Becoming Great Rental Housing Providers

To paraphrase Dickens “It’s the best of times and the worst of times” to own rental property.

Rents are up, vacancies are way down. The market is hot. On the other hand, eviction court is overflowing, lawyers are swamped, and repair crews can’t catch up with the ever increasing expectations of the renters (from mold to radon to unending complaints of plumbing, heat and ants).

Meantime, our property rights seem to be further eroded every day with new regulations, changing standards, not to mention the tenants’ rights advocates.

If it’s true that “bad things happen to good people” – it’s also true that great landlords can end up with rotten tenant experiences. There are numerous horror stories we hear about -  such as the missing bathroom fan cover that helped sway a judge to toss out an eviction and give free rent to a non-paying tenant due to  “habitability” issues left unattended by the landlord.  It can be scary out there, and it’s easy to get on the defensive.

However – as in pro sports, the best defense is often a great offense.  How do we address the threats? Frank Sinatra said “The best revenge is massive success.” Maybe we don’t need to learn legal martial arts. My son’s karate instructor emphasizes at every class that the best way to win a fight is to avoid it in the first place.

So, let’s discuss ideas on how to lessen turnover, minimize vacancies, attract the best occupants and generate the best ROI on our rentals.  Let’s discourage litigation and encourage managing our rentals above the minimum standards. To misquote St. Augustine, let’s “Love Landlording, and do what we will” in order to thrive in the rental housing businesses and have great tenant relations.

Steve Martin had a shtick called “How to earn a million dollars and not pay taxes”. He said it was easy. First, earn a million dollars. Then… don’t pay taxes. If the IRS asks what happened, just say “I forgot!”

Some rental property owners operate their business the same way. They read a book called “How to Get Rich in Real Estate.”  It instructs them to get a rental and move in a tenant.  If the tenant stops paying, they've read, “Just get another one, and then, start again!” It’s pretty simple, right?

Here is a question: Can you describe your perfect tenant? With whatever profile you create, there are always exceptions. One thing we learn over time seems to be that the tenant who moves in is often not the same as the one who moves out. Their charm fades over time and the fastidiousness they had moving in gives way to the predictable wear and tear of the unit, which we are left cleaning up after.

Yet while we are trying to figure out how to find, screen and rent to the ideal tenant, there’s another essay somewhere out there for tenants on How to Find the Perfect Rental. They hear tales of owners who are unscrupulous and buildings that are falling apart. They seek to identify the perfect landlord! Any idea on what they are hoping to find? “Someone who leaves them alone, fixes everything they ask for, and never raises the rent.” Is that how we see ourselves or how we want to run our business?  

I think it is time to confront the chasm that has developed in the tenant / landlord relationship. The first step is to challenge the notion that we are Real Estate Investors in the real estate business and that our assets are our properties, (precious castles, for which we need to employ effective tactics to help protect from the onslaught and misuse caused by rampant hordes of invasive tenants).

What if, instead, we updated our feudal image from “Landlords” to a more modern and truer job description and re-branded ourselves as “Rental Housing Providers”? Maybe it’s time to own up to the fact that we work in a customer service industry; that our assets are our tenants. Without paying customers, our rental properties are just money pits requiring constant maintenance and repairs – and left vacant they’ll die on their own of neglect. Perhaps it’s time to re-examine our business plans and adjust to changing social mores.

 In the spirit of this challenge I submit that as Rental Housing Providers, we need to value our tenants as “important relationships that we participate in common with, towards a successful end” rather than just “necessary obstacles with whom we need to put up with and protect ourselves from”.  

Having a successful rental business is not so much an issue of finding and keeping good tenants, rather it’s a question of:

·        How can we provide quality housing, develop positive relations and remain competitive?

·        Are we doing all that we can to achieve the best possible results for our business? 

·        And, ultimately, will the best tenants come our way and want to choose our rentals?

There is no “one size fits all” way to address these questions, but it starts by sizing up what kind of property we have to offer and making some realistic observations and creating a plan.  We should ask:  What do we want from our investment properties? Are we just looking to create an income stream? Are we just looking to off-set expenses?  Do we have a long term goals here? Have we created a realistic budget?  In other words, why are we in the rental housing business and can we make improvements? 

Our answers affect how we meet the challenges we will certainly face; and that affects what kind of tenant relationships we develop; which affects how much turnover we have, and our bottom line!

There is an old saying that “wherever there is dependency, there is hostility”. Are we being held hostage by the rent we get every month? Or do our tenants feel dependent on us for their basic security and stability?

One axiom of negotiation strategy states that the party with the least commitment holds the most power.  So the secret to being a great Rental Housing Provider is to not “need” the tenant.  But listen to what I mean by this…  It’s not like Bill Cosby who said to his son “hey – I brought you into this world and I can take you out of it, and it don’t matter to me ‘cause I can make another one who looks just like you!”  Not needing your tenant actually means really wanting your tenant.

If we want our tenants to enjoy paying us rent, and to take pride in their home, then we need to:

·        Provide the right environment for that to happen, (after all, it’s our property, right?!)

·        We have to respect them and their issues (there is no such thing as an unimportant detail).

·        Believe that the quality of housing goes beyond the minimal legal standards. 

If we can achieve these ends, then the issue is turned around and we can insist that the renters will then maintain their side of the covenant. They should feel privileged to rent from us!

Now here’s the rub:  Just because the act like they are “entitled” doesn't mean they aren't…

Housing is fundamental. If you've read Maslow you know his hierarchy of needs. Right above basic survival of food, water and shelter is Safety - including freedom from fear.  Few businesses cut as close to the bone on basic human emotions as housing. When you think about it, we are perceived to have awesome control over the lives of our tenants.  No wonder there is so much drama in property management!

Yet in order to have happy tenants that treat us and our real estate well, they need to feel secure in their home. “When people nest, they act their best.”

Obviously, a 4 bedroom 3 bath SFR is going to have different dynamics than a 16 unit building of 2 bedroom apartments. But no matter what type of housing we own, the starting point is to figure what we need to do in order to truly give it those 3 magic words: “pride of ownership”.  

When we go out to eat, whether it’s steak and lobster or just off of the dollar menu, we don’t want to take our family to any restaurant that is operating at the bare minimum of health and safety codes!

There are old landlord axioms that state: “Any color so long as it’s white”. Nothing fancy – it’s good enough for a rental. Buy FHA grade carpet. Let’s get new “used” appliances.  The list goes on. But there are other familiar adages too –like, “What you sow, so shall you reap”. Or “treat others as you would have them treat yourself”. How about this one – “Could you live here?”

It’s been said that in business, one should deal in commodities they regard well. If you are a vegetarian, then buying a hot dog stand might be a bad idea. In rentals, consider the property from the eyes of a tenant. We ought to feel like we could rent this place to someone in our own family. As Rental Housing Providers, we should strive to be the landlord that the best tenants would want to have. 

Is it a Good Time to be a Landlord?

Nothing says "get rich" like becoming a real estate mogul. In the past, most of my clients have been people seeking to build a wealth portfolio by strategically investing in residential income properties.

For decades, "mom and pop" landlords have been slowly amassing their way to retirement through buying, fixing and keeping rental houses, duplexes and four plexes.

These days, however, many (if not mostt!) of out clients are "accidental landlords" - people who are stuck in houses they no longer want but cannot afford to sell at these current depreciated values.

After hiring us to help them with the chores of landlording, they often wait a couple years and decide to cash out and swallow their lumps.

But, is that the best strategy? Maybe there is a longer term vision they can adopt, now that they have been painted in the corner of owning a rental against their will....

This month, MONY magazine published an article on the 4 ways to become a millionaire. Along with stocks, power saving and building a small business, there was the time honored strategy of owning 3 rental properties. What is most surprising is how little the strategy has changed in the 30 years I have been in this business!

Here is the link to the article. It is worth the read.. If you would like to discuss how it could benefit you, please give me a call!

http://money.cnn.com/2012/07/20/real_estate/millionarie.moneymag/index.htm

Tenant Safety

There are numerous disclosures and forms that tenants are generally required to sign when entering into a rental agreement; one which has now become common is a Safety Addendum. 

The first statement on the form published by The Metro Multifamily Housing Association reads: 

“WARNING!! Many areas of the property may pose dangers to unattended children who may not be aware of the risks.”

The form (click here to read it) addresses safety issues commonly associated with 9 areas:

·         Windows

·         Use of appliances

·         Parking lots

·         Dumpsters and Trash compactors

·         Exercise equipment

·         Swimming pools, Spas and Saunas

·         Water

·         Balconies, Decks, Second story walkways

·         Play areas

It doesn’t take a lot of imagination to contemplate what could go wrong and cause serious injury or death when reading this list. However, it’s not unusual for people to scoff a bit and say “Duh” while reading and signing this form, as if  “anyone knows you can drown, fall or get hit by a car”. D-U-H.

Yet, every week there are "Breaking News Stories" in the media of horrific accidents that occur while at home involving these issues. A recent tragedy in SE Portland was reported when a small child fell out of a 3^rd floor window as his caretaker had stepped out of the room. The TV story made a point of showing how the window screen was not even bent after the child had pushed on it before the accident, demonstrating just how little protection lay between safety and tragedy.

In truth, these are very difficult subjects to think about and discuss. Yet, like any emergency preparedness, with a little forethought individuals can do a great deal to prevent the unthinkable from happening. A recent article in The Oregonian gives tips on securing windows and is well worth the read. 

Take a moment to learn more and read this valuable article by clicking here.

Why Should I Hire a Property Manager?

The Top 3 Reasons Why someone who owns a rental would NOT choose to hire a property manager:

1.       We can do it ourselves (we WANT to. It’s fun.)

2.       We have a friend (cousin co-worker, etc) who we are/ will be renting it to.

3.       We can’t afford the expense of hiring someone else to do it for us.

For Rent. 3 Bdr 2 bath. Fenced yard. No pets. $1,100 per month.  1st + Last + $500 DP to move-in.

This was the sign in the window of the house when I pulled up, the day the owner called for information.

Roger had lived there for 8 years and, after losing his job last year, he decided to rent it out to an ex co-worker. He had done a lot to the house (refinished floors, stainless steel appliances, cool antique bathtub) and wanted someone to take care of it. He worked for a local building association in town (he was a project manager) so he “knew something about being a landlord”.  His mortgage (without taxes and insurance) is $960.00 so he chose the rent that would cover it and pay the utilities, and the co-worker agreed. He told him there was no smoking, and the tenant agreed to only light up on the porch.

Five months later the tenant said he had 2 roommates with a young son who wanted to move in to share the costs. They were his old friends - so Roger dropped by to meet them personally. He determined they were “okay” – especially after realizing the boy was only 10 months old, so probably couldn't do too much damage. Then, 3 months later (in August) the tenants let Roger know they had adopted 2 cats. Because they agreed to pay an extra $150 deposit for the pets and the rent was always on time, (and Roger was out of town traveling for his new job and couldn’t really deal with it), he went along with it...

When they called on November 8th to say they’d be late on the rent and planned to move by Thanksgiving weekend anyway - they wanted to know how soon they would get their security deposit back.

Roger heard about me from a friend. He called and I came by the day before Thanksgiving to see the rancid mess they left... There was stuff everywhere and Roger was “not sure if they had fully moved out yet”. He was visibly discouraged, and he felt betrayed. He told me he was "changing the locks and just going to keep the damn deposit and sell the pool table and all the stuff in the shed they had left". His new plan was to spend the next month - through Christmas - fixing it all up on weekends, because his nephew was moving to Portland at the end of January, anyway….

He mainly wanted to know how much I charge, but he wasn't sure he wanted to hire me, because now he was even further behind. So... I mused, just how many mistakes had Roger made?

1..         Wrong rent (too low for the market).

2.          Wrong move-in charges (last month's rent guaranteed he be disappointed).

3.          Bad rental agreement (Stevens Ness).

4.          Wrong expectations (what make a good rental and how to qualify a tenant).

5.          Floors = scratched. Stainless = scuffed. Old bathtub = water damage. 

6.          Renting to a friend = "rapport hell" and anger and angst.

7.          No written non-smoking policy= new paint required throughout.

8.          NO pre-qualification on roommates. (Luckily they moved out too...)

9.          HUD violation on child (see www.fhco.org for details).

10.        Too little deposit and not properly accounted.

11.        No written termination notice.

12.        Wrongful entry on the day before Thanksgiving.

13.        Improper handling of abandoned property.

14.        Improper Lock out.

15.        Improper final accounting.

.

I told him I charge 8% per month + ½ month’s rent for screening and placing a tenant. And with my vendors, I could have the house ready in 1 week, but I wanted nothing to do with the prior move out.

After consideration, he reluctantly went with me, but after signing the management contract, he confessed to me that he felt relief.

SO WHAT HAPPENED NEXT?

I had it rented by December 15^th for $1,575 per month. $2,500 security deposit (including $500 for pet – 1 cat) and no last month’s rent on a 15 month lease (so it would be vacant next in the Springtime, not again next Thanksgiving!). Total cost for turnover was $3,350.

On Jan 4^th his furnace went out adding to his out of pocket costs (we took the call on Friday night at 8:00 pm and had it fixed on Monday after taking space heaters to the house).

By hiring me and taking my advice his (simplified) yearly rental income looked something like this:

$1,575 x 12 1/2 =     $19,687.50 GROSS RENT  - Rented in 5 days - getting him 1 ½ extra month’s rent.

-          $ 1,575 Management Fee

-          $    788 Vacancy Fee

-          $ 2,800 Cost of Turnover (painting and touch up repairs)

-          $    250 Cleaning – (Metro Professional Cleaners)

-          $    300 Yard care clean out (Green Source Landscaping)

-          $ 1,400 Furnace Repair  - (blower /gas valve but tech mis-diagnosed circuit board)

$12,574.50 Net EARNINGS

-          $11,520.00 Mortgage Payment

$  1,054.50 POSITIVE CASH FLOW

Had Roger not hired me, and completed his original plan on his own for convenience and economy:

$1,100 x 11 =       $12,100 GROSS RENT      - Spending 1 month to fix it. Vacant for January.

-          $ 1,000 Materials for Turnover

-          $ 1,800 Furnace Repair (owner would not have re-negotiated the circuit board)

$10,300.00 EARNINGS

Roger makes $40 per hour as a consultant.  ($40.00 x 15 hrs x 6 weekends = $3,600 in labor).

$10,3000.00 EARNINGS

-          $   3,600.00 Roger's Labor

$   7,100.00 NET EARNINGS

-          $11,520.00 Mortgage Payment

($ 4,820.00) NEGATIVE CASH FLOW

Here is the Apples to Apples Comparison:  

He saved $5,874.50. No out of pocket expenses for the heater. His weekends were now freed up.

The top 3 Reasons Why someone who owns a rental would choose to hire a property manager?

1.       We do it professionally (we WANT to. It’s our business.)

2.       We legally screen the tenants, use proper documentation and don’t rent to friends.

3.       We know the market value of rent and we have skilled vendors that work with us 24/7.

(I know that’s more like 6 reasons, but it just goes to show, you get more for you money by hiring us).

Should You Walk Away?

Some owners are tired of feeding the beast - paying for a mortgage that no longer makes any sense. What are the consequences for walking away? Reuters reports on this and addresses both the moral and financial impact and outcomes. Click here to read.

Trends in Mortgages

We all know that a key component of the housing recovery will center around the banks loosening the stringent credit requirements to obtain a new loan. DSNews.com has encouraging news on this today. Click Here to read.

Cash is King

A recent article discusses the pressure that cash buyers are putting on home values. Click here to check it out:
http://www.housingwire.com/2012/01/23/investors-buying-with-cash-pressure-home-prices