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Some Rents Are Actually Down

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Rents have been steadily increasing in most parts of the country for the past several years.  There are however a few places where rents have been on the decline as HuffPo reports here, but for the most part, increasing rents still rule the day.

Many have a hard time connecting the dots to explain these rent increases and decreases. Rent is nothing more than a price, subject to economic laws just like any other price.  Rents go up when demand is high and supply is short.  Rents decline when the opposite occurs.  Demand increases because more people are chasing the same number of rental units thus pushing rents up.  This can happen due to a foreclosure crisis which pushes people into the rental market or because of some strong attraction such as job growth.    Restrict the construction of new rental units to feed this demand and rents will rise even more.  Pump trillions of newly printed dollars into the economy and rents will rise even more.  

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.

 

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

The Squeeze Continues

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The bottom 20% in this country continue to get squeezed more and more.  I recently wrote about the increasing cost of everything and how some were cutting back in other areas to be able to afford the rent.

No we see, as demonstrated by the attached chart, that rent and food make up over 50% of the bottom 20%’s expenditures. 

Expect this trend to continue and be on the lookout for calls for “rent reform.”

 

h/t: www.economicpolicyjournal.com/

The Fire Clause

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On the latest episode of the Smarter Landlording Podcast, my guest Bucky Philip and I discussed clauses that were required in residential leases here in Tennessee.  One of those clauses is a statement demonstrating that you as the landlord are not responsible for the tenant’s personal items in case of a fire, break in or some other emergency.  I call it the fire clause.

We have such a clause in our lease.  In fact, we go one step further.  We highly recommend that tenant’s get their own renter’s insurance and then have then initial next to the clause.  That way if there is ever a problem in the future (let’s hope there is not), the tenant cannot claim they were not informed.

Here is the fire clause we use in our lease.  Feel free to modify to fit your needs.

Tenant’s Personal Property: Manager shall not be responsible for loss of, theft, or damage to, Tenant’s personal property.  Manager shall not provide fire and casualty insurance for Tenant’s personal property. IT IS THE TENANT’S RESPONSIBILITY TO OBTAIN RENTER’S INSURANCE.     

         I/we understand the rental insurance policy:___________ Tenants Initials.

Check out the Smarter Landlording Podcast with Bucky for other information you need to know. 

Also stay tuned for the next episode coming up in a few weeks.

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.

Simple Supply and Demand

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The market is following the demand!

With the ever increasing numbers of renters and booming rents the following headline had to be expected.

Housing Starts, Permits Smash Expectations On Surge In Rental Construction

“…almost the entire surge was led by an almost 40% spike in multi-family units as the ‘rental nation’ grows ever stronger.”

Check out the full article here.

Will they overbuild this time?  If they do, will rents stop soaring, level off or perhaps drop?  Time will tell. 

No Candles Allowed

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This is why there are no candles allowed in our apartments.

“An apartment tenant told firefighters that he was burning candles in his bedroom and then went to another area of his apartment. The candle was sitting on a table and caught nearby combustibles on fire.

The estimated damage to the building is about $75,000, according to the battalion chief.”

We place the restriction in our “House Rules” which is attached to, and thus a part of, the lease.

Yeah, I know, it can be hard to police but we have to try to protect our property and tenants.

 

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

The SmarterLandlording Podcast – Episode #3 – The Eviction Attorney

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The SmarterLandlording Podcast – Episode 3 – The Eviction Attorney: An Interview with John “Bucky” Philip on Leases, Tenants and Evictions

“This is certainly in the landlord’s interest.”

 

 

 

 

 

 

 

 

 

 

Need to do an Eviction?  Here is Bucky’s Contact Information

John Philip

Crislip, Philip & Associates

4515 Poplar Avenue, Suite 322

Memphis, TN 38117

901-201-5078

800-335-9613

Bucky’s Website – http://www.crislipphilip.com/

Links and Forms We Mentioned

Tennessee Uniform Residential Landlord and Tenant Act – Click through and then on property.

MemphisInvestorsGroup.com

Release of Rights of Possession Form

Check out all the podcasts at iTunes on the Smarter Landlording Channel. 

Like the Intro Music?  Check out my good friends in the band Kitchens and Bathrooms (Kind of fits right!).  They write and play some awesome, original music from right here in Memphis, TN.

Seller Financing – It’s Real!

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When you are new to real estate, and without much starting capital, seller financing is the strategy that gives you hope. With seller financing, you don’t need a bank. You don’t need a hefty down payment. You don’t even need good credit.

I was sure that seller financing was a strategy of fairy tales.

As it turns out though, obtaining seller financing is completely possible. I bought a property with seller financing within 6 months of purchasing my first property. Regular banks would not have financed another mortgage for me that quickly, and I didn’t have 20% of the purchase price saved for a down payment. So, attention newbies and veterans alike, seller financing exists and it’s in your best interest to find it!

So, how did I find a seller willing to finance?

  1. I looked for real motivation. This property was days away from being sold at a tax sale for several years of past due taxes. If the owner hadn’t have sold her property, she would have lost it completely and gained nothing. I did her a service by jumping in with an offer at the last minute. Seller financing allowed us to close in just a few days.
  2. I asked. It’s as simple as that. You never know if someone is willing to carry the note if you don’t ask. In my case, I let her know that the only way this would go through is if she would be willing to seller finance the property. She listened and agreed.
  3. I told her she could foreclose on me if I failed to make payments. That’s right. If I stop making payments, she can take back full ownership of the property—including all of the hard work that I’ve put in and wonderful tenants I’ve put in place. This made her feel a bit more comfortable.
  4. I promised that she wouldn’t have to pay a dime in closing costs or legal fees to transfer ownership. She wouldn’t be financially hurt by agreeing to seller finance.

So, here I have an owner who is willing to seller finance. That doesn’t mean that we agreed on the details. This particular owner was quite stubborn about the dollar figure that she wanted to gain from selling this property. Now, many investors would like to interject at this point and say that she has no bargaining power given her situation. Quite frankly, I was outside of experienced territory and I’ve never been the kind of person to feel as if I was taking advantage of someone. So, I heard her out. There was no way that the property was worth what she wanted, but I listened anyway.

It’s important to remember that this is a people business. We are dealing with real people who are experiencing real problems—and who deserve the respect to at least hear them out. If I had low-balled her, she would have walked right out of the door. It was obvious, given the tardiness of her actions, that there was a part of her that was unconcerned with losing the property at tax sale. I listened.

Then, I told her exactly where I needed to be for this property to make sense for me. That’s right; I put all of my cards on the table. With seller financing, the silver lining is in the terms—because everything is negotiable. Here are the steps of our negotiation process.

  1. I told her that the back taxes owed would absolutely need to be deducted from her asking price—since that would need to be paid immediately. I also explained that the private loan I would need to get to pay these taxes would have a high interest rate. This allowed me to shave off a bit more from the asking price. After all, it wasn’t my fault she didn’t pay her taxes!
  2. Remember how I promised that she wouldn’t pay anything out of pocket for closing costs? Well, I had an estimate of what that would cost me, and dollars add up! I showed her this estimate and explained that this dollar amount should also be deducted from her asking price. She agreed.
  3. I explained the extent of repairs, and what it would cost me. At this point however, she was adamant about sticking to our new—already declining—asking price. She became flustered and kept saying the property is being sold “as is.” OK OK, calm down. Let’s switch gears.
  4. I explained that it wouldn’t make sense for me to purchase a property at the after repair value while ¾ of the property was vacant. It would inhibit my ability to perform renovations. Would she be willing to allow me to start my payments 6 months from our closing date? Yes, in fact, she would. I purchased the property on December 31, and I won’t start making payments until July 1.
  5. Next, I showed her the numbers. I listed the taxes, property insurance, private loan payments, utility expenses and any other expense that I could think of associated with the property. I also told her that I needed to make $200 in profit per unit for this deal to be worth my time. We looked at the numbers and could easily tell how much of a payment I could afford to give her every month. From there we manipulated the length of the loan and interest rate until that monthly payment landed where it needed to be. We shook hands and met at the closing table two days later.

In this case, I bought a quadplex with $0 out of pocket. I gained a 20 year loan with an incredibly low interest rate, and I have time to renovate and rent out the units before I start making payments. Each seller financing deal will be different, I’m sure. Maybe the next seller will be adamant about the length of the loan, the down payment, or even the monthly dollar amount. The beauty of seller financing is that It doesn’t matter. Every inch of the terms are negotiable and you’re the boss.

Go out there and get it.

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.