SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Real Estate Investing

Tax Appeal Deadline July 31

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The deadline to file an appeal with the Shelby County, TN Board of Equalization  is rapidly approaching.  If you want to challenge your recent property appraisal by the Shelby County Assessor’s Office, you have until July 31st to file.  I will be filing appeals for several properties.

You can download the forms you need and file online here.

A word of caution though, if you file online you will not get a receipt.  There will be no record that you have filed.  I would recommend printing out your forms from the link above and actually taking them in person to the office to get a receipt.  You do not want to “get lost in the mail” so to speak.

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.

Update #4 – Property Reappraisal Challenges

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I have reviewed all of my property reappraisal notices.  To see what I have done previously in this process see here, here and here.  Some I can agree with and can see the logic behind the valuation while others I simply cannot explain.  Some of my properties’ values more than doubled in just one year for example.  With others, the value significantly increased while surrounding properties’ values were lowered.

Sometimes the Property Assessor did not even use comparable sales to value my properties.  They used “replacement cost,” meaning they added up the cost of the “bricks and mortar” needed to replace the property.  Using replacement cost really makes no sense.  For example, think of a run down section of your town or city, imagine building a house there using $1 million worth of materials (marble, quartz, gold fixtures, you name it!).  Is the home you built worth $1 million, or does location, location, location come into play?

Anyway, I asked for and received an “informal review” of several of my properties’ valuations.  This is a process whereby the staff of the Assessor’s office takes a look at the new values.  The results of this process were mixed.  Some properties were reduced to the old values (yeah!), some were reduced a little bit but not all the way (hmmmm?) and others were left where they were, too high (nope!).

So now we go on and upward with a formal appeal to the Board of Equalization.  At the very least, the informal review process reduced the number of formal appeals I need to make, so it is valuable to do.  I also must say that the staff of the Assessor’s office was at all times helpful and professional.  They returned phone calls (many times), listened to my reasoning and were as helpful as they could be.

If you live in Shelby County, TN the deadline to file is July 31, so be sure and get your paperwork in if you plan on appealing.  I plan on appealing several and I will be writing about that here in the future.

Update #3 – Property Reappraisal Challenges

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This is the third installment of my posts regarding challenging the property reappraisal process by the Shelby County, TN Property Appraiser.  You can see the first two posts here and here.

I have finally received all of my new property assessments.  And in the greatest recession since the Great Depression, my properties have increased in value by about 17%.  Obviously I will be challenging some of these new assessments.

The first step in the challenge process is to go to the assessor’s office and ask to see the comps (or comparable property sales) that were used to determine my properties’ values.  The staff at out local assessor’s office is generally quite helpful and will be glad to do this for you.

The second step would be to then analyze those comps and compare them with your properties to determine if they are a true comp.  Does the comp property mach the characteristics of your property?  Does it have the same number of beds and baths for example?  Does it have the same heating and air systems?  Are the comps in the same general area?  Are you being comped with a much pricier locale?  Location can really make a difference in my location as one block can be a huge change from one right next door.

Third, start looking for your own comps.  This is when it is really helpful to be or know a realtor, as they have access to one of the best databases for this kind of information.  But there are plenty of other sources out there, including the assessor’s database itself.

In looking over the comps for my properties I have several questions regarding how the assessor used those comps.  I have e-mailed the assessor with those questions and I am awaiting a response.  When I get that response, I will blog about it and this continuing process again in the near future.

What Happens Without Positive Cash Flow?

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Positive cash flow is king.  If a property does not produce positive cash flow, then don’t even think about it.  Without positive cash flow, you are doomed to failure.  Eventually, the bills and the expenses will mount up and you will be writing a check every month just to keep the property afloat.  A lot of people cannot do that.  They have or will run out of money.

What happens then?

Repairs stop being made.  At first it is little things.  Apartments are not repainted.  The property begins to look worn out.  Soon it turns in to major problems.  Roof leaks continue to leak, air conditioning fails to cool, the dead refrigerator is not replaced.

Next, good paying tenants start to leave.  How long would you put up with a leaky roof?   No AC in the summer? I am out of here!  Bills continue to mount and now less cash is coming in.

Perhaps then the owner begins to take in a lesser quality tenant.  They may or may not pay.  They definitely will be dirty if not trash the place.  They will drive any remaining good tenants away.  They will likely leave in the middle of the night and stiff you on rent.

At this point it is unlikely that the owner can even get tenants in the property.  It sits vacant or nearly vacant.  It is not long before vandals take notice.  Copper starts to disappear.  First it disappears from the HVAC units then from the plumbing.  Now the property is truly uninhabitable.  The only people living in it are perhaps squatters.

With no money coming in foreclosure is not too far away.  The property has become a distressed property.  Smart investors have been watching this property for a while.  They noticed when the current owner paid too much.  They have watched the property slowly deteriorate.  They know that a potential deal is now available because someone bought without positive cash flow.

Think the above does not happen?  It is how I have bought many of my properties.  Stay tuned in the future as I write about what to watch and look for and how to pick up some of these properties yourself.

The Key to the Deal is Motivation

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There are generally two types of investment properties out there on the market to buyers like me.  These are:

  1. Investment properties that are owned by other investors.
  2. Investment properties that are owned by banks.

I have bought from both of these owners over the course of my investing career.  Both present their own unique circumstances.  But no matter who the owner is, they have to be motivated.  Without motivation, there is generally no deal to be made.

Investor owned properties that are on the market are generally going to be listed with a real estate broker.  Many times the broker will list the property with an “exceptional” price.  In these circumstances, you have no idea why the owner is selling the property.  The owner may be retiring, he may be sick of dealing with tenants, he may have an illness or he may be trying to gauge the market.  He may just be trying to see if there is someone out there who will “pay his price” so to speak.

In other words you have no idea if the seller is truly motivated or not.  You can ask the broker why the owner is selling, but most likely you will just receive a vague answer.  If you want the property, all you can do is view it, run your numbers and make your offer based on those numbers.  If the seller comes back with a counter offer, you can begin to gauge the motivation.   If not, move on, he is not motivated.

The second type of seller is generally always motivated.  Banks do not want to be landlords.  They may have unrealistic prices in their heads, but they are generally motivated.  Again these properties will also be listed with a broker and what I have found is that banks often need to be educated on the true value of the asset they are holding.  Sure, the asset may be worth the price they are asking if it was fully rented, generating top of the market rents and lacking repairs of any sort.  But that is rarely the case with bank owned properties.  It can take a little time to educate the sellers and work these deals.

I like working with either type of seller, but for the deal to work for me, they always have to be motivated to sell.  If the motivation is not there, the gap between ask and bid is just too wide to bridge.  So determine the level of motivation as best you can early on.  If you find it lacking, move on to the next deal.

5 Traits of an Effective Landlord

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What makes an effective landlord?  Here are my top five traits.

  1. Effective Landlords are Sagacious.  Yeah I know, sagacious is a rarely used word but I think it really works here.   It means that effective landlords have a keen mental discernment and good judgment.  In other words, we have good BS detectors. This trait is important because being a landlord means that you have to shift through a lot of BS to get things done or get to the truth.  Being sagacious means we can see which real estate deals are truly deals, we know which gurus are full of it and can tell when our tenants or potential tenants are not being wholly truthful.
  2. Effective Landlords are Reliable.   To be effective in the landlording business you have to be reliable and be perceived as being  reliable.  You have to be a person of your word and do what you say you will do.
  3. Effective Landlords are Persistent.  Someone is always going to be throwing up some sort of obstacle to attempt to derail you or trying to get further into your pocket.  It could be family naysayers.  It could be the local utility company or city, it maybe your tenants or your insurance company.  Whoever it is, you have to be focused on your goals of being an effective landlord and keep fighting to achieve your goals.
  4. Effective Landlords are Confident.  To be effective you have to be confident in yourself and your ability to do the job.  That confidence comes from training and on the job experience.  Get yourself educated on landlording basics by joining a local reia group, reading this blog or finding a mentor.  Make that first step and acquire your first property.  Yes you will make a mistake or two, but nothing breeds confidence like a little success.
  5. Effective landlords are Creative.  To be effective you are going to have to find ways to get things done.  You will need to find properties to buy and hold.  You may need to renovate those properties.  You will need to find tenants before your competition.  You will want to retain the good tenants.  You will want to set up effective business practices.  You will want to do all of this while the forces in number 3 above are working against you.

These are in my opinion the essential qualities that differentiate effective and non-effective landlords.  I am sure there are others and I am sure others will have different opinions.  But if you are sagacious, persistent, reliable, confident and creative, I believe you will be successful.  The good part is, all of these qualities can be acquired.  Education and experience will make you a better BS detector, and give you confidence.  Reliability and persistence can easily be acquired.  Just start now!  Creativity will come as you learn and experience more and more about landlording.

 

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Update – Property Reappraisal Challenges

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This is an update to my previous post, I Thought Real Estate Was In the Dumps.  It is a property reappraisal year where I live and despite the down real estate market the county property assessor seems to think we are in the boom times.  Follow along with me as I go through the process of challenging these appraisals.

I have received more property reappraisal notices over the past week.  So far I am looking at an even greater supposed substantial increase in property value for 2013.

The first step in challenging these appraisals is to find out what basis the property assessor used to determine these values.  The basis is generally comparable sales or “comps.”  I went to the property assessors office and asked to see the comps for my various properties.  This information is generally public record and all you need to do is ask for it.

So now I am armed with the info that the assessor used to value my properties.  I will be analyzing it over the coming weeks and will let you know what I find.

I will also note here that the staff in the assessor’s office were very helpful and I could not have been treated better.  I was in and out of the office in about 15 minutes.  It is always refreshing to get good service.