What To Do When Elon Musk & Bill Gates Both Apply for Your Nice Rental House
In this month’s edition, we have a riveting property management fairy tale! Once upon a time in a nice, far-off place called “Charlotte, NC”, a nice landlord put a nice, vacant rental house on the market. Now the market was not too hot, not too cold, but just right…
The next day, a nice rental application was submitted for it. And the day after that, another nice rental application was submitted. The nice landlord dutifully ran the applications and found that both applicants looked to be fully qualified:
Tenant #1:
Elon Musk
802 credit score
Criminal record: 3 traffic tickets in last 3 years
Employed: CEO of X, SpaceX, & Tesla, Inc.
$221.4B net worth
Homeowner: no recent personal landlord history
No pets
Move-in date: 35 days from today
Length of lease desired: 2 years
Tenant #2:
William (“Bill”) Gates III
814 credit score
Criminal record: None
Employed: CEO of Bill & Melinda Gates Foundation
$127.3B net worth
Homeowner: no recent personal landlord history
Pets: 1 cat (10 pounds) & 1 border collie (60 pounds)- aware of non-refundable pet fees
Move-in date: immediate upon acceptance
Length of lease desired: 1 year
The nice landlord has a very nice problem! Two well-heeled applicants want his rental property. They have 800+ credit scores, no criminal background issues, plenty of income, and no landlord issues. That is great!
But outside of the nice fairy tale, is it really great? How would a regular landlord pick a winner and a loser? He may have to be not so nice?
The Musk application has many positive aspects with it having no pets and wanting to lock into the property longer with a 2-year lease request. But there is a 35-day wait for occupancy (each vacant day costs money!) and there is a criminal record (frequent speeding tickets can signal risky behavior).
On the other hand, Gates wants to move in right away (cha-ching!) and has a higher credit score than Musk. But he does have a lower net worth and who knows the damage the 2 pets could do to the house especially if he leaves after the initial lease ends.
So under normal circumstances and with no one else involved, both tenants would easily be approved for the property. But there is only one home. And they probably don’t want to share it. So what to do?
It’s a tough one and it happens every so often. Unfortunately, the non-approved person usually gets upset. But a decision has to be made.
I don’t think there is perfect methodology for this. Some landlords use tactics such as:
- First application in gets first dibs on the house: I like this one due to its simplicity and it seems to have the “get in line” logic that most adults can appreciate. Its major flaw is that a property manager really needs to pick the best available applicant for the owner client, regardless of who was first. If a marginal candidate applied first and then Bill Gates submitted an application, should I be married to the marginal candidate? I don’t think so.
- Make the applicants give their “highest & best” offer: The rent is listed at $2K/month. “How much rent are you willing to pay if we let you have the house- $2,500/month? Will you sign a 3-year lease? Move-in right away?” We’ve done this on occasion and it’s a lot of effort and most people don’t want to play (I’m not sure I would either). Due to the bad feelings it creates, I largely tend to shy away from doing this.
- Have some sort of points system based on all quantifiable application information. Add up the points and whoever has the highest score wins the house. This does not take into account any non-quantifiable information (or “soft skills” for lack of a better term) which tend to matter a lot with tenant relations.
Trying to make a choice between great tenants can be a good problem to have if handled properly (in and out of fantasyland). But I think I’d go with Musk application on this one. It’s very nice!
Happy Landlording!
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Building God’s Temple & Lease Extensions: Are You Ready?
“King David rose to his feet and said: “Listen to me, my fellow Israelites, my people. I had it in my heart to build a house as a place of rest for the ark of the covenant of the Lord, for the footstool of our God, and I made plans to build it. 3 But God said to me, ‘You are not to build a house for my Name, because you are a warrior and have shed blood.’”
(1 Chronicles 28:2-3)
“If you fail to plan, you are planning to fail.”
Benjamin Franklin
King David loved God; they were tight. Towards the end of his life, he wanted to do something grand for God- so grand that he aspired to build the greatest temple in the world for Him! David shared this with Nathan, his resident spiritual advisor, and asked him to see if God would approve. Nathan inquired and relayed that God was not amenable to King David doing it; however, He told him that Solomon, his son and future successor, could build it.
King David did not use this as an excuse to sit on his hands. He asked God exactly what He wanted and proceeded to write down specific plans for Solomon to use. He not only detailed plans to build the temple and the surrounding buildings themselves, but for the all the items that would be kept in the temple. He mapped everything out precisely, even the weights of the lamps and tables and how the priests who would work there would contribute. All Solomon would need to do is dust off the plans and enact them when he was coronated. He would be ready to go!
For smart landlords, this is how lease extensions should be approached. When leases are expiring in the near future or tenants are proactively in contact about extending their leases, landlords should not be scrambling! A well-thought-out plan should be in place ready to be enacted.
As a Charlotte property manager, retaining good tenants is paramount. If we don’t hear from tenants prior to 80 days before their leases’ expiration, we start the “Lease Extension Plan”. This begins by running the nearby comparables to determine market price, checking their payment ledger to ascertain tenant quality, and making a recommendation to the owner on what we feel the lease extension price and terms should be.
Once we have finalized our lease extension offer, we e-mail it to the tenants somewhere between 60-75 days prior to lease expiration. This gives them plenty of time to ask any questions and make a decision. We also incentivize tenants to commit earlier as the proposed rental price is offered in tiers based on when they let us know their plans (example: “Let us know by 6/15, and the price will be $1,500.00/month… or if after 6/15, the price will be $1,600.00/month.”). We also offer options for month-to-month lease extensions (at a 10-20% premium to the existing rent based on current market conditions) and multi-year extensions (incentivized by allowing the rent to stay the same over the life of a longer lease term).
Other important factors we incorporate in the “Lease Extension Plan”:
- The new lease is written on the latest version to make sure that the owner has the best legal protection incorporating any recent changes to landlord law
- The tenant information is updated: Did anyone leave or is now joining the household? Did anyone get married/divorced? Name change(s)? New children? New pets to be accounted for?
- Are there any issues that we want to address with the tenant (or vice-versa) before we reup with them for another year or more?
Though King David was disappointed he would not be the one to build the temple, he made sure approved plans were prepared and ready when Solomon got the green light. Smart landlords will follow his example! With increased repair costs on rental home turnovers, keeping tenants by signing lease extensions is becoming more and more important to achieve rental home ROI.
Happy Landlording!
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Fix or Replace Broken Appliances? Factoring in Sunk Costs at Carowinds
I remember several years ago my out-of-town, 6-year old niece was coming to visit. My wife wanted to make sure that she had a great time, so we were brainstorming a list of activities:
Bowling? No, that could be done anywhere.
Movies? Same thing.
Family board games? No, she might beat us…
Hiking? Not a bad plan, but…
How about going to Carowinds, the local amusement park? Yeah! It’s a bit pricey (around $50/person) but Carowinds is a legitimate, massive amusement park and would provide fun for the entire day. And this would make her trip memorable. It was decided!
The big day came and we excitedly ushered my niece to Carowinds. It went well at first; the first few rides were a blast! But then 30 minutes into our adventure, my niece says (something to the effect of), “Well, that was fun! Where are we going next?”
This was not a question I was expecting. Of course, the real answer was (something to the effect of), “There is no “next”. For 50 bucks a person, we are staying at the amusement park for the next nine hours. In addition, you are going to love every moment of it and be bragging for years about how visiting your Charlotte-based aunt and uncle was your childhood’s crowning experience.”
However, from a marriage perspective, I recognized that “my real answer” and “the real answer” given to my niece could possibly be different; I wasn’t sure what my wife’s appetite for niece appeasement was yet. And from an economic perspective, it was close to immaterial. The Carowinds tickets were a sunk cost regardless (we already bought the tickets). If we left the amusement park and went hiking (free), it was a wash.
To me, this story feeds into how we handle broken appliance repair calls from tenants in our Charlotte property management company. When we get these calls, we are left with the choice to either send an appliance repair person or just buy a new replacement appliance. What’s the best way to handle them? Sunk costs are part of the decision-making process.
The economic analysis on these starts with the appliance repair company. The way they bill is that it costs roughly $100 for them to show up at the house and diagnose the issue (this is the sunk cost- we bought it when we called them). If we choose to approve the quote for their recommended repair, the $100 is credited towards the repair. If we think that an appliance is too costly to repair, we can just thank them for the diagnosis, refuse the repair recommendation, and pay them their $100 service call fee.
Lower-end appliances in the Charlotte market usually cost somewhere between $500 – $1,000 when shipping, taxes, installation, and old appliance removal fees are factored in.
Some of these decisions are common sense. If a new stove costs $800 and an older stove is found to need $700 in repairs to fix, we’re going to replace the stove. However, for math purposes, the cost for a new stove is really $900 ($800 for a new stove + $100 appliance repair company diagnostic fee). Tacking on the sunk cost of the diagnostic fee will make replacing appliances cost more.
In turn, the math goes down when repairing appliances. If the same stove is found to need $250 worth of repairs, the real differential is $150 (the first $100 is a sunk cost). This usually makes repairing appliances a better proposition unless there are other mitigating reasons to replace them (beat-up looking, opportunity to homogenize mismatched colored appliances, etc.). $150 versus $800 makes taking the chance that the repair would keep the appliance operating for a while very appealing.
The harder decisions are when the cost of the repair is 50% of a new appliance. I tend to go towards the repair. It requires less money outlaid initially and I’ve found that older appliances seem to be built better than the newer, low-end ones. The only problem is when an older, repaired appliance breaks down near-term for a different reason and I’m left eating the loss on the larger sunk cost of the repair (and holding a bag of regret).
Smart landlords factor in sunk costs when in appliance “repair or replace” dilemmas. Smart uncles also factor them in to assuage anger when one is unexpectedly hiking Crowders Mountain after paying to ride the Fury 325.
Happy Landlording!
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Don’t Be a Desperate Housewife (or Landlord), Just Push the Right Buttons
“Desperate times call for desperate measures.”
Hippocrates
Typing the word “desperate” makes me think of the old TV show, Desperate Housewives. The story centered on four suburban women who were neighbors. They found themselves making risky choices in order to look good, be fulfilled, and live the lives they thought would make them happiest. This made their lives hectic and drama-filled. And it also made it one of the most successful shows on TV for its 8-year run.
However, no one really wants to live the way they did; it may be entertaining to watch, but it’s not peaceful. Desperate is not desirable.
Desperation can elicit hopelessness and cause knee-jerk reactions:
I never think anyone is going to marry me! So I’ll lower my standards and date anyone and try to make it fit.
I don’t have any money and lots of debt. I’ll rob a bank.
We need to win a championship this year or the fan base will be calling for my head. I’ll trade away future draft picks, get a marginally better player now, and hope it works out.
We see it in all walks of life in many different situations. Desperate situations make people feel that they have little choice but to make hasty and risky decisions. And these decisions generate results that usually share one common trait- they are poor.
For landlords, they typically begin to feel desperate when their rental properties are vacant and they need tenants to move-in and start paying rent. Things look bleak as time rolls by and there has been:
- Financial bleeding: mortgage payment, management costs, utilities, lawn mowing
- Vandalism and/or squatting while vacant
- Only substandard applicants applying
It’s tough. There is pressure on landlords to accept the first person that has the deposit and first month’s rent to put down. “Just move in quickly, please!! We need this off the market to get the rent coming in!”
As a Charlotte property manager, we are not immune to this either. We get some version of this at times:
Aren’t you the professional?? Why is my property empty? What does your marketing look like? It doesn’t seem to be working, bud!! I could do better than this myself!
Desperation can take hold… And it takes discipline to stick to the fundamentals and not succumb to the pressure.
When a property has sat on the market for longer than expected, the key is not to panic! Slow down, take a breath, and push the right buttons:
If there are no showings of the property:
- Double-check the marketing, add/replace pictures, make sure the home is coming up in on-line searches. Then see if any showings happen. If not, go to step #2.
- The price is too high. Lower it ASAP. Prospective applicants are not seeing the value on-line versus other homes.
If showings are being generated:
- Ask people who have seen it why they are not filling out an application. It will usually come down to some cosmetic issue. Take care of the issue! Note: Some “cosmetic issues” are personal preference- if it is not a major flaw and only one or two people comment on it, it might not make sense to address it if it is costly. If almost everyone mentions it, it either needs to be fixed or the price needs to be lowered (or both).
I remember we had a large house on the market that “desperately” needed work. We did not want to pay for it (it was going to cost a lot to get to market shape) and we were hoping we could slide by with one more rental cycle before ordering the major (cosmetic) fix-up. We went a few months with several showings, but no approvable renters from those who filled out an application. Most non-applicants who visited the home cited a few issues they wanted addressed. What to do?
The easiest way path is to give in to the desperation, roll the dice, and approve a risky tenant. In contrast, experienced landlords will reject substandard tenants, double-check the marketing, fix any reasonable home repair issues, and lower the price. It’s better to wish you had a tenant than wish you didn’t.
Don’t fall for the feeling of desperation and press the panic button! Stick to the fundamentals and your future self will thank you for dodging the money/time/emotional sinkhole of the eviction process. Don’t let yourself become another desperate resident of Wisteria Lane!
Happy Landlording!
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Steve Martin, Roxanne & Tenant Identity Issues
In the timeless appeal of romantic comedies, one of the tried-and-true story lines is the ugly guy who tries to get the really beautiful girl who is out of his league. I was thinking of the movie, Roxanne (with Steve Martin and Daryl Hannah), and realized bringing up that reference was probably on par with bringing up Ben-Hur with Charleston Heston at this point- it’s like how long ago was that??? But humor me…
In Roxanne, Darryl Hannah is the beautiful bombshell and Steve Martin is the smitten, huge-nosed fire chief who does not feel worthy to pursue her. A much better-looking, witless firefighter expresses interest in Hannah and Martin decides to help him; he gives him romantic ideas and poetic things to say to woo her. Hannah loves it and the romance is on. Of course, the subterfuge can only work for so long until it is discovered and then… (you’ll have to get the VHS to find out the dramatic ending!). But, suffice to say, the ruse did not help either of them with their relationship with her in the aftermath.
Outside of Hollywood endings, lying about one’s identity is not typically a long term, winning strategy. And as a property manager in Charlotte, we are seeing a lot of prospective rental tenants misrepresent themselves on their applications (right now, I’m applauding myself for my diplomacy in that last statement). Okay, to be more direct, some applicants are outright lying. And this may be the worst that I’ve seen in my twenty years of screening tenants. It’s high quality “fakery”- doctored paystubs, friends as landlord references, other people’s information being offered (with better credit & criminal reports), etc.
Why? I believe it is a combination of much higher rental rates and inflation. Housing and regular living expenses cost much more and this has eroded the financials of many prospective renters; debt levels have increased, credit quality has declined, and landlord reports have less nice things to say. So, it makes it harder to have prospective tenants pass muster on screening criteria.
The thing is, at its core, good tenant application screening is designed to protect everyone (especially tenants!). I don’t know how many times I’ve given some version of this stump speech:
Listen, we want to approve you as a tenant. We easily get paid the majority of our fees to place tenants, not turn them away. But prospective tenants with similar incomes have a tough time making it work at this rental price coupled with their other monthly obligations. Then when rental payments inevitably aren’t made, it creates a bad situation for everyone: the owner doesn’t get the money, which forces us to use available avenues to secure the money, and then it creates a lot of all-around stress. No one wants that- trust me, we do not want to chase you. So, let’s avoid it and find a less expensive rental house for you.
Of course, most people don’t like to be told “no”, no matter how nicely or well-meaning the message might be. So, they try to avoid the “no” by submitting falsified information making their application appear stronger.
How do we figure out what tenant information we receive is true and what is manufactured? As President Reagan famously said, “trust, but verify.” And verify. And verify. And verify.
As landlords, we need to ask a lot of questions, especially now. Call landlords and wait to get them on the phone. Is the information the same as what is stated on the application? Call the employers and do the same. Is there a potential fraud alert on the credit application? Do the paystub calculations for taxes and deductions pass an eye test? Request bank statements to confirm the money flow.
It takes more time. And applicants do not always like the increased scrutiny- and they’ll tell you this! But there is a lot at stake. Since the CARES Act, evictions take more time and a wrong applicant can be very costly. Take the upfront time to avoid the backend headaches.
Steve Martin and his young accomplice had Daryl Hannah fooled… up to a certain point. Smart and thorough landlords need to make sure that certain point is prior to handing the keys over!
Happy Landlording!
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“Oh, you know, COVID…”: Spotlighting Tenant Retention Amid Rising Costs
“I noticed you didn’t post a blog last month? I really missed it!!”
(Actually, no one said this…????)
I think one of the frustrations that I’ve had in the last year is how seemingly how every business underperforming service-wise or raising prices can be explained away easily by COVID or her offspring (shortages, inflation, sharp price increases, not enough employees, etc.). Examples:
My coffee cost $4.00 last week and now it is $5.50. Why?
“Oh you know, COVID… Prices of coffee in South America have spiked due to complications in the harvesting process and container price shipping increases.”
Why wasn’t the gym open this Monday when I showed up there?
(A sign with a partial explanation was posted to the locked front door on Monday and then Tuesday the front desk person offered more details)
“Oh, you know, COVID… Staffing is still really tough as no one wants to work anymore. Once people left the workforce, they just didn’t want to come back. You know, I think it’s mostly due to video games- guys just prefer to play them all day instead of going to work.” (Oh, really???)
Voicemails I run into frequently: “Due to recent events, call volume has increased creating longer than normal hold times.”
(I’d like to get an explanation on why this voice mail message is still there and has not changed in almost three years). But I can speculate… COVID?
I can be frustrated as a consumer, but understand it. I’m used to getting what I want at a reasonable price and in a reasonable time period and feel slighted when I don’t. Pretty much every business has raised prices and many have had hiring issues. It’s a fact that costs and wait times have skyrocketed whether I agree with the causation rationale or not.
Many landlords have experienced “Oh, you know, COVID…” conversations for the costs now associated with fixing up rental homes between tenants. All of the issues above coupled with a hot real estate market has led to sticker shock when these repair quotes come out. The cost of painting an entire house and replacing the flooring (as well as the myriad of handyman issues) has risen, especially when landlords compare prices 5-10 years ago (think double).
Rising rents after fix-up will eventually offset these increased costs, but it is still painful to look a $10K+ repair bill and know that the person writing that check is going to be you. So, how can this be avoided?
It can’t be avoided forever. However, there is the strategy of kicking the can down the road as long as possible. This can be accomplished through an intentional effort in tenant retention. The basic rationale is that if tenants don’t move out, most repair costs (cosmetic, that is) can be avoided until after their tenancy is eventually over.
So how do landlords accomplish tenant retention? There are books written about this, so I’m not going to go into all the creative ways people have thought up of: giving free flat screen TVs to the tenants when they sign a multi-year lease, delivering chocolate chip cookies on their birthdays, having a monthly rent credit incentive where some of the money is forfeited if tenants move-out prior to a set number of years, etc. The advice below is for a landlord who is more a “nuts and bolts” person and doesn’t bake very well.
The great news is that the cards are stacked in the landlord’s favor right now so most of what I propose is being done by others already. The landlord’s job is just to keep the rental rate reasonable on lease extension offers. That’s it. I’m not even saying to not raise the rent at all; just don’t be greedy. That’s the only thing the landlord has to do right now as a decent tenant retention strategy.
Very few people like to move. Landlords should continue to perform normal landlord activities in a timely manner so tenants do not have some explicit reason why it is imperative for them to leave the house. And be pleasant. Then wait. The heavy lifting is already being done by the big institutional landlords who own houses nearby and are raising the rents up 25%-50%. When tenants see the advertised rental rates of homes on the market and then see their reasonable lease extension rate, most will stay put.
If the tenant still leaves, then biting the bullet on fixing up the property may be an unfortunate reality. But the silver lining is that the house can now be advertised at the higher market rate (thank you again, big institutional landlords!) which will reduce the time on the ROI.
Best of luck keeping your good tenants around and avoiding the “Oh, you know, COVID…” expenses on your rental home for as long as possible.
Happy Landlording!
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Real Estate Investing: Preparing for Recession
“Where there is no vision, the people perish…”
Proverbs 29:18
Well, we started with a Bible verse, so it’s a good time to go into the story of Joseph in the Bible (located in Genesis 41).
To paraphrase, Pharoah, the leader of Egypt, had two dreams that no one could interpret. His chief cupbearer (and a former jailbird) remembered that he knew a guy in the joint who had (successfully) interpreted dreams for him and his buddy a few years back. He told Pharoah about this Joseph guy and Pharoah had him sent for.
Joseph said God had revealed both of Pharoah’s dreams to him and they had the same message; Egypt and the surrounding lands would have seven years of incredible plenty followed by seven years of devastating famine. He advised, “Let the Pharoah look for a discerning and wise man and put him in charge of the land of Egypt. Let Pharoah appoint commissioners over the land to take a fifth (20%) of the harvest of Egypt during the seven years of abundance… This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt…”
He concurs and appoints Joseph to head this newly created post and things go as predicted. Egypt is the only place that has food when the years of famine come, and Joseph is administering it on Pharoah’s behalf. The Egyptians and the people of surrounding lands are forced to sell Pharoah all their possessions and land just to get food.
To bring this back into the realm of real estate investing, landlords are clearly in the time of plenty as property values and rental prices have been on a growth curve for the last ten years. To boot, interest rates have been historically low (and really still are) which allow for low borrowing costs and has made for a robust sales market. Many landlords have used this as a time to sell some of their “dog” properties, make improvements and raise the rents on their existing properties, buy some new ones, and refinance/eliminate debt.
Recently, interest rates have more than doubled and many economists (none with divine inspiration like Joseph to my knowledge…) claim a recession is around the corner. If that’s true, the housing market could take a sharp correction which could be a great opportunity for prepared investors.
I have vague recollections from the last housing correction from 2008-2012. I did not buy any investment properties then; I was too concentrated on keeping my existing rental homes afloat as rents were low during that time period. I remember that selling homes was really hard; buyers were scarce! Many sellers were just giving their houses back to the bank or using “short sales” as the banks would take a loss on part of the loan during the sale. I remember thinking, “What’s wrong with me? As a wanna-be real estate investor, how am I not buying homes now? These houses are going for a steal and they seem to be all over the place!”
The thing that was wrong was that I could not get a decent loan and did not have much cash on hand. So, I needed to sit on the sidelines like most other people until the economic waves grew more favorable. But the buyers who were prepared got some great deals!
The investment challenge now is to be more like Joseph and be prepared for any possible famine while things are favorable. If the right investment comes along during any upcoming recessionary period, I’d like to be able to snap it up (while simultaneously staying solvent during any prolonged economic slump). Preparation now can pay huge dividends later.
Happy Investing & Landlording!
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Extend the Lease AND Sell? That’s Not “The Way”
“You can have it all.”
(1980’s Michelob Light Advertising Slogan)
I was (attentively) listening to a teacher’s presentation at my children’s school and she referenced the movie, Twister. I nudged my wife and whispered, “That movie is probably 20 years old now.” “Yeah, at least…”, she quietly agreed while discreetly double-pointing to the stage to redirect my attention back to (arguably) more important points of the on-going monologue.
But it got me thinking about older movies and Road Trip came to mind. In short, it is about a group of Ithaca College (NY) students racing against time trying to get across the country to the main character’s girlfriend’s dorm in Texas before her mail arrived. It was going to be close so they needed the quickest route to get there.
There was the route that took all interstates and would definitely be the safest way. But would it be fast enough? Preliminary math on the mileage didn’t look promising. However, there was another path that was more closely aligned with “how the crow flies” that would cut considerable time off of the trip. It would take them on unproven, side roads. It was the classic “risk versus reward”.
One of the quotes from the movie that I still remember is from the character, Rubin, when he was defending taking the unproven route:
“It’s supposed to be a challenge, it’s a shortcut! If it were easy, it would just be the way.”
The point that I take from this is that if something is straight-forward with the least amount of risk, it is “the way”. It’s a “best practice”; there is no short-cut needed. If they could have made it to Texas in plenty of time on the interstates, they would have been cruising in the fast lane there (though it would have made the movie less interesting…).
The way may be boring, but it is effective. And it requires good planning in advance.
As a property manager in Charlotte, we ask our owners approximately 75 days prior to lease expiration whether they want us to extend a tenant’s lease and for ideally how long of a time period (one year or multi-year). If the rental home is being kept as a long term investment, then “the way” is to offer to sign a lease extension for a long period of time. If the owner wants to sell it in the near future, “the way” would be to sign a shorter-term lease and/or let the current lease expire and go month-to-month until a notice to vacate is needed.
In a perfect landlord world, tenants would be in leases all the time (no vacancies!), but landlords could still sell the home and have the tenants vacate when the buyer wanted. But, alas, the world doesn’t work like that. We live in a world of tradeoffs.
A lease is legally binding regardless of who owns it. The main trade-off made with long term leases is that both the tenants and owner are sacrificing flexibility for security. The tenants now cannot move out (without incurring financial penalty) if Uncle Joe calls in a few months and offers a free house to stay in. They are stuck in a lease. And, on the same token, if the owner loses his job and wants to move back into the house, he cannot kick the tenants out and take the house back. On the plus side, the tenants can feel confident that their kids will be able to go to the same school for the life of the lease. And the owner can count on monthly rental payments.
There is security for both parties, but not flexibility.
You usually can’t have it all, no matter what Michelob Light says.
But what if the owner did extend the lease and then decided he wanted to sell the home right away? We still live in the United States of America and no one can tell someone they can’t sell an asset that they own. However, when selling, the prospective buyer would be purchasing the home SUBJECT TO the existing lease. In short, the buyer would be stuck with the tenants at the terms of the lease for its duration. For investors, that may be acceptable (or preferable!). For someone who intends to live there, not so much.
That’s when Rubin’s “shortcut” would be needed. And that is when it can be a challenge. Solutions include trying to find investors to buy the home subject to the lease, letting the tenants out of their lease and encouraging them to find a new house, and/or negotiating a financial settlement to entice the tenants to move. It can be tricky (and not always successful).
However, shortcuts sometime work out. The Ithaca students were able to get to the incriminating piece of mail before the girlfriend could get to her mailbox. But it was a stressful “road trip” and success didn’t seem likely during most of it.
I don’t know about you, but I generally prefer the calmness of the way; “boring” property management works well for me! It’s good to make lease extension decisions thoughtfully now to avoid having to take uncertain shortcuts later.
Happy Landlording!
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Rental Roomies & Higher-End Homes a Win-Win?
“Many hands make light work.”
(Old English Proverb)
I remember back to my college days in sunny Arizona when I had to figure out where I was going to live my sophomore year. Most of my friends were thinking of staying in the student housing in the dormitories for Year 2. I had virtually no experience with rental properties and wasn’t sure what to do.
I talked to my Dad about it (I learned early it was always smart to run my plans by my financial backer first). He didn’t really have any input on where I lived; I was the third child and he was much more pragmatic. “I’m paying XX dollars for your housing- just let me know in what bank account it should go. So, in that brief exchange, I had my financial backing and freedom to choose where to live.
Some of my friends got similar commitments from their parents and we were house hunting! Of course we were all-in on finding a house with a pool (common in hot Phoenix) and hot tub (more rare, but not insurmountable). We found a 4 bedroom house with both, plus lemon and lime trees in the backyard to boot. It came to $1,200.00/month (which was high back then for Phoenix and definitely over market rate).
But… split between 4 guys it was $300.00/month which was a third of my Dad-provided housing budget. I now had extra funds to play with. We, as a group, were overpaying, but I was psyched! I was paying much less than if I was living on my own or with one other roommate.
I’m seeing a similar play in the rental market as prices continue to rise. Some of our higher-end rentals are (smartly) getting taken by groups of young professionals.
First, as a point of reference (according to Rent.com), the average one-bedroom apartment in Charlotte in April 2022 costs $1,513.00/month and the average two-bedroom is $1,730.00/month.
If we chop that into per person, we can calculate roughly $850 – $1,500 per person. When that is multiplied into a 4 or 5 bedroom home or townhome, you can equate that to a $3,400.00 (low end) to a $7,500.00 (upper end) rent spend- and that’s going off of averages. Obviously, some people spend more than that on their housing.
As good of a strategy it is for tenants to decrease their rental costs, it is also a good one for landlords. Purchasing lower-priced housing in Charlotte has been very competitive for years, but most investors typically avoid higher-end housing. However, by buying higher-end housing and marketing to roommate situations, it could allow for good cash flow. Relatively-speaking, there is just not that much higher-end housing available for rent in the Charlotte market. Really nice, feature-rich houses could go fast and for top dollar.
For now, it’s a good deal for all, much like my college housing. Tenants get better housing at a lower price and investors get less buying competition and the ability to charge higher rents. It could be a rare win-win in the current investment housing market.
Happy Landlording!
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Don’t Ask Me When You Should Buy Real Estate…
“Don’t ask the barber whether you need a haircut.”
(Warren Buffett)
“Hindsight is 20/20”
(Popular Idiom)
When you work in real estate for a living (especially on what could be considered the investment side in property management), you tend to get a lot of “party questions” about buying rental homes. You hear different versions of this:
Oh, you’re in property management? My cousin owns about 50 rentals in Lincroft, NJ and is making a killing. He fills them all with Section 8 tenants and just collects the guaranteed money on the first of each month. Lucky dog! Is it a good time to start buying properties and get into something like that here in Charlotte?
There are different schools of thought on how to answer that question.
The first school of thought: YES, YES, & YES!! You sell and manage rental properties for a living- duh!!
Back in the day, I worked with a woman who would look at me cross-eyed when she saw me show any hesitation when the question of when someone should be buying real estate came up. To her, the answer was always unequivocally “now!”, followed up with “I’ll pull up some listings that we can go look at!”. In her book, it was a complete rookie move to even contemplate any different type of answer. If her kids were going to eat tomorrow, she needed to sell real estate today. So it was always a good time for anyone to buy real estate (and the more the better!).
I laughed at her response and actually thought it was a bit dishonest. But, if you followed her advice at the time, you would have made an absolute killing. And her advice is still the same, in case you were wondering.
The second school of thought: I’m not sure… (The “Honest “Approach)
A friend of mine recently forwarded me an e-mail from 2018 that we had shared discussing an investment property he was contemplating buying. I wasn’t sure (at $120K it seemed a bit high for what it was…) so I encouraged him to lowball the offer and ask for some concessions. Of course, when an offer is bogged down like that, it is typically rejected unless the seller is on the desperate side and low on options. So my friend did what I suggested and the sale never went through.
On top of his recent e-mail was a link showing that the property sold this year for $210K. So in less than four years, he would have pocketed $90K; that’s not a bad day in the office for the eventual buyer! But I felt sort of badly that I helped talk my friend out of what turned out to be a great deal. Fortunately, he is a gracious guy, and hasn’t come over to break my legs (yet…).
So, don’t ask me when you should buy real estate! I want to give you the right answer, I really do. But timing the market is tough. I’m not sure if we are on the top of the market (and about to fall of a cliff) or if we are only getting started.
However, if you can make the numbers work for immediate cash flow and have plans to hold the real estate long term, it is a good time to buy now (especially in Charlotte!). I can say that with all honesty while not drawing the ire of my old co-worker.
Happy Landlording!
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