SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Real Estate Investing

Growing the Positive Cashflow Money Tree

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Positive cashflow is the key to becoming a successful, smarter landlord.  Without positive cashflow, your time as a landlord is limited. Smarter landlords are always looking for ways to grow the cashflow money tree.

Here is how you can grow yours.

Reducing Your Expenses – There are all kinds of expenses associated with rental properties including utilities, maintenance, and upkeep.  The trick is to save while not skimping on necessary maintenance.  Some tricks include using the same brands and materials in all of your rentals.  Use the same paint, faucets, tiles, etc.  This should cut down on repair costs and the time to do it (remember your time is important too).  Use energy efficient lighting and install low flow water devices to save on utility costs.

Increasing Your Revenue – Sure you can raise rents every year but that may increase turnover.  There are other ways to raise revenue.  Put in coin laundry.  Put in a soda machine.  Rent out the basement to your contractor for storage.  Build some storage space cages in the attic and rent them out to your tenants.  Include cable or satellite dish service as part of your rental package.  Get creative to get those revenues up.

Managing Your Tenants – Tenant turnover is a cashflow killer.  Tenants move either because of a life change or because they feel they are not getting good service.  For those that have to move, ensure you have policies and procedures in place to get your property back as rent ready as possible.  For those that simply want to move, you may need to look at your customer service skills.  Are you responding to their requests adequately?  Are you fixing things that need to be fixed?  The longer tenants stay, the better it is for your bottom line.

Managing Your Property – You have to actively manage your properties or manage your property manager.  You can’t just collect the rent and forget it.  Otherwise little problems can get swept under the rug or become bigger, more expensive problems in a short matter of time.

Fixing it Right the First Time! – Don’t cheap it out because you will just be fixing it again in no time.  Do you really want to pay to fix the same thing two or three times?  Spend a little more upfront on better materials and quality contractors to do the job.

Positive cashflow is the key to being a successful landlord.  But generating positive cashflow is not just about collecting rents.  Sure, that is the biggest part of it, but there are many other facets as well.  Use these tips to fine tune your business and improve your cashflow.

Tools of the Trade – For Real Estate Beginners

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It felt like I was preparing for the first day of school. Do you remember getting excited about shopping for school supplies? I would map out everything I needed, and I would carefully plan out how to best organize them to prepare for a whole new year of challenges.

I re-experienced this excitement after closing on our first house/investment property. The first thing I did was run to the store with a list of tools and supplies that I was sure that I would need. I went home, unpacked them, and organized them perfectly.

I was ready to rehab.

Upon reflection, I could have been smarter. Some of the things I bought were surprisingly useful, like our step stool. I never anticipated using it as much as I do. Other items were just a plain waste of money. So, what tools do you need to begin the path of real estate investing? This post should help.

  • Cordless drill, socket/bit set
  • Wonder bar
  • Crescent wrench
  • Ladder
  • Utility knife
  • Channel locks
  • Putty knife: one wide, one narrow
  • Wire Strippers
  • Electrical tester
  • Dolly
  • Step stool
  • Tool box/bucket
  • Extension cord

Of course, this list is assuming that you have already purchased the bare necessities while you were searching for the perfect property.

There are quite a few other tools that I purchased during my rehab, but I’m not sure how soon every beginner will need them: drain wrench, basin wrench, and dremel tool. When I asked Kevin whether or not this list was exhaustive; he said that his reciprocating saw has been his best investment.

I can say, with complete confidence, that any expensive tools that you can borrow is money well saved. The costs of these items add up quick, and so do your materials.

 

Are you an experienced investor?

If so, which item has been most valuable to you?

Have I left anything off?

Working With Contractors: How to Pay Them

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Having a good contractor that you can trust and rely on makes any real estate investor’s job easier.  It is a big comfort to know that you have someone you can depend on to do the job, big or small, right the first time.

I have already written about how you should go about finding good contractors.  In this post I want to talk a bit about another just as important aspect, and that is how you should pay your contractors.

Let me start off by telling you the last thing you want to do.  That is to pay them up front in full.  Anyone worth their weight in salt is not going to ask for full payment up front.  If they do it is a huge RED FLAG.  Run away and start the process to find another contractor.

Smarter landlords want to pay as little upfront as is possible.  Actually, it is best if you can pay nothing upfront and the balance of the bill upon completion.  On small jobs, say less than $500 to $1,000 that may actually work.  But it does not always work so well with larger jobs.  The contractor is likely going to need some money to get supplies.

Until I get to know a contractor, and even later on, I like to give as little as possible upfront.  See if they will agree to 10% or 20% of the quoted job price (you got a quote right?).  As you work with the contractor more and more and as the relationship builds, you can increase this a little, but I never go over 1/3 of the price on big jobs.

So how does the remainder get paid?  The best way is to pay it upon completion of the job and for smaller and midsize jobs that can work.  Major jobs though are often going to require draws so the contractor can pay his crews and purchase more materials.

Usually there will be three or four draws totaling a 1/4 or a 1/3 of the total job price.  These draws are often paid at agreed upon steps as work gets completed.  For example, you might permit a draw once all drywall is hung, sanded and primed.  Or, you might allow a draw once a kitchen floor is tiled and cabinets are installed.  It is up to you and the contractor to work these details out in your contract (you are using a contract right?).

The last draw should be upon completion of the job.  This is your last chance to go through the property and make sure everything was done up to your standards.  Walk through the property, make a punchlist of items needing to be fixed or completed.  Once that list is completed, pay your contractor.

Here are some other smarter tips.

  • Always use a contract.  Specify in that contract who gets paid, how much, when, how and upon completion of what specific work.
  • Pay your contractors promptly and in full according to your contract.  Don not jerk them around.  They have done the work, so pay them promptly.
  • Consider giving them a bonus if they do a great job, that is on budget and finished early.  After all time is money to you and them and you should reward them for finishing quickly.
  • Be fair and respectful.  Kind words and understanding can go a long way.  Remember you are trying to build business relationships here.  You want to use these contractors again if they do a good job.  Treat them right so they will answer the phone the next time you call.
  • Sometimes no matter what things go south.  If they do, cut your ties quickly and move on.  Don’t hold a grudge, just move on and find someone else.

The One Clause You Must Use When Buying a Property

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You never know when a potential deal will come along.  I have literally gotten a property under contract less than an hour after talking with the owner.  That is why I always have a copy of a purchase contract on hand.  Because you really don’t ever know, so be a smarter landlord and be prepared.

I like to keep my purchase contract short and sweet.  It gets right to the point describing the property, how much I will pay and when I will close.  I do not like to put a bunch of other contingencies or clauses in there.  They tend to muddle things up and if you really want the property and intend to close, they are not necessary.

There is however one clause that is absolutely necessary.  I will not sign a purchase contract without it, and neither should you.

Here it is:

“Seller warrants that seller has good, clear and marketable title subject only to property taxes and any easement and or/restrictions of record.”

If you cannot get a “good, clear and marketable title” to a property, then do not purchase it.  If there are so called, “clouds” on the title, then move on down the road to the next deal

Clouds on a title can do all sorts of things.  They can hinder your ability to get bank financing.  Clouds can prevent you from getting title insurance (something you want) and they can leave you exposed to a law suit (something you do not want).

All sorts of things can cloud a title.  The property could have been sold at a tax sale.  A foreclosure may have been done improperly.  A property may not have gone through the proper probate process or may have IRS or contractors liens attached to it.

So how do you find out about these clouds?

You pay to have a title search done.  A title search generally ranges in price somewhere between $250 and $500.  Do it!  Do it every time you are going to purchase a property.  It is money well spent.  Don’t think so?  Imagine purchasing a property only to find out later that the person that sold it to you was not the rightful heir and had no authority to sell it.  Can you say lawsuit?  How much will that cost you?

So use this clause in your purchase contract.  Use it every time.  Get a title search done, every time.   Avoid those clouds on the front end, don’t let them develop into a storm.

Hiring Contractors on Craigslist

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Kevin recently posted an interesting article about How to Find Good Contractors. I have to agree with him; networking with other landlords is the best way to find good contractors. Sometimes, these contractors think like investors. This can be helpful if you’re new to the game, like me.

We have already established that contracting cheap is not worth it for serious repairs: electrical, gas or plumbing.

My triplex needs a lot of miscellaneous work though. I need to repair the trim on doors, replace a cellar door, craft kitchen floor boards, and replace random pieces of exterior wood. This is in addition to the debris remaining from our carport demolition.

These repairs don’t require a lot of skill, but they do require time. So, it’s time for me to find some hired help. Where does a frugal, novice landlord turn?

Craigslist.

Looking for contractors on Craigslist can be efficient and cost-effective. Many people make their entire living off of Craigslist. I guarantee that you can find someone willing to do the work for the price you’re willing to pay. It’s not all flowers and sunshine though. There are just as many dishonest and unqualified people out there trying to make a dime. Here are a few rules to follow when using Craigslist to hire contractors.

  1. Do not post your phone number, email address or property address on your Craigslist post. You’re trying to save time by hiring help. Don’t waste it away answering questions to no avail.
  2. Itemize each repair requested in your post. Post pictures to reference repairs if you can. Transparency allows people to offer honest bids for the work.
  3. Sign a name to your post, but only a first name. You don’t want them to be able to look your property up if they know it’s vacant, right? *Ladies, I don’t sign my name. I use my boyfriend, Eric’s. It makes me feel less vulnerable, and Eric will most likely be on-site directing them anyway.
  4. Do not provide any information beyond what is needed. This is especially important when you’re issuing multiple posts. People who work off of Craigslist can easily piece together your information based on your signature or pictures. I posted once that I had recently purchased a truck. Someone responding to an unrelated post mentioned it. Watch out.
  5. Provide people with specific instructions to follow when responding to your post. Ask that they itemize their bid for each repair requested. At a minimum, I ask that people respond with their first and last name, phone number, whether or not I can text them, and their itemized bids. If they don’t follow directions when responding, rule them out!
  6. Call your Craigslist respondents. Ask them questions like what vehicle they drive and what tools they plan on bringing to the job. You may want to tell them you’ll call them back after speaking with the other potentials. Be discerning.
  7. If they don’t arrive at the agreed upon time, cancel and start over again. Craigslist is less dependable than Kevin’s recommendations, but it can be worth it. I get better deals when people blind bid for the work.
  8. After the work has been completed, pay the agreed upon price. Only pay your contractor for the work that has been finished. If you ask your respondents to itemize their bids, this step will be easy.

I rank my respondents based on their email professionalism and bid amounts. Good indicators are people who sell themselves a bit, people who respond with a business name and people who respond with a picture of their truck, trailer or tools. As Kevin said though, follow your gut. Be guarded with your personal information and property until you have developed a working relationship.

I will concede that buying, selling, and hiring help off of Craigslist takes time and patience. I’m a beginning investor though; all I have is time and patience.

I’m building a Rolodex from the ground up.

 

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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 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?

Finding the Real Estate Deals

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There are many ways that real estate investors go about finding their next acquisition.  Driving for dollars is one way while sending targeted letters or buying from wholesalers are others.  I myself have used these techniques and more.  In today’s market however I find the source that works the best for me is the good old realtor Multiple Listing System or MLS.

If you are unfamiliar with the MLS, it is the database that realtors use to list all of the properties that they have for sale in a particular area.  True, this list does not include all properties that are currently for sale, but it is going to include most of them.  And it is the source where I have found most of the properties that make up my portfolio.

Why is that?

I think mainly because when a property becomes distressed, either through foreclosure or through poor management the owner wants to unload it.  They are naturally going to turn to a realtor to list the property because that is the traditional way properties are sold.  They believe that a listing will bring them the best possible price.

Most foreclosures are there.  Most short sales are there.  Many estate properties are there.  In essence, many properties are there.  So I am there too.

So how do you get access to the MLS?  You can do that one of two ways.  Either find an investor friendly realtor to work with you or become a realtor yourself.  There are advantages and disadvantages to both methods and I will discuss those in another post.  But as an investor, you need to have access in one of these two ways.

Once you have access, set up a daily search.  Simply apply the criteria you are looking for such as the desired locations, types of properties, etc.  You can also set the search to look for keywords such as “foreclosure” or “as-is.”  Set your search to e-mail you either daily or immediately when a property that meets your criteria has been listed.

From there, you need to know your market.  You need to be able to recognize a potential deal when you see it.  Because honestly, there will likely be many properties listed that are not worth an investor’s effort.  Learn how to weed them out by understanding your market.

From there you need to have your financing ready.  Others are looking too and if you can move quickly and provide a solid offer, it just may get you the deal.

So get tuned in to the MLS.  Set up a search and begin writing offers.  You and your portfolio will be glad you did.

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.