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Does Bad Credit Mean No?

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One thing you need to examine when screening potential tenants is their credit report.  A credit report will give you an insightful history of just about everyone.  But should the credit report be the only thing you consider?  No.  There are numerous other factors to consider as well like criminal history.  But let’s take it one step further.  What if an applicant has bad credit?  Should that be an automatic case for rejection?  I think again the answer is no.

There are certain situations where you may want to consider renting to someone with bad credit.  For some landlords, their potential tenant base will determine if credit is an issue.  Everyone belonging to certain tenant bases may have bad credit.  Other potential tenants may have had their credit destroyed due to extenuating circumstances.  Let’s look at some examples.

If your rental properties are in marginal neighborhoods, you may not be able to find any applicants with good credit.  You may have to rent to people with bad or at least not so good credit. 

So what to do if everyone has bad credit?

  • Look to see that they are telling the truth.  Any false statements on an application should be immediate grounds for non-acceptance.
  • Look for a steady job history.  Look for someone who stays employed.  Hopefully at the same job.
  • Look to see that they pay most of their bills.  These tenants are likely living paycheck to paycheck and a bit beyond their means.  So look to see if they pay most of their bills. 
  • Get good references from the two previous landlords.  Did the tenant leave owning them any money?
  • Look for a steady rental history.  You do not want someone who moves every year.  You want stability.

In other instances, someone’s credit may have been ruined because of forces beyond their control.  Someone may have been through a nasty divorce or they may have been diagnosed with cancer or been in a terrible accident.  These types of situations can easily drain all available funds and bankrupt a person. 

So what do you look for if someone has had their credit destroyed?

  • Again, look to see that they have told the truth.  Your application should have questions about their credit, work, and criminal history.  If they are upfront with you about what you will see and why, that should carry some weight.
  • Look to see if the credit report supports the story you are being told.  We once had a cancer survivor apply for one of our apartments and their credit was devastated from the medical bills.  This person was honest about it and it was obvious from the report what had happened. 
  • Look to see that they are trying to get back on their feet.  Are they trying to pay off the bad debt or the bills?  Are they trying to get a fresh start?  It will be obvious from the report.
  • Check references.  These references should confirm what you have been told and vouch for their character.

So there you go.  Having bad credit may not necessarily be a show stopper.  As an example, our former tenant who is a cancer survivor was one of our best tenants ever.  There was never a missed payment and the property was kept in excellent condition.

You can of course try to reduce your risk a bit with bad credit tenants by asking for higher security deposits or increasing the rent a bit.  Just be sure that you have everything spelled out on paper in your application review policies.

Scarce Rental Units = Higher Rents

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The Wall Street Journal reports:

Demand for rental housing continues to climb more than four years after the recession, pushing up rents and cutting into Americans’ disposable income.
 
The rental vacancy rate, or the share of units that are empty and available for rent, fell 0.5 percentage point in 2013 to 8.2% in the fourth quarter from a year earlier, the Commerce Department said Friday.

After peaking at just above 11% in 2009, rental vacancy has fallen sharply in the wake of the housing collapse and recession. That reflects families flocking to rentals after losing their homes to foreclosure, being blocked from obtaining a mortgage due to tighter lending standards or simply concluding that buying is too risky.

The higher demand and tighter supply of units are enabling landlords to raise prices. The median asking rent for vacant units in October through December was $746, up 3% from $724 a year earlier.

h/t to:  Economicpolicyjournal.com

Flipping Is Back!

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Looks like house flipping is making a comeback.   According to Realtytrac.com:

 

The average gross profit for a home flip — the difference between the flipped price and the price the flipper purchased the property for — was $58,081 for all U.S. homes flipped in 2013, up from an average gross profit of $45,759 in 2012. The average gross profit for homes flipped in the fourth quarter was $62,761, up from $52,746 in the fourth quarter of 2012.

 

 

Let’s just hope we don’t forget what happened the last time (in 2006 or so) we got so excited about flipping houses.

Is Your Rent Increase Legal?

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Rents seem to be on the rise in most areas of the country right now.  Some are predicting this trend to continue for a few more years.  As landlords we obviously want to maximize our rental income to increase our cash flow and increase the value of our real estate holdings. But you can’t just go and increase rents across the board at any time.  There are certain steps and rules one must follow for it to be legal.

First, you have to remember that your lease is a contract between you and your tenant.  This contract spells out, among other things, the amount of rent to be paid, when the rent is due and the term of the contract.  If your lease is like most residential leases out there it has a specified term, often for one year.  That term generally sets the clauses of the lease in stone meaning that you cannot raise the rent without the consent of the tenant during term of the lease.

So unless you have specifically put some type of language in your lease allowing you to increase the rent during the term of the lease, you cannot raise the rent until the end of the lease term.  Can you put special conditions in your lease to allow an increase in rent?  Sure, if local laws allow it.  You could for example state that the rent will increase if property taxes are increased.  Your tenant would have to agree to it beforehand however and that is not likely.

Once the term of the lease is completed or just before completion, you can begin to renegotiate new terms for the lease.  Now you can increase the amount of rent.  To do so however you usually have to send notice to the tenant stating that the terms of the lease will be changing and what those changes will be.  This notice usually has to be sent at least 30 days prior to the time the rental increase is to go into effect.

For example, if you want a rent increase to be effective on May 1, 2014 you need to send a notice to your tenant no later than April 1, 2014.  This notice is nothing more than a letter from you to your tenant spelling out the terms of the rent increase.  At least that is how it works here in Memphis, Tennessee.  Local laws can differ greatly.  The City of Seattle for example makes things much more complicated.  So be sure and know your local laws to make any rent increase legal.

A word of caution is necessary however.  I would not go hog wild raising rents unless you are in a particularly hot market.  Raising rents to much might cause many of your tenants to leave creating lots of tenant turnover.  And tenant turnover is the biggest cashflow killer out there.  Think about all of that new paint and carpet along with all of the other repairs that will need to be done once a tenant leaves.

So don’t shoot yourself in the foot by raising your rents to high or too fast.  Give careful consideration to rent increases.  Perhaps gradually and gently is a better way to go.

 

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Getting a 203K Loan? Expect Trouble!

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Yeah, I said it. The 203k loan is troublesome.

But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.

There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.

Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.

That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.

Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.

For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.

The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.

Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.

With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.

Plus, my other property acquisitions should feel like smooth sailing after that—right?

 

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Why Are Your Tenants Moving?

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Apartments.com just did an interesting survey of over 1,500 renters.    The survey examined the major reasons renters were and were not moving.  For example, here are the top five reasons survey respondents said they are moving in 2014:

 

 

 

  1. Shopping for a less expensive apartment: 24.6%
  2. Wanting to live in a different neighborhood: 13.6%
  3. Looking for a bigger apartment: 12%
  4. Change in marital status: 11.6%
  5. Looking for a smaller apartment, or to live alone: 10%

There are several other bits of interesting information from the survey.  You can read the rest of the article here.

Information from surveys like this one can be important to your landlording business.

Tenant turnover is probably the number one killer of positive cash flow.  If you can figure out the reasons your tenants are considering a move and can address their concerns you can save yourself a bundle of both time and money.

Always ask your tenants why they are moving when they give you notice of a move.  Perhaps some minor upgrades will encourage them to stay.  Perhaps you can provide them with a larger or smaller unit.  Perhaps you have something available in a different location.  If you have a decent tenant, try your best to keep them.  Good tenants can be hard to find.

Landlords – Don’t Do This Either

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Unless you want your mug shot posted all over the news too!

Landlord forged judge’s signature to evict Cortlandt tenant, police say

Landlords – No Dirty Tricks!

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One of the worst things for a landlord is a non-paying tenant.  It creates a crisis in your business as the revenue you need to pay for the mortgage, insurance, taxes, repairs, etc stops coming in.  In years past, landlords had all sorts of dirty tricks to deal with non-paying tenants.  Tricks you had better not even think about doing today.

Tricks like:

  1. Taking off the Front Door – This is one of the older more creative tricks landlords used to use.  If a tenant fell behind or did not pay, the landlord simply removed the front door, leaving the unit and the tenant’s possessions out in the open
  2. Changing the Locks – The ultimate in “no pay – no stay.”  If the tenant wanted the new key and access to their stuff, they would have to pay up.
  3. Shutting off the Heat – This worked especially well in the colder months, but the landlord ran the risk of frozen pipes.
  4. Shutting off the Water – How long would you live in a place with out a flushing toilet, or the ability to take a shower?  The hope of many landlords was not for long.
  5. Blocking Up the Sewer Line – Taking a 2×4 and jamming it in the sewer clean out line was another tactic.  It did not take long before the toilets stopped flushing and the showers stopped draining.  Can get pretty smelly fast.  Of course once the tenant is out, the landlord was left with a mess.

Like it or not, a landlord can get in a lot of trouble if they use any of the above tricks.  There are just too many lawyers out there waiting to sue you to take the chance.  Can you imagine what a judge would say in this day and age if they heard you shut off the heat on a family in the middle of winter or that you had removed their front door?  Instead of solving your problem and getting the tenants out, you have created a huge pay day for them, plus they get to stay.

Don’t let that sense of crisis you feel because you are not getting paid allow you to succumb to bad advice or do something stupid.  In years past, landlords had a lot of dirty tricks up their sleeves that they could get away with; some are still using them.

Today however, the best alternative when dealing with a non-paying tenant is to offer cash for keys.  This technique gets them out as quickly and as cheaply as possible with little or no mess to clean up later (or doors to put back on). Proper screening will also solve a lot of these problems.  Learn these two important techniques rather than resorting to dirty tricks.

 

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Landlords – They Are Changing The Laws

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Where the landlord laws are made.

I have written about this topic before but it is important so I will say it again.

Landlords need to keep up with what their state legislatures are doing. 

Most landlord/tenant laws are written at the state level.  So it is important to keep up with what is going on in your state capital. Every year they try to change the state laws that outline how you run your business.  For example, many state laws dictate:

  • If you can charge a late fee
  • How much that late fee can be
  • If and how much of a security deposit you can take
  • What clauses should be in your lease
  • When you can evict
  • When you cannot evict
  • How difficult it will be for you to evict if you have to
  • What to do if a tenant abandons your property.

The list goes on and on.

As a landlord, would you not want to know if someone is proposing a law to make it more difficult to evict someone? How about if a law is being proposed to restrict how much a security deposit can be?  Would you not want to know about any law that will make you job as a landlord more difficult, like this one proposed here in Tennessee (Does a tenant who has been legally evicted really need another 48 hours)?

Of course you would.  These laws directly affect your business and you would likely want to voice your opinion on those proposed laws.

On the flip side, perhaps a law is being proposed that will make your job as a landlord easier.  Sometimes laws are proposed that might actually help us out, such as this one here in Tennessee which shortens the eviction appeal process.  Would you not want to know about and perhaps voice your opinion on those as well?  Of course you would.

As landlords, part of our job is to watch what those folks in our state capitols are doing, because what they do or do not do can really have an impact on our business.  Of course I would much rather focus on my business but every year I have to devote a little bit of time to watching what is going on in Nashville because my business could depend on it.

Where can you find out about these proposed laws?  I think the best place is your local REIA.  Most of the time someone there is focused on the state legislature and will report what is going on.  Plus, as far as lawmakers are concerned, numbers matter.  So get informed and watch what those legislators are doing. Your business may depend on it.

Where Do The Super Rich Invest Their RE $?

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Here is an interesting story on where the super rich have been investing in real estate.  Seems they have been increasing their holdings quite a bit in recent years.

 

 

 

 

 

 

 

 

 

 

h/t to EconomicPolicyJournal.com