach these people a lesson!”  I understand all of that and generally agree.  I am all about incentives.  My house rules and strictness from the outset are designed to incentivize good behavior.  Again things happen.  But, if a tenant wrongs or takes advantage of me, then I have and will go after them with an eviction.  They know that on the front end.

I understand that larger companies those with larger apartment complexes may not want to use this tool.  Word can get around and tenants “learn” very quickly.  Cash for Keys may not be a reasonable tool to use in those situations.  But for me and my business it is a tool that sometimes comes in very handy.

And that is really what it comes down to.  What is the right thing for you and your business.  There is no one way to be a real estate investor.  You have to choose what works for you based on your particular circumstances and sometimes Cash for Keys, despite the negative aspects, is right for me.

Word Gets Around

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Real estate investing is in many ways still a very local endeavor.  Despite the achievements made by some turn-key companies and others, many investors still just work locally.  The real estate investing community in any locale can therefore be very tight knit.  Everyone has at least heard of, if not met, the other investors and players in the local market.  And word gets around about everyone.

They get around because the plain truth is that people like to gossip.  Everyone talks to everyone else.  Investors talk to other investors.  Your attorney talks with other attorneys.  And your CPS talks to other CPAs.  The same goes for your contractors when they see other contractors over at Home Depot.  They all discuss what they are doing and what you are doing.  They may not directly name you, but it all eventually comes out; the good, the bad and the ugly.

What Gets Around?

What sorts of things and I talking about?

  • If corners are cut, or not.
  • When legal “grey areas” are crossed into.
  • If bills are paid or not.
  • If anyone has been “screwed” over.

All of these things of course affect your reputation.  And reputations in the real estate business mean a lot because much of what we do is based on trust.  Trust that others will uphold a contract or deliver a good rehab for example.  But your reputation is not built by you alone.  It is also reflected by those you choose to work with.

Assumptions Will Be Made

Like it or not, you will be judged by the company you keep.  Even if nothing is known about a particular real estate investor, if they use certain attorneys, contractors and others, assumptions will be made.

Imagine the following scenario.  You are interested in a property bought to you by a wholesaler.  How would you feel about the deal if your attorney told you that “He uses so and so as a closing attorney.  That attorney is thorough.  There should be no problem.” Now imagine the opposite.  What if instead your attorney said “He used so and so as a closing attorney!  We need to look at this deal a lot more closely.”  How will this affect your dealings with this wholesaler?

Or think about this.  Would you rather have the building inspector at ease or on high alert at one of your projects due to the contractor you are using?  A building inspector’s discretion can cost you a lot of time and money.  By using people with a solid reputation you put the building inspector at ease and you are more likely to be the recipient of their good discretion.  That discretion can mean a lot for any project.

Bad News Travels Fast

Bad news, especially in a close knit industry such as real estate investing, travels quickly.  Reputations can be made or lost very quickly.  Once lost, a reputation can be very hard to get back.  Using people with solid reputations is just the way to go.  Yes, they may cost more on the front end but only thinking about cost is short sighted.  Smarter investors also remember how much, time, effort and money is saved on the back end over an investing career by using people who do not cut corners and have good reputations.  Smarter investors work hard to preserve their reputations.  Sure, we can all get fooled once, be we are the fools if we let the fooling continue.

Property Taxes By State

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Understanding property tax costs is vital to any real estate investor’s bottom line.  Property taxes are one of the major components that have to be plugged in when figuring out how much a property is going to cash flow.   Property taxes by state can however vary widely as this report from the National Association of Home Builders demonstrates.   Some states, such as New Jersey and New York have very high effective property tax rates, while other states like Alabama and Wyoming are much lower.

Investors also need to understand however that property taxes potentially only make up a portion of your total tax burden.   Many states will also tax income.  Others, like Tennessee where I live, will also tax entities such as LLC’s that are used to hold property.  Plus, some properties are going to be taxed differently.

Thus, while the attached report is interesting and informative, it only tells part of the total tax story.  Smarterlandlords are wise to research and uncover the entire tax story and burden wherever they plan to invest.

Keeping The Utilities On

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Landlords cannot always trust tenants with their property.  Even the best tenants can and will do the seemingly unreasonable.  One such thing they can do is leave in the middle of a lease term without telling you they are doing so.  They can and will pack up their stuff, leave and turn off the utilities.  Your property, unbeknownst to you, can be left in the dark and cold.  Keeping the utilities on and our properties protected is an issue we landlords have to deal with

Having your tenant leave in the middle of the night is one thing, but having them turn off the utilities without your knowledge is another.  It may not sound like a very big deal but what if it is in the middle of winter?  The cold could very well cause your water pipes to freeze and burst.  Reconnecting the utilities can also cost you money and time.  Surly you have better uses for re-connection charges and for the time you have to spend waiting for the utility technician to show.  In short, having the utilities turned off without your knowledge can at a minimum be a pain or possibly cause thousands of dollars in damage.

Your Local Utility May Be Able To Help

To help you, your local utility company may have a program that can prevent the utilities from being turned off.  Here in Memphis, the utility has an apartment owner’s re-connect program.  The program will automatically switch the utility connection back to our company anytime the tenant turns off the utilities or even if they fail to pay.  It helps us to ensure that the utilities do not get turned off in the dead of winter.   It also helps  us not waste time and money on re-connection fees and meeting technicians.  This program has saved our butt more than once.

The Catch

The catch however is that you need to stay on top of this program.  Generally, the utility company will send you a written notice when the tenant has turned the utilities off or is behind on their payments.  These notices can easily be lost in the shuffle of all the paper that being a landlord generates.  Beware that less scrupulous tenants know of this program and may try to use it in hopes that you will not notice and thus pay their utilities for a while.

Watch For Notices

Those notices from the utility thus become very important.   They can also be an advance warning to potential trouble.  Especially if a tenant is getting behind in their utility payments.  But, if you have a lot of properties, the notice can be easy to miss or forget about.  The smarterlandlord therefore sets up some type of system to double check the status of their property when such a notice is received.  A simple phone call or a property drive by could head off trouble.

These re-connect programs can be quite helpful, like anything else they can be abused and need to be monitored.  Use them to help your business, but do not abdicate your responsibility to stay on top of things.

The Highest Bid Does Not Always Win

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Investment properties can be tough to come by right now.  There is a lot of money, big money, chasing almost every property that comes on the market.  Getting outbid is almost becoming the norm.  But, the highest bid does not always win.  There are ways we smaller investors can tip the scales in our favor.  Learning how can help you get more properties.

Money Is Not Everything

Sure, everyone would like the biggest pile of money they can possibly get for their property.  That is just human nature.  But sometimes other factors, especially speed, can be more important.  Time is money.  If you can close quickly, and I mean really quickly, like within 48 to 72 hours, you might just beat out everyone else, even if they bid more than you.

You may not think you can close that fast, but it can be done.  To close quickly you need three things.  One is financing that is ready to go.  The second is a good knowledge of rehab expenses.  The third is a title search.

Traditional bank financing is not speedy.  You are not going to have time for appraisals and other paperwork.  Fast money comes from private lenders, lines of credit and even hard money lenders.  These sources of funds need to be developed now, before you make any offers.

The financing types needed to make this quickness work need to be developed well in advance of any offer.  You need to have private lenders or other types of funds lined up and ready to go once you make an offer.  There will be no time for lengthy explanations once the trigger is pulled.

Secondly, you are likely to only get one shot looking at the property.  You will not have time for any later inspections.  Actually, the fact that you do not require inspections is what will make your lower bid offer tempting.  Make the time you do get to examine a property count.  Learn how to estimate a rehab.

Lastly you will need a quick title search.  This can generally be done by a reputable title agency.  Have a relationship lined up before you make any offers.

Put It All On One Page

All of the above can be said on a one or two page purchase contract.  Keep things simple.  Lots of words and clauses can create confusion.  A confused mind will often say no.

Contingencies?

I am not a big fan of signing anything without a way out, but sometimes it might have to be done, especially in this seller’s market.  You can often lure a seller if you offer a contract with a speedy closing and NO contingencies.  No appraisals.  No Inspections.   Nothing.

Be careful here.  But if you know what you are doing and are confident of your numbers, then go for it.

I’m Local

You might be surprised, but sometimes sellers feel better about selling to someone local.  During negotiations, I always try to somehow thrown in that I am a local buyer.  You never know, it just might give you an edge.  I know that it has helped me a time or two in the past.  Try it.

Someday the market will swing back towards us buyers and the money that is out there will dry up.  But for now, we smaller buyers may have to pull out all of the stops if we want to keep growing and acquiring properties.  By doing so we may just find an edge over those deeper pockets.

Rent Report For February 2019

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Zumper.com has published a compilation of average rents for one and two bedroom units from across the United States.  How is your location doing?  Memphis, TN experienced a dip in overall rental amounts for these units, but it is the slow time of the year.

From the report:

“While most of the top markets had another flat month, there was some movement toward the bottom of these 10 cities. Miami fell out of this group, being replaced by Santa Ana, so now 6 of the 10 most expensive rental markets are in California (again).”

Read the rest of the report and check out the data on rent amounts here.

 

What Is Rent Control?

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When I looked ahead to 2019 to see what was perhaps in store for the real estate investing business, one of the things I saw was misguided calls for rent control and other restrictions upon landlords.  I did not have to wait long.  Oregon seems set on passing SB608 which will enact rent controls state wide.  In this post I want to examine what is rent control to provide landlords a basic understanding of rent control and its repercussions.

Rent Control Defined

Black’s Law Dictionary defines rent control as “Laws or ordinances that set price controls on the renting of residential housing.”  What is meant by price controls?  Price controls in this context set the maximum amount of rent that may be charged on a rental property.  Rent control laws set a price ceiling.  In effect, the government tells the landlord how much they can charge the tenant in rent.  Rent control laws can go by an assortment of names, including rent stabilization, rent regulation and rent freezes among others.

There are many jurisdictions across the United States that have some form of rent control laws on the books.  New York City and San Francisco are two of the more well known examples.  But other locations in California, Maryland, New Jersey and Washington D.C. have rent controls.

Rent controls are enacted by local governments because an increase in the demand for housing drives up the price (rent).  In New York City for example, rent control laws were enacted just after World War II because so many people were returning home or looking to restart their lives after the war that demand for housing far outstripped supply.  Thus the price for housing rose and the government enacted a rent control price ceiling to make housing “more affordable.”  While a few may reap that benefit, the effects rent controls have on landlords, tenants and the housing stock are counter-productive and substantial.

What Rent Control Does

Landlords under rent control are prohibited from charging market rate rents.   They can only charge the controlled, “more affordable” price.  Most rent control laws also prohibit landlords from raising the rent above a certain amount every year, allowing only perhaps a two or three percent increase every year.  What is more, many rent control laws, including the proposal in Oregon, prohibit landlords from using a no fault eviction.  Since most ordinances allow a landlord to raise rent to a market level once a tenant moves, this ban on no fault evictions is done to prevent landlords from evicting existing tenants in order to do just that.

Rent control also has effects on tenants and the housing supply.  These laws distort and change economic incentives.  By legislating a price ceiling or maximum price, these laws dissuade landlords and other entrepreneurs from investing in housing.  This lack of investment actually compounds the problem the rent control laws were trying to fix.  The incentive to create new housing (increase supply) and maintain existing housing is removed.  Supply is thus often further restricted which in turn further drives up market prices (as long as demand remains steady).

Rent controls also restrict the housing supply in another way.  By prohibiting market increases in units that are already rented (rent stabilized), these laws incentivize existing tenants to stay put.  Why move if it will cause your rent to drastically increase?  These laws therefore remove housing stock from the market that might have otherwise been made available.

Finally, rent control laws can take what is often already a potentially adversarial landlord-tenant relationship and make it worse.  Just as there is no incentive for the tenant to move, there is no incentive for the landlord to maintain or fix-up the property.  Thus disrepair, blight and antagonism become the norm rather than the exception.

Long Tern Effects

Rent control once enacted, tends to never go away.  It also tends to increase the size and scope of both government and government regulation.  New Your City for example is using rent control laws enacted to protect returning soldiers over 70 years ago.  Since rent control laws create new incentives and distort others, landlords tend to get creative in order to make up for lost rent.  They do so by charging for “furnished” units or large key deposits.

These creative endeavors by landlords then create a ratcheting up effect of laws to prevent such things.  This in turn places enormous burdens on the courts, city budgets, landlords and tenants as they all try to enforce or grapple with ever escalating rules.  New York City, again for example, has had to set up a specific court just for housing related complaints.  This housing court has 30 judges which handle over 300,000 cases per year!

Going Forward

We landlords must constantly remind people that we are not just sitting around enjoying the income that higher rents bring.  Landlords also have increased costs in the forms of more expensive materials, taxes, insurance, utilities and everything else.  We also need to make sure that the understanding of the effects of rent control is clear.  Rent control, while sounding good and holding much appeal is simply devastating.  Rent Control reduces total housing stock.  It reduces the quality of existing housing stock.  It creates perverse incentives.  Rent control also increases both the size of government and the amount of government regulation thus increasing costs on the whole of society.   To demonstrate these points, I end this post with a quote from economist Assar Lindbeck.  “Next to bombing, rent control seems in many cases to be the most efficient technique so far known for destroying cities.”

When A Bad Tenant Needs A Reference

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Remember that tenant who skipped out in the middle of the night owing you rent?  Of course you do.  We always remember the bad ones.  Your thoughts at the time likely consisted of anger and frustrated revenge.  I say frustrated because the tenant seemed long gone.  However things always tend to come back around.  Former tenants, even the bad ones, often need a reference.  While revenge can be tempting and sweet, what is the best way to handle the situation?  What is the best policy when a bad tenant needs a reference?

If you stay in this landlording business long enough, you will get a bad tenant or two.  No screening system is perfect and sometimes tenants just go bad.  If you continue to stay in the business, you will find that many of these tenants eventually pop back up again and actually seek your assistance.  They pop back up after several years because they need to explain a gap in their housing history.  They may be trying to rent another home or get a loan of some type.  No matter the reason, someone, somewhere is asking them something they cannot explain away.

When you hear your former tenant’s name it instantly rings a bell.  Both because you remember the sting and you have been waiting for this day.  You cannot wait to get on the phone and share all of the juicy details.  Your thoughts turn to how sweet revenge is going to be.  But before you do speak, before you over indulge in that sweetness, I want to stop you.  I want you wait just a few moments more and think about what you are doing.  Because if you do it wrong, it could come back around to you.

Stop and remember that we live in a litigious society, and anything you say or do can be used against you.  Yes, I know that former tenant screwed you over, but what you say now could hurt you even worse.  You need to play things safe here.  If you do, you will get your revenge and protect yourself from further damage as well.

How do you do that?

You do it by being professional and by sticking to the facts.  I am not telling you to not say anything about past events.  That would be unfair to whoever is currently asking and to you.  Plus, there should after all be repercussions for past actions.

What I am telling you is to act and sound like the professional landlord you are.  I know it is tempting but please do not fly off the handle with accusations and name calling.  Instead, relax and take a look at your files.  Explain exactly what happened.  Be calm, cool and collected.  Use phrases such as:

“Mr. Former Tenant was late 4 times with his rent.”

“Mr. Former Tenant left owing $1,000.”

“Mr. Former Tenant was evicted by our company on June 10, 2015.”

Just the facts as Joe Friday on Dragnet would say.  By remaining composed and by sticking to the facts, you limit your exposure.  No name calling.  No long winded rants.  Just the facts, just the way it happened.

If you want to put a bit of icing on the cake say the following:

“No, I would not rent to this person again.”

Quick, simple and factual statements like these say a lot.  Anyone on the other end of the phone should grasp your meaning.  They will also appreciate your calm and cool manner.  Now sit back and wish you could be a fly on the wall in whatever meeting your former tenant is in.  The look on their face is probably priceless.

Have a good story about getting back at a former bad tenant?  Please share below.