Minnesota Investment Real Estate

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The Minnesota Department of Transportation and the Minneapolis Public Works Department are presenting plans to create a new off ramp from I-35W South exiting onto East Hennepin Avenue via either Lincoln Street or Buchanan Street.  These ramps are in response to the 35W bridge collapse and are said to be temporary.  Buchanan is a narrow neighborhood streets with single family and rental homes.  As I have a rental property in this immediate area, I know that there are many children on these blocks that play outside.  The additional traffic through this neighborhood will be dangerous. 

Unfortunately, I am told that despite the city holding “Neighborhood Impact meetings”, they have all but decided to push forward with the plan.  I understand that making adjustments and compromises in light of the traffic congestion caused by the 35W bridge collapse is necessary.  I am concerned that these “temporary” exits will become permanent and forever change this otherwise quiet neighborhood.   

The meeting will be held:

Tuesday, September 4, 2007
5:00 p.m. to 7:00 p.m.
983 Hennepin Avenue East, Minneapolis
Intelligent Nutrients Building; 612-617-2000

That is easy—911…but who do you call when you are on the beach in Acapulco and the water heater at your investment property dies?  Or more importantly, who do your tenants call when the water heater dies and you are out of cell phone range?  Do you have a plan and/or people in place so you can take vacation and confidently leave the properties alone?

With some simple preparations, you can easily slip out of town and relax knowing your investment properties are in good hands. 

Preparation prior to vacation:

• Have all your service & emergency calls routed through the same phone number.  You can then change the voice-mail message when you are out of cell phone coverage or just want to “unplug”.
• Consider mounting permanent lock-boxes to the door frames of each unit.  Alternatively, you can put an extra set of keys for an entire building into a locked store room or mechanical room and then put a key for just that room into a lock-box at the building.
• Compile a list of all contractors and handymen that you use on a regular basis.  Make sure they are listed in your cell phone. 
• Identify a “vacation buddy” who will take calls and manage any emergencies that may arise when you are away.  This may be your caretaker or your handyman, but it may be a parent, friend, or relative.  Make sure they understand your business.  Take them on a tour of your properties (print out a map with addresses!). 
• If you don’t have a caretaker at a building, at least identify a tenant that you trust to give you an honest assessment of a situation if they are the only eyes on site.

When you are away on vacation (where you can’t receive cell phone calls):

• Either change your greeting on your phone to give the callers the name and number of who to call for maintenance, emergency, and leasing questions or have your vacation buddy check your voice-mail periodically throughout the day.
• Be firm with your tenants and/or vacation buddy that any non-urgent requests must simply wait until you return.
• Print out a list of your contractors and handymen that you use as well as your tenant’s contact information and leave it with your vacation buddy.  Make sure your vacation buddy feels comfortable relying on the expertise and advice of your contractors.
• Leave your keys with your vacation buddy and/or make sure s/he has the combinations to your lock-boxes at the properties.
• Give your vacation buddy funds (a credit card) to pay for emergency items while you are gone.
• If you just can’t stand to unplug for a long period of time, pre-arrange a call date and time with your vacation buddy to check in.
• Give your vacation buddy your travel schedule and your emergency contact phone numbers (if you building really does burn down, you would want to know immediately).
• Take copies of your tenant phone list and contractor/handyman phone list with you so in an emergency you could help your vacation buddy with who to call or make calls yourself.

These preparations are good practice whether you are going to grandma’s house 100 miles away or to Acapulco for an extended vacation.  They will keep your assets protected, your tenants happy, and your vacation more pleasant.

You decide to not renew your tenant’s lease for any number of good reasons (noise complaints, consistently late payments, dirty apartment, etc).  After you notify them of your decision, they stop taking your calls and don’t answer the door when you stop over.  They need to vacate their apartment by the 31st. 

Ultimately, you find a new tenant, that you are excited about, to move in on the 1st of that next month and sign a lease.  You show up on the 31st at 5pm and are surprised to see that the outgoing tenant is still there, has not packed a box, and says that they are staying.  Now What!

Well, I have some ideas on “Now What!”, but let’s back up and examine the process from the beginning and let me show you how you can put contingency plans in place to reduce your risk of having a “Now What!”

Prior to telling the tenant you are not renewing their lease:

• Tour the unit (apartment) looking for any work that may need to be done for a new tenant coming in.  Painting the entire unit may be tough, but how about fixing all those other items?  This will speed up the turnover and possibly put the existing tenant in a better mood.
• Chat with the tenant informally about their plans to renew the lease.  See if they are thinking about a larger/smaller place, different neighborhood, and such.  Maybe they just need a little coaxing to move on their own.

How to tell the tenant you are not renewing their lease:

• I suggest that you do this verbally first, as it is easier to quickly explain the situation, it is less formal and more personable. 
• Always follow up with something in writing (tell them you are sending it).
• Give 61 days notice.  This should work legally in most states and it is neither too long nor too short.
• Call them back in a week and see how they are coming on finding a new apartment.  If they are not taking your calls, stop by.  If they won’t answer the door, you should start preparing for the worst.

Preparing for the “worst”:

• Work hard to get in and speak to them.  Use your best negotiation skills.
• If you can get them talking and they are telling you directly that they are not going to move, consider giving them an incentive such as all their damage deposit back regardless of the condition of the property (within reason).  Offer to give them $200 toward a U-Haul or moving company of their choice (pay money to movers directly).
• This is going to sound harsh, but consider a pre-emptive strike:  If they are late or past due on their rent or violating any part of the lease, think about evicting them (or threatening to evict them) early.
• Do not lease the apartment to anyone needing to move in immediately after the existing tenant is supposed to leave.  This step will cost you at least one month of lost rent, but will prevent the “Now What!” situation above.
• Have your attorney draft a letter simply reasserting the lease ending date and what will happen if they do not move.
• Research how to evict a “Hold Over” tenant so you are prepared if they stay.
• Typically, the lease that is in place will convert to a month to month lease with the same conditions, rules, and requirements.  Some leases will allow the landlord to raise the rent once the lease expires.  Examine your lease and use it as leverage.
• If the tenant receives any public assistance, contact their coordinator and see if they can provide any help or leverage to get the tenant to move on time.

The morning after (they didn’t move out):

• In every state, tenants have rights.  These rights are to protect the tenant from the landlord simply walking in and moving all the tenants furniture to the curb on the morning after.  If you did your research above, you should know what both your rights and the tenant’s rights are.
• If your lease allows you to change the rent amount, notify the tenant of the new rent amount.  Try to use any other provisions in the lease as leverage.
• Put your “Hold Over” tenant eviction plan into motion.  How long this will take varies by location and even time of the year.  In Minnesota, it can take up to 1 week (and in some cases longer).

Having a tenant refuse to leave once their lease expires can be a stressful event.  There are many unknowns and turns in the road.  By being prepared as early in the process as possible with good contingencies, you should be able to avoid the “What Now!”.

The definition of flipping is as varied as the definition of a “good” investment.  I looked up the definition of “Flipping” (houses) and there isn’t actually a dictionary entry yet!  The closest definition I could find actually applies to equities in the stock market (but it seems correct):  “To buy and sell an equity within a short period of time to take profits is called flipping.”  Source

As you begin to work on deals for your flips, you will find that every flip will fall into one of the three categories:

• Paint and clean
• Bath and kitchen rehab
• Major renovation

These are NOT concrete categories, as often a flip will involve some of all three categories, but generally it will fall into one of these categories overall.  Here are the definitions:

• Flip #1-Paint and clean-You are not looked at any differently if you admit you do this type of flip!  It is probably the lowest capital requirement and lowest risk, but also possibly the lowest amount of income potential.  This type of flip has a low degree of difficultly and is very good for new flippers that are going to do most of the work themselves (almost anyone can learn to paint in a short amount of time and hopefully you already know how to clean!).  Because of the lower income potential, the key to the success of this flip is to do the work as fast as possible.  These are also good candidates for “flip and holds” (as I like to call them) as you should be able to quickly begin to rent them out and generate cash flow (possibly even before you first mortgage payment is due).
• Flip #2-Bath and kitchen rehab-Often these flips are not totally confined to the bath and kitchen, but they generally do not include significant wall removal, installation, or any structural changes.  They will normally include a paint and clean of the entire property also.  These flips can produce high income, but require less risk and capital than a major renovation as you may not be moving walls and adding square footage.  The key to success with these flips is to minimize the lead times on cabinets and have a standard “package” of materials (cabinets, flooring, counters, etc) that you use repeatedly and become familiar with and know that they appeal to your buyers.  The level of difficulty is moderate with this type of flip and will require the use of professionals for plumbing and electrical at a minimum.
• Flip #3-Major renovation-These are renovations that add square footage, change the floor plan significantly, or repair/replace a major part of the property.  These include additions, finishing basements or attics, moving walls (including load bearing walls) to open a room or add more space from one room to another.  This type of flip has a high degree of complexity, risk, and capital requirement.  It should be undertaken by individuals that have experience (or access to someone with experience) in framing and general contracting.  The key to success is to have an accurate understanding of everything that must be done and when to coordinate this complex project.  Often new flippers will take on a project of this size in their spare time and weekends, only to find themselves overwhelmed, over budget, and over schedule.

When considering getting into flipping, it is important to be realistic in assessing your capabilities, the capital requirements of the project, the time commitments, and risk.  It is always better to start small or easier and graduate to larger and more complex projects.

It seems so clear now that I have been an investor for many years, but I can remember how intimidating it was trying to figure out where/how to get started.  It felt like being a freshman on the first day of high school.  Just like any new experience/hobby/job/change, you just need to get started.  Secondly, you need to surround yourself with advisors that you trust to give you great advice.

Here are the steps I would recommend to get started:

• Figure out what type of investing you are interested in:  flipping, flip & hold, single-family investments, multi-family investments, commercial.  If you are uncertain, call for rent signs and talk to other landlords.  Go to your local REI meetings and meet other investors. 
• Read everything you can about real estate investing.  Participate in on-line forums and discussion groups.  Take a real estate investor to lunch and pick his brain.
• Find a mortgage broker that specializes in investment property.  Without the financing solidified, you can look at properties day and night, but will never be able to buy anything.  S/he should own investment property so that s/he understands the nuances of being a landlord.  You should expect that this person will give you long-term advice and that you will be working with him for years.  Because of the long term commitment, make sure it is someone that you like and trust.
• Next, ask your new and trusted mortgage broker if s/he can recommend a realtor.  Preferrably one that specializes in investment property.  Also, s/he should own some investment property or done the same type of investing that you are interested in (flipping, flip & hold, etc).  Tap your realtor for information regarding both the market and how to buy investment property. 
• Once you find a deal, analyze it thoroughly, but quickly.  I find that some newer investors get start in analysis paralysis.  Keep in mind that if it really is a good deal, probably 10 other investors think the same thing and you will lose the deal because you took too long.  Get a second 3rd party opinion from someone in the REI group or an on-line forum.
• At the closing, ask questions about the process.  Understand all the documents you are signing.
• After closing, immerse yourself in understanding how the process works.  Whether you are flipping or buying to rent, learn all you can from the contractors, tenants, your advisors, and on-line.

Your realtor and mortgage broker are your key advisors that you need.  Other advisors that you should quickly identify are:  accountant (once you own investment property, you should never do you own taxes again), attorney (hopefully you will never need him beyond setting up your llc), contractor for each trade (find business cards on boards at local hardware shops).

The key to becoming an investor is to surround yourself with people you trust and then just get started.  It is an amazing ride!

As I take on new investment property customers, one of the early questions is:  “Where do you find tenants?”.  As with most other questions, I usually say “It depends”.  The neighborhood in which the property is located often has a lot to do with your advertising technique. 

Here are some different advertising suggestions and what I have found works best for each tenant demographic:

• Craig’s List-This is a free resource for almost every major city the US.  I have had good success with Gen X & Gen Z tenants on Craig’s List as they are on-line so many hours per day.  You should post pictures in every ad, as some prospective tenants will not look at your post without pictures.  Also, you must repost your entry every 4-5 days as just like the search engines, we have been trained to never go past the 1st page.  Read more about Craig’s List in my May Newsletter.
• Major newspaper-In Minneapolis, this would be the Star Tribune.  Although typically a more expensive option, this is one of the only ways to reach out to tenants without computers.  I have had good success with the newspaper in NE Minneapolis.  You should pay for the full 2 week run which will cost you about $165.
• Free newspapers-Typically these are the newspapers inside the door at the grocery or record store.  Many of these papers actually have incredible circulation numbers.  They are often cheaper to advertise in than the large corporate newspaper (such as the Star Tribune).  You should examine your target tenant to decide if they would read this newspaper.
• Yard sign-In certain areas this has outperformed all other advertising.  I recommend NOT using the $3 wimpy sign from Home Depot that is going to blow over at the slightest wind.  Find a sign shop and have them make you a bright red 2′X3′ sign with a metal frame that says “For Rent” in 4″ letters with your phone number.  I will even put my sign in the front of my building on a busy street just to get calls for another building down the road. 
• Ask you existing (good) tenants for referrals and pay them $200.  People love to recommend businesses and connections they are comfortable with.  Generally, people will also only recommend other good tenants as a bad one will reflect poorly on them.

Each of these suggestions may need to be tailored for your area or the property.  By analyzing where your calls are coming from, you can optimize your time and money spent finding new tenants.