Starting Out as a Landlord of a 4-plex

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

4y

@Jacob I Strauss, with regard to your utilities I would first check your state's laws about submetering. I don't believe all areas allow you to submeter and to bill back a tenant.

1. Personally, I would try to avoid submetering. It adds a whole layer of complexity in calculating a bill to then bill back to the tenant and to collect. I would be more likely to factor the utilities right into the rent and keep their rent a flat monthly amount. However, I would have a sliding rent scale based on the number of occupants. So, your 3 bedroom rental might be $3k for 1 person and $100 per month for each additional person to account for the additional utility costs.

2. I use quickbooks and have a bookkeeper. There are products specifically for rentals, but I feel like using this approach will work best for me in the long run as I grow because its generic and I can get any bookkeeper to work for me.

I use apartments.com (formerly cozy.co) for rent collection via ACH transfer. It works fine, but their customer support has been less than stellar. I believe you can have tenants submit their maintenance requests through there as well, but I am not using that function yet.

In addition I set up a "profit first" cash management system with my bank accounts to help me manage day to day activity and to be able to pay myself without worrying I don't have everything budgeted for.

https://www.amazon.com/Profit-...

3. I can't help you much with your eviction process. However, I would consider the cost of the vacancy/turnover. The lost rent, the time and cost to prepare the unit for the next tenant isn't insignificant. It might make sense to get the rents closer to market rate and try to keep some of the existing tenants. Collecting $2800 instead of $3200 might actually make you MORE money.

Also, with market rent, keep in mind that market rent (in my opinion) isn't the most a similar rental is going for. I estimate 5% vacancy. So, for me market rent means I need to keep a tenant on average AT LEAST 2 years. If I price the rental high and tenants leave every 12 months, I'm really not at market rent and am making LESS money by charging too much.

4. Again, check the laws of your state about deposits and see what is common. There are some places where nonrefundable fees are the norm (don't call them deposits because they aren't returnable).

With regard to income, the rule of thumb is GROSS income (not net income) of 3x the rent. That is very similar to how a lender would underwrite someone for a mortgage. So, it really makes sense. Gross income is simpler to compare as well especially with self employed people.

Credit score is subjective. A good score is great and makes it easy, but in my area I have a lot of people who are under-banked and who use credit sparingly. So, their score often isn't a good reflection of them. So, I try to look further, ask questions, and keep that in mind.

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Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

4y

Originally posted by @Jacob I Strauss:

Hey BP so I'm excited because it's looking like I'm going to be the proud owner of a 4-plex breaking my analysis paralysis buuuuuuut I could use some direction.

1. currently the water is paid by the land lord half the electric and gas also paid by the land lord as well as trash and sewer. Long story short the rents are heavily depressed and to be honest I am not sure how the current investor makes a profit so first order of business is to sub meter the property though I was curious to know whats the best way to go about this? Do I need a meter for the toilet and the sink if one unit is attached to the home? should I prioritize one utility over the other? Should I hire someone to install these or is this something I can DIY? Also any recommendations for meters would also be appreciated planning for wireless ones so I don't have to physically check the meter and it'll just send it to my email.

2. What systems worked best for you in terms of book keeping and automated pay collection? In my mind I know I need to track the bills for each tenant and I also need to collect rent as well as file any complaints or work orders for each unit any help here would be greatly appreciated.

3. Because these rents are so depressed I am pretty sure I will have to go the eviction route and I have accounted for this I mean here in Vista, CA a 1 BD 1BA is 1,500, they are going for 1,100 the main home 3 BD 2 BA should be around 3200-3500 currently 1,800 and hes paying most of the utilities. That aside I know whats required by law but what strategies work best for a peaceful move out?

4. What are musts in the screening process so I imagine Credit score has to be good the higher the better, income needs to be 50%-75% above rent, must provide a deposit "considering doing a non-refundable deposit instead of holding onto a deposit" Job/ income verification is it a steady job etc etc... what tools or services do you use to verify these aswell?

As always thank you BP community!!!

You indicate you know the law (assuming including the rent control law), but here are some thoughts:

You can only legally terminate the tenant for a rehab extensive enough that tenant cannot occupy unit or to move in close family if your lease indicates that moving in family member is a reason for tenant termination. Of course you can offer cash for keys.
The studio at $400 below value likely is not in poor enough shape to justify a rehab. The house may be.
The turnover costs on the studio units will consume quite a few months of the rent increase.
I would find out when was their last rent increase and the amount. I would give the tenants in studios the max increase allowed under rent control ordinance if the unit is not in in poor enough shape to justify an extensive rehab.
In CA you do not need to submeter to have tenants pay utilities. Any equitable division is allowed as long as you are not profiting off the tenant for charging for utilities (i.e. you cannot charge more than what the utilities cost). The existing tenants cannot have a substantial change of their lease terms. This includes changing what they are paying for utilities. Changing what is being charged for utilities would qualify as a substantial change of lease terms. When you move in new tenants you can change what the tenants pay for utilities, but at no time can it be higher than the utility bill.
Your income qualification you listed is way off. Usual is 3x rent, sometimes you see 2.5X rent.
Your idea on deposit besides being illegal would be very bad for your units as there would be little justification in them taking care of the unit.
Items that we list as mandatory to qualify for our units: No evictions (ever), Verifiable income 3x rent from sources that are at least present for 6 months, Cannot have been in more than 2 residences in previous 5 years, no missed rent payment on credit report, good credit, non smoking/no drugs, about 75% of our units do not allow dogs or cats, strong LL recommendations. Basically you are better off leaving units empty than rent to someone that is not at least a decent tenant.
We use quickbooks for managing the financials.
For tenant maintenance items I am old school and just use a notes to-do app that is shared with my lead handyman (who is leaving me in December: Ugh!).
For payment, do not accept cash. Direct deposit to your account can be an issue for problem tenants (partial payment is tough to stop). Even though I say this, we allow direct deposit, Venmo, Paypal (F/F), and check to our PO Box. Do not pick up payments even if they are late.

Good luck

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Jacob I Strauss

OP

Flipper/Rehabber · San diego, CA · Member since 2021 · 27 posts · 16 votes

4y

Gentleman,

Since last posting I have taken your advice and looked into a few more things such as minimum 3X income vice the rent IDK what i was thinking and it totally makes sense.

I looked into Quickbooks as well how do you like the mobile version? would you say it works smoothly? I haven't gotten in there just yet to really see what its all about but reading through reviews and seeing what it offers I see that it can and likely will be a simple yet powerful, and accurate way for me to account for my business.

As far as charging for utilities I was considering doing something like this:

1. The main home with JADU will be metered separately from the other 2 units and further the main home will pay 75% vice the 25% of the JADU for all water/ electrical / gas expenses.

2. I will have the 2 ADU's water metered as they already pay gas and electrical I would just need to add a water sub meter off the main line coming to the property.

3. I will pay for trash and sewer though leave a provision that if this is being abused like overfull trashcan fees, or disposing of waste or chemicals, electronics etc improperly will be billed to the tenant.

I think that should cover it but I was curious how all that works for these kinds of properties should I make the payment but charge my tenants on the back end or should I have them get it in their names.

Also do you usually make that a separate charge or do you include it with the rent payment and provide an itemized account of the charges?

I think I am going to go with Tenant Cloud for my software they seem to provide a nice streamlined service and I like that it keeps everything in one place it's all online and I can screen, accept applications, and list my property right from there. The price point seems appropriate though I think later when I can justify the price that I would move to a larger software provider.

I also did more research to what is offered in the area It seems like trash and water is pretty common so I went with trash and sewer since sewer is included in the property taxes its just easier for me to pay it and it's not that much.

As far as terminating a tenancy I can do so in CA by serving a 60 day pay or quit notice since they are on month to month leases I plan on having the current landlord serve this when we enter escrow so ill essentially have just a 30-day turnover if the new tenants do not wish to agree to the new terms. Would it be rude to ask them to do this or ask the question if he has notified his current tenants that they may be needing to find a new place to live? I am not sure the best way to approach this though cash for keys is an option I think I would try to give them time first while the property is in turnover on the land lord side of things.

What do you think of signing 1 or 2 year leases to lock in profit based on expenses associated with tenant turnover? As for rent control if I did a 2 year I could only raise rents 1 time vice the year annually at least though not much each year as a whole. It's not a big issue honestly because once I move out of from house hacking the property will make 2k after expenses but I also don't want to be way below market rents like the previous LL is.

Sorry for the rant but I wanted to reply to both as detailed as possible thank you both so much for your insight.

2 Reply

Kevin Sobilo

Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes

4y

@Jacob I Strauss

Splitting utility bills could cause contention between tenants if they don't feel the split is correct. I would just estimate usage and factor the bills into the rent and it will even out over time.

As for whose name the bill should be in. If you are splitting the bill, then it needs to be in your name because you cannot expect separate tenants to cooperatively handle this. Also, if the utility is provided by a govt entity, you want to have it in your name because if not paid the bill becomes a lien.

If you are billing tenants back for utility costs, you want to have in your lease that any monies paid by them goes towards utility bills, late fees etc FIRST before any owed rent. This way, if they don't pay the utilities you bill them for the money they pay for rent goes to the utility bills and they owe you rent which you can evict for if necessary under the lease.

I have found it hard trying to get 2 year leases, so I stopped trying. Tenants seem accustomed to 1 year leases and those have been sufficient for me.

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Johann Jells

Rental Property Investor · Jersey City, NJ · Member since 2011 · 1k+ posts · 876 votes

4y

Originally posted by @Kevin Sobilo:

@Jacob I Strauss

Splitting utility bills could cause contention between tenants if they don't feel the split is correct. I would just estimate usage and factor the bills into the rent and it will even out over time.

I have always done this with water/sewer in my units with their own heat bill since this is standard in my area, and did it for 8 years in my 4U with steam, the rationale being that the cost isn't what I pay, but the difference between what I pay and the cost built into the rent. But I've found that I suffer in the search engines when posting the units. The last time I posted a unit I broke out the heat and 'free' laundry into a $100/month flat surcharge. It's effectively $100 more rent, but I can advertise it $100 lower to compete with units where heat and laundry is not included. The tenants were not fazed in the least by this.

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Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

4y

@Jacob I Strauss I pay heat, hot water, water, trash and sewer where it’s called for. Some of my units have free trash pickup if they buy town bags. Some of my units have separated heat and the tenant pays their own heat. Some units the hot water comes off the furnace so I’m paying for it, some the tenants have their own water heaters.

In all my units I pay for water and sewer. I have one septic system I also pay to maintain that’s about the same price as my sewer bills.

If I could break out more of my expenses and pass them on to my tenants I would, but when I can’t, it’s included in the rent.

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Jacob I Strauss

OP

Flipper/Rehabber · San diego, CA · Member since 2021 · 27 posts · 16 votes

4y

Thank you everyone for sharing your experience with this I do like the idea of a flat surcharge though I think where I can separate I will do that just to avoid the complaint of well they leave there TV on all night or they wash their car 3 times a week kind of gripes. It's a little more to do it through sub metering but if it makes sense to do it I will I think sewer and water baked into the rent is a great idea and maybe just meter for the electric and gas.

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Nathan GesnerBusiness Member

Moderator

Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes

4y

@Jacob I Strauss I will only address the utility issue, simply because I just wrote this long post and want to take advantage of it.

HOW TO SHARE UTILITIES 101

You have a property with two or more units and the utility meters are shared. There are a few options.

1. Pay to separately meter the utility. This can be very expensive and is usually the worst choice to make because you can't justify the cost.

2. Charge the tenants a higher rent rate and include utilities with their rent. This is the simplest method, but it also means your tenants are more likely to abuse the utilities by leaving windows open with the heat or A/C running, leaving lights on, ignoring the toilet that constantly flushes on its own, etc.

3. Pay the bill yourself, then reimburse yourself by charging the tenants based on a formula. This takes a little more work, but it's the most fair and reduces the likelihood of tenants that squander utilities.

If you choose #2 or #3, there are considerations:

Start with an average. Use varies throughout the year. Heating costs go up in winter, as does electric due to the reduced natural light and people being indoors more. Electric can also spike in the summer with A/C. Contact the utility provider and get an historical average based on the last year of use. It won't be 100% accurate, but it will be close enough. I recommend you do this each year to adjust for utility increases and other variables. If your average heating bill is $150, you may not collect enough in the winter months when the bill reaches $225 but you'll collect extra in the summer when it drops to $65. If you base your tenant charges on the historical average, you should come very close to collecting the entire amount over a one-year period.

Charge a higher rate. If the water bill is $100 a month, increase the price by 20% (or whatever you decide is fair) to compensate you for the time required to split and bill and to cover additional use when tenants squander the utility. If the bill is $100 a month split between four units, increase it to $120 and charge each tenant $30.

How to calculate charges. Don't make it harder than it has to be. If you have four 2bed/1bath units with the same appliances, split it four ways and call it a day. You can make minor adjustments based on the type of appliances (dishwasher, clothes washer and dryer, air conditioning, etc.) and the size of the rental. If Apartment A is a 2bed/1bath with washer/dryer and Apartment B is a 1bed/1bath with no washer/dryer, Apartment A should pay a higher rate. Another option is to split the cost based on the number of occupants in each unit but this also means you'll need to adjust the charges as tenants move in/out, so it requires more work and I wouldn't recommend it. I recommend a simple spreadsheet to check your math and it will make it simple to adjust each year.

End the complaints. Tenants may complain about your method of calculating how much each unit pays. They think it's unfair because they only shower once a week but they can hear the upstairs neighbor showering twice a day. You can put an end to this by showing them an actual utility bill. Why? Because a large percentage of the charges are base fees that do not change based on use!

I just looked at a utility bill and it has a total charge of $184.12 but $116.50 is from base fees! If I divide this bill by four units, each tenant would pay $46.03. If they were separately metered, each tenant would pay the $116.50 base fees and their individual use, which would be 3x higher than what they pay when sharing a meter.

There are a lot of options out there, but don't make it more complicated than it needs to be. Tenants actually save money when using a shared meter, so there's plenty of room for error when calculating how to distribute the charges.

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Starting Out as a Landlord of a 4-plex

Starting Out as a Landlord of a 4-plex

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