If you were a landlord and lived through the mid-2000′s, you saw market rents fall as many better tenants were buying houses and vacancy rates were climbing. I had to make major upgrades to many of my rental units AND take 10-20% drops in monthly rental amounts to get or keep some places rented. This is not a great way to make money! I suspect that in a long term view, this is why we have some of the foreclosure mess that we have today in the investment property side. Landlords were not consistently making enough money over the years to off-set expenses.

Well, that seems to be changing. I reported in January that 2010 was a record year for vacancies. We saw a drop from 7.3% vacancy rate in 2009 to a 3.8% rate at the end of 2010. The study also predicted that we will see a 3-4% rent increase.

Fast forward 7 months and the numbers keep getting better. According to a recent Minneapolis/St. Paul Business Journal article, market rents inched up from an average of $902 a year ago to $921 at the end of second quarter.  While $228 per year doesn’t sound like much, it should help some landlords get back in the black and more than anything, keep up with increases in rental licensing, gas prices, and it seems like everything else getting more expensive.  Some areas like downtown and Uptown Minneapolis experiences up to a 6.9% jump in average rent since last year.

Vacancy rates are also at almost historic lows dropping to 3.1% in the first quarter and then again to 2.4% in the second quarter.  This is again compared to over 7% in 2009.  Some highly desirable areas have even lower rates such as Uptown which is at 1.9%.  I would argue that we almost at a true 0% vacancy.  Much like the unemployment number that never falls below 2.x% because there is always a baseline of rental units in transition between tenants and such.

While it is not time to celebrate, these are wonderful numbers that we as landlords can all enjoy.

Our guest blogger is Eric Drenckhahn, edrenckh@gmail.com, 651-283-7651.

This is a rental situation that is run across many more times than you think.  If you think it is your tenant scenario, it may be, but it happens so often it isn’t funny.

So you have found a tenant.  They are solid people, from a criminal standpoint.  Not even a parking ticket.  They have spotty rental history, an eviction a few years ago for unpaid rent.  In your face-to-face interview, they are genuinely good people that have fallen on hard luck.  It may have been a divorce, a job loss, medical problem, a domestic violence situation.  The prospective tenants have a source of income, but it is a bit light.  Your minimum requirement is twice the rent in income, and they cross that hurdle, but barely.   Their credit score is weak; they have more bad accounts than good accounts.  Some defaults on accounts that have lead to a judgment.  They even have some of the deposit, but have promised to make a payment on the deposit next month to get your full deposit.  And they want to move in right away.

You have to analyze a few things.  Money today, is better than money tomorrow.  Passing on this tenant could mean another month of vacancy.  You know the Federal Government recommends families pay no more than 30% of their income in housing; these people will be paying over 40%.  These people need a home; you have a vacancy, so you take a chance.

They start out OK.  The first month’s rent is paid before they move in.  Maybe even by a Government source.  The next month’s rent is on time, but is paid on the first Friday of the month, not the first of the month.  The third month’s rent, they ask for a delay.  They can pay on the 10^th, the second Friday of the month.  They were never able to come up with the rest of the deposit, but they are still good people; no issues, no complaints.  By the four month, they have had car trouble.  They need until the 15^th to pay.  They have paid according to their word a bit late for the past two times, so you are OK with it.  You wait until the 15^th.  No payment arrives and you call them.  They need another week.  It is now the end of the month, and you have not received any money, not even $100.

Eventually the end of the month comes, and they may or may not have paid any additional money.  It is time to evict, or negotiate a move out, if you are an astute landlord.  If you were really astute, you would have avoided the situation in the first place, and not rented to them.  Or you would have lowered the rent so they could afford it.  Or you would have started the move-out process sooner, around the 10^th.

In any case, you now have some expenses on your hands.  In MN, it is $320 for Eviction Court fees, plus $75 to serve the eviction papers.  You file it yourself, to avoid another $100 in attorney fees.  You have not received the past two months rent, but your tenant has only been living free for a bit over 30 days.  It adds up fast.  So you are out $2,000 in lost rents.  You win the eviction case, and have to get a writ.  It costs another $55 for the Writ, and another $75 to serve it.  They finally move out on the 15^th, six weeks after your last rent payment.

You do a damage assessment, and you find the place needs cleaning.  The range and refrigerator is not cleaned enough for your next tenant.  The carpet was not vacuumed, and it needs to be cleaned.  The bathroom and tub is not clean.  There are a few small fix it items.  You estimate the cost to be $500 to fix back to where it was, plus about 25 hours of your time.  Luckily, you collected a $500 damage deposit.  Paying for the labor would have been another $500.

After you clean the apartment and get it ready to go.  All with your own volunteer labor.  You start to advertise and show it.  You have another tenant that wants it right away, and is ready to move in, in six weeks.  You have now recovered.  Or have you?

All in all, this very typical situation costs a bit over $4000, with lost rents, court costs, damages, plus another 40+ hours of your time and aggravation.  It was probably the entire profit for that unit that you were expecting for the entire year.  It also costs a lot of aggravation.  That is assuming that you started evicting right away.  Some landlords wait another month, and add another $1000 to the bill.  They then go to small claims court, and spend more money trying to get money from someone who does not have any.

So, you look back, and reflect.  You start to think being a landlord would be easy if not for these type of people that do not pay.  But in reality, it is your own fault. You jumped too fast on the first tenant with money for rent.  They did not qualify in anyone’s guidelines but yours.  The subpar tenant put the golden handcuffs on you.  You could have lowered your rent by as much as $200, made more money, strengthened your rental criteria, and got a rock star Tenant that would have to stay year after year.  You would have the golden handcuffs on them, as your value would be that much greater than anywhere else.  You may even be able to increase your rent at the next lease signing.

So what do you do to avoid the Landlord Trap?  Analyze your marketing; are you reaching the right audience?  Analyze your prices; Is your rent too high for your target market?  Do not look at other housing prices. Every house is different.  Look at how many solid tenants come and see your property, and do not fill out applications.  If it is more than five showings to qualified tenants without a lease application, adjust your prices.  Analyze your apartment move in date.  Good tenants look at least six weeks out.  If you are not holding your apartment for great tenants, by definition you are stuck with bad tenants.

So in the end, you lost money.  You do it again and again, and soon you do not have money for a new paint job, new appliances, and new carpet.  You are now only attracting bad tenants; good tenants would not live in your unit if you paid them.  You collect a few bucks here and there, but at the end of the year, the only way you ‘made’ any money, is due to deferred maintenance.  Fixing the broken stuff, and maintaining your unit, would have eaten up all of the rent and more.  Your rents are lower and your building is worth less.

Do not get caught up in this Landlord Trap.

Matt Engel is our guest writer for today.  Matt is an attorney and a Minnesota Real Estate Show radio partner.

Q: “I have a new tenant who will pay the first and last months rent in advance due to bad credit.  If they are late on a month can you still evict or do you wait until the next month?  Do you use the advance payment if they are late or hang on to it and insist on payment for that month?  What is the standard use of this last month paid in advance?  How do you handle it if you get to the end of the lease and want to extend?”

A: I am not aware of a specific section of the landlord tenant statute that deals directly with advance rent payments.  However, Minn. Stat. 504B.178 deals with interest on security deposits; withholding security deposits; damages; and limits on withholding the last month’s rent.

The reference to the limit on withholding the last month’s rent is actually addressing the tenant’s withholding the last month’s rent in lieu of the security deposit, as opposed to an advanced rent payment.

I would argue that the advance rent payment is an exception to the application of this statute section per the following language in Minn. Stat. 504B.178:

Subdivision 1. Applicability. Any deposit of money, the function of which is to secure the performance of a residential rental agreement or any part of such an agreement, other than a deposit which is exclusively an advance payment of rent, shall be governed by the provisions of this section.

Therefore, I would argue that section 504B.178 does not apply to the last month’s rent payment because it is an advance payment of rent.

For learning purposes, let’s take a look at the provision that discusses withholding rent.  The relevant portion dealing with withholding rent states:

Subdivision. 8. Withholding rent. No tenant may withhold payment of all or any portion of rent for the last payment period of a residential rental agreement, except an oral or written month to month residential rental agreement concerning which neither the tenant nor landlord has served a notice to quit, or for the last month of a contract for deed cancellation period under section 559.21 or a mortgage foreclosure redemption period under chapter 580, 581, or 582, on the grounds that the deposit should serve as payment for the rent. Withholding all or any portion of rent for the last payment period of the residential rental agreement creates a rebuttable presumption that the tenant withheld the last payment on the grounds that the deposit should serve as payment for the rent. Any tenant who remains in violation of this subdivision after written demand and notice of this subdivision shall be liable to the landlord for the following: (1) a penalty in an amount equal to the portion of the deposit which the landlord is entitled to withhold under subdivision 3 other than to remedy the tenant’s default in the payment of rent; and (2) interest on the whole deposit as provided in subdivision 2, in addition to the amount of rent withheld by the tenant in violation of this subdivision.

Now that we know that a tenant is prohibited from withholding the last month’s rent on the grounds that the security deposit should serve as payment for that rent, let’s get back to the discussion on advance rent payments.

I found a Minnesota Supreme Court case from 1921 that discussed advanced rent payments – and it actually states that the landlord can retain an advanced rent payment if the tenant breaches the lease prior to the time when that advanced payment was to be used.  Here is the language from that case:

Where a lease is terminated for a default of the tenant after he has made an advance payment of rent, the landlord is entitled to retain such advance payment, although the lease was terminated before the beginning of that part of the term upon which such advance payment was to be applied.

Thomas Peebles & Co. v. Sherman, 148 Minn. 282, 283-84, 181 N.W. 715, 716 (Minn. 1921).

Although this case sounds promising to landlords, especially those landlords that collect the first and last month’s rent, I think its usefulness would apply more to a well briefed court battle as opposed to the simple confines of the housing court.  In other words, I don’t think a housing court referee will force a tenant out of their home when they have a month’s worth of rent on advance to the landlord.  What’s the trade-off?  The person making the Peebles argument is attempting to keep the last month’s rent, and risking the time, effort, filing fee, and service fees if the case is dismissed by the housing court.    Probably not a good investment.  It should also be noted that the tenant breach in the Peebles case was for violation of the non-subletting clause, not for non-payment of rent.

In sum, rarely do I see standard language in residential leases that require the first and last month’s rent, as well as the security deposit.  The last month’s rent is an advance rent payment.  Again, according to the 1921 Peebles case, it would appear that the landlord would be able to keep the advance rent if the tenant breaches the lease prior to the last month.  However, for all practical purposes, I don’t see a housing court referee signing an immediate Writ of Recovery  in favor of the landlord when a tenant has made an advance rent payment.  One could try to make the argument with 90 year old case law, and might be technically correct, but could also be wasting time and money (with having to re-file or appeal) by using this argument.  My recommendation?  I would use the advance payment as soon as tenant is late with rent.  If tenant makes payment in the meantime, you have your advance payment back.  If the next month comes and the advance payment is gone, then bring the eviction action.

Matthew A. Engel, Esq.
The Engel Firm, PLLC
www.theengellawfirm.com
612-373-7060

I wrote at the beginning of the month about an apartment in NE Minneapolis that I am showing.  I have had many calls and probably 10 different groups through this 3 bedroom apartment.  The bedrooms are large, but the living area (kitchen and family room) are very small.  Most of the previous tenants that lived there were roommates that preferred to spend the majority of their time in their own rooms.  I moved the rent down from $950 in the past to $850, as I figured that someone would overlook the size for a cheaper apartment.

Unfortunately, despite all the people that have been through the property, no takers after almost 30 days of trying.  I have rented a couple other places during that same time, so I know it is not the market.  Plus, as I wrote previously, vacancy rates are down according to the experts.

Yesterday, as I stood there waiting for an appointment, I took an honest look at this place.  The paint is in good shape, but needs to be touched up prior to the new tenant.  The hardwood floors are nice, but could be waxed.  There are some cobwebs here and there.  The bathroom and kitchen need a heavier cleaning.  There are a couple switch plate covers that need to be replaced.  These are all items that I would typically get done prior to a tenant moving in.  Unfortunately, most tenants have no or little ability to see past these minor items.  This is probably driven by experiences with landlords that don’t repair items or say they are going to do something and never do.  I need to get those items done and off the punch list prior to showing this apartment again.

I also decided that although the floor in the kitchen and bath are fine, they are not very impressive.  The current tiles are worn or chipped in places and just don’t help these rooms.  Maybe upgrading the flooring will make the rooms feel bigger and help the place rent faster.

I am going to take the time and money to update them. I have great success with a commercial grade vinyl tile from Armstrong called VCT.  I have put it in every house I own (including my personal houses).  You can purchase it at Home Depot in large boxes (they carry 3-4 basic colors).  It is installed by applying a very sticky epoxy to the floor and then setting the tiles onto the glue.  I typically do a checkerboard design, which really looks great (see finished picture).  I also love the fact that I can install this myself in about an afternoon with a minimum of tools and frustration.

While I am not suggesting that you need to stage your apartment with furniture and paintings on the walls, maybe you need to take an honest assessment of the property and make some necessary cosmetic improvements to help you rent it faster.

I am in the middle of showing a duplex that I have in NE Minneapolis.  It has hardwood floors, 3 bedrooms and because it is kinda small, I am asking $850.  It is available immediately (if you know anyone, send them my way!).  I have had several interesting experiences in this round of advertising and showing to prospective tenants.

First, I decided that I was only going to take responses and questions via email.  In the past, I would give out my phone number on the Craig’s List ad and my phone would ring like crazy.  I found it was too difficult to take those calls.  I could be driving down the road, get a call, talk to the person, book an appointment and forget to put it in my calendar.  Other times, I would get the ODC tenant that would call me 18 times every 2 minutes until I finally answered.  I would get lots of voicemails where I could not understand the person leaving the message or would attempt multiple times to call them back with no success.  I figured email is a slower pace and I can reply when it is convenient to me.

I started to notice that many of the prospective tenants wanted me to call them.  Instead of calling, I simply cut and pasted a note that said “I am showing the apartment on Tuesday at 5:30pm, come by if you are interested”.  I was getting almost zero replies from my response.  Strange.  Why would almost 10 people write me, I reply and then never get back to me to say “Yes I will be there or no that doesn’t work, can I schedule a different time”.  I did eventually have a couple people show up on Tuesday.  Here is what one said to me….(I am paraphrasing):  ”I only came to this appointment because when you replied you had your phone number in your signature line in the email.  I called you and you answered.  You appeared to be legit, so I showed up.”

We talked about what they were seeing in the market and I guess there are so many scam artists going around showing an apartment, collecting rent, and then never actually owning the property.  Another interesting one was a “landlord” shows up at the property to meet a tenant, he “forgets” his keys, they talk, the prospective tenants take an application, he calls them the next day and says that he has to go out of the country to South Africa and they should mail him the money now and he will send the keys.  This sounds strangely like the “you are the long lost heir to a $15.3 Million estate” spam emails I get!

Moral of the story is that as a landlord, tenant applicants are leery, handle with kid gloves.

Second, this is a repeat, but I want to be sure you hear this tip:  The next week I took what I learned and started to call people or at least craft personal emails to show I was real.  I received emails from probably 15 interested parties for my apartment.  I had positive confirmations from maybe 10 parties that were going to show up (this time on Thursday at 7:30pm).  I booked all of them at the same time, because history has taught me that many will no-show.  I had 5 parties that showed (one that was 45 minutes late-I happen to be waiting for someone to fill out an application, otherwise I would have been gone).  50% no show.  What if I had booked each one of those on a different day or time?

Moral of the story is that to save time and be more efficient, book all your appointments at the same time or worst case space them out by a couple minutes on the same trip.

There is no silver bullet when showing your units.  You just have to listen to what is going on the rental market and adjust your strategy to make the best of it.

According to Marquette Advisors, a Minneapolis-based, real estate consulting firm, the Twin Cities posted a record year as it absorbed 6,400 rental units in 2010, up from -3,450 (yes, that is negative) in 2009.  The absorption rate increase shows a greater demand for rentals.  In fact, rentals outpaced new construction in 2010 demonstrating that many families are either forced or choosing to rent instead of purchasing.

We saw a metro-wide decrease from 7.3% vacancy at the end of 2009 to a 3.8% vacancy rate at the end of 2010.  This is no surprise as the numbers of families losing their homes to foreclosure or doing short sales continues to rise.  These homeowners will need new places to live.

According to the study, rents have also remained steady throughout the Metro area.  They also predict that rents may go up as much as 3-4% as demand will continue to out pace supply, forcing a shortage of good rental properties.

Single family home rentals are averaging $200-$400 per month in positive cash flow.  If you have ever thought about buying rental properties, now is the time.