SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Landlording

How to Find Good Contractors

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Working with contractors is a routine part of the real estate investing business.  Something is always breaking or in need of rehab.  Plumbers, electricians, painters, HVAC, and general contractors are all folks who you will need in your investing career.

To the newbie, finding and hiring these contractors can seem daunting.  You have heard the horror stories.  You don’t want to get ripped off.  You don’t want to appear stupid.  So what to do?

First think about what you need.  You need a variety of people with various skills that can solve your repair and rehab problems quickly, at a reasonable price and without hassle.  You want someone who is reliable, because you are going to go to them again and again as problems arise.  You want to know that the job will be done and furthermore, you want it done right.

Next, follow these tips to find the people you are looking for.

  • Network With Other Landlords – This has consistently been my best source to find quality people.  Other landlords know who will do a good job at a fair price.  Plus, references will open doors.  You can meet other landlords at your local reia club.
  • Ask at Contractor Stores – Ask for references from stores frequented by contractors such as paint, lumber and home improvement stores.  Ask who is reputable.  Ask who pays their bills on time.  Most of the time someone at these stores will point you in the right direction.
  • Hang Out at Contractor Stores – Yep! Get there early when contractors are picking up materials.  Talk with folks.  Tell them what you do and what you are looking for.  Soon you will have a catalogue of business cards to call upon.
  • Talk with Friends and Family – Ask your friends and family who they have used in the past and if they liked the work.  This can be a great place to start.
  • Get Several Estimates – If you can, get several estimates on any project.  Listen to what the contractors say.  How will they do the job?  What materials will they use?  How quickly can they be completed?
  • Get References – Good contractors will be able to provide you with references.  Follow up on these.  If you can, go see some of their work.
  • Use Online Sources – Angie’s list and others rate contractors as well as many other businesses.  Make a post on Facebook asking for references.  Online sources are only going to grow in the future.  Just be careful with the reviews and don’t be attracted to the biggest ad.
  • They Purchase Their Own Materials – Remember you are an investor, not a chauffeur for contractor supplies.  If they cannot afford to get or cannot transport their own supplies, move on.  It is not worth your time.

Here are some more thoughts.

  • Do not always use the cheapest one.  Cheap is not always worth it.
  • If they do not return your call in a timely manner, don’t follow up or do what they say they will do, move on.
  • Don’t worry if they drive a nice truck.  That means they likely do a good job.
  • Realize there is trial and error involved.  You are going to have to try some to find the right one.  Do not be afraid to fire and move on.
  • Some contractors may be good today and tomorrow they flake out.  This just seems to be part of the business.  I have been through many contractors over the years.
  • What ever you do, when you are new to this or working with a contractor for the first time, use a carefully worded contract that spells out who, what, when, where, and especially how they get paid.  I will talk more about that in future posts.
  • Listen to your gut!  If something feels wrong or you are unsure about something, get more info or move on.

Finally, remember contractors are human too.  Most are out there hustling trying to do an honest days work.  They want and need your business!  They will be happy to talk and see if they can meet your needs.  Remembering this little fact can go a long way.

When to Spend on a Rehab

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Most of the properties I have bought in my investing career have been distressed.  That means that they needed work.  I am not afraid of a major rehab.  In fact, I find that properties in need of a major rehab often make the best deals.

Of course as an investor I want to maximize my return on the properties I buy, but I also realize that I intend to hold these properties for the long term.  So I have learned over the years that you can save your self some money, time and hassle by spending a bit more money on the front end.

Here is what I mean.

Kitchen and bathrooms often sell a place to a potential renter.  If these two rooms look good, not only can you generally get a bit more in rent, you will also generally get a better tenant and the property will rent faster when it comes on the market.

So, instead of linoleum on the kitchen floor, invest in square foot ceramic tiles.  Tile is almost as inexpensive as to install as linoleum but it will look so much better and last so much longer.  Linoleum flooring simply gets grimy looking and it is guaranteed to be ripped or torn by your tenants when they are moving in or out.  Why install a floor that you will have to replace every two years or so?  Go with tile.

Same goes for the bathroom.  Install tile on the floors and shower walls.  Use those same square foot ceramic tiles you put in the kitchen.  They look nice, are easier to clean and simply more durable.  They will resist the water much better than that cheap plastic stuff, and even better, they resist the mold too.

So be a smarter landlord and invest a little bit more on your rehab upfront with the kitchens and baths.  Both you and your tenants will be glad you did.

Breaking Rule #1

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I used to have a best friend whom I knew from the day I was born. We hit every milestone together—and so did our parents.  When we were both looking for a place to rent at the same time, it seemed like a no-brainer. Who else would make a better roommate than my best friend?!

It was quite possibly the worst mistake I have ever made. Within a month, our friendship was damaged. She didn’t like my cat. I didn’t like her make-up mess. We bickered, we fought, and we never recovered.

So, when I read all of the real estate blogs (including this one) about NEVER renting to family or friends, it resonated with me. I knew there was truth behind the warning, and I swore that I wouldn’t do it.

All of that changed when I jumped neck-deep into a triplex rehab. Suddenly, I found myself reevaluating my options—reweighing the pros and cons.

If I rented to a friend, then I could do the work while renting out the unit. I could start building cash flow to help fund repairs. The logic was persuasive.

In the end, we decided to rent to our friend at a discounted rate for one year, which still equals more than if we had held it vacant an additional month. He agreed to paint himself and to allow us free access to his property whenever we needed to fix something. Given that his unit needs the most work, this felt like a decent deal. I conceded; we signed a lease.

It’s now been over a month since we signed the lease, and I have to say, it’s not that bad.

PROS:
The tenant helped with the carport demolition
I have a tenant that I know, like and trust
I’m collecting rents earlier than expected
I don’t have to paint

CONS:
I have to work around stuff: furniture, appliances, dishes, etc.
I feel imposing, especially since he works 3rd shift
It seems like I always have friends over now
I’m more distracted when working

So far, the pros greatly outweigh the cons. We discovered a massive leak in the kitchen wall shortly after signing the lease, which meant that our tenant received brand new cabinets, sink and faucet. We were happy to have him as a tenant throughout the kitchen rehab, which proved to be messy and time consuming. It would have been an awful inconvenience for a new tenant. Plus, he’s happy to have a new kitchen.

I would do things a little differently though, like be more specific!

For example, I told my tenant that I would purchase the materials if he painted. That seemed fair. However, I failed to mention that I had envisioned white paint in all rooms. So, when he brought me the color swatches that he had picked up from Lowe’s, I felt compelled to go with his plan. Had he been an average tenant, I would have responded with a heartless “Sorry but I failed to mention…” Since he was a friend (and had been so great throughout the kitchen debacle), I coughed up the extra cash for the colors he wanted. I’m always looking for the silver lining though. Our tenant friend feels almost as much invested in our rehab as we do.

That has to be good news, right?

Has anyone else ever cautiously rented to friends or family? I would love to hear your thoughts, especially since my grandparents are getting older and inquiring about a one-bedroom.

The Importance of Networking

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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.

Teach Your Tenants to Help You

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I wrote previously about tenants being the eyes and ears of your properties.  Tenants can really save you some serious time and money if you listen closely to what they are saying.

In this post I want to talk about another way your tenants can help you save time and money.  All it takes is a little bit of teaching and training on the front end at  move in.

The key here is to understand that tenants are not homeowners.  They likely have never owned and therefore never learned about a house and its systems.  They do not know how the electrical and plumbing systems function.  They also don’t know how appliances work except that you push the “on” button to make it go.

Your job as a smarter landlord is to teach them about some of the basics of these systems.  Once you do that they will be able to help you solve minor problems which will in turn save you time money and even aggravation

So here are some of the basics we go over with new tenants to help them help us.

  1. The Breaker Box – Do not assume that your tenants know how to work breakers or even what a breaker is.  We show our tenants the electrical breaker box and how breakers work.   We explain what a tripped breaker is and tell them what it causes.  We then show them how reset it the breaker.
  2. Gas Cut Off Valves – We show our tenants how to shut off the gas.  We explain what gas smells like and instruct them if they notice a faint smell of gas to shut off the gas and call us right away.
  3. Water Cut Off Valves – We like to show our tenants where the various water cut off valves are located and how they work.  Surging water can cause major damage really fast.
  4. Appliances – We explain how to run the washer and dryer.  Many just do not know that you cannot wash all of your rugs at once.  They also do not know that a clogged lint trap or vent pipe will prevent the dryer from heating properly
  5. HVAC System – Believe it or not, we once got a call that a tenant’s heat was out.  After going over there, the only problem was that she had hot turned the thermostat to the heat setting.  Now, we show them how to the thermostat works.   Plus we explain the importance of changing filters and also leave a few filters near the HVAC unit.
  6. The Toilet – I once got a call late one night from a tenant telling me the toilet had broken completely and was unusable.  When I got there the pull chain from the flush handle had come off.  The toilet was certainly still usable.  So now in addition to the cut off valve, we also explain the inner workings of the toilet tank.

By showing tenants these few items you can really save yourself some time, money and aggravation.  Your tenants will now be able to flip that tripped breaker, turn off the water until you get over there tomorrow to check it out and not ruin your washing machine by washing every towel at once.  It does make things a little bit easier.  Helping them learn helps you.

What’s The Rent?

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Smarterlandlords want to maximize their investments by maximizing rental income.  That means they need to be charging top dollar for their rental properties.  Problem is, how do they know what to charge?  Here are some tips and tools to help.

 

 

 

  1. Talk to other landlords.  Most have no problems telling you what they get in rents because they want to verify what they are doing as well.  Where do you find other landlords?  You can find then at your local REIA.
  2. Scan Craig’s List.  Most landlords will put “for rent” ads up on this site.  You can refine your search in a variety of ways and target your market.
  3. There are several other tools available online.  Use them to establish a base.  But be careful.  Some of the data on these sites can be a bit misleading.  So know your market. Here are a few of the most popular.
    • Hotpads.com – The place to find your place.  Do a search here like you would for Craig’s List.
    • Rentmetrics.com  – Claims to be real time rent comparable data for real estate professionals.  I took a look around for my area and was impressed.
    • Renometer.com  – Paying too much or charging too little?  Cool site but it gave me quite a range for my area.
    • Zillow.com – Search the for rent section to see what you can find.  This site is nice, but it also gives me quite a range.

Remember however that these websites only show what rent was being asked for.  They do not really show you what the landlord actually got in rent.  So again, use these sites as a starting point.

  1. Finally, depending on your market, you may have to drive around and look for “for rent” signs and give them a call.  Some markets are just not going to be as accessible on the internet.

Once you have done your research, try putting your property on the rental market for as high as you think it can go.  If it does not rent in a week or so, you are likely asking too much, drop the price until you find a renter.  Only then will you truly know how much the rent is.

My Offer Was Accepted, Now What?

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You have gotten to know your market.  You have a pretty good idea of what a good buy and hold deal is. You just negotiated an offer.   It got accepted.  It is your first deal!  Now what?

That depends on what is in your purchase contract and how you are planning to purchase the property.  No two contracts are the same but most have several standard parts.  These can include:

  1. Buying the property “as is.”
  2. A property inspection period.
  3. A review of leases and financials.
  4. The need for some type of financing to close the deal, likely from a bank.
  5. A way out or escape clause.

So let’s go through each one.

  1. Many investors buy investment properties as is.  Buying a property “as is” means exactly that.  You are buying the property as it is where it is and the seller will not make any repairs.  It is incumbent upon you to know what you are getting into and what, if any, repairs and upgrades are needed and what they will cost.  To find all this out you need an inspection period.
  2. Just because you are buying a property “as is” does not mean you should not inspect it.  In fact you should!  During initial negotiations you may only have seen portions of the property.  Now is the time to see it all.  Your inspection should include all rental units, attics, basements, crawl spaces, roofs, etc.  Anyplace you can get into.  If you are new to this, you may want to hire a property inspector or at least take a trusted contractor with you.  During this inspection period you should be doing two things, making a list of repairs needed and looking for major damage and/or problems you were not aware of.  If you find major damage or problems, it may be time to go back to the negotiating table.  If the seller will not renegotiate, use your escape clause and back away from the deal.
  3. Get copies of all leases and at least two years of past income and expense reports.  Read these over carefully.  You will be inheriting the tenants and they come with certain rights.  You can’t just kick them out because you are the new owner, you will have to live with them for a while.  Be sure you are aware of what you are getting into.  Make sure utility payments jive with what you were told for example.  Do the tenants really pay them, or are they listed as expenses on the expense report?  Depending on what you find, you may need to renegotiate.  Again, if the seller is unwilling to do so, you may need to back away from the deal.
  4. Finally, if you are getting bank financing, there will be an appraisal.  Always, always, always go to the appraisal and meet the appraiser.  This person can make or break your deal depending on how they value the property.  Be helpful to the appraiser.  Take them some comps if you can.  Hold their measuring tape for them.  Explain to them, or better yet provide a list of the repairs and upgrades you plan to make.  Do all you can to ensure the appraisal goes well.
  5. This is pretty self explanatory.  If something goes wrong, such as unexpected and costly repairs, you need a way out as we see in 2 and 3 above.  But only use it if you absolutely have to.  If you make an offer, you should have every intention to close.

Assuming all is in order and has gone well, your next job is to secure insurance for the property.  Find a good insurance agent who understands your market and understands investment property.  Trust me, not all of them do.  You can often find one at your local REIA.

Finally, develop a checklist to make sure all of these various pieces get placed in their proper slots.  Do not just assume that the appraiser has the proper address to send the appraisal.  Do not just assume that your insurance agent has sent the proper forms to the right places.

It is your job to follow up with all of these people and make sure that everything gets to the right place in time to close.  E-mail the bank to make sure they have the appraisal scheduled and that they receive the appraisal when completed for example.  Nobody else cares about this deal as much as you do and often times you need to expend some energy to get all the pieces together.

Only then, once it all has been fitted together, then maybe, you will close on your first deal.  Congratulations!  Now the real fun begins.

Tenants Are Your Eyes and Ears

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You can’t be at your properties 24/7, but things can certainly go wrong 24/7.  Your tenants are your first set of eyes and ears that can alert you to something gone wrong.  Your job as landlord is to determine when something requires your immediate attention.

A smarter landlord listens closely to what their tenants are saying.  Tenants are not property experts.  Something that seems like a huge problem to the tenant may not be a huge problem.  But, something that seems small to the tenant may in fact be a huge problem.  Here is what I am getting at.

The other night a tenant called after business hours.  We ask tenants not to call after hours unless it is a true emergency, but the definition of true emergency can get muddled.  Anyway, the tenant says that half of the building’s power is out.  Some things are on, others are not.  And, it is not just in his unit, everyone is reporting the same issue.

The thing here is that his report was odd.  If all power is out, it is likely a utility problem.  If only some power in one unit is out, it is likely that a breaker is tripped.  But here not all power is out in all units.  This is odd and odd things should get your attention.  So I went over.  Turns out a tree branch had broken a power line and knocked out one phase of the power.  This explains why some power was on and some was out.  However when I was there I could hear the AC condensers trying to kick on, but not having enough power to do so they were burning themselves up.  If I had let this go overnight, they would have burned up and cost me thousands in repairs.

Another time a tenant complained about lights flickering.  No big deal I thought.  But she also mentioned her phone charger plug had melted in the outlet.  That is odd.  Something is wrong.  Power is surging somewhere.  Long story short, when I got there the meter was literally smoking hot.  I was minutes away from a major fire.  That tenant saved the building and who knows, maybe a life.

Another time a tenant called and complained of a musty smell.  Now you might not think a musty smell is such a bad thing but what causes a musty smell?  The answer is water.  Water is collecting somewhere, likely somewhere hidden.  It could be between walls or under the house because of a broken pipe.  It is something you need to check out before the walls, floors and everything else becomes mildew infested and rot.

So learn to use your tenant’s eyes and ears.  You don’t have to respond to every request right away.  But you must learn when you should.  If they are telling you about something out of the ordinary, you might want to check it out.

What to Watch to Know Your Market

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Last time I wrote about the importance of knowing your market.  You never want to go out and just buy an investment property for the sake of buying a property.  Rather, you want to make a calculated investment decision.  And in order to do that, you need to know your market. 

But what exactly does that mean “know your market?”  What should you be watching?

Here are four items that I watch almost every day.

  1. What is the Rent? – What are properties in your market renting for?  You simply have to know what type of income you can expect before you can make any purchase decision.  How do you watch them?  You scan Craig’s List, read the classified ads, call for rent signs pretending to be a potential tenant and talk to other landlords at your local REIA club.
  2. Where is the Rent Going? – Are rents in your market steady, going up or going down?  This factor obviously can drive many an investment decision.  If you see rents going up, perhaps it is time to ratchet up your buying, if they are going down, perhaps you should consider another market.
  3. What are Properties Selling For? – As buy and hold investors, we are generally concerned with one thing, positive cash flow, hence our focus on numbers one and two above.  Price is also a very important factor in that cash flow calculation.  You need to be keenly aware of property values and prices in your market, because when a deal comes on the market you have to spot it and act quickly sometimes to beat others to it.  You can’t do that unless you know your market.  My Sunday paper prints listings of sales every week.  Working with a realtor from your local REIA group can also be very handy here.
  4. Know Who is Buying In Your Market – No I do not mean by name, but what the buyers’ goals are.  Are they owner occupants or are they investors or both.  Knowing this information may help you determine your next move.  If there are many owner occupants they may be driving prices too high for a reasonable cash flow return and it may be time to find a new market.  If there are a lot of investor types, you may have found a good rental market, but the competition may be stiff to get properties.  I like to watch the daily property transfers here.  Your location may have a similar publication or website.

If you watch this information continuously, you will soon develop a very good feel for your market.   You will become a much smarter real estate investor.

Know Your Market

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As a Smarter Landlord, you should be very in tune with the market where you invest.  Remember, you are a real estate investor buying investment properties and the value of an investment property is based solely upon the income it can generate.

To a landlord that means you really only need to know one thing when looking to buy a property, what will the property generate in rent.  Once you are reasonably certain about the rental income, everything else will fall into place.

I have seen way too many “investors” go at buying properties from the wrong direction.  They start, not by looking at the income, but by looking at the expenses.  They note that their mortgage, tax, insurance and expenses payments will be X dollars.  Therefore they reason, they will need Y dollars to cover those costs and make a little profit.

Sounds great, but here is the problem.   You do not get to set the rental amount at Y dollars.   The market, hundreds if not thousands of other landlords and tenants, will determine what the rent will be for you property.  It may not be Y, it may very well be Z.  The market does not care that you need Y dollars and were not in tune with what it was trying to tell you, it will simply ignore you

This is why knowing your market is so important.  Knowing what your market can generate in rents will set the price for the properties you are looking to invest in.  Knowing your potential rent first and then subtracting expenses will lead you down the path towards becoming a successful investor.  You will also be able to see when a deal is truly a deal.

Remember, the numbers do not lie.  If the numbers do not make sense, then do not buy.   And never, ever bet on appreciation.  Betting on appreciation is speculation, not investing. Look where that got folks in the last few years.

So learn your rental market and what it closely, by doing so you may just spot your next deal.  I’ll write more about that in future posts.