SMARTERLANDLORDING

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Now the Hard Part Begins

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I have posted before about Wall Street getting into the local rental market business.  I tried to tell them again that getting into this market was not going to be as easy as it seems.  I am sure everything looks great on paper back at the office.  But the reality of this business is very different.  Tenants skip out in the middle of the night, leave water running, all kinds of crazy things.

Now, Blackstone’s buying binge has ended according to this article on Bloomberg.  After spending nearly $8 billion to buy over 43,000 homes across the country, the company has reduced its spending on new property acquisitions by 70%.

So, after spending all of that money, driving prices up and beating out local investors and actual owner/occupant buyers, what now?

“We’re not selling the homes. We’re building a long-term business,” said Jonathan Gray, global head of real estate for the New York-based firm.

I wonder.  It is easy to buy them, hard to manage them.   Let’s check back in a couple years and see what they say.

More Rentals and Shrinking Home Inventory Ahead

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There are some interesting stats in this recent survey done by Redfin.  From the article:

“There’s a new trend among 2014 homebuyers: the decision NOT to sell their current homes when they move. For the latest Redfin Real-Time Buyer Survey, we polled 1,909 homebuyers across 22 major metro areas in the U.S. Among homebuyers who already owned a home, 39 percent said they planned to buy a home and rent out their existing home instead of selling it, thus further limiting the number of homes available for sale.”

The Smarterlandlording Podcast Is Here! Episode #1- Interview with a Newbie

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The SmarterLandlording Podcast: Episode #1 – Interview with a Newbie: Jumping Right into Investing in Multi-Family Properties with Jenna Stonecipher.

“This has been the most exciting time of my life.”

 

 

 

 

 

 

 

Books We Talked About

Rich Dad/Poor Dad by Robert Kiyosaki

Creating Wealth by Robert G. Allen

Nolo’s Every Landlord’s Tax Deduction Guide by Stephen Fishman

Links We Mentioned

MemphisInvestorsGroup.com

NationalReia.com

Screeningworks.com

Nextdoor.com

Biggerpockets.com

Landlordlocks.com

Check out all the podcasts at iTunes on the SmarterLandlording 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.

Is a Property Manager the Answer?

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The answer to that question is maybe.  It will depend on what you as the landlord do once you hire a manager.

To many a tired landlord, hiring a property manager seems like the way to go.  No more phone calls, no more showings, no more tenants, no more, no more, no more.  And while hiring a property manager or someone to help you manage has many advantages and benefits, it also opens the door to a whole new set of problems and responsibilities.

When you are managing your properties yourself, you were on the front line.  You see what works and what did not.  You were able to make necessary changes quickly.  You were in your business. 

Things change with a manager.   You will not be as up close and personal.  You will delegate many of your responsibilities to the manager.  But I caution you not to delegate everything to the manager.  You must now work on your business instead of in it.

Now is the time for you to develop systems for the nuts and bolts of your business.  Systems to screen and approve tenants.  Systems to handle maintenance requests.  Systems to collect and deposit rent payments.  Systems to make your business successful.  Only with well scrutinized systems, can you begin to trust others with your business.

These systems need to keep you, the landlord, in the loop.  You simply cannot walk away or abdicate all of your responsibility.  If you do, it is too easy to lose.  People can embezzle your rents, like this property manager did, or they can ease up on rental standards causing  a slow erosion of your tenant base.  You simply have to manage your manager.

So yes, property managers are perhaps part of the answer to some of your landlording problems.  But smarter landlords stay involved.  They work on their business and build systems that will foster growth.

If you are just beginning to think about building systems for your business, the best place for you to start by far is the E-Myth by Michael Gerber.  Check it out!

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Zoning Ruins a Landlord’s Day

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As a former planning director and chief code enforcement officer, I would like to stress to you other landlords out there that you have to be aware of and follow your local zoning laws and building codes.  If you ignore them, like this guy did, the powers that be can and will bring down the heavy hand of government.  Zoning regulates what you can do with your land, such as build or add on an apartment or construct an office building or have a home based business. 

So please do not try to add units in that garage or attic space without first checking with your local building department.  If you get caught, all of that money you spent adding the illegal unit will be for nothing.  Plus, fines for compliance can be stiff and think about all of those lawyer fees that you will rack up.   

Zoning can be very complicated, so if you are unsure, ask.

Some Properties Are Taxed Differently

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Are you aware that property tax rates can differ for different properties?  They can.  Here in Tennessee for example, commercial property is taxed at a higher rate than residential property.  Not knowing and understanding how these different rates apply could cause you to make a mistake during your property analysis and crimp your cash flow.

To understand how these two tax rates work we have to first define some terms. 

Let’s look first at what “residential” property is.

Residential property as per Tennessee Code Annotated is a single family dwelling or a duplex where the owner is an owner/occupant and lives in one side of the duplex.  So to be classified as residential property, an owner of a duplex must live in one of the units.  A singly family dwelling is always classified as residential, no matter where the owner lives.

So what is “commercial” property then?

It is just about everything else.

Commercial property includes properties that you would ordinarily describe as commercial, such as strip shopping centers and office buildings.  This category also includes industrial buildings and multi-family buildings.  It includes large apartment complexes and smaller buildings like tri-plexes and quad-plexes, no matter if the owner lives in one of the units or not.  It also includes duplexes if the owner does not reside in one of the units.

So what is the difference between these two property classifications when it comes to property taxes?

It’s 15%.

Residential properties are assessed at 25% of their appraised value for property tax purposes.  Commercial properties are assessed at 40% of their appraised value. 

Let’s look at an example and how it might affect you.

You have found an owner occupied duplex that you wish to purchase.  As you do your research on the property, you look up the current taxes and plug them into your spreadsheet.  The property cashflows well, so you decide to buy it and add it to your portfolio.

To make it easy, let’s say the property’s appraised value is $100,000 and as an investor, you have no plans to live there.  At the closing table, your attorney places your office address on the deed so everyone knows where to send tax bills.  This change in ownership will trigger the local tax assessors’ office to reassess the property to the higher commercial rate of 40%.

Now, instead of paying taxes based on $25,000 of value ($100,000*25%) you will be paying taxes based on $40,000 of value ($100,000*40%).  Here in Memphis and Shelby County, TN that can be a huge difference as this change in assessment amounts to a tax increase of over $1,100 per year.

Ouch!  That’s almost $100 more per month.  Double ouch if you were not expecting it because you based your calculations on the residential rates.

I would bet that it is safe to say that other state do similar things.  Please be aware of these potential tax rate differences and how they might affect you.  Your cashflow depends on it.

The Biggest Cash For Keys Deal

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This is a pretty amazing read. 

“A hotel hermit living in a filthy rent-controlled room was paid $17 million to leave – the highest price ever to relocate a single tenant in the city of New York, while the son of legendary General MacArthur only got $650,000 in the same deal.”

Thankfully, I have never had to pay that much in a cash for keys transaction.

I’ll Write My Own Rent Check

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From my tenant’s account.

This is not how you should collect back rent!

“Newport Police charged a 35-year-old Newport woman and landlord with felony breaking and entering, forgery and receiving stolen goods for allegedly writing herself checks from a tenant’s account.”

You can read the rest here.

Zillow Stirs Up The Pot

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While surfing through the headlines I came upon a blog post on Zillow.com titled, Landlords, Test Your Rental IQ.  The post described a survey that purported to show that half of landlords and over half of renters did not understand basic landlord/tenant laws.  For example, here are some of the survey’s supposed findings.

  • 82% or renters / 76% of landlords lack understanding of laws concerning security deposits, credit, and background checks.
  • 77% of renters / 69% of landlords lack understanding of privacy and access rights.
  • 62% of renters / 50% of landlords lack understanding of laws on early lease termination.

Interesting I thought.

Reading on, I noticed that there was a link to a “Rental IQ Quiz.”  OK Zillow you got me.  I had to click on that to check my landlord IQ.  After all, I have been a landlord for over ten years now.  I have read and re-read the Tennessee Landlord/Tenant Act.  I should have a pretty good understanding of things right?  Nope, I do not according to Zillow.

However, I call BS.  Zillow is just trying to stir up the post and generate controversy.

Why? Because it seems to me that this survey is poorly designed and worded.  Or perhaps it was very cleverly designed and worded.  Designed to stir up controversy and create bullet points like the ones listed above.  You decide.  Here are a couple of questions reprinted from the survey.

As a landlord, I am allowed to reject an applicant if I discover he or she has been convicted of illegal drug use while living in a previous rental.  True of False

As a landlord, you must make yourself, or someone you designate to act on your behalf, available to your tenants 24 hours a day in the event of an emergency.   True or False

As a landlord, it is within my right to enter the rental property to make emergency repairs whenever I need to.  True or False

So what are your answers?  Mine were true, false and true.  According to Zillow, those answers are incorrect.  Zillow then had the audacity to call me a “semi-pro” landlord! 

So Zillow, are you telling is that drug users are a protected class?  No they are not.  I can legally discriminate against drug users and do. 

And Zillow, I understand that things happen in the middle of the night, but I have to sleep as well.  I know of no law or statute, at least here in Tennessee that says I have to make myself available 24/7.

It is the last one that really gets me however.  Is Zillow telling me that if there is a gushing water leak, a gas leak or some other major problem of immediate concern I can’t go in and fix it unless I give notice?  Wrong!  In fact state statute here in Tennessee expressly authorizes me to enter a property to fix an emergency. I have to in order to protect my property and other tenants.  Now that does not mean that I will not try to contact the tenant, but if I can’t, I’m going in.  And if subsequent repairs are needed, of course I am going to work with the tenant after the emergency is over.

Zillow is spot on in the article when they say that landlords need to know and keep up with their local laws and regulations.  But these survey questions are simply suspect, designed only to stir up controversy and generate hits on a webpage.

So next time you are reading something and you wonder to yourself, “How did they come up with that nonsense?”  Remember this prime example and remember also not to believe everything you read.

Can Home Prices Be Far Behind?

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Mortgage applications have fallen to their lowest point since 1995!  Will we see a corresponding fall in home prices or will investors continue to gobble up the inventory?  Either way it should make for some interesting times over the next few years in the housing market.

 

Source: ZeroHedge