Real Estate Retirement through Rental Investing

What You Need in a Lease Agreement Contract

2010-05-08T20:10:00.000-07:00

Strong lease agreement contracts include a variety of critical components, beyond simply the names of the parties, the lease term, the security deposit, and the amount of the rent. The following elements are mandatory for any comprehensive lease agreement:

1. What happens at the end of the lease term?
At the end of the lease term, does the lease continue on a month to month basis? Does it automatically terminate if both parties don’t agree to continue it in writing? Or maybe it automatically renews for another full term? Be sure to spell this out unambiguously.

2. Who is responsible for what utilities, and how are they paid?
Does the tenant pay them all directly, or does the landlord pay some and the tenant reimburses them? This can become a point of contention, and quickly.

3. Who is responsible for what repairs and maintenance?
Most people agree that if the furnace explodes, the landlord is responsible for replacing it, but what about if there’s a plumbing blockage? What if the tenant’s dog starts digging in the back yard, and the basement starts flooding? Who’s responsible for paying for the tenant’s damaged stereo system that was in that flooded basement? These types of questions come up, so it’s absolutely necessary that the lease agreement spells out who is responsible for what kinds of repairs and maintenance.

4. Is the tenant required to adhere to cleanliness and/or noise standards?
This can become a particular issue if the landlord owns a multi-unit apartment building, where the landlord hears from the neighbors if a tenant is overly noisy or dirty. Additionally, no landlord wants a tenant who doesn’t respect their rental property and neighbors.

5. Does the lease agreement adhere to state landlord tenant laws?
Each state has their own landlord tenant laws, which can require specific clauses to be included in the lease agreement, or specific disclosures included with the lease agreement. Additionally, most states limit the amount of late fees, security deposits, etc.

6. What happens if a rent payment is late?
Beyond the late fee, some states allow the landlord to evict the tenant if they make their rent payments late a certain number of times in a one year period.

7. When Does the Landlord Have Right of Entry?
Many states require landlords to give a certain amount of notice (typical is 24-48 hours) before they can legally enter the property.

8. Is sub-leasing allowed?
Some tenants may want to sub-lease the property, if they will be spending the summer out of town or perhaps want to take on an additional roommate.

Lease agreements are legal contracts, and as such, they need to take as many possible scenarios into account as possible. As Murphy dictates, what can go wrong will go wrong, eventually, so protect yourself with a strong lease agreement.

How to Evaluate Property Management Companies

2010-01-15T20:32:00.000-08:00

While real estate investors can certainly handle the management of one or two rental properties, what happens when you get up to ten rental units? Twenty? There comes a point where you simply cannot manage all of your rental units, and do any other work. How do you choose a good property management firm?

First of all, it’s worth noting that the best time to evaluate property management firms is not when you need them; rather, you can (and should) start evaluating property management companies long before you’re actually ready to hire one to manage all of your rental units. Most property managers will place tenants for you in your rental units, usually for a fee of one month’s rent, even if they won’t be handling the ongoing property management. Ask around your real estate investment club, find out who’s recommended by the investors you trust the most, and try out the three or four best companies.

As you work with each of these property management companies, get a sense for how thorough they are in their tenant screening. Do they pull credit reports? Do they check civil court records? Do they verify income and employment? Do they call applicants’ current landlords to verify payment history? Do they inspect the applicants’ current residences to check their cleanliness? Good property management firms use all of these screening methods, and sometimes more.

How are the tenants placed by each of the property management companies? No property manager can place perfect tenants every time, but better property managers have better batting averages, and these emerge over time.

What kind of contractors do each of the property managers use? Are they licensed? How long have they worked with these contractors? Good property management companies have longstanding relationships with reputable contractors that they trust, and you can tell right away how by how confidently the property managers speaks about their contractors how confidently you should feel in the property manager themselves.

How long have they been in the property management business? How many clients do they have? How long have they worked with their largest client?

There is, of course, always the issue of pricing as well. Most professional property management firms charge between 5-10% of collected rent, though this number is often negotiable. Yet another reason to start working with property management companies before you’re actually ready to hire them full time is to establish a relationship, which can then be leveraged as you work out the pricing arrangements with the property manager of your choosing.

Property management companies come in all sizes and qualities, and the cheapest is often not the best. Evaluate these firms carefully, as a bad property management company can break your business with high vacancy rates, causing tenant lawsuits, and failing to care properly for your rental properties. Experienced and effective property management companies, conversely, can make your life a lot easier, and allow you to sleep at night knowing that your investments are in good hands.

Real Estate Sales Methods for Any Market

2009-10-06T17:14:00.000-07:00

The overwhelming majority of your retail/homeowner sales will be through a real estate agent, as that is how homeowners buy. However, there are some alternative methods of selling real estate to investors, that often more useful and cost-effective.

Wholesaling Directly to Investors

One of the purposes of real estate networking (more on this in a few chapters) is to meet fellow real estate investors, who will buy and sell real estate with you. The larger your rolodex, or digital equivalent, of real estate investors, the better the chances that one will be interested in a piece of property you've upgraded and are looking to sell. Call every real estate investor you can possibly think of, who might be interested in a particular property or area. If one of them is interested, you've just saved yourself 7% in realtor fees.

Indirect Wholesaling

Every time you hear a "no" from someone in your network of real estate investors, ask them if they know anyone who might be interested. If they say still say "no," ask them to keep their ears open for anyone who might be interested, and consider offering them a referral fee. It's worth noting, however, that paying a referral fee on a deal like this lies in the gray area of the law, as connecting buyers and sellers is generally a domain jealously guarded by real estate agents.

By tapping into your contacts' contacts, you exponentially multiply your own reach, so make sure you offer the best possible incentive to your contacts to encourage them to send buyers (and sellers for that matter) your way.

Auctioning

Auctions are a tried and true method of sale for many properties, but they are, of course, extremely unpredictable. The greatest benefit of auctioning off real estate is that you can choose the sale date, removing the guesswork from the sales and marketing schedule. The greatest risk is that there's no predicting the sales price; you can set a reserve, so that you won't lose your $100,000 investment for $60,000, but you still risk the marketing costs and auctioneer's fees, which are generally several thousand dollars.

One way to improve the predictability of auction sales is to hire an extremely reputable and well-known auctioneer, who will have a large mailing list, high visibility, and a large group of investors reviewing their calendar. The auctioneer's bill is not a place to skimp; pick the best local auctioneer, with the biggest following, and hire them.

Another way to improve your chances of selling at auction is to only auction properties in neighborhoods that respond well to them. Review your chosen auctioneer's sales record in your investment areas, and get a sense for the kinds of prices they generally fetch. If they've auctioned three properties on your street within the last year, and all sold for prices you'd feel comfortable with, consider auctioning your property.

It's worth noting that auctioning a property saves money in two ways: realtor fees and carrying costs. Subtract out the auctioneer's fees (including marketing fees) from the 7% of your estimated retail price to get a truer sense of your savings, and look at the average marketing time for properties listed on the MLS in your area. New real estate investors consistently fail to account for carrying costs, and consequently bite their fingernails each month as they pay the mortgage, taxes, insurance, ground rent, etc. If you only have to carry the property for two months, instead of six months, calculate in the savings and reduce the sales price you'd be willing to accept by that much.

Retail

Listing your property with a real estate agent is always a possibility, particularly if you have an outstanding realtor who is extremely active in that neighborhood. Before signing on the dotted line, however, ask the real estate agent the following questions:
1. How many of your listings in the last year have been in this neighborhood?
2. What commission do you charge?
3. What's the average marketing time required to sell a property in this neighborhood?
4. Do you know anyone who might be interested in this property?

It's entirely possible to sell a property through a realtor without ever listing the property on the MLS; many of the better realtors focus on one or two areas, and have a massive network of investors they work with informally who might be interested in your property. Talk to a few realtors before signing a listing agreement, and see if they can make a few phone calls to sell your property without ever listing it.

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Rental Agreement Investing for Early Retirement: Introduction

2009-08-20T10:37:00.001-07:00

This blog offers snapshots into the world of income-based real estate investing, designed to replace your job as the way your bills are paid every month. Each blog post will be a nugget unto itself, a piece in the puzzle of real estate investing for cash flow through a solid rental agreement.

By way of introduction, here are a few words to help lay the groundwork for later posts.

Retirement: What It Is, and What It's Not

Perhaps now is the time to reiterate very clearly that this is book is not designed to guide you through a get-rich-quick scheme; this is not about getting rich. Sure, it will create a healthy net worth for you, but even that is largely irrelevant. This book is about being able to quit your day job, freeing your time to pursue, well, whatever you like! This probably means an initial period of relaxation, travel, and leisure, but most people generally go back to work after that.

"WHAT?!" you ask? "What's the point of going through all this work then? Why not just keep doing what I'm doing now?"

Because when paying your bills is no longer connected to your job, you can do whatever you want, regardless of the compensation; each rental agreement you have signed helps see to that. Always wanted to be a underwater photographer? It doesn't pay $200K/year, I can assure you, but it's a hell of a lot of fun. Or maybe you always wanted to be in a jazz band? You can now do it, because your bills are being paid, and will always be paid, for the rest of your life.

You don't have to be rich to retire young. All you need is to be able to pay your bills without slaving away at a job, and suddenly your time becomes your own again.

Achieving Passive Income

Passive income is our goal: reliable monthly income that requires little (if any) work on your part. How is this achieved?

In short, you'll need multiple properties, all owned free and clear with a signed rental agreement, with trustworthy tenants, in neighborhoods destined for appreciation, with business structures in place to automate your property management. If this sounds like a challenge, that's because it is; if this were simple everyone would own rental properties and no one would work. Fortunately for you, it's challenging enough to deter most people, but entirely manageable for you to implement if you follow the right steps.

To help you through this "Dip" (as dear old Seth Godin would put it), we'll give you guidance on every single step of the way, to avoid the pitfalls and navigate the rocky terrain of rental agreement investing.

Before getting into that nitty-gritty, there's an important distinction that needs to be made: most real estate investors (and home buyers in general) evaluate real estate based on comparable sales ("What did the house across the street sell for?"). Our approach is going to be different; we're going to ask "How much money can this property earn for me every month, and how much money is it going to cost me every month?"

One size does not fit all. The house you're considering may be worth $50,000 to the general market, but only $40,000 to you (don't buy), or it may be worth $50,000 to the general market, and $60,000 to you (buy, if you can pick it up for $35,000).

We're interested in passive income through a rental agreement. Not egos, not net worth, not bragging rights at cocktail parties (although of course all of those things are fun too). But at the end of 20 months, the only question that matters is "Can I quit my day job?"

If you play your cards right, the answer will be "yes."

_______________________

Resource Box

Rental Agreement - customizable for each state

Market Rents

The Rental Agreement Investing Value Sweet Spot

2009-08-20T10:37:00.000-07:00

The Rental Agreement Value Sweet Spot

Everyone has an opinion about the right kind of neighborhood for rental investing, and there are as many models out there that work as there are neighborhoods. But there are some statistical and demographic realities that can and should be reviewed, which have led to MY opinion about the right types of neighborhoods for rental investing.

We just spent some time exploring different types of tenants to aim for, which will determine what kind of neighborhood you choose for rental agreement investing. Consider this, however: there is a spectrum of socio-economic classes, and each part of that spectrum has different characteristics. On the lowest end of the spectrum, investors can buy in very inexpensively, and sometimes earn a strong return on that investment, but the tenants on the end of this spectrum are far less financially stable, far more likely to default, more likely to engage in crime (in the traditional sense), and far more likely to sue their landlord. On the highest end of the spectrum, prices are high, and rents are not nearly as high, relative to those prices.

The higher you go on this spectrum, the higher percentage of the residents that are homeowners. Investors, by definition, are not willing to pay as much for a property, because they have additional costs (such as carrying vacancies). So when investors start competing with homeowners to purchase rental properties, that's roughly the breaking point where neighborhoods no longer offer strong returns on rent for the purchase investment. Homeowners are always willing to pay more, which is great for sellers, but makes it tough for a buyer to score a good deal.

I've found that the best neighborhoods to invest in are the best (most expensive/respectable & least dangerous) neighborhoods that are still largely bought & sold by investors. Some local homeowners are fine, and can actually help matters, but if homebuyers are consistently bidding on properties in a neighborhood, it's too upscale. Usually, these neighborhoods are working class neighborhoods, inhabited by skilled or semi-skilled workers, many of whom have grown up and lived their whole lives there, and are invested in the neighborhood. Alternatively, these may be immigrant strongholds, where a particular immigrant group has firmly established themselves and are vested in the neighborhood improving. These are, of course, also the neighborhoods most likely to "turn the corner," switching to homeownership (and therefore retail pricing), which means massive appreciation.

While cost of living and housing costs vary from city to city, generally this sweet spot lies somewhere in the $650-950 rental range, depending on the town and the neighborhood. Keep an eye on established, older blue collar neighborhoods and immigrant neighborhoods, and remember that there is a huge difference between "working class" and "lower class," and the difference can be found in the labels themselves.

Resources:

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