All Forum Posts by: Drew Sygit

Most generic leases are just that, "generic".

They get the job done, but not done well.

You don't seem to want to spend a lot of time on this, something that is critical to running your rental business properly.

We recommend downloading 3-5 state-specific leases from various sources, then spend the weekend going through them to:

1) UNDERSTAND why everything is in them.

2) Copy & paste the paragraphs you like (once you understand them)

3) Continue to "tweak" as necessary to meet your concerns & goals.

4) Have an attorney review to confirm meets all federal, state & local requirements and there's nothing illegal or compromising in it.

Good luck!

Even submetering is not always as easy as one may think.

Rarely were the water lines run separately for each unit.

So, the kitchens & baths, typically stacked above/below each other in a lower & upper flats situation (most common in Detroit), will share the same feed line. 

So, the water supply lines will need to be replumbed to be separated. Which means cutting holes in walls and perhaps removing kitchen cabinets to access the lines.

Wouldn't it be nice if someone had a color-coded map Classifying all 183 Detroit Neighborhoods instead of using unwieldy zip codes?

@Kevin Van Ness seems you have two choices:

1) Shrink/consolidate/retire

or

2) Delegate

I personally hit 24 units before I finally hired someone to do all my showings and lease signings. I still handled the advertising and prepared the leases, but it saved a lot of time. 

Then, I got rid of maintenance, but still did rehabs myself. Again, saved a lot of time.

Recommend you figure out what you do NOT like to do and then figure out a way to effectively delegate it - but, still keep an eye on it. NEVER blindly delegate!

Don't forget to do some basic math on cost to delegate versus what YOUR time is worth. Guessing your time now is worth more than what you made when you were a teacher:) So, if you can delegate for less than that amount, it's worth it for you to do so.

If you can't figure out how to delegate, or you're just a control freak (nothing wrong with it, as long as you can admit it to yourself), see #1 above:)

@Niranjan P Ghate a desperate owner, is really not much different than a desperate tenant.

What makes an owner, "desperate"? 

Running low on funds to make their mortgage payment(s), divorce, lawsuits, etc.

So, PMCs have to take steps to protect themselves. How else can they collect what they are legally owed?

1) This is negotiable, as an owner may want to be notified in case they want the property vacant to sell. Also, owner should have some say in renewal amount.

2) How do YOU have more experience & knowledge than the PMC?

3) So, you want to hire a PMC to manage a property for you, they place a tenant and then you fire them with no repercussions? Easy solution, just have your PMC ONLY do month-to-month leases. Your tenant turnover costs will probably go up though.

4) 3 months is fairly standard. Otherwise, what's to stop a "sneaky" owner from firing their PMC when they tell them the tenant wants to buy the property, then the owner turns around and deals directly with the tenant? All to save paying that 3-6% sales commission.

5) Negotiable

6) They're not one-sided. You hire an attorney to represent you in court - what happens if they lose? They have no liability other than malpractice. Why would you expect this to be different with your PMC?

7) See desperate owner issues.

8) See desperate owner issues.

Suggest you try looking at these issues from a PMC's point of view, to better understand them:)

@Chabelis Alegria think about it this way, how many years will it be until you have to address these issues again?

Decades!

This is one of the challenges of buying older properties with LOTS of deferred maintenance.

Just be careful about HOW much repairs you do and the QUALITY.

You should fully understand what "Maintain to the Neighborhood" means! 
- If you under-improve, you risk being a slumlord.
- Many newbie investors OVER-improve and do Class A work on a Class C property. Then they wonder why they aren't seeing any ROI!

The standard "systems" are set up to over-improve. 95%+ of agents only deal with owner-occupied properties, which are typically Class A, so all their connections are geared toward servicing Class A (maybe Class B) properties. Even many PMCs are focused on Class A & B properties, so they're unlikely to be cost-efficient with Class C (or D) properties.
YET NO ONE THINKS TO TELL AN INVESTOR THIS!

@Stephen Fleming what city is your house in?

Since this sounds like it will be your first rental, one of your challenges will be - are rentals right for you? 
- You may find in a few years that you don't like dealing with tenants, nor PMCs.

Have you spoken to a tax professional about your potential Tax Exemption if you sell your primary? 
- Typically it's $250k individual filing, $500k joint.
- How will the tax savings of a sale, compare to the low interest rate on the $122k?

You're really going basic on your "profit" calculations. What about:

1) Vacancy - 5-10% of the rental amount is typically used
2) Maintenance - 10% is typically used, unless you have a Class C or D property.
3) What will your nonHomestead-millage-rate property taxes increase to, once you convert to a rental?
4) What will be the increased cost of a landlord property insurance policy?
5) Depending on the property city, have you looked into the rental inspection requirements?
- GFCI's, handrails, smoke detectors and other repairs may be required.

How equiped are you to advertise your rental, show it to prospects, find a rental application to use, do a background/credit check on applicants, figure out how to screen applicants, find a lease to use, find a handyman for maintenance or do yourself, etc...

@Ivette Raygoza

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

Why is Property Class so important for investors to understand and apply in their investing strategies?

Because the Property Class dictates the Class of the tenant pool that the property will attract.

The Tenant Class greatly impacts rental income stability and property maintenance/damage by tenants.

Both Property Class and Tenant Class affect what type of contractors, handymen and property management companies will work on a property.

If you buy & renovate a property in Class D area to Class A standards, what Tenant Class will rent it?

Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

So, if you fail to apply the correct assumptions to a property, your expectations won’t be met and it may even be a financial disaster.

We use the following to rank Property Classes, in order of importance:

• Property Tenant Pool: closely linked to location, but not always.
• Property Location: closely linked to tenant pool, but not always.
• Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood.”

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.

Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

Source: Fair Isaac Company

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

We've never had a good experience with a home warranty company.

Owners do get upset with us though, and blame us, when the inevitable happens and their claim is denied or the tenant threatens to move if the repair isn't taken care of faster.

@Eric Waldron get a HELOC on your primary - NOT to use to buy, but in case of an emergency ONLY.

That should give you the peace of mind to move forward.