SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

REIA

Getting Over the Fear

by

It’s Halloween, a time for all things that instill fear and scare us.  The thought of real estate investing for some causes fear.  They are fearful that they will loose a lot of money.  They fear that tenants will destroy their property and contractors will rip them off.  They are fearful that they do not have the right skills.  “Why would anyone ever invest in real estate?” they think, “It is just too scary.”

To tell the truth, I was scared of real estate at one time.  Heck if you are not a little scared about dropping tens of thousands of dollars into a project for the first time then there is something wrong with you.  But I got over the fear.  How?  I did it through education and action.

Fear generally arises from the unknown.  Knowledge therefore erases fear.  The way to gain knowledge is through education.  I spent a lot of time on my real estate education in the early years.  I like to tell folks it was like going to graduate school.  Here is what I did.

  • I turned off the TV.
  • I went to the library and read almost every book they had on real estate.  You can’t beat free and they had a lot of great resources for beginners.
  • I subscribed to and read local and national business journals.  If I was going to be a business person, I needed to begin thinking like one and I needed to know what was going on in my local market.
  • I joined my local REIA group and went to every event I could.  I met folks, made new friends and networked.
  • I read blogs, like Smarter Landlording and biggerpockets.
  • I bought several real estate courses and other books.  They were expensive, but I considered them an investment and they have paid off many times now over the years.
  • I built a team of people that could help me achieve my goals.  These included a realtor, an attorney, other investors, a CPA, etc.  I had folks on my speed dial that I could call whenever I had a problem or situation arise.

Sound like a lot doesn’t it?  Well, it was and it ultimately took several years, but that was the easy part.  The second part, the action, was harder.

Overcoming fear and putting knowledge into action is one stumbling block that many cannot get over.   All I can say here is just do it!  You have to take that first step.  Once you do the second one becomes easier and the third one even easier.  Before you know it, you have taken 10 steps forward and are well on your way.

Yes, you are going to mess up at times.  Yes, you are going to fail at times.  Yes, you will have to take a step back every once in a while.  But the smarter investor learns from their mistakes.  They know failure is part of the process and keeps moving forward.  Remember that every step back can be met with two steps forward which will still keep you going in the right direction.

Don’t want to take a huge step?  Then how about starting small?  You don’t need to buy that 20 unit apartment building right off the bat.  But how about getting a house in your own neighborhood as a rental property?  Or perhaps you could get a duplex and live in one side and rent out the other?  Don’t even want to start that big?  Wholesale a property to another investor for a few thousand dollars.

These are small steps that will help you learn along the way and give you the confidence to do bigger deals later on.  These small steps will lead to bigger steps and with each step that fear will get smaller and smaller.

So enjoy your Halloween.  Eat some candy.  Then get over the fear by learning and doing!

How to Find Good Contractors

by

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.

Preparing to Buy Your First Property

by

If you’re like me, you turn to the internet to answer all of your questions. Every time I’m ready for a new challenge, I begin by typing, “How to…,” in the Google search bar.

So, I’ve created a few posts that combine strategies that have helped me to prepare for the big purchase. Following these strategies can increase your savings, reduce your expenses, and move towards your goal of home ownership.

First and foremost, define your goal
Do you want to buy a single family house or a multifamily house? Will you live there? If so, how long do you intend to live there? Will this be a rental property? Do you plan on selling it in the future? Answering these questions will narrow down your search criteria.

Next, decide on your price range
I’m a huge proponent of living below your means. Reduce your expenses to live a more moderate lifestyle. My advice would be to set the top of your price range below what you can afford. Make sure your price range is based on a well thought out budget and a consistent spending record.

Get your finances in order
Pull your credit and review that information. You are allowed to request a free copy of your credit every year from each of the three reporting agencies (find that link here). Is everything correct? 1 in 4 people have a mistake on their credit report. Having open disputes on your credit report could prevent you from qualifying for an FHA loan. So, take care of this early.

Get smart
You should be able to have an intelligent conversation with your lender about your options. Don’t let others make decisions for you. This is your purchase, isn’t it?
Which product best suits you: FHA, FHA 203k, Conventional, or Homepath?
Learn the lingo: GFE, Warranty Deed, Closing Costs, Owner-occupant, Per Diem Interest, FRM and ARM

Save and Source
Stick to a savings plan that is consistent and can be tracked. It’s not enough to stick money under your mattress. You have to be able to show where the funds came from and where they went, for at least 3 months. This is to ensure you’re not opening new debt to fund your down payment or closing costs.

Find a Knowledgeable Real Estate Agent
Everyone I have worked with was based on a referral, and I must say, I have worked with some amazing professionals. If your real estate agent is knowledgeable and experienced, he/she can connect you with other knowledgeable and experienced professionals like lenders and title companies. They can advise you of real estate trends or bidding strategies. I chose an agent who was also an investor. So I gained a good bit of insight on buy and hold deals, flipping houses, and the benefits to gaining your real estate license.  You can often find such an agent at your local REIA meetings.

Have FUN
Searching for a home is a fun experience! Don’t let the research or the pressure stress you out. Don’t get emotionally attached to the property either. The best real estate purchases are made when the buyer has a clear mind and is not in a hurry. I lost out of many bids that I wished I had won, but I ended up with a great purchase that I love. I’m sure you will too.

The Importance of Networking

by

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.

What to Watch to Know Your Market

by

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.

Get Off the Wall

by

I attended my local REIA meeting the other night and was glad to see several first time visitors there wanting to get into real estate.  As I have written before, joining a local REIA group is a great way to get into real estate and now is a good time to get into real estate.  Being an officer of MIG and one of the more experienced members, several first time visitors caught up with me during the meeting.  They always ask the same thing, “What do I need to do to get into real estate?”  Here is what I tell them.

First, I tell them they need to study all they can about real estate.  There are many different aspects to real estate and I do not know what you want to do and frankly, neither do you.  Check out every book from the library, buy a few books, listen to pod casts, peruse the internet.  You need to get familiar with the basic terms and concepts used in real estate like wholesaling, mortgage, writ of possession, trust deed, etc and you need to become familiar with the methods to invest in real estate.  There is no right way to invest but not every way is right for everyone.

Secondly, you need to get to know some people in real estate.  You need to meet people who do different things in real estate such as landlording, or rehabbing or retailing.  While all deal with real estate they are very different and utilize very different skill sets.  You need to determine which investing activity best suits your skills.  There is no better place to do this than at your local REIA group by talking with other experienced investors.

I know this can be hard.  I was a newbie once too.  I went to meetings and stood along the wall and I see many first time visitors doing the same thing.  I know what they are thinking.  They are afraid you will sound dumb.  They are afraid you will not make a good impression.

But none of that is true.  The more experienced folks remember when they were first timers and how hard it was to take those first steps.  We will not think you are dumb.  We will be impressed that you have taken that first step!  So take that first step.  Get off that wall and up out of your seat.  Ask what people do, how they got into investing and ask for a business card.

Here is another idea for you first timers, offer to take a few of the people you meet out to lunch.  You need to eat lunch.  They need to eat lunch too.  Use your lunch time to your advantage.  There is nothing like an hour over a good meal to pick someone’s brain.

So get to a local REIA meeting if you really want to get into real estate.  Get off the wall and introduce yourself, talk to folks and find out what they do.  Over time, they will help you become a successful investor and soon you will be handing out cards to the first timers.

The One Clause Every Lease in Tennessee Should Have

by

If you invest in the great State of Tennessee like I do, there is a clause that you should be sure that you have in your lease.  I say “should have” because it is not required.  But if you put this one clause in your lease, you will save yourself some time and hassle down the road.

Tennessee Code Annotated (T.C.A.) 66-28-201(c) states in part that:

Rent shall be payable without demand at the time and place agreed upon by the parties. Notice is specifically waived upon the nonpayment of rent by the tenant only if such a waiver is provided for in a written rental agreement.

What that law says is that you the landlord have to provide your tenant notice that he/she is late on their rental payments before you can take them to court, unless your lease specifically contains a clause stating that the tenant waives the right of notice.

When you go to eviction court here in Tennessee, one of the first things the judge is going to want to see is your lease.  The judge will ask if you have the notice clause in your lease.  If you do not, the judge will then ask if you served notice that rent was due.  If you have not served notice, guess where your case goes.  Yep, right out the door.  Ignorance of the law is no excuse.

I know it sounds silly.  The tenant knows they have not paid the rent, why do I need to notify them of it?  Plus, it takes time, effort and money to serve notice, time you do not have because they are not paying you!  You want them out so you can get it re-rented.  So put a simple clause in your lease like the following:

Rent is due without demand or notice from Manager/Landlord.

And be sure to have your tenant initial beside this clause when you are going over the lease with them.

Remember I’m not a lawyer and can’t provide legal advice.  I am only a landlord with several years experience.  So check with your own legal counsel.

Those of you in other states, I bet there are quirky laws like this for your state, so be sure to know and follow the laws in your state.  One good place to find out about local laws is at your local REIA group.  Find one and join up today.

 

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

What Makes a Solid Lease

by

A solid lease is one of the keys to being successful as a landlord.  It will clearly define both the tenant’s and the landlord’s roles.  So what makes a solid lease?  Here are my top ten components

  1. Make sure it is written.  Seems simple enough but I have heard more than just a few times of people not having a written lease.  If you do not write it down, how will you prove to a judge what the terms were?  It will come down to he said/she said.  Have a written lease!
  2. State the monthly rental amount and late fees upfront and in bold.  Have the tenant initial next to these amounts.
  3. State clearly when the rent is due.  Put it in bold and have the tenant initial next to it.
  4. State the amount of the security deposit.  You may want to have another form letting the tenant know what they have to do to get it back in full.
  5. Set a term for the lease.  Will the lease be for six months, a year, two?  What ever it is set the term and then make it go month to month at the end of that term.
  6. Outline who is responsible for what utilities.  Clearly spell out the utilities that the tenant and the landlord are responsible for.
  7. Have a set of house rules about noise, trash, cars on the lawn, criminal activity, etc, etc.
  8. List what appliances come with the property.  You may even want to list serial numbers on the lease.
  9. If your property was built before 1978, have a lead based paint disclaimer and be sure to hand out the lead based paint brochure.  It could be a $20,000 fine if you do not!
  10. Include any clauses that may be required by your state or local jurisdiction.  Laws vary from place to place.  In my location the laws are completely different from one county next door.  Be aware of your local laws and seek competent advice on them!

You may want to take the time to have an experienced attorney look over your lease.  I have and it really helps.  Also, ask folks at your local REIA group if they will share copies of their lease with you.  Everyone’s lease is a little bit different and you can tailor one to fit your needs.

Finally, your lease should be a “living” document.  You should change it as you experience new issues or laws change.  Review it every once in a while to be sure it is keeping up with your needs.

Happy investing and work smarter not harder!

Dealing With Tenant Drama

by

Tenants are the lifeblood of a landlord.  Their rent payments keep us up and running.  Tenants, being human however always bring some drama along with them.  Many times they want to involve you, the landlord, in that drama.

Sometimes it is just petty BS.

“My roommate is driving me crazy and she needs to move out! Make here leave.”

“My roommate did not pay me for this month’s rent so I only have half of the rent.”

Other times it is more serious.

“We are getting a divorce.”

“I lost my job.”

You will get all kinds in this business.  I have had roommates stealing from each other, fall off the wagon, stop taking their meds and start screaming in the middle of the night.  Every year brings a new experience.

You as a landlord need to protect yourself, your property and other tenants from the tenant drama.

Let’s tackle the petty BS first.

First of all, we are clear at move-in, we do not do tenant drama and we do not resolve disputes between roommates.  Renting an apartment is an adult experience and we expect our tenants to act and resolve disputes like adults.

Secondly, you need is a strong lease.  Be sure that every adult living in the property is a signatory on your lease.  Our lease states that each tenant/roommate is “jointly and severally liable” for the payment of rent.  So if one does not pay, the other tenants are each individually liable for the non-payment and we can evict them all.  We also require that we receive only one check or money order for the rent, no matter how many roommates.  You do not want to be chasing down roommates for their share of the rent.  These tips will protect you and give you an out to point towards when dealing with the drama.

When tenants try and drag you into the drama, you need to be cool, collected and firm.  Remember, you do not do tenant drama.  Listen to your tenants, always be polite and remind that they are adults and they need to work out their problems as adults.

Then there are the more serious matters.  You need to have policies in place to deal with these events.

When someone gets a divorce or loses a job, no matter what your lease says, things are going to change.  Your job now is to manage that change as best as you can.  These more serious matters are going to generally require someone to move and many times the breaking of a lease.

Tenants may try to hide things as long as they can, since “denial” is not just a river in Egypt.  Eventually however the problems will surface and you need to be proactive.  Talk to your tenant as soon as you suspect a problem.   Again be firm but polite and listen to the problem.

If there is a divorce and someone needs to move, let them move.  Have policies in place that state the consequences for breaking the lease.  For example we may keep all or a portion of the security deposit depending on the circumstances.  We require a release fee of extra month’s rent if they break the lease.  You just need to say that you understand their problem however our policy is x y and z.  Most people will understand.

When a tenant has lost their job it can be a really serious blow and you have two options; evict them or work with them to move them out asap.  Again be firm but fair.  State that you understand their problem but that they can’t stay without paying and that they will need to find other accommodations soon.

Set a date for them to move out and be sure to stick to it.  You may actually need to help them move along with gentle reminders or you may even want to provide them some funds to move or give their security deposit back upon move out even if the have to break the lease.  You job here is not to stick it to someone who is down, your job is to get your property back in as close to a rent ready state as is possible.  One of your biggest expenses as a landlord can be eviction and the subsequent clean up and repairs.  We try to avoid that at all costs.  You are not going to get blood from a stone at this point, so cut your losses, help the tenant transition out and get your property back so you can re-rent it.

What about the tenant that stops taking their meds and starts screaming in the middle of the night?  When these types of situations arise you need to be careful.  You can try talking to the tenant, but they may not be helpful or may be embarrassed, etc.  In this case you may need to call their emergency contacts for help.

Your rental application should have a section for emergency contacts.  Be sure that you ask the relationship of the emergency contact to the tenant on the application.  Many times the tenant will put a family member, such as mom or brother, on the application.  These types of  situations may be ones where you get in touch with the emergency contacts to discuss your concerns.  Be careful of your tenant’s privacy rights here.  You may just want to let them know that it may be time to check in on their family member.  We have had success using this approach in the past.

As a final note, be sure to check with your own state laws.  If you become aware of drug dealing, spousal or child abuse and do nothing, you may become liable.  So be careful here and take action if necessary.  You can find out about your local laws at your local REIA.

In sum, expect a lot of tenant drama.  Be ready for it with a solid lease, a good application form and firm but fair policies that you discuss with your tenants at move-in.  You can’t predict or be ready for all the drama (we change our house rules every year based on the drama we experience), but you can sure save yourself a lot of aggravation, headache and drama.

 

Subscribe to Smarterlandlording and receive a Free Report: 21 Tenant Screening Red Flags

Spring Break

by

Spring has sprung here in Memphis, TN.  It came a little early this year after a very mild winter.  I’m sure a lot of people now have spring fever and want to get outdoors or to the beach for spring break.  For me however spring break has another meaning, spring means repairs, a lot of them.

It seems that whenever the seasons change, things start to break.  In the spring with the March winds and April showers it is missing shingles and roof leaks.  With the rising temps, people start up their air conditioners and some will need recharging while others may not work at all.  All of the landscaping and trees turn green again and need cutting, pruning and trimming.  In short, it seems every seasonal change, with spring being one of the most drastic, brings a clump of repairs.

It is uncanny.   As soon as the temperature changes, the phone calls start coming in.  “My AC is out.”  “There is a leak in the kitchen ceiling.”   So far this spring I have replaced a condenser, a fan motor, recharged several AC units, fixed three roofs with two more to go and removed two trees that blew over.  And it is not even April yet!  So what does a smarter landlord do about all of this?

  • First, just know it is coming and accept it.  Things break and spring is a deluge.  In the winter it is the heat and frozen pipes.  This is just the way it is.
  • Second, save up some funds.  In a previous post I have stressed the importance of budgeting 10% of gross rents for repairs and putting away a little bit more each month for major expenses in reserves.  Trust me, spring break it going to make you (and your tenants) glad you did.  Understand that you will not have 10% worth of repairs every month.  Some months may have no repairs, but averaged out over the year 10% is a good number.  My repairs for all of 2011 totaled 10.14% of gross income.  Almost right on the money.
  • Third, have some skilled contractors on your team that you can call to fix the problem quickly.  You will need a roofer, a plumber, a good HVAC person and a landscaper/tree person.  By having these people on your team you can handle repair problems quickly and thus cut down on an even bigger expense, tenant turnover because you did not fix stuff in a timely manner.  Where do you find these team members?  Your local reia is a great place to start.
  • Fourth, take the opportunity to be proactive and do a little “spring cleaning.”  Now is a perfect time to inspect your properties, both inside and out, for damages and other problems.  Contact your tenants and let them know that you will be conducting an inspection.  Then, check their HVAC units and change the filters (tenants never do it), check their smoke detector batteries, check the plumbing for leaks and check around the outside for other general repairs such as fallen limbs, rotten wood, etc.

A smarter landlord has to be proactive and routinely check on their properties.  I would recommend that you conduct an inspection at least twice a year.  Perhaps once in the spring to check their AC, clean the condensers, etc., and once in the fall to check their heat.  Always look at the plumbing under sinks, around toilets, etc.  I can’t tell you how many leaks I have found that had obviously been going on for months and the tenant says “Oh yeah, I was going to call you about that.”

So there you have it: spring break, accept it, prepare for it and be proactive.

Until next time work smarter not harder.