SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Multi-Family

Every Landlord’s Nightmare!

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The following story describes every landlord’s nightmare.  You have to read it to believe it.

Smarter Landlords screen their tenants and verify everything they say.  Save yourself the time, aggravation, frustration and money, screen your tenants or risk something similar happening to you.

 

 

By Barry Carter/Star-Ledger

He looks like an attorney in his crisp gray suit, white shirt and red patterned tie.

Not only does he dress the part, Mark Newton knows the law. In fact, an exhaustive Star-Ledger review of his court filings shows that for at least 19 years he has made Superior, chancery, federal and municipal courtrooms his virtual offices, representing himself in hundreds of court battles — though he has no license to practice law.

His specialty? Avoiding eviction. And he is relentlessly effective.

Read  the rest of the article here.

 

H/T to Josh at Biggerpockets.com

When Is Cheap Worth It?

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I delved into real estate investing because I thought it would save me from the misery of living paycheck-to-paycheck. I’m 2 months into my rehab and I’ve found that not much has changed yet. I’m rehabbing paycheck-to-paycheck. When I’m shopping for tools and supplies, it’s no surprise that I reach for cheap. I look for deals and I do the work myself.

Not everyone shares my sentiments concerning frugality. I bought a Husky crescent wrench and was advised to buy better tools. My plumber strongly recommended that I install a new, double-basin sink. My partner and I disagreed when I insisted on using a combination of old and new shoe molding. This isn’t how I imagined my investor persona!

I justify my frugality by telling myself that I can replace it all during my next vacancy. I need to get my second unit cash-flowing so that I can better fund repairs. I ask myself if my tenants will know the difference. This is when I turned to Kevin. I emailed him, “when is cheap NOT worth it?” This is his response:

  • When it involves gas.
  • When it involves electric.
  • When it wastes your time. You have to understand the value of your time. You may need to pay a plumber for a service call, but they will get it done right and quick. You may be able to do it, but it will take you four times as long to do it. You will have to make three trips to Home Depot to finish it.
  • Appliances! Just buy a new “used” one rather than trying to replace parts. Unless it is incredibly simple to fix, it is just not worth it. The part will cost almost as much as the replacement appliance. You will most likely order or receive the wrong part. Beware, many parts look the same but have slight differences. Trust me on this.
  • Is it really cheaper for you to do it? Don’t try to save money if it is costing you potential rent. Take a rehab for example: You do it all yourself and it takes two months. You could have had it rented at a rate of $625 per month. A contractor could have had the job done in 2 weeks for $1500. Did you really save any money?

I appreciate Kevin’s emphasis on avoiding repairs with safety implications: gas and electricity. I was considering teaching myself how to repair appliances, but I think I’ve axed the idea. For the time being though, it makes financial sense for me to most of these repairs myself. Sometimes cheap is worth it, and sometimes it’s not.

Save

  • We used the cheapest vinyl tile at Home Depot and the kitchen floor looks great. You don’t even notice the mismatched shoe molding.
  • We shopped for used cabinets. We bought unfinished cabinets and painted them. The cabinets look great.

Spend

  •  We bought the cheapest paint brushes we could find, and it was a horrible decision. The hairs fall out and get stuck in the paint. Don’t do it!
  • We paid full price for a window air conditioning unit. I never will again. I later came across two used ac units, which were three times better for a third of the price.

 

While I advocate for frugality, please don’t cut corners by sacrificing quality installation. Tenants and buyers will notice. I firmly believe going cheap should be our current strategy. We rehabbed the entire kitchen of unit 1 for less than $1,000. It looks so much better than before. I look forward to seeing it look even better than now.

Do you have any advice? When is cheap worth it and when is it not?

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.

Finding and Keeping Good Tenants

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What is a good tenant?  It is someone who will pay their rent on time and take care of your property.

Finding good tenants will depend on your particular market, your marketing strategy and then your screening process.  Keeping them will depend upon how you respond to their needs.

First, you as the landlord need to put on your marketing hat and understand how your potential tenants want to communicate and find you.  Different segments of the market find their homes in different ways.  Some will read print ads, but fewer and fewer do.  Some will heavily utilize the internet.  Others will have limited access to the internet.  Some will drive around looking in particular neighborhoods because of school or family connections so yard signs are a must.

In my market segment, the internet is key.  Thus, a website and ads on Craigslist are a must.  I hardly ever use yard signs anymore as they just do not generate positive leads.  I know others in different markets that have to use yard signs, do not have websites and even hand out fliers at major supermarkets and do very well.  You will most likely need to try several techniques before you find the one that best works for you.

Once potential tenants find you and your property, you need to check them out to find the good ones.  “Trust but verify” are the key words here.  You start this process when they call.  Ask questions like “Can I show you the apartment after you get off work?”  Or. “This apartment rents for $x, is that something you can afford?”  These types of questions are designed to pre-qualify prospective tenants.  With such questions you can find out if they have a job and if they can afford the apartment among other items.

Continue the process by having them fill out an application so you can verify all of their information through a credit, criminal and work history check.  This is a vital step.  Do not take their word. We once had an applicant that looked and dressed professional, had a decent car and said all of the right things.  He filled out his application and paid the application fee in cash.  When we checked him out, he had the lowest credit score we had ever seen and from what we could tell had never paid a bill in his life.  Even the phone company was looking for him.  If we had taken his word and not checked him out and let him move him, he would have lived in our place up to six months rent free before we could have evicted him!  Another gave us his work info but neglected to tell us he had been fired that morning.

As a matter of fact, simply telling prospective applicants that you will conduct these checks will weed many of the bad ones out, but not all of them.  So check them out!

Once your find them and get them in, you want to keep them.  One of a landlord’s biggest expenses is tenant turnover.  When a tenant moves not only are you not collecting rent, there are expenses as well.  Often the apartment will need to be repainted.  Minor repairs may need to be made and carpets will have to be cleaned.  These items can really add up.  So you need to be proactive on the front end and do what you can to keep the good tenants.

How do you keep them?  It is simple.  You respond to their needs and maintain your properties.  You need to spend a little money upfront to avoid spending a lot more on the back end.  If they need something fixed, fix it as quickly as possible.  If they are concerned about crime, maybe you can offer to put in an alarm system for a few dollars more rent per month.  Reward long term tenants with new ceiling fans or other small amenities.

You should also be professional, respectful and fair at all times.  That does not mean you do not read tenants the riot act if you need to, but that you do it in a professional and respectful manner.  Tenants will appreciate this because so many other landlords can be just plain obnoxious.  They have lived under those landlords.  A professional and respectful manner will get you referrals and sometimes my tenants move back after leaving.

So in sum how do you find and keep good tenants?  Figure out your market and how they want to communicate.  Pre-qualify prospective tenants and have them fill out an application.  Verify all of their information.  Be prompt to requests for repairs or other issues from them and always act in a professional, respectful and fair manner.

Till next time, work smarter not harder!

Does It Pay To Place “For Rent” Ads Anymore?

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There was a time not too long ago when it was a must to advertise your vacant properties in the “for rent” portion of the classified ads in the local daily newspaper.  While local daily newspapers are still around, today thanks to the internet there are many more choices out there that are available to us to get the word out about our rental properties.  Even with all of this competition, the local dailies are often the most expensive venue to advertise in.  Does is still pay to advertise “For Rent” in the local daily paper?

The answer to that question depends on one factor.

 

What is the demographic you are trying to reach?  Who is your typical renter?

Here is a list of your typical tenant types and ways to reach them.

The Young Hipster/Professional – These tenants are young, just going to college, in college or just starting out at their first job.  They want cool, safe places to live in the “hip” parts of town.  They are generally technologically savvy and their first source of information is the internet.  They never read the paper (I teach at a local community college and for many years none of my students say they read a daily print newspaper anymore).  To reach this demographic you need to have a web presence.

You may be big enough to have your own website.  If not, you at least need to be on Craigslist.org which is free.  Another good source to reach this demographic is your local alternative newspapers.  These newspapers are generally printed every week and are available throughout the city for free.  They often highlight the entertainment scene around town and have a classified section.  By placing an ad in this type of paper, you will reach your demographic as they look for things to do on the week end.  But the bigger plus is that the print ad will also get you an ad on the newspaper’s website, where most of this demographic goes to search.

This website feature may also be true of the daily newspaper.  A print ad may also get you on their website which may be good for people researching your area from out of town.  But it is going to cost you, and the first three alternatives, a website, Craigslist.org and the alternative newspaper are what I have found to be most effective in my area.

The Working Class Tenant/Family – This demographic is going to be looking for value.  They can’t afford more upscale places in the “hip” parts of town but want a clean safe place as well.  Often they will be looking in a particular part of town because of a school location or because they have family and friends near by.  These tenants are not going to be as savvy with technology or their access to it may be spotty at best.  Further they also will generally not read the local daily paper.  So how do you find these tenants?  Signs.  These tenants will generally drive a particular neighborhood makes calls from the car from the various signs in the yard.  Here are a few tips for this type of tenant:

    • Have professional “For Rent” signs made with the name of your company and phone number on them.  Do not use the red and white “For Rent” signs that you can get at the local hardware store.  Why?  A professional printed sign makes you look more professional and the dead beats will move on down the road because they figure you will actually check their credit, criminal and work history.  Trust me, these types of signs are not very expensive and will save you a lot of unnecessary phone calls.
    • You may even want to place a separate sign in the yard describing the unit and the rent, for example 3 BR / 1 Bath $750/Month.  This sign will also cut down on the number of phone calls asking about the size of and rent for your unit.
    • You need to have a system in place in working class neighborhoods so that if someone calls about your rental, you or someone else is able to go right away to show them.  If you make and appointment for a later time, 8 out of 10 times they will not keep it because they have driven down the road and called another one that was able to show up immediately.  I know it is hard, but that is the nature of the business.

The High End/Professional w/Family Tenant – These are professional high income people who are looking for higher end rentals in the nicer portions of town.  They maybe officers in the military who will only be around for a couple of years.  They maybe a business professional that has just transferred to the area and wants to rent for a year or so to get a feel for the area.  These folks are looking for safe, clean well maintained rental properties located in good school districts.

They are very technologically savvy and are often a little more old school and will read a newspaper.  So it may very well pay to place an ad in the local daily paper if you are trying to reach this type of tenant, especially if you also get an ad on their website as mentioned above.  However, they will also find you if you have the web presence that I described above.  A professional sign is also advantageous as these folks will also “explore” their new community.

So does it pay?  I think the answer is generally no.  Print is dying and there are just too many less expensive and father reaching alternatives out there.

Please let me know your thoughts and if you have any tools that you have used to find tenants by leaving a comment below.  Thanks for reading.

Rents Are Up, Housing Still Down

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Rents are starting to go up.  According to the Federal Reserve Bank of Cleveland:

Rents are starting to accelerate. Rent of primary residence rose 3.1 percent in December, and has risen 3.5 percent over the past six months. Owners’ equivalent rent (OER) rose 2.2 percent in December and is up 2.3 percent over the past six months. Interestingly, all but one of the regional OER components we use to compute the median CPI posted an increase near 3.0 percent in December (the median component was OER: Midwest, which rose 2.9 percent).

Rents are simply responding to the laws of supply and demand.  Demand for rental properties is up as the number of renters has increased significantly due to the foreclosure crisis and a reduction in the amount of available credit for home loans.  The market is responding to this increased demand for rental units.  According to the US Census Bureau, the number of permits for the construction of multi-family units are up over 50% since December of 2010.

Single family home construction continues to be in the dumps.  New single family home construction permits are down over 75% from the boom time highs, as this chart shows:

What does all this mean for the average investor?  First, if you own rental property, keep it.  Rental inflation and thus rental profits should increase over the coming year.  Second, continue to buy and hold rental properties if you can.  Third, if you’re a flipper, buy and hold investors are going to be your buyers.  Fourth, continue to be very careful with retail flips.  Very few areas are viable retail markets right now so choose wisely.

It is more and more obvious to me that real estate investors are going to be the ones that get us out of this mess.  I just hope the banks and our government begin to realize it as well.

What Properties Should I Invest In?

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I have often been asked by people wanting to get into real estate investing for advice about the types of properties they should invest in.  There are so many different kinds of real estate investment types, from single family homes, to farms to industrial parks and there is nothing wholly right or wrong with investing in these various types of real estate.  Each has advantages and disadvantages.   But in my experience, residential real estate is the easiest to get into and the learning curve is the shortest.  So for the new investor, I recommend residential real estate investment properties and that is what I am going to discuss in this post.

 

There are three types of residential investment properties.  All three can be great investments.   Just be aware of the advantages and disadvantages of each type before investing.  Let’s go through each one.

 

Single Family Homes – Single family homes are properties with just one dwelling unit in them.  They can be detached homes on acre lots, town homes, even condos fall into this category.  Single family homes can be great investments.  One of the best features of single family homes is that they generally are the only properties you can sell on the retail market.  You often therefore can get a higher sales price when you sell than you would with other type of residential properties.

 

In today’s market there are many, many homes out there that are priced right and will generate positive cash flow.  In fact, right now they are the cheapest I think they are going to be for a long time.  Even thought prices have declined, rents have not.  Properties in desirable neighborhoods can bring good rents and very stable tenants.

 

New investors can also get some very favorable financing for single family investment properties right now.  Rates are currently amazingly low.  Investors with W-2 (regular job) income and a good credit score can get up to 10 investor loans with low fixed rates financed over 30 years, just like you can with an owner occupied house.  So both pricing and loan rates make this type of investment property very attractive.  (Here is a tip.  If you are married be sure to put these loans in only one spouse’s name.  That way you can get 20 loans, 10 in each spouse’s name.)

 

In many areas however, the prices of single family homes are far higher than the rental income they will produce can cover. In other words, unless you are paying in cash for an expensive home or have a large down payment, the amount you will have to finance will not create positive cash flow.  Be careful buying in pricier neighborhoods.

 

A downside to single family homes is the fact that when your tenant moves out, your house is vacant and producing no income.  You need to move quickly to get your property re-rented.  Vacancy is a cash flow killer!  For example, if your monthly cash flow is $150 per month on a home that rents for $900 per month and it remains vacant for a full month, you have just lost 6 months of cash flow profit.  Plus, when they are empty, they are more prone to theft and vandalism.

 

Duplexes, Triplexes and Four-plexes – These are the two, three and four unit properties or smaller multi-unit properties.  These also make great first time real estate investments.  The main advantage here with these multi-unit properties is that they will still produce income when one unit becomes vacant.

 

Another advantage for the newer investor, you can often get the same types of loans mentioned above with single family homes.  This is because Freddie Mac and Fannie Mae, the buyers of these loans, treat these multi-unit properties the same way they treat single family homes.

 

These smaller multi-unit buildings can still possibly be sold to owner occupants.  So the market for these properties is a little stronger than it is for others.  They can often be sold to someone like me perhaps.   When I was beginning my investing career, I wanted to generate some extra income so I bought a duplex and lived in one side while I rented out the other.

 

Apartment Buildings – Apartment buildings are properties that contain five units or more.  These types of properties can really be income producers.  However, they can also be real drains if they are mismanaged.

 

Management of these types of properties has to be strong or they can quickly get out of hand.  Tenant issues and faulty maintenance can quickly add up to a negative cash flow situation.  You might think you can hand this type of property over to a property management company.  But if you do not know how to manage your property or manage the property management company, you will end up on the short end of the stick every time.

 

Financing these properties is also much harder.  Say goodbye to 30 year loans that you can get with the above properties.  To purchase these types of investments, you will most likely need to go to a local bank and get an officer’s line of credit or commercial loan.  These loans have significantly higher rates and much shorter terms.  Often terms of 5 years or less.  In this way they are very much like commercial or industrial properties.

 

Selling these properties is also much harder than with other types of residential investment properties.  Think about it.  Who is going to buy these types of properties?  Certainly not a retail buyer, but another investor who is going to be looking at the same cash flow numbers you were when you bought the property.  In other words that investor will be looking for a deal just like you were.

 

What should you buy if you are just starting out?

 

I would suggest starting with a duplex, triplex or four-plex.  You can generally get decent, long term financing.  They will produce income with multiple units as opposed to sitting vacant.  The resale market is fairly good for these types of properties.  These three factors help reduce the risk for you first time investors.  If these types of properties are not available where you live, then go for single-family homes in stable neighborhoods for many of the same reasons.  Whatever you decide to do, do get into real estate investing today.  Make it a goal to buy one or two investment properties this year.  The combination of low prices and low rate may not be seen again for a long, long time.