Real Estate Rental Blog

It’s been a long time since I posted anything on this blog. For the past two weeks, I’ve been on vacation in Vegas. Man, was it fun! If there’s one place you can go to refresh your love for real estate, Vegas is the place! Just walking up and down the strip looking at all the construction and expansion that is going on was amazing. It reminded me of my ultimate goal in this business which is to own several multi family dwellings (in the hundreds of units) and commercial buildings. I have such a long way to go if I’m going to get there, but this journey is a life-long one for my wife and I and I’m remaining optimistic.

If you own multiple rental properties like me and you have a goal of scaling it up, then you should really consider hiring a property manager of some type. Several months ago, my wife and I hired someone to help manage some of our properties. He collects rent, cuts grass, performs minor repairs, serves notices and is generally that “visible presence in the field” for most of our properties. Prior to hiring him, we had many issues with rent collection and spent much more time and money on small maintenance activities than we do now. The majority of our rental properties are about 1 hour’s drive from us, so it’s not easy for us to collect rent in person and to handle some of the other issues that may come up from time to time. While we were in Vegas, his value was even more evident as we were able to have piece of mind knowing that issues were still being handled properly. It allowed us to enjoy our vacation much more.

After spending some time relaxing and clearing my head I was reminded that it’s good for us to have goals and to pursue our ultimate dreams with all our hearts. But in the end, we need to be sure to keep a balance so that we don’t neglect the things that are most important to us along the way. For me, those things are God, family, friends and health. These things are more important to me than all the real estate in the world. Ultimately, the only reason that I got into this business is because I wanted to live a lifestyle that would allow me to spend more time focusing on those aspects of my life. So my point in all this is just to remind you to take some time out and enjoy the things and the people who are most important to you. This business can become very stressful and at times it is a very unforgiving business. If you find yourself becoming consumed, make it your goal to streamline your business so that it becomes less stressful. Hiring a property manager is one way to help, but sometimes it’s just a matter of streamlining your business processes. Sending letters to tenants instead of calling them is a great practice because it makes the exchange less personal (especially when it’s pertaining to a contentious issue like an unpaid water bill or some other form of violation). For someone like me, that means the chance of getting into a day-spoiling argument goes from “highly-likely” to zero and allows me to keep more of my hairs from turning gray.

….anyways, sorry if some of these thoughts seem a little random. It’s getting late and my mind is still in vacation mode….but this is what’s been on my mind — Let’s enjoy life!

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As my wife and I began our investment career, we discovered that there are many variables which have to be considered in order to evaluate a potential deal. I touched on many of the non-financial factors in my “Finding the ideal property” series of posts. But from a strictly financial perspective, there are also several other factors that should be considered.

When purchasing a property I’m interested in several metrics. The first is the annual rate of return or ROI (return on investment). Secondly, what I’ve termed the “total acquisition cost” (the total amount of money needed to acquire the property) is significant because it determines how much cash is needed to purchase the property. The expense-to-income ratio is also very important because it has an impact on how your debt to income ratio is calculated. And of course, your total monthly cash flow is a significant number because it ultimately determines how much closer you will become to achieving your overall cash flow goals for your portfolio.

In order to help wrap my brain around all these factors, I’ve developed a Property Analysis Spreadsheet. This is basically a mortgage payment calculator which additionally factors in other expenses associated with the purchase and maintenance of the property, as well as other income that the property may generate (like coin operated laundry machines, for example). Over the past few years, I have refined it and it has been a great help to me. If you’d like to give it a try, please feel free to download it here.

After seeing a tool like this, the temptation for me is naturally to look at the numbers in an oversimplified way. For example, you may plug some numbers into the tool and find that a particular investment could provide an infinite ROI (for example, a “no money down” deal which generates a small positive monthly cash flow). On the surface this may seem like an unbeatable deal, however you also need to be sure that the total monthly cash flow is enough to cover the anticipated monthly expenses associated with maintaining that property, and also, you should consider your expense-to-income ratio to be sure that you are able to maintain your debt-to-income ratio. In my experience thus far, I’ve found that this figure can vary greatly depending on the age of the building, the quality of the construction and the quality of the tenants! As you progress in your career, you will learn how to estimate this amount more effectively. This is another reason why I encourage new investors to take it slowly!

Anyways, I would love to hear your feedback on the tool. Hopefully you will find it as useful as I have. I plan to continue to enhance it with suggested features from you. Have fun!

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One of the many battle scars I’ve acquired during this journey has to do with the importance of performing thorough due diligence before purchasing an investment property. I’ve learned the hard way that there are many sellers out there whose only goal is to offload their house as quickly as possible. These unethical sellers, in my view, are sometimes motivated out of a sense of desperation and will hack together low quality, superficial “enhancements” to give the property a temporary appeal in order to entice potential buyers. With the housing market as it is today, the number of desperate sellers in the marketplace has skyrocketed. So while it is true that there are many opportunities to find a great deal, investors must also be on the lookout for unethical sellers trying to offload “Hackjob Houses”.

After purchasing my first rental property in early 2006, I was extremely excited and could hardly wait to do my next deal. What I didn’t realize was that there were a few hackjobs in that house just waiting to be exposed. As I look back on the situation, I should have easily seen one of them earlier if I was more attentive during my initial walk through. This is a picture of the staircase in that house leading to the upper level. I took this picture a few days after closing on the property. It took about a year before the tenants began complaining to me that the steps were breaking. Since then, I’ve had to completely rebuild that staircase. Now this is not to say that I wouldn’t have done the deal anyways. But perhaps I could have used this as a bargaining chip to get a better purchase price on the property.

Another property I purchased seemed so ideal at the time. The inside of the house was in great shape and the exterior appeared to be brand new. From the street, the roof looked brand new. I still don’t know much about roofs, but it appeared to have asphalt sheets covering it, which seemed fine to me. I later learned that those asphalt sheets made better paper airplane material than roofing material. The next summer after buying the house the tenants began to tell me that large sheets of roofing were peeling off the house. The stuff was all over the streets and water was beginning to seep into the house when it rained. Needless to say I had to replace the roof in a hurry. You can see what remained of the roof by the time we started replacing it.

Ultimately, it’s the buyer’s responsibility to ensure that the house has no major issues. If you’re thinking about buying an investment property, it’s a good idea to hire a home inspector and make your offer contingent upon a positive report from that inspector. I don’t have a lot of experience with home inspectors, but I’m fairly confident that a reasonably good one would have been able to identify both issues above. That being said, it’s still a good idea for you, as the buyer, to be aware of potential pitfalls so that you can lookout for anything your inspector might not pick up on.

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Today, the main handyman that I use came back in town.  He was on vacation for several weeks, but I was not expecting him back until then end of the month.  When I heard he was coming back early I was relieved.  As I mentioned before, there are so many issues that I’m trying to address and we’ve established a certain amount of trust over the past couple years that we’ve been working together.  I needed to bounce some ideas off him so I was glad to be able to talk to him again.  Plus, we already have some unfinished projects that he needs to complete at two of my properties.

Anyways, when he gave me a call this morning I realized that he was actually calling me from the police station.  I was curious as to why but it wasn’t until later in the day, when he called me back from home, that he told me what was going on.  As it turns out, the reason he was at the police station, and the reason he cut his vacation short, was because one of his former subcontractors is wanted by the police for murder and the police needed to question him.  Apparently, while he was out of town an incident occurred on a job site which ended in the death of someone affiliated with the client.  I don’t know many more details, but what I do know is that as an investor, it would be an absolute nightmare to ever have an incident like this occur at one of your properties.

Hearing about this news, I began to think about what I can do to help protect my tenants against such tragedies.  In reality, this could have easily happened at one of my properties.  In fact, this very subcontractor has done work for me on more than one occasion.  In the past, I’ve sent contractors to perform work at my properties unsupervised.  At times the tenant might even be at the property alone while the work is being performed.  Incidences like this make me reevaluate that approach.  As investors, we need to ensure that there is always more than one person at the job site when work is being performed.  The stakes are too high!

I certainly don’t claim to have all the answers on this one so I’d love to hear comments and suggestions from others…

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There has been enough activity (i.e. expenses) on my properties over the past several weeks to make a grown man cry! Things have been extremely hectic. In the last few weeks, I’ve replaced 90% of the electrical wiring in a house, replaced a roof, and endured 2 unexpected vacancies. I also have several other projects in the works including getting a pressure booster pump installed, replacing another roof, re-carpeting 2 rooms and several other miscellaneous tasks.

If you’re an investor, the possibility of encountering times like this is very real, so you’d better be prepared. When my wife and I purchased all our properties in 2006, we knew it would be important to have a decent amount of cash in reserve specifically for times like this. There is always a possibility of unforeseen expenses so it’s good to have some cash on-hand so you can deal with it. But what happens when all that cash has dried up and the expenses keep coming? If you don’t have enough money available and you need to replace a roof, what can you do? There are certain issues that need to be addressed quickly or else you run the risk of losing your tenants. This can be the beginning of the end of your investment portfolio because without tenants, you have no income and the cash flow problem begins to amplify itself. Sometimes, as I drive through high rental neighborhoods in and around Chicago, I can’t help but think how many investors this must have happened to. Could this be one of the factors contributing to the excessive number of abandoned properties I see? I don’t know….

If you’re investing in rental properties, you definitely do not want to end up in the situation above. So it’s a good idea to build yourself a safety net that you can fall back on in the event that your cash stores become depleted. The safety net I’m referring to is a line of credit. As I look back on the decisions we made leading up to the beginning of our investment career, one thing I can say is that I’m very glad that we were diligent about keeping our credit score strong and establishing very large lines of credit (into the 6 figures). In extreme situations where you don’t have enough cash to pay for all your immediate expenses, a line of credit allows you the flexibility to handle the current situation and spread the payments over a more manageable time period.

Establish your lines of credit early!…I once heard Robert Kiyosaki explain that the time to apply for credit is the time when you don’t need it. In other words, if you’re going to apply for a home equity loan or a home equity line of credit (HELCO), for example, your best chance at qualifying for the load is at the time when your fico score and debt-to-income ratio are at their best. If you wait until you actually need to credit line, chances are that your credit score and/or DTI are not optimal due to the very factors that are necessitating your pursuit of those new credit lines.

As an investor, my credit score is important, so I always try to keep an eye on it. By using services such as FreeCreditReport360.com, I am able to check my credit report online for free. This allows me to take any corrective actions necessary so that there are no surprises when it comes time for me to apply for some form of funding. In general, I try to keep my fico score at or above 720 if possible. If you’re just starting out, and you determine that your credit score is not where it needs to be, there are various things you can do (depending on the nature of the factor which are pulling your score down).

One of the common issues for new investors is simply not having enough established credit history. This can usually be addressed by applying for prepaid credit cards or smaller secured lines of credit. Opening these kinds of accounts provides an opportunity to prove that you can make your payments responsibly each month. Over time, this will improve your credit rating and increase the likelihood that you will qualify for larger lines of credit down the road. If you already have visa, mastercard, American Express (AMEX) or some other form of unsecured credit it is essential that you remain diligent in your payments on those cards as well. As an investor, your credit score is your lifeline so be sure to protect it.

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It’s been a long time since I posted anything in this series so I think I’ll post the final article today. If you’re looking to purchase a rental property, a major factor that should be considered, in my opinion, is the fair market rent values for that neighborhood. This is such a fundamental metric to gather because it essentially determines the amount of money that you can expect to gross from your property on a monthly basis. For me, this is the starting point of my analysis. Once I determine the amount of rent that I can potentially get from a property, I then begin to work backward to understand what my total expenses have to be and then, finally, what loan terms are acceptable in order to allow me to hit my total expense threshold that I have calculated. As part of that determination, I am able to come up with with my offer. When I purchase a property, the gross monthly cash flow can be no lower than 133% of the total monthly PITI (Principal, Interest, Taxes and Insurance) that I will pay on the property. The reason for this is two-fold. First, my experience with lenders has shown that they only count 75% of your monthly rental income toward your DTI (debt-to-income) ratio. This means that when you are applying for your loan, they will ask to see your current leases. If the total monthly rental income for your leases are $1,000, they will add $750 to your total monthly income for the purpose of calculating your DTI ratio. However, they will still take 100% of your Real Estate expenses into account. Therefore, if the cash flow on your property is not at least 133% of your expenses, your DTI is actually getting worse with each property you purchase! The second reason for this ratio is because it allows you up to 3 months per year of vacancy before you start to have a negative overall cashflow on the property. If this is not WAY more than enough time to fill a vacancy, you’re probably in the wrong neighborhood!

Now, please don’t take these numbers too literally. There is a reason why I said that the gross monthly cash flow should be NO LOWER than 133%. The calculations above do not take several factors into account including, but not limited to, repairs, late rent payments, legal fees and any other issue of the suite of issues which will be encountered at one time or another. The impact of each factor, however, will vary greatly depending on the specific property, neighborhood, tenant etc….so the 133% should be used only as a theoretical absolute minimum!

Well, now that that tangent is over — There are a couple methods that I have used in the past to gauge the fair market rent value. Perhaps the simplest, and definitely the cheapest, method is to call your local Section 8 office. Every section 8 office that I’ve dealt with publishes a list of the fair market rent values for each type of house within their jurisdiction. So for example, you can ask for the fair market rent value of a 4 bedroom 2 bathroom house and they will tell you some dollar amount. That dollar amount represents the maximum total monthly rent that they are willing to allow a tenant in their program to pay to a landlord for a property within their domain. In the past, I’ve simply called section 8 and asked them for the fair market rent values for every kind of property I might be looking to purchase. You should note that these numbers can vary greatly from city to city. Also, they do not necessarily represent the maximum price that the market will bear for that area. So you should take your results with a grain of salt. However, this is a decent way of getting a quick idea of what people will be willing to pay for an average property of a certain profile in your neighborhood.

Another method for gaging what the market is willing to pay is to examine the local newspaper. In many classified ads you will see the prices that landlords are advertising. This gives you a decent idea of what you could also ask for a similar property. Taking this concept a step further, you could run two ads online on a major search engine such as google or yahoo. On these search engines you can “split test” (or A/B test) between 2 or more ads in order to determine which one is more popular. So, for example, you could run two ads in parallel each with the following text:

Ad 1:

4/2 condo 4 rent. Big

Yrd, Bsmt. $1,000/mo.

Memory Ln, Columbus

Ad 2:

4/2 condo 4 rent. Big

Yrd, Bsmt. $1,100/mo.

Memory Ln, Columbus

Since the ads are not displayed at the same time, people are not able to simply compare and choose to click the ad with the lower price. Instead, over the course of several clicks, you will be able to see which one has the higher click ratio. If there is no clear difference between the two, it shows that people are as open to considering a $1,100 property as much as they are a $1,000 property. You can then replace the ad displaying $,1000 with one displaying $1,150 and continue this pattern until you see where the click through rate drops off. Once you’re done, you’ve basically just surveyed a population or renters and discovered the maximum rent that they are willing to entertain for a property on Memory Ln in Columbus.

Note that just because you may get good clicks for an ad displaying a certain price, it does not mean that you a guaranteed to get that for your property. This is just a way of getting a rough idea in cases where you may want some extra insight. There is a moderate learning curve with this method, but it’s nothing insurmountable….and finally, NO, I have not tried this method for myself with rental properties. I learned this technique at a marketing seminar I attended and thought that it might be good to share here. If done correctly, I think this concept can work well, but take it for what it is….just food for thought!

I’ll let you know my result when I get an opportunity to try it.

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This weekend for me was all about trying to get one of our vacant properties rented out.  I spent a good portion of yesterday cleaning up the house and today I had a few appointments to show it to prospective tenants.  My wife and I decided that we would advertise the property as a “rent-to-own”.  This property is way off in a city which is situated in the exact opposite direction as the majority of the other properties that we own.  So it is a real hassle to manage.  Our plan is to just sell it and get out so that we can focus our efforts on one locale.

As a short tangent, one important lesson learned from this property is to ensure that you’re always buying your properties at the right price (preferably below market value — especially with today’s market conditions).  This particular property was purchased at a price that I now know was too high.  When I purchased it, I was mainly looking at the projected rental income and whether or not it was enough to produce the monthly profit margins I was looking for, however, I neglected to give careful consideration to the purchase price relative to the other property values in the neighborhood.  Because of this fact, I’m realizing that many prospective buyers consider my asking price to be too high.

Anyways, I had the opportunity to meet the next door neighbor while I was out there.  He seems to be a good man who is very interested in ensuring that the neighborhood becomes one that he can be proud of and feel safe in.  He revealed some things to me about my previous tenants that I was not aware of.  One example is the fact that there were shootouts at the house on more than one occasion.  In one case, people actually came through his backyard and positioned themselves behind his fence to shoot into our house at the old tenants.  During the time my tenants have been gone (I was unaware for about a week, that they vacated the property), he has been cutting the grass for me so that the house still looks occupied.  He also observed the prospective tenants from the neighborhood who I showed the house to today.  He was able to offer his opinion on each prospect based on his knowledge of who they were from the neighborhood.  It’s becoming clear to me that someone like this can be a very, very valuable asset.

At another property, I also met a neighbor like this.  He once informed me that a particular contractor whom I hired was continually leaving the job site early and then returning to the vacant apartment late at night high on drugs with women (I’ve since learned not to leave contractors unsupervised unless you are very familiar with them and have developed a high level of trust….and even then you should limit the amount of unsupervised work time).

I plan to keep in touch with these neighbors in the future so that they can continue to alert me to any issues that may require my attention with future tenants.  If you can find someone like this it is a very good thing.  Of course you should always keep one eye open, because you never know what anyone’s motives are or what they’re thinking.  I never fully trust anyone in this business so it’s important to know as many sources as possible so that you can piece together the full picture yourself.

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It’s been a long time since my last post.  I’ve been super busy taking care of various issues with my properties and just being a family man.  I’ll be posting details about what’s been happening recently in the coming days.

I may have mentioned before that we had a vacancy in one of our units in the 4 unit building.  It took a few weeks, but we were finally able to get someone in there.  I was contacted by a young lady who was looking to move into an apartment within the next few days.  Apparently her family was moving out of town and she was planning to stay.  She was unable to find a suitable place to live until she came across our unit.  I showed her the apartment, took the rental app and shortly thereafter, we signed the lease.

Within two days of her moving in, she called me to tell me that there was no water coming out of the faucet in either the kitchen or the bathroom when it was turned on.  I was not completely surprised to hear her say that because just 2 days prior, while preparing the apartment for her to move in, I noticed that the tap was very slow.  I promptly called 3 plumbers to have them investigate.  After looking into it, they all came to the same conclusion.  It seems that the main water supply into the building only uses 3/4 inch piping.  I’m told that for a 4 unit building with 16+ fixtures, it should have at least 1 1/2 to 2 inch piping.  Because of this, when the tenants in the lower levels are using the water, the water pressure is too low for the tenant in the top unit to get any water.  Needless to say, the plumbers were glad to quote me on running new 2 inch copper pipes from the street to the building.  The cost would be $13,000+.  The other option was to install a pressure booster pump in the basement to increase the water pressure in the existing 3/4 inch pipes.  This will ensure that the water pressure is always high enough to supply the top most unit, even when the other units are running their faucets or showers.  The quotes on getting this work done ranged from $2,500 to $8,000 which is still too much.  So I’ve started looking into the cost of the pump and I plan to install it myself.  Right now it looks like I can get one for around $500.  I think this is a project worth doing on my own!

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Well, last night I went to one of our properties to collect the rent only to find that the tenant had abandoned it. I should have seen this one coming. We mutually agreed a few months ago that she would move out. She was required to provide 30 days written notice when she knew the exact date that she would be moving. Well, that notice never came. I’ve seen this scenario a few times now…I should have seen it from a mile away.

Anyways, we wrote an ad this morning for the local newspaper and I came across another “resource”. I use the term “resource” loosely because, having already placed a ton of ads in local newspapers, I should have already found this….but if I overlooked it, it’s possible that others have too.

One thing I’ve always struggled with was finding the right words to put in my ads. There is so much to say in a classified ad and such little space. I’ve submitted ads online before only to finish my work and see hundreds of more elegantly worded competing ads. I always wondered how everyone knew about those abbreviations that allow you to pack so much descriptive power into each keystroke….anyways, it turns out that many newspapers have an online listing of accepted abbreviations. I went on google and did a search and came across a few. Just go to google and type in “classified ad abbreviations” and you’ll get a ton of links directly to the accepted lists of hundreds of publications. By skimming the list before writing my ad, I found it much easier to come up with a short power packed description of my property.

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There’s just too much going on today.  The air conditioning guy is coming out to make his (hopefully) final assessment of what’s wrong.  I’m praying that I don’t get sticker shock when I see the bill….The roof that I just had repaired had some unforeseen expenses to the tune of $1,200….In addition, I have not had any formal documentation between the contractor that I use and myself.  So I recently found out that there are a few outstanding jobs that I still owe money for.  This is my fault, I have a form that I use to detail the scope of work for each project and it requires sign-off by both myself and the contractor.  I was using it before each job started and in the midst of a whole lot of activity, at some point I stopped using it.  I’m going to refine that document and start using it again.  Maybe I’ll post it here once I’m done….anyways, in the midst of that I’m about to leave to replace a front door and finish painting a step….All this while trying to fill a vacant unit…In the middle of this, I’m getting a request from a tenant about getting a dog.  Our policy is to not allow pets, but the temptation, during all this cash flow drain, is that this is an opportunity to increase the monthly rental….I told him I’ll call him back.

….that’s my rant for today.  As usual, I’ll keep you posted.

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