SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Tenants

My Offer Was Accepted, Now What?

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

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

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

So let’s go through each one.

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

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

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

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

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

Tenants Are Your Eyes and Ears

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

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

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

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

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

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

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

What 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.

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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A Key (Box) For Saving Time and Aggravation

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Ever notice that tenants will lock themselves out at the worst possible times?  Mine have called while I’m on vacation or out of town even once during an anniversary dinner.

Repairs needing help from contractors were always fun too.  They would tell you when they would show up so you could meet them and let them in the property.  But, those contractors always took a little longer on the jobs before yours and that wait was always a little (a lot) longer than you thought.

I used to go to my properties to let locked out tenants in (yes, I did charge them) or to let in contractors.  As I got more properties however running here and there to unlock doors became quite the time consumer.  I am lucky, most of my properties are pretty close to my home, but I know other landlords who live much farther away, even in the next town.  So quickly running over to their property was not an option.

My solution to recapturing my time and reducing aggravation was to place key lockboxes at my properties, in which I put keys to every lock on the property.  Now, if a tenant calls while I am on vacation or simply out of town, I can provide them with the access code to get their key and open their apartment.  Now, when a trusted contractor needs to go to a property to make a repair, they have the access code to get the keys, make the repair and then lock it up upon leaving.

I use a lockbox from Master Locks.   This lockbox has space for several keys. It is sturdy and hangs easily.  Plus the combination code can be set and reset easily which I do from time to time or if a tenant has gained access.

These boxes have been a true time saver.  No more going to let a locked out tenant in.  No more waiting for contractors to show up.  Now I just text them the address, the problem and the lockbox code and they text me back when done.  Take some of your time back and get some of these lockboxes for your properties today.  To save money and time, I get mine from Amazon.com.  You can too by clicking this link.

Tenant Selection Criteria – What to Use?

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Use the right criteria to say no!

Tenant selection is perhaps the most important thing a landlord can do.  You have heard the saying “One bad apple spoils the bunch.”  Well one bad tenant spoils a landlord’s life.  Bad tenants will not pay you, will destroy your property and will generally be a thorn in your side and to your other tenants.

So you want to weed those bad tenants out before they get into your property.  But, you must be careful with your selection in order to avoid a potential discriminatory claim.  To do that you need to establish a set of criteria that you use to rank all applicants.  You want to find tenants who can pay, who will pay and who will take care of your property.

What are those criteria?  Let’s first discuss what they cannot be.  You cannot base your tenant selection on the eight federally protected classes.  These are: race, color, national origin, religion, sex, disability, familial status.  That means you cannot disqualify someone because they are black, or Jewish or female or because there is a child involved.  These criteria in no way affect anyone’s ability to be a potential renter, so do not even think of using these criteria.  It is just wrong and it will get you in some serious trouble.

So, back to the question, what criteria can you use to select your tenants?  Frankly, it could be almost anything except those criteria listed above.  But here are some of the more common items used:

  • Enough income to cover rent, utilities and living expenses.  Many will use a standard of a monthly income equal to three times the amount of rent.
  • A steady work history with good references.
  • Decent references from past landlords.
  • A decent credit score.
  • A history of prompt bill payment.
  • No recent bankruptcy or evictions (last 5 to 7 years).
  • Criminal or arrest history.

Using the above criteria, you should be able to determine fairly well if an applicant can pay the rent, will pay the rent and if they will take care of your property.  Is it 100% effective?  No, nothing is when dealing with people but it does work pretty well.

Some will include other criteria based upon their own personal experiences.  I know of landlords who will not rent to lawyers.  Lawyers like to sue.  They are not a protected class and you can discriminate against lawyers as long as you are consistent.  I know another who will not rent to people with motorcycles.  Their experience has been that the motorcycle will end up in the living room dripping oil come winter.

You will most likely need to tailor your criteria to your particular circumstances.  Depending on your location, your tenant pool may not have decent credit scores, or bankruptcy may be very common.  Whatever criteria you do decide upon, be sure to write them down and be sure to evaluate everyone against those written criteria.  Keep a record of your evaluation process.  If someone ever does come back on your screaming discrimination, you will have records showing otherwise.

 

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What’s In Your Rental Application?

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The rental application is one of the most important documents that a landlord uses.  It is the tool that is used to verify everything that a potential tenant has told us.  The application should give you the authority to check an applicant’s credit, criminal, work and housing history.  A good application for should do three things:

  • Positively identify the applicant (yes, some do lie here.).
  • Determine if the applicant can afford the rental unit.
  • Provide enough information so you can rank the applicant according to your application standards.

You application form needs to be clear, easy to read, and easy to complete.  At a minimum it should ask for the following:

  • Legal Name
  • Current Address
  • Social Security Number
  • Phone and E-mail
  • Addresses for previous 5 years
  • Employment Information
  • Income Information
  • If the applicant has ever been evicted
  • If the applicant has ever been convicted of a crime
  • If the applicant has ever filed bankruptcy
  • If the applicant has pets
  • Who will be living with applicant (adults and children)
  • Where they bank
  • Credit references
  • Emergency Contacts
  • A space for comments and explanations
  • Authorization to check references, call employers and pull a credit report.
  • A place for their signature.

All of this information should be enough for you to determine if the prospective tenant can afford the property, meet your rental criteria and will be a decent tenant.

Keep it simple and straightforward.  Also be sure to keep your application form neutral in regards to the 8 federally protected classes, which are race, religion, color, national origin, age, sex, disability and familial status.  Determining your applicant’s ability based on any of these criteria is just plain wrong and will land you in hot water.

Next time I will take a look at some criteria you can use to rank your applicants.   Untill then, have a happy new year!

100% Occupied May Not Be What It Seems

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100% occupied.  Sounds great right?  That is just what we want to hear when we are looking to purchase a multi-family building to add to our portfolio.  However, not everything is always as it seems.

Trying to sell a building is easier if you can tell perspective buyers that the building is 100% occupied.  The buyer thinks that there will be less work involved in taking over the building when the sale closes.  They will not have to advertise, they will not have to do showings, they will not have to spend money rehabbing the apartment to make it rent ready.  There will be a smooth and easy transition.

But, as I said, not everything is as it seems.  Sure the building may be 100% occupied.  But, what if the current owner rented the last few apartments to anyone who could fog a mirror just so they could say the building was 100% occupied?  What if the people they placed in the building had been evicted from their previous residence just a few months before?

Don’t think the above happens?  It happened to me when I bought a four-plex several years ago.  Yes, I did my due diligence and reviewed all of the leases and the income and expense statements.  Everything looked fine.  But if I had bothered to check a simple and free database I would have noticed that one tenant had just been evicted and had a drug arrest as well.  No one in their right mind would have rented to this guy, unless you were trying to say 100% occupied.

So what happened?  You guessed it.  As soon as we closed, he stopped paying.  Four rent free months later, after going through the expensive and lengthy eviction process I had a dirty and damaged rental unit back in my possession.

On the bright side, I learned a valuable lesson.  Check out the current tenants as best you can before you close.  The court and criminal databases are free here as they are in many jurisdictions.  It is as simple as typing in a name.  If you do find something odd, go back to the seller and discuss and if you need to, renegotiate.  It would not have been so bad kicking the guy out if I had gotten a little bit better price.

Cash for Keys

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Tenant screening is one of the most important things that a landlord can do.  You want to make sure that you selected people to live in your properties that can pay, will pay, will pay on time and will not tear up the place and cause trouble.  However, no matter how well you screen your tenants, every once in a while you will have a tenant that cannot pay.

Perhaps the tenant lost their job, or had some other unfortunate circumstance happen.  Whatever the reason, when you have a non-paying tenant you want to get them moved out and a good paying tenant moved in as soon as possible.  It is not that you are a mean person, but you have to eat as well and the bank really does not care that the tenant has stopped paying you, the mortgage payment is still due.

The first thing that most people think of when they have a non-paying tenant is the eviction process.  Yes, you can go that route, but it can be expensive, time consuming and just downright nasty.  It creates ill feelings on both sides.  Plus, crafty lawyers will be sending your tenants advertisements telling them how they can stop that eviction with a bankruptcy (and they can for several months!)

Rather than eviction, I prefer to use the cash for keys method.  What is cash for keys?  It is simple really.  You pay the tenant to move out and hand you the keys.

Why would anyone do that?  Shouldn’t the tenant be paying you the back rent?  After all, they owe you money.  Yes, that is correct, but by the time they get to the point where they cannot pay the rent they have likely exhausted their resources.  They may want to move, but do not have the money to do so.

So it seems to me that it is better to pay them a little bit of money, maybe even as little as $50 or even as much as $300 to get them to move their stuff out and give you the keys.  By using the cash for keys process you have control of the incentives.  You can even get the tenant to clean the place before they leave so they can get their money.  Evictions use the threat of the courts and we all know cash today is much more effective than the threat of a judge sometime down the road.

Plus, when using the eviction process you are going to have to pay a lawyer.  How much will that cost?  $300, $400?  Did you figure in the filing fees, process server fees, writ fees and set out crew fees as well?  Now which one makes more sense?

I know it can be hard to swallow giving money to someone who may owe you a substantial sum.  But the best thing for everyone is for the tenant to move on and for you to get possession of your property back so you can get it re-rented as quickly as possible.

One last thing, before you had them the cash for their keys, be sure to get them to sign a release to the rights of possession.  Otherwise you could be in for more headaches down the road.

Do Not Disturb (The Tenants)

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Many new real estate investors have bought at least one piece of real estate, their own home.  They have been through the real estate purchasing process at least once and this process is their frame of reference for future purchases.  The process for purchasing investment real estate is very similar.  You negotiate with the owner, agree on a price, draw up a contract, fulfill the terms of that contract and close the deal.  One key way that the process is different however revolves around existing tenants.

Investment properties like duplexes, quad-plexes, apartments and even single family homes that are on the market often have tenants in them.  Tenants make showing the property difficult.  The current owner is simply not going to invade his tenant’s privacy every time someone thinks they may want to buy the property.  You as a buyer have to realize that you will often have to make an offer on a property without seeing the entire property beforehand.  This is generally not a problem as we shall see below.

Tenants also require a certain level of discretion on the part of any prospective buyer because many times the owner has not told the tenants the property is for sale.  Often there will not even be a “for sale” sign on the property because the owner does not want the tenants to know that the property is on the market.  Why not?  People hate change.  A sale of the property means change and many tenants will simply move rather than deal with change in ownership (Yes, I know moving involves change as well but that is just the way tenants are.).

So when looking at an investment property with existing tenants, NEVER disturb the tenants in any way shape or form.  Always inform the listing broker or owner before you go on the property.  The agent or owner will most likely want to meet you at the property to show you a vacant unit (or possibly an occupied one) and prevent awkward encounters with the tenants.  You can always do a drive by for a look, but do not do much more.   If you do, you may just anger the owner enough that you will loose the deal.

As you can see, you will almost never see all parts of an investment property before you make your offer.  So how do you protect yourself?  You put a clause in your contract stating that the contract is “contingent upon the inspection and approval of the condition of all dwelling units.”  Once the seller and his agent are confident that you are a qualified buyer who can close and intends to truly buy the property, the owner will arrange for your inspection of all dwelling units and most likely let his tenants know that the property is going to be sold.  If, upon inspection they are in a condition that you anticipated then move forward and close.  If not however, it is time to return to the negotiation table.

 

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