How My Investor Friend Grew a Student Housing Empire Using Private Money

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One of the advantages of running an investment group is that you get to meet a lot of interesting people, while also discovering many investing opportunities. My one buddy who used to run the meetings with me not only became a pretty good speaker, but he also became good at raising private capital. He had a good personality, he was very trustworthy, and he did what he said he would do.

In the beginning, we were just raising private money to do small real estate deals. In fact, I probably did more lending than borrowing. But it wasn’t long before we started raising money for larger investing opportunities. At first, we were raising money for commercial office condos and pools of notes. I pretty much stayed in the note space, but my buddy morphed into student housing, and although we’ve taken different paths, we’ve both done pretty well.

student-housing

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When Opportunity Knocks

At the time, we were entering the downturn, and it was tough getting banks to refinance rehab properties, so the timing to enter the student housing market was good. Residential lending was getting so strict that the only loans they wrote seemed to be FHA, owner occupied loans. If you were a self-employed borrower, just forget about it.

It was also perfect timing, as a large university in the Philadelphia area was expanding quite rapidly and didn’t have enough off campus student housing to go around, and my buddy recognized the opportunity.

Related: BP Podcast 140: The Riches Are in the Niches (Like Student Housing) with Bill Syrios

Having a Plan

At first, my friend started to assemble his team. Since he was previously a lender, he was smart enough to be constantly meeting with bankers to test the waters as far as the types of loans they liked in the current market.

What he discovered was that even during the downturn, the banks were shying away from residential mortgages in their portfolio, but they loved lending on commercial properties, especially ones that cash flowed, like apartments.

He glanced at apartments, but in the Philadelphia area it’s tough to find ones that make sense. You almost have to wait for someone to die. What he quickly figured out was that the student housing cash flowed much better than apartments — and so that was the path he would take.

The good news was my friend already had experience raising private money and doing rehabs, so this was going to be a piece of cake. He quickly learned that his end-users were students, but the real renters, contractually, were the parents, even though they both signed the leases.

The beauty of this was that he was now going to buy fixer-uppers near the college and then do a nice remodel job with granite countertops, security systems, and amenities that would appeal to the parents and the students. Often, he was even lucky enough to get rents paid for the semester in full or have them leased for the entire year instead of just the semester.

other-peoples-money

The Model

His first steps were to use private money to purchase and rehab the properties. He had one entity to do the rehabs and another entity to do the property management piece. He also brought in a high income partner to personally sign on the permanent commercial exit loans. Needless to say, the banks loved lending on a high cash flow, commercial property.

Fast forward a few years, and my friend had several hundred student properties in a portfolio worth approximately $18-$20 million that he has a plan to pay off in a 10-12 year period. All of this was accomplished with none of his own money or credit and in about a three-year timeframe.

Related: Student Housing: What Investors Should Know About Pros, Cons & Profitability

As you can see, a lot can be accomplished just from having the ability to raise private money the right way. My buddy always put his investors first, as he can see that none of this would have been possible without them.

So, guess what happened after he paid back all the private money with the lower rate commercial financing? You guessed it — he has even more capital at his disposal as his track record and reputation have continued to grow.

So, let me ask you, what are you doing to grow your private money list?

Leave your comments below!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

38 Comments

  1. The problem with “student housing” is that the rentals tend to be uniformly poor quality because of the perception that college students do not go to school to study, but to party, and will trash the house anyway. If student housing is mixed with regular residential housing as in the accompanying photo (which does not look like Philadelphia at all, by the way. In fact, it is the spitting image of a house in my neighborhood), then the rent tends to price out a regular family because student housing landlords figure the rent in a strange way. They set a rent higher than what a family can pay, but rationalize to themselves that the rent is a bargain because the students can split the rent, say, 4 ways. (Assuming a typical 2/1 rental). It prices out regular families because it assumes 4 incomes instead of 1 income.

    Furthermore, since parents must invariably cosign, these landlords do not worry about whether the rent will actually be paid. They know they can go after the parents. Therefore, they apparently do not bother to screen to the usual high standards. As long as the rent is paid, they seem to not care about the quality or character of the tenants. Families may find themselves next door to a party house wondering how the landlord could possibly have been able to tell from the get-go that this group of tenants would be a problem. Furthermore, when you look at the Craiglist listing for the house, it is pretty obvious the type of tenant the landlord is trying to attract, and it is NOT the quiet students looking to do well in school.

    • John L.

      I’ve always been on the fence on student housing for the issues you listed, but it doesn’t necessarily make the owners or the investment bad. If you have a university, there will be a need for those students to live and someone has to provide it. I think most students actually do go to school to study and won’t necessarily trash the house. The minority that do can be compensated by the higher rents and likely guaranteed rent payments (much better than eviction + trashing + no rent). But definitely a specialized market and need to know how to deal with the situations that come with it.

      • David Zheng

        You seem to have something against students haha…

        I graduated from a top 15 university 3 years ago and now own 3 properties (and growing) that only target students. If you are looking at huge state schools or community colleges, yes you can generally find less quality tenants. But personally anything ranked 30 or higher is a good bet at reasonably responsible students

  2. Peter Mckernan

    Hey Dave,

    Good little blog post that captures a great success from one of your close friends. This shows that using private money is a great option and can really happen for anyone that actually goes in with a plan and keeps the professionalism up.

    It sounds to me he was able to tap into a resource that was endless and the possibilities did not stop with one or two deals.

  3. Logan Hassinger

    Well Katie, it sounds like that neighber to the “student housing” home should be looking for another place to call home. It’s hard to expect that living near a college campus would provide some piece and quite on Friday and Saturday nights.

  4. Derrick Atkinson on

    Hello Dave, great article, I actually had the pleasure of meeting you last year at a REIA in Delaware, where you spoke on performing notes. My business partner and I have a Duplex and a Triplex in the Temple U area, both properties are currently under construction, one property is about 80% complete and the other will be completed and available for the 2017 spring semester. We are currently using our own money to purchase and rehab, and we are now trying to figure out how to raise and use private funding moving forward. Our goal is now trying to figure out how to learn and master all that you spoke on in the first paragraph of The Model, starting with raising private funding and also understanding the concept of having a high income partner to sign the permanent commercial exit loans?

  5. Derrick Atkinson

    Hello Dave, great article, I actually had the pleasure of meeting you last year at a REIA in Delaware, where you spoke on performing notes. My business partner and I have a Duplex and a Triplex in the Temple U area, both properties are currently under construction, one property is about 80% complete and the other will be completed and available for the 2017 spring semester. We are currently using our own money to purchase and rehab, and we are now trying to figure out how to raise and use private funding moving forward. Our goal is now trying to figure out how to learn and master all that you spoke on in the first paragraph of The Model, starting with raising private funding and also understanding the concept of having a high income partner to sign the permanent commercial exit loans?. Sorry, I wasn’t logged in on the first comment.

    • Dave Van Horn

      Hi Derrick,

      Good to hear from you!

      Of course there’s only so much that could be said about Raising Private Money in a blog post (or in a comment) but I could definitely offer up some pointers. To really start to raise private money, you have to begin with mapping out your own business model to sell to investors. Sort of like a pitch book – this is why I always suggest those new to Raising Money to read “Pitch Anything” by Oren Klaff. This plan and you/your relationship with this person is really what makes them want to invest – which is why trust is the other major key factor in raising money. “The Trust Edge” by David Horsager is another great read on techniques on how to build trust with potential clients.

      Other than that, it’s really just about tapping into the right network of individuals. There are plenty of high income earners that are looking to invest in Real Estate but don’t want to do the work of finding the deals, managing properties, flipping properties, etc. My friend really started with just the contacts he had in his cellphone and slowly but surely moved on from there. He was fortunate because he had built up a relatively large network up to that point by hosting RE Networking meetings, and out of that he gained opportunities to raise money for other people’s companies/commercial deals first. So he already had credibility right out of the gate.

      And to elaborate on the high income earning partner, this person was pivotal because my friend was a self-employed guy that who, at the time, didn’t have a lot of assets. So when he went to refinance with the high income earning partner, they would get better terms on the financing and my friend wouldn’t be held personally liable. Now you might ask, “why would the money partner do that?” Well, when you think about it, sure they put up the risk and the money but all the work they have to do is in the flick of a pen. And if they trust the other person and can evaluate that it’s a good deal, why not?

      Hopefully this response could be of help, but if you have any other questions feels free to ask. Love to get a dialogue going from other people here on BP as well.

      Best,
      Dave

      • Cody Steck

        Any insight as to what kind of split he did with his high income partner? I know that everything is negotiable, but what do you think a “fair” split would be? Considering the upfront risk and work that your friend took, he has actually really put in a lot of effort to get these things ready to go, I would imagine he is somewhere between 25-50%?

  6. Thanks for the article Dave, building a private lender list is crucial to building a successful real estate investing team. There are so many lenders out there that want to get into real estate, they just prefer for someone else to do the leg work.

    • Dave Van Horn

      Hi Jeff,

      Thanks for commenting.

      Speaking from experience, as someone who did the leg work and was the fund raiser, you can really appreciate it all once you eventually become one of those people on the private lender list.

      The biggest thing I learned in all three of those roles was it’s all about efficiency. You don’t need money to make money in Real Estate, and you yourself don’t even have to do all the leg work. If you’re efficient enough and put the systems in place, (like by training the team of bird dogs to find the deals for you, for example), you can do pretty well just essentially connecting the deals to the money.

      Best,
      Dave

  7. Samuel Awosolu

    Thanks for the share on this post Dave! Examples like this show there is plenty of opportunity in real estate investing if you think outside the box. I have already put “Pitch Anything” by Oren Klaff into my Amazon wishlist.

  8. Jacob Calbillo

    In student housing, how does an investor plan around possibly having vacancies every summer? I know you quickly mentioned some renters paid in full for the semester or year ahead but how do you account for other possible vacancies, especially in college towns where population fluctuates pretty dramatically during the school year and summer. Care to elaborate more on this?

    • Dave Van Horn

      Hi Jacob,

      That’s a good question. Here’s what I know about my friend’s strategy. From the beginning, he made a point of offering quality housing to students. Most if not all of his units included a security system, granite counter tops, in unit laundry facilities, along other amenities. He also had a certain location range he would invest in so that all of his places were very close to the campus. What he really benefited from was the market timing because he entered/helped create an ever emerging market (ideal for fix and flips). So when he started, this type of close quality housing certainly wasn’t the standard and he started to gain a good reputation quickly.

      So now the units are so in-demand, there’s a waiting list to get in. And you hit the nail on the head, renting for the year helps alleviate vacancy issues and I suppose you can employ a few options. Set the price so as to offset the vacancy for the summer or if your units are popular enough (like his), you could have rules in place where if a student wants to hold the property for the fall semester, they’ll have to pay for the summer or most of the summer. I’m not positive which strategy my friend uses, I think it depends on the property. He may have a month of them empty…but on a small scale, with sites like Airbnb, I’m sure you could get creative with that as well.

      Also, since his property is in a city, it’s not necessary a “weekend” college where people go home as often, so he’ll find that a lot of students want to stay over the summer.

      Hope this info helps, let me know if you have any more questions!

      Best,
      Dave

      • Because my work required frequent moves, I ended up being a tenant long beyond the time people usually spend being in the “typical tenant” demographic. I experienced first hand the kneejerk disdain so many landlords have for the “tenant class.” In fact, regardless of the professional nature of my work, landlords tended to assume that someone of my age and career who has not bought a house must have some kind of severe financial character flaw.

        Therefore, I see issues from both sides (which often aggravates other BP members). If a landlord chooses the student housing niche, he chooses the possibility of annual 2-month vacancies. Students should not have to pay a higher rent that prorates the summer months over the 10-month academic year. Nor should they have to gift the landlord with 2-months rent to secure a place to live during the school year.

        If a landlord requires a 12-month lease, then the lease should not have provisions that prevent the student from mitigating some of that sunk cost, such as the rule against subletting for the summer. (As an aside, I think all rental agreements should be month-to-month anyway, but that is another comment on another post). In general, landlords should prohibit subletting because subletting defeats the whole purpose of tenant screening.

        Landlords should fill or not fill their own summer vacancies. One suggestion is AirBnB; another is marketing your place to companies in your town that have summer internships. Many landlords double-dip by collecting summer rent from students who they know or believe are not occupying the unit, and then turn around and rent the unit out for the summer to someone else.

        This actually happened to me. I signed and paid for a lease that began on August 1. My idea was to move in, settle down, and get ahead of the student rush for part-time jobs. I wanted to have my part-time job before the competition started looking. On August 5, My parents drove me 8 hours to my new place, only to find put when we got there, the landlord had rented my room to someone else for the summer. The landlord told my parents to take me home and come back in three
        weeks. Naturally, my parents refused. I ended up sleeping on the couch in the commons. The landlord also refused to refund that month’s rent. Ridiculous. This is the sort of nonsense that even great tenants experience on a regular basis. No wonder, as Josh and Brandon have repeated pointed out, landlords have a bad rap.

        If landlords put people first, the money will follow. Putting money first may yield more money in the short-term, but end up being lost to increased expenses in the long-term. Even if putting people first is a little less profitable, it is still a better policy than money first. It does no good to counter that the purpose of a business is to make money. Of course, it is, but money needs to be made in the context of putting people first. Our society learned this lesson the hard way (see the extreme examples of the shirt-waist factory fire, the plight of child labor, etc), but too many people (not just landlords) want to ignore these lessons.

  9. Dave Van Horn

    Hi Katie,

    Thanks for chiming in again.

    I’m actually a tenant as well, in fact I talk about why in one of my previous articles (https://www.biggerpockets.com/renewsblog/2013/04/17/renting-owning/). So even though I own more properties than my landlord, as a renter I agree we’re treated differently and I can also see it from both sides. And working in the mortgage industry, oftentimes I see an unfair bias in the media and government regulation towards homeowners rights vs. tenants rights. Now having said that, I do think there were other points you made that I either had questions about or felt the need to address. My response is as follows (and for convenience, anything I put in quotes is from your last comment):

    “If a landlord chooses the student housing niche, he chooses the possibility of annual 2-month vacancies.”

    For better or worse, we live in a capitalistic free market. Student housing is a marketplace. If a student doesn’t want to pay to secure their property for 12 months even though they’ll only be living there for 10 months, they are free to go elsewhere. Student housing is not a dormitory, as long as the owner/landlord stays within the bounds of the Landlord Tenant laws and local ordinances, they’re free to prorate rent, sublet, etc.

    Student rentals and beach rentals are very similar in this way. There are two types of landlords in many of these scenarios. Someone who rents to a tenant that lives in the property year round and pays a certain amount of rent. Or the landlord who choose to just rent during the summer months when it’s very popular. Now are they going to charge more for the summer months to make up for the 7 to 9 months of vacancy? Absolutely! Plus you have to consider with all of that turn over they also have to pay for the more common wear and tear on the property.

    “I think all rental agreements should be month-to-month anyway…”

    I’m not clear on why you would think this? Unless you’re lucky enough to find an affordable rent controlled apartment as a tenant, if all rental agreements were month-to-month, landlords could raise the rent as they see fit. And if you were the landlord, your tenant could move much more frequently, which is a lot more work. Trust me, as someone who also runs a rental with short term tenants (a recovery house), the weekly turnover there compared to some of my traditional rentals where I’ve had tenants for an 10+ years is definitely more difficult to manage.

    “In general, landlords should prohibit subletting because subletting defeats the whole purpose of tenant screening.”

    But aren’t students more transient? They study abroad, they change majors/schools, jobs etc. In college, if my landlord didn’t allow subletting, he’d not only lose money but he’d also have to work like crazy to constantly keep his rooms full. The benefit there was, he allowed us to find people in case one of us needed to move (thus breaking our lease) we both still screened the subletter. In fact, it was better that way because at least we got a say in who was living with us.

    “Landlords should fill or not fill their own summer vacancies. One suggestion is AirBnB…”

    The trouble is, Airbnb isn’t allowed everywhere. Also not every landlord has time to do Airbnb. Also doesn’t AirBnb deflate your argument about tenant screening? How well can you screen your AirBnb Guests compared to your tenants? Also in certain states (like California for example), isn’t it easier to evict a tenant with a signed lease agreement vs. a squatting AirBnb’er?

    Either way, your story is certainly an unfortunate one and I’m sorry you had to go through that. It sounds like that landlord violated your lease. Although it’s not always the smoothest process, I think the only resolution in that scenario would be to file a complaint in landlord tenant court. Being a tenant for much of my life, I too know that they aren’t all great. But I also try to correct some of that myself, employing reasonable practices and a highly regarded management company.

    And of course, everything I’ve said above is merely just my opinion. I would definitely be interested to hear more of yours (and others on the site) about the subject. BP is a great place to get a dialogue going.

    Best,
    Dave

    • Several months ago there was a long discussion about MTM vs leases. Whether I am a tenant or a landlord, I prefer MTM. Many landlords use leases to trap tenants in what turns out to be either an undesirable property of a difficult relationship. Many bad tenants prefer leases because it is harder to evict when a lease is in place. In such a case, a landlord may end up effectively unable to evict until the lease expires. Of course, theoretically a landlord could raise the rent anytime during a MTM, but in practice they do not. A landlord who abuses MTM by raising rent too high or too often will find himself with a vacancy pretty quick. If a good landlord gets a bad bad tenant, they can simply give a 30-day notice. If a good tenant gets a bad landlord, they can also simply give a 30-day notice. In my experience, good landlords and good tenants love MTM and good landlords have no trouble retaining extremely long term tenants with MTM.

      I actually do not care much about AirBnB. I manage a high end vacation home, and I would never list with AirBnB. Too many horror stories. I was merely echoing another person’s suggestion. As far as subletting goes, landlords who do not let students sublet really put students in difficult situations. Perhaps, landlords and students should work together on the subletting so landlords can screen properly and students have a say in who the live with.

      There is actually quite a lot of student housing in my neighborhood even though the university is actually ten miles away. Honestly, it seems most landlords of student housing really do not vet well, or do not care that much about the neighbors.

      • Dave Van Horn

        Hi Katie,

        Thanks for writing back!

        That’s an interesting take on the MTM situation. As a landlord, I feel like universal MTM leases for my rentals would be a nightmare. Every time a tenant moves out it costs me several thousand dollars to repaint, re-carpet, etc. So if they left anywhere under a year, it wouldn’t really be beneficial to me. And then god forbid I don’t re-rent it again fast enough. Not to mention, since my personal portfolio is on the east coast that means I have to worry about winter! As I’m sure you know, paying to heat your places through winter out of pocket can cost a pretty penny. Plus in my experience I’ve noticed that the majority of tenants do not move in the winter months here, especially around the holidays. So if someone moves out of one of my properties just before Thanksgiving, I’m lucky if I find someone before March. So unless you’re in an area of high demand, for that reason alone, a MTM lease could be a problem.

        And as a tenant, I’ve never felt “trapped” by a lease. In fact, quite the contrary. Yes, the lease should designate how long I stay in the property but it also serves other functions as well. Leases are designed to enforce rules, address repairs and escrow for your security deposit as well as timelines; and it’s my defense against the landlord. The lease traps the landlord more than the tenant in my opinion. I should know, I’ve had countless tenants move on my leases! When my tenants have been arrested, or decide to pick up and leave without notice, they never seem to consult that lease we have! No matter how much I screen, in many of my markets, this happens.

        It’s true what you said about landlords abusing the MTM lease with raising rents but a 30-day notice isn’t always effective as you might think. It actually doesn’t really do much of anything if the tenant files for Bankruptcy or if they consistently delay the hearing. I’ve even had a tenant (months behind on rent, with no plans of paying) try to sue me just to delay the notice and buy time. And it worked! I’m talking serious time too. So if they know even a little about the law or have a lawyer who does, that notice can be worked around easily.

        Also the big question I have here is: What about financing? Most major banks usually require signed 1 year leases from landlords to refinance on a rental property. In fact it’s not just rental properties it would affect, if I went to buy a house tomorrow, the bank would say, “Oh you own 19 properties? We’d like to see all of the signed 1 year leases.” to verify my income. This is commonplace so how do i solve that issue only allowing MTM leases when they require 1 year minimum leases?

        Look, I’m really playing devil’s advocate here and maybe it’s just an area we’ll have to agree to disagree on. I have plenty of good tenants that have stayed for years and they like knowing that their rent is guaranteed to be the same for as long as they signed for. And as a tenant I like it too! My landlord signed a 3 year lease with me for a largely discounted rate.

        And as for Airbnb, I’ve actually had plenty of great experiences with the site, but I’m sure there are plenty of horror stories out there. I also happen to know it’s extremely popular with a lot of people making supplemental income, so who’s to say? And the ideal subletting situation you described is actually one we had in college, and I wouldn’t expect it to be any other way (although I’m sure it is). I know some student rental landlords have reached out to me and read this blog post, so maybe some of them will see this thread and take it into consideration if they haven’t already.

        As for the student housing in your neighborhood, I’m not sure what to say. I certainly can’t speak for all landlords and it sounds like you’re living in a changing place however unfortunate or fortunate it is for the community. Have you tried reaching out to your local councilman/woman, perhaps if it gets to be a bigger issue they can do something about it? I know the college town that’s very close to me has many laws/ordinances in place so the students and regular residents can live side by side without much issue.

        Best,
        Dave

        • It would take too long address every point you made. I will pick one. “Plus in my experience I’ve noticed that the majority of tenants do not move in the winter months here, especially around the holidays.” According to you, the risk of losing a tenant in the winter is low. So even if the tenant is on MTM, they will not likely move during the winter. Then you say, “If (that rare) someone moves out of one of my properties just before Thanksgiving, I’m lucky if I find someone before March…for that reason alone, a MTM lease could be a problem. ” This statement implies strongly that the benefit of a lease to the landlord is precisely because it traps the tenant.

          Any statistical survey you wan to look at indicates that tenants typically earn below the median wage of the general population, and very often significantly so. Most of them cannot afford to cover a landlord, and also deal with the distress that prompts the unplanned move. From their point of view, disappearing is the most cost effective (and possibly the most responsible) thing they can do. It seems to me your own words indicate that unwanted vacancy with MTM is very low risk in the winter, and not a problem other times of the year. The risk of vacancy is a cost of doing business, not an opportunity to take more money from a tenant. If a tenant wants to leave in less than a year for whatever reason, I say let them be free to leave. It is far better than having a resentful tenant. Landlords using MTM have as many or more very long-term tenants as landlords requiring leases.

          Lenders requiring one-year leases for the purposes of refinancing is another question. However, that temporary need for leases can be handled. It is not really a justification for a permanent policy of one-year leases. As a landlord, my overriding philosophy is to treat my tenants as I wanted to be treated when I was a tenant. I see my responsibility as providing housing I would happily live in myself. I see my attitude as gratitude to tenants for allowing me to use their money to further my financial goals. Good screening generally insures against tenants that abuse this philosophy. The rare tenant that slips through I consider a fluke, not a reason to change my policies.

  10. Dave Van Horn

    Hi Katie,

    Thanks for the response. I think you raised some good questions but I want to be clear on a few of my responses and ask some questions about yours.

    “This statement implies strongly that the benefit of a lease to the landlord is precisely because it traps the tenant……The risk of vacancy is a cost of doing business, not an opportunity to take more money from a tenant.”

    No matter the season, I don’t consider myself “trapping” the tenant by having a one year lease. Like I said in the previous post, leases can only do so much. If someone wants to leave they will. And when they do, there’s really not much recourse either. In fact, when you file a judgement against someone for breaking a lease and not paying rent for the duration of the agreement, usually you can only attempt to reclaim the money you didn’t make until it’s re-rented again (if that). On top of that, this judgement is an unsecured lien so basically “good luck.” Also, I’m sure it depends on the landlord but personally speaking, there have been many situations where I’ve given free extensions, allowed tenants to walk away, etc.

    So it’s not a trap, it’s merely a commitment to our agreement for how long they plan on renting the unit. The terms are often negotiable and if both parties don’t agree to these terms of the lease, then we do not have an agreement. And like student housing, it’s a free market, so they are free to rent elsewhere with an MTM lease if they so desire. I’m not taking money from the tenant for nothing, they are paying for the time they agree they’ll occupy the property.

    “Landlords using MTM have as many or more very long-term tenants as landlords requiring leases.”

    Although I like to believe this, I’m not entirely sure I do. Is this just your opinion or do you have data to back up this claim?

    “Lenders requiring one-year leases for the purposes of refinancing is another question. However, that temporary need for leases can be handled.”

    Can you elaborate? This is a big issue with MTM since refinancing is a major exit strategy/way to recapitalize utilizing HELOCs. How could it be handled?

    “Good screening generally insures against tenants that abuse this philosophy”

    Again, I’d like to believe this. I really wish this were always the case but working as both a manger and in the mortgage industry I have to ask…What about bad things that happen to good people? Death, divorce, job loss, and medical issues all can happen unexpectedly. So you can screen a potential tenant until your purple, I don’t know if you can predict any of those things through a screening process. I’ve had stellar tenants who’ve been laid off and couldn’t find work, or who have gotten ill and haven’t been able to work again, etc. Many Americans are living paycheck to paycheck, 60 to 90 days from bankruptcy. Many don’t have reserves, savings, etc. It’s certainly a problem, that doesn’t have one single cause or one single solution.

    And I’m still not clear on how I solve the potential short turnover issue? Seeing as I’m dealing with volume as opposed to just one property, this “cost of doing business” is the constant risk of THOUSANDS of dollars in repairs, mortgage payments, and lost time and for what? To potentially make my tenant happier? What if they’re like me and don’t mind the one year lease commitment? I’ve had plenty tenants tell me they don’t want a MTM lease.

    To sum up, I actually do a hybrid of both of our strategies – a one year lease with my tenants for the first year, and then it reverts to MTM. That way, the tenants that are more likely to be long-term are willing to commit for the first year and as a landlord it makes it easier to recoup my investment in repairing the property and doesn’t restrict me in terms of financing.

    The reason I bring up the points above is not because I’m interested in changing your mind, but really to add more perspective. Having owned/managed hundreds of units for over 30 years I’ve found that my method works for my market/tenants. I find it hard to speak to it generally when people have different business models, marketplaces, quality of tenants, personal preferences, etc. And maybe our opinion on what’s fair is where we really diverge. It sounds like your philosophy is based on your time as a renter more-so than a landlord. Although you argue a happy tenant makes for a happy landlord, in my opinion MTM seems to benefit the renter much more than the landlord who has a considerable amount of risk. How is that fair? I ask, why can’t the risk be split?

    Best,
    Dave

    • I do appreciate your willingness to engage. Again, your response is so long, and time is so short…

      “What about bad things that happen to good people? Death, divorce, job loss, and medical issues all can happen unexpectedly. So you can screen a potential tenant until you’re purple, I don’t know if you can predict any of those things through a screening process. I’ve had stellar tenants who’ve been laid off and couldn’t find work, or who have gotten ill and haven’t been able to work again, etc.” So we should add to their distress the concern about paying off the rest off a long-term lease with money they do not have? Let them give a 30-day and leave. Do you not see that most of your justifications for long-term leases amount to traps?

      And why would a landlord expect a judge to allow them to double dip by accepting rent from a new tenant while simultaneously accepting a judgment payment from the tenant who broke the lease? A general principle of law is that a plaintiff is only entitled to actual damages (in this case, actual lost rent). Another general principle is that the plaintiff is required to mitigate those damages as much as possible (in this case, by re-renting the unit).

      Even if there is no distress, maybe the tenant wants to buy a house. And why shouldn’t they? Very few people can afford to pay for rent and a mortgage at the same time for the duration of a lease. Let them give notice, and happily move into their new house, as opposed to resentfully giving up a house they wanted because they cannot get out of a lease. See, another trap.

      “It sounds like your philosophy is based on your time as a renter more-so than a landlord.” My philosophy is not pro-renter or pro-landlord; it is based on the Golden Rule (a rule that some BP members have ridiculed). The power differential already lies with the landlord from the get-go. What is true is that the time I spent as a renter informs my policies as a landlord and helps me apply the Golden Rule. That is a positive attribute, not a negative one. What I find disturbing is that most landlords spent some time as tenants, and yet disregard that experience (except for the BP members who say they and their friends were terrible tenants and therefore assume their own tenants will be just like they were). I prefer to screen well, and if the tenant wants to leave for whatever reason, they can give a 30-day notice and leave. If I want to get rid of a tenant for whatever reason, I can give them a 30-day notice and they are gone.

  11. Dave Van Horn

    Hi Katie,

    I want to clear up some confusion that you had with my last post, and make some final points.

    “So we should add to their distress the concern about paying off the rest off a long-term lease with money they do not have? Let them give a 30-day and leave. Do you not see that most of your justifications for long-term leases amount to traps?”

    No and no I do not. If any of those scenarios happened to a tenant with little assets or reserves, as the landlord I’d most likely never see that money again for the duration of the lease. I merely brought up those 5 unexpected scenarios to counter your point about screening tenants to avoid having them abuse the agreement. What would you do with your MTM lease in that scenario? They would have to get out within 30 days with no source of income or an illness? I don’t see how that’s any better for them than a one year lease. At least with one year leases, I’ve had plenty of tenants hiccup and get back on track again. I don’t send them a 30 day notice to get out immediately.

    “And why would a landlord expect a judge to allow them to double dip by accepting rent from a new tenant while simultaneously accepting a judgment payment from the tenant who broke the lease? ”

    They shouldn’t and I doubt you’d get a judgement payment in that scenario. This was something I mentioned to support my claim that as a landlord you don’t have much recourse when a tenant walks out on a lease if they don’t have assets.

    “Even if there is no distress, maybe the tenant wants to buy a house. And why shouldn’t they? Very few people can afford to pay for rent and a mortgage at the same time for the duration of a lease. Let them give notice, and happily move into their new house, as opposed to resentfully giving up a house they wanted because they cannot get out of a lease. See, another trap.”

    I don’t even know what to say here, it’s so hypothetical. I’ve never had a tenant say to me “I’m going to miss out on the opportunity of a lifetime on a house I could purchase, please let me break our lease agreement.” If my tenants sign a lease for a year, it would be very odd for them to look for a house to buy during that time (unless it’s towards the end). Plus to get mortgage they would need a VOR (Verification of Rent) Letter from me saying they are within good standing for the bank to approve their mortgage. Also their first mortgage payment is a month out from the closing. So they could stay an extra month and not have two payments. And if they were looking to buy a property, I’d try to assist them any way I could as a Realtor/RE Investor. I’ve helped many a tenants with rent to own on my properties, etc.

    “My philosophy is not pro-renter or pro-landlord; it is based on the Golden Rule (a rule that some BP members have ridiculed). The power differential already lies with the landlord from the get-go.”

    I understand what you’re saying with the Golden Rule, but I completely degree with this misconception of power. As a tenant, I know I have more power than my landlord. I could move out tomorrow without notice, skip out on rent (whether it’s on a MTM or One Year Lease) and what could he do? If I have no assets in my name, what could he gain? He’s out of money. He’s at the disadvantage. And I’ve moved on. Plus I could have wrecked his property and he would be the one stuck with repairs, not me. He’d have to track me down, hire a collections attorney, and then at the end of the day he still probably wouldn’t get any money back. And believe it or not, when you get to own/manage 100’s of units you’ll see plenty of scenarios where this can happen.

    I’m still not convinced MTM leases are 100% the best. There are advantages to it sure, but there are plenty of disadvantages as well. For instance, what if the landlord has someone move in for a month with a MTM lease and then they decide to sell the property? The new buyer, who has to honor the existing lease, could send give them 30 days to vacate notice right away. Where as if there was a 1 year lease, the landlord (and new buyer) has to honor the one year term. How does the MTM lease benefit the tenant in that scenario?

    Also, you still haven’t addressed my comments on the financing. The bank would balk at financing a commercial property with MTM leases because they know statistically there are higher vacancies with Month to Month tenants. Even if they approved your commercial loan the first time around, these loans typically recast every 5 to 7 years so they could actually call your loan in full if you had all MTM leases (again, this is something a tenant wouldn’t have to deal with). So how do you have MTM leases with your commercial properties?

    My point here is, the types of leases and their terms are just tools in the tool belt to manage properties the best way possible. It’s your job as a landlord to use the right tool for the job.

    Best,
    Dave

    • I feel like your landlord blinders make it difficult for you to understand my points. ” it’s so hypothetical” It is far from hypothetical. Lots of tenants face this problem whether any of your tenants have discussed with you or not. In fact, people who relocate to a new community often must rent even while having the intention to buy as soon as possible. They are out homesearching regularly. “And if they were looking to buy a property, I’d try to assist them any way I could as a Realtor/RE Investor.” Tenants know that such consideration is rare.

      With those scenarios, what would I do with my MTM tenants? Nothing, until and unless they started missing rent payments. I would never say, “Oh I heard you lost your job. Here’s a 30-day notice.” Of course not. It would be the tenant who gives me the 30-day notice if the tenant thinks his distress is acute enough that he cannot fulfill his responsibilities. A lease in that situation pretty much compels the tenant to the only power he has and “skip out,” Responsible people do not want to skip out, and according to you, the lease does not actually hold a tenant anyway. A MTM lets them leave responsibly.

      If I were selling a property, I would probably talk to my tenants and give them a choice. I would explain that they have 3 options: move out, take their chances with a new landlord, or sign a new agreement with me that the new landlord would inherit.

      When I was a tenant, no lender ever asked me for a VOR, so I do not even know what you are talking about here. Lenders only want to know that your debt to income ratio will pay for the mortgage. They do not care how much rent you are currently paying.

      Mostly, you have said the leases are traps that some tenants escape by skipping out. I say MTMs are better because tenants do not have to escape from landlords; they can leave honorably. The MTM also benefits landlords because they can more easily get rid of a bad tenant.

      • Dave Van Horn

        Hi Katie,

        Thanks again for the response. I feel as though we may have overstayed our welcome on this thread, just wanted to chime back in to make some clarifications.

        “…people who relocate to a new community often must rent even while having the intention to buy as soon as possible. They are out home searching regularly”

        I definitely think this depends on the market and the tenant. Although I have units in areas where I’m sure this could happen, I also have many properties in low income areas with tenants that are on government assistance/disability who do not currently have the ability to purchase a home. Many of my tenants have stayed for 10+ years (and they are on MTM Leases), so could this happen in certain areas with certain tenants? Absolutely. Is this happening regularly in my units? It’s possible but it hasn’t been brought to my attention unfortunately.

        “A MTM lets them leave responsibly.”

        Perhaps I didn’t state this clearly above, but a lease is merely a contract with terms that must be agreed upon by both parties. Contracts can and often are broken. Any negative emotion tied to breaking a contract, any contract, due to it’s terms is purely psychological and a stigma that isn’t something I for one support.

        As for the VOR Letter, I’ve placed a link below for the FHA Single Family Housing Policy Handbook from the government website for the United States Department of Housing and Urban Development (HUD) from August of 2015 stating the requirements when applying for an FHA loan to purchase a property. You’ll notice at the top of page two, under Section C “Payment History on Housing Obligations”, you’ll see it states:

        “The Mortgagee must determine the Borrower’s Housing Obligation payment history through:
        verification of rent received directly from the landlord (for landlords with no Identity of Interest with the Borrower) ”

        http://portal.hud.gov/hudportal/documents/huddoc?id=sflive_excerpts_08-25-15.pdf

        “Mostly, you have said the leases are traps that some tenants escape by skipping out.”

        I’m sorry but I can’t agree with this statement because I don’t feel as though I’ve said this. A trap by definition is something that allows entry but not an exit. I’ve described above the potential exits to the contract in the form of a lease above. The lease is a contract that requires an agreement between the parties at hand, and if the terms of a contract cannot be negotiated, the respective parties on both sides will have to look elsewhere. It’s really that simple.

        Finally I’d like to circle back to the first thing you said here, “I feel like your landlord blinders make it difficult for you to understand my points.”

        Out of the 30 years I’ve been a landlord, I’ve been a tenant for the last 7 (and have been a tenant previous to me becoming a landlord). Not once in those 7 years have I ever felt trapped in my lease. I’ve asked other colleagues, friends, and family members if they think their one year leases are “traps” and I was met with a resounding “no”. Does that mean you’re wrong? Absolutely not. You’re entitled to your opinion just as they are entitled to there’s. Clearly it’s a matter of personal preference and I really think the type of lease should depend on what the tenant/landlord can agree upon and works best for them. I have MTM leases with tenants and I have One Year Leases. I personally can’t say one way works better than the other in all cases for everyone, because I certainly can’t speak for every person or scenario. This is a nuanced business with different types of tenants, markets, leases, etc. I don’t believe there is a one size fits all contract, but clearly you disagree. And that’s okay.

        That being said, I don’t know if this opinion of mine can be said in too many more ways, and I wouldn’t want to waste your (or any other reader’s) time reading it even if it could. I’ve said what I felt was necessary and although I disagree with you, I feel as though I understand your opinion and argument at this point. So please, feel free to respond but I probably will only be able to read it since I most likely will not have the time to continue this correspondence much further. Thanks again for reading (and commenting), I’m glad to have heard your opinion on MTM, student housing, and other matters. You brought up a lot of great points on a slew of subjects, and have actually given me a couple ideas for future articles.

        Best,
        Dave

        • I do appreciate the respectful tone. You have also clarified some points that are outside my experience, such as VORs. It also seems your tenant pool characteristics have many differences compared to my tenant pool.

          “A trap by definition is something that allows entry but not an exit. ” Here is the crux of our issue. I have made it perfectly clear that a lease can be often trap that allows entry, but often no responsible exit, only escape. As far as the point about leases being negotiable (well, not usually), and freedom to go elsewhere (difficult in a community like mine with its 0.5% vacancy rate), these rationales seem very landlord-centered. If you answer that my community does not have the healthy competition that would encourage nice homes at reasonable rents with reasonable landlords, I would agree with you. Landlords in my town know they can easily find tenants for their exorbitantly-priced garbage. Landlords in my town resent my efforts to promote nice rentals below so-called “market” rent because profit is all they care about. My goal is ambitious, maybe even grandiose. I would really likely to reform the rental market of this town.

          As far as a survey of how many tenants consider their leases to be traps, I can probably find as many who answer with a resounding yes as with a resounding no. The only way to answer this question adequately is probably with a properly randomized sample and a professional worded survey. Just a sample from my own experience: on two different job relocations, I was very happy to have my RV because it allowed me the freedom to say no to unacceptable properties, rental agreement, or landlords (yes, I vetted my prospective landlords. How impudent of me). In one case, it took almost a month to find a place; in the other, seven weeks. Landlords of units I accepted were rewarded with a great, long-term tenant (4 years, 5 years respectively).

  12. Adam D.

    Katie,
    In which area of the country, which metro area please, do you live? In your posts you keep saying “my town.” Where is your town?
    Also, where is your high end vacation home located? I wonder if your experiences are different than mine because we’re in different areas.

    I’m in Colorado, by the way, and have properties in Denver and Colorado Springs metro areas.

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