Raising Rent on Your Section 8 Tenants

Despite being a landlord for over 6 years, I swear I learn something new in this business every month.  Have you ever leased your property to a tenant (Section 8 or not) for less than you were really trying to get?  Most of us have.  Maybe it is a slow rental time of the year, maybe you just haven’t had many calls on the apartment, maybe it is 2 weeks before the first of the month and you just want to get the place filled.  I bet every landlord has done this at one point.

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 lease and 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.

Reminder: Section 8 Seminar Tonight

Just a reminder that we have our Investment Property 201 seminar tonight called:

Section 8 Tenants”  Every you want to know about Section 8, but were afraid to ask.”

Tonight in Burnsville at 6:30.

Register here.

Title Fun

You have to love this lawyer……..

Part of rebuilding New Orleans caused residents often to be challenged with the task of tracing home titles back potentially hundreds of years. With a community rich with history stretching back over two centuries, houses have been passed along through generations of family, sometimes making it quite difficult to establish ownership. Here’s a great letter an attorney wrote to the FHA on behalf of a client:

A New Orleans lawyer sought an FHA loan for a client. He was told the loan would be granted if he could prove satisfactory title to a parcel of property being offered as collateral. The title to the property dated back to 1803, which took the lawyer three months to track down. After sending the information to the FHA, he received the following reply.

(Actual reply from FHA): 
“Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral property back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.” 
Annoyed, the lawyer responded as follows:

(Actual response):
“Your letter regarding title in Case No.189156 has been received. I note that you wish to have title extended further than the 206 years covered by the present application.  I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased by the United States from France, in 1803 the year of origin identified in our application. For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by Right of Conquest from Spain. The land came into the possession of Spain by Right of Discovery made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the Spanish monarch, Queen Isabella. 
The good Queen Isabella, being a pious woman and almost as careful about titles as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to finance Columbus’s expedition. Now the Pope, as I’m sure you may know, is the emissary of Jesus Christ, the Son of God, and God, it is commonly accepted, created this world. Therefore, I believe it is safe to presume that God also made that part of the world called Louisiana. God, therefore, would be the owner of origin and His origins date back to before the beginning of time, the world as we know it, and the FHA. I hope you find God’s original claim to be satisfactory. Now, may we have our loan?”

The loan was immediately approved.

Painting Between Tenants

My long time reader, John Gall, shot me a question that is a great post that many other landlords can probably benefit from.  Here is what he asked:

I’d be interested to hear your thoughts on painting walls between tenants.  Seems like the bedroom walls always get scuffed up, dirty etc.  I could almost paint between tenants each time.  I stopped and just allow them to paint if they want, some do and some don’t. 

1:  Do you paint between tenants?

2:  If you’ve painted between tenants and after they ones move out the paint is scuffed, dirty and generally worn do you charge them for the repaint from the deposit?

3:  Why do tenants always seem to dirty the paint?  I’ve been in my house 10 years and nothing needs painting.  I don’t get what goes on.  I’m not even talking about trashing the place, the paint just seems to be “wearing” in the bedrooms.

Great questions.  Here are my answers:

1. Do you paint between tenants? Yes, typically.  I rarely just do touch up, I will repaint the walls.  The ceilings get done every 4-5 years depending if I have smokers.  As your follow on questions show, I rarely have a unit that is perfect enough to be rented as is.  Plus, I want to put my best foot forward with the new tenant. 
   • Because I use the same paint color on all my units (a darker beige color) it is pretty easy to roll the walls and not have to cut in.
   • The amount of time I have during my turnover may also determine how well I paint or if I do.  If my handyman has time, I will often have him roll the walls as necessary.  If there are other rehab or maintenance to do, again, it may change the amount of paint we are doing at the turn.
   • I do have some friends that paint their walls dark tan and the woodwork (when painted) very dark brown to hide dirt.  They will often not have to repaint, but maybe wash the walls in places or touch up such as where the couch was.
2. If you’ve painted between tenants and after they ones move out the paint is scuffed, dirty and generally worn do you charge them for the repaint from the deposit? That depends.  Your lease does state, normal wear and tear.  I know that even in my own house, I personally dinged the wall when I was moving something, plus the wall behind my computer desk gets marked occasionally by me sliding something around on my desk.
   • If the apartment is otherwise perfectly clean when they move out and it appears they were trying to be careful and do the best they could, then NO, I don’t charge them.  Alternatively, I know other landlords that want the unit in the same perfect condition as when the tenant moved in and will charge the tenant for any marks.  You need to find your happy medium.  Remember you should document your charges with pictures in case the tenant takes you to court claiming foul.
3. Why do tenants always seem to dirty the paint?  I’ve been in my house 10 years and nothing needs painting.  I don’t get what goes on.  I’m not even talking about trashing the place, the pant just seems to be “wearing” in the bedrooms. Wow!  I knew the answer to that, I would screen for the people that were not going to wear everything out!  I think everyone just has a different standard of living. 
   • My kids rooms are occasionally messy and they always have a toy or two in the family room at my house.  I can’t stand it and it drives me crazy.  When I complain about it, my wife has said that our house is perfect compared to some friends of hers that have toys and stuff ankle deep on their entire main floor.
   • It is no surprise that each community or neighborhood draws a different tenant profile.  This is driven by nearby jobs, schools, bus lines, rent amounts, and many other socioeconomic facts.  Your rental properties will attract the typically resident for that neighborhood.  Your experiences as a landlord for cleanliness, upkeep, paying rent, politeness, etc of your tenants is simply a byproduct of where your property is located.

It is not impossible to have a tenant that treats your rental like you treat your own home, but you need to search.  One option you do have when screening tenants, is to require an on-site inspection of their existing apartment.  Write up a 100 point scoring system to keep it completely legit and legal.  When you walk through, give them points for how clean the stove is (is it full of grease or is clean), how clean in the bathroom, are there clothes everywhere, what do the walls look like?  Using this scoring system and more importantly, getting into their current rental will tell you loads about how they will maintain your place.

You will be surprised at what a tenant calls “I just cleaned my apartment” and what you may call it.  Hopefully you are pleasantly surprised like my friend who’s tenant tells him to take off his shoes if he is coming in the door!

How a $19,900 Condo Was Still Too Expensive

I am no stranger to selling cheap houses.  In 2008 & 2009, I sold well over 100 homes that were priced under $50k with the majority under $40k.  My cheapest house I sold was $12,500 back in March of 2009 (the bank netted $69 on the deal-read the post on my Saint Paul Real Estate site).

So with that all said, it was amazing to be out with a customer of mine the other day looking at condos in Brooklyn Park.  We looked at 4 that were priced at $19,900.  I remember saying to him “I can’t believe I am about to say this, but this condo is too expensive.”  Wow!   I would say even the cheapest new car these days costs more than $19,900.  So why did I say that?  Here is how the numbers break down:

While $90 is not the worst cash flow I have ever seen, if this customer ever has to replace the flooring in the unit, it would require an entire year to pay back the cost of it!   We started talking about offering $15k for the unit and even at that price it is still not enough cash flow to make it worth it.  Now you could pay cash for this unit, but is it really that great a use of your money to get $146 per month for your $20k?

You can’t make every deal work.  Making it cheaper doesn’t always solve the problem.

Renting to Friends

I know it is very common for people to rent this homes or apartments to friends.  I suspect that like most things in life, 80% of those rental relationships do just fine. I probably just here about the 20% that do not.  Here are some tips to making sure that you as the landlord (not as the friend) is protected if this friendship goes south and your “friend” becomes the bane of your existence!

• Many “friend” landlords simply let the tenant “friend” move in and just pay them some verbally agreed on amount of rent.  WRONG!  You need a standard written lease.  This may seem formal, but this really protects both of you.  With a written lease there is no opportunity for one party to remember the conversation differently.  Plus, as the landlord, if the friend stops paying you or does something you disagree with, it will be difficult (but not impossible) to evict them.  One example is a couple that let a brother rent this old house in the country.  After about 6 months, the brother started paying parts of the rent every couple weeks when they would hound him.  He then started to remodel the house, plus he moved in a couple other roommates and they all had parties every weekend.  Without a lease in place, these landlords had a terrible time getting this guy out.
• Keep a key to this home and install a 2nd one in a lock box that only you have the combination to.  You can give out this lock box code to repair guys that need access to the property for repairs without bothering your friend.
• Do not allow your friend to be late on the rent.  This will be worse than letting the average stranger tenant be late on their rent.  You will get into this strange situation where you want to hang out with your friend, but will be frustrated when he is buying a round of drinks for the bar, all the time you know he owes you back rent.
• Consider putting your friend on a month to month lease.  Then you can simply give him 60 days notice to move out if the relationship starts to sour.  Then there doesn’t need to be an eviction involved (unless he doesn’t leave).  You just part company from a housing standpoint and go your separate ways.

Renting to friends can be a great way to have a quick and most likely wonderful tenant.  Just don’t leave all your landlord experience and common sense behind!