Fibonacci

Here's the situation:

My current home is in South Oakland County (pretty much central to Metro Detroit). I refinanced in June '03 into a 15yr fixed @ 4.875% and am considering renting vs outright sale (Metro Detroit is a buyer's market) and waiting out the funk.

I've sliced and diced the numbers. Worst case scenario, I break even month to month based on current market rents. Best case, I'm modestly cash flow positive and will have the home completely paid off in 11.5 years.

I don't need the equity in our current home to purchase our next home, but my dilemma is that it was built in 1926. So while I live in a great neighborhood, it's fully updated, great condition, lot's of charm, yada, yada - it's still an old home and I'm not particularly handy.


So here are my questions for those of you who have experience being landlords:

1. What have your negative experiences been?

2. What kind of liability insurance do you carry?

3. What's the best way to find a 'good' renter?

4. What are the most common things that first time landlords do WRONG?

Any feedback greatly appreciated...

mrdeeno

I own a 9 unit residential/commercial building in PA and a single family rental nearby.

here's what I think:

1) Negative experiences...where to start?

Tenants that don't pay or are habitually late
Tenants that make a mess everywhere
Tenants that leave damages when they move out that their security isn't enough to cover and taking them to court is useless since they won't pay anyway.
Tenants that complain about EVERY little inconvenience, even when THEY caused it.
And I can think of several others, but most of these apply to my building and not the single property.

2) I don't remember what limits I have, but I know I have enough that I don't worry about someone jumping out of their window and their family suing me for "causing" it by not putting bars on the window.

3) Best way to find a good renter is someone that has references (and check them ALL), has a steady job, and just "seems" right. I've met all sorts of different faces and characters, and it's pretty consistent how i've been right about them. For example, I have this couple I'll call the "snake" people. They are always late on their payments, they live like animals, and they dress and act the part like they are high on crack everyday.

OTOH I just started renting to this kid. He seems very normal and "cool", and makes his payments every month with his online bankpay and I have no problems with him.

It may not sound "politically" correct, but if someone seems wrong, they probably are.

And NEVER NEVER NEVER rent to someone without a job. Whether they just quit and are expecting a better job, or they will start at a job next week, NEVER rent to these people. If they start next week, then you can wait 'til next week to rent to them. I rented to my aunt's "friend" because she insisted he was good for it and he would start working in a week. 3 months later, he just started a job and I'm charging him $100 extra every month until the end of his lease to make up for it, and since he's already in default, if he's late again he's out.

Check references...work, previous landlord, etc.

4) My first time mistakes was failing to account for all repair and maintenance costs. And another mistake is making "exceptions". For example, I let a tenant keep a cat (I have "No Pets" listed on my lease). Before I knew it, all the other tenants wanted to keep pets and I had to kick the dude with the cat out at the end of his lease.

Fibonacci

Great feedback, thanks!

The liability part of the equation is what scares me the most. You just never know about people, who's sue happy - blah, blah.

mrdeeno

yeah, that's part of the equation too.

I always found that people who live the worst (and are the laziest) are the people who complain the most (and would most likely sue).

I used to rent to this woman on public assistance (for a 3-bedroom, she paid $200, the city paid $500). It's good because you are almost guaranteed to get your rent, but it's funny how the people who pay the LEAST are the people who complain the most. Not to be racist, but she was african-american and didn't work for "health" reasons, yet she took all sorts of vacations all the time. This lady complained about EVERYTHING...from the color of the walls to the way the floors "creaked", just so she could get out of paying her rent.

And the city actually sent me notices about these complaints. I wrote back that the floors creaked when i bought the building, the floors creaked when the last 3 tenants were in there, the floors creaked when this lady moved in, and the walls were the same color for the past 2 years before she ever moved in. If she's "phishing" for complaints so she doesn't have to pay her $200 per month for a $700 per month apartment, then i suggest they insist to her to give her 30 days notice and find another place where she'll be happy.

And that's what she did, she gave me her 30 days. But after 30 days, she did'nt move out so I complained to the city. Turns out she couldn't find another apartment with the same size and in the same neighborhood for the same price. I said that she gave me her 30 days and never retracted...I don't want to rent to her anymore especially if she's going to complain about every little insignificant thing.

She stayed the term of her lease and I refused to renew, but since I told the city to tell this woman off, I never heard a peep from her for the rest of her lease.

Fibonacci

^^ I've got a feeling you've got a lot more stories where these came from.

The demographics of my area are great - so I'm not planning to be a slumlord. I just don't know if the hassle of finding, interviewing, background check, blah blah is worth all the time and potential aggravation.

mrdeeno

if it's a single home and I didni't want to keep it as a rental property, I would do a rent to own if the market isn't decent at the moment.

These types of tenants usually want to buy a home but have relatively poor credit. I would draw up an agreement for a sale 5 years from today with an agreed upon price. They rent the place and are responsible for everything like it was their own home. The rent they pay is usually higher than a normal rent and will go to offset the sale price.

If they can get financing sooner, then I'd still sell for the agreed upon price. If they can't get financing in 5 years, then I would draft up another agreement if they wish with a new sale price and continue putting rent towards the sales price, or they can forfiet whatever they paid in and move out.

It's a little risky because you are depending on them to pay all taxes and upkeep for the property, but the payoff is that you locked in a sales price if they do get financing, and if they don't get financing and forfeit, then you had a tenant that was keeping up and renting the property for more than a regular tenant for a longer period.

Fibonacci

^^ This sounds like a land contract, is that what you are referring to?

mrdeeno

actually, yeah i guess that's another name for it.

but the difference I think is that land contracts aren't recorded but rent-to-own is. I guess I don't do rent-to-own since I wouldn't record it either.

MR1

I have a few two family homes and relatively few problems. If yoy are going to rent I strongly suggest that you take your time and do all of the screening before you allow anyone to move in. Much better to have an empty unit than a problem tenant imho.

One thing that I always try to do is go see how they are living in their current place. They will likely keep yours the same way. Another thing is that I am not a social service agency, everybody has problems. You have to obtain good, strong enforceable leases. After that everybody must honor the agreement. This means eviction notices and late fees as required. I generally have a good relationship with the tenants. When things break I get them fixed. If they break something, they pay for it. It is not a good use of my time making repairs, painting or cutting grass. These things are done by various handymen.

Problems, I've seen my share over the years. People problems usually caused by me picking the wrong tenant or letting them stay to long. I have had a few unscheduled repairs; a couple of furnaces and central air conditioners @ $3-5,000 each. A broken pipe under a concrete slab ~$4,000, etc. In my limited experience I have had good and bad tenants from all racial backgrounds.

Benefits; overall my units pay for themselves totally and all have more than doubled in value. Biggest disappointment is that I didn't start investing in property 15 years before I did. Hope this helps.

iTimmy

I'm confused how, as you worded it "sliced and diced the numbers" when you haven't priced insurance. I am in the midst of building a 200 unit complex and wouldn't think of getting involved with a single family home as a rental property. With one home you have way to high of a risk and not enough other tenants to float the balance if things don't go well. Even though I am sure you can afford to fix things as they brake or if the tenant does not pay you, but it is a large hassle at times and with one unit not worth opening the can of worms. I would rather see you sell the home and purchase a duplex, or quad with the equity - IMO it would be a better entry into the land lord arena.

Fibonacci

Well, that's one of my questions. I already have a $1 million umbrella policy in addition to homeowners insurance. Do I need more? Is there something I'm overlooking in this area?

Excellent point.

As stated, the home is fully updated newer roof, brand new Trane furnace/central air, new hotwater heater, blah blah. I don't foresee any major problems popping up other than a tenant not respecting the original hardwood floors.

That would defeat the purpose in this case because the main reason I am considering keeping the home is because I'm baked into an excellent loan where more than 55% of my mortgage is already paying principal not interest. And Motown is an extreme buyers market, thus the equity extraction wouldn't be nearly as ideal as letting a tenant pay for my equity.

I appreciate the feedback - there are probably things I am overlooking...

If I screw it up, I'd rather make a mistake on a single home.

Fibonacci

I'm hoping that dipping my toes into the waters will convince me that being a landlord is worth the hassle.

mrdeeno

it depends on your personality. some people can't seem to see beyond the benefits and forget about the problems/expenses, while others can't see beyond the problems/expenses so don't get involved at all (my parents for example tried and tried to talk me out of buying rental property because all they could see were the problems).

i know people that have gotten into it and think all the rent collected is "income" for them and forget that the income comes AFTER expenses, including future expenses and contingencies that need to be accounted for.

as for single homes, consider how bad the market is getting (in my llocation) for sellers, i'd rather hold onto something and rent it out until the market is better for sellers or set up a rent-to-own scheme where i wouldn't be making a loss.

MR1

It's all relative. If you have the capital, desire and experience go big, otherwise start where you are. I could trade up but don't want all my eggs in one basket. Prices in my area are also way out of line on all residential property for investment.

I would generally agree about single family but in this case his equity position is great. Hope your project goes well, that is a whole different league.

iTimmy

I agree completely, in particular with all your eggs in one basket, which would be my fear of a single family... but like you said if your equity position is good, other then potential headaches you have nothing to lose.

Thanks for the good luck on my project, I am sure it will be an experience I'll never forget.

Fibonacci

bump, looks like a landlord I shall be. Will post my experiences, hopefully they will all be positive!

MR1

Congratulations!

Start with your mind right. All of your experiences will not be positive!
I certainly hope that most of them are though. Just take your time and stay open minded.

LaCostaRacer

Wow and old thread, but a very useful thread for prospective landlords. I have rented out a house for 6 years with this being my first foray into being a landlord.

A couple of tips that I have found helpful:

- set up a separate savings/checking/credit card accounts that are only used for your rental. This makes things easier for tax purposes as well as seeing if your venture is actually profitable or not.

- in screening applicants, use a service (I used SafeRent.com) to perform credit checks. Make sure that you charge the applicant for this check. Applicants generally know that they have crap credit and will tend not to continue the process with you.

- I read this in a book and it's been great advice over the years. To insure 'prompt' rent payments, give the tenants a 'discount' if they pay the rent of the 1st of the Month. I lop off $50 off the rent. All the rental forms have the real rental rate that has the $50 factored in. There has been only one case where a tenant paid late because one of their checks bounced in 5 years that I have been doing this.

- Make a note of the Consumer Price Index for the date your rental contract begins. You can use the BLS's website at www.bls.gov to get a table for your area. I like to use the increase in CPI as an excuse for raising the rent. Tenants appear to accept this because the numbers are concrete and they can verify things themselves. I use a proportional formula to find what the new rent will be based on percentage difference of the CPI. This is a crude way of coming up with a rent- I use other ways as well based on checking rent listings and such. I generally don't raise the rent too often and try to keep the intervals to a year or more.

- Keep good records to make your taxes easier. I have a text file for keeping notes of things: maintenance issues, site visits, etc to help me do the taxes each year. I keep all the receipts in their own folder and things like that.

- When figuring out your breakeven numbers, you must consider maintenance as well as vacancy factors into your numbers. These are variable expenses that may or may not happen on a annual basis. By doing this, you'll build up some reserve $ for when a big expense does occur. For vacancy, I factor 2 weeks a year. So far, in 5 years we have not had any vacancy so this has allowed us to build some reserve money for other things.

Fibonacci

^^ Great info!

I'm meeting w/ my attorney next week to set up an LLC and write a lease agreement.

Fibonacci

videojock

Great post LaCosta

CL Type Slim

Thank you for great info!!

LaCostaRacer

^Thanks! It's fun seeing what people are thinking about regarding the
landlording business.

What I have found over the years is that tenants will treat you right when you
also treat them right. It's the golden rule and it does work.

In the very beginning, I hired a property manager to do the early property
management while we were refurbishing our rental back in 2000. I found that at
least this property manager (a very well respected one that's been in the
business for 20 years) wasn't very accessible to prospective tenants. People
would live messages inquiring about the property and couldn't talk to a human-
just a machine. He also did a somewhat crappy job trying to market the
property. After a month of him not making headway finding tenants I lost my
patience and fired him. Being new to this, I did what seemed to make sense:
place a sign out front and place an ad with an open-house listing in the
paper. I bought a nice sign and bought one of those circular thingies for
holding flyers and attach that to the sign. The flyer was very simple having:
rental price, my cell phone number, a listing of amenities and the kicker was
the back side had a floor plan on it (copied from an appraisal). I held one
open-house and the place was rented with about 3 people trying to compete to
get the place.

So the summary to this is: be careful about property managers. I'm sure there
are good ones around but I think there are more bad ones. Remember they are
not taking much risk when your place sits vacant while you're paying the
mortgage and all the other bills. They're losing maybe 10% of the rent while
you're stuck paying the mortgage and such. When they decide to raise the rent
and you find yourself with a vacancy you'll see what I mean by this.


One other tid-bit is to be very careful about your rent increases, especially
if you like the tenants. Suppose you decide to raise the rent $100 and piss
off the tenants so that they feel like moving. If you're lucky you'll have a
one to two week vacancy but maybe it gets closer to a month. As a result you
just lost half to a full months rent on your property. It could take more than
a year to make up for vacancy with the extra $100 rent increase. For me, it
would take almost 2 years to make up for a 1 month vacancy in this scenario.
With that in mind, I have planned my rent increases very carefully and always
give the tenants some assurances as to how long I think the rent rate should
last for. This last time, I guaranteed the rent for 2 years which is may be
a bit excessive. I'm now at the end of the 2 year guaranteed period now so
I'm contemplating a rent increase.


Here's an example of the 'crude' CPI approach to figuring a new rent:

Last CPI: 198.8 (May 2005 Western States)
Current CPI: 212 (Apr 2007 ")
Delta CPI => 13.2 or a 6.6% increase from 2005

Current Rent: $2300
2007 CPI Normalized Rent = $2452.72 (or 2300 * 1.066)

I would then round up to the next $50 and say the next rent would be $2500
with the $50 discount for paying on the 1st-effectively $2450. This will
appear like a large increase so I would guarantee the rent for another 2
years.

The problem here is that I live in Southern California and house prices are
dropping. I haven't fully figured how this is going to affect rents. There
are two sides and they each make sense. My gut tells me rents will increase
but slower than usual.


Well enough of the rambling for now anyway.

Fibonacci

Ramble on!

MR1

LacostaRacer, good advice.

A few thoughts...purchase prices are dropping in most areas however credit requirements are tightining up. The CPI method of determining rent increases looks like a valid method for accuracy. What I find however is that local market data is supreme. Constant rental surveys in my particular market indicates how much rent I can command.

There are a glut of apartments and rental homes available in my area. Still, rents are increasing slightly. The high number of rentals is due mostly to the fact that the properties were purchased at above (current) market prices by potential flippers. They find that they can't sell without losing money and can't rent for enough to cover the payment and expenses. When they lower the rent to help offset cost, they also cut back on repairs.

All of my units are midmarket priced for working people that can't afford payments on their own homes. My tenants tend to be stable and willing to spend near the top of the range for a nice quite place. When a tenant does move, usually one of my others has a referral for me. My rents are generally adjusted within a 12-18 month period. I think we are restricted in how large increases can be for existing tenants by state law.

In my design model, if a property can't totally pay for itself, I'm not interested.

LaCostaRacer

^ back again.

I have had an interesting time with this rental mostly because it is a house with a perpetual roommate setup. There is the senior Tenant who I deal with directly and she finds her friends or roommates to share the place with her. I have worked with her for almost 4 years now. Some tenants come and go, but it is her responsibility for finding her roommates. It's a nice place so she has never had any problems getting people. The place attracts the younger 20/30-somethings that wish to live near the beach in a house with a yard and garage and such. It's a dated house missing a dishwasher so I'm not going to target this rental for most families. It's great for single people that don't really cook since the kitchen is also kind of small and there's no DW.


Yes I also use other factors for tracking the market price of a house
as well. I'll explain one approach below. What I have found is that the tenants pretty much accept the increase because the CPI is objective evidence. The market evidence almost always correlates within $100 so I'll use the Market approach when I have an actual vacancy and the CPI approach (with a quick market sanity check) for rent increases typically. I like to price my house to be very competitive so the tenants see the value and I don't have as many hassles.



Here's a trick that works for me in tracking rents in my area (Solana Beach).
I like to cut out the For Rent adds from the Sunday Paper. For larger areas
you can focus on the homes the match yours (eg. only 3br/2ba etc.) to reduce
the number of listings. In my area, I usually see maybe 5 listings so I use
the entire sample set. I then tape the ads onto a piece of paper so that I can
have a row of ads going left-to-right on the paper. For new listings, I usually
mark them a special way and then draw lines to the next week's listing of
the same house and so forth.

Once you have a couple of week's data, you can do some nice things with
it:

- you can see how long it took for the rental to find a
tenant by assuming that once you stop seeing ads the landlord probably
found someone

- you can see what the rent $ trends are by seeing if next week's rent
is lower than the previous week and so on.

- you can see which places are the high-turnover places that might be
overcharging their tenants by seeing the same place come up on
regular cycles. I'll sometimes see the same place on the same sheet of
paper some times.

- you will get some good ideas for any future ads you need to run based
on what you see. You'll also learn more of the lingo so make a
compact ad with lots of information. For example, here's a version
of the ad I ran many moons ago:

SOLANA BCH $2300,OcnVu
3BR 2BA w/bonus rm,
hdwd flrs, gar, nice!
XYZ Dr 760-###-####


This is extremely low tech market research approach, but works quite well. I haven't done
this in 2 years but think that I'll start this Sunday again. Feel free to post any other ideas you have- somehow I'm hoping there's a web site analogous to Zillow for tracking rents- just haven't found one yet (I haven't looked very hard yet).

Fibonacci

I live very close to one of the largest teaching hospitals in the area and in less than one week, I've already had four high quality prospective tenants contact me.

My question is this? What's the best way to protect myself from liability, I'm getting conflicting advice.

My real estate attorney is advising me to set up an LLC.

My accountant is telling me that an LLC is not true protection from personal liability and should set up a C-corp. But his personal opinion is that it's not truly necessary for just one rental property.

LaCostaRacer

I have a 1M personal umbrella policy as well as a pre-paid legal plan. These are two things I hope I never need to use. The other word of advice I had from reading a book is never to rent to a Lawyer. There are no laws against occupation discrimination and I used this advice 4 years ago. There was a young couple whose Husband was a Lawyer and the Wife had severe mold allergies who really wanted to rent our place. I saw TROUBLE all over that deal and said there was someone else that beat them to it.

Fibonacci

$1M persona umbrella policy, already done.

Occupation discrimination,

Fibonacci

Bump, am rapidly closing in on my first year as landlord. Luckily, found a great tenant(s). Young professional couple, no kids, no pets - pays on time every month. Have had a few minor plumbing issues, but no major problems. In a flat market, I'd normally have an extra 8-10gizzle more equity, but in a falling market, am merely treading water.

But overall, it hasn't turned out to be such a big deal - yeah it would have been nice to cash out my equity in a healthy market and splurge on a CaymanS, but with our first child, priorities have changed. And if I wait a few more years, I can splurge on a New NSX.

Knock on wood - things have gone well enough that I'm considering another investment/rental property. Am looking at a foreclosure near my other rental (rare for the area) which is listed at 40% below last appraisal.

phil2

You guys are insane. I have 38 units now and I have no need for this bullshit umbrella policy you speak of. If the building is in an llc. then you really have no personal liability and are covered under your homeowners policy.

Fibonacci

^^ Umbrella policies are cheap insurance. And my attorney said LLC's don't offer total immunity from personal liability.

godfather2

from personal experience with my two rental properties in florida, EVERYTHING THAT CAN GO WRONG, WILL GO WRONG

MR1

Glad to hear the year has been uneventful, they will not all be. FWIW, 40% below last appraisal doen't mean jack. This from an appraiser. Basically same question all the time; will it show positive cash flow?

Out hear in lala land the market value of my properties has fallen nearly 50% in the past 12-14 months. It doesn't affect me right now because they still pay for themselves. I not selling or refinancing so it doesn't make any difference.

Prices in my area are almost down enough for me to again consider looking for something else to buy. About your car example, I have a real life situation. In 1992 we got my wife a new MDX on a Friday evening. Sunday I found a two unit property at a great price and bought it. Today the MDX value is down 50% and the income property has doubled. We have enjoyed both and my tenants payed for my wifes vechicle.

How is your new castle working for you?

Fibonacci

About appraisal meaning jack, true, true... But yes, it will show positive cash flow from day one.


I presume you mean 2002? MDX's weren't produced until 2001. :wink:

Great, we love it.

Although I wouldn't define 3200sq feet plus 1500sq ft unfinished basement as a castle, it's just a very comfortable family home. We have the smallest floorplan in our sub. Could have gotten a steal on a used home, but glad we went with new construction to get everything we wanted.

MR1

Yes, 2002, sorry it was late.

3200sf is about 30-40% larger than average. Everyman's home is his castle. My old ranch style house (my castle) is only 2000sf. This could easily be 1500sf for the wife & I.

Smallest house in a subdivision of large homes always a good move. Again, size like income is relative. Compared to the general population I think we are both kind of 'living large'. Anyway, good luck with the pending purchase.

korrupted

It's a pain in the ass, especially if you live in another state.
It's a good tax write off, but if you sell without purchasing another "like" property you're gonna eat it on the cap. gains tax.
Tenants are a pain in the ass unless you have a management company renting the property.
I'd think an LLC would prob better and easier than a Corp (did you mean S Corp)?

jlukja

and on the recaptured depreciation (which is taxed at your regular income rate)

korrupted

lol yup, forgot about that stupid dep. 27.5 yrs WTF.
They should make it less of a tax burden.

Fibonacci

Just closed on my sale today. Have never been more excited to realize a 40% loss.

Long story short, I'm obviously thrilled to punt despite the loss. Have decided that being a landlord is not my chosen path to the promised land. I pocketed a few bucks at closing and have a nice write-off for 2013 to book value.

Am happy that the buyer was a young person deserving of a nice break and not a flipper.

Good luck to any of you have the patience in this space.