Archive Page 2

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

27
Mar
13

You say you don’t want to be a landlord?

I just completed another weekend hosting a booth at the home and garden show. Having a booth at the home show is another way of marketing our business, to get our name out there and let people know what we do. Home shows typically are places for companies such as builders, landscapers, cabinet makers and anyone who has anything to do with improving your home or garden. So when people pass by our booth and don’t see a display of carpeting, cabinets, or cookware, they will ask “what is it that we’re peddling?” Our response is, we’re a real estate company that specializes in working with real estate investors. We help them find rental property to buy and can manage that property for them. Some people are polite, take our giveaways, some ask more questions and are truly interested in what we have to offer.

Then there are those that get this troubled look and walk away saying they have no interest in being a landlord. They normally walk away quickly and don’t give me a chance to talk to them as to why they feel that way. I can only guess they feel that way because they’ve heard horror stories about being a landlord. Three things come to mind. First, where are they getting these horror stories? Usually they’re getting them from unsuccessful landlords. People who got into the business without a good education, probably gave up and got out of the business. Then they spread their horrible experience to anyone who will listen. Second, they’re afraid of getting that dreaded call from a tenant late at night or over the weekend with a problem with the plumbing or heating and cooling system or whatever else the tenant thinks is an emergency. My reaction to this is “Really?” Someone is making your mortgage payment, paying your insurance and taxes and an occasional call from that person is a problem? Come on…. they’re buying you real estate. The inconvenience is minimal versus the return you’re getting. Of course there are ways to minimize problems with your property, but that’s for another time. And the last thing that comes to mind is they don’t realize that there are companies like us that can manage everything for them from finding tenants to making a property ready for the next tenant and everything in between. That means we get the inconvenient calls, not the property owner. Yup, that’s right. Those people who walked away are missing out on an opportunity to invest in real estate without knowing the truth about how to generate income and increase their wealth.

My research indicates that there are around 3,000 landlords in just one of the counties I service. If being a landlord is that bad, what are these people thinking?

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

11
Mar
13

Frugal vs. Duct Tape

I recently had a call from a potential client. He was looking for a property management company for some property he was about to acquire. After we discussed my services and how I could help him, we discussed quality of property and maintenance. He came up with a phrase that I just thought was great. The phrase was “frugal vs. duct tape”.

As a property manager, I am limited as to what I can do to maintain a property based on the owner’s wishes. Not that we can’t fix a problem that a tenant has when one arises, because we can. I’m more concerned about preparing a property when a tenant moves out and making the property ready for the next tenant. If a tenant does damage, then we repair the damage and take the money out of the security deposit. But there is normal wear and tear, and the tenant is not responsible for that. Most of my clients understand that in order to get top dollar and to get the property re-rented quickly, that a duct tape philosophy is more costly in the long run.

The duct tape philosophy is “just fix what’s broken, clean it, and start showing it”. It doesn’t matter if walls need to be painted, the carpet is worn, or the light fixtures are 20 years old.

The frugal philosophy is “watch the dollars, but let’s make this place something someone would be proud to call home”. You can buy mini blinds and light fixtures cheap and the return is great. How are those floor registers? How about the light switch covers or the electrical outlet covers? What about the drip pans on the stove? It doesn’t take a whole lot to make a place tip top. You don’t need to go overboard, but a property that presents well will bring you top dollar and won’t stay on the market long.

You have to be willing to invest in your property. You already have a lot invested; a few more dollars will only do you good.

Yes, I do have some clients that have the duct tape philosophy, but I can be pretty persuasive and have been able to change that. My argument helps when their property stays vacant. That potential client that I was talking to? He has the frugal philosophy. I hope to sign a contract to manage his properties soon.

Here’s to keeping cash flow positive,
Dave

04
Mar
13

Starting Your Rental Property Business

One piece of advice I give anyone wanting to get into investing in real estate is to understand that this is a business. I have seen people jump in and buy a property without doing due diligence. Some get lucky and do just fine, while others fail and fail miserably. There are many factors to consider when you decide to be a real estate investor. I’ll cover some in this post and will follow up in future posts.

Educate Yourself
DO NOT jump in without first getting an education. Learn as much as you can. There are many resources out there about investing in real estate. There are books, websites, podcasts and just about anything you can find in this day of mass communication. Learn the terms. Learn what to look for. Learn the law! I speak from experience. I bought my first property with little education and no experience. I thought it was easy, buy a property, put a tenant in it and cash the check every month. I got an education alright, but learning from your mistakes can be pretty expensive.

Determine Your Goals
Why are you investing in real estate? Is it strictly for positive cash flow? Do you want to increase your net worth? Is this part of your retirement planning? Are you looking for a specific return on your investment? Are you already quite wealthy and just want to rejuvenate a blighted area? It’s important to determine exactly what your goal is as this will help you make sure you are buying the right property. For example, if your goal is positive cash flow to support your desire to travel the world, then you wouldn’t buy the same property as someone who is looking to increase net worth. You would want something that already has tenants as opposed to finding something that’s being sold below market value and is going to need work to make it move in ready and built in equity.

Financial Analysis
I spoke to someone who told me that he got a great deal on a house that he bought as a rental. I asked him how he knew he got a great deal. He said “I bought it for $10,000 less than the asking price.” This is probably not the best way to analyze an investment. There are several factors to look at when doing an analysis. Many just look at income and the obvious expenses like taxes and insurance. What about the not so obvious? Are you including management fees? A lot of people who self manage don’t. They should! Three reasons. 1) Everybody’s time is worth something. It doesn’t matter if you self manage, your time has a dollar value associated with it. Pay yourself something even if it’s just on paper. 2) Most banks include management fees when they do their analysis for your loan. What if, God forbid, something happens and they have to foreclose? Managing that property until they can sell it is going to have a cost. 3) When you’re ready to sell, what if your potential buyer isn’t going to self manage? They will add management fees, so you might as well add it in now. Every property is different and the expenses with it will vary. Every possible variable needs to be included in your analysis.

When you complete your analysis, is this the right property for you? Will it bring you the positive cash flow you’re looking for? Are you getting the best return for you value? Could you find a better return on another property? If this doesn’t work out, there will be other opportunities. This is a business, and if it’s bad business, you don’t need it.

This will get you started. We’ll cover more in future posts.

Here’s to keeping cash flow positive,
Dave

25
Feb
13

What is the Positive Cash Flow Blog?

Welcome to my new blog! This blog is about investing in real estate. I named this blog “Positive Cash Flow” because investing in real estate should always have positive cash flow. My intent is to share with you information and insights to help you make sure you’re cash flow is POSITIVE!

Why should you follow this blog? Because it doesn’t matter whether you’re an experienced or a novice investor, no one knows everything. That includes me. Real estate investing is my full time business and I study this stuff. I spend a lot of time reading, taking classes, listening to podcast, attending seminars, or watching webinars. I always learn something, and when I think it will benefit you, I’ll write about it. So unless you’re doing all the same things at the same time that I am, you’re going to learn something. Maybe not with every blog post, but keep an open mind. I promise you, you’ll learn something. And, I hope to learn from you too. Please contribute when you have something to offer. I’ll benefit and others will to.

I’ll do my best to keep things interesting and relevant. I’ll probably throw in a little humor too. Hey, we manage hundreds of properties and you would not believe some of the things we run into. Like the time an applicant told us that denying his application because of his credit was discrimination.

Want to know a little about me? Click on “about” above.

I hope you’ll follow and invite your real estate investing friends to follow too.

Here’s to keeping cash flow positive,
Dave




Enter your email address to follow this blog and receive notifications of new posts by email.

Join 1,372 other followers

Licensed in Missouri