Get your tax hat on. Here are some tips and tricks for closing the books on 2012:
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Next Post: Planing for the Big Expenses
Prepay the Mortgage? Before You Call Suze Orman, Let Us Discuss Your Objectives
In the boom times of real estate (2003-2007), everyone was talking about leverage and real estate:
- “No money down is the way to get rich”
- “I just quit my six figure a year job so I can be a real estate mogul”
- “Cash in the bank is for guys who just don’t understand how to make money”
- “Who is John Paulson?”
After the Lehman debacle credit crisis, gold hoarding, and other attributes of the Great Recession, gurus like Suze Orman and Dave Ramsey fired out these mantras:
- “Pay off your house”
- “Debt is evil”
- “Don’t take calculated risks”
- “You don’t need to pay up for leather seats in your car” (ok, I added this for emphasis)
In the last ten years, it is amazing that the general opinion on leverage has swayed from one extreme to the other side of the spectrum. Infinitely leveraged real estate clearly didn’t work, but neither does a “cash only” economy.
How much debt is right for you? Here are some ideas to think about when deciding on how much debt you should have:
1) You need to write a check every month for principal and interest. Now look at your revenues. Are you waiting for that rent check to clear so you can pay your mortgage or do you have a year’s worth of mortgage payments stockpiled in the bank by March? Sit down with your spreadsheet and crunch the numbers. Look at the facts, not fantasy.
Do you have room to either take cash out to buy more property or should you be looking to reduce your monthly nut by refinancing your loan to lower your rate or extend or lengthen your term to get your payment lower?
Here is your banker demanding payment:
2) What is your goal with regards to real estate investment?
- Stable monthly cash flows due to fewer properties with minimal debt and tenants (and tenant related issues) resulting in higher monthly cash flows, but less potential gain or loss in the due to fewer underlying assets.
OR
- Larger back-end (capital gain/loss) potential. Typically due to owning more properties while carry more debt resulting in lower monthly cash flows.
Unfortunately, as an owner, you can not have a large leveraged real estate position AND relatively large monthly cash flows. Think about your level of comfort and objectives. Pursue what you truly want to be your desired outcome.
3) As D.G Watts stated in his classic book Speculation as a Fine Art, ”Sell down to a sleeping point.” Forget your theoretical profit from your unit and the value of the property as well as your income from non-real estate activities Every month you need to transfer money from your bank to your mortgage holder. How much are you comfortable with parting with every month? By no means is this final question in determining your appropriate debt load, just another view of your debt situation. I only pose this question as a “take a step back and look at the raw number”. Figure out what your comfort level is for debt and get to that debt level so you are not waking up in the middle of the night in a cold sweat followed by watching reruns of the Morton Downey Jr. Show (OK, the guy has been dead for over a decade, but I’m sure his show is in syndication). Everyone’s financial situation is different, so everyone’s acceptable level of debt will vary too based on personal preferences and their cash flow.
It is your decision regarding your debt load. Examine your own current financial situation, objectives, and your comfort level. With this information, you can sleep well at night with your debt load while achieving your real estate goals.
Bigger Pockets Post: Tips on Getting Your Records in Order for Uncle Sam
Bigger Pockets Post: How to Get a Co-Signer to Make Your Lease Worth a Lot More
Tenant with weak to terrible credit? Before you toss the tenant’s app in the garbage, explore your co-signer options.
Next Post: Prepay the Mortgage? Before You Call Suze Orman, Let Us Discuss Your Objectives.
Bribery Can be Cheaper than a Full Eviction
You had to get the place rented, right? You didn’t properly screen your tenants (read: The Most Important Rule again), the tenant got into a fight with his girlfriend and now neither one is paying the rent, the tenant lost his job and doesn’t have any money to pay you, or the tenant simply decided to stop paying you. It doesn’t matter what reason the tenant gives; all that matters is that you don’t have your rent money.
When you don’t get your rent money, the tenant excuses start piling up. I’ve heard a lot, but there are new ones created everyday:
- “My [relative] died and I need to leave the state for the funeral. You’ll get the rent when I come back.” (It is always an out-of-state dead relative, don’t ask me why, it just is)
- “My company is behind on their payroll, so as soon as I get paid, you get paid.” (It’s always someone else fault that they can’t pay the rent)
- “I have the money, but its in my bank account and I lost the checkbook, so I can’t pay you until I move money into the other account, but that account will get overdrawn because I need to pay my gas bill which is overdue because I was paying you last month’s rent but then my car broke down…” (What?!?!? You gotta love the long, run-on, never-ending story)
Responsible tenants pay their rent. Irresponsible ones make excuses and try to live for free by tugging on your heart-strings. You are running a business, not a hostel, so stay with your plan of making your business work.
Unfortunately, when you have a deadbeat tenant, they usually don’t leave on your terms. Evictions cost money, time, and possibly damage to your unit. Often these tenants are ‘professional squatters’. They know their tenant rights better than most landlords, and they will exploit them as much as possible.
As soon as you recognize the signs that the tenant is a bum, stay cool. Don’t start screaming at your tenant that you want your money (remember, they don’t have it, so it doesn’t do any good to yell). Make the eviction your problem and offer the tenant a ‘bribe’:
Call up the tenant and explain that your son, nephew, friend, etc has fallen on tough times and they need a place to stay or they just got a new job and they are moving back to your area. Whatever story you make up, make it your problem. The bottom line is that you need the unit back and you are willing to compensate the tenant for moving out.
Since you want this tenant out yesterday, offer a reasonable amount of cash to incentives the tenant to move. In some states evictions can take up to six months. This means you will be losing rent, paying an attorney, and repairing the damage to the unit. In other words, you have a lot of room to pay off the tenant and still come out ahead. Offer the tenant an amount that would make you want to move-maybe it’s a month’s rent, maybe it is two. Start with a serious number and leave some room for the tenant to counter.
When you reach an agreement on price, have the tenant sign a letter stating that they are agreeing to break the lease and that they are being compensated $XX for breaking the lease. Once the tenant has all their stuff out of the unit, pay the tenant the money (preferably a check) and change the locks. Both parties walk away reasonably happy.
In the event the bribe doesn’t work, call your attorney and start the eviction. However, it is worth a shot to try this method before taking more drastic measures.
Bigger Pockets Post: How to Get a Co-Signer to Make Your Lease Worth a Lot More
Bigger Pockets Post: Fun, Sun, and Income? Sit Down and Do the Analysis Before You Buy Your Investment/Vacation Home
Want a vacation home that earns you additional income? Before you start your wave of hi-fives followed by a pass through the spanking machine as you say “Yeah, I have a vacation home, my life is awesome!” Read this first:
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Next Post: Before Calling An Attorney to Evicting a Tenant, Try This First
The Right Way to Make Sure Your Tenants Transfer Their Utilities
When a new tenant moves in you need to have a simple set of move-in procedures in place. I’m not talking about the depth of the policy and procedure manual of a IBM mainframe or the latest debt ceiling measures for congress; just a simple checklist for covering everything that is needed for the transfer.
Double check that you have a signed lease, the security deposit and first month’s rent cleared in your account (the green stuff, cash, is more than acceptable too), and the tenant has received the keys for the unit. Ensure that everything is in order with unit and is ‘OK’ with the tenant. Check that all the keys work in the locks (I’ve had to do the U-turn more than once after getting home upon the tenant realizing that he didn’t have all the right keys).
The last thing you want to do is hand over keys without a properly executed lease. If you’re anxious because its one of your first time renting or you get nervous around cash and contracts, don’t be afraid to pull out your checklist and go through all the items on the list. Sure you make look ridiculous pulling out a ’3 Item Checklist’, but it sure beats making a costly mistake in terms of time and money.
Utility transfers can be tricky, because there is a third-party involved, the utility companies. Stress to your tenant that they are responsible for calling up the gas, electric, and water companies and putting the services in their name. Often the utility companies tie in the user’s social security number to the unit, so it is imperative that they get the service transfer into their name ASAP. I always follow-up with utility companies one to two months after the tenant moves in and double-check that the old tenant is off the bill and the new tenant is on. The last thing you want is the tenants heat to go out in the middle of winter leaving you open to frozen pipes (here is my adventure with near frozen pipes).
Since no one uses rabbit ears for TV reception anymore, the tenant will want to install a satellite dish or cable TV. Often these companies will want your signature or verbal sign off before their guy shows up and starts drilling holes in the walls:
Cut to the chase, and talk to the tenant immediately about how they want to handle the TV situation.
Next Post: Bigger Pockets Post: Fun, Sun, and Income? Sit Down and Do the Analysis Before You Buy Your Investment/Vacation Home
Bigger Pockets Post: Working with Tenants Who Want to Make “Improvements”
Tenants like to express themselves with your unit. Here’s how to get make it a “win-win” for both tenant and landlord.
(At the very least, watch the clip with Bill Murray in his prime)
Next Post: The Right Way to Make Sure your Tenants Transfer Their Utilities
What To Do When a Tenant Wants to Add/Change a Roommate in the Middle of the Lease
Often you will end up with two or three roommates in your unit. They may be boyfriend / girlfriend, bff’s, people who met on craigslist, or husband / wife. Whenever you get more than one person renting a unit, there is always the possibility that they decide to part ways. The couple breaks up because she rolls the toothpaste and he squeezes it, one of the friends for life gets transferred to a remote section of Tennessee, the craigslist people realize that all people on craigslist looking for roommates are just as crazy as they are, or the forty-five year old, overweight husband decides that he should pursue his childhood dream of playing for the Cubs.
Often one tenant will want to remain in the unit, but will want to bring on a new roommate. Explain to the remaining tenant that they are responsible for all costs for finding a new roommate and that you will expect the rent check to continue to come in on time regardless of the occupancy of the unit (check the laws of your state/city–this statement is true where tenants are joint and severally liable for the lease).
Never allow a non-screened roommate to move into the unit. I have had my share of tenants in this situation go into shock when they see that their “fantastic” future roommate has terrible credit. ”Good friends” doesn’t mean good credit. Tell the tenant that you are running the credit check on their behalf as well as yours. As soon as the existing tenant understands that you are looking out for their needs, they will stop fighting you to “trust their friend”.
When adding another tenant to the unit make sure one of the following are true and you’ll be fine:
- The current tenant has good credit and enough income to carry the entire unit’s rent by himself (keep in mind you have had a history of on-time payment with this tenant, so “good” credit is acceptable)
- The new roommate has outstanding credit and enough money to carry their half of the unit’s rent.
If local laws permit, you may want to write a sub-lease fee into your lease when you initially write it up. It is a great way to generate additional income without any extreme effort on your part in the event your tenants start playing musical chairs with your unit.
Next Post: Bigger Pockets Post: Working with Tenants who Want to Make “Improvements”
Bigger Pockets Post: Renting to Tenants with Pets
Should you rent to owners with pets? Find out here:
Next Post: What To Do When a Tenant Wants to Pick Up a Roommate in the Middle of the Lease
Even Landlords Deserve A Vacation
You have a work trip or a vacation coming up (maybe you are on vacation now, today is Christmas, so Merry Christmas), so how do you handle any rental unit issues when you are out of town?
Most of the time you will not have any issues with your unit. Let me repeat this again to illustrate how unlikely it is that you have a major problem that needs your immediate, on-site attention: Most of the time you will not have any issues with your unit. As a result, it will appear to the tenant that you never left town. It is for this reason that I don’t tell my tenants when I am unavailable. I have found that when you let your tenants know that you will be out of town, they always decide they need you do something to the unit or they will call you the minute you drop your whole wad on black at the Golden Nugget in downtown Las Vegas.
If it were 1950 and cell phones didn’t exist, I would have a different approach to leaving town. Since we don’t go to sock hops and fear commies anymore, here is what I do when I get out of the city:
- If the tenant does call with an issue, I explain that I am out of town. If the issue is something that can be handled when I return, I take care of it when I get back. If the problem needs immediate attention, I start calling repairmen and have the tenant let the repairman in the unit.
- If you feel more comfortable with person who could be “on call” in the event your property needs attention, talk to a friend, preferably who is also a landlord too. Give him the keys to your unit and have him be your local “property manager” in the event you get a call from your tenant.
Speaking of Christmas, give me the gift of “Liking” me on Facebook. It would be great if I could break double digits for subscribers before the first of the year.
Next Post: Bigger Pockets: Renting to Tenants with Pets; The Decision is Easier than You Think.
