I guess it’s a philosophical difference. I know several investors who have a bare-bones approach to getting rentals ready and maintaining them. I see their point because they are looking at it as a revenue generating object. Maintain just enough to protect the object and the investment.

On the other hand, I tend to go in the other direction and perhaps do too much to get a property ready and maintain it. But here’s the deal: my philosophy is to increase value and attract better tenants and keep them satisfied.

I don’t know if I’m right, but there is method to my fix-up madness. I want to attract a tenant who will be pleased with the house. I also have this idealistic notion that people will take better care of the property if they see I care about the property. Okay, you can quit snickering now.

Here is a list of reasons why I go a little overboard on fix-up and maintenance.

1. I want the tenant to know that I care about the property and that it means something to me.
2. I want the tenant to be proud of where they live.
3. I want the property to be much more valuable when I sell it than when I bought it.
4. I want to get a reputation of renting good homes in good condition and keeping them maintained.
5. I want to be respected as a landlord and attract tenants through word of mouth.
6. To minimize turnover and vacancy.

However, I do see that doing too much can negatively affect return on investment, so I have learned from other investors how to be frugal and not throw money away on vanity and a overdeveloped sense of aesthetics. Like everything else, I guess it’s about balance, but I tend to go more in the direction of doing more rather than less in hopes of getting a better return in the long run. Naive? What are you, and over-doer or an under-doer?

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Tags: income property, landlord, real estate, real estate investing, real estate investor, rental, rental-property, tenant

Not too long ago I went to a neighboring town to check out an investment possibility for an investor I work with - rental subdivisions. The owner had built these homes in a college town 15 years ago and they were all basically the same style, cottages — some 2/2, some 3/2, 1400 sq ft and 1600 sq ft, respectively. This particular deal didn’t work out because the owner wasn’t budging on price and the numbers didn’t quite work out — I think he was basically satisfied to sell them one by one unless he could get his price for all of them, but it got me to thinking.

If it’s true that rentals will increase for awhile because of buyer caution and lender tightening, these, what I call rental villages, might be a good investment. Two reasons I think they might be a good investment are lower construction costs in this market and lower land cost. I looked online and found a cottage design that to me would be perfect — attractive and not too difficult or costly to build — and with the same basic design throughout the village it would be more efficient. My one concern was when you go to sell would all the cottages being basically the same style hamper sales.

The owner of the ones I looked at had already sold half of what he had, about 64 units, so it didn’t seem to hamper his sales. They were all painted in different colors (or not the same side by side) with minor differences among them, so they didn’t all appear to be the same house. It was actually an attractive “village” with nice trees and shrubbery about.

My thoughts were that a rental village of single-family homes would be more attractive to renters — I mean, if you are going to rent, why not rent in the best living environment possible. Most people don’t like apartments and the available rentals of single family homes is sort of hit and miss, at least here. I know that the vertical building of apartments is more cost effective because of land and construction costs of single family homes, but I looked at the prices of land slightly outside high priced land in town and they were attractive. I also think that when an investor goes to sell after holding them for awhile and letting the market improve, he/she might do better selling individual homes rather than one apartment building.

I think the key would be to make the village attractive with a common social area. I also think it would be wise to keep the properties in good condition and allow them to appreciate by putting the necessary money back in from cash flow to keep them updated and maintained. The owner I previously mentioned was getting top rent in his area and had such a demand he could pick and choose the most qualified renters who met his strict requirements. He had worked out sweet deals with businesses in town when carpet needed replacement or a paint job was due or appliances needed changing. He also had worked lease/purchases with some of the renters who needed time before purchasing.

I have put together a proposal for the investors I work with and wanted to pass this along. The numbers look good. The key is to be in an area where appreciation is likely to return in a few years. That’s the risk.

Tags: landlord, Learn Real Estate, real estate, real estate investing, rental village, rental-property, single family homes

Last week we discussed rehabbing a home for personal use (Getting Started in Rehab ), this week we will explore rehabbing for the purpose of renting. Of the three main types of rehab, personal use, renting and flip, the rental falls in the middle in terms of risk. If the rental market is strong where the house is located, you do not have to worry about your exit strategy.

A simple fact of real estate investing is that renters will not take care of a property the way an owner would, in most cases. Another fact is that renters do not have the same expectations as buyers when it comes to quality. A person looking to buy a property might expect ceramic tile floors and granite countertops where a renter is quite satisfied with vinyl flooring and a laminate counter. This means that you can spend a lot less money on the rehab if your ultimate goal is to use it as a rental property.

Basic Systems

Tenants and buyers will both have certain expectations. They are looking for a home that has the basic systems in good working order. This means that the plumbing and electric must be adequate, the heating system works properly, the roof keeps the house dry and, in warmer climates, the air conditioning functions, as it should. With a rental, if these systems are not in order you can expect to have higher than normal maintenance costs.

Regardless of the ultimate goal, any rehab should include bringing the basic systems up to an acceptable level of performance. This is not an area where you should cut corners. Upgrading the electric or the plumbing doesn’t have the pizazz of a new kitchen or bath and won’t add much value on resale or yield a higher rent. However, a house with the basic systems in poor condition can subtract value and make it difficult to sell or rent a property.

Durability Counts

Renters tend cause a greater amount of wear and tear than owners do. That being the case, you should usually choose items of greater durability wherever possible. When choosing carpet, paying a little more for a product with better durability may actually be less expensive in the long run. If you can avoid using carpet in certain areas, even better. You could consider using a laminate flooring product in high traffic areas.

When the time comes to sell a property, you can go back and complete the rehab. The time to do the fancy things and add the amenities that buyers love is when you are ready to sell. There is no point in doing a lot of high-end, high-cost rehab on a rental. More likely than not, you will just need to do it all over again when you are ready to sell.

Buy It Right

One of the most difficult aspects of real estate investing is finding property that will provide a positive rental cash flow. As hard as it is, it is significantly easier if you buy rehab property. Since a fixer-upper should be available for well below market value, it is likely to command a much higher rent as a percentage of purchase price. House “A” and house “B” may command the same rent if they are in comparable condition. However, house “A” may sell for $100,000 at full retail, but house “B” is selling for $50,000 with $20,000 in repairs needed. The total costs for house “B” was $70,000 but will rent for the same amount as house “A” even though that house costs $30,000 more. That could well be the difference between a house that helps put food on the table as opposed to a house that eats you alive.

A fool and his money are soon elected. - Will Rogers

rehabbing, renting, rehab, flip, Tenants, fixer-upper

Tags: real estate investing, Rehabbing, rental-property

In many municipalities, a Certificate of Occupancy (often referred to as the “CO”) must be obtained by the seller and delivered to the buyer prior to or at closing. This insures that the buyer is aware of any outstanding violations or pending assessments against the property. However, some towns do not require a CO. If you are purchasing a property in such a town, beware!! If your agent fails to be proactive and inquire about outstanding violations or assessments, you could be stuck with some very large bills.

I currently represent a buyer who purchased a $30,000.00 vacant lot. Sometime after settlement, he received four bills from the city for demolition work performed on a deteriorating building, which was located on the property, while the property was under the seller’s ownership. Although the demolition work was completed several months before settlement, the city’s bills were forwarded after settlement, and subsequently attached as liens to the property. The city is now looking to my client to satisfy those liens. Unfortunately, when my client first looked at the property, all he saw was a vacant lot. He was not even aware, and the seller failed to disclose, that there was a structure on the property at one time that was demolished by the city.

How could this problem have been avoided? If my client’s agent had performed a minimal amount of investigation, by contacting the city violations/assessments office, it would have become evident that this property had pending bills for work to correct the seller’s outstanding violations. My client could have then made an informed decision whether or not to purchase the property. Unfortunately, the city only cares about who is the record owner once the bills are due and the liens attach. Now, the seller’s violations have become my client’s headache. Instead of a seemingly quality investment, he has purchased a property worth $30,000.00 that has $20,000.00 in liens.

You may be asking about whether my client has a valid claim under his title insurance policy. Most title policies exclude coverage for liens and encumbrances that are created or attach after settlement. Even though the demo work was performed prior to settlement, the liens did not attach until after settlement. Therefore, the title company has disclaimed any coverage in this matter. Further, the title company typically is not responsible for any liens or other blemishes on title that are not of public record. Unfortunately, pending violations against a property do not show up in a title search, as they do not affect title until they become liens. Therefore, the title company would not have discovered the city’s outstanding bills in conducting a title search prior to settlement—another reason why the title company refuses to extend coverage to my client for this horrible mess.

Now, my client’s only remedy is to pursue expensive and time-consuming litigation against the seller, my client’s agent, and the title agent.

All of this could have been avoided with a minimal level of effort and competence. So, the next time you intend to purchase a property in a town that doesn’t require a CO, don’t rely on your agent—make sure you contact the appropriate city department to inquire whether there are any violations, fines or outstanding bills that could potentially become your responsibility once you take title.

Tags: landlord, occupancy, Real Estate Law, rental-property, tenant

I’ll get into more details at another time, but I thought many of you would be interested in this situation . . . I have a few multi-family properties out of state and have used a management company to operate them. To date, this company has done a phenomenal job managing the properties, but earlier in the week, disaster struck.

Screwed By My Property Management Company

I received a letter on Tuesday, July 10, letting me know that as of Wednedsay, July 11, the company would no longer be operating. The letter was postmarked Friday, July 6.

Imagine my surprise . . .

This company, called Whitener & Flynn Properties LLC, run by partners Amber C. Flynn, and Travis Whitener, out of St. Louis, MO completely abandoned me and the rest of the landlords whose properties they were responsible for. In the time that they were running my buildings, they did a phenomenal job. However, their shutdown with 1 day notice is completely unacceptable.

The worst part of it all is that what they did in shutting down was completely legal. I spoke with the Missouri Real Estate Commission, who told me that the only requirements for shutting down a management company is that all participants (owners, boards, etc.) are notified. I’m glad to see that our government is once again looking out for us . . .

Wouldn’t a law mandating at least a 30 day notice make sense?

While closing their doors was legal, the company did breach their contract with me. In the contract, they were required to give me 30 days notice to end our relationship . . . that certainly didn’t happen!

As of yesterday, Wednesday, the phones & cell phones were shut off, and the website went offline. For all intensive purposes, the company does not exist. While I have my contracts and paperwork, along with my keys, I never received any funds. I look forward to see if they live by their word and mail out checks to all owners. I am pretty skeptical, and already have the local papers, district attorney, and other officials on my speed-dial.

The Search for a New Property Manager

Along with dozens, if not hundreds, of other landlords, I’ve been in a mad dash to find someone to manage these buildings. With so little notice, I haven’t been able to lock anyone in yet. I’ve been interviewing all the managers in town, but have yet to find someone I’ve been completely excited about. One of the companies I was excited about provided me with a contract that was beyond scary. Many won’t work in the areas I’ve got property. Many are ripping off their clients with crazy fees and charges. I have been told by friends in town to avoid many others. It is best summarized by one word - frustrating!

Lessons Learned

I guess the lesson here is to have a backup at all times. I’ve never worried about doing this in the past, but experience always teaches us new things. Once I find a new company to operate my buildings, and get everything settled, I plan on beginning the search for a proper backup, in the event that something like this happens again. As for other properties, I will also be doing the same with them.

BTW - If anyone has any recommendations for a quality, trustworthy management company or manager in St. Louis, please pass their info on to me! I have already been contacted by several other people who are also desparately looking for someone good! Thanks.

UPDATE: Read Part II

Tags: landlord, property management, real estate investing, rental-property

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