Dealing with Tenants

It appears I continue to have to back up each time I discuss apartments. I started with how to buy an apartment building, then why to buy one, and now I am hearing the objection that tenants create major headaches and damage. It's the fear of the three "Ts"; tenants, toilets and trash. Well let’s solve the tenant one now.

One person complained that they have a resident manager who seems to listen to the hard luck stories of tenants who are consistently late on rent. They were not sure if they should continue with the 3-day notices and eviction threats. While they said their current screening is much better than in the past, they inherited some problem tenants and asked what I would suggest to deal with late paying tenants. Here is what we discussed and what I said:

It seems like you have several things going on at the same time. One involves training your manager, but maybe that’s been handled because you say your screening is better now. I think the apartment association does seminars to help in this area.

Regarding the tenants, in addition to the screening, I think you have a couple of choices. First, you or your manager must be diligent with your 3-day notices to train your tenants that the rent is due on time. If you get sloppy, the tenants will get sloppy.

Second, you can interview the tenants to see how you can help them pay the rent on time. There are services that do automatic bank drafts for rent payments. But what if your tenants don’t have a checking account?

You can train your tenants how to handle money more effectively. I hope you know how. If you own apartment units, I expect that would be the case. However, I’ve discovered that 90% of our population has not been taught money skills, not from their parents and not in the schools. How can people be expected to know how to budget for their rent, car payments, groceries, and everything else, when barely anyone has been taught?

Many years ago I came upon a novel way to solve the problem of tenants who continually paid late or had rent checks bounce. These particular tenants, a husband and wife, had good jobs, earned a good living and had good credit based on their reports when they moved in. When I sat down to talk with them about the problem, they admitted they were never taught “how” to budget. I suspected this because I’ve been teaching these skills in classes at UCLA for over 10 years. After a few years of meeting thousands of people who lack budgeting skills you know the signs to look for.

We sat down and went over the concepts and practical tools of a budget. I actually call this a “spending plan.” We talk about spending money in alignment with the goals they want to achieve. I find more people like to “spend money” than those who like to “budget.” We talked about planning for the unexpected. For example, we all know a car will break down, or need service; we just don’t know when. I showed them how to plan for these expenses, how to “pay themselves first” and how to set financial goals.

Next, we set up their budget based on their income and lifestyle. In three months they had saved an extra month’s rent in a separate account. They were never late or had a check bounce again. They stayed another two years before buying a house and moving out.

In Los Angeles we have rent control and we are limited to a 4% annual increase to current tenants and on July 1 that changes to 5%. When someone moves out we can peg the rent to market rates. I give each of my tenants a copy of my Wealth On Any Income book, (buy at Amazon) and my guess is that 50% of my tenants move out because they’ve purchased a home.

If someone doesn’t feel confident in training a resident manager, or training their tenants themselves, they can read my book first, or provide a copy of my book to the tenant or the manager. That’s an easy way to get the job done.

Rennie

Why buy an apartment building?

After my previous blog posting I got a comment that it was not a fit. Here I was writing about the steps in finding and closing escrow on an apartment building, but I was not addressing the issue of why to buy an apartment building in the first place. This came from an attorney who said she owns a small condo and wanted to know why she should even consider buying an apartment building. Her first thoughts were the three “Ts”; tenants, toilets and trash.

When we are small children and people tell us something, it becomes our truth. As adults we are far more suspicious of what we are told, regardless of what it is. When I was a child my mother impressed upon me what a great investment it was to have an apartment building. She said, “The tenants are the ones who buy the building for you.” This was a lady who worked as a bakery clerk earning an hourly wage. She and my dad sold their home when I was 8 years old and used the money as the down payment on a 4-unit building near Beverly Boulevard and Robertson.

My dad died 3 years later and she was able to raise me as a widowed single mom. When she retired she had her social security payments and a union pension. She lived rent-free and received rental income. The total was more than she needed to live on so she was able put money into saving up until the time she died. If a bakery clerk can buy an apartment building, so can this attorney and so can you.

Just like my mother, this attorney has an advantage; she owns a home, or rather owns it with the bank. When my mom died I inherited the building. It’s about a block and a half north of Beverly Hills. They bought it in 1956 for $36,000. While today that wouldn’t be enough for a down payment, my parents were only earning about $4800 per year between the two of them. This attorney had been in her condo for a while and the equity is enough to use as the down payment on a small apartment building. But, and this is very important, but she doesn’t have to do it by herself.

If you do not home a home, you can still buy an apartment building. In the same way Robert Allen writes in his books about buying property with no money down, what he really means is that you buy it without using YOUR money for the down payment. You can get seller financing or find an investor to buy the building with you.

While the Southern California apartment building market is tight, there are still bargains available. It just takes more time and energy to find them. In my last posting I spoke about one of those bargains I found. If you are not prepared to do the work yourself, partner with someone who does this on a regular basis. While I intended to share this project with two other people I now need to do a 1031 tax deferred exchange, so the two friends will have to wait to invest with me later.

Again, you don’t have to do it alone. If you find the property and can’t handle it on your own, call me. With my partners and friends we are always looking for more property. Owning an apartment building creates financial security, it is purchased for you through the rent tenants pay, and you have tax advantages I did not even discuss in this posting.

Rennie

Buying an Apartment Building

Today I received great news from my broker, Robert Bluman (www.RobertandDianne.com) I placed an offer on an apartment building in Burbank and the offer was accepted. BUT, how it works when you buy a house is not how it works when you buy an apartment building. There are phases that have to be completed before the deal is done.

Phase one – find a property
a. Create criteria for the income property that you want based on your long term goals, preferences, ability to manage (or provide to a management company), cash flow, ROI, deferred maintenance, mismanagement, ability to add value, whatever.
b. Then find a property that fits your criteria. That is the most difficult part; you could look on www.Loopnet.com, the classified ads, work with one broker or several brokers, do a mail campaign to apartment owners, or whatever. While I found a few that appeared to be a fit over the last 18 months, it does not mean any of my offers were accepted.
c. Make a written offer on the property and put up a cash deposit. With apartment buildings you do this BEFORE you see the inside of the property. When buying a house, you do not make an offer until AFTER you have seen the inside of the property.

Phase two – make an offer
a. If your offer is at all within the range of acceptable, you continue to negotiate the price and terms until you and the seller come to an agreement. Terms are just as important as price, and sometimes more important. Examples: Do they want to carry back any financing? Do they need a short or a long escrow? Are they willing to do any repairs?
b. After you come to an agreement on the offer, you now set up an appointment to see the inside of the units. This is called the "inspection period." It would occur 7, 10 or 14 days from the date the offer is accepted. This is one of the terms that is negotiated.
c. This is a two way street; as the buyer I need to prove that I have the ability to buy the building; that I have the cash for the down payment; that I know what I am doing (own other properties already); and present documents that prove what I say.
The seller needs to provide an accounting for the building, leases, permits, estoppels, and proof of expenses like utility bills and maintenance.

Phase three – enter escrow
a. If I like what I see and the seller likes what he sees, we now enter escrow. If I don't like what I see, the process stops and we do not enter escrow. If the seller doesn't like what he sees, the process stops and we do not enter escrow.
b. Escrow continues with all of the documents being prepared so the sale can close, down payment funds are verified, liens are handled, financing arranged, deeds prepared and so on.
c. If items were found that could not be discovered in the initial inspection, then more negotiation can take place. A cracked foundation is discovered, a leaking firebox for the heater, a lack of permits for remodeling or the replacement of water-heaters, whatever.
d. When everything can be finalized and signed and recorded, escrow will close. The buyer gets title and the keys to the property and the seller gets the money.

Phase four – dealing with the tenants and the property
a. Now you notify the tenants about the change of ownership and where to direct rent payments; get leases signed if they were missing (and if you want them), evict tenants that have not paid rent and do on.
b. Begin to take action based on your criteria. Here are my criteria: I look for buildings that have been mismanaged and have deferred maintenance. This usually means it has below market rents and I will be able to purchase it at a good price. I will then invest in the remodeling work and raise rents to market, or above market rates. In the Los Angeles market, for every dollar of additional rent that I create I have added ten dollars of additional value to the building. To see our properties, visit www.ValleyVintage.com

Rennie

Credit cards & vending machines

A recent article (2-26-07) in the Los Angeles Times reported on a new market for credit cards; vending machines. It appears sales have been lost because many people just don't have change, and most vending machines will not take bills larger than $5; but most people are carrying $20 bills they got from the ATM machine.

So while consumers are excited to find a vending machine where they can use a credit card that will give them expensive candy or soda, and Cadburry Schweppes and MasterCard are thrilled to see the sales up by 5-35% in their test markets from New York and Chicago to Dallas, I am concerned that consumers will create even more debt they cannot pay off.

About 14 million Americans cannot do any better than make the minimum payments on the credit card debt. People often make purchases in a trance, do not do comparison shopping, and have no plan on how to get out of debt. They have become wage slaves to the credit issuers and little by little line the pockets of major corporations while going into bankruptcy. Of course many people, one third of credit card users, pay off their balances in full, so I am not talking about them. I am talking about the other end of the population that is being taken advantage of.

According to Vending Times, an industry publication, 2005 sales was $46 billion and was practically all cash. What a wonderful new market for the credit card issuers. Fast food restaurants were the last big cash outpost to gain credit card acceptance, and we are all so much healthier as a nation now that we can eat more fast food and put it on our credit card.

While I don't have any solutions here, I can at least post a warning: Wake up and be conscious when using credit cards, or making any purchases for that matter. I created a spending register many years ago that has helped thousands of people get on track with their spending. In 5-10 seconds it allows them to evaluate if they are on target to their financial goals. It allows them to be conscious when they spend money. More more information on that concept, please read my book, Wealth On Any Income.

Money vs Marathon

Yesterday, Saturday, March 3, I taught the UCLA class based on my book, Wealth On Any Income, and today I rode my bike in the L.A. Marathon bike tour. The bike tour starts at 6 am, 2 hours before the start of the Marathon. In that way it is completed and those on bicycles are not in the way when the runners get started. This year, to have it even more safe, the runners started at least 8 miles away from where the runners started. Based on this opening paragraph, you may be wondering, what does this have to do with the title, Money vs. Marathon. Right?

I didn't connect the two until today when I reflected back on my class in how people develop the habits they need to handle money effectively, pay off debt, save, invest, and so on. I can no longer run in the marathon because my right ankle gives up too soon, like 2-3 miles. So, now I ride a bike. Back when I started training, it doesn't matter if it was to run the marathon or ride the bike, I didn't start by running or riding 26.2 miles. Specifically, when I started jogging, I got 1/4 mile before I was winded and had to walk. From there, I gradually increased the distance.

When I started riding my bike, I would practice by riding up the hills in Encino. I recall the first time I tried this; I had to stop and rest 3 times to go up a steep 1 block hill, and that was even after doing a zig zag pattern up the street. I couldn't even go up the single block in a straight line. But now I can ride all the way up to Mulholland, about 3 miles staight, with no rest stops.

Now I will get to the part about money: It works the same way. The principle that creates wealth is based on a concept that is 5000 years old called "pay yourself first." Many people will do a spending plan, or budget, and figure out they need to set aside 10-20% of the their income to meet emergency spending and retirement goals. Rather than start where ever they can, like 2, 3 or 5%, they act like they have to run the marathon without building up their bodies to go the distance. If they can't set aside 15% right now, they do nothing instead.

This is how money and the marathon are related. When it comes to creating wealth, you need to start from where ever you are, take some actions, set aside some money, and as time progresses move on from there. Start a savings plan now. Increase your 401(k) deferral. Set aside funds for emergency spending, regardless of how little it might be right now.
Rennie

Location, Location, Location vs Price & Value

I ran across the following article by Kerry Bodily. He is a 25 year veteran of the real estate industry, a real estate instructor, award-winning software designer, real estate board officer, and advisor to the Multiple Listing Service. So I think what he has to say about the difference between the old adage about real estate value being "location, location, location" may need to be questioned. The following is his article in it's entirety. His book on the topic is available at Amazon.
Rennie

How the Real Estate Market Really Works
Determining Price and Value

Imagine living in a home on a busy street with a major train line just beyond the back yard fence. People really do live in these locations, and even worse ones, by choice, but why? We’ve all heard the real estate adage, “location, location, location,” but there are two things much more important than location, and they are price and value.

You see, in real estate especially, you can only buy what you can afford. But regardless of the location, style, or attributes, as a buyer, you should still receive maximum value for the price you pay.

Let’s say, for example, that you’re wearing your buyer’s hat. You’ve hopped in your car, driven all over town, and you’ve personally inspected every viable property in today’s market that meets your particular needs and requirements. Now you’ve chosen one: A single, perfectly beautiful piece of property and the first issue you should decide is what is its intrinsic value to you. After all, you are the one who will be living there.

But what if you could determine the value of this property before deciding to enter the negotiating stage? Then you would know whether the asking price was too high (forget it), too low (a steal), or just right (perfect). In other words, there wouldn’t be a need to consult with an appraiser, a real estate agent, a relative, or even your best friend, because we all know what happens next: if you ask the opinion of others, the answer would come from their perspective of price and value, and not yours.

What I’m getting at, is that the truth about price and value in real estate is quite simple:

Today’s competition determines today’s value

If you have just viewed a dozen properties, and you have inspected and evaluated each, then that is today’s competition. It’s not what sold yesterday, or what recently sold up the street, or what just sold three blocks over, but it’s what’s on the market today. Once again, it’s today’s competition that determines today’s value.

Think of it this way: that you, as the buyer, are the expert on value. The real value is simply what it is worth to you. And therefore, your opinion of price and value is now exalted. Why? Because, without a buyer, i.e., without you and your genuine interest in that single, perfectly beautiful piece of real estate, there is no sale and you are not going to pay more that it’s worth to you, the buyer.

Now, by contrast, let’s put on a seller’s hat and take a walk through the immediate neighborhood. Yes, walk! Though the buyer must drive, the seller can walk. Why? If you’ve ever sold a home, or talked to a real estate agent or appraiser about how to value a parcel to sell, the typical explanation takes a wild and crazy turn away from the simplicity of value. The common answer passed down through the decades would sound like this: Find three properties that have sold recently, in your neighborhood, preferably mirror images of yours, and even on the same street, if possible.

Now those comparables, when presented to the seller, along with a myriad of statistics, market trends, charts, graphs, and other non-conclusive data, will ultimately suggest a price range from which the seller can choose. The typical seller will usually choose the higher values from the range. Wouldn’t you? But, does that sound anything similar to how buyers value properties? No. In fact, it’s exactly the opposite! Sellers are looking at properties from a market that no longer exists, and buyers are looking in today’s market at the only choices they have.

Let’s ask the question, “Why should there be any difference in how value is determined, regardless of who is asking the question, or for what reason? All logic says, “There shouldn’t be,” but each half of the market, i.e. buyers and sellers, determine price and value from opposite sides of the fence, if you will. Is there a problem here? And, if so, is there a solution?

One example of a problem for sellers is signs that say, “Price Reduced.” The implication is that the seller has finally realized the property is over-priced, i.e., not priced competitively, and now wants to fix it. Too little, too late? Maybe. Consider this: When a new property is added to the market most of the activity takes place in the first few weeks. In real estate circles, this is often labeled as, “The window of opportunity.” Buyers and agents who are actively looking in that area and price range will often try to be first-in-the-door. If their first impression is, “Nice house, but overpriced”, then they move on and rarely look back. Though, to appease sellers, it is often said: “Buyers can always make an offer,” but most buyers don’t want to start negotiating with a seller who has visions of grandeur. The point is: the property would not have been over priced if the seller had determined the value the same way typical buyers would in the first place.

The real solution for the seller is almost as simple as driving around town or looking on the Internet and identifying your viable competition. Now adjusting for differences and determining your comparative value requires some simple tools, which are slightly beyond the scope of this article, but the real challenge here is overcoming the natural human trait of resistance to change. As a seller, put on the buyer’s hat and try looking at the market through the buyer’s eyes, though this approach would be foreign to most real estate agents or appraisers. Open minds, open doors!

Kerry D. Bodily, author of Untold Secrets How the Real Estate Market Really Works. http://www.pricingrealestatecompetitively.com/,
To reach the author directly, you can email him at kerry@kerrybodily.com