So if you are landlord long enough, you will eventually get a bad check. I wanted to pass on something that happened in March that I am just now getting around to posting about.
My tenants in Property 4 pay rent quarterly. This is an arrangement I made with them a while back in exchange for a 24 month lease and a reduction in rent. They are great tenants and this was a win-win for both of us. They usually pay me in cash which is a real wad of money as the rent is $1,200 per month on this property. So in March, I show up and they present me with a check.
Something just did not seem right about this as the check number was really low, written from the wife’s account, and they usually paid me in cash. I did get one check from them before and it was from the husband’s account and at a different bank. Anyhow, given the large amount of the check and my GUT feel, I did something my father told me to do with every check that I get. Go the bank that the check was drawn from and verify the funds.
You can find this advice in some of the RE books, and I must say I would recommend you do this. It’s not a huge effort and worth it in the long run. You need to go to the bank that the check is from, walk up to the teller and tell him/her you want to verify funds are there to cover this check. In my state, they are required to tell you. You don’t need an account at this institution or anything. It’s on their paper, they have to tell you. Now, I must say even if they tell you that the check is good that only means it’s good at that second – who knows 3 seconds from then? What I look for is the – NO answer. And this is what I got.
I went back the next day to the bank. Still no good. I called my tenant and asked her if she made a large deposit. She informed she did and it was on a Saturday through the drive-thru. I assumed that was the issue and waited another day. Still no good. I called my tenants back and had them meet me at the bank.
They met me at the branch near the house, and it turns out they deposited the funds in one account and wrote me a check from a different account. Honest mistake. They moved some dollars around and the check cleared. Disaster averted – they were extremely apologetic. It was now the seventh, but of course I did not charge them a late fee.
Had I not checked this at their bank, I would have just deposited their check into my account. It would have bounced and caused all kinds of headaches for them and me. Furthermore, about a week after this deposit I was out of the country on Spring Break with the family at the beach – I would have gotten all these nasty e-mails/calls from my bank about a bad check. I would have been panicked and probably would have spoiled the vacation and raised my stress level.
I am so glad I made that stop by their bank. Do yourself and your tenant’s a favor and verify funds on your checks.
I found this article: “Why are hiring managers scared of Entrepreneurs” and found it to be a great topic that deserves more attention. As someone who holds a day job at a Fortune 100 Company – I can tell you this mentality around hiring entrepreneurs certainly exists. This is one reason I keep quiet about my rentals around the office.
Here is a quote from the article,
“As we evolve as a society, it’s essential we better understand the psyche of the entrepreneur and how their skills can be successfully leveraged by any business, whether at a start-up venture or an established Fortune 500 company. Successful entrepreneurs’ expertise spans the board, equally adept at marketing, accounting, technology, and, by necessity, management and leadership.”
Masters of opportunity identification and assessment, entrepreneurs aren’t afraid to roll up their sleeves and get into the weeds of implementation, yet remain focused on the big picture objectives. There is nothing an entrepreneur can’t do – that’s because being an entrepreneur isn’t a job or a function. It’s a way of thinking.
The foundation of entrepreneurship requires a diverse set of skills, including creativity, superior problem solving capabilities, the ability to learn quickly and the disposition to remain focused on the primary goals and objectives, all built upon a deep level of passion.
In one week, I could be juggling many tasks: negotiating a purchase, bidding work with a contractor, managing tenant’s, challenging property taxes, etc. These are real skills that in reality make me a better “Day Job” employee.
I know many entrepreneurs who have struggled with this issue as well. They have made all these efforts to fill gaps in their resume where they owned their own business. Instead of hiding these gaps they should be highlighted as great experience and character strengths. It’s too bad hiring managers and Corporate employers are shortisighted and not able to leverage these entrepreneurial skills.
A couple of weeks ago I had a reader e-mail me with several questions. These have sparked a few ideas for future posts, but I thought I would post a portion of his Q&A for others as well.
Do you have a minimum rent multiple that you use when deciding to purchase a home and make an offer: i.e. rent should be 1.3% of purchase price or something of this sort? Do you use this rent multiple to determine if a property will cashflow?
I call this a “Rent Ratio” and I use 1.5% as my target. I have seen 1% and I have seen 2% among other investors. For my area 1.5% gets me the Cash flow, property class, and neighborhood that I like. Sure I could reach 3% if I buy a trailer for $15k and rent it for $475 per month. I am just not going to do this.
I see on your site where sometimes you settle on a purchase price that is anywhere from 15%-30% below asking price. What do you use to determine your offer? I’m amazed that banks would accept an offer 30% below asking price. How many homes do you make offers on before one is accepted at such steep discounts? Do you mainly go after bank owned properties or do private sellers I accept offers this low as well?
I use my cash flow formulas to determine my purchase price. I have bid over list in several instances and less than half of list in other instances. Some banks just put $99,900 list on most of their properties with no real analysis. I don’t put much stock in a list price.
It gets to a point where I feel I am not looking for properties, I am looking for sellers that have a property they do not want. This is what these wholesalers are doing with their bandit signs and “we buy ugly house” billboards. They are looking for deals with big margins. These are the deals you want…If you can be patient and wait till you find one, this is going to be your best buy. You do have to be careful here as I have found many of these require more rehab than I want to do. Remember, we both have full time jobs. I don’t want to do $20k in rehab just so that I can get a great deal. I will pay a bit more and accept a 10-12% CAP instead of a 15-20%.
I know you meniton a 10% CAP rate, and I understand what a CAP rate is, but I am unsure of how to calculate expenses. I’ve seen rules of thumb for expenses (taxes/maintenance/vacancy/etc.) as much as 50% of gross rent. Is this somewhat acurate?
The 50% rule ends up being a bit conservative (especially if you self manage) but it’s not far off based on my experience.
How do you calculate CAP rates on single family home properties when expenses are variable and depend to some extent on chance as an AC unit, roof, water heater, etc. could require replacement at any time?
Several of these expenses are fairly consistent once you get started. After I narrow down the neighborhood, then I will know how much the property taxes will be (BIG dollars here in Texas). Insurance is also consistent or you could just call your carrier and get a quote. For maintenance I assume $100 per month. Some properties go over this amount others go below, but it’s a good estimate. My CAP rate calculation assumes the home will be vacant one month out of the year. In my experience to date my longest vacancy was 28 days and this was in January/February and we had 2 snowstorms with over a foot of snow during that time. I use this very conservative estimate as I include the make ready expense on the vacancy. I also like to assume something for capital improvements or the larger items you mentioned. This improvement figure varies depending on the age of the property and the scale of the intial rehab done.
Last week I had a question from someone that ran across my blog. Below is the first part of his question.
I am looking to get into buy-and-hold real estate investment. I am not sure how I should go about this. I’ve been reading various books, but many books seem to have a get-rich-quick mentality or a get as much leverage as you can obtain and the sky-is-the-limit mentality. Neither of these are options that I am interested in.
I have talked to several people that want to start investing in rental properties, but many are just a little gun shy. I was exactly the same way. I read so many books that they all started sounding the same. I was listening to radio shows, podcasts, books on tape, webinars, the works. I talked to everyone I knew that was already doing it. They made it sound so easy to get started.
During this time I also heard from many people who had never invested in Real Estate. You know these types that love to give advice on topics they know nothing about. This is dangerous. Listen to those who have already been there. This is the whole point of seeking experienced advice.
”The Final 30 Feet”
I read an article years ago about a concept called “The Final 30 Feet”. I don’t have a link to this article anymore, but the original idea came from a comedian. He said, only take advice from someone who has walked that final 30 feet from backstage to the front of a live audience.
So while I am not one of these landlords with 25 years of experience – I can say I have walked that final 30 feet. I feel I am unique in that I still have the perspective of just starting out fresh in my mind. I think it is the perfect time to give my 2 cents on starting out in rental property investing. So far what it’s worth, here are my tips:
- Buy close to home and self-manage your properties. The best way to learn the ins and outs of this business is to self-manage. And the best way to do this is to have properties close to your primary (within 20 miles). You will quickly learn if landlording is right for you. Be careful if your plan is to immediately hand over the keys to a Property Manager. How do you even know if you have a good property manager if you have never managed yourself?
- Take your time. Keep your day job – don’t jump in with everything. Rental property investing is a great way to build wealth and I think it should be done over time while you keep your day job. This will give you more funds and make you look more attractive to lenders. There is no need to over leverage and build an empire right away. Only buy one that first year, pay more upfront, make sure it cash flows. Your first purchase does not have to be a homerun – a single is fine. You will have time to try and hit one over the fence later…
- Know your numbers and have an exit plan. Without a doubt you need to understand rental rates, home values, repair estimates, cash flow, etc. Do your spreadsheets and run the numbers for multiple scenarios. Also be prepared for several options if things don’t work out. What is the worst that can happen and be willing to live with that? Flip it, wholesale it, live in it, etc… If you had to firesale to “We buy ugly houses” the day after you purchased – would there be a loss and could you live with it? Once you totally understand this, it’s much easier to take the leap.
I could have written 10 Tips on How to Start out, or 20 ways to get started, but I narrowed it down to just 3 tips that I feel are a must. The rest is just the same old stuff that I am sure you have read before in the thousands of RE books. I feel these 3 are critical and most often overlooked in many of todays RE books.
I had my first partial payment of 2013 already. On Friday, I picked up $200 that was originally due the first of this month. I really don’t like partial payments, but sometimes it’s just part of the business.
These partial payment issues are tough and you just don’t find much on this topic in all of the RE books. I am always firm with these tenants and give them my usual speech. It more or less includes the following elements:
- I talk to them about the danger of falling behind. You need to tell your tenants that after they make that second payment (usually after they get paid again in 2 weeks) the full rent for the next month comes around very quickly. I reminded my tenant that February is a short month, so this makes it even tougher.
- I then listen to their explanation. In this instance my tenant just got fewer hours at work and her husband hurt his back on his job. She assured me her work schedule was back and she was getting some overtime this week. Her husband was back on his feet and was already working again. You need to determine quickly if they have fallen off the cliff or just stumbled on a crack in the sidewalk.
- Get everything in writing. I like to write receipts that show what they paid, what they still owe, when they will pay it, what are the consequences if they don’t, etc. I wrote about this in another post here. Getting this history in writing just formalizes the conversation and lets them know how serious you take this issue. Of course it also eliminates any “I already paid you this month” or “ I said I was just going to pay the rest next month” or any other “confusion”. This is critical for your cash payers.
- Don’t waste your breathe on converting them to savers. I would not recommend giving them the ‘Suze Orman’ treatment. The concept of a 6 month emergency fund does not compute with my Class C tenants. It just creates this relational issue between you and the tenant that will not improve the situation.
- I tell them the roof over their head is the most important thing. A bit of a scare tactic, but I remind them shelter for their family should be the #1 priority. I recommend they late pay their electric or water bill before their landlord. I tell them my late fees are more expensive than the utility company or other obligations and if they are not then perhaps I need to alter them. This is about as rough as I get and I save this one for last.
In the end, this particular tenant had a good story. They paid $625 on time and only delayed $200. If it was the reverse, I would have been more concerned. Other than the partial payment, they have been good tenants. It’s just one of those areas of landlording that needs to be handled firm yet delicately at the same time. I feel over time you develop this ability to look deep into their eyes, watch their body language and you can get a sense of truthfulness and sincerity from them.
I have said many times that vacancies are a killer for landlords. It’s that double edged sword of lost rent and make-ready expenses that really eats into the profit. I usually attack my vacancies from the minute I find out until the next tenant moves in. Filling a vacancy in one week is tough, but it can be done. Here are some of my tactics:
Look and listen for signals. Stay in touch with your tenants and listen for signals that they may be thinking about moving. Ideally you will get notice of your vacancy, but even without it you might be able to start on some rehab before they even move out.
Start on the rehab early. Don’t spread out the work over a couple of weekends. Get the make ready done right away even if it means staying at the property late.
Advertise early. Get those signs out quickly. Talk to neighbors and others in the area that might be interested in the property. As prospects come to look at the place start prescreening. Even If the house is not ready to show, go ahead and schedule an apt for the day it will be ready.
Answer your phone – For those who read my blog, you know how passionate I am about this topic. When I have a vacancy, I try and pick up every time. Is it a pain? – you bet. But many tenants just will not leave a message. They have short attention spans and will assume it’s already been rented, out of their price range, etc.
Be on site. If I am already there working on the house, I leave an ‘OPEN HOUSE’ sign next to my “FOR RENT” sign. I also leave the front door standing open.
Show often – Many times I feel I have gotten a tenant just because they could never schedule a showing with the house down the block listed with a Property manager that only shows houses once or twice a week. We live close to our properties and will drive over to show anytime it sounds like a good candidate.
Get completed apps. If someone is interested in the property, get them to fill out an app. Keep your app to one page, free, and simple. Check their employment and current landlord quickly if you find a good candidate. Then get back in touch with them right away before they find another place.
If you want to fill a vacancy in a week you have to act with a sense of urgency. However, don’t confuse filling a vacancy quick with just putting anyone in there you can find. This can be a much bigger mistake than taking 2 months to fill it.
Last January, I posted about our goals for 2012. Below are the original goals and how we did:
- Buy 2 properties – at least one with seller financing. COMPLETE. We did purchase 2 properties last year. The first one was with owner financing. The second one was a cash offer despite my attempts to get the seller to bite on owner financing.
- Put our insurance out to bid. COMPLETE. Val and I had our insurance with 2 different companies before. We sat down and looked at each other policies and I had a sit down with both insurers. Some policies were cheaper at one company and vice versa. At the end of the day, I switched most of my policies to her provider and we ended up saving around $2k per annum. Well worth the effort and we have better coverage.
- Get my Real Estate Agent License. INCOMPLETE. I have over half of the necessary coursework or credits to get my agent license, but we just don’t need it. We have someone that pulls comps for us and this is our primary need. I might look at this again in the future.
- Renew the Property Management contract. OBSOLETE. At the beginning of the year we were planning on just renewing a contract to manage a property for someone. The current tenant in that property just happened to move out as this contract was coming up for renewal so he just offered to sell us the property. This was the first of our two purchases this year.
- 30 days or less total vacancy for 2012. INCOMPLETE. I am not disappointed about missing this one. We had a great year from a vacancy perspective. 30 days was a dream target to begin with. If you take out the vacancy period at the time of purchase, then we met this goal anyhow.
- Savings and paydown goals. COMPLETE. Valerie and I met or exceeded all of our savings and paydown goals this year.
- Find another reliable handyman. INCOMPLETE. I am still looking for that jack of all trades handyman as a backup to the one I have. The one we have is so great that no one else gets a chance at any new work we have. I did meet a good painter and another decent plumber this year, so still continuing to build my rolodex.
- $8k per month in rental income by December. COMPLETE. I feel this was our biggest stretch goal. We made 2 purchases this year and that is just what we needed to get there. We feel good with 8 properties and management of these is very comfortable for us.
We feel really good about 2012 – It was a smooth year for us. We hardly had a phone call for the last three months of the year. Of course the first 3 weeks of this year we replaced a hot water heater, garage door opener, called out the plumber 3 times, and got a call from a neighbor about something. Here we go…….