13
May
15

Reserve? It’s like a rainy day account.

When doing an analysis on a property, one of the things you should account for is a reserve fund.  Our clients allow us to hold a reserve in their account for them.  Actually we require it.  It’s a relatively small amount but it’s enough to cover most any expense that comes up after we distribute their funds to them every month.

But that’s not the reserve that I’m talking about.  Your reserve should be sufficient enough to cover one of two things.  First, major expenses like a roof or air conditioner.  Granted, you should have accounted for these things and adjusted the purchase price when you first bought your property.  But knowing this expense will be coming up; you should have those funds set aside. The second reason for a reserve is something that you can count on happening.  You’re going to have a vacant property.  Make sure you have enough to cover the mortgage while your property is vacant.  If you don’t, you’ll have a tendency to become emotional about finding a new tenant and will soon settle for a less than desirable tenant.   Doing so will more than likely be more costly than allowing your property to go vacant for a longer period of time.

There are different trains of thought on reserve; some say you should have a separate reserve for each property and your analysis should include the reserve.  In fact, your bank may require you to have a set reserve when considering approving your loan.  I personally don’t think you need to.  You know your properties and know the condition of things like the roof and air conditioner and the chances of having multiple vacancies at the same time are low.  You also know your cash flow and can figure out how long it will take to replenish your reserve.  With proper planning and a watchful eye you can free up some cash to put towards additional properties.

One last note.  If you have plenty of equity in your portfolio, I don’t see a problem with having an equity line of credit to use towards your reserve.

We have seen owners who did not manage their reserves properly and the outcome has been very unfortunate.

Here’s to keeping cash flow positive,

Dave

04
Mar
14

It’s just a few coins

We have this little office pool going where you guess when the postage meter has to be refilled. Who ever guesses the correct date, wins. When we first started this, you just won bragging rights and you just had to get the closest to the date. We changed it to you have to pick the exact date and you would win money. If nobody guessed correctly, the pot grows. Where does this money come from? The money is found money. We do “move out” inspections once a tenant moves out. The tenant always has the opportunity to be present. Some tenants don’t bother showing up for the inspection. Probably because they leave the place a mess and they know the inspection report will come back not in their favor. It seems when we perform these particular inspections, we always find loose change laying around. And, I’m not talking about a penny here and there, I’m talking a lot of coins scattered all over the place. I’ve even found a roll of nickels once. Sadly it’s typically tenants that have financial problems. I truly believe that the fact that they leave money lying around, probably thinking that it’s just a few coins, is the root of their financial problems. When you treat money with such low regard, even if it’s just a few coins, your overall mentality toward money is not conducive to financial security.

There’s an old saying that “Money is the root of all evil”. The saying is actually a derivative from a bible verse “For the love of money is a root of all sorts of evil”. It’s the love of money. Money itself is not evil. Money is freedom, money is liberating. With money a person can do wonderful things. Money is necessary to survive.

In order to have money, you have to have a respect for money. Maybe not respect for money itself, but respect for the value of money. Money has value because one has to work for it in one way or another. The money you have is a result of the amount of effort you put into it. A real estate investor’s effort ranges from raising the funds to buy their property, to taking the many risks involved in owning the property. On the surface that may not seem like a lot of effort, but any real estate investor understands.

Here’s to keeping cash flow positive,
Dave

13
Nov
13

They had the money

This past weekend, I was scheduled to show a foreclosed property that one of my clients was looking to buy. I arrived about 15 minutes early and was walking through the property when someone knocked at the door. It was a neighbor who was a little curious about what was going on with the house because it had been vacant for so long. He gave me a pretty good history of the house. I told him that I had a client coming to see it and possibly buy it and that he was an investor looking to buy it as a rental property. This gentleman let me know that he had four rentals locally and how bad tenants were in that area. When I asked him to explain, he told me about all the bad things his tenants had done. Security deposit never covers the damages they create. I was a little blunt; I asked him why he rented to them in the first place? He said they show up and have the money so he rents to them. I let him know that I’m a property manager and we perform background checks on all tenants and asked him how he performed his background checks. His response was not surprising. He said he didn’t have time to do background checks.

Taking a little time to do background checks would certainly save him a lot of money. I’m of the belief that, for the most part, bad tenants were bad tenants before you rented to them. Our background checks consist of a credit check, employment or income verification, rental history, and criminal background checks. We let our prospective tenants know what is required to rent from us and disclose this as part of our application packet. If you don’t meet these requirements, you shouldn’t even bother applying. This landlord saw that they have money and that was good enough for him. We’ve had prospective tenants tell us they have the money now, and sometimes enough to pay a couple months rent in advance and they need to move in today. We politely tell them that we have to run a background check on everybody and they will have to wait to see if they’re approved. EVERYBODY goes through a background check and has to wait for the results. We have lost tenants because they’ve found something else before the results have come back. That’s a risk we’re willing to take.

All landlords should make it a priority to screen their tenants. If they don’t have time, there are companies out there that will do it for you for a fee. You can pass that fee on to the tenants if you want. Some landlords may absorb the cost of the service looking at it as a worthwhile expense, some refund the cost back to the tenant if they are approved and sign a lease by way of a reduction of the first months rent. We charge the fee to the applicant. This is part of our screening process. If someone knows that they will not pass our background check, they won’t waste their money or time applying.

My client ended up making an offer on the property and, hopefully, he’ll get it and we’ll put a good tenant in place. The neighbor will see that there are good tenants in that area and we’ll get a new management contract. He has my business card.

Here’s to keeping cash flow positive,
Dave

11
Oct
13

Pawn Star’s Mentality

One of my favorite TV shows is Pawn Stars. If you don’t know it, it’s a reality show of a pawn shop in Las Vegas. It shows people coming in trying to pawn or sell items that they either bought from somewhere obscure or was left to them by a late relative. On occasion, someone will bring an item that they have no idea of its value. The question that’s always asked when someone wants to sell something is “How much do you want for it?”. Not knowing its true value, they come up with a number like $500. Rick the owner of the pawn shop appears to be an honest person and will tell a person if he thinks it may be worth more. As usual, Rick will call a friend that’s an expert. The expert will come in, examine the item and declare it a rare find and value it at some large number, let’s say $7,000. The seller is always shocked and elated. Then Rick will ask “Now how much do you want for it?”. The seller will inevitably say “$7,000”. Of course Rick will laugh and point out to the seller that the $7,000 is what the expert said was the retail value and he has to make a profit and offers $2,000. The seller almost always hardly budges from the retail price, and as Rick moves up in price they act as if they would be taking a big loss if they come down much more. Now wait a minute. Didn’t they originally ask for $500? And, when they came up with a price of $500, they were surely thinking that they would have to come down from that in the negotiation. Through Rick’s efforts, they are taking home a whole lot more money than they thought they were going to in the first place. Why not be happy with that?

I recently worked with an investor client who was interested in a property I found for him. He did his analysis; found a price that would give him the return that he wanted. Knowing that he would probably have to go back and forth with the seller, he offered an amount much lower than the asking price and lower than the price he was ultimately willing to pay. We did the usual offering, waiting for the sellers to counter, buyer counter, sellers counter, the buyer going up a little and the sellers going down a little each time. This went on for a while until he offered his maximum and the sellers offered their minimum. We were still way off. My client did the right thing and walked away from the deal. If it doesn’t bring the return you want, walk away and look for another deal that does.

Several weeks later, the sellers still had not sold their property and reduced their asking price. I immediately contacted my client and let him know that the property was still available and, GREAT NEWS, the price was reduced to below what he calculated as his maximum price. My client’s response was to submit an offer well below his initial low offer. The sellers ended up accepting an offer from someone else for the full lower asking price. My client got the Pawn Star’s mentality and lost out on a property that was going to give him a better return than he was looking for. I have nothing against getting the best deal that you can, but if the deal fits your needs, why not be happy with that?

Here’s to keeping cash flow positive,
Dave

17
Jul
13

Why is it still vacant?

We face this a lot. We market every property the same way, but some rent right away while others stay on the market for a long time. When a property stays vacant for a while, I get owners calling me asking me why we don’t have their property rented as if we’re not doing our job. I let them know that we’ve been showing their property to those who inquire about it, and for people that call wanting to know what we have available, we tell them about all of our vacancies. Sometimes I think that they want us to force tenants to rent the place.

If your property isn’t getting rented, here are three things that could be keeping it vacant.

The condition of the property

I often tell people that if you want top dollar then you have to offer top quality. And it’s usually the little things that kill you. Do all the light bulbs work? Has the place been swept or vacuumed lately? Are the batteries in the smoke detectors working or is the smoke detector constantly chirping? You may think these are minor, but people do notice. I had a property that had a hole in the wall where the refrigerator goes. The owner didn’t want to spend the money to fix it because it would be hidden when the tenant put their refrigerator in. Because of that and a few other things they wouldn’t do, it stayed vacant.

Is the rent you’re asking fair market value?

If you are asking for more in rent than other like properties, you’ll be waiting for a while. You may have a nicer property than all those other places, and though some people are willing to pay extra, not everybody will. That means you’ve narrowed the market. Rent should be set at what the market will bring. I’ve had people upset with me because the rent I suggest isn’t what they’d like. They tell me “I need to have…” Unfortunately, the market dictates the rent, not your needs.

Is the property functional?

There’s a term used in real estate called “functional obsolesce”. What this means is, does the property meet today’s expectations? For example, many older homes have small closets. For some reason, 75 to 100 years ago people didn’t need the closet space we do. So a home with four foot wide closets is functionally obsolete. Can you rent a functionally obsolete home, yes, but don’t expect the same rent as a house with walk in closets. We recently had a house where the owner spent a lot of money remodeling the kitchen. The kitchen was beautiful. Not too extravagant but a lot nicer than you would expect for that house. The problem with the house was that the only bathroom was in one of the bedrooms. Not functionally obsolete, just plain not functional.

03
May
13

Security deposits

One of the things a lot of landlords fail to realize or refuse to accept is that the security deposit belongs to the tenant. The landlord may be holding it, but it still belongs to the tenant. As a professional property manager and regulated by the state of Missouri, I’m required to hold the security deposit in a separate bank account. I suggest everyone do the same. That’s one of the reasons I require the tenant to pay their rent and deposit on separate checks at lease signing. This helps keep records straight. Our state has regulations regarding security deposits that help protect both the tenant and landlord. For example, you cannot charge the tenant for normal wear and tear. Normal wear and tear is very subjective and if challenged, you need to be prepared to defend your assessment. What I would suggest is to talk to other landlords that have been challenged in court and see what their experience has been. Another regulation addresses the use of security deposits for the last month’s rent. Unless the landlord agrees, the tenant may not use their security deposit as last months rent. If they try to, we consider the rent to be late and charge late fees. Doing so allows us to bill them for the late fee, show in our system that they did not pay the last month’s rent, and have an outstanding balance. You might say that it doesn’t matter, you probably won’t get the money anyway, but if the tenant ever uses you as a reference, you won’t be giving a very good reference. And, if you want, you could make a small claims case and have it on the tenant’s record. If another landlord does a background check, it’ll show up.

Again, it is critical you keep the security deposit separate. It is the tenant’s money that you are holding in escrow. We are so particular about protecting the tenant’s money that we have turned down clients that do not allow us to manage that money. I do not understand why any of my clients would object. It’s not their money, and why would they want to worry about compliance with state statue. Our state requires that the tenant be either refunded the security deposit or receive an explanation of any funds held back within 30 days of when the property was vacated. If this doesn’t happen, the tenant may sue for double the amount owed to them.

How much should the security deposit be? Missouri allows no more than twice the rent. If you were to look at our website you will see that we post a “minimum” security deposit. We may just charge the posted amount, or the tenant may have a problem with their background check and we will require more than posted. Most people expect the deposit to be equivalent to one months rent. We charge more. That’s our way of letting the tenant know that the deposit is not the last months rent. I don’t have evidence that it works, but it at least puts that seed in their head.

Here’s to keeping cash flow positive,
Dave

19
Apr
13

Yes it’s called Fair Housing

The other night I was at a social event. I ran into someone that I’ve met before but don’t know well. He informed me that he was one of my competitors. I knew that he didn’t hold a real estate license so I asked him how so? He let me know that he owned rental property and he self managed. Well that’s not really a competitor, but I understood what he was saying. I let him know that a lot of people self manage and I’m excited for anybody who’s successful. He proceeded to tell me a little bit about how he ran his business and how well he was doing. One of the things he told me raised a red flag. I won’t give any details but part of his screening process could easily be considered a violation of fair housing law. I let him know that he could be fined a minimum of $10,000 per violation. He told me of something else he did when approving or denying an applicant. Again, what he was doing was in some circumstances a fair housing violation. His response was “are you telling me that I can’t keep people out of my property that I don’t want?” I let him know that it depends on what it is that he doesn’t want.

The fair housing act became law in 1968 and amended in 1988. Fair housing covers the following protected classes: race, color, national origin, religion, sex, familial status or handicap. And in some cases depending on state or local law, sexual orientation is considered a protected class . For more details on the fair housing act, go to the U.S. Department of Housing and Urban Development web site HUD Fair Housing.

I can’t emphasize enough that this is a business, and as a business you need to know every law national, state, and local. Fair housing is not something to be taken lightly. All of my employees have had fair housing training whether they are going to be talking to the public or not.

Here’s to keeping cash flow positive,
Dave




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