Blackjack & Making Lease Extension Offers: You Gotta Hit or Don’t Hit

 

Blackjack is a classic gambling game pitting card players versus a dealer.  The goal is to have the card players’ hands total 21 or as close to 21 as possible, while not going over 21.  As the game unfolds, if the card holders’ hands stay under 22, they will be compared to the dealer’s hand (if he stays under 22); whoever has the higher total wins the hand.  It can be both exhilarating and frustrating!

 

The main conundrum for the card players is whether to request an additional card (“hit”) to pad their point totals.  The upside is that the closer the players get to 21, the stronger their card hands become and the more likely they are to win.  The downside is that if any of the players get over 21, they automatically “bust” (lose) and their bet for that card hand is immediately forfeited.

 

At casinos, it is not uncommon to hear players loudly talking about their decisions on hitting on their card hands:

 

“I knew I shouldn’t have hit.  I would have won!  Ugh!!”

“Yes!  I got the King I needed to hit 21.  Great hit!”

“No hit for me.  Dealer is going to bust!!!”

 

Both hitting and staying put (taking no cards) can be the right strategy depending on how the cards land.  But if a wrong decision is ultimately made, there is no way players can change their minds afterwards.  Once players take a card (or don’t and “stay”), their decision is cast and they need to wait to see what happens.  There are no “do-overs”.

 

As a Charlotte property manager, this reminded me of giving lease extension offers to existing tenants. 

 

From a landlord perspective, landlords want to charge the highest rent possible and have the tenant re-sign their lease at that rate.  From the tenant perspective, the tenant wants to stay and pay the least rent possible or move to another rental unit that serves their needs better (this could mean lower price, better or different location, different size unit, etc.).  Both sides have some disparate interests that need to be rectified before a new lease extension can be signed.

 

But an initial offer to extend the lease (tendered usually by the landlord) must be made.  And the question is what price should be asked for.  There are usually no “do-overs”.  The price offered is going to be what the tenant ultimately makes a decision off of.  Whatever it is, it needs to be strong and not wishy-washy.  Wishy-washy can create problems:

 

Landlord: Good morning, Mr. Tenant!  Your lease is up at the end of next month and I wanted to see if you were looking to sign for another year.

 

Tenant: I was thinking about it.  What are the terms?

 

Landlord: Well, I was going to raise the rent $200.  How does that sound?

 

Tenant: Not that good.  I thought I was overpaying now.

 

Landlord: How about no rent increase.  Will that work?

 

Tenant: I’m not sure.  I need to talk to my wife and think about it.  We’re going in the right direction, though!

 

Landlord: How about $200 less than you are paying now.  Would that work?

 

Tenant: Now you’re talking!  That’s more in line with what I think this dump is worth.  I’ll get back to you.

 

Landlord: How about $300 less?

 

This can create a slippery slide. 

 

Much like Blackjack, landlords need to look at their situation and decide how much risk they want to take on with potentially losing the tenant they already have in place.  Then they need to make the offer (hit) and wait to see what decision the tenant makes.  Sometimes, the offer doesn’t matter because the tenant was going to vacate regardless.  But often, the price is the motivating factor on whether the tenant decides to stay.

 

Smart landlords will think hard about how much they will raise the rent (hit) or whether they will offer it at the same rate (stay).  There is no middle ground- you gotta hit or don’t hit!  They know that once that card is played, there is little chance to do it over and take it back. 

 

Happy Landlording!

McAlister’s Deli “Service Fee” Strategy: Applicable to Rental Homes?

 

The (FTC) complaint alleges that (a large property management company) advertised monthly rental rates that failed to include mandatory junk fees that could total more than $1,700 yearly… These undisclosed fees ranged from “services” such as “smart home” technology and “utility management,” to air filter delivery and internet packages. Renters could not opt out of paying these fees.

(www.FTC.gov)

 

Some friends and I meet for a Bible study on Monday nights at the local McAlister’s Deli.  After buying my sandwich one night, I started to peruse my receipt after paying.  I was trying to figure out why my regular sandwich cost so much and looked at the bottom of the receipt.  I saw the tax amount (can’t dodge that!), but above it was an itemized “Service Fee”.  And here I thought I had just picked the sandwich up at the counter…

 

I clicked on an icon next to the aforementioned “Service Fee” and it offered a fuller explanation.  “This fee is used to help pay for the restaurant’s app and website.”  Surely, companies can’t charge for that as a mandatory fee.

 

Wait- or can they?

 

I always thought companies were only allowed to upcharge under the condition that they added more value.  If McAlister’s allowed me to add another slice of cheese to my sandwich, I’m fine with them charging me more.  If I wanted a bigger drink than what is in their value meal, I’d expect to pay more.  But ordering on their app or website?  Isn’t maintaining the on-line ordering portals the cost of doing business in today’s environment?  And isn’t it cheaper and easier for them if I use them?

 

The line on chargeable value has gotten blurred in rental real estate as well.  As property management companies have piqued Wall Street’s interest of late, maximizing revenue is being stressed and companies are getting really “creative”.  Now I’m all for “revenue enhancement” as making more money is generally good.  However, fees should be generated by providing tenants voluntary options that could make their lives easier or give them greater flexibility; mandatory fees for unwanted or unwarranted services could easily cross a line (see the FTC blurb above detailing the “value-added services” that incurred a $48M fine).

 

We are starting to have tenants ask us things like, “Is the rent really $1,800/month or are there hidden fees that are not mentioned?”.  Being that these questions are being asked at all means this practice is becoming prevalent; legislation and more enforcement is probably on the horizon.

 

Landlords and property managers all aim to maximize revenue for their real estate investments and rightly so.  However, we need to be cautious and make sure a fair value proposition is made.   If any fees are questionable and wouldn’t withstand scrutiny, they should be scrapped.  Landlords should be on notice and make sure general business practices on add-on fees stay on the right side of the law.  “Service Fees” for common technology usage may only work in the food industry.

 

Happy Landlording!

How Much Do You Know About Thanksgiving? And Your Rental Home?

My 9-year old daughter, Emme, decided she wanted to have a family “Thanksgiving Trivia” game this year.  She dutifully came up with some questions about the holiday that we’ve celebrated every year.  Just through osmosis, I figured that the adults would know most of the answers.  How hard could it be?  I pictured Pilgrims eating turkey and corn with the natives while celebrating the bountiful harvest together with some boats in the background.  That’s at least the sanitized version of events I thought we’d cover.  And it would be multiple choice!  How hard could it be?

 

Well, she didn’t take it easy on us.  Some actual questions:

 

1. How many women were the first Thanksgiving? (5, 7, or 10?)
2. How long did the first Thanksgiving last? (3, 5, or 7 days?)
3. How long was the Mayflower’s voyage from England to America? (66, 77, or 81 days?)
4. How many countries celebrate Thanksgiving?  (11, 16, or 20?)

 

As each person filled out their trivia sheets, it became apparent that we didn’t know Thanksgiving quite as well as we may have thought.  Our ancestors would not have been very proud!

 

It made me think of how well we really know our rental homes.  Sure, we may know how many bedrooms and bathrooms they have.  The advanced landlords may know how many square feet and how large of a lot it has off of the top of their heads.  But what about the aspects that would really make people interested in it?

 

One of the key aspects of marketing is differentiation.  Why would a potential renter pick one 3 bedroom / 2 bathroom house with a .25 acre lot over another with the same features?  Most of the rental homes in Charlotte were built in subdivisions that offer a large degree of uniformity.  Why would one cookie-cutter home be more desirable than another cookie-cutter home? 

 

Price and availability are certainly two differentiators.  If one home is on the market for $2,000/month and one that is close to the same is $1,800/month, the $1,800/month house obviously presents better.  Or if there is only one house available in a desired subdivision, that would also work well- one can only take what they can get!

 

But if there are five rental houses in a subdivision that are available and priced similarly, what would make one stand out?

 

As a Charlotte property manager, one of the questions we ask our new clients is what made them buy their house in the first place.  What were the special characteristics that made them want their house over all the others that were available?  Some have some great insights on why and that really helps in marketing; usually they had lived in it at some point.  Others don’t know.

 

For those that don’t know, that’s okay.  But as the people who are responsible for positioning their home in the marketplace, we need to come up with this differentiation.  What’s special about this rental home that we want potential renters to focus on that other rental homes don’t have?  “This home’s large, manicured backyard boasts a built-in, outdoor gas BBQ and covered back patio making it perfect for outdoor gatherings with friends!” is an example.

 

This also plays into what type of home renovations to do between renters.  Do we want to focus repair dollars on the making the kitchen really nice so we can use something the effect of “Enjoy the smell of simmering cocoa on the new stainless steel stove while leaning against the new granite countertops in your spacious gourmet kitchen!”  I remember picking a hotel to stay at in the mountains during one winter that highlighted the “recently renovated bathroom with heated bathroom floors” as its point of marketing emphasis.  It sold me on an otherwise non-descript room.

 

To consistently succeed in a crowded rental market, smart landlords will know their rental home well enough so they can highlight point(s) of differentiation to entice prospective tenants.  It’s tough to win the Thanksgiving trivia contest by only knowing the basics of the holiday!

 

By the way, the correct answers to the trivia questions above are respectively: 5, 3, 66, & 11.

 

I hope you had a great Thanksgiving & Happy Landlording!

“100% Guarantee For Your Rental Home!” Delightful or Sour?

 

Tommy:  Here's how I see it. A guy puts a guarantee on the box 'cause he wants you to feel all warm and toasty inside.

Ted:  Yeah, makes a man feel good.

Tommy:  'Course it does. Ya think if you leave that box under your pillow at night, the Guarantee Fairy might come by and leave a quarter.

Ted:  What's your point?

Tommy Boy (1995)

 

My 9-year old son was eating frozen blueberries a few weeks ago and started to complain about them.  “They’re so sour!  Gross!” 

 

I advised him, “Well, that’s too bad.  You get some good ones, and you get some bad ones.  It’s the way life goes…”  Then I patted myself on the back for imparting some timeless, Forest Gump parenting advice.

 

Sometime later, he complained again- and then three or four other times after eating these blueberries.  Finally, I grabbed the package off the table and saw it was the “Great Value” Wal-Mart brand.  My eyes narrowed on the “Great Quality.  Great Price. Guaranteed.” guarantee printed on the back.   Verbatim, it read:

 

If for any reason you aren’t happy, we’ll replace it or return your money.  Whichever you prefer.  All of you need is the package.  It’s that simple.  Guaranteed.

 

Now was the time to teach my son about the advantage of paying attention and reading the fine print!  “Son, we’re going to Wal-Mart and you’re going to take care of it.”  “Dad, are you sure we can bring this package in and they’ll give us the money back?  I’ve already eaten half of them…”  “Yes, son.  It’s that simple.  Guaranteed!”

 

After my son negotiated that he could keep the $2.99 windfall and put it towards a pack of football cards, he signed on to this gambit.  We drove over to Wal-Mart and, from a distance, I watched my son explain to the customer service person that the blueberries were sour and that he wanted a refund.  After a minute or so, he walked away from the counter, defeated, and let me know that we could swap it out for another bag of (sour) blueberries; there was no option of getting football card money instead.

 

Now Dad was sure there was a misunderstanding!  It’s guaranteed!  It’s simple!  And it’s a $2.99 charge to a multi-billion dollar conglomerate!  Well, yours truly fared no better when I approached the customer service desk and was promptly (but nicely) shut down.  If I didn’t have the receipt or credit card it was bought with, their hands were tied.  There was nothing that could be done.

 

Undeterred, as my young kids trolled the Wal-Mart aisles unattended, I called the #800 number that was located under the guarantee.  After a 14-minute phone call of providing serial numbers, date of purchase, and personal information, the customer service representative (who was also very nice) said that we would receive a $5.00 Wal-Mart gift card mailed to us within 2 weeks, but no cash.  When we got home, I sent a message through the “Great Value Guarantee” website and they referred me to the in-store customer service desk for any refund requests.   I wrote back saying that was where it all started!  Then I never heard back.  Ugh!

 

If for any reason you aren’t happy, we’ll replace it or return your money.  Whichever you prefer.  All of you need is the package.  It’s that simple.  Guaranteed.

 

The final scorecard read: (1) in-store visit, (1) 14-minute phone call, (1) web inquiry, & (1) 2-week wait for a $5.00 store credit.  So, obviously, it’s not that simple.  And it’s far from guaranteed.  And we are talking about getting $2.99 back from Wal-Mart which they explicitly stated was a sure thing on the package itself.

 

Great story!  But what’s your point?  What does getting a cash refund for a sour bag of Great Value frozen blueberries have to do with property management?

 

A lot, actually.  It’s about the danger of relying on corporate guarantees when picking vendors, especially in real estate.  Whether it is for home warranty insurance against bigger ticket items breaking down (HVAC systems, roofing, appliances, etc.), costly property management occurrences (eviction, pet issues, etc.), or just getting money back from poor work (a flooring vendor recently), it is difficult to get companies to honor them.  No company wants to pay (not even $2.99!) and there is always a reason why the guarantee doesn’t apply.  It’s frustrating, (super) time-consuming, and borderline unethical at times.

 

But that doesn’t stop them from being ubiquitous:

 

1. Home warranty companies: “If your HVAC system goes down and it can’t be fixed, we’ll buy you a new one!  It’s so simple.  Guaranteed!”   
2. Property management companies: “If there is an eviction or pet damage, we’ll cover the costs- It’s so simple!  Guaranteed!”
3. Wal-Mart: “If for any reason you aren’t happy, we’ll replace it or return your money.  Whichever you prefer.  All of you need is the package.  It’s that simple.  Guaranteed.”

 

Life is too short.  The best bet is to pick a company that consistently offers quality blueberries instead of trying to be compensated on the backend when they are sour.  Getting the $2.99 back is arduous at best, and unfortunately, usually fruitless.  Be wary of upfront guarantees and concentrate more on established track records of excellence!

 

Happy Landlording!

Ohio State Football Recruiting Similar to Great Tenant Selection?

 

“He has shown you, O mortal, what is good. And what does the LORD require of you? To act justly and to love mercy and to walk humbly with your God.”

(Micah 6:8)

 

“No Shoes, No Shirt, No Dice.”

Spicoli in Fast Times at Ridgemont High

 

Ohio State college football has been a dominant program for a long time.  In the last 10 years, they have a record of 106 wins and 13 losses while winning 2 National Championships.  This makes them one of the top programs in the country as they have set a standard of excellence few teams can match.

 

To have a perennially highly-successful football team, Ohio State has been able to get great players to come to their school; great players make great programs!  But how does Ohio State determine what high school football players will actually become great college football players?  What do players need to demonstrate?

 

Like every college football program, coaches will look at all the on-field performance measurables: how many yards, touchdowns, tackles, etc. each player had in high school.  And then the physical measurables:  how fast, big, agile, and strong each player is.  And then there is mental aspect where players will take tests and answer questions showing off their “football IQ”.

 

These are all very important metrics and are heavily considered; the top recruits all grade very well on most or all of the criteria.  But what gives players who measure out well in the criteria above the edge over one another?  I remember reading something about that from former head coach Urban Meyer.  He said that one of the most important things he looked at in recruiting was how the high school player played in the biggest games and versus nationally-ranked players in one-on-one match-ups; he was looking for what he considered true greatness.  Did their performance ramp up to meet the challenge or was it pedestrian?  Did most of the players noteworthy performances come against average teams or did their biggest, statistic-rich games come against the best players in the most high-profile games?  Did they look forward to and excel in the most competitive situations and will their team to win?  Coach Meyer believed that getting the types of players who had the ability to rachet their games up a notch was paramount to Ohio State winning national championships.

 

In property management, tenants are the big-time recruits!  Landlords are looking for tenants who pay on time, maintain the rental homes well, and stay out of trouble.  If landlords can secure great tenants, property management can be really easy!  This is why great landlords spend considerable resources on tenant screening.  We look at all the measurables of the “Big 4”:

 

1. Employment & Income
2. Past Landlord Reports
3. Credit Check
4. Criminal Background Check

 

Measurables tell most of the story and tenants who grade out highly in these areas can provide a solid program.  But what about in situations when there are many tenants applying for one house?  Who is the best one when all the measurables look good?  Who is going to take care of the house?  If some bad event happens, who is going to remain steady and still pay rent?  Bottom line, how can great tenants be found?

 

These are tough questions.  The right tenant roster can make or break a landlord.  What to do?

 

I tend to pay extra attention to 2 things:

1. Debt level (and the corresponding available credit): How extended is the tenant?  Hard times: If there is a sudden job loss or car issue, can they absorb it?
2. Past landlord reports: What did they think?  Did they like the tenant or was the tenant difficult to deal with?  How did the house look when they moved out?  Would they rent to them again?

 

At the end of the day, Ohio State football and smart landlords are looking for great players.  Great recruits win championships and profitably pay off rental houses.  Pick wisely!

 

Happy Landlording!

Finding Value & Buying Rental Homes on Your Credit Card

Fresh out of college, I was living in New York City and was slinging cell phones by day (they were relatively new back then) and dreaming big dreams at night.  How could I become financially successful like many of the people I was passing on Wall Street everyday?  I wasn’t overly into finance, but started reading a lot of material from the real estate gurus.  Be a millionaire with no money down!  Live off of passive income to live the life you’ve always imagined!  It’s so easy anyone can do it!

 

That sounded right up my alley- easy and something even I could do.  If that mother of 6 in El Paso could be netting $25K month in passive rental income, surely I could do half of that?  I was all-in.  Unfortunately, New York City real estate was prohibitively expensive for me to buy (got $1M to plunk down?), so I wasn’t sure how I would get started. 

 

So I moved to Charlotte and became a full-time Charlotte real estate investor.  The $1M homes were replaced with much more affordable options.  I posted classified ads (“We Buy Homes!”) and tried to follow the guidelines from the infomercials.  I joined an investment club and started getting calls and e-mails for discounted homes to buy.

 

Many of the homes were really cheap, some to the tune of $50K.  The problem was to what to do with them after purchase.  Most people didn’t want to live in them as they were in “war zones”.  I’ve never been a gun guy, but visiting some of these homes made me think hard about my self-protection stance.  I didn’t feel overly safe at many of them and replacing broken windows constantly didn’t seem economically savvy.  So I, and others, passed on buying many of these homes (laughable now, right?) and they languished on the market for months and years.

 

One day, I visited one of these types of homes and was not really interested.  The seller said she was negotiable on price, but I liked being alive and really didn’t want to be involved.  Plus, she said she needed to close really quickly and needed cash, and I didn’t have a ton of cash on hand.  I figured I’d ask what she was looking for before declining.

 

$8K. 

 

Well $8K was in my wheelhouse.  I wrote up the contract and asked the closing attorney if he would take one of my Visa checks that came in the mail earlier that week from my credit card company.  No problem! 

 

Did I want this house?  Not really.  It came with issues.  I had to sink another $20K into it just to make it habitable for a rental.  And the area wasn’t great.  But $8K?  Come on!  I had to do it.

 

I learned that every asset had a price.

 

I got a call recently from a prospective client who asked me if her home had a realistic chance of renting.  It was in a desirable area and she lived there currently, but the kitchen wasn’t redone and it had an older layout.  Did she need to sink $50K-$100K into it before it could go to market?

 

The answer, without even looking at it, was “yes” and “no”.  The real question was how much she wanted to rent it out for.  Would it rent for as much as the remodeled home down the street if it wasn’t renovated?  Probably not.  But depending on the rental price, someone would gladly take it.  There are 66 people on average moving to Charlotte every day who need a place to live!

 

Real estate, like anything, is a value proposition that has a suitable price.  A rental house priced at $3K/month may sit, but at $2K it may fly off the market.  Value is what matters.  Top conditioned homes will rent out the highest, while homes in poorer condition will rent out for less.  The market is relatively efficient. 

 

Happy Landlording!

Santa’s Influence & Rental Home Inspections: Naughty or Nice?

 

He's making a list
He's checking it twice
He's gonna find out who's naughty or nice
Santa Claus is coming to town

("Santa Claus Is Comin' to Town" written by J. Fred Coots and Haven Gillespie)

 

Oh, Santa Claus!  He’s the mythical man who causes such delight and fear in the hearts of children (and some misinformed adults).  He can be a best friend who showers good kids with gifts, or a cold, disapproving, gift-withholding coal-dispenser. 

 

Parents have long used Santa’s inexplicable worldwide influence to ply good behavior from their children, especially in the month of December.  There are several proven manipulations:

 

1. Santa the Spook: He’s watching you… all the time… his values are perfectly aligned with your parents… you could blow this Christmas big-time if there are any incidents… he sees all- yup, even that…

 

2. Santa the Bully:  Do you want to get any presents???  Do you??? Then you better be good!  Do you think Santa is playing?  He’s been doing this forever and knows payback better than anyone.  Do you feel lucky, punk???  Don’t try Saint Nick …

 

3. Santa the Eager Rewarder: Santa loves you- he really does.  He wants to get you those Legos… but if you take the screws out of your sister’s bed, how is he going to justify giving you the galactic mother ship when Mrs. Claus asks?  Even the reindeers would revolt if you were rewarded for that behavior.  Just make it easy, be good, and let the Lego ship will fly down your chimney on Christmas Eve…

 

The Santa illustration can be carried over to our bi-annual home inspections.  For clarity purposes, our rental home inspections include an on-site visit of approximately 10 minutes where we have a checklist of things to look at (air filters, smoke/CO detectors, pets, smoking, etc.) and we take some pictures of the interior and exterior.  And, yes, we check our list twice.

 

The question is: “Are home inspections naughty or nice?”

 

As a property manager, I initially wasn’t a huge fan of conducting home inspections and had them on the “naughty” list.  I figured the tenants were going to be staying in the home largely regardless of what we saw (short of some major discovery at the home) for their lease duration, so I wasn’t sure what we were trying to accomplish.  Badgering tenants into compliance also seemed to be a loser’s battle.  And, to boot, tenants did not like the home inspections either and would gripe.  The whole thing seemed like a waste of time and resources to me.

 

But we did them anyway.  As time went on and we had years of home inspections under our belts, visiting the homes twice a year proved to be really beneficial!  At first take, there were some smaller, auxiliary benefits for our owner clients.  We were able to catch some repairs early and head off some more major issues.  We had a good idea of what a home was going to look like after the tenants moved out.  We could eyeball certain tenant complaints in person and see if they had merit.  We built better personal relationships with some of the longer term tenants we would visit.  And we elongated the life of HVAC units as we made sure the air filters were changed regularly.

 

But the largest benefit was that we got the homes back in better shape.  And I would attribute that to the “Santa” influence effect.  If people think someone cares and is actually checking, people tend to put more thought and time into their efforts.  Home inspections are a good reminder that the landlord cares how the rental house is kept and the tenants should too.  And most of them do!

 

Rental home inspections seem to limit naughtiness.  So Santa (and this property manager) now put them firmly on the “nice” list.

 

Merry Christmas & Happy Landlording!

Rental Homes: You Break It, You Bought It?

 

   

“The “Pottery Barn Rule” is an American expression alluding to the policy of “you break it, you bought it” or “you break it, you remake it”, by which a retail store holds a customer responsible for damage done to merchandise on display.  It generally ‘encourages customers to be more careful when handling property that’s not theirs.’”

Wikipedia definition of the “Pottery Barn rule”

 

I think every parent has there own story on this concept.  My version comes in “Hobby Lobby” when my young son smashed a glass Christmas vase while “admiring” it.  I was within a 50-yard radius (which apparently puts me in the “bad” or “absentee parent” category); I heard the crash and prayed no Furniss was involved.  I wasn’t so fortunate.

 

The next step was to ‘fess up to a cashier or store manager.  As I searched the available employees up front, I was left with the strategic decision of who to approach:

 

1. The 17-year old (does he look apathetic or one that would stick me with store policy?)
2. The middle-aged woman (does it look like she might sympathize/empathize?  Or is she the type that makes an example of a parent who prioritizes reading “Calvin & Hobbes” ornaments over watching his kids on the other side of the store?)

 

The downside of either was $17.99 + tax and a stern look.  The upside was getting off with a warning.  I approached the front gingerly and dutifully offered to pay.

 

“Don’t worry about it!  It happens all the time!”, the middle-aged woman cheerfully chirped.  “Chip!  Go clean up aisle 5.”  The 17-year old gave me a look and grabbed a broom.  Mercy won out.

 

One of the hardest things of being a property manager is the security deposit dispensation after a tenant moves out.  Homes are rarely left in perfect shape which leaves the owner paying a bill to get the rental home back in market shape.  The question that is left is how much of the bill should the tenant shoulder and how much falls under “normal wear and tear”, which is legally permitted. 

 

The problem is that nothing in a house costs $17.99!  Things are expensive.  Steam cleaning a carpet costs a few hundred dollars; if the carpet needs to be replaced, it’s now in the realm of thousands of dollars.  The costs are similar for painting- touch-up can be much less versus a full paint job, but it’s still in the several hundred dollar range. 

 

Very few tenants ‘fess up and offer to replace the carpet or paint the house after they vacate.  In fact, most say that the “place was like that when they moved in” and not getting their full security deposit back is nothing short of an injustice.  Property managers tend to utilize pictures/videos and tenant-filled out “move-in inspection reports” to document what the home looked like prior to home occupation.  These are helpful to ascertain the truth.

 

Regardless, costs can be high if a home is not taken care of.  And if not, there can be a large degree of sticker shock when a tenant receives a bill for repairs that runs in excess of their security deposit.  How could this happen?

 

The components of homes are expensive.  And someone needs to fit the bill.  The assumption can’t be made that the landlord pays for everything short of a wall being knocked down.  “Normal wear and tear” cuts both ways.  Abnormal wear and tear is costly and the tenant is legally responsible for it.

 

It is a win-win when a landlord can return a non-docked security deposit to a tenant- trust me!  Then no one needs to shell out funds to repair folks and a house can be turned over for another family to move into; this is the most desirable and profitable outcome for all involved.

 

But, with rental homes, if you break it, you bought it.  It may “happen all the time!”, but someone has to pay the piper and most home issues are not cheap to fix.  Smashing a $17.99 Christmas vase is one thing, but see what the “Hobby Lobby” cashier says if your kids clip the branches of their $2K “Super-Deluxe” Christmas tree.

 

Happy Landlording!

Comfort of Old Cars & Non-Perfect Rental Homes: Does Anyone Care?

 

 

“Champagne tastes with beer budgets.”

Common real estate agent lament

 

I drive an old car.  And it has lots of miles (almost 300K!).  I’m reminded of this from time to time:

 

“Dude, seriously?  You’re driving that?  Don’t you want to step things up a little?”

An old friend

 

“You thinking about buying a new car soon?  I only ask because I’m looking to buy a car for my teenager and thought you might be interested in selling… How does it run?”

Pastor at my church when I saw him in the parking lot

 

I get it.  Nothing looks like success more than a new, nice car.  If you want people to think that you’re the “property manager to the stars”, you shouldn’t be driving a beater.  Realtors especially lock into this mindset.  A nice car means lots of closed sales.  “You look good, you feel good, you sell good” as the old salesperson mantra goes.

 

But there are positives to driving a beater.  First there’s an overall peace of mind (if it doesn’t breakdown).  For example, when I take things out of my car, I don’t particularly care if it scratches the paint or rips the seat.  When I walk out of the supermarket and someone has dinged my door, I’m OK.  When my young kids spill something in the backseat, I’m not reading them the riot act.  I’m cool.  No worries.

 

There’s also the financial piece.  There are no car payments.  The taxes are low.  Occasional repair bills are taken in stride as they are lower then having a new car.  Insurance is lower with a “liability-only” policy.  I’m not worried about additional miles detracting from the value of the car.

 

Most people don’t subscribe to my “peace of mind” thinking.  They want to look cool.  I’m OK with that, to a point.

 

I see a similar thought process play out in rental homes.  As rental rates continue to rise significantly annually (in the Charlotte-metro area, newly offered rents increased 16.7% from September 2020 to now per CoStar), the tenant income levels needed to support the higher rents also need to rise significantly.  But people’s incomes are not going up 15%-20%.  This is where all the press about the lack of affordable housing comes from.  Renters are becoming “severely cost-burdened” where over 50%+ of their incomes are going to housing costs.  That’s a huge percentage (which many experts call a crisis).

 

What has contributed to this crisis?  One factor is the decision a landlord is generally left with after their tenant moves out and they are preparing the house for the next tenant.  Do they spend a lot of money to make the rental house look great (full paint jobs, new carpet, new appliances, etc.) or do they try to “let it ride” (minimal to no touch-up paint, steam clean carpets, entry level appliances, etc.)?  I think with all the HGTV housing television shows, many owners decide to fully refurbish their rental homes.  By employing this strategy, they are looking to get top rent when it goes back on the market.

 

This only works when tenants play along.  Tenants need to be willing to sacrifice a higher percentage of their incomes for a nicer, updated home.

 

And they are!  Even when they clearly can’t afford it.

 

When some of our clients “let it ride”, we accordingly price the house lower.  The owner chooses to accept below-market rents to avoid a pricey fix-up bill.  They play the long game; every year that goes by, they use the rents to lower their mortgage payment until it goes away (that’s when the landlord game gets a lot more fun!).  And as a bonus for the tenants, they keep more of their money.  They also get a lot more leniency on their security deposit deductions as the house is already worn, so any mishaps they inflict on the house aren’t so noticeable or costly when they move out.

 

But many tenants choose not to make this trade-off.  “The carpet is stained!  The walls have some scratches!  The refrigerator is old!”  Um, that’s why it is priced lower.

 

Most tenants don’t seem to care.  Frankly, it’s shocking to me.  I’ve expected more tenants to happily make the trade-off for the peace of mind it offers.

 

Old cars may not look cool, but they may allow for a cooler, more peaceful life.  But if this line of thinking has little appeal, I suppose landlords need to give people the housing they want.

 

Happy Landlording!

Lease Renewals: Lock in the $2.00 NYC Breakfast!

 

 

 

 “If I can make it there, I’ll make it anywhere, It’s up to you, New York, New York…”

“New York, New York” by Frank Sinatra

 

I remember living in New York City (NYC) when I was first out of college.  All of the big buildings, happening things going on, the energy, the lights, so many people… it was amazing to behold.  It seemed like everything that was going on in the news was happening right around the corner from my apartment.  It was really cool.

 

But it was really expensive.  Everything cost so much, especially compared to college life.  After my first week of work, I went out with some colleagues and offered to buy the first round of drinks- big mistake! 

 

“That will be $90.00, sir.”

“No, I’m sorry… There must be some misunderstanding.  I only ordered 5 of them and we just got here.”

Weird look.  “Um, it’s $90.00 sir.”

(Gulp)  There goes this week’s money…

 

And that was 20 years ago.  I hate to see what things cost now.

 

However, there was one great deal in NYC- the breakfast food trucks.  You could get a coffee and a big bagel for $1.00 each.  I’d line up every morning before getting on the subway to lock it in before heading to work.  When an apple cost $4.00 at the bodega across the street, this was the way to go (maybe not health-wise, but you couldn’t beat the bang for your buck).

 

I remember one morning being in line behind an obvious tourist who looked like he had just gotten into town.  He asked the food truck proprietor how much a cup of coffee was and did a double-take:

 

“$1.00???  Seriously?  I’ve never paid $1.00 in my life for coffee!”

 

That’s when I knew this guy was about to have the worst vacation in his life.

 

I feel this way about rental rates in Charlotte.  I was recently going through our list of tenants with expiring leases and was struck on how much rental rates had gone up, especially those who were coming off of 2-year leases.  Rents have been climbing up for almost a decade, but have become more pronounced in the past two years.

 

As a landlord, this is great.  Higher rents equal more profits.  The question becomes how much more rent to ask for when existing leases are near their expiration and it’s time to offer the tenant the lease renewal terms.  Is the strategy to ask for market rate (probably 10-20% higher) or keep the increase on the lower end (5-10%)?

 

Generally-speaking (if it is a good tenant), I’m a proponent of keeping the increase offer on the lower end and trying to keep the tenant in the property.  Avoiding all the vacancy costs and keeping the cash coming in is usually the most profitable path, as well as the easiest.  I don’t like good tenants looking elsewhere as new ones are not guaranteed to work out as well.  However, if the tenant still decides to leave, then all bets are off and the house can be re-marketed at the higher market rate.

 

If I was a tenant in this scenario (once again, generally-speaking) with an offer of a lower than market rental rate on a lease renewal, I’d also look to stay and try to lock into a 2-year lease.  Looking at the competition for rental homes now as well as the higher prices, it should be close to a no-brainer.  It’s a win-win for both the tenant and landlord to keep near the status quo.

 

So while the New York City nightlife and dining choices are enticing, it’s probably best to enjoy the vacation and relish the $2.00 breakfast combo.  Good deals in this market are hard to find, so it’s probably best to lock them in without complaint!

 

Happy Landlording!

Getting Rental Turns Right the First Time with Perfect Practice

 

 

 

 “Never mistake activity for achievement.”

John Wooden (legendary UCLA basketball coach)

 

A popular maxim says that if you want to be wealthy, keep things old:

 

1. Old Car
2. Old House
3. Old Wife

 

When you get things right the first time, it saves a lot of money!  I’d also add “Old Tenant” to the list…

 

It’s also been said that “practice makes perfect.”  Athletic gurus (originally attributed to Green Bay Packers coach, Vince Lombardi) have amended that to “perfect practice makes perfect.”  The reasoning is that if poor technique is being practiced, more practice could potentially make one worse.

 

The same can be said of turning homes for rent (I’d say selling them too, but it seems like if your house was on fire in Charlotte, it would still receive multiple offers).

 

It makes sense that the longer a rental home is on the market, the better the chance is that it will rent.  More potential exposure equals more showings which would equal more applications and a quicker turn between tenants.  More time on the market (practice) automatically equates to better results (perfect).  But I don’t think that the market always bears this out.

 

So having a home on the market for rent for a longer time can be sub-optimal?  Why?

 

Most of the time, to increase the days on market, the days are taken from when the rental home is tenant-occupied or while it is vacant and repairs are being completed.  This is usually when the house is not in optimal condition.  So rental ads are urging people to see a home that isn’t in great shape.

 

This matters for several reasons:

1. Great tenants care about the condition of the house.  They are very interested in their living environment and value well-kept domiciles.  These types of tenants typically return the home in as good or better shape than when they moved in.  We really like these meticulous tenants!  They usually pay before the 1^st of the month too.
2. The manner in which the internet home search game works warrants putting out the best product first.  Prospective tenants typically set up search parameters and are alerted when rental homes come to market that fit their profile.  So when a home is initially put on the market, this should precipitate the biggest surge of showings.  If the home is hard to get into (tenant-occupied) and/or looks disgusting (being cleaned and repaired), they will visit and pass on the unit.  Or the wrong type of tenants who aren’t bothered by the poor condition will put an application in.
3. Homes on the market for a long time tend to get stale.  People wonder what is wrong with the house when it keeps coming up in searches for months and hasn’t been snapped up.

 

A caveat to this: I don’t have a big issue going to market while a home is tenant-occupied (this does not factor in COVID considerations).  If the tenant that is there is cooperative with showings, it is essentially free time to market the house.  It’s a great feeling to approve a tenant during this time and time their move-in a week after the current tenant vacates (allowing time to get the home in shape for a new occupant).  But #1 above can still apply if the home is in poor shape.

 

In short, for optimal results, wait until the house is fixed up and at its best, then go to market.    Get the rental house right the first time and practice perfectly!

 

Happy Landlording!

Noah’s Ark & Real Estate Investing: Can You Persevere?

 

 

 

Noah’s ark is a crazy story.  God tells Noah, some ordinary guy, that He is heartbroken with how sinful mankind has become and is going to flood the Earth and start again.  He tells Noah that he is going to spare him, his family, and all the animals if he builds an ark.  Noah takes God at His word and builds the ark, gathers the animals and provisions, and loads the ark up.

 

Everyone knows it rained for 40 days and 40 nights, but Noah and his crew were safe because they were floating on top of this massive amount of water.  The lesser talked about part of this story is that they did not walk out of the ark on Day 41 ready to repopulate the Earth; there was way too much standing water (they were floating above mountains, for goodness sake!).  They were actually stuck on the ark for over a year before it was sufficiently dry enough to get out on land and walk around.

 

The children’s Bible I was reading my son surmised that it wasn’t boring because they had so much to do.  They had daily routines to feed and care for all the animals, put out fires (so to speak), and take care of themselves and the ark.  Wash, rinse, repeat.  If anything was neglected, there were problems.  Survival for mankind and the animal kingdom was at stake and duties needed to be carried out diligently or there would be dire consequences.  The carrot was that if they kept to the plan, they would be free of the confines of the ark at some point and the whole beautiful world would be waiting for them to enjoy. 

 

It reminded me of real estate investing.

 

Like the ark, rental homes require constant diligence.  They need to be fixed up, repaired, and maintained.  Tenants need to be acquired, serviced, and replaced.  The mortgage, insurance, and taxes need to be paid.  The HOA and government entities need to be catered to.  These duties need daily attention; if they are neglected, the financial boat can start taking on water and sinking can become a real possibility.

 

The carrot of real estate investing is owning the property someday.  As it rains (roof needs replacing, tenant evictions, tenants not paying because of a pandemic), it seems like that day is far off.  Sometimes it seems like it would be better to abandon the ark and swim without it. 

 

But persevering and waiting for the ark door to finally open to dry land has its benefits.  Free cash flow, a higher net worth, and assets that can be liquidated for college tuition or passed on to children are great financial prizes. 

 

But tending the smelly animals is a pain day-after-day (ever try to pick up after 1,000’s of animals?).  The lightning is scary.  The boat rocks a lot and causes sleepless nights and sea sickness.  Some boards on the ark look like they are breaking down.  Drowning is a real possibility.  Why did I get on this thing to begin with?  My friends who stayed behind at least seemed merry before the torrential downpour.

 

However, amidst the doubts and setbacks… there is belief that one day in the future the sun will come out, the water will recede, and the dove will return with a leaf clenched firmly in its beak.  The remaining mortgage payments will be made, the appraised home value will be high, and the financial statement will be solid.  Landfall will make it all worth it.

 

Noah persevered and he and his family were rewarded.  Hang in there!

 

Happy Landlording!

Predicting Presidents & Charlotte Real Estate Prices

 

There are people who are very interested in politics, especially in the US presidential election every four years.  “It’s the most important election of our lifetime!  Think of the children!”  I don’t fall into this camp.  However, I do like to try to predict who will win.

 

That doesn’t mean I’m any good at it, unfortunately.

 

I try to use “common sense” on who will win- ha, ha!  Below are the actual winners from the past few elections and my rationale at the time for why there was no way they could win:

 

2008: Barack Obama.  I was wrong.  I didn’t see how a community organizer with no experience running anything could win.  Plus, he shared his middle name with a top, evil dictator.

 

2012: Barack Obama.  I was wrong again.  The economy was in shambles and the “Great Recession” was on his watch.  I wasn’t sure that President Obama could effectively keep blaming former President GW Bush for the poor economy his entire term.

 

2016: Donald Trump: Wrong on this one too.  Where do I start on how I didn’t think his election was possible?  I mean he didn’t even think he was going to win.

 

2020: ???  Pollsters say Joe Biden is close to a shoo-in. 

 

Now let’s shift to Charlotte real estate.  When COVID-19 began to affect our lives in March 2020, people were understandably afraid.  Corporations began rapidly shedding jobs, the stock market tanked, and there was little optimism in the world. 

 

We had just put up a home for sale for a client that month (who really needed to sell) and we were concerned that COVID-19 would adversely affect the market.  We lowered the price and worked quickly to get it under contract before things got worse. 

 

However, the adverse effect on Charlotte housing prices never really happened; in fact, prices actually climbed and continue to climb.  We probably should have raised the price!

 

So why am I bringing up my poor predictive skills?

 

Sometimes it is more effective to forget the short-term noise of what is going on and stick to market fundamentals.  The market fundamentals for Charlotte are that 66 people on average are moving here every day and that number will probably increase as people flee big cities for more space.

 

There is also a housing shortage in Charlotte.  This has been exacerbated as people are “sheltering-in-place” and not putting their homes on the market.  The fundamental “supply vs. demand” rule takes effect and prices rise with scarcity.

 

Things can change quickly, but fundamentals and long term trends tend to move glacially or not at all. 

 

And political incumbent candidates usually win…

 

Happy Landlording!