Before and After

Many of my rentals are 100 years old.  I know, that sounds scary … 100 year-old houses must be nearly falling down by now, right?  Not at all.  Actually, they were built better than a lot of the new construction we see today.  They’re sturdy.  They’ve had the plumbing and electrical updated (thank God) and of course, they have newer furnaces and windows.

But I do have issues from time to time, with flooring, leaks, etc.  This rental had a leak under the bathroom floor, from the toilet.  When my tenants moved out, I discovered the toilet actually rocked like a rocking chair!  And the floor around it was very soft.  The floor had to be torn out because there had been a slow leak which eventually rotted the subfloor and part of the joist underneath.  Here’s the before picture — not good!

The bath vanity had seen its better days, so I found a new one on clearance for $30 at Home Depot, and got a piece of sheet vinyl on clearance as well.  My wonderful handyman Craig did the dirty work and within a couple days I had a brand new bathroom.

This is the finished product:

And voila!  The house is now ready for my next tenant.  Craig put down a new subfloor, along with a couple new joists, and it’s ready to go.

Older homes have their own issues . . . the windows may be older, and drafty.  The walls may be plaster, and uneven in places.  But they were built to last.  And they do.

If the major updates have been done, I don’t hesitate to buy an older house.  They have character, and they have a lot of quality built in.  I like that.

So don’t be fearful of those oldies . . . they’ll be around long after you and I are gone!

Tips For Buying a Rental Property

Buying rental property is a great investment right now.  Thousands of foreclosures have flooded the market and are dragging prices down, and the end is not in sight.  But where do you start?  It doesn’t have to be overwhelming if you break it down:

  • Get your financing in line first.  How’s your credit?  Trim down on that extra (unnecessary) spending and start planning for your first purchase!  Figure out what you can spend and how you’ll pay for the property.
  • Find your target neighborhood.  Before I bought my first rental property I drove several neighborhoods, none of which were further than 30 minutes from my house.  Drive through at all hours of the day, talk to homeowners . . . they will give you precious details about the area/residents.
  • Talk to other, seasoned investors who’ve been there, done that.  Join a landlord association.  Read books.  (Mine is a good one. Lol . . . but seriously, it offers tools, tips, techniques, forms, products and advice to simplify the process.)  In other words, don’t go into this blind.
  • Decide on multi- or single-family rental properties.  Multi-family will bring in more money but is more labor intensive.
  • Look at your personality, work life and home life — do you have the time, etc. to manage your own properties?  Not everyone is equipped to do this work.  Some people have time constraints that prevent them from doing it, others have personality constraints that make it difficult.
  • If you’re not going to do much of the work yourself, find honest, reliable subs before you buy.  You’ll want to hit the ground running as soon as you close on a property, so you’ll need to have your workers all lined up and ready to go.

There’s so much involved in buying rental properties, especially as a first time buyer.  But it’s fantastic for income and long term investment, and now is an excellent time to consider jumping in . . .

So prepare well, trust yourself, and go for it!

Zoning Hell

I bought a cute tri-plex back in the late 90s and operated it as such for several years.  There were a couple duplexes across the street so I never dreamed that zoning violations would be looming in my future.  I was so wrong.

Out of the blue, I got tagged with a letter from the zoning board saying my house wasn’t in compliance with the local zoning regulaltions.  That’s when I entered “Zoning Hell.”  Evidently, my tri-plex had once been a single family home (so what?) and the zoning people wanted me to take it back to what it was.  Needless to say, it would be very costly to do that, and my ROI (Return On Investment) would suffer terribly.

I decided to fight City Hall, as they say, and I jumped through hoop after hoop, submitting measurements, specifics, rifling through documents at my house and the court house.  What a nightmare.  I also appeared and spoke in front of the five-person board, pleading my case.  I’d been told I didn’t have a chance in (zoning) hell, but I gave it my best shot, passionately telling them this city needed more  multi-family housing like mine, accompanied by  more attentive landlords like me, etc.

I won my case by a vote of 3-2.  Whew!  The moral of the story?  Even if it looks like your potential purchase fits in with others in the area, you’d best check on it to make sure it’s zoned appropriately.

A side note … I always wondered how or why I got tagged for this violation.  Much later, I found out through a neighbor that one of my tenants (who I eventually evicted) used to get drunk and run around the front yard naked.  Hmmm …. maybe someone called the city and complained?  Too bad they didn’t call me instead!

Mother Nature Rides Again

We’ve had some pretty wicked storms around here this summer and, with the age of some of my rentals — 100+ years — I’ve found myself holding my breath a few times!

No matter where you live in the country, you’re susceptible to some kind of weather issue: tornadoes, hurricanes, snow and ice, intense heat, mudslides, etc.  When I purchase a rental, I pay a lot of attention to the exterior material.  I never buy homes with wood siding unless my plan is to reside them with vinyl.  Brick is best of course — neither the Big Bad Wolf nor Mother Nature can blow that house down! — but it will cost more money.  I also check the condition of the roof, because a good strong wind can do a lot of damage.  So can a fallen tree.  Check out the picture below:

This happened a couple of weeks ago.  The tree didn’t appear to be dead or rotten but it just snapped in half during one of our bad storms.  I check the trees on the property after I buy a rental, and have dead and overhanging branches removed, especially from areas around the house or garage.  In this case, thank God it just fell on the garage, not on the house or my tenant!

She called me immediately and I had my “tree guy” remove it quickly.  Unfortunately, it pierced the roof in a few areas so I had that repaired as well.

Since the entire cost was under $1000, I didn’t file it with my insurance company.  I have $1000 deductible to keep my premiums low, and I take a consevative approach re: filing claims.  I like to hold out for larger claims, and in almost 17 years now, I’ve only had to file twice with my insurance co.  Really, if you do a good solid job on the rehab after the purchase, you shouldn’t have much trouble down the road.

However, do protect yourself with a good insurance policy.  You just can’t trust Mother Nature . . . she’ll sneak up on you when you least expect it.

Rent, or Buy?

The early 2000s . . . ah yes, the good old days, when home prices were soaring and investors were flipping houses and making money hand over fist. And then, the total collapse . . .

With today’s economy in a state of flux and the real estate market still flat-lining, thousands of wonderful homes are sitting on the market. Homeowners are under water on their mortgages and can’t sell, and are becoming landlords by default.

People are nervous. The banks, who were so crazily free-wheeling a few years back, have tightened the purse strings to the point where applicants who deserve loans are being denied. Even those who are capable of purchasing homes are hesitant:

  • They’re unsure of the direction of the economy
  • They fear being laid off.
  • With the rising cost of education, they’re choosing to put money in their children’s college funds rather than invest in “The American Dream.”

But for those who still lust after that traditional dream, there’s a formula — although a loose one at that — that might help determine if your city is one in which it’s better to rent or buy. It’s called the rental ratio formula and here’s how it works.

You take the cost of the house you’re looking to buy, and find out what the comparable place would cost to rent, for one year. Divide the total yearly rent by the sale price of the home. If the asnwer is less than 15, it makes sense to buy rather than rent.

For example, on the three-bedroom foreclosure I purchased last fall (See “And Speaking of Fortunes Being Made . . .”, October 2010) the rent I receive is $825/month x 12 = 9900. In this Indianapolis market, I bought that home for 35K and with repairs, have a total of 40K in it. But, the surrounding homes are worth (in a normal market) 80K. Either way, when I do the equation, the results are 4 and 8.5, meaning Indy is definitely a city where it’s better to buy.

But don’t be fooled by the numbers or the gurus. Even though this formula says it’s more costly to rent than buy, our Indy rental market is very strong and I don’t see the end in sight. My 27 rental units never stand empty, which tells me there’s opportunity on both ends — both as a buyer, if you can qualify, pay cash or use private money — and as a landlord who rents out your properties.

So don’t be shy . . . now’s the time to buy!

Location is Key

We are a mobile society, and this trend will continue . . . According to Doug Matthews (COO of Right Management, a division of Manpower, the job placement firm), 84% of employees in the US plan to look for new jobs this year.  That fact is staggering!  At the start of 2010, that number was 60%.

The main reasons for job disappointment are increased work load and stagnant comensation.  So we’re a nation on the move.  What does that mean for us landlords?   The rental market will remain strong over the next several years, for sure.  It’s a fantastic time to buy.

In real estate, we’ve all heard it before.  It’s all about location, location, location.  When I look for a rental property to purchase, I consider the distance of the house to:

  • schools/college settings
  • grocery stores
  • retail shopping
  • hospital
  • businesses/industrial areas
  • daycare facilities

The closer the rental is to some of these, the more attractive it will be to prospective tenants.  With gas prices jumping all over the place, tenants want shorter commutes.  What a wonderful advertising point this would be:  “Walk to work/school!”

And when the rental is available, you can post fliers on bulletin boards at the places listed above.  I went to a factory a few blocks from a rental of mine, talked to an office manager, posted a flier with her blessing, and got a wonderful tenant who stayed with me for several years.

If yours is considered a middle- to upper-middle income rental and there’s a company headquarters nearby, make a flier with great photos and take it there.  Many times, companies have out-of-town people in for a few months and will pay top dollar for a nice home rather than an extended-stay hotel.   You might have to furnish it but this can be done inexpensively and, if you establish a long term relationship with the company, it can mean big returns for you on that rental and very little vacancy . . . definitely an idea worth considering.

So before you buy, think about location.  And if you’ve already bought, think about how you can maximize your current location.  Using local establishments to advertise and get the most exposure for your rental will decrease vacancy rates and increase your bank account.

Here’s to smart buying and creative marketing!

That “Decorator” Touch

When I get in discussions about buying rental properties I’m usually asked about amenities.  “Do you provide window coverings?  How about throw rugs, shower curtains?  Do you use two-tone paint and decorator colors?”

My answer to these questions is always the same.  It depends on the neighborhood.  First and foremost, this is not YOUR home in YOUR neighborhood!  Don’t overdo it on the rehab and amenities.  I’ve seen investors make this mistake again and again.  And they never recoup that money they spent in crown molding, granite countertops, etc.  Your rental has to measure up to those in the surrounding area.  Period.

 I rehab my places to fit the nieghborhood.  As for the small amenities prior to renting them out, this is what I do.  For all of my rentals, I supply exterior and interior door mats, to protect my flooring.  My friends save their gently used bath and other rugs so I can use them in my low-income rentals.  They add a homey feel to my units.  I also hang mini-blinds or curtains, at all of my rentals.  These can be bought cheaply at Wal-Mart or Target and they really improve the ambience of the home.

Paint is an entirely different story.  For my lower-income rentals, I started out using one color — a creamy beige — throughout. But a few years ago I began using dark brown on the trim.

I realized that using this dark color saved me tons of time on repainting when people moved out.  After all, the doorways, baseboards, cabinets take the brunt of it in nicks, fingerprints and other dirt.  The dark paint allows me to wipe down these areas with a damp rag and Krud Kutter (for the most part) instead of repainting — a great time saver!  And, people like it.

 (By the way, Kilz Casual Colors is the best deal going.  I use latex satin.  It covers amazingly well, doesn’t splatter, and compares to brands that are twice as expensive.  It runs about $23/gallon, and  Consumer Reports touts it.)  For my middle- or upper-middle income places, I use current colors for the walls and trim, of course. 

If you’re unsure of what the neighborhood holds, you can always check it out for yourself.  Schedule a showing at a nearby rental . . . you could be looking on behalf of your son or daughter, right? . . . and see what you’re up against. 

Remember, you’re in this to make money, and whatever low-cost perks you can add to your rental  to improve its appeal will result in higher rent.  And, higher rent means more money in your pocket.   We like that . . .     🙂

Do’s and Don’ts

When I’m asked about real estate investing and, more specifically, buying rental properties in Indianapolis, people always want to know my input on two things:

  • What does it take to be a landlord?
  • What’s your best advice — do’s and don’ts — to someone who is starting out in this business?

The answer to the first question is easy.  Good landlords understand the importance of being very organized and keeping good records.  They also understand the importance of “letting go.”  There are so many things beyond our control, especially in tenant management.  You have to let that stuff roll off your back and move on.

The do’s and don’ts question is very interesting.  I was interviewed for an article about this very subject and the piece appeared last week.  Here’s the link:

There’s lots of good info there, for people who are either considering investing or have already jumped in.  Several of the tips are covered in my book, but one of my favorites is to not fall in love with a potential property.  When you make emotional decisions, whether it’s about a purchase or a tenant situation, you’re headed for trouble.

Even though I read everything I could get my hands on before I began my real estate investing career, I made tons of rookie mistakes.  I wrote my book to share my story and expertise, to save others from making needless mistakes.  So, when I come across additional information, I enjoy passing it on to my readers . . . happy investing!

Was Chicken Little Wrong?

Do you remember the story of Chicken Little, who ran through town yelling “The sky is falling!  The sky is falling!”  Well, I’m the total opposite of Chicken Little.  I choose to think the best, in people and situations.  Part of it is genetics, part of it is choice.  And I like being this way because it adds to my overall contentedness with my lot in life; when things are rough, I trust the situation will take a turn for the better very soon.  This philosophy is very helpful when you’re a landlord.

However, I don’t ignore reality.  **** happens when you own and manage rental properties, and you can’t ignore tenant issues or problems with your units and wish them away with positive thinking.  You protect yourself from tenant issues with an airtight lease like mine.  (Check out my book, The Landlord Chronicles:  Investing in Low and Middle Income Rentals.)  You protect yourself from problems with your units by checking on them regularly and purchasing a good insurance policy for each of them.

I use an insurance broker, who shops around for the best  policy for me.  I have all of my policies with him (home, car, rentals) and he saves me a lot of money.  In my 15 year career, I’ve only had two claims.  (I don’t bother with small stuff; it’s not worth nickel and diming the insurance company.)

The first was a fire at one of my duplexes.  One of the units was a total loss.  I’d paid $26,000 for the house and the damage for that one unit came to $37,000!  No problem . . . they had to start from scratch, but when they finished, the apartment, below, looked like new.

The winters here can be brutal, and this fire was caused by an old space heater that malfunctioned.  I was so grateful to have insurance, and there were no questions asked.  It was very easy and straightforward.

The other claim I had to file was due to a large branch from a neighbor’s tree that fell onto the porch overhang at one of my duplexes.  We can get some pretty stong storms here in the warm summer months, and this happened after heavy winds and rain.  My tenant called me in a panic and I went to the house immediately.  The man you see in the picture is actually the next door neighbor . . . the owner of the “errant” tree.

This repair was much less expensive but still worth filing a claim.  Part of the huge branch actually penetrated the wall of the upstairs bedroom.  You can see a small piece of it sticking out, above the porch overhang. 

So, the first thing on my “to do” list when I buy a property is make a call to my insurance broker, so that I can get the rental insured immediately.  By the way, I don’t insure my properties at replacement value, I use market value as my guide.  If the property burns to the ground, I’ll take the money and run . . . and buy another!  My deductible is $1000, which helps keep the payments low.

My advice?  Be an optimist, be positive, but don’t be a fool.  Think the best but be prepared for the worst.  A good, solid insurance policy will provide peace of mind regardless of what happens at your rental.

So, was Chicken Little wrong?  Yeah, for the most part.   In 15 years, I’ve had two claims.   If you’re a Chicken Little supporter, you may not be cut out for this work.   If I had the Chicken Little attitude, I’d be nervous, afraid and miserable every day, and I’d drive myself and everyone around me crazy.  I don’t want to go there.

I’m lucky to be me.  🙂

You Need Help!

I do a lot of my own work.  When tenants move out, I get in there and go to work, cleaning, hauling out whatever junk they may have left behind, making minor repairs, painting, etc.  I try to accomplish this work as quickly as possible and advertise the property.  The longer it sits empty, the longer I’m without income on that unit.

I have a great list of sub-contractors who do specific jobs for me.  My plumber, carpet layer, electrician are all wonderful people who have been with me for years.  My carpet guy works for a company during the day and does side jobs.  My electrician used to work for the local public electric company and is retired.  He charges me about half of what a normal electrician would charge.  My plumber works for a commercial company and does side work.  Granted, he’s not available at the drop of a hat, if I have a terrible emergency, but if the job can wait a few hours or a day or two, he can get it done for me cheaply.

You can find these people by networking with other landlords, or looking in local free publications and checking several of the references they give you.  Another good option is to post an ad on Craig’s List.

But your one most essential sub-contractor is a great handyman.  (Or, in today’s world, woman.)  My handyman Craig has worked for me for about 12 years.  He grew up in the neighborhood where my rentals are and he now rents from me.  I met him when I was on one of my roofs doing some trim painting and he was across the alley at a garage.

We talked a while and although I didn’t use his services right away (I already had someone at that time) he called me a few months later and I decided to give him a try.  Craig is honest — this is essential! — and dependable.  These are the two most important qualities you need in a handyman.  When one of my tenants calls me with a repair issue and it’s something I can’t handle, I call Craig.  I don’t have to worry that he’s not going to take care of it and do the job correctly.

I don’t give his number to my tenants, however.  I feel it’s my job to field the calls from them, not his.  I’m going out of the country for a vacation next month and in that instance, I’m going to leave my tenants a note, telling them I’ll be unavailable by phone for that week.  I’ll give them Craig’s number for emergencies only.

Prior to beginning work for me, I had him sign a Contractor Agreement (found in my book, The Landlord Chronicles: Investing in Low and Middle Income Rentals), excusing me of responsibility should he get injured while performing work for me.

Before you begin your journey into real estate investing, make sure you invest in a reliable handyman . . . Craig has brought great peace of mind to my business.  A huge ice storm is supposed to pass through town tomorrow, and there’s no way I’m going to venture out in my little work car.  (I call it the Fred Flintstone mobile.)  Any repair issues during the next couple days will be handled by Craig .

And worth every penny!   🙂