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Letter on Selecting Tenants

Monday, August 31st, 2009

Radio Host Mark Maxon Radio Host Mark Maxon

Below is an email that I received from someone who recently signed up for my 7-week informational course based on my book How to Start a House Fix up and Rental Business. I removed the name to protect her privacy.

It was great hearing you on Mark Maxon’s radio program this am. My son is again trying to do what you did. The first one didn’t go well. Can U tell me how U selected your tenants? Also I am in an interest only mortgage & want to get out of it. I applied for a Loan Modification & it’s been dragging on.

Any ideas? It would be greatly appreciated. Thanks again for offering your course to help folks like us.

Sincerely, xxxxx

—————–

My response:

Hi xxxxx,

Thank you for the note.

I think the hardest part of the rental house business is finding good tenants. In many ways, the only way to get good at it is to just do it. You make a few mistakes along the way, but you get better with each passing year.

But, there are also some key things you can do to help get good tenants.

1. Have the tenants fill out an information sheet, requiring them to list previous places they lived, list bank account info, job info, etc. Call all of their references, their bosses, and their old landlords. Verify their salary. You may be able to check county court cases on-line like we can here in Tucson. If so, run a check on their name.

2. Read through the entire contract with them before they sign it. Emphasize the penalties they face if they pay late.

3. Enforce the contract. If they pay late, call them immediately, and require that they pay the penalty (I charge 1% of the total rent per day that they pay late).

4. Get a book that describes landlord rights in your state. These books usually include legal forms that you can mail to bad tenants, to make them comply with your contract, or to evict them.

Sorry, I don’t have any knowledge about getting out of an interest only mortgage, or the loan modification process. There was recently a mortgage broker on Mark Maxon’s show. It might help to contact someone like him.

Best of luck to you and to your son.

Terry Sprouse
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Posted in finding tenants, managing apartments, managing tenants, Mark Maxon, maximize rental profits, real estat investing, selecting tenants, tenants | 2 Comments »

Five Questions to Identify Motivated Sellers

Friday, April 18th, 2008

,
Thinking about buying an investment property?

Check out Real Estate Investing – The 5 Magic Questions at ezinearticles.com, by Robert Rentalman (yes, Rentalman).

The MARLA formula consists of 5 magic questions that will help you quickly weed out the motivated sellers from the rest of the pack. MARLA is an acronym for Motivation, ARV (After Repair Value), Repairs, Loan balance, Asking price. For more details on the 5 magic questions, take the link above.

Info on Terry’s Book

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Posted in buying real estate, finding tenants, how to make money renting housing, investing in real estate, investing in your spare time, investment house, investment property, investments, investmet properties, learn to invest in real estate, managing tenants, tenants, tenents | No Comments »

Serial Home Seller Tax Exemption, Part 3

Thursday, January 10th, 2008

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Advantages of selling a home every two years and claiming the exemption:

1. No more dealing with tenants

One of the biggest gripes of real estate investors is dealing with problem tenants. In fact, based on what I have heard from former investors that I have talked to, that is probably the biggest reason that investors decide to get out of the business. The next best thing to biting the bullet and learning how to deal with tenants through the school of hard knocks (or reading a copy of Property Management for Dummies), is to have no tenants.

Who wouldn’t want a world without tenants? It’s a dream come true! No more weekend calls about clogged garbage disposals and toilets not flushing. No more staying up late balancing the books. No more late payments and far-fetched excuses. No more rush to put the place back together and quickly rent it out again, when someone moves out. No more surprise midnight moves by tenants who get out under the cover of darkness.

2. Lower interest rate

Owner occupants can pay 1% less for their mortgages than people who don’t live in their investment properties. For a $200,000 house that can be an additional $132 a month, or $1,584 per year, that you don’t pay for your mortgage.

3. You control the whole process

If you become a serial home buyer/seller and move from one house to another every two years, you alone are in total control of your investment future. You’re captain of the ship.

Since you live in the house, maybe while you fix it up, you’re just making mortgage payments that you would be making anyway, if this wasn’t a business for you. So, you’re not out any extra money, except for the closing costs when you buy or sell.

If you decide you want to live in the house a few years longer, no problem. You can live there as long as you want to, 20 years if you like, and still take the tax exemption.

But you can also decide to buy and sell every few years, and each cycle buy a nicer home, like Suzanne Brangham did, as described in her book Housewise: the Smart Woman‘s Guide to Buying and Renovating Real Estate for Profit. She started in San Francisco in 1972 when she couldn’t find a job that she liked. She decided to create her own career. She started by investing $9,600 in a condo and wound up renovating and selling 71 houses and apartments.

Regarding self-reliance, Ms. Brangham says:

“The biggest lesson I learned in the property business in that there are no absolutes except yourself. Prices fluctuate; products change. Markets move up and down. Tax laws are rewritten every year. Interest rates are as predictable as unwired champagne corks. But there is one stable element in all of this: the person who renovates for profit.”

Disadvantages of utilizing the exemption every two years

1. No long-term profits

In addition to losing the headaches associated with tenants, you also lose many benefits by selling rather than renting. You lose:

a. An monthly rent payment. Its easy to get used to those once they start coming in.

b. Tenants are gradually paying off your mortgage for you.

c. Tax deduction for depreciation and for interest on your loan.

d. You lose the long-term appreciation of 5% per year. Its nice to have the option of cashing in on that appreciation by selling off a house or two when you are ready to retire.

2. It’s difficult to time the market

This is not a disadvantage of the exemption as much as a disadvantage of operating a business of buying and selling every two years. Under this investment strategy, you may not be able to time your house buying and selling to accommodate the fluctuations of the market. For example, many would say that now is not the best time to sell. Some real estate analysts say that cycles usually last between 2 and 10 years, and naturally the ideal time is to sell is when demand is high and the prices are up.

A similar problem exists for buying your properties, you may be caught in a cycle when prices are artificially high.

——————————–

What is the secret to overcoming these seemingly insurmountable obstacles? Where do you turn? What’s that up in the sky? A bird? A plane? Who was that masked man?

The next installment of this series will address some of those questions.

Part 4 of Serial Home Buyers/Sellers, What properties do serial home buyer/seller buy?

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Posted in managing tenants, quirky tenants, serial home buyers, tax exemption, taxes, tenants | 1 Comment »

Termites, a relentless foe in rental houses

Friday, November 16th, 2007

In the fixer upper rental house business, we must constantly monitor the status of our property.

I was reminded of this again when we discovered that we had termites in one of our bedrooms. This is a fixer upper house that we are living in as we make repairs; soon to be a rental house. My son bumped his foot against the floor trim and found that there was no longer any wood trim there. All that was left was the the shell of the paint in the form of the trim. The wood had been completely eaten by termites.

Hiring a Pest Control Professional

I usually like to do all fix-up type repairs myself, but this is a case where I let the exterminators (no relation to the California governor) do the work. The first few companies I called would not give me a quote over the phone. The one company that gave me a “rough estimate” came in at a budget busting $1500 to $2,000 for a 1600 sq.ft. house. The job must be based on the square footage of the house, so it’s not rocket science to calculate the cost. It makes it impossible to compare companies if they all have to come to the house before they can give me an estimate! They think that after you invest the time to have them come over, you’ll just fall for their sales pitch, rather than spend any more time finding the best deal (and at the same time you’re concerned that your house is crumbling from the relentless termite onslaught).

So, I kept calling. After several more calls I connected with A-OK Termite and Pest Control and they really were “A-OK” because they gave me a bid of $650 without a house business. They did the job last Saturday.

Termite Living Habits

Yikes! Termites

Here in the desert southwest, we have subterranean termites, which I believe are the singlemost common type. They live in colonies deep within the ground, sometimes to depths of 25 feet. Termites work their way up through the soil from their nest and enter any wood they can. Termites can gain entrance by crawling up the sides of foundations, building mud shelter tubes to shield them from light, or they can go up hollow sections in block foundations or up cracks in the poured concrete foundations.

Every 48 hours or so termites must return to the soil to get moisture or they will die. The exterminator (again, no connection to Arnold) sets up a barrier of chemicals in the soil that the termites cannot pass through. They usually inject chlordane into the the soil every eighteen inches around the entire house. The same procedure can be done inside the house.

Even if only one part of the house is infested, the entire house must be termite-proofed or the termites will migrate to the untreated parts.

The time it takes termites to do serious damage varies from only a couple of years to 10 or more years. So, if you think you might have termites, don’t put off taking care of them too long. If it’s been 5 years since the last treatment it’s time to have the house inspected.

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Posted in contractor calculations, contractors, do it yourself, fix up houses, fixer upper houses, fixer uppers, fixer-upper business, fixing rental houses, investment property, learn to make repairs, live in, making repairs, managing tenants, property damage, repairing properties, repairing rental houses, repairs, Uncategorized | No Comments »

Night of the . . . Unwanted Zombie Tenants

Tuesday, October 9th, 2007

If you are in the fixer upper rental house business like me, you want to avoid bad tenants like you would ravenous zombies.

How do you go about avoiding bad tenants?

A good contract and checking out references is a good start to getting good tenants. But, despite our best efforts to weed them out, sometimes we still wind up with a someone who doesn’t pay on time, or who bugs us incessantly with phone calls for knick-knack repairs, or who bothers the neighbors.

Below are my observations on dealing with the inevitable bad tenant.

I give my renters a $25 dollar discount if they pay on the first of the month, or early. If they pay after that, then they pay the full amount of rent. I frame it this way so that it looks like they are getting a good deal if they pay on time.

I received a late rent payment earlier this month from a tenant, but it didn’t include the full amount. I called and he said he thought the due date was the 5th and not the first. I assured him that it was indeed the first. So, if the rent if $900 a month, they pay $875 if they pay on time or before the 1st. If they are even one day late, they don’t get the discount.

What happens if they pay late and don’t pay the late fee? I call them and remind them and insist that they send me the amount they owe ASAP. I usually require a fee of 1% of the rent for each day that the rent is late. If the rent is $700 and they are ten days late, then they pay an additional $70, or $7/day.

Late Pay = More $

I had one tenant who consistently paid 2 to 3 weeks late. The first couple of times he paid late, I sent him a “pay or get out form” legal form so he would get in the habit of paying all late fees. At first, it bothered me that he paid late, but then I realized I was making an extra $150 or more each month from his inability to pay on time. I actually started enjoying getting the late payments each month. I was getting an extra $1,800 a year just because the tenant had a personality flaw that made him always pay late. Of course, if he hadn’t pay the fee, I would have removed him from the house. In general, its best to get the rent on time, but there are times when one should be open and flexible enough to make a little extra money.

Do Tenants Stay or Go?

Granted, when you are renting out several properties at the same time, it can be headache if one tenant is paying late. You have to ask yourself, would you rather remove the tenant and go through the process of fixing up the property and searching for a new tenant, or just continue to rent it out under less than ideal conditions? Since my wife and I both have regular jobs, we usually opt to keep the tenant in the house as long as possible, unless they are not taking care of the property or not paying the rent. We subscribe to the landlord mantra of “the less turnover, the better”.

In a perfect world, all tenants would pay on time and stay in the property for 15-20 years. We’re still looking for that Ned Flanders-esque tenant.

As you might expect, the late-paying tenant left the house without paying the last month’s rent, last April. However, he rented the house for about 18 months, so with the security/clean up deposit that I kept, and all the late fees we received, we still came out well ahead.

You can usually see the signs that certain people are going to be “train-wreck” tenants. When they start off paying late right at the beginning of their lease, you know that’s not a good sign. But, at that point all you can do is stay on top of the situation and enforce the late payment rule until their inevitable departure. After the late-payer tenant left, I started using month-to-month rental contracts, which makes it a little easier to get rid of bad tenants.

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How to Learn the Skills to Repair Houses, part 2

Wednesday, September 26th, 2007

This of Part 2 of my reponse to a question asking, “My background is not in the building trades. How do I learn the required skills to start a business in repairing houses and renting them out?”

How to learn the appropriate skills:

3. Draw on the Past

After I got more involved in the repair work of our houses, I thought back about how my father had taught me a lot by example. I recall seeing him construct screened-in porches on various houses that we had lived in. I was too young to help out much at the time, or to appreciate what he was doing, but looking back I realize that it required a strong desire to learn the basic principals, and a sense of self-confidence to build it. He had no formal training in construction, and didn’t have reference books like I do, but he learned by observing other porches that had been built in the neighborhood.

I also have a friend who has made a career out of living frugally. He does virtually all of his own house repair and car repair work. If he gets stuck, he goes to the library and finds books to help him. It helps that he has a background in teaching vocational eduction. We have helped each other with house repair projects over the years, and he is a source of practical advice when I need help.
You too may have family members, or friends, that you can draw insight and inspiration from when it comes to making repairs.

4.Create a House Repair Library

I like to scour the fix-up book areas at used book stores for good buys. I buy a book as soon as I see it if I know that it has valuable information. In the past, I have waited to purchase the book only to return later and find that the book I had wanted was gone. The price you pay will literally be a drop in the bucket compared to the money you will save. I have books on almost every possible repair topic, including electrical wiring, plumbing, flooring, you name it. Some books that offer information on a wide variety of repairs, such as Reader’ Digest “Fix-it Yourself Manual” and Better Home and Gardens Complete Guide to Home Repair,” are also good to have. See my earlier blog for more infomation on recommended repair books.

When a book is not enough, I can usually get good advice on specific jobs at hardware stores, like Ace Hardware. And, you can sometimes get advice on difficult repairs by doing a Google search.

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Posted in buying fixing renting rehabs, buying real estate, do it yourself, excellent real estate books, Fix em Up Rent em Out, fix up houses, fixer upper houses, fixer uppers, fixer-upper business, home buying, house buying, house repair, house repairs, how I got started in fixer uppers, how to make money renting housing, how to start a real estate business, How to start your own house fix up and rental busines, invest real estate repai and sell or rent, investing, investing book, investing financial independence, investing in real estate, investing in your spare time, investment house, investment property, learn repair skills, learn to invest in real estate, learn to make repairs, making repairs, managing tenants, real estat investing, real estate books, real estate principles, rental house protection, rental houses, rental management, rental properties, rental property, renting, repair, repair books, repairing properties, repairs, safe ways to invest in real estate, small investor, spare time | 1 Comment »

Landlording Help

Tuesday, September 18th, 2007

Landlording is a tough job, not for the faint of heart. Yet, its worth the time it takes to be a good landlord for the long-term profit we gain.

A pretty good webpage to learn about landlording is mrlandlord.com. They offer both free information as well as services that you can pay for, such as specialized documents, forms, newsletters and credit & background checks. I’ve read the newsletters and they are informative, with good tips on landlording. I bought a sampler pack of 12 back issues for $12. They also have a free page where rental owners ask landlording questions and get answers and tips from other landlords, and a searchable database of discussions on a plethora of topics.

Mr.Landlord advertises instant credit checks for $9.95, but when you get into the application process, it turns out that smaller rental property owners must also pay an annual fee of $59. Another way to get information on potential tenants is through the county courts webpage. In Tucson, you can search by a person’s name to find out any civil or criminal action has been taken against them.

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Posted in for rent, landlording, managing tenants, rental houses, rental management, rental properties, rental property, rentals, renting, tenants, tenents | No Comments »

Who Was Your Quirkiest Tenant?

Thursday, September 13th, 2007

I’ve had a married couple in one of my rental houses for 16 months. I have them mail their monthly rental checks to my PO Box, as I do my other tenants. Yesterday, they called and asked me to give them my PO Box address so they could mail in the check. They had misplaced the address. Misplaced the address? In the past they have lost their keys. They have also lost their copy of the rental contract. Last month they mailed the check to the wrong address, and had to cancel their money orders and send me new ones (precipitating yesterday’s request).

Granted, I don’t have the greatest memory in the world. I call my kids the wrong names all the time, and yes, sometimes I absentmindedly use our dog’s name when calling out to one son (in my defense, both their names start with the same first letter). But, you’d think the mailing address for the landlord is such an important piece of information that they would try to make a special effort to keep track of it. I call that a little quirky.

Quirky tenants, of course, are better than out-and-out bad tenants who won’t take care of the house and don’t pay on time. I’ll take quirky any day. In either case, it’s always comforting to remember that whoever occupies your house is ultimately helping you to achieve your goals of financial independence. Each day that you have a tenant in the house, they pay off part of your mortgage, you clear a certain amount from the rental payment, and the value of your house goes up an average of 5% each year. (Well, it doesn’t go up 5% per year these days, but that’s the 30-year average. And, we have to be grateful for the big boost in equity that we received in the 2005-2006 housing boom.)

In general, if we have rental properties and long term-tenants, that’s a pretty good situation to be in.

Speaking of quirky tenants, check out Will Ferrell in The Landlord Video.

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Posted in landlording, managing tenants, quirky tenants, rental, rental houses, rental management, rental properties, rental property, rentals, renting, tenants, tenents | 1 Comment »

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