Month: December 2021

By Robert L. Cain, Copyright 2021 Cain Publications, Inc.

PROPERTY NEWS SERVICE

Smart and experienced investors plan thoroughly.  Because they have been doing it for so long and so successfully, they have a list, possibly just in their heads, of issues that can pop up with any property they might consider buying.  A search of the internet and the numerous books I have on the shelves in my office comes up with the usual advice about choosing a property.  They are all valid, excellent, and important factors to consider: Inspect the property carefully, check the rent rolls, look for hidden problems, and so forth.  But these experienced investors do even more.

The difference between that advice and what I’m going to discuss here has to do with what surrounds the property.  I’m going to deal with the monsters and assorted creepy critters lurking down the block, inside school district offices, and city hall waiting to pounce on and devour real estate investors.

These issues may be difficult to foresee, but are often discoverable with a little research and keeping up with local news. 

The drug house next door

Smart investors survey the neighborhoods around prospective properties.  That, of course, includes neighborhood crime statistics and the ownership and management of nearby properties.  Unfortunately, few of us have crystal balls that allow us to see where a neighborhood might go in a couple of years even though everything is fine now.

Then a nearby investor sells an apartment building, gets a new manager, or simply stops paying attention and, presto! in moves a drug dealer or two along with the druggy tenants eager to live close to their crystal meth supplier. 

A drug house can decimate a neighborhood.  And they can appear even in what seems to be the most stable of neighborhoods.

The disappearing school

Many cities suffer from declining public school enrollments, often not even for all the same reasons.  Smart investors carefully check out the school districts and the schools around their prospective investments.  After all, good schools draw parents who want their children to get a good education.  Most likely, that correlates with responsible parents who will likely be better parents than the parents who think of schools as someplace to babysit their children to get them out of their hair while they sit in the bar, smoke dope, and wait for their welfare checks.

School boards sometimes make bizarre decisions and close under-enrolled schools combining them with other schools.  Closing a school, especially a first-rate one, can also decimate a neighborhood.

The school morphs into disaster.

Principals and teachers transfer, or are transferred, to different schools every year.  Sometimes a principal who had created an exceptional school gets her just reward and earns a transfer to an under-performing school to work her magic there.  Often those principals take teachers with them, the best ones.  What replaces that principal and those teachers might make the old school less than desirable.

How about an entire school district?  Take, for example, the Clayton County, Georgia, school district that lost its accreditation in 2008.  An entire school district losing accreditation had happened only twice before in 40 years.  Think what that did to Clayton County rental properties.  They regained accreditation in May 2009, but the damage couldn’t be repaired.

A bad school, or school district, does a number on the neighborhood or even an entire county.

Local government engages in government thinking.

It might be a huge increase in property taxes for non-owner occupied properties, a sales tax on rents, rental inspections, or a new fee inflicted upon rental properties. No matter which, it affects the ability of a property to turn a profit.  Rents can only go up so far because they have to compete with properties just on the other side of the city limits that aren’t saddled with those extra costs.  That means investment real estate owners can’t make as much, or any, profit on their rental properties as the rents increase and the vacancy rate follow. 

Of course, then, with vacancies increasing and rent amounts dropping, the money the city anticipated receiving not only disappears but the net receipts decrease. Let the whining begin. But that’s what governments are good at: government thinking. You can’t do just one thing. Every action has consequences, many predictable.

Who would have even dreamt of such things happening?  But there may lurk even more unexpected and unpredictable events, ones I can’t think of now so bizarre and rare that they might happen only once or twice in a century.

Can we think of everything?  Obviously, we can’t.  Can we do something about unexpected events?  Usually. The most important thing to remember about rental property investing is to pay strict attention to everything that might affect property values.  After all, real estate investing is hands-on if it is to be successful.  Paying attention involves more than just scrupulous maintenance and consistent rent collection.  It requires watching out for those monsters and creepy critters waiting to negatively affect our investments.

How you create goals makes all the difference

By Robert L. Cain, Copyright 2021 Cain Publications, Inc.

PROPERTY NEWS SERVICE

How will you know when you are successful? If you believe you are now, how do you know?  Most people, landlords included, simply cannot point to an accomplishment and state positively that they have been successful. I know just about every landlord had visions of being successful when he or she bought that first rental property. Success still waits for every landlord to grab and run with it.  And you can snatch success or restart it in the next month. So get ready to set New Year’s resolutions that might encourage success. Details forthwith.

Because of my insatiable curiosity, I did a search for landlord New Year’s resolutions. I came up with three or four websites that listed at least 10 each.  The goals in each were remarkably similar even if worded slightly differently.  All were aimed at getting landlords to do the things that will make them successful in their businesses. But they don’t provide the final but essential step to accomplish those goals.

We are to “cut costs” and “watch cash flow.”  We are to “get better tenants” and “screen better.”  We are to prepare a maintenance plan and schedule maintenance.  We are to “get organized.” We are to “get rid of bad tenants.” We are to “enforce late fees.” We are to “increase rents.”  Fluff, fluff, and more fluff. Here’s why.

Each of these goals appears worthwhile.  But they are fluff.  Two more, which rank as fluffiest, were “be proactive” and “focus on the long-term.”  Huh?

The essential part of any resolution or goal is an objective, measurable result so you can tell when you have accomplished it. You can point to it and say, “I did it!”  That is not possible with any of those fluffy ones I found on the websites and listed above.

Of course, none of these websites could provide actual measurable goals because rental property success is measured one landlord at a time, one property at a time.  Each landlord’s success is unique to him or her, not to some overall, generalized goal such as those the websites listed.

Let’s take one or two of these goals and see how to put them into practice so they can be measured.

“Get better tenants” is a broken record to many landlords.  We all want the best tenants possible renting from us.  Okay, how do we know if Richard Renter standing in front of our desk with a rental application mostly filled out (except for the landlords and addresses where he’s lived that he “doesn’t remember,” of course) will be someone whom we would accept as a resident in one of our rental properties? Would he be a “better tenant”?

Since each property is different, attracting different qualities of applicant and tenant, we can’t make a blanket assumption of the classification of “better tenant.” That requires carefully crafted rental policies and standards reflecting the demographics of each property that we can use to compare the qualities of each applicant against.  Without those, the judgment of “better tenant” is left to our whim, mood at the moment, and how good a salesperson the prospective tenant is.

Thus, a measurable resolution might be worded, “create rental policies and standards for each rental property that includes minimum income required, minimum length of previous residence required, minimum credit score required, and quality of landlord references, and do it by January 15, 2022.”  Then decide for each property what those are, write them out, print them, and hand them to each applicant, making you ready to measure each rental application against them.

“Get rid of bad tenants” is no question a worthwhile, profit-enhancing goal.  But how do you measure who a “bad tenant” is?  That may be a harder one.  I have had tenants who irritated me and whom I was happy about their moving but who also paid the rent on time and took care of their homes.  Were they “bad tenants”?  Only when I got the notes with each rent check with complaints such as “light bulbs burn out too often” did I think of them as “bad tenants.”  Of course, the evil end of the “bad tenant” continuum is Tina Tenant who hasn’t paid rent on time, if at all, since the first month she lived there and whose boyfriend moved in with her along with his constantly “visiting” friends who have wild, drunken, drug-induced parties every weekend.  Obviously, Tina goes.

But somewhere in the middle is a continuum midpoint for tenants to get rid of and tenants who are simply annoying.  Again, with each property, that cutoff may be somewhat different. and for each landlord it may be different depending on a landlord’s ability and need to tolerate irritation. But the important point is that each landlord has to decide where that cutoff is. How many times may the rent be late?  How many times do the police have to come?  How much damage to the property must there be?  Answer those questions about each tenant in each property.

By all means, make New Year’s resolutions.  Raise the rent, get better tenants, enforce late fees, get organized, but write down exactly what that means so you can point to success when you accomplish it. No more fluff, only measurable success.  It is your success and you can accomplish it if you know exactly when that success has arrived.