September 2007

If you're an engineer who cares to think about retiring some day, and you haven't been overly friendly with well-to-do and lonely elderly people who have no heirs, you've probably tried to stuff away a few bucks into a retirement account, most likely a 401K. The options are limited to a few funds that have been foisted onto your company by fatcat investment houses such as Fidelity. You're right to be nervous around mutual funds, they aren't under your direct control, they aren't insured, and what's the fun in handing access to your dough to fund controlled by someone who makes more money scooping off the top of your hard work by January than you make all year? You really need to diversify and have a more hands-on approach to your assets. Maybe it's time to consider becoming a landlord!

We speak from experience experience here, having been in this game for a couple of years. So when we're not answering email, you can guess we're busy honing skills on drywall repair and replacing toilet seats. If you're paying a property manager to take care of all the two thousand problems that crop up each year on a "mature" property while you golf on Saturdays, you missed the point about actually making money as a landlord...

We acquired couple of nice properties a duplex and a triplex) that can both generate positive cash flow when fully populated at market value rent. Both are in neighborhoods that are becoming upscale, which adds an upside component that you can follow using Zillow. The next buyers will likely push these houses into a dumpster and build some really nice homes, that's their business, but it's not a way to increase the property owner's net worth.

The combination of positive cash flow and gentrification means the properties are immune to dips in the local housing prices, you can sit back and laugh when some of your coworkers find themselves with negative equity in their primary homes in new subdivisions. Ha-ha, laugh while you can! They'll get their turn to laugh at your real estate misfortunes, it's all good.

When you buy property a mile and a half from the local university, you can expect to rent to some well-off coeds that didn't draw a room in the dorm lottery. Girls so pretty that your wife won't let you collect the rent by yourself. Stop dreaming, so far these units have attracted nothing like that. Let's review a couple of cases.

This tenant has to leave

This tenant started out as a likable guy, but he had some personal issues and fell way behind on rent, farther than we should have allowed (see rules of thumb below). When we finally kicked him out, the apartment appeared equivalent to a human living inside a litter box that needed cleaning. A cat pretty much had free run of the place, especially after the tenant broke a few windows, which is standard practice for tenants that forget to carry their key. Broken windows are no big deal to a tenant when heat is included (see rules of thumb again...) If you ever thought your kid's room was a mess, landlords have seen entire houses that are much worse.

If you can't afford a car, just take a shopping cart from a nearby Safeway. They're free!

Here's a couple of signs found in the apartment, they tug at the old heart strings, but as a landlord you'll need to have any heartstrings surgically removed.

The real problem isn't lack of work for the unemployed, or lack of stuff to pawn, judging by the home-invasion kit that was left behind (black duffel bag filled with screwdrivers, prybars, a hammer and a flashlight). Care to guess what's the real problem?

Here's some of the tenant's many appliances for smoking rare and expensive tobaccos... he also had quite an arsenal of ammunition, but (thankfully) his firearm collection in the end amounted to a small pile of unredeemed pawnshop slips.

This tenant lost all interest in paying rent, and from what we hear none of his friends would take him in on account of his habit of borrowing without paying back. For a while he was sleeping in an abandoned van which he left on our property. It's pretty hard to get rid of an abandoned vehicle on your own property, when it has no registration or title. The trick is to push the abandoned vehicle onto a public street and then deflate a tire so that it can't be pushed back onto your property. Then wait for some neighbors to call it in to the local constabulary...

Another tenant that had to go elsewhere...

This Section Eight single mother had some interesting drug habits, judging from spoons found in her bedroom that were shiny on the business side but charred black on the bottom. She had violent boyfriend issues as well, every single door in the apartment was kicked in so that either the door or the door frame was damaged. Even closet doors!

Throwing knives make great Christmas presents! Quite a few holes in the wall were caused by the kids practicing... This was a family that liked to throw food, and sometimes lit candles at their walls. You'll stump the paint guy at Home Depot when you ask him what paint is best for hiding candle wax!

Mom's boyfriend often left cute little messages for his honey to let her know he was thinking of her. This one was written on the back of her bedroom door with nail polish:

Section eight housing certainly has its advantages. The government pays the rent each month, like clock work. But they don't pay the utilities. And when the tenant doesn't pay, in some states the utility supplier can revert the bill back to the landlord. That sucks! Section eight leases can't be broken, but they don't have to be renewed, and this one wasn't. In the likely case that you won't be returning their paltry security deposit, Section Eight demands receipts. Tell them you'll give them some receipts when they come over and clean the kitchen!

Slum lord rules of thumb

We'll compile a few pointers here, and you're welcome to add to our list!

  1. Don't even try this if you live paycheck to paycheck. If you can't write an unexpected check for $10K once in a while, forget being a landlord, you need to get your own act together first.
  2. Consider that while you are attending to your rental property, your own home may have to go on the "zero maintenance plan" for months at a time. Which can mean for every window pane you glaze on an apartment, you'll get yelled at when you return home because you didn't clean the pool at your own house.
  3. Only buy a house if it offers positive cash flow. Translation: buy the ugly multiplex house on the block, the one built entirely of cement blocks (termite-proof!), with high weeds and broken windows and ugly paint. The highest margins are made on the lowest priced houses which have the most units to rent. Houses that generate positive cash flow don't lose value when the housing market drops.
  4. This is the twenty-first century.  Go to Craigslist, Ebay, the local paper and look for a FSBO property (for sale by owner). You're a smart guy, you can figure out what the property is worth, and what's wrong with it. You don't need someone to "stage" the house for you with new furniture, drapes and scented candles. This is an investment, you're not gonna live in it. A title company will do the closing for you, it's easier than you think.
  5. In a multiplex unit, carefully consider a property that does not have adequately split utilities. Sure, you can pay the utilities yourself and charge more for the unit, but there are no control rods in a system that offers free energy (or water) to a low-end tenant. Room temperature will be regulated in the winter by opening windows, not by turning down the thermostat.
  6. Figure that you will only rent the house 75% of the time. You will always lose a few months between tenants. For properties that need substantial work, the on-time might be less for the first year while you correct the problems. Do as much as you can of the work yourself, but only between tenants.
  7. Never, under any circumstances, buy wall-to-wall carpeting for an apartment. Looks great when it is installed, seeing it destroyed when a tenant moves out will cure you. In low-end housing, no one wipes their feet, cleans up spills, or walks their pets regularly. Spring for a floor with a high dielectric constant: ceramic.
  8. When you replace a stove, get a self-cleaning one. The tenants will never clean it, and now you won't have to either!
  9. Get a tetanus shot, you'll need all the protection you can get.
  10. If you drop a paintbrush in the dirt while painting the property's exterior, just pick it up and keep painting. This ain't the Mona Lisa!
  11. Speaking of paint, look around your own house. See that the doors are all one color and the walls are another color and the ceiling is a soft white? Rooms in rental properties are all one color. Here's a critical thinking exercise... do you know why that is?
  12. When you are in the midst of a renovation, be careful what you leave in the apartment when you're not there. Power tools have a habit of ending up at the local swap meet, and copper wire is a form of currency for bums. A sizeable amount of copper wire gets melted down twice before it carries any current.
  13. Get a property manager to screen tenants and collect rent.
  14. When a tenant is behind on rent, have the property manager kick them out. Don't let them fall even a month behind. Thirty days late=courthouse date!
  15. No matter how bad you feel about kicking someone out, the kicking-out part always goes easier that you think it will. The hard part is cleaning up the mess!
  16. Here's rule Tim sent us, and he speaks from experience: "never rent to relatives" . Yes, this is an experience we'd rather skip!


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