There are many reasons why a person might want to know who the owner of a property is, but did you know that the owner of a property is a matter of public record? Every county in the United States has a property tax assessor whose job it is to establish a value for every single piece of property in their counties. The assessment will include assigning a value to the land and all of the structures on that land. If deemed appropriate by the county and the state in which that assessor is located, it is also the job of the assessor to collect the property taxes for the properties in that county for the county and also for the state.
As a result of the meticulous job assessors are charged with to both identify properties, assign value, assess taxes and collect the taxes, assessors must keep thorough records regarding who owns each parcel of property within a county. In some states, there are both county and city tax assessors. Cities collect taxes for their local government purposes, including police and fire departments, park upkeep and other infrastructure, etc. In order for assessors to know who is responsible for paying the property taxes on the parcels of property within their jurisdiction, it is imperative they know who owns the property.
So, if you want to know who owns a property, the local assessor in the city or county where that property is located will have that information and since this is tax collection information, it is a matter of public record. This means that anyone can have access to that information upon request.
These days, most assessors’ offices have interactive websites that make obtaining the information regarding the name of the owner of a property easy to achieve. In areas where the assessor does not have an official website with the information readily available, an interested person can either visit the assessor’s office and request the information in person, or can mail a request for the information. In some instances there is a charge for the assessor to provide the information, but in many cases information obtained via the internet is free.
Tenants should know what a landlord is not responsible for, and should act accordingly.
Local regulations differ widely nationwide, but there are some basic requirements of a landlord and there are some areas that leave a tenant vulnerable. Tenants should plan for, and cover themselves, for those things a landlord will not be responsible for, or they risk having losses that they will have to pay for out of their own funds.
1. Theft of a vehicle. A recent article on Heraldnet.com covers one such instance. A landlord is not responsible for a car stolen from the property. As a driver, you are required to carry insurance to cover accidents. In most states it is not necessary to carry vehicle loss insurance. However, if you do not cover your vehicle for theft and it is stolen from the property, you are personally responsible for that loss. Such a theft loss is not the responsibility of the landlord.
2. Theft of personal property inside the home. A landlord is not responsible for a tenant’s personal property, stolen from the home. Renters are wisely advised to purchase a renter’s policy to cover a theft of personal property. These policies are, generally speaking, affordable and they will give a tenant peace of mind. One of my properties has an alarm system that I installed when I was living there. I have had a number of subsequent tenants in that property, all of whom have elected not to activate the alarm system. While this is clearly a choice my tenants make voluntarily, since I have provided access to an alarm and it has not been activated by a tenant, my responsibility for any thefts at the home is greatly diminished. Tenants should especially consider purchasing renter’s insurance that includes valuables, if the renter intends to keep jewelry or collectibles on the premises. A landlord will only be responsible for a theft loss if the landlord is directly responsible for the theft, for example: When giving workers access to the property for repairs and failure to lock the door when leaving the property.
3. Flood damage of personal contents. A landlord is not responsible for damage caused by a flood to the personal contents of a tenant. This means that even if the landlord carries content coverage on a flood policy, that coverage will not cover a tenant’s possessions, should those be lost in a flood. Renters who purchase renter’s insurance will also be able to purchase flood damage coverage to cover their personal belongings, should there be a flood in the home.
4. A guest who experiences a personal injury. While most landlords carry personal liability coverage that covers losses in the case of the personal injury of a tenant or a guest at the property, this does not eliminate the liability of a tenant from being also named in a lawsuit or a claim for personal injury, especially if it can be shown that the tenant negligently contributed to the injury. For example, if the tenant personally places a large rock in a pathway where it can be tripped over. Renters should exercise caution when inviting guests to the home, but should also cover themselves in the event that a guest is injured on the property as a result of an act of theirs and not the landlord’s. Sadly, we currently live in a litigious society and forethought and protection from money judgments and lawsuits must be a part of what we consider when we make decisions about what we need.
These are just four reasons why a renter should consider purchasing renter’s insurance when renting a property. A landlord’s policy will simply not cover areas that a landlord is not responsible for and a renter must decide what losses he or she can comfortably afford and what losses to protect against.
Why you should not neglect the exterior of your rental
By: Eveline Brownstein (c)
Everyone wants a desirable rental property that has tenant longevity. Here are my four tips for making your rental the most desirable one in the neighborhood.
1. Landscaping. Most rental referrals are from yard signs and people who drive past the property to view the neighborhood and the property itself. Don’t underestimate the power of a pretty yard. Frequently mowed grassy areas, clean flower beds and property trimming of trees and shrubs can go a long way to make a strong and positive initial impression of your property, making potential renters more interested in seeing the interior of the property.
2. Exterior condition. If the paint on the exterior of your house is peeling and faded, the initial drive-past could make a potential renter drive away permanently. Maintaining the exterior of the home by touching up the trim paint and painting the exterior when necessary will make your rental home a place renters want to call home.
3. House numbers. There’s no point in advertising a property if your rental home cannot be found or can easily be mistaken for the property next door. In addition, emergency personnel need to be able to easily identify your property (this is a good tip for owners and renters). Make sure that the property numbers are clearly displayed and easily readable, from the street. This can be achieved by regularly painting your curb numbers and by erecting onto the house some large house numbers that can be seen from the street. Make sure your rental can be found and identified by potential renters and the people they may invite as guests and the emergency personnel, who may need to find the home.
4. Don’t neglect the mailbox. A leaning, missing or broken mail box can send a message to a potential renter that you do not care enough to make minor repairs to the property. After all, new mail boxes are not expensive investments and repairing the posts for them are generally simple and easily done. A sad mailbox could signal to a potential renter that the interior of the house is as sad and that a landlord will be difficult to deal with when it comes to making home repairs.
Don’t neglect the exterior of your rental home. It is the first impression a renter will have of the type of landlord or property manager you are and what they can expect in the future. Sadly, you will never know if a potential renter was disappointed with the exterior of the home as most will not bother contacting the leasing agent if they were put off by the home’s exterior. A renter may even overlook minor imperfections in the interior of the home, if the exterior makes them interested enough to enter the home for a viewing.
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:
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.
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.
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.
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.
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.
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!)
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.
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.
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.
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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).
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.
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.