BofA developing foreclosure rental programs to deal with distressed properties-BOA, Fannie and Freddie are trying to figure out how to move some of these non-performing mortgages or worse these REO properties that they own.  Banks have an estimated $50 billion worth of REOs on the books right now.  The thought is that banks may rent the house back to the people that lost it to foreclosure.  They would do a short sale on them to an investor and rent it back to the previously owner.  Interesting, but I think some of these people need to downsize and move out.  Plus the emotional attachment to the house has to be severed.  As a landlord, you can’t have someone remodeling their bathroom because they still regard this house as theirs.

Residential Housing Ready to Awaken-As we have seen over the last 5 years, you get 50% of the “experts” saying we are in a recovery and 50% of the other “experts” saying we have time to go.  This article suggests that some of the important pieces are falling into place for a 2012 slow, but steady recovery.

How Can Renters Solve the Housing Crisis-This article perfectly articulates what my customers have been seeing over the last 5 years.  The market is going to recover, put your money in rental properties, and you will see a gain.  The mindset of people has shifted.  It is OK to be a renter and not a homeowner.

So even after being an investor for this many years, I still learn something occasionally.  It can either happen because the world has changed or maybe my view of the world has changed.  This is a small one, but it was definitely a Homer Simpson “Duh” moment with the traditional slapping of the forehead.

As I bought all my rental properties years ago, I made a point of changing all the lock sets. I standardized on a Quickset deadbolt and then I would always remove the locking knob (so that no one could lock themselves out-requiring me to come over with a key).  I bought the locks from a little locksmith in NE Minneapolis on Central. They were very helpful and as I was a newbie landlord, I had not been in the trenches very long.  I had all the locks keyed with a master figuring that it would be easier to open and change them out if all I needed was one key.  Unfortunately, this locks and the master key system cost me about $55 per deadbolt.  To me this seemed like the right way to do it.

Yesterday I was working on a new listing and realized my inventory of lock boxes was at zero.  I had heard of REO agents getting cheap lock boxes on-line for 50% the price that you pay at Home Depot.  I found the site and while I found the cheap lock boxes, I had that paradigm, “DUH” moment.  Here are deadbolts that I see on every foreclosure home that I go into.  They cost $3.

I could have purchased 14 of these for every one of those expensive deadbolts.  Frankly, I have paid more than $3 for just new keys in the past!  This paradigm shift could have allowed me to have boxes of locks with keys and very easily (and less expensively) changed them out simply.  I always try to run my rentals better than most landlords, but here is a situation where I was wasting money.

I guess the moral of the story is to stick your head up occasionally, look around and see if there is a better/cheaper/faster way to manage your properties.

This is also a great time of the year to get in and take a look at your rental properties.  If nothing else, it is an excuse to tell the tenant that you need to do your bi-yearly inspection so you can go in and take a look around at how they are treating your property.  Here are some other items that are worth doing as a preventative maintenance to potentially prevent emergency calls later:

• Turn on the furnace!  I can’t tell you how many calls I get once we have a cold spell from tenants that say their heat is not working.  Often, those calls are at 9pm at night once the temp drops.  Frequently, it is simply someone turned off the electrical switch next to the furnace, not knowing what it was.  Fire up that furnace now, make sure it runs, and more importantly, make sure the tenant knows it runs.
• Change the furnace filter and leave a box of 6-8 more filters for the tenants to change out every 30 days.  While I am pretty realistic that most tenants won’t change out the filters, at least the correct sized filters are next to the furnace.  Then if I ever need to go in for any other service calls, I can simply grab one and throw it in.  You will find that older home and homes that have smokers tend to have full filters much more often.
• Turn off the outside water spicket and drain it.  You do not want that to freeze and potentially flood the basement!  In fact, in many of my multi-family rentals, I simple remove these outside faucets.  There is nothing that a typical tenant needs that outside water for.
• Double check the operation of the front door locks and the garage door.  While this is not a cold winter item, these parts of the building take a lot of abuse.  Make sure they are lubricated and the screws are tight.
• Pour some drain opener down the drains.  Even if there is not a problem, this is an excellent preventative process.  I had to go over to a tenant’s property on Thanksgiving day once to unclog a kitchen sink.  She called me all in a panic because her sink was clogged and company was coming in 4 hours!
• Change the batteries in all the smoke detectors and carbon monoxide detectors.  I can’t tell you how many times I have seen tenants take the smoke detectors down and put them in a drawer because they were either beeping because they burned a pizza or because they were low on batteries.  This way, you insure they have them mounted and insure they will not beep.
• If you are responsible for supplying a shovel and/or sidewalk salt, make sure both are ready to go.  Fill up the salt container or leave another bag.  Better to do this now than when it snows at the end of October and you are running around!
• Winterize the lawn mower by at the very least putting some fuel stabilizers in the tank.  If possible, drain the oil, change the spark plug and air filter and sharpen the blades.

While all of these items may not be necessary for every property you own, getting into your units twice per year (once in the fall and once in the spring), can help you head off other maintenance calls and keep an eye on how your tenants are treating your investment property.

I attended this seminar last week.  I was very skeptical that this wasn’t going to be much more than a very basic landlord class.  Boy was I wrong!  This class was informative and interesting, even for me (a guy that has owned lots of rental properties and helps investors get started as landlords almost daily).  This class is actually taught by an attorney from the Home Line Tenant Hotline.  They provide free legal advices to tenants and will even help them in court in certain situations.

The speaker was one of the attorneys from Home Line.  He was engaging and interesting, but what I found fascinating was how he and his peers looked at different situations that we as landlords encounter every day.  He was able to show how they defend the tenants by using the landlord’s ignorance of the laws and statutes.  A couple quick examples were:

• They are often able to have leases invalidated because the landlord has a PO Box as the mailing address (when the state statute requires a physical address).  I realized that I was taught as a landlord to use a PO Box to get your checks.  I am sure there are many other landlords out there that are breaking this rule.
• If your lease converts to a month to month lease for a tenant, you legally must send them a written notification 75-90 days prior to the expiration of the lease telling them about the automatic renewal. This notification can only be sent during that 75-90 window and must be sent via certified mail or personal service.  How many landlords do you think actually do all those steps?
• If you have  tenant that stays on past the end of the lease, they are a hold-over tenant.  If you accept money from them, you have entered into a new oral lease and you can not evict them.
• We also discussed many other legal issues such as fair housing and discrimination.

These and many more gaps/problems in landlord procedures were pointed out to us in class.  I was writing furiously because I could see places that I needed to shore up my processes to keep myself protected.  Not only could this information help you be a better landlord, it may help you stay out of court!  I recommend that every landlord take this class.  It was invaluable.

That said, here are a few tips for first time landlords.

1.) Purchase the Right Properties
Buying the right flats to rent is one of the most important things that any landlord can do, and is usually the first step in the process of becoming a successful business person. You may also want to purchase a house, as many people would prefer to live in a house over a flat. Once you have purchased at least one property, you can begin fine-tuning your business.

2.) Choose Your Tenants Wisely
Choosing the tenants that you will rent to is one of the most important decisions you can make as a landlord. Remember that the majority of the money (most all of it, actually) in this business will come from your tenants, so you will want to be sure that they are good for it from the very beginning. Doing a credit check and holding a lengthy interview is the best way to ensure that a potential tenant is worth renting to. It is highly ill-advised that any landlord rents to a random tenant.

3.) Be Firm
One of the most common mistakes that first-time landlords make is that they let their tenants take advantage of them by allowing them to pay late (or not at all) for their rent. This is terrible practice, and can set you up for disaster in the future. Always be firm when it comes to rent.

So then, how do you get the rent back up to where you want it to be without upsetting anyone?  With non-Section 8 tenants, I tread lightly.  I would rather sacrifice $50 per month than have them decide to start looking and move out.  Each turnover costs me $1000-$2000 in painting and property repairs, even when they leave the place perfect.  Plus, that is assuming that I will NOT have any vacancy time.  In my book, that $600 that I am losing per year is cheaper than a turnover.

A friend of mine that does property management for about 250 units (60% of them get some rental subsidy like Section 8), told me something I never knew.  You can raise the rent on a Section 8 tenant dramatically in one year or every year and Section 8 will approve it.  This is even if it goes over the maximum rent amount for that unit. Me and another landlord just sat there with out mouths open, about to cry over all the money we had left on the table over the years!

Here is an example of how it works:

• You have a duplex with two 3 bedroom units.  Both units are identical.
• You typically rent each unit for $1200 per month.
• The previous tenant moves out in December and you are having a tough time finding a tenant.
• A prospective tenant calls you about the apartment and says they have a Section 8 voucher that will only pay $1095.
• In a pinch and desperate you decide to take them, despite getting $105 less per month that you normally get (after running the typical tenant screening process).
• You sign a lease at $1095.
• At month 10 (60 days before the expiration of the lease), you contact the tenant to see if they want to stay.
• If so, you draw up a new lease for $1200 and have them sign it.
• You submit the new leaseand documentation of the rent for at least three other comparable 3 bedroom units in duplexes with the same amenities, in the same neighborhood, to justify your rent increase.
  • The other comps must be NON-Section 8 tenants.  You are trying to show what the market rent is for that property.
  • One small wrinkle is getting comps.  You can definitely use the other unit in this duplex in this example, but then you may need to figure out a way to provide proof of other units in the immediate area renting for the same amount.  Hopefully you either have other buildings nearby or maybe you can ask a neighbor landlord to give you a copy of his/her leases for this.
• There is no guarantee that Section 8 will approve this, but if you have a decent case with good comps, my friend said he has raised the rent $200 one year to get the property to the correct amount.

One question that got asked was, why would the tenant agree to a large increase.  The answer is that they may not feel the increase as Section 8 may simply pay the difference.  While you can’t guarantee this, it is worth mentioning.  Alternatively, I do know that Section 8 will mostly ignore smaller yearly increases of $25-50.  These just fly under the radar.

So…..Watch for your lease renewals on your Section 8 properties and bring your rent up to market standards.

I find that most new real estate investors are too soft on rent collection.  Unless you have training or experience in collecting debt, this is not a natural process for you.  Many people don’t like confrontation and rent collection is about putting someone (the tenant) on the spot.

Here are a couple quick tips when you are “dialing for dollars” to make it easier to collect rent:

1. Be consistent about calling immediately upon the rent being late.  If the tenants sense that you are not concerned about the rent, they won’t be either.
2. If you can’t get them on the phone, drive over there.  There is nothing more important to you and intimidating to them to have the landlord standing at the door at 8pm at night.
3. Impose the late fee every time.
4. Mail statements to everyone that owes anything over $5.  Make sure to get them in the mail or hand delivered immediately upon the rent being late.
5. If you get a partial rent payment, immediately call and find out when the rest of the rent is going to be paid.  Send another statement with the updated balance.
6. When you are talking to the tenant about paying the balance or when they are going to pay, push a little to pay more or sooner.  Most people (the tenant) will give in to authority when asked.
7. If the tenant does not live up to their commitment, start eviction immediately.  It is better to evict early than let it drag on and having them owe you more money.  Most tenants can not recover from being a full month behind.
8. If your tenants tells you they are paying you next Friday, call them a day or two before and remind them that you are expecting rent and how much your are expecting.  Again, if they believe you won’t call or check in, they may/will blow you off.

We own investment properties not because we have nothing better to do, but to make a profit (either short or long term).  Rent collection is the key to being a successful landlord.  You need this rent/income to keep your business solvent.

• Roommate 1 always pays her $333 rent on time.
• Roommate 2 has some issues paying on time, but always calls and usually pays everything by the 10th.
• Roommate 3 is always late on her rent and often short pays.  It is now the 15th of the month and after repeated calls you finally get $200.  She already owed you $150 from the month before for a total now of $350.

What do you do?

You can’t evict just roommate 3 as all of them are typically on the lease.  Do you want to spend the money to file an eviction?  Can you force the other 2 to make up the difference?

Here are some idea on how to handle this situation (preferrably before it happens):

• I got this idea from Ryan O’Neill over at Minneapolis Lofts.  He has all the roommatees sign the lease, but makes one of the roommates responsible for collecting the rent and cutting one check to him.  If they want to swap roommates or one is having issues, that one is responsible.  Love it!  This expectation needs to be set up in advance.
• When one roommate get’s behind, call a house meeting and sit them all down and explain that the other roommates need to pick up the slack.
• Send all the tenants a Cure or Quit notice.  Although it is not required, it may be enough to get their attention.
• Start an eviction or go to mediation.  This is a more drastic measure, but if the balance is high enough it may be worth it.
• Make sure that all the tenants receive a statement every month.  They should see that roommate 3 is not paying.

Managing this multi-dimensional situation can be challenging.  You just need to get out in front of the problem and stay there!

Let our experience get you started!

Our next Investment Property 101 Seminar is being held on December 16 at 6:30 pm in Burnsville. I look forward to seeing you there.

Register for the seminar by filling out this quick registration form or call 612-281-5419 for more information.

Two weeks ago while I was down at Hennepin County, filing another eviction (5th one for 2008-not a good year), I read about doing Pre-Filing Mediation. This is a procedure in which a neutral third party, at the request of the parties to a dispute, assists them in reaching a mutually satisfactory settlement. In mediation, both parties need to agree to meet with each other and the mediator. The mediator is not a judge and will not decide the solution, he is more like a facilitator to help the parties find a agreeable solution.

3 possible outcomes to pre eviction mediation:

1. An agreement is reached and signed by both parties, no court case is filed, no fees are paid, and no record of this action exists. Good for everyone.
2. The parties can not agree during the mediation session, they are served right then to appear in court in 7 days. This case will be one of the first ones heard by the judge in Hennepin County eviction court.
3. If one of the parties is not willing to use mediation, the case is referred back to housing court and the eviction will proceed as normal. This case will be one of the first ones heard by the judge as a reward for attempting mediation.

Benefits to Mediation for the Landlord:

• No filing fees if the case is settled
• Priority status on the Hennepin County Eviction Court Calendar if the case does not settle

Benefits to the Tenants:

• If the case is settled, there is no court record of an eviction action being filed against the tenant.

In my case, I decided that the tenants just needed an authority to wake them up to the fact that they are not living in Mom & Dad’s house any longer. They have signed a lease and they have obligations to pay. Although we did not go to mediation, the letter from the mediator quickly motivated them to work out a payment plan with me. As of now, they are on their way to paying off their back rent!

Although I may not use this in every situation, I think mediation can be a softer approach that may get you your past due rent paid, instead of just clearing out your apartment.

Have you always wanted to own investment properties, but never knew where to start?

• I am not sure why, but I always find the door knobs in my units are loose when we do a turnover. I bought a small tube of Loc-Tite”, which most mechanics use, that will almost glue the screw into the knob (do not buy the permanent product as you will never get the knob off!).
• The only locks in the entire unit are the deadbolts on the doors. I do not like keyed knobs anywhere in the unit or on the front doors as it is just asking for someone to lock themselves out of their apartment or room. I confirm we do not have any stray locking knobs.
• I always run drain cleaner down each drain to insure they are operating correctly. I bought a product called “Thrift” at the plumbing supply store. It is extra strong and used by most of the drain cleaning experts.
• If the toilet is not working correctly or is more than 5 years old, I replace it. Yes, the parts only cost $8, but I don’t trust them as I had an $800 water bill on a single family house after my plumber just replaced the parts. I could have bought 8 complete toilets that month for the cost of that water bill!
• I leave a box of cheap furnace filters during the turnover to help the tenants know to change the filter occasionally.
• Even if the tenants have never complained about mice, I put a few fresh mouse bait pouches in the basement and under the stove. This insures we are ready if any of the critters gets into the building.
• Remember to replace batteries in the smoke detectors.

Most of these items are inexpensive, but they can save you taking a maintenance call later. Find your small repair items and do them at the turnover.