Would You Live In Your Rental?

We ask the question in the title of this article because we want to make a point. Most tenants spend just as much effort into finding a new home as you put into marketing your vacancies, perhaps even more. Some may even put as much or more effort into the task as you would if you were looking for a new place to live.

All landlords want good tenants, where “good” basically means those who will pay the rent on time each month, take care of your property, and not cause trouble for your other tenants or residents of neighboring properties. The type of tenant you want should not be willing to live in just any property. If he is so undiscriminating that he doesn’t care about the quality of his housing, he probably won’t care about how he takes care of your rental or how he gets along with others.

Those looking for a new rental home evaluate available rentals in the same manner as you would evaluate a place to live. At the top of their list when beginning to look for rentals are location and price. They want a location in a safe and attractive neighborhood that is convenient to their workplace or school, to shopping, and to cultural and/or recreational attractions. Price is equally important to most tenants and, for many, has historically been of more importance than location. However, with $3-$4 per gallon gasoline (with possibility of even higher in the future), location is becoming evermore important, because long-distance driving can result in commuting expense comparable to rent. When a tenant does the math, he sees that he is ahead financially to pay an extra hundred dollars in monthly rent rather than commute an extra 20 miles per day round trip, 5 days per week.

Also of importance to most applicants is the condition of the rental property. Few tenants want to live in a unit where windows are cracked; the carpet is badly worn or dirty; the walls haven’t been painted since 6 tenants back; the toilet runs continuously (particularly if the tenant is paying the water bill); or any number of other possible deficiencies. While all units must meet habitability laws, you would almost certainly be unwilling to live in a unit that only just barely meets the law.

When a potentially good tenant sees a property that the landlord doesn’t maintain properly, he assumes that the landlord is likely deficient in other ways, for example, doesn’t respond to repair requests.

On the other hand, bad tenants see a poorly maintained property as a plus. They figure that a landlord who doesn’t take care of the front yard or maintain the wooden fence probably doesn’t run screening reports or check with previous landlords. Such a potential tenant may even assume that the landlord manages the property so loosely that he won’t even notice when the rent is a week or two late. If the potential tenant’s assumptions were wrong regarding screening, the landlord will have wasted time when the applicant fails to submit an application upon finding out about screening. If the applicant’s assumptions were wrong regarding rent collection, the landlord will likely have to deal with a problem tenant.

The next priority may be size and/or floor plan of the living space. The number of bedrooms and baths can be a critical issue. For some applicants, particularly the physically challenged, the rental unit being single-story is often very important even if handicap design features are not needed. When it comes to amenities, there can be a wide variety of items that are of varying degrees of importance. Some tenants must have a pool, while others absolutely won’t rent a property having a pool. Some tenants want laundry facilities within their unit, while others are happy with common laundry facilities on the property, and yet others don’t mind using a Laundromat as long as it is nearby.

Assuming that you already own the rental property, there is little that you can do about most of the issues discussed above. You can’t change the location or change the floor plan (at least cost-effectively). You could rent units for less than market value, but most landlords prefer to get market rents for their rentals.

The things that you can control are the condition of your property and how you represent yourself and your property. Attracting good tenants requires that the property be in good condition and that it show well. The latter means that it has curb appeal. While interior condition may eliminate applicants, you may not even get phone calls if the first impression of a potential tenant driving by prevents him from getting an appointment to see the inside or even calling for additional information.

Accordingly, landlords should maintain attractive landscaping, keep the exterior adequately painted, replace cracked windows, and properly maintain fencing, carports, and other exterior components. You don’t want to give the potential good tenants a reason for not renting your property before they even get inside.

Good flooring, attractive window coverings, clean and undamaged appliances and plumbing fixtures provide a good first impression when they view the interior. Amenities such as dishwashers, microwaves, and, in many climates, ceiling fans also help. Even the age of the heating/cooling system may be of interest in view of increasing energy costs. Offering living space that is both in good condition and attractive attracts better quality tenants, allows higher rents, and reduces the length of vacancies. The bottom line is that you will usually get a good return on your investment in providing housing that you might be willing to live in. Always ask the question, if you wouldn’t live there, why would a preferred applicant want to?

Risk Management – Part 1

Life is full of risks to health, safety, security, finances, and happiness. Investing in real estate adds a number of additional risks to one’s life. First, there is the risk of buying the wrong property, one that is in a bad location, in worse condition than you thought, and for which you paid way too much. Then, assuming that one purchases a good property at the right price, owning and managing that property has many categories of risks.

However, there are ways to reduce risk to acceptable levels. Reducing risk is basically a matter of having adequate knowledge and utilizing good risk management procedures.

With this article we begin a multi-part series regarding ways to manage the risks associated with rental property ownership.

Adequately managing risks of any business, including landlording, can be complex and time consuming, and can involve a number of components and potential complications. Good risk management is achieved through adequate organization and planning.

Risk management includes a variety of activities. Landlord-tenant relations, proper maintenance, adequate record keeping, formal safety programs, adequate insurance, and proper vesting of properties are some of the things that are part of a good risk management program. The goal of risk management is to anticipate and avoid future legal and other problems. When legal problems occur, the goal is to end them as efficiently as possible, which usually means obtaining an early settlement.

As for all businesses, landlords should have a risk management program in place. Some refer to such a program as asset protection. However, asset protection is actually only a part of risk management. Good risk management includes a number of issues in addition to asset protection. Asset protection becomes important primarily when all other risk management measures have not been totally effective. Considering that the goal of risk management is only to protect assets from creditors is a dangerously limited view.

Disaster planning is another part of risk management. Is your real estate investment business ready for a fire, a hurricane, a flood, or whatever other unexpected event might occur tomorrow, next week, next month, next year, and/or beyond? It is not only 9/11 or Katrina level disasters that should be of concern. Are you even prepared for a hard-drive failure that could occur at any time?

You may have already considered the most obvious risks, such as fire or injury related to your rental properties, and have bought insurance to protect against those risks. Unfortunately, there are hundreds of other liabilities with potential for loss that every landlord should consider, many of which are often overlooked or ignored.

Security deposits, lead-based paint, mold, and a bunch of fair housing items are only a few of the many potential land mines that landlords can encounter. Accordingly, it is important that, as a real estate investor, you (1) avoid being sued or becoming the subject of governmental investigation, (2) be the winner in any lawsuit or agency investigation that does occur, and (3) make sure that a potential judgment or penalty does not result in one landing in the poorhouse.

Exposure to lawsuits and governmental actions is minimized by having a good understanding of all the laws related to rental housing and following them all very carefully.

The odds of winning a lawsuit or being exonerated in a governmental investigation that does occur in spite of your best efforts are maximized by (1) not being having done anything seriously wrong in the first place and (2) having maintained adequate records to prove it.

Avoiding financial damage, even total ruin because of losing a serious lawsuit requires that one follow adequate asset protection procedures as part of a comprehensive risk management program. This includes utilizing proper vesting for all properties and carrying adequate insurance.

All risk management measures, including asset protection and disaster planning, require that you have to put things in place prior to occurrence of the catastrophe, not after the fact. Most attempts at after-the-fact maneuvering are usually ineffective. In fact, some methods of attempting to protect assets after the fact by transferring property are considered “fraudulent conveyance” and are illegal. You need to manage risks now, before the event occurs.

A few risks are predictable or at least are things that can be planned for and even controlled to some extent. Included in this category might be:

Death – “when” is sometimes somewhat controllable, “if” is never controllable

Taxes – second only to death in probability

Insurance premiums

Rents

Loan expenses

Employee costs

Operating expenses

Computer problems – backup, backup, backup

Other risks are unpredictable and usually beyond the landlord’s control. Included might be:

Illness, even permanent incapacity

Changing tastes in rentals

The local economy and its impact on the rental market

Actions taken by neighboring landlords

Actions taken by various levels of government or agencies thereof

Some events affect day-to-day operations only, others reduce profits, yet others result in hassle and stress, and still others can cause serious financial losses, even result in bankruptcy.

Risk management can be divided into the four approaches of:

Avoiding risks completely,

Controlling (minimizing) risks that can’t be completely avoided,

Transferring risks to other parties, and

Retaining risks of low probability and/or low maximum potential cost.

Some risks can be avoided or eliminated, others can be controlled or minimized, still others can be transferred to someone else, and some can and should be retained. However, before you can decide what to do about which, you need to identify and analyze them.

We will discuss each of the four approaches in future newsletters. A detailed discussion of risk management is provided in our “9 Steps to Managing Risks” Mini Training Guide.