What makes a good rental property?

Why what you buy is as important as where you buy.

So you’ve decided to buy a rental property and you are working with an agent to find that “right” property to purchase as a rental for others to live in.  What makes a good rental?  A lot of real estate agents appear to believe that distressed properties that they are not having much luck selling to others make good rental properties.  Even when I worked as a licensed realtor in California, I would never have encouraged an investor to invest in distressed property for a rental, unless that investor was willing to restore the property to pristine condition after a thorough home inspection that identified all of the issues with the property and a commitment to restore and repair those as new.

Any work not done on a distressed property, has the potential to create a habitability problem for a renter which will cause a landlord numerous headaches.  Habitability includes heat, ability to cook, hot water for showers and a leak-free, safe shelter, though most local municipalities add substantially to this list and a rental owner must know what the local regulations are before proceeding to list a home for rent.  It has been my experience that one of the first major items that is neglected in a distressed home is the roof.  Roofs run in the tens of thousands to replace and most owners of distressed homes find that they are unable to pay for the basic repairs and maintenance to a home, let alone a several thousand dollar roof.  If a roof is leaking at all, a home is uninhabitable and the roof must be water tight in order for it to meet the habitability requirements of a rental.

Another neglected area of a distressed home is the electrical wiring.  As homes age, the electrical wiring often needs updating and repair.  Many distressed homeowners neglect the wiring in their homes or can be unaware that there is even an issue with wiring.  I purchased a three-floor, Victorian home where the third floor had not been used or lived in for decades.  In fact, it had been sealed off to preserve the heat on the bottom two floors.  When I opened it up to reveal the most beautiful rooms with authentic, Victorian wood details, I had to remove the old knob and tube wiring in order to make the third floor safe for habitability.  The wiring problems were only apparent when we removed the old lathe and plaster (which was falling off the walls in chunks).  The rest of the house had been rewired, but since the previous owners had no intention of using the third floor, they had not bothered to remove the old wiring and rewire that floor.  Had I not engaged in the renovation of the third floor and left it sealed up, I may never have become aware of the old wiring issues on that floor of the home.  Even though it may have been attractive to have tenants on that floor, without engaging in a proper restoration and removal of potentially dangerous conditions, it would have been irresponsible to have anyone residing in that portion of the house, even a family member.

These are just two examples of why purchasing a distressed home for a rental may actually be inadvisable.  I sympathize with real estate agents who struggle to sell distressed homes, but they do not make suitable rentals unless the investor is willing to invest all of the money necessary to make the home completely habitable.  It should also be a concern for an investor that even if a home is brought to code for habitability according to local regulations, parts of the home may become uninhabitable within a very short period of time after the tenant is permitted to move into the home, simply because of the age of the home and the lower urgency of those particular repairs.  While the local government has regulations describing what constitutes a habitable home and those do protect tenants, rental income real estate investors should make sure that they always have the financial ability to maintain and repair a home within those regulations.  That financial ability can become more challenging when a home is purchased with existing repair needs.

So, here is my list of what to do to make it easier for you to purchase a great rental property:

  1.  Enlist the services of a real estate agent who understands what your financial ability to pay for repairs now and in the near future truly is.
  2. Be very clear about what repairs you are willing to make and what repairs you are not willing to make.  While a distressed home may seem like a great deal, the longer it takes to repair the longer it will be before you can generate income and, even after the home is generating income, it is more likely that a larger percentage of that income will have to be set aside each month in order for an owner to anticipate and pay for repairs that will need to be made.
  3. If you cannot afford a home in your “preferred” neighborhood, try the neighborhood next door (assuming it also meets the “best places to invest” criteria, of course).  A great real estate agent will never allow you to be narrow-mindedly specific about a neighborhood in which you should purchase a rental property, but will go over the pros and cons of investing in a general geographic area.  This will help you find the best rental home your money can buy for the best rental return you can expect to achieve and without the headaches associated with major repair costs.
  4. If you are not a contractor, a lack of contractor knowledge can make a distressed home a money pit, rather than an income-generating investment.  So, if you are still determined to purchase a distressed property, engage the services of a trusted contractor who can give you realistic and practical estimates for the necessary repair work to the property.  Don’t allow the contractor to suggest cutting corners.  Most reputable contractors will not allow you to do this, but investors are sometimes so concerned with the cost of repairs that they will ask a contractor if there are short-cuts to the repair issues.  Don’t ask.  In fact, someone without a construction background of any kind is well-advised to avoid a “fixer-upper,” in the first place.
  5. Buy the most house you can for the dollars you have and be willing to make minor repairs to bring the home up to code and fully habitable.  Your tenants will appreciate a clean and safe home.  One of the biggest errors a landlord can make is assuming that if the rent is low, a tenant will be willing to live in less-than-favorable conditions.  This is not only short-sighted, it is illegal and can lead to a landlord being cited by the local authorities.  If a home is cited by local authorities, the tenant may be asked to vacate the property, engage in repairs to the property at the cost of the rental income, or be due monies from the landlord.  None of these situations is consistent with rental income property investment goals and should be avoided at all costs.
  6. Always keep in mind that your rental property is your tenant’s home.  Yes, it is true that some tenants abuse rental homes and damage them without concern for the cost to the landlord, but if a landlord or property manager has done his or her due diligence with regard to tenant screening, then it is safe to assume that most tenants want a comfortable, clean and safe home for themselves and their families.  We tend to have an emotional attachment to that place we call home and we deserve that place to be safe and secure.  Great landlords can achieve long-term, tenant retention and timely rent payments by providing a home for a tenant, rather than simply a roof overhead (especially if that roof is leaky!)

The Home Handbook-Why Your Rental Needs One

By: Eveline Brownstein (c)

Do your tenants know how to operate the dishwasher?  Do your tenants know where the circuit breakers are?  Do your tenants know who to call in an emergency?  Do your tenants know what days to put the trash out?

These and many other questions can be answered by referring to a Home Handbook that you maintain on the home, and which is given to a tenant upon move-in.  Newly acquired tenants generally have lots of questions when they move into a property and property managers must answer many of the same questions, repeatedly, with each new tenant.  Not all of these questions come up during the walk-through and property managers tend to field a lot of new tenant questions about “how to” and “what if” more than actual service, maintenance and rent payment issues.

In order to alleviate this,  a few years ago I prepared a Home Handbook for each rental property.  If you have been a diligent manager or home owner, you likely already have most of the items that will go into this handbook.  My handbooks are large binders with plastic sleeves inside so that I can easily change the contents as the information changes.  These are the items I place into the binder:

Appliance Manuals.  Appliance manuals fit neatly into the plastic sleeves.  If the manuals are only available online (a practice being followed by some appliance manufacturers) I print it out so that I have a hard copy.  If you rely upon your tenant to refer to an online manual, you might be erring.  Giving your tenants access to the operation manuals for each of the appliances in the rental unit will likely save a service call or the need for you to demonstrate how to use the appliance.  It will also help to alleviate any misuse damage, for example: if you have a high-efficiency washing machine and it requires the use of high-efficiency detergent.  If any of the appliances are still under warranty, a copy of the warranty information should be in the handbook.  This will be useful when the appliance needs to be repaired under warranty.  Having a copy of the warranty at the home means that the tenant has it on hand when the repair professional makes an appointment to undertake the repair or when the property manager needs to meet the repair professional at the property to supervise the repair.

Emergency Phone Numbers.  I generally place a list of emergency phone numbers in the very front of the home handbook.  Besides the obvious 911, the list includes the local police department phone number, the fire department, the nearest hospital and of course, my 24 hour phone number.

City Policies. If there is a curfew policy in your city, it’s a good idea to tell the tenant.  Other policies that may require your tenant to behave in particular ways should be written in the home handbook, for example: if there is a policy regarding noise after certain hours; parking restrictions; traffic ordinances peculiar to your city, etc.

City Council Information. Even tenant residents of a city are entitled to representation by their local city council and a voice in what happens in their community.  Knowing who is who in the local city council and when meetings are held is information a tenant should have.  People who feel that their issues are of concern to their local legislators feel more connected to the community in which they live and become positive partners for the betterment of neighborhoods.  Encouraging your tenants to become involved in the local community is a good idea.

Rent Payment Options. I always add a page into the handbook with the rent payment options available to my tenants.  This includes: a way they can pay their rent directly into the bank account by walking a payment into the bank; the address to where payments can be mailed, and the forms of payment that I will take.

Trash Pick Up Procedures and Policies.  Does the city recycle?  Do they use separating bins?  What is the pickup schedule?  What is the policy with regards to bulk pickup and yard waste?  The answer to all of these questions should be in the home handbook.  Even if you go over this as part of your move-in/getting acquainted walk-through, expecting a tenant to remember all of these policies is unrealistic and having the information handy is one less phone call a tenant has to make.

Approved vendors for repairs and maintenance. If you have a policy that tenants can call service or maintenance companies directly, the numbers of those approved service people should be in the handbook.  If you prefer the tenant call you first, then add a page in the handbook that directs a tenant to call you if there are maintenance or repair issues that need to be taken care of.  I also add the same text that is in my lease which says that the tenant may not repair or engage the services of any repair professionals without my prior consent.

There are lots of useful items you can put into your home handbook, but do not forget to have your tenants sign for their receipt of the book.  Also, do not forget to make sure that a tenant who is moving does not accidentally pack it with other belongings when moving out.  The book should always stay with the home and be updated on a regular basis.

Finally, make the first page your welcome page.  Welcome your new tenant to the property and let the tenant know you are happy the tenant decided to rent your home or the home you mange.  There is nothing more heartwarming than moving into a new home, sitting down to read the home manual and being greeted with a warm welcome when you turn to the first page.

Are Move-in Incentives a Good Idea?

By: Eveline Brownstein (c)

Yes, I have used them.  As to whether or not they have actually worked.  I am not so sure.  If you are going to use move-in incentives, here is my best advice:

Move-in rent reductions. A lot of property owners and managers reduce the first month’s rent as a move-in incentive.  I don’t think this is a wise idea.  I do not care for the rent reduction incentive, especially if it occurs at the beginning of the lease period. It can send an unintended message to a tenant that you can afford to not receive the full amount of rent under a lease.  By sending that message, a tenant may be more likely to approach you for a reduction or release from rental amounts owing later in the lease period.   A wiser strategy might be to offer a final rent payment reduction, but this is not likely to encourage a tenant to move into a home.

Gift Certificates. I have used this strategy with limited success.  Instead of a rent reduction of say $100, I have given a local grocery supermarket gift certificate, in that amount, as a move-in incentive. I am not convinced it made my property more attractive to move into. I still firmly believe that renting a home, like buying a home, is an emotional decision, based less on price than on how one feels about the layout and offerings of the home.  Nevertheless, in a rental market where there are an abundance of available and vacant properties, a move-in grocery gift certificate could tip the scales in favor of your home.  I would also consider offering a Home Depot or Lowe’s certificate, or a Bed Bath and Beyond one.  Even a restaurant certificate would work in this instance, but I still do not truly believe a move-in incentive, even this one, would cinch the deal if the property is not appealing in the first place.

Rental Negotiation. Being wiling to negotiate the rental rate to lower than is advertised in the listing is probably the most effective move-in incentive.  In a market where most rents are priced approximately the same, offering a small, negotiated reduction in order to close the deal makes sense.  To renters, $25 to $50 per month represents a large annual savings.  Being willing to negotiate can lead to a completed application on the spot, rather than the experience of the tenant leaving to look at other properties, sometimes never returning.

Upgrades to the property. If you were planning to upgrade anyway, this is a good strategy to let a prospective tenant know that you care about the property and that you will be responsible when it comes to maintaining it.  It also lets the tenant know that you expect the tenant to take care of the upkeep of the property. If other properties in the area are being updated, you may not attract as many tenants to your property if it is looking outdated and in need of sprucing up.  Letting a tenant know that you will be charging the same rent, but would like to upgrade various items while the tenant is occupying the property can help to keep the rental income flowing as you make the repairs.  Never promise to make repairs or upgrades you have no intention of making.  Make a list of what you will be doing to the property and ask the tenant to sign a copy of the list.  This does not apply to items that you are obligated to repair for habitability of the property.  Those are legally required before a tenant can move in, or as soon as possible when you become aware of them, after the property is occupied, so check your local ordinances carefully.

Lease Renewal Incentive. This is probably the best tool for property owners, landlords and property managers.  Offering a lease renewal incentive ensures an ongoing tenant and a lower risk of vacancy.  Any one of the above incentives can work to encourage a lease renewal.  Offering a lease renewal bonus of $50 or $100 is common.  Again, I don’t care for the rent reduction incentive, but a refund check after the first rent payment under the new lease, or a gift certificate, are great ways to avoid giving the appearance of not requiring full rent payments, while rewarding the tenants you want to keep.

Despite the tools available and the popularity of move-in incentives, I personally have had mixed results when using them.  For the most part, they are neither expected, nor required by tenants and occasionally, have had the effect of making a landlord seem somewhat cavalier about rent collection.  So, if you are considering this approach, use it carefully and wisely and really get to know the market in which you are renting out properties.

Is A Short Sale A Good Idea for a Rental Property?

By: Eveline Brownstein (c)

When considering any rental property for purchase, part of that consideration is how soon you can start generating income, and how much of a return on the money you put into the property are you going to get.  Short sales often appear to be bargains.  The bank or mortgagor is willing to walk away from the property for less than what is owed and the owner of the property needs to get out from under the mortgage.  Besides the bargain price, there are a number of considerations that go into the decision to purchase a short-sale property for a rental income:

How much time do you have?  Typically, short sales can take three to six months from acceptance of the offer price to closing of the sale.  Hiring a realtor who is experienced in short sales is important, because often the mortgagor on the property will have a tendency to move the file on the property through different departments for review.  An experienced realtor who has dealt with short sales knows that it is important to establish at each stage which department the file has been transferred to, and who to contact for a follow up.  Nevertheless, these transactions usually move very slowly and file review takes months.  A buyer cannot expect to own the property for several months and therefore cannot expect to be able to move a tenant in during that time.

Do you want a move-in ready property? Many short sales properties suffer from the reality that not only did the owner not have sufficient money to pay the mortgage, but the owner also did not have any extra money for maintenance, repairs and upkeep on the property.  I once represented a buyer of a short sale property where the owner had begun extensive remodeling of the property and then lost her job.  She was unable to complete the remodeling projects and thus any offer my buyer made had to take into account that the remodeling projects left undone would need to be completed before she could move in.  The same would go for a property one intends to rent to a tenant.  Landlords have a legal obligation to provide a habitable property as defined by local and state ordinances.  Any issues with the property will be the responsibility of the buyer as short sales are generally sold “as is” without a single credit for repairs, nor are any made prior to the closing of the sale, regardless of habitability.  Short sales are typically not move-in ready, so added to the time considerations of how long it will take to own the property, one has to consider the additional time it will take to undertake the repairs to the property, before it can be rented.  Between the time it takes to own the property and the time it takes to undertake necessary repairs, it could be close to twelve months, or more, before a buyer can realize any rental income on the property.

Are you willing to pay the original amount of property taxes? Even though a short sale property sells for less than the market value, most property tax rates are based on the market value of the property.  So, once you close on the property and you have undertaken the necessary repairs to make it habitable, you will pay the market value of the property in property taxes as determined by the local assessor’s agency.  Once you get that first property tax bill, the bargain of the purchase price may not seem like such a bargain if the property is located in a high property tax, or high property value area.

Can you set aside enough money to make necessary repairs? As mentioned above, if the property is not move-in ready (and most short sales are not), you will need to set aside enough money to make necessary repairs.  When considering the cost of the short sale, you must also add in the cost of repairs to the property.  For the purposes of a rental property, adding in the cost of currently necessary repairs may not be sufficient.  A property inspection may reveal future, necessary repairs.  As I have previously stated, I believe that the purchase of real estate for rental income purposes (and many other purposes) should be undertaken with a ten-year plan to hold the property.  So, apart from the immediate repair issues, one should also consider long-term repair projects like roof replacement, furnace and water heater replacements and appliance replacements.  Painting of the exterior should also be considered in this plan.  When calculating what the rental income will be, one should consider what portion of collected rents should be set aside in a capital improvement account for the long-term repairs of the property.  Short sales with deferred maintenance may need sooner capital improvements, due to long-term, general neglect.

Are you willing to defend a legal action? In the current climate, some banks have been accused of acting improperly in their short sales and foreclosures.  This could expose a buyer of these properties to legal action.  A very careful review of all the paperwork in a short sale is critical to protect the buyer from legal action.  It is a good idea to hire an experienced real estate attorney to review the legal paperwork, if an attorney for a real estate transaction is not required in your jurisdiction.  Legal fees charged by such an attorney should be considered in your calculations of the cost of the property.  Nevertheless, even if you do not have legal exposure, this does not mean that you cannot be sued and that you will not be required to defend your purchase.  It may merely mean that you will prevail, but you will still likely have to hire an attorney to defend your position and that can be costly.  The potential for this should be weighed against the savings you will be realizing in the short sale purchase. Purchasing a short-sale from a mortgagor who has a solid and dependable reputation for legally reliable transactions is important.  So, take some time to research the mortgagor’s reputation in these types of transactions, before making your offer.

Some bargains truly are bargains.  Some bargains have the potential to become money pits.  Taking a little time to thoroughly research the parties and the real costs involved in a short sale, before committing to the purchase, can ensure that your purchase choice is the right one for you.

 

Perhaps Not the Best Places to Buy Rental Income Property

By: Eveline Brownstein (c)

A recent online article by CNN Money lists their pick for the 10 best cities to buy a rental income property. As I read through the list I was astounded by the cities listed.  I, personally, would not even consider purchasing rental income properties in most of the listed cities.  I wondered if I was alone in my very strong reaction to the article, so I read the comments and found myself agreeing with the many who had taken the time to comment.  I believe that the cities listed pose glaring risks for me.

Reconsidering what I said in an earlier article about what is possibly the single most important driving factor for my own purchases of rental income property, I stated: “Buy in neighborhoods where there are opportunities for jobs.”  Astoundingly, CNN Money lists several cities with rampant unemployment and few near-term  job growth prospects for those who are unemployed.  In the article, CNN Money also shows the projected home price for 2014, and in most of the areas listed there is also an expected projected further decline in property values.

I want the properties I buy to increase in value, over time.  I want my rentals to rise with inflation.  I want people to have the ability to rent my homes.  I want renters to choose my homes because of the neighborhoods in which they are located.  The availability of jobs is more likely to drive people to move into an area; whereas the lack of jobs is likely to drive people to move out in droves. Growth areas, even if the growth is positive but small, yet constantly rising, are preferable to me than depressed areas that are stagnating or on the decline.  Though properties in declining areas are attractive for their lower prices, they are unattractive to me for a host of other reasons besides that the rents are generally lower too.

And what does it mean for a landlord or a property manager who is hired to manage properties in distressed areas?

1.  Difficulty collecting rents.  Sometimes.  It has been my experience that even tenants with less than stellar credit pay their rent first.  Most people desperately desire a roof over their heads and do not want to be homeless.  Despite a tenant being very motivated to pay the rent, rents are more likely to be late or partial when the tenant falls on hard times. A tenant who pays the rent, even if it is received a few days or even a week late is often preferable to a vacant house in a depressed area.  Sometimes, this leads to tenants availing themselves of the opportunity to stay just inside the law, which can be an administrative headache for a landlord or manager.  Owners would prefer occupied properties without vacancies of any time at all and a paying (even late paying) tenant is usually better than even a single month’s vacancy. This can lead to some extended hand holding of a tenant and a lot of  frustration for the property manager.

2.  Difficulty attracting good tenants to the area. Depressed areas are more likely to have longer vacancies and extended vacant homes pending foreclosure. Many banks who own vacant foreclosed properties, fail to maintain them as a result of the additional costs involved and they are often easy to spot in a neighborhood by the fact that the lawn has not been mowed in a while, the trash has not been removed, exterior repairs have not been made, etc.  For managers who are managing in a depressed area, showing people an available rental home becomes challenging.  Even if the home itself is impeccable, if the properties around it are unattractive, good tenants will simply not want to move there.  In areas where unemployment is rising and there are continued job losses, tenants may struggle to pay rents.

3.  Difficulty collecting sufficient rent to cover the property expenses. With depressed areas usually come reduced rents, at least for the near term while things begin to stabilize, even if they stabilize at the bottom of a downtrend.  This can sometimes mean that the amount of rent a property manager is able to collect may be lower than what is needed for upkeep and repairs to the rental property and to cover other expenses, such as insurance (please tell me you insure your rental income properties), taxes and utilities. This will mean an out of pocket expense for the owner. Managers who are working diligently to meet their owners’ needs may find themselves caught between the frustration of the owner and a general market rent that is unsatisfying to the owner’s investment goals.

Professional and experienced property managers are able to overcome the obstacles presented by managing properties in distressed areas and are honest and forthright with their property owner clients when explaining the challenges and setting realistic expectations for what is is possible to collect in rents.  Great property managers also remember that economic circumstances beyond their control can make for stressed tenants and stressed owners, both of whom may need their sound advice with respect to what is possible, over what might be unrealistically expected.

Managing Your Property From A Distance Is Risky

Why landlords should consider hiring property managers.

By: Eveline H. Brownstein (c)

In a previous article I wrote about how to decide what rental homes to buy, I said:

Don’t be afraid to buy in affordable areas outside of the state you live in.  Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby.  This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county.  They may indeed be in another state.  Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.

Despite the sound advice in this writing, problems can arise when those who buy rental income real estate elect to follow the first piece of this advice and dismiss the second.  It is important that anyone who follows the advice to look for lucrative rental income opportunities outside of the area in which they live, also follows my advice to hire a local property manager to manage the property.

The first critical part is, that if you are considering an out-of-area rental income property and after running the numbers you realize that you will not have sufficient income from it to hire a property manager, then I believe it is unwise to purchase the property.  Property managers typically charge around 10% of the rental income as a management fee, though there are areas of the country where a flat fee is charged after a certain maximum rental is reached, and others where managers will work with you to give you a “bulk break” if you have more than one property.  In a prior writing I emphasized the need to carefully calculate what your costs will be.  Factoring in the cost of property management for a property when it is unwise for you to manage it yourself, such as in the case of an out of area property, is an essential part of those calculations.

There are significant risks to a property owner if that property is not carefully managed and the greatest is with those properties where the landlord is absent.  Here are some of the more common risks:

  1. Never meeting the prospective tenant.  Despite all of the best background checks that might be done, there are risks when a landlord is unable to meet a prospective tenant face-to-face.  Many people can look great on paper, but how do you know for certain that the paperwork they give you indeed belongs to them?  Being able to check some things in person, like drivers’ licenses or other identity documents, is a more reliable way to know that the person who is renting your property is who they say they are.  Landlords who manage from a distance risk not knowing the veracity of the person who has applied for tenancy and is more limited in their ability to verify the information presented.  Additionally, it is more difficult for landlords who are absent from the area to conduct in-person tours of the property, or do a move-in checklist of the property’s condition, so that damages to which the security deposit can be applied are noted.  A landlord will not know that damages were done by a tenant, if the landlord is not certain of the condition of the property when the tenant moved in.
  2. Lawsuits.  A poorly managed property that does not meet the legal standards of being fit for tenancy, or one that is managed without careful regard for the legal rights of the tenant, can cause the property owner to be sued.  A lawsuit such as the one filed by Montrose, Texas tenant, Mark Kaufman against Harvey Horowitz of California can have devastating financial consequences for a property owner and could easily equal more than the sum total of any property management fees that the landlord would have had to pay to have the property managed by a local, competent management company.
  3. Destruction of property.  Some comfort resides in tenants who know an owner is not going to just drive by and check on their property.  In one case in Asia, the “trusted” tenants removed the entire house, brick-by-brick and the landlord was left with nothing but an empty lot.  The neighbors were apparently not concerned, figuring that the tenant had the landlord’s permission to remove the house.  This is clearly an extreme case of property destruction, but nevertheless, a landlord cannot rely on the vigilance of neighbors to ensure that a property is being properly cared for by a tenant.
  4. Failure to maintain the home.  Those areas of the home that are the tenants’ responsibility to maintain could be neglected if a landlord is not present to ensure that they are undertaken responsibly.  Simple matters like mowing the lawn or removing snow, which are designated in the lease as responsibilities of the tenant, may be neglected or not undertaken properly.  An absentee landlord will not know that these issues are not being taken care of, if the landlord is unaware of them because the landlord is not able to inspect the property.
  5. Failure to hire competent repair professionals.  Absentee landlords are less likely to know who might be the best local professionals to handle repairs and maintenance on their properties.  Local managers, who are diligent about how they conduct their business on your behalf, make it their business to know who to hire for repairs and who can be trusted to make proper and guaranteed repairs to your rental home, so that your investment in it is secure.
  6. Delays in making repairs or taking care of maintenance.  Landlords who are not nearby the property they own may necessarily delay needed repairs or maintenance as they investigate who they might hire, get referrals and quotes, and make arrangements for the repair person to meet the tenant at the property.  Successful property management companies make sure they keep copies of the keys to the property and make legal arrangements to enter it so that the repairs can be made, even if the tenant is not available to facilitate access to the property.
  7. Lease Violations.  Landlords who are not able to regularly inspect or drive by the properties that they own will likely not become aware of some rather serious lease violations, for example: if the tenant acquires a pet that is not permitted in the terms of the lease; if the tenant moves additional people into the home or sublets it without permission; or, if the tenant engages in a business out of the premises which is not permitted under the terms of the lease.
  8. Delayed necessary evictions.  A landlord who manages from a distance will find it difficult, if not impossible, to evict a tenant who is not in legal compliance with the lease.  Finding a local attorney to take care of the situation will likely cost more than if a local manager handled the process, because the attorney will be required to hire people to undertake the more simple tasks, like serving the paperwork and monitoring the eviction.  While an attorney is generally necessary for the filing of the paperwork and for making sure that all aspects of the eviction are in compliance with applicable law, there are, nevertheless, certain aspects of the eviction process that a manager can handle.  These aspects vary from state-to-state, but may include: serving the initial paperwork to let the tenant know that the tenant is not in compliance with the lease; ensuring that all deadlines for compliance are met, and in some cases even taking care of removing an evicted tenants belongings from the property timely, so that it can be rented out promptly.  It is usually financially impractical for an absentee landlord to make the many trips that may be required to complete the eviction process timely and with minimal delay.  Delayed necessary evictions not only cost money as a result of the process involved, but generally also come with a loss of rents that could have been minimized had they been carried out timely.

These represent just a few of the risks that landlords who choose to manage properties from a distance may be confronted with, and why it makes sense for any out-of-area landlord to rather spend the time more wisely, that is: in pursuit of a competent property manager who is properly qualified to manage residential properties, and who diligently monitors the actions of any tenants who are permitted to rent the property.

Who is my client? A timely reminder for Property Managers

By: Eveline Brownstein ©

The property owner is, of course.  It is the responsibility of the Property Management Company to always make decisions in the best interest of the owner of the managed property.  A critical part of this is to ensure that the property is legally compliant with all local tenant/landlord laws.  Tenants have rights and property managers must protect their property owners by ensuring that they comply with those legal rights at all times.  A property manager should engage in ongoing real estate education to keep up to date with changing legislation.

A good property management company will be helpful to the tenants wherever it can, but it must beware of letting go of its business goals in favor of its manager/tenant relationship. Renters are not your customers. Renters are the customers of the property owner and you are obligated to secure good tenant-customers for your owner-customers. Sometimes, in an admirable effort to reduce vacancies and keep tenants happy, property managers inadvertently closely guard their friendly relationship with a tenant and become hesitant to protect the property owner.  On those occasions these undesirable situations may occur:

  •  Violations of lease provisions (sometimes because the manager mistakenly believes it is minor in a bigger picture)
  •  Delaying rent collection
  •  Delaying enforcing lease provisions relating to tenant upkeep of the property
  •  Delaying beginning a necessary eviction process
  •  Overspending on repairs
  •  Undertaking unnecessary repairs or items of a merely cosmetic nature
  •  Permitting a tenant to choose a repair professional
  •  Permitting a tenant to undertake repairs to the property
  • Trusting a prospective tenant’s statements about their background or credit, over proper checks of their credit and background

Property managers owe a legal and fiduciary duty to their property owner clients.  Property owners owe a legal obligation to their tenants.  Property managers are the agents entrusted with that legal obligation, and if they are diligent in their legal and fiduciary duty to their property owners, they will also be effective in helping to manage their owners’ legal obligations to the tenants.

Owners should hire well-qualified property managers so as to minimize their legal exposure.  Property managers should always know and follow local regulations and laws regarding tenants, and regarding their legal, fiduciary duty to their property owners.  Owners are paying property managers for their services.  Therefore, property owners are the clients of the property manager.  Tenants are paying the owners.  Therefore, tenants are the clients of the property owner.

Smart Ways to Buy Residential Income Real Estate

By: Eveline H. Brownstein (c)

The real estate market is at a low for prices and a high for inventory.  This is, according to many, the “perfect time” to invest in income-generating real estate.  Many articles are encouraging people to invest in income real estate, like this Wall Street Journal report which suggests that retirees can benefit from become landlords in owner-occupied rental properties; or this MSN article with five tips to get you started.  In all of the articles I have recently read, few have detailed the dangers that may lurk in not carefully planning your strategy.

At the very height of our recent real estate boom, before the start of what is now being referred to as “the Great Recession,” many people looked at the speedy accumulation of equity in their homes as a handy “cash register” for investing.  Sadly, many of those same people not only now find themselves without equity in their homes, but many of them find themselves also without those homes.  The bursting bubble was predictable if you were someone like me with four generations of real estate professionals in her family and a history of great investments by generations that came before; but it is easy to see how people with very little real estate experience might have failed to see what experience had taught me was coming.

Despite many articles being written, to the contrary, now is not the best time for everyone to buy rental income properties and, for some, it may never be appropriate.  There are, nevertheless, some smart strategies for buying rental properties.  Here are my strategies:

  • Start with a plan.  As mundane as it sounds, having a written plan for purchasing rental income property is essential.  Your written plan should detail your strategy for acquiring the property, renting it and paying all of its expenses.  It is (and it will become) a business, like any other.  All good businesses start with a business plan and rental income real estate is no different.
  • Purchasing rental income property is not the same as flipping houses.  Some people decide to buy distressed properties, renovate them and then instead of selling them, decide to rent them out.  This is not a plan to own rental income property.  A plan to own rental income property should include the realization that even in the best of circumstances, the return on such an investment will not be realized for at least ten years or more.  You will be committing yourself to owning a rental property for a minimum of ten years and to managing and maintaining it for this period of time, or longer.
  • Don’t use the equity in your home to buy a rental income property.  Assuming you are fortunate in this real estate climate to still have equity in your home, that equity is part of your good credit.  Actually, it always has been; however in the recent real estate boom, lenders seemed quite uninterested in credit worthiness and some were lending without proof of income or ability to pay.  I believe that the equity in your home is better used as a short-term loan, that you can quickly and easily pay off, should you need it for emergency repairs to a property, or to cover a mortgage payment or two in the event your rental is vacant for a couple of months.  Read the terms of your home equity loan very carefully for restrictions regarding what is possible and seek the advice of a loan specialist.
  • Don’t buy rental  homes in wealthy neighborhoods.  There are two reasons why this is a poor decision for the average rental property buyer.
  1.  Most people who live in wealthy neighborhoods own their homes.  Neighborhoods where there are a majority of owners are highly desirable and, as a result, the price of these homes is usually high.  Therefore, the price of the home you will be buying will be very high, in relation to the monthly rental that you will be able to charge.  Two fairly-priced homes in a middle-class neighborhood, when combined, will often generate the same (and sometimes more) income than the single home in the wealthy neighborhood.  Always keep in mind the risk of vacancies which will result in you needing to come up with the mortgage payment.  While it is possible, it is less likely that both homes will be simultaneously vacant, meaning you will only have to come up with 50% of what a more expensive home will require.
  2. Higher rental homes can stay vacant longer due to the high cost of moving into them (first month’s rent plus security deposit can run tens of thousands), forcing you to come up with a very high mortgage payment to cover payments due during vacancies.  Once again, purchasing two homes in a less expensive neighborhood will spread your risk and help minimize the length of your vacancies.
  • Buy income properties in family-oriented neighborhoods. It has been my experience that family-oriented neighborhoods offer amenities that appeal to the widest variety of renters, regardless of whether they have families or not.  The populations in these neighborhoods also appear to be much less transitional, leading to community continuity and some predictability regarding neighborhood desirability over the long-term.
  • Buy properties in neighborhoods with lots of opportunities for work.  If I had to choose ONE tip for where to buy rentals, this would be it.  A few years ago, someone suggested to me that I invest in a neighborhood, “because it is growing.”  Never one to pass up the chance for a new investment opportunity, I traveled to the area to take a look for myself.  I spent a number of days there, speaking to the locals, visiting the neighboring areas, speaking to realtors and looking at houses.  Finally, in bewilderment, I asked the realtor what jobs there were in the area.  All I had seen were a number of service-related jobs and lots of restaurants.   The realtor responded that there was a university nearby.  Needless to say, despite the growth that was going on, this community did not fit my requirements for a good place to purchase rental income real estate.  People will always move into an area where there are jobs and no more so than right now, when our unemployment rate is so high.  You want to rent to gainfully employed individuals and they are where the jobs are.  A university is a great place to work, but I don’t know of any university that can employ everyone in a neighborhood.  A desirable neighborhood has many different industries represented in it and offers job opportunities to people in all strata of the worker population, not just one or two.
  • Research the neighborhood diligently. With the internet being a primary source of information, it is very easy to research a neighborhood before you buy.  Know what the neighborhood offers to residents, but also know what might make it undesirable.  Know what the market rate is for rents in the area.  Make sure that the property you buy is properly priced so that the rent you receive represents a good return.  There are several formulas for determining this.  Most involve figuring out how many years it would take for you to realize a break-even return on your investment. Sperling’s  BestPlaces.net is one of the sites I frequently use to research a neighborhood, but don’t forget that a visit in person can tell you what an online website cannot.
  • Two homes are better than one, and three is even better.  All investors and their advisers will tell you to spread your risk among investment opportunities.  The same can be said for real estate.  I am not an investment adviser, so I am not able to give investment advice, but spreading your risk when buying residential real estate makes sense.  If you are able to buy two properties, instead of just one, then two will spread your risk.  The odds of both being simultaneously vacant are lower than if you have a single home.  The strategy that worked for me was to buy one home free and clear and take out a small mortgage on a second home.  The first home covered the deficits created by vacancies in the second and had the ability to save for itself, should it have a vacancy.
  • Don’t be afraid to buy in affordable areas outside of the state you live in.  Conventional wisdom has always been that if you are going to buy property for rental income, you should live nearby.  This does not take into account the fact that the best places to buy may not be in your neighborhood, or even in your county.  They may indeed be in another state.  Of course it is unrealistic to expect you to manage a property from a distance, but that’s where really good property managers can be your best tool for getting the most out of your rental.
  • Be committed to maintaining your property in tip-top shape.  So you’ve bought a property and you have a renter.  Now you just collect rents and pay the bills?  No.  A rental income property must have the same attention from you as the home you live in does.  It must be properly maintained and not be permitted to go into a state of disrepair.  A home loses its equity and its value quickly, when it is not well taken care of.  To me, collecting rents from tenants obligates a landlord to maintain the home.  When I was a realtor I often heard other realtors say, “You can tell this was a rental.”  It meant that clearly rentals were not as well looked after as owned homes.  It didn’t need to be a truth.  Rentals can be looked after just as well as owned homes and can command the same price if the time ever comes to sell or finance it.  Don’t lose valuable equity in your rental home by not taking care of repairs and maintenance, freshly painting it, keeping a pretty garden for great curb-appeal and tending to repairs promptly.
  • Research your property thoroughly.  The realtor you are working with may not know everything about the property that you will find important.  Always verify what the realtor tells you (the contracts you sign with the realtor say as much) by doing your own research.  Tax rolls and home values are available online on websites such as Zillow.com.  You can also get a lot of information from the local City, either in person or online.  Most of this information is publicly available.  Spend the money to get a thorough home inspection done .  Knowing what repairs will have to be made now, or in the future, will help determine if the purchase is a wise one.  Look at the local flood map.  Research the weather patterns for hurricanes, tornadoes, earthquakes, etc.
  • Don’t forget to diligently do the math.  There is more to rental real estate than just paying the mortgage and collecting the rents.  Don’t forget the other expenses that will be incurred:
  1. Insurance.  Rental properties must be insured, especially if you have a mortgage (the mortgagee will require it).  A good policy will cover the loss of rents in the case of damage to the property and other unforeseen disasters.  Set up the payments online to come out of your rental property account each month to ensure the policies stay in force.
  2. Repairs and maintenance.  Depending on the age of your property, this will vary.  Setting aside ten percent of your collected rents for repairs is a good policy.  Don’t forget to add in the cost of normal maintenance for the property, for example, gardening (if the tenant is not responsible for it).
  3. Utilities.  Renters typically pay for utilities, BUT don’t forget that you will need to pay for the utilities during the times that the property is vacant and being shown.  Utility companies generally require a deposit from you to maintain an account in your name as the landlord for the property.  When a tenant moves into the property, a utility will transfer the service to your tenant, but when the property is vacated, you will once again have to turn the utilities on in your name.  Besides water and electricity, there are sometimes city expenses, like sewer and trash pick up charges.  A diligent realtor will be able to get this information from the prior owner, so that you can properly plan.
  4. Property Taxes.  Know your obligation BEFORE you buy.  Understand the tax collection policy for the neighborhood, when taxes are due, how and when they are billed.  When I lived in Los Angeles, taxes were billed April 1 and December 1.  They were due in full, December 1.  They were very easy to forget.  In Arkansas, my taxes are billed once a year and are due the month of the anniversary of when I purchased the homes.  They are also easy to forget, if I am not diligently putting the money aside for them. In New Jersey, they are billed yearly and due quarterly…not so easy to forget.  Make plans to set the taxes aside from the collected rents from every collected rent payment.  I have found that the best way to handle this is to set up a separate bank account from where the taxes are paid and into which anticipated tax monies are regularly deposited.

Buying rental income real estate can be very rewarding and for many it is a passion and a full-time job that they love.  Careful planning and attention to some of the more frequently overlooked details can make it a successful business venture, as well.

Rolling out our new look

 

 

By: Eveline H. Brownstein

rentUSAnow.com has rolled out a new logo and new colors throughout the website.

Lots of hard work went into the creation of the new logo, which was refined and perfected by Bob Post of PG Promotionals, of Red Bank, New Jersey.  Many people contributed ideas and helped me decide on the final design.  Nick Berkland, a successful car salesman at Royal Oak Audi in Alberta, Canada contributed the USA image and was the person who convinced me that the logo needed changing.  My visionary in all these matters, Kevin Squires, helped me pick from a variety of designs I created, as did Jen Packer a neighbor and marketing guru and Anette Menzel who owns BeautyAura.com and who is a European Image Consultant, with extensive experience in making people look fabulous.

We are now embarking on an intensive marketing campaign to accompany our new look and we welcome your feedback on our efforts thus far.