Five things you need to know before becoming a landlord

Five things to know before becoming a landlord

by James Miller

These are things I didn’t really give much credence to until I started investing in Real Estate.  I share them with the hope it will raise awareness for those just starting out.

These five items are targeted to those of you starting out who will become landlords in the process.

Note that if you think that the lease option exit will not make you a landlord, you are mistaken.  While you do seem to get a higher caliber of character as a  tenant-buyer (probably because as they have more money on the line), you still have to do most of the same babysitting duties as you do with a  straight rental unit.

1) If you are going to be a landlord, you will have to evict tenants.

There is no “if it ever happens”. You will eventually have to evict someone.

People who seemed so nice moving in are the very same ones who will be saying how terrible  you and your apartment are to the Judge when you are in court.

I knew this was a possibility when I bought my first property, but by the time I got to 20 rental units, it seemed I had to start the eviction process more often than my lawnmower.

I have really only had to go through with a full blown eviction a few times, but I have had to serve “pay or quit” notices at least 30 times.  As with a lot of things in Real Estate investing, the things you really don’t want to do, are the very same things that you most urgently need to do.

Serving notices and evicting tenants goes with the territory of being a landlord.  You should accept this and start learning the eviction laws and court system in your area.

Getting a good attorney to guide you in this area is crucial.  If you don’t serve papers correctly, or miss a step in the process, they may hold the case over for a later date, costing you money as the defaulted tenants continue to live in your apartment. And once they know you are taking them to court you have zero chance of the tenants willingly paying you anything.

2) Paperwork, bookwork,  and paying bills will take a lot of time.

Before I started obtaining properties, I could bang out my monthly bills in about 15 minutes.   It now takes me over two hours,  just to get bills for the properties written out every two weeks.

I really should be assigning this task to someone else, but never seem to get around to it. I have to admit that part of it might be my controlling nature not wanting to let go of something so integral to the business.

Paperwork and bookwork take a lot of time too,  getting the paperwork done for a new tenant or tenant buyer to move in involves: a lease,lead based paint disclosure, move in move out sheet, welcome letter, and a schedule of security deposit withholding fees.

Most of these I have multiple copies of, but they all need explaining when turn over the keys.

My brother who is my partner in the majority of our properties is in charge of the bookwork. We use Quickbooks as our accountant seems to speak to that software very well.

Even with this premium software package to speed our bookkeeping, I am sure my brother spends no less than five hours a week on entering information. This is mainly due to the fact that we have several rehab projects that generate a lot of receipts.

The properties are  costing us ten hours per week just to keep the papers in order and get bills paid.  This doesn’t even include the periodic phone calls and letters to the tenants.

3) Advertising expenses will be a lot more than you think.

The classified ads we place are a lot more expensive than I thought they might be.  When I have vacancies, it is normal for me to ring up a classified ad bill of over a $100 before we get the right person in.

Now there are a lot of places where you can advertise for free, like posting flyers at the local convenience store, or on Craigslist, but for us the newspaper classifieds out pull the free ads by about 4 to 1

When you have an empty apartment that is costing you $150 a week to hold, you want to generate as many leads as possible as quickly as you can. Newspaper classifieds becomes a necessary expense.

4) You will have to clean and touch up most apartments after tenants move out.

The law allows for “normal wear and tear” to an apartment. What this means to you is that you can’t force the old tenants to make the place move in ready for the new ones.

Some tenants are really good about leaving things in good shape when they leave, but in most cases you will need to have someone go through and clean the apartment after they have left.

In my experience no one ever cleans the stove.

You will be able to deduct for some cleaning and repair expenses, (I do deduct for a stove cleaning) but this is  a built in cost to apartment turn over.

5) You will need to keep a bigger reserve amount than you think.

“Reserves” is the money that is set aside each month for replacement of things like a worn out carpet.   The problem is that the big ones can take a huge bite out of your checkbook.  A water heater will set you back about $300 if you install it yourself.  A furnace can easily be $5000.

Even if if you have  reserve amount of $50 a month being set aside, a new furnace will take over eight years of reserves to pay for it.  This assumes you don’t use the reserves for anything else during that time, which in eight years, is pretty unlikely.

Don’t be afraid to ask for too much.

Don’t be afraid to ask for too much
by James Miller

As I was sitting in small claims court last Monday.  As I waited for  my turn to try to get a judgment against an Ex-tenant, I watched as an old man in an electric wheelchair argued his case against the tenants he was evicting.

His tenants were trying to use some claim of water damage against getting evicted and judgment for past due rent.   They failed on both accounts. After this the landlord asked to add in court costs as part of the judgment. This is a standard request, which he was granted.

The elderly landlord then asked for the most audacious thing.

He claimed that by the tenants not paying their rent, it forced him to have to refinance with the bank, causing him to incur $1700 in refinance costs. He asked that the $1700 be added as damages to the judgment.

I smiled at his bold attempt to stick it to them and waited to hear how the judge would deny this crazy request.

Instead, the judge said that it was an unique and novel idea, and that he would hold it over for a hearing.

What this means is that instead of denying the claim, the Judge was actually considering it.

Now I really don’t think this damage claim will end up having much traction in court.  If the old guy was running things that tight, it is hard to say that the tenants missing a rent payment or two, was the defining event that pulled him over the edge.

I think he will have his work cut out for him if he tries to draw a direct correlation between having to refinance and not getting in rent payments.

It seems that would be akin to getting fired for being late, and then trying to sue the driver of your carpool for lost wages. While he may not have contributed to your situation, there were surely some mistakes you made before he came along.

I sat in amazement in that courtroom, not only at the old guys creativeness, but that I had never even thought to ask for so much in court.  I realized that we all tend to ask for what we feel is owed to us, or what we deserve, but no more than that.

I think that it is human nature to ask for what we think is “fair”.

My contention is that in asking for only what we deem as “fair” we are shortchanging ourselves.  What we think is fair may be an unbelievable deal for the other side.
I am going to start asking for things that I think I consider unfair, but in my favor.

I don’t think that there is anything unethical with this as the person on the other end of the conversation has a choice whether they will say “yes” or “no”.

I may start asking if I can get a free desert with my dinner order, or a discount on the clearly priced toilet paper.

I may even suggest to my neighbor that they shovel the snow out of my driveway for me.

Who knows what I might get taken up on.

Ok, I might be taking things a bit far, but this does apply to Real Estate.

You can make thousands of dollars more from a deal just by asking for “too much”.
It reminds me of the popular Real Estate saying when making offers to purchase:

“If you are not embarrassed by your offer, you are offering too much.”

By just moving your lips, you have the potential to make more money than you can from all of those late night hours of swinging a hammer at the “fix and flip”  house.

Here are the questions I like to ask the most when dealing with sellers:

1) Are you willing to sell it for what you owe?
2) Is that the best you can do?
3) Can you do any better in price if I agree to (close quickly, let you take the appliances, etc.)
4) Are you willing to bring money to the closing table to sell this house?
5) I need to include your (boat, truck, car) as part of the deal, are you ok with that?

Try Asking  for what feels like “too much”.  I can’t promise you will get it.

I can only assure you that you won’t get what you never ask for.