Archive for the 'Uncategorized' Category

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

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

04
Apr
13

Below Market Rent

I recently read an article about how to keep tenant turnover low. One of the suggestions was to not raise a tenants rent. The author commented that tenants do not understand that taxes go up or insurance goes up therefore won’t understand why rents go up. I for one am in complete disagreement with this concept. Everyone in this business has to understand that this is a business. It’s true that turnover has cost, but turnover is part of the business. Yes, keeping turnover to a minimum is something to strive for, but at what cost? I don’t buy into the concept of tenants not understanding that your cost goes up. Everything goes up, utilities, groceries, and rent. Keeping rent below market value only hurts property owners in the long run.

Two things come to mind. First, when you’re ready to sell your property, the savvy investor is going to do an analysis based on actual numbers. I’ve seen where someone is trying to sell their rental and when asked how much is the rent, they will respond with “we’re getting $700 a month (as an example), but you could get $900”. If the buyer were my client, I would advise him/her to do the analysis based on actual income. This would be true on any business you buy and rental property should be no different. If you can get the higher rent, then that would make your return on investment even better. Getting the higher rent would be because of your effort, not the sellers so why reward the seller for something they did not do.

The second thing that comes to mind is keeping a tenant’s rent considerably below market is the same as supplementing their rent. I have acquired management of properties where the rent was 25% to 50% below what rent should have been. The tenant had not had a rent increase for several years. Not to be heartless, but you’re in business to be profitable. There are agency’s out there to assist people with needs. It is not you. What we have done in those cases where the rent was so low, was to increase the tenant’s rent a little at a time until the rent came in line. We increased the rent quarterly for a year. We did this to help the tenant adjust to the increase over time.

Let me be clear, I’m not against renting your property slightly below market value, as a matter of fact; it IS a good way to keep or attract tenants. The only caveat is that the cash flow meets your goals. What I am against is keeping rent considerably below market. Your taxes will go up, your insurance will more than likely go up, and as the building ages, maintenance will go up. Smart business mandates that you raise the rent accordingly. If it’s a nice property and the rent is right, the tenant will stay.

Here’s to keeping cash flow positive,
Dave

19
Mar
13

Cats and Dogs

One of the questions I ask a client when we acquire a new property to manage is if they want to allow pets. Some are firmly against pets, while others are very open to them. Then there are those that are just not sure and want my opinion. When it comes to making a decision about their properties, I don’t like to give my opinion, so I just state facts to help them decide.

Here are some facts about pets. Did you know that 60% of Americans own some kind of pet? That’s a bunch! Not allowing pets reduces potential tenants to just 40% of the population. How about your insurance? Your insurance premium could go up just because a “dangerous” breed is on your property. There is a huge debate about labeling some dogs dangerous. Part of the argument is, and probably rightfully so, that all dogs could potentially bite. Would you believe some states are considering legislation against discrimination of pets? Here’s something else to consider when deciding if you want to allow pets or not. Does your property have carpet or is it all hardwood/laminate/tile? Think about what a pet could do to a carpet? You could argue that a dog that doesn’t get its nails regularly trimmed can scratch up the hardwood floors. Speaking of scratching, I’ve seen dogs do a lot of damage to doors and trim from being locked in a room and wanting out.

I know I said I don’t give my opinion but there are two things I’m pretty insistent about. First, if the property is an apartment building, I am opposed to allowing dogs. Cats maybe, but not dogs. Barking dogs are too much of a disturbance for others in the apartment complex and not all dog owners are great about picking up after their dogs. You will also have additional problems if the dog gets fleas and they migrate to an adjacent apartment. If the flea problem were in a single family home, it’s the tenant’s problem. If they migrate to an adjacent apartment, then it becomes your problem. Second, if an owner says that they would be OK with an outside dog, I tell them that they may as well say no to pets. There is no way to control or fully monitor whether an outside dog comes in or not.

Another thing to consider when deciding whether or not to allow pets is the additional income you could receive. Every one is different, but our pet policy is to collect a one time non refundable pet fee and increase the monthly rent. We make sure to note in our lease the additional rent is for the pet in case the tenant were to ever lose or get rid of the pet. Note that we call it a “pet fee”, not a deposit. If we call it a deposit, that could be implied as funds to repair any damages caused by the pet. This fee is what we ask our tenants to pay for the privilege of allowing a pet on the property.

Whatever my client’s decision is, we abide by it. If we advertise a property as not allowing pets, we’ll still get calls from potential tenants asking us to reconsider. They say they’d even pay an extra deposit. The answer is still no. We hear a lot about how wonderful and well trained their dog is. The answer is still no. I have never had anybody tell me how bad their dog is. If the client does allow pets, we are up front about additional fees. Pet lovers are thrilled to find a pet friendly property.

Here’s to keeping cash flow positive,
Dave




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