These nice ladies want to share a new apartment –>

This is different than the situation I described in my last blog post. That covered an existing tenant wanting to add a roommate to share the rent. And, of course, you will have situations when an existing tenant wants to add a roommate for romantic or family reasons. Both of those obviously present different issues.

However, roommate situations from the beginning of a lease present plenty of challenges of their own. You can avoid some of them by setting clear rules and having an appropriate legal arrangement. You will also do better with certain kinds of roommates than others. Note here that I’m not talking about married tenants who obviously (unless they are separated) will be sharing the apartment.

But generally, the best roommates will be those who have lived together before. These folks already know each other really well, and are unlikely to discover unpleasant things about each other that make one of the roomies move out early.

I don’t think you should spend any time at all figuring out how the roommates are going to share the apartment. For example, you don’t really care who uses which bedroom or how they figure out long distance charges. There are excellent Roommate Agreements, arranged strictly between the roommates, which they can find on the Internet.

The simplest arrangement might actually be to get a completely separate lease, with separate payments due, for each of the roommates. In this case, you are treating each roommate as a separate tenant.

One problem with this is that the tenants may earn very different incomes, so that one can afford all or half of the apartment, and the other cannot. Frankly, however, such disparities make for very temporary roommates. Unless they are in a romantic or family relationship, when one roommate depends on another for support, the arrangement almost never lasts.

Another problem is that if one of the tenants moves out, the remaining tenant or tenants still have valid leases. Suppose you have two separate leases, each calling for $450 per month. One of the roommate/tenants moves out. Now you are getting $450 per month, total, for a unit that should bring in $900. And you probably can’t do anything about it.

A better bet, I think is to have one lease, signed by all parties, with one rent payment they are collectively and individually liable for. This means that if you have three people in a unit with a lease for $900 per month, it is up to them to come up with the $900.

Using the one-lease arrangement, the remaining roommates or roommate still owe you the full rent. Realistically in that situation, you’re probably going to give the remaining tenants a chance to find a new roommate. However, this is not something to stress before anybody signs a lease! You want the new tenants to believe they have a financial stake in getting along – that way they will treat the commitment more seriously. And, of course, you may want to evict remaining roommates if one of the original two or three breaks the lease – it may be an opportunity to find new, better, or just better paying tenants.

If you do allow the remaining tenant to find a new roommate, you have two options. One is to have a new lease supersede the old one, but with the new names. Cancel the old arrangement, and create a new one, only if the tenants’ do not owe any rent for the current or previous months under the old lease.

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Tags: apartment, find roomate, housing, rent, renter, roomate, roommates, tenant

The perfect storm is underway to help landlords cash flow on their rental purchases in certain market places.  The dramatic decrease in  home prices, underwriting guidelines that require larger down payment, low interest rates and the increased number of renters can lead to more cash flow for investors.

Market places across the country have seen double digit decreases in housing prices.  This is good news for investors buying homes.  Some market places are now half the prices of the market just 3 years ago.

While there are still many home loans available to investorsthere are no more zero downpayment loans.  Many lenders require at least 20-25% down.  While this may limit the number of homes you buy it also leads to small principle balances, lower mortgage payments and the ability to cash flow in many cases.

Interest rate have continued to hold at the 6 to 8% range for investment properties.  As the stock markets and financial markets calm, investors could have a chance to take advantage of even lower interest rates.  Low interest rates and low principle balances equal low mortgage payments.

Finding the right renters is always a challenge, but most market places have a good demand.  Some average rental rates have declined just a little, but they have not fallen to the same proportion of home prices.

As we combine all these factors, it becomes clear that the rental market is healthy and the individuals that can buy should take closer look into their market place and other market places.

Based on the average of four metro areas, Los Angeles, Phoenix, Atlanta, and Chicago I have put to test my theory of cash flow.   These figures are based on Housing Urban Development’s Fair Market Rents(2009) for each area on a three bedroom home and the National Association of Realtors median home price (2008 2Q).

Phoenix, AZ

• Median Home Price $205,000
• Fair Market Rent $1,277
• Mortgage Payment with 30% down at 6.5% = $907.02 + 200 (taxes&insurance) = $1107.02
• Cash Flow: $169.98

Atlanta, GA

• Median Home Price $158,000
• Fair Market Rent $1069
• Mortgage Payment with 30% down at 6.5% = $699.07+ 200 (taxes&insurance) = $899.07
• Cash Flow: $169.93 

Chicago, Il

• Median Home Price $257,000
• Fair Market Rent $1227
• Mortgage Payment with 30% down at 6.5% = $1137.09+ 200 (taxes&insurance) = $1337.09
• Cash Flow: $-110.09 

Los Angeles, CA

• Median Home Price $417,800
• Fair Market Rent $1828
• Mortgage Payment with 30% down at 6.5% = $2640.78+ 200 (taxes&insurance) = $2840.78
• Cash Flow: $-1012.78 

Keep in mind these number indicate an estimated cash flow of income to mortgage expense.  Every investor needs to account for maintenance, increased property taxes,  vacancy and a number of other items. My arguements is not for the calculation of cash flow, but targeting cities that have the opportunity for the most cash flow.  There are a number of websites that can be found to give you averages and estimates.  Use these numbers to identify opportunity and dig deeper into that market place.

If you dig into the Phoenix market place you will find a number of homes at nearly half the median home price. These home might rent for close to the average fair market rent.  My point is statistics can lead you to market place that are more favorable and better use of your time.

Photo Credit: turkeychik

Tags: fair market rents, FMR, Interest Rates, market conditions, rent, rental market, rentals

It is no secret that inflation has reared its ugly head in the US and around the world. And it is easy to see its effects whenever you go to the gas station to fill up your car or to the grocery store to buy a loaf of bread. You can read the statistics: gas prices are above $4.00 while corn and wheat prices are touching record high in the futures markets. However, for the individual investor it can be difficult to gauge the devastating impact of inflation on his or her investment portfolio.

Most investors have the bulk of their money invested in paper assets such as stocks, bonds and mutual funds. Paper assets as opposed to hard assets like gold or real estate usually fair the worst during inflationary periods. The reason for this is because while goods and services are rising in price there is a simultaneous drop in the value of the US Dollar and the price of securities or common stocks.

Public companies tend to trim operations during inflationary and recessionary economies because they find it difficult to pass on higher production costs to consumers who are spending less. This usually means that stock prices decline along with corporate growth. This is especially dire for the individual investor’s stock portfolio because as the price of stocks decline so does the value of his or her portfolio. This situation is only exacerbated by the fact that while stock prices are dropping there is also a decline in the value of the US Dollar. The overall value of an investment portfolio is eroded by two factors, the falling currency value and the falling stock values.

Many savvy investors, during inflationary periods, chose to invest their capital in hard assets like commercial real estate to counteract and hedge against the forces of inflation. A commercial real estate investment such as the purchase of an apartment building offers distinct advantages over paper assets.

The apartment building investor is directly benefiting from inflation because as prices for goods and services rise, so do rents. The most popular method for the valuation of an apartment building investment involves calculating the building’s Net Operating Income. Rising rents and net operating incomes can increase the overall value of an apartment building investment. In addition to increasing the market value of the apartment building rising rents can also help to defer the increasing operating costs.

The US dollar can be viewed as any other commodity such as wheat or soybeans because its value is primarily driven by supply and demand. Banks and lending institutions have cut back their lending on most residential and some high risk commercial construction projects around the country. Therefore money supply for new apartment building construction projects is very difficult to obtain. Also, there are fewer commercial construction companies willing to risk the development of a new apartment building complex while the costs of raw materials are rising. What this means for the apartment building owner is that there will be fewer vacancies on the rental market and a tightening supply situation in many metropolitan markets. The tightening supply of new apartment units combined with an inflationary economy should continue to cause rent prices to rise.

The demand for rental housing in most metropolitan markets around the country is forecast to increase in the next five years. The new demand for rental housing is being driven by two major factors. The first factor effecting apartment unit demand is the rise of residential real estate foreclosure rates around the country. Many thousands of homeowners have been forced to vacate their homes due to an inability to pay their mortgages and subsequent bank foreclosure. In addition, many first time home buyers are finding it impossible to qualify for a mortgage to purchase a new home because banks have tightened their underwriting guidelines for new home loans. Home buyers with no or poor credit are finding it especially difficult to find loans because there is no demand in the secondary market for packages of sub prime mortgages. All of the above mentioned people are going to need a place to live and most likely they will be looking for an apartment. These new additions to the rental market should help to buoy demand for rental units all over the United States.

Simple economics dictate that as the supply of rental units remains steady and demand is increasing then the price or rents for those should increase as well. In my opinion many real estate analysts are underestimating the potential demand for rental units and therefore I believe that sale prices for apartment building should rise well above most people’s expectations.

Tags: apartment building investing, apartment building investments, apartment buildings, buy an apartment building, buying apartments, inflation, landlord, rent, rent inflation

If you are a starting a new business that requires you to either lease office space or open a physical store where you can visit with customers, chances are you will be signing a commercial lease. Before you engage in the process of selecting a viable location that meets your needs, it is a good idea to retain the services of a commercial real estate broker that specializes in representing the interests of tenants (often referred to as a “tenant rep”). Tenant reps are typically familiar with the available properties in your geographic location and have a firm grasp on the fair market rent for varying property types. Best of all, tenant reps are paid a commission by the landlord; so, essentially you get to avail yourself of the knowledge and skill of your tenant rep without cost.

Even though, many tenant reps are knowledgeable in handling the lease negotiations with the landlord on your behalf, it is still extremely important to have a real estate attorney review and amend, if necessary, the proposed lease in order to insure that your interests are protected. On a side note, I have spoken with many tenant reps that have told me they always suggest to their clients that they retain the services of an attorney—beware of any tenant reps that advise otherwise.

This article will briefly discuss some key provisions of a commercial lease that are important for tenants to review and understand before committing to any lease.

1. Basic Lease Information - Many commercial leases will have a few summary pages in the beginning, which may be referred to as “Basic Lease Information”, “Lease Information” or other similar name. These pages serve as a quick reference of the key terms of the lease such as: rent amount, address of landlord and tenant, term, security deposit amount, square footage of area leased, option period, etc. It is important to understand the actual start date of the lease–some leases may refer to this date as the “Rent Commencement Date” or “Lease Commencement Date”. If the space requires either the landlord or tenant to build-out the space to fit the tenant’s business needs then the actual start date of the lease will probably be a certain defined period that is related to the completion or substantial completion of the construction to be performed.

2. Alterations, Fixtures, Improvements - Most leases will prohibit the tenant from making any alterations or improvements to the interior and exterior of the property without prior approval form the landlord. Tenants should also be aware that the landlord will deem as fixtures any items or alterations that are affixed to the property, which are surrendered upon the termination of the lease. If you are tenant, you want to insure that any trade fixtures installed remain your property and may be removed upon vacating the property. Trade fixtures are equipment that a tenant specifically installs for the operation of his/her business. Since trade fixtures can be expensive, you want the ability to take all equipment with you when your lease is up.

3. Assignment and Subletting - Leases almost always require that the landlord give prior approval before the leased space can be assigned or subletted to a third party. If you are a tenant attempting to assign or sublet your space, it is essential that you read the language of your lease very carefully - typically, the lease states that the tenant is still fully liable for all rents even if the property is assigned/subletted to another party.

4. Condemnation - Condemnation deals with a governmental entity acquiring ownership of the property. Some leases state that if all or any portion of the property is taken by condemnation, then the lease automatically terminates. Other leases provide that the tenant may remain in the property if only a portion was taken by condemnation, and the tenant is still able to utilize the remaining space without interruption in the tenant’s normal business operations.

5. Defaults and Remedies - This provision of the lease is extremely important. It sets forth specific conduct or actions on the part of the tenant that trigger a default under the lease. Some examples include: failure to pay rent, the filing of a mechanic’s lien against the property as a result of tenant’s failure to pay for work performed, abandonment of the property by tenant, filing a petition in bankruptcy, failure to pay all required taxes, etc. The landlord’s remedies in the event of a default are also clearly defined. Tenants should pay special attention to a “Confession of Judgment” clause. In some states, a Confession of Judgment clause permits the landlord to go to court in the event of tenant’s default and obtain a judgment of possession to take back the property without any prior notice to tenant. This essentially speeds up the process for the landlord to regain control of the property if the tenant has defaulted under the lease.

6. Attornment and Subordination – In this provision, the tenant agrees that the lease and all of tenant’s rights under the lease are subordinate to the rights of any mortgage, deed of trust or other security instrument constituting a mortgage upon the property. If a mortgagee (such as a bank or other lender) comes into possession of or acquires title to the property, the tenant agrees to “attorn to” or essentially recognize the mortgagee as the new landlord. Under this scenario, all terms and conditions of the lease remain in effect.

7. Additional Rent for Taxes, Common Area Maintenance and Insurance - Most commercial leases require tenants to cover additional expenditures associated with the property, and classify these costs as “additional rent”. Tenants should pay particular attention to these expenses in calculating monthly and yearly payments owed to the landlord. It is quite common for landlords to require that a tenant pays for a portion of the real estate taxes on the property, the costs of maintaining the common areas (hallways, stairways, elevators, lobbies, bathrooms, parking lots, etc.) and the commercial liability/property coverage insurance on the building.

Tags: commercial lease, Commercial Real Estate, commercial tenant, fixtures, rent, tenant

If you can’t get rid of them, raise their rent . . .

Sometimes we end up in a situation where tenants aren’t the wonderful people we hope that they are. They throw out of control parties, damage the property, litter the property, have 10 people stay in the 2 br apartment, pay rent late, and so on. You get the point - undesirable.

Many landlords don’t want to have to go through the eviction process. Often times, evictions can be costly and time consuming.

If you’re close to the end of a lease (and you’re not in a rent controled area), why not just raise the rent? I’m not talking about raising rent 2 or 3 percent, but 10% - 15%. There aren’t many tenants who will put up with that kind of increase, and if they do, then it might be worth reconsidering keeping them around. Remember, the odds are they would be paying much more then typical market rents at that point.

Set the Ground Rules Up Front

To avoid all of this in the first place, you need to establish your guidelines up front. You cannot put up with bad behavior, or your tenants will walk all over you. Write a set of guidelines that they must follow with a schedule of fines and have them sign it with the lease. If they pay late, fine them and send out your written warnings preceding eviction process. If they damage the property, fine them. The key is to let them know you are in charge.

I can’t tell you all of the headaches I put up with at first because I was too nice. When I started to lay down the law, and got rid of the undesirables, landlording started to become a much easier process.

Tags: evict, eviction, landlord, rent, rent-control, rental-property, tenants

Looking to send your tenants a signal that you’re partially human? With the holiday season in full effect, now is a perfect time to get into your renter’s good graces.

Here are a few ideas to let your tenants know that you’re not so bad this holiday season:

• Send out Season’s Greetings Cards
  The cost is minimal and the benefit is outstanding. A simple card can go a long way towards tenant loyalty.
• Decorate your Property for the Holidays
  Keeping things festive always puts a smile on your tenant’s faces.
• Throw a Holiday Party
  This works better for larger buildings (I’d guess 4+ units). Mingling with your tenants under a different set of circumstancess will help them to look at you in a different light. The holiday party is a nice perk that can go a long way towards tenant happiness.
• Upgrade Your Apartments
  We’ve talked in the past about using incentives or gifts to attract tenants. The holiday season is the perfect time to do a few upgrades on your units. Even simple things like new hardware, doorknobs, etc. let your tenants know you care.

Remember, a happy tenant is often a long-term tenant. Find some way to thank them and show your appreciation!

Tags: apartment, happy, holiday, landlord, rent, rental, renter, tenant

I got an email this weekend about a great little tool that I wanted to share with everyone. Rentometer

Just enter a property address, number of units in the building, and the current monthly rent, and Rentometer will show you where your price stands compared to others in the area. In addition, this Google mashup also shows comparable properties in the area on everyone’s favorite, Google maps.

This is a great tool for any landlord to have in their arsenal.

Tags: google, googlemaps, landlord, mashup, rent, rentometer, web20