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Property Investing Safe Haven

Commercial property alternatives

It’s sometimes easy to get too staid as a property investor. If you’re used to residential investing, you tend to stick with it, thus placing most all of your real estate eggs in one basket. If you’ve been doing this for a while, you might want to consider a safer haven for part of your nest egg….commercial property. And by commercial property, it can run the gamut from office and retail space to more niche-oriented, but relatively safe property investments, such as medical office space, hospitals and nursing homes. The entire medical care industry is a safe bet for tenancy in the mid to long term periods.

Building your safety net

You’ll soon discover that locking up tenants for long term leases is a whole lot safer and more predictable, let alone less expensive to administer, than finding tenants each year for every one of your residential rental units. The time factor of not having to constantly be advertising, screening, doing financial and background checks, and dealing with a multitude of residential tenant emergency issues makes renting to commercial tenants a great boon as an alternative.

Office buildings, for example

Consider the benefits of office buildings, where many leases with a wide range of tenants over multiple lease terms helps to increase their overall return on investment, relative to residential property. When one tenant in an office park leaves, the effect will be minimized on the overall performance of the building, compared with residential rental unit buildings, especially smaller multi-family dwellings with less units than apartment houses.

In addition, if you own commercial property, you’ll certainly be negotiating for longer-term leases than only one year. Typical commercial leases will range between three to five years on average. Some, a lot longer, depending upon how much remodeling work a business has to do prior to moving in. The more upfront costs they have to incur to get their store ready, the longer the lease they’ll be looking for, in order to help them amortize the total cost of their renovation in your building. On the other hand, a two year lease in residential property would be considered long. And then you have to spend the time replacing any tenant when they leave.

The upshot of the longer term leases in commercial property? Simple…you’ll be able to plan better, as well as realize a greater degree of security and consistency of cash flow by having longer-term tenants. The steadiness of the income stream is one of the chief advantages of commercial property over residential investments.

Other benefits of commercial property

There are several other key benefits of investing in commercial property relative to residential investing. Consider that commercial real estate offers a wonderful buffer against inflation. This is because most tenant leases, since they are mid-to-long term in nature, have bump-up increases in yearly rents. This acts as a hedge against inflation. This helps build in increased valuation for your commercial property over time. In addition, there tends to be less market volatility amongst commercial buildings. Especially ones that are at or near capacity for rentals. Relative to residential buildings, commercial property will show a much flatter growth line, with fewer sharp spikes or dips.

Lastly, commercial real estate offers the ability for certain tax breaks that may not be available for residential property. For example, if building or renovating in a central city a municipality may be offering commercial property owners certain tax-deferred tax breaks to spur construction in their city. This is just one type of tax benefit that may be available to commercial property owners relative to residential investors.

photos courtesy of miamire.com, businessfinancespecialist.com, barryspringerlaw.com, luxist.com, browninsuranceservices.com

Investment Property Dangers: Your Tenants

Heed the warning signs

Here are some basic no-no’s to be aware of and avoid when acquiring investment property. These are related to strictly tenant issues here for brevity’s sake. When you understand how you can get burned, you tend to steer clear of these pitfalls more easily, and heed the warning signs that are associated with these particular set of investment property dangers.

The Tenant Slide

The slippery slope of leasing to tenants is a definite learning curve. Hopefully, you can scope these common dangers out before they hurt you financially. Tops among tenant problem areas is that, by and large, renters have a bundle of legal rights that protect them. So, for example, you can’t simply throw a tenant out if they don’t want to leave, without first going through an eviction proceeding. They didn’t pay you rent last month? They won’t allow you n to inspect their unit? You’re getting complaints from other tenants in the building about them? Tough. You still can’t legally throw them out until you go through the formal eviction.

You’ll still have to pay an attorney to take you through the eviction process – and win. And this not only costs in terms of their fees, but the time spent could be several months – of lost rent. Not to mention the clean-up and repairs after the tenants trash your place. How to prevent this? Always find good tenants. And that’s not always so easy to do…

Vacancy issues

And speaking of lost rent, vacancies are another lurking property investment danger. Even in a tight rental market, when one renter leaves, you still have to show the unit and usually clean it up, or even simply paint it, before the next one can move in. That’s a month of lost income right there. Naturally, you build in a vacancy rate for all your units when figuring out your cash flow – but don’t think you’ll escape unscathed in softer rental markets, or areas with stiff competition for apartments. Don’t be surprised if you’re losing several months’ rent when you lose a tenant.

The “bad” tenant

Of course, another key investment property danger is the Tenant from Hell. And yes, there are a few of them out there. Most landlords can relate their “Tenant From Hell” story. It ain’t pretty. A seemingly “normal” renter can become a bad tenant almost overnight. Your unit will suffer the most. Bad tenants have a nasty reputation for tending to destroy units. It’s usually not willful…think of it as more “playful” destruction of your property. It’s just in their genes. And it will cost big bucks to repair said unit after you successfully remove the tenant through the aforementioned eviction process.

Lawsuits and you

And also don’t forget this fun investment property danger: when your tenant sues you. They could slip and fall on a patch of ice in your parking area, or fall on a cracked walkway, or trip on a poorly lit stairwell in the building. Whatever the reason, if the tenant is determined to see some cash from your misery – they will be relentless. This is mainly due to our legal system, as well as how our insurance companies work. Naturally, as any smart landlord, you have adequate liability insurance on your building. (Remember my article on you and your insurance agent, right? The one where the agent tells you his recommendation for how much liability insurance would make sense for your size building?)

Well, even with the right amount of liability insurance, a suing tenant will traditionally have hired a personal injury attorney who only gets paid if there is an award of cash damages. They traditionally receive a third of the award. Then they sue you, your insurance company’s attorney reviews the case, and in long order (yes, it takes months if not years in some cases), the insurance company authorizes a settlement amount to pay out to your tenants and their attorney in order to avoid a lengthy and potentially devastating court case and heftier damages if they lose in court. This is our judicial system. Welcome to it. Yet another potential investment property danger just waiting to snag you.

photos courtesy of investors.housez.ca, kristinandcory.com, mcclurepropertymgmt.com, tenantchecker.com, clickpropertymanagement.co.nz, tenantscreeningblog.com, thegreatestrealestateblog.com

Quick Property Investment Tips

Advice for the beginner investor

Novice property investors should be cognizant of these quick and simple property investment tips. They will keep you pointed in the right direction. Always refer back to them when you hit a snag in the process… (It also makes sense to try to memorize them, and recall them as you begin searching for new investments to acquire.) In this way, you too, can become a savvy, experienced property investor.

Purchase for retention

Make sure you always purchase rental properties for retention purposes. The longer you hold, the better equipped you’ll be to take advantage of long term appreciation in the property. You’ll also concurrently be writing down any mortgage note you’re paying off, thus increasing your equity valuation in the property. If you make a plan for purchasing a property at set intervals (for example, every couple of years – or yearly, even better), then you’ll be able to slowly accumulate a portfolio of properties (your “stable”) that will continue to throw off ever-increasing amounts of cash flow, as well as capital appreciation.

The power of leverage

Make sure you take advantage of leverage, when possible. While making all cash offers on properties may be advantageous to netting the best price on any one property, it is not advantageous to utilizing other people’s money to grow your investments through the concept of leverage. If you can obtain a mortgage, by all means do so. The greater the loan to value ratio the lender will allow, the better. Just make sure you don’t overextend yourself, and that you’ve double-checked your expense numbers properly. You want to ensure you have a comfortable positive cash flow on any property you’re thinking of acquiring.

Beware the bargain basement

While the concept of “stealing” a house in an auction or other competitive bid situation sounds really appealing, always be wary of the cost of a “steal.” Finding a great bargain in a poor location is like finding fool’s gold: you’ll end up paying for it down the road. Long term difficulties with obtaining market rent, high vacancy rates, and terrible capital appreciation tend to make that “steal” a steal for the seller! So be very, very careful when a deal feels too god to be true. It probably is.

The location axiom

Naturally, more desirable neighborhoods will yield greater upside potential in terms of capital appreciation. This does not mean buying a property in a rundown area is bad. Just be aware that a cheaper price for a lesser neighborhood will require you to understand the vagaries of dealing with the neighborhood…which will probably be run down in five or ten years, or whenever you will be selling the property. Keep your sights set realistically. If a bad neighborhood is all you can afford, make sure you don’t expect much from the property n terms of its capital appreciation over time. Or, at the very least, buy in a changing neighborhood – one that’s experiencing the start of some gentrification. (Hint: let the changing face of local stores be your guide here.)

Cash flow is great, but…

Make sure you always keep an eye on the capital appreciation rate in any given area you’re searching in. It’s the holding and growth of the marketplace of houses surrounding your building that will add value to your property in the long run. Be very mindful of this fact. Your year-to-year cash flow is obviously important to paying the bills and allowing yourself a profit on a regular basis. But it’s when you are ready to sell the building that most of your profit should be made…

Create an individualized investment strategy, and stick to it

Critical to this concept is that you’ll need discipline. In addition, you’ll need a plan. And most importantly, you can’t have discipline and a plan without also being scrupulously devoted to research and numbers-crunching for any potential property you are looking at. Simple math errors, not doing total due diligence on a property, accepting seller information only – these are like death to a property investor. You cannot tolerate mathematical mistakes. If you know this is not your strong point, then enlist the aid of a partner – or at the very least, seek the outside help of a trusted, math-oriented friend. Either way, this is the simplest way to mess up. So don’t.

photos courtesy of worldpropertychannel.com, images.cisdata.netmlsNY, pooboy.com, dminotes.com

Property Investing Analysis Shortcuts

Tips for quick comparison of investment property

All property investors should be able to utilize a couple of quick and dirty techniques to ascertain whether to make an offer on any property. You’ll certainly want to compare comparably priced buildings (comps) to see if their recent sales prices are in line with what you hope the purchase price will be for any particular property. And as you gain experience, you’ll find you’ll get better and better at understanding local comp values in your particular area.

Return on investment

But the most important ingredient in determining the relative value of any given piece of investment property, is the projected Return On Investment (ROI) calculation. Determining the projected ROI on any property will allow you to quickly and easily compare many properties you see in any given day.

To minimize the sheer volume of properties to consider making an offer on, try to figure out the relative cost per square foot for each property you consider worth your while. Using a price per square foot comparison is a good way to rule out obviously overpriced investment properties from your offer list. This will save you time and running around town energy as you search for your next investment property to make an offer on. And it should help you create a range to compare apples with apples for different investments. However, this type of analysis won’t help determine what a good offer price should be.

Calculating ROI’s

The simplest way of calculating the return on any piece of investment property, you’ll need to first gather all the investment costs. These include your total down payment, your loan costs, any renovation/repairs costs, and your property taxes, insurance and mortgage payments. Make a projection for your selling price based on comps, then subtract the loan balance you’ll have left when you eventually sell it.

Once you subtract the loan balance from your sale price when you sell, you’ll have your net proceeds from the sale. Then just divide your total cost into your net proceeds, and voila, you’ll have your total return on investment. Then you’ll be able to compare other possible investment properties one to another. You can then choose the optimum ones to make offers on as you compare apples to apples. With this quick and simple technique, you’ll be able to fly through a large volume of potential investment properties, winnowing them down to a choice few that will provide the optimum ROI’s.

photos courtesy of flickr.com, carterrealtyagency.com, nathalykolp.com, newdenverrealestate.com

Insanity

A tale of WHOA!!!

Let’s say you purchase a piece of commercial property. You then find a tenant for it, sign your lease, and start collecting rental income that will produce the intended positive cash flow on your commercial building.

Sometime down the road, you then find out that there is suspected criminal activity going on in your building by your tenant. You find this out by criminal charges being filed against you by the local district attorney. Now you have to fight – not simply for your right to make an income on your investment property – but to stay out of jail.

Sound impossible here in the U.S.? Think again.

A chilling story…

Recently, this story about a local commercial landlord was reported in the Burlington (Vermont) Free Press:

“Chittenden County’s top prosecutor said filing criminal charges against landlords that host spas that mask as prostitution sites is the latest effort by the state in helping local communities combat the problem. State’s Attorney T.J. Donovan admitted state and federal investigators have had little luck in the past 10 years pursuing prostitution at the spas. “We can do better in this community than what we’ve done. And frankly our approach to this problem in the past hasn’t worked. We need a new approach.” Donovan made the comments minutes after a Burlington man pleaded not guilty to a charge permitting his building in Williston to be used for prostitution.

Lunacy? You bet!

But wait – there’s more:

Once the landlord “received a warning letter last week from Donovan, the property owner took action to get the tenants to leave. He said they vacated the building, and the business is closed and in search of a new tenant…Donovan is trying to send a message to the community so landlords are on notice. Donovan said going after the landlord is a new philosophy in trying to battle prostitution.”

Kind of makes you want to see if Mr. Donovan owns any rental property, then rent it out, set up an illegal lemonade stand in front of it, then get him to charge himself with illegal activity….Oh, that’s right – that would be a conflict of interest…

Goose stepping ramifications

Imagine the ramifications of this particular case for property investors. Any landlord leasing out rental office space would be liable for the actions of their tenant. Let’s say you’re renting to a hedge fund company that absconds with their investors’ money, a la Bernie Madoff, for example. You get arrested. Let’s say your tenant leases warehouse space from you. To store their ( place your preferred name of contraband here). You get arrested. Let’s say you’re renting out an apartment – maybe it’s your vacant apartment upstairs in a building you happen to also live in. The tenant sets up a meth lab. You get arrested. Or puts in more unrelated “tenants” than your lease allows. Again, you’re on the hook to be arrested.

To paraphrase Mel Brooks, “what in the wide world of sports is going on here?”

Simple. Zealous prosecutors in a judicial system that is by definition political, and requires district attorneys to be elected to their office, create an environment of absolute insanity in a free market capitalist system for property investors.

A simple solution

What can be done? Again, simple solution. Vote against these zealots. Get them out of office. If you have one in your area, and they are clearly taking a broad stroke approach to fighting crime by going after landlords, then fight back! Get your friends and family to vote them out of office. Spread the word, write letters to the editor of your local paper…voice your opposition to Gestapo-like tactics by overzealous local prosecutors.

Besides our basic capitalist system being threatened, it’s your investment property dollars that are at stake. And that’s the bottom line.

photos courtesy of magnoliaforever.wordpress.com, thegreatestrealestateblog.com, clickpropertymanagement.co.nz, brookdale-pms.co.uk, tenantscreeningblog.com, futurity.org

Doom And Gloom…Or Real Opportunity?

Get ready – it’s going to be a bumpy ride

A new article published this week in MSN Money on-line (“Welcome To The New Recession” by Anthony Mirhaydari, MSN Money, April 24, 2013) questions the underlying stability of the U.S. economy right now. Mr. Mirhaydari, a regular writer on stocks for MSN Money, makes a strong case for this instability. He cites that many indicators are pointing to very stormy weather for our economy in the near future. This will occur despite the stock market’s current robustness, as well as the Federal Reserve’s continuing to pump more money into the U.S. economy.

Mr. Mirhaydari makes his case clear and succinct: “But while the market suffers from Ben Bernanke’s reality distortion field, the situation on the ground is deteriorating quickly. Nearly 70% of the economic data points released over the past month have missed expectations, up from 53% two months ago and 35% three months ago. As a result, by some measures, the economy appears to have succumbed to a new recession, invalidating the theory that cheap money solves all problems and casting a pall over the market’s recent rise.”

Backing it all up…

He goes on to back up his conclusions with more recent information: “Just consider the economic data we’ve received so far this week. The Chicago Fed regional manufacturing index disappointed. Existing home sales disappointed. The Flash PMI manufacturing activity index disappointed. The Richmond Fed regional manufacturing index disappointed. New-home sales disappointed.”

The writer then goes on to reach some rather obvious deductions: “It wasn’t supposed to be this way. The fiscal cliff and sequestration battles are behind us. The Fed is pumping $85 billion a month into the bond market. The Bank of Japan just pledged to double its monetary base over the next two years. The Eurozone debt crisis is off the front pages. But as I’ve been saying for months, none of this addressed the deeper, structural problems such as tapped-out consumers pinched by a slowing job market, higher taxes and lower savings. Or a slowdown in Asia, especially China. Or a deepening recession in Europe, which is now infecting Germany, as illustrated by its abysmal Flash PMI manufacturing activity report Tuesday. Or the fact Congress hasn’t finished its budget battles, with $2.5 trillion more or so in additional budget austerity needed over the next 10 years to stabilize the national debt.”

How these conclusions will affect property investing

I had previously written here at the beginning of this year that “I don’t believe Congress, in all its machinations on the fiscal cliff, will allow the full sequestration cuts to go through. The country would be placed in a very real jeopardy for a new recession if this were to occur, especially if there are major cuts to the defense budget, as well as social programs. If sequestration were to occur, the overall unemployment rate would zoom up in 2013 and beyond.”

So I was wrong – sue me…

We did get sequestration. Though Congress is trying to amend certain provisions as I write this article. Nevertheless, the market data indicated above proves out that we are heading towards a new, secondary recession. I had also previously written that “if the unemployment rate were to go up next year, look to continue acquiring residential rental property, since rent prices will then continue to escalate. And cash flows on rental properties would commensurately increase as well.”

Time to repeat myself

Oh, how I hate it when I’m right…OK, I won’t gloat here. But again, my suggestions for residential property investing from earlier this year are still as much, if not more, valid now: “My best suggestion for property investors in the unlikely event of a Congressional meltdown and a descent into another recession, is to consider taking the properties you already own, and use the time to properly maintain and upgrade them in a downturned economy. Use the downturn to your advantage, and try to rebuild your weaker, or deferred maintenance properties. You’ll be able to address all necessary repairs, and/or increase their valuation by upgrading the properties. In so doing, you’ll also be able to increase the rents you charge on all your improved units.”

Obviously, this will put you in better shape to ride out any recession that is forthcoming – regardless of how deep it becomes. Your cash flows and profitability should increase as you beef up the attractiveness of your properties in a market that will see even more demand for rentals as people lose confidence in home buying.

One final note…

Also remember the advice I gave in that earlier article on the coming shape of our economy, and how it will affect what you do in your property investing strategy for the coming year. “Consider the next year as a good time to try refinancing your investment properties to help increase your overall cash flow on all your collective properties. With rates at all-time historical lows, and with an economic downturn occurring, you’d be able to lock in excellent rates for the long-term on your portfolio of real estate holdings. So in the event of a recession, look to revamp, refinance, increase your rent rolls and build cash flow on existing properties owned in 2013. And hold these properties in the short term until you see signs of a recovery.”

Can I get an amen, somebody?

photos courtesy of funagain.com, singaporepropertycycle.com.sg, worldpropertychannel.com, ehow.com, phlegmfatale.blogspot.com

The Latest Outlook For Property Investing

The new normal

As the overall real estate market continues to recover across the U.S., there is now becoming a new normal for property investors. Compared with the last several years, investors need to be aware of several important changes in the marketplace. Understanding these changes is crucial to properly allocating your real estate investment dollars in the foreseeable future.

Inventories are stabilizing

As the foreclosure crisis slowly becomes a foreclosure way of doing business, and the overall volume of foreclosed properties continues to drop, the real estate market will respond by pricing rebounds. The less inventory, the more demand. This is simple, basic economic theory. Banks have been selling off their inventories of distressed properties to investors in record numbers over the last few years. And that huge glut of foreclosures has now been worked down to a manageable amount. Investors who bought them are now reaping the rewards of either flipping or holding them for rentals. This slow lessening of housing inventory nationwide will invariably tighten the overall marketplace.

Investment loans are getting costlier

Interest rates have remained at record lows for quite some time – almost three full years. That’s about to end. The Federal Reserve has indicated they may tick rates up slightly later this year, based on the continued slow but steady economic growth pattern exhibited in the U.S. last year. Rates should remain relatively low through the end of the year, on average between 3.5 to 4 percent. But the lowest rates have already come and gone. In addition, expect the credit markets to remain tight for property investors, making qualifying for a mortgage much more difficult.

The Ability To Repay Rule makes borrowing more difficult

As mentioned in one of my recent articles posted here, the Consumer Financial Protection Bureau instituted a new rule to make sure lenders prove that borrowers can actually repay the mortgage they’re applying for. Obviously, this was created to help protect the entire U.S. banking system, and avoid the collapse we came through over the last few years, as no-income mortgage lending was the norm – and got so many homeowners into hot water as they could not repay their loans. So now all lenders must verify all assets, income and debts of every borrower. In order to now qualify for a loan, the new norm here is that investors are obtaining mortgages from hard money lenders, with higher interest rates and much shorter terms, in record numbers.

As inventories level off, expect a construction boom

Records indicate that building permits for single family homes nationally are up about 25% from the past year alone. With the near-record low interest rates currently available, builders have been gambling on pent-up demand in the housing market. And it’s a demand that has been held back since 2007. New home prices have been rising faster than existing single family homes of late, and builders also want to take advantage of this trend. However, this expected larger supply of homes could keep prices down over the next year.

Valuations continue to level off

While a majority of local real estate markets saw increases in house prices over the last year of about 9 to 10 percent, due to shrinking inventories and low interest rates, this year should produce more modest gains. Economists feel these price increases will probably be in the 2 to 3 percent range. Naturally, everything is an average, so there will still be some areas of the country, like in the Northwest, which will continue to remain hot regarding price increases. But others will lag, and some major cities will continue to show little or no growth. These include cities like Denver, Atlanta and Chicago.

Investors continue to feed on distressed properties

As mentioned above, it’s getting harder to find great foreclosure deals these days, as the sheer supply of distressed properties plummets rapidly. Most large investors have gobbled up the best foreclosure deals. Real Estate Investment Trusts (REITs) enlarged their portfolios over the last two years, buying huge numbers of distressed properties, then fixing them up and renting them out en masse. Still too, many banks decided to hold a number of their foreclosures, add value to them by making minimal repairs, and have placed them back on the market with higher prices. But overall, as the inventory has declined, house prices have rebounded.

photos courtesy of reiwa.com.au, blogs.va.gov, legalrefinance.com, builderonline.com, vamortgageveterans.com, guardian.co_.uk, biz.thestar.com.my

The Story of Jackie – Ohhhhhh!!!

A cautionary tale when investing in rental property…

I was attending a get-together dinner recently for members of my curling club, as curling season begins in earnest this month. Jackie, one of our esteemed board members (and the most ebullient curler in our group) was recounting her rather unfortunate recent tale of woe. It involved a small, but rather intense kitchen grease fire that she accidentally started in her apartment. Of all the possible worst-outcome scenarios, she has to consider herself lucky – she, nor anyone else in her building, were harmed.

Her apartment was not so lucky.

To her credit, she had the foresight to have a kitchen fire extinguisher on hand in case of emergency, and coupled with her staying calm under pressure, she was quickly able to extinguish the flames caused by the fire. (Note to landlords: provide fire extinguishers for all your tenants….you know – an ounce of prevention and all…) Unfortunately, smoke damage to her unit was extensive, and while the local fire department did not have to put any fire out, the local building inspector pronounced her unit uninhabitable, forcing her to seek temporary lodging.

Several key issues arise from this accident…

Since she as the tenant was responsible for damage to her unit, what exactly is she responsible for? Does the landlord have to make the necessary repairs (utilizing a specialized fire-damage contractor, for example). What time frame must the repairs be done? Doe the landlord have to allow her back into his building after the repairs are made?

To make matters even more complicated, Jackie mentioned this little addendum to her tale of woe: the landlord was set to close on the sale of the building in a few days. So, what happens to that sale? Can it go forward as planned? What liability, if any, does the current owner have to the buyer, since they are under contract?

A bit of a pickle, right?

Let’s start with the basics – that is, Jackie’s rights and responsibilities as a tenant. She apparently did not have a lease, and was on a month to month tenancy arrangement with the landlord. Very common…but alas, very unfortunate for her and her landlord. So when investing in rental property, know that without a lease, the landlord has no requirement to reinstate a tenant in his building after repairs are completed to the unit. In this case, Jackie most probably will have to look for another living arrangement.

Liability issues

Next – what is the extent of Jackie’s liability in this case? She started the fire, so landlord negligence is not applicable here. Most leases have traditional damage clauses in them. For example, a standard Blumberg lease calls for the tenant to make all repairs at their own expense when a fire is started due to their negligence or act.

But if the tenant has no renter’s insurance, it is doubtful they will be able to cover all related repair expenses. So in reality, the limit of financial liability for any tenant is the full amount of their security deposit. If there is no lease, then the security deposit is all the landlord can recover. (Though legal action to recover further damages can be sought in the court system, it’s usually quite difficult and pointless for landlords to attempt to recover from most cash-strapped tenants.)

How to best protect yourself

Obviously, you as a landlord need to protect yourself. So the three basic rules to be learned here when investing in rental property are: You must always have a lease. In that lease you must always require the tenant to carry renter’s insurance. And that lease must also require that you be named as a co-insured on the tenant’s policy.

Now, if the tenant has a tenant’s insurance policy, then the tenant’s insurance carrier would be in the first position to pick up the tab for all repairs due to the tenant’s negligence. However, if the tenant has no renter’s insurance, then the landlord’s building insurance policy would come to the forefront, and would pay for the requisite repairs (less the deductible of course). And the landlord could use the tenant’s security deposit to defray the cost of his deductible, for example.

Either way, the tenant is still responsible for their rent up till the time the unit was damaged. If the unit becomes uninhabitable, the tenant cannot be charged rent. Of course, the tenant usually wants to move back in after repairs are completed. So it behooves the tenant to aid the landlord in finding a contractor quickly to make those repairs as soon as possible. In this case, without a lease, it becomes the landlord’s option whether to allow Jackie back in as his tenant again.

If other tenants in the building were affected by the fire as well, the landlord can’t demand the tenant make restitution for the other tenants’ rent roll, or repairs to their units. In that case, the landlord’s insurance policy would cover both the lost rent revenue from other tenants, as well as increased expenses due to the additional repairs from the fire damage. However, any time a claim is made on a landlord’s insurance policy, obtaining subsequent coverage for future buildings may be much harder to get. In addition, premiums may rise on existing policies as a consequence of a claim. That’s why it’s also so important to require your tenants to carry their own insurance, with you named as the co-insured on that policy.

The hard part

When there is an existing contract of sale in effect between the landlord and a buyer for the rental property and then disaster strikes prior to closing – whether through an act of nature, or an act of God… or an act of Jackie…the seller is required to put the building back to the condition it was in when the contract was signed. This does not mean they are required to make everything new. De facto, some repairs require new materials – for example, new sheetrock being installed due to a small amount of fire damage. Or, in the case of a total destruction of a building due to flood, fire, tornado, etc. the buyer is not entitled to a new building.

As such, most real estate contracts cover this rare possibility by allowing the buyer to either accept the seller’s insurance company’s amount for replacement coverage, thereby taking the building damaged, as is, along with the settlement cash, or they can walk away from the deal with their deposit returned to them.

Renegotiating

In the case of a smaller amount of damage, like oh, say… a small kitchen grease fire, then it is common for some amount of renegotiation to occur. The buyer will usually be presented with several scenarios: if they want a quicker closing, they can wait for the seller’s insurance company to present an amount they are willing to offer the seller for the repairs, as mentioned above. The buyer could then accept that amount, take the building as is, then close and make the repairs themselves.

Another alternative is for the seller to make the repairs to the building, in concert with their insurance company. While this is common, it will also take much longer to close, as everyone must wait for not only the insurance company to send an adjuster out, but also a claim amount must be approved with the seller, and then a contractor has to be hired and he must then make all the repairs prior to the closing being set. Yet another option is for the seller and buyer to renegotiate the price of the building immediately, not waiting for the insurance adjuster.

Delays abound

In all cases, it ain’t pretty. And if the buyer had his financing set to go for the original closing date, he might lose it if the closing were to be delayed by more than a month or two. And usually a sales contract would spell out a buyer’s rights in event the seller has to delay a closing. (The norm would be that the buyer unilaterally would then have the right to exit the deal if he chose not to wait.)

The bottom line

So while poor Jackie has to wait for all these issues to sort themselves out, including finding temporary housing, she also wonders if she can be locally “blacklisted” by area landlords for her accident. And the answer is yes, she can. When subsequent landlords ask for her prior landlords contact information to check her references as a tenant, they may disqualify her as a prospective tenant for purely economic reasons: she has unfortunately made herself a higher-risk tenant due to this one accident.

But there will always be landlords who don’t do their homework, and don’t check references when selecting tenants. In a more positive light, some landlords may be more understanding of a prior accident, and not be so rigid, if they can be financially protected. As mentioned above, a solid lease which calls for a tenant to have renter’s insurance, and which names the landlord as co-insured, should be adequate protection for anyone investing in rental property.

photos courtesy of biancoinsurancepittsburgh.com, glogster.com, recipetips.com, floridarealestatelawyerblog.com, intowner.com, startribune.com, home.howstuffworks.com, insurancequotes.com, ehow.com

How To Be A Truly Terrible Landlord

Being a really lousy landlord is fun, easy and rewarding!

As Eddie Murphy’s radical poet character Tyrone Greene recites in his infamous poem “Images,” from the old Saturday Night Live : “Kill my landlord. Kill my landlord. C-I-L-L my landlord.”

Here’s some useful investment property advice for all you novice real estate investors wanting to become landlords. Consider this a primer for the uninitiated to help merit the kind of poem Murphy wrote.…

Make sure to follow this primer carefully

Now if you want to be a truly bad landlord, here’s what you’ll need to do:

Be especially unresponsive: don’t get back to your tenants in any timely fashion after they call you for help. In the inimitable words of Joe Walsh, “Leave me a message. Maybe I’ll call…”

When a tenant calls with an emergency, make sure to really put off getting back them. They’ll deal. Or better yet, they’ll fix the problem themselves. See – no need to get back to them. Problem solved!

Snow and ice creating a hazardous situation on your walkways for your tenants? Let them handle it. They can buy their own shovels, clear the walkways and spread salt and sand. They’ll never fall and sue me…

Seriously???

When your tenant finishes their lease, be sure not to be there the day they leave to wish them well, check their unit for damages/cleanliness, and return their security deposit back to them.

Better still, wait a month to return their security deposit. Why should they have their money back any sooner when you can keep it in the bank in the interim continuing to earn interest for yourself (at a whopping 2/10 of one percent). Lord knows – they don’t need their security deposit back any time soon…

The Tao of Bad Landlording…

Who cares what they think of me? They’ll never be in contact with any potential future tenants in any of my buildings. They’ll never jeopardize my securing only the best tenants for my units. Right? Well…right???

Why should I even give them the time of day? Their requests (for poor heat, inadequate water pressure, faulty lighting/bad electrical outlets/you name it – are all ludicrous!

I think my tenants should consider themselves lucky they have a place as nice as mine to rent out.

The proper attitude

So be sure to follow this investment property advice that gives you the proper attitude to be a truly bad landlord. Without the right attitude, you can’t possibly pull off being a terrible one. And if you haven’t already seen it, check out “The Landlord” with Will Ferrell to see the quintessential nasty landlord. It pretty much says it all:

http://www.funnyordie.com/videos/74/the-landlord-from-will-ferrell-and-adam-ghost-panther-mckay

photos courtesy of funagain.com, flvmp3.org, apartmenttherapy.com, phlegmfatale.blogspot.com, sf.curbed.com, funnyordie.com

Selling Your Investment Property With Tenants In Place

Oh, those pesky tenants…

If you’ve decided it’s time to sell your rental property that is underperforming, or if the investment property is scheduled to be sold at a particular interval, and you have tenants already in place, what is the best way to market the property? The soundest investment property advice is that tenants certainly have rights, and you must abide by them. However, planning for the sale is key.

One of the things you should do when taking on any new tenant is to make sure that your rental agreement states exactly how you will have access to their unit when you put the property up for sale. An intransigent tenant can be a major stumbling block to realizing the proper market price on the sale of your property.

Always stay on good terms with tenants

That is why it is important to maintain good relationships with your tenants over the entire term of their lease. Of course, if you have a property management company, they should be maintaining a proper relationship with each tenant as well.

When it comes time to bring your investment property to market, you’ll need to notify each tenant of your intention to sell the property. You’ll also need to give them advance notice well ahead of placing your property up for sale. If they are on a long-term lease, new prospects looking at your house will need access into their unit not just to see the condition of the property, but also to evaluate what kind of tenants they will be inheriting from you.

Avoiding devaluation of your property

A poorly kept unit with a particularly bad tenant can easily blow a sale. For this reason you or your managing agent will need to check out the unit before you put the property on the market. If there are any problems with the unit (for example, if it looks disheveled or needs repairs) then this must be addressed immediately prior to putting your investment property on the market for sale.

Another bit of sound investment property advice: it’s always a good idea to keep your tenants happy. And if you had a problem with one or more tenants prior to putting your house on the market, you might want to consider a token “gift” so that they can help you sell your property. As an example, this might include a gift card to a local dinner establishment. It should not be in the form of a rebate on their rent however.

When your property is being shown…

If real estate agents are going to be showing the house, tenants must be advised ahead of time of all potential showings. You’ll need to set up a system for the listing agency to contact the tenant and obtain their permission to come in to show their unit. At all times real estate agents have to respect the rights of tenants when going to show prospective buyers your property.

It is also important for the listing agent to take pictures of your property with each tenants’ permission for photos inside a tenant’s particular unit. The listing agent should also be giving tenants notice well in advance of any open house they may want to have on the property. (These may consist of broker open houses for the wholesale trade and/or retail open houses – that is, open houses to the general public.)

No perfect way

As an owner of an investment property being readied for sale, it is also important that you understand there is no perfect way in which to sell your investment property with tenants already living there. It will be completely out of your control what the exact condition of each unit will look like when prospective buyers show up at the door.

You also will not have control over sounds or smells emanating from each unit when the property is shown. For this particular reason, it is always a good idea to try to have showings of your property in the morning or early afternoon only, staying away from dinnertime. Smells emanating from tenant’s kitchens at dinnertime can vary tremendously, and some prospective buyers can find it off-putting. And if those buyers intend to make an offer on your investment property, this could devalue their offer.

Make nice with your tenants

The most important investment property advice for a rental property owner when selling their investment property, is that they only have so much control over the presentation of their property when tenants are living there. The best thing that an investor can do prior to marketing their property, is to make “friends” with each tenant in their building. In this way, your tenants can ultimately help you when it comes time to sell your property.

photos courtesy of nicerenter.org, realestatedubaiblog.com, trexglobal.com, howtogetridofstuff.com, mcclurepropertymgmt.com, lets4u.net, tenantchecker.com