this is a great site , I have spent quite some time reading through different messages. I am a first time landlord and am compelety teriffied to deal with renter situation. I have spent quite some time talking to real estate attorneys, property managers, and realtors about renting my investment house.
Intially I bought the house brand new and was planning to flip it, but now I have a change of heart and decided to hold on to it to get into the business of buying and renting the house.
My current mortage is 1400, and having placed few adds i have received calls for potential rents of 1300. Negative cash flow.
I think I have done quite some research on getting together a good lease, understanding the eviction process, the concept of making the rule and enforcing the rule. what I lack now is confidence on picking the tenant…
any advice of things to consider when accepting a renter?
I have set up the link to to get tenant to fill out application, run their background checks, verify their employment, by asking for paystub along with application.
any other pointer and advice will be greatly appreciated!
The background check, employment check and references are good ideas… just follow through with them. Also stick to your guns about the two months and deposit. You’ll be hearing every sad story under the sun, and a few might even be true. But what I’ve learned after four years as a landlord is that if you don’t get the deposit you are a sitting duck. The same people that were so thankful and appreciative to you when they were moving in are the same people who will burn you and back-bite you on the way out when they fail to pay rent and have to get evicted.
Here’s my 2 cents… take it for what it’s worth and make your own decision…
Rental properties, even with ‘good’ tenants tend to take a beating. Unless you’re renting out to a convalescent old lady with no kids or pets, even good renters don’t take care of your home the way you would. Walls get holes and chips, paint gets marked up by the kids, carpet gets dog or cat crap stained into it, kitchen drawers get knocked out of whack, screens get ripped, tub gets chipped… the neglect goes on because it’s not “their” property.
So… personally, what I’d do is sell this nice property for a good return now while the market is good (it’ll be lowering soon and already is in some places). Then, re-invest some or all of the gains into one or even two rental properties that aren’t quite as pristine as what you currently have. This way instead of the renters bringing down the value by say 30% with their damages… it drops maybe only 10% because it wasn’t so perfect to begin with.
Otherwise, even with a good renter, be prepared to do lots of fix-ups to make that nice property ‘nice’ again.
I sold off a nice home in a good neighborhood after renting it out to a working woman and her husband who was a local cop. They were nice enough people… but apart from the repairs I had to do when they left, they mangled the backyard fence and stole two trees out of the backyard when they left. I sold the place, used the money to rent out four small trailers and made more from those combined than with the one home.
Everybody has their own plan, I’m just sharing my experience and thoughts.
Excellent post by Enrico! He’s absolutely right. I’d suggest selling this property and buying properties that are suitable rentals. If you want to be in the rental business, then you’ve got to have positive cash flow. Otherwise, you better pray for appreciation.
Appreciation don’t pay the mortgage.
UNLESS you hold the property and it really does appreciate then you sell it and take those proceeds and pay off the mortgage to another one you are holding .And you are closely watching the market and you do this time and time again Like I did. ;D NO the free ride isnt going to last forever but if you know how to read the market as it is happening and YES IT IS BASED ON SPECULATION . But if you see a a hundred bees flying into a bush would you stick your head in to see if there is a bees nest in there?NO !!! But if there are dollar bills dropping out of the bush next to it I bet my last dollar you stick your head in see where they are coming from wouldnt you? Can you say all bushes will kill you NO but some may.Can you say all bushes will pay your mortgage NO. but some will.Will appreciation pay your mortgage in pimple arkansas.NO will it pay your mortgage in South beach Florida .You bet it will (If you find the right bush) And thats all I have to say about that.
Let me first state that I am a newbie as well…I have only been in the business for 18 months and I have learned a lot from the posts on this site! I have one property like the one you are discussing in this post. Every month it drains a portion of the cash flow I receive from my other propertirs…on the other hand I got for 85,000 and it’s value at this point is about 145,000. I agree with what others have written…if you purchased it for cashflow that is not going to happen until the market rents increase which might be quite some time
Yes the Glass IS half empty.That does not erase the fact though that it is STILL half full.And as long as no one gets thirsty and it doesnt evaporate it will always be half full ;DThat Glass of water is the EXACT scenerio of real estate If you let it go and never check on it ,it will evaporate or someone or something will drink or take it.Or if you put a tenant(flower)in it it will suck the life out of your half full glass.BUT if you take a few short moments of your time to check on your glass and give it a little tlc ,keep it out of the sun,add a few drops to bring it back to half way,clean the outside,You will ALWAYS have a half full glass of oppprtunity.
Simple landlording. If it’s a negative cash flow – you lose.
The Five Headaches of Home Ownership
Headache #1: Maintenance & Repairs -
A safe estimate is about 1% of property value per year for maintenance and repair costs. Do you hire it done or do it yourself? What is YOUR time worth?
Headache #2: Management & Collections - What about property management? Do you collect the rent payments yourself or have you hired a collections company to do this for you? How much time do you spend on managing your property? What if the rent payments are late? What do you do?
Headache #3: Vacancies - It is a well documented fact that when people have no vested interest in their home, they are far more apt to move from place to place. It’s always safe to allow one month per year in your budget for unexpected vacancies.
Headache #4: Legal & Professional Expenses - Are the rental contracts you are using favorable to your interests? What if your tenant goes into default? Do you know how to handle an unlawful detainer action? Do you know how to properly serve your tenant? Do you have a CPA handling your accounting and collections?
Headache #5: A Tenant with No Incentive - This is your biggest problem of all. People with nothing invested in their home are far more apt to move than someone who takes pride in his home. Use the proper asset management strategy and give your tenant more than just the use and occupancy of your home. Think outside the box. Your lemon will begin to turn to lemonade.
I thought about trying to convert it from a 2 family to a 3 family. My current rents are 700 so I have some room for rent increases, I am also looking at a potential land trust but I don’t know if it can be done in michigan and in a duplex.
No need to convert from a 2 to 3 unit. In a land trust, you are not only fully protected by Federal law (Garn-St.Germain) and exempt from the DOSC, but Michigan has an individual statute reinforcing that law providing double protection for the land trust method.
445.1626 - Circumstances under which enforcement of the DOSC is prohibited.
Sec. 6. - A lender shall not enforce a due-on-sale clause in a residential real property loan in any circumstances under which enforcement is prohibited under section 341(d) of the Garn-St. Germain depository institutions act of 1982, 12 U.S.C. 1701j-3, as currently in force.
You would need a separate trust for each side and could triple net lease to your tenants for a nice positive cash flow. Your tenants will have full responsibility for maintenance and repairs and you also won’t have to collect any rents as your trustee does that for you. Best of luck to you.
Dude, you already own the property so take the knock and don’t sweat a little out of pocket. My logic for cash flow is: Could you have taken the resources and got a better return some other way? If yes, don’t invest. But it’s too late to make that decision now so take the loss and enjoy the tax benefit.
In addition to the excellent advice offered by enrico, I have an additional tip to reccommend when checking tenants.
Perform a debt to income analysis using the info they give you.
Take all the minimum monthly payments off their credit report and add them up. (Use current accts, If they have chargeoffs, don’t use them cuz they ain’t getting paid)
Take their net pay from their paycheck and multiply that times four.
Subtract the minimum monthly payments from the monthly income.
Then subtract their rent, estimated utilities, gas food and car insurance.
I have found with may applicants that after this test there is no money left whatsoever or worse, a negative. So even if they have good or great credit, there is no way they can afford the rent.
Ask single applicants if they have kids. Sometimes there’s child support to deal with that they don’t tell you about.
Try it, you will be surprised how quickly this can weed out a seemingly nice applicant and you will be doing them and you a favor by rejecting them.