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Getting Back Into Hot Water With Your Tenants

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AKA – What To Do When Tenants Have No Hot Water!

tenants hot water tank brokeEveryday’s an adventure when you’re a landlord! Especially when a somewhat important part of your property breaks down and a tenants are mad.

The quick intro is I had a hot water tank go down, it didn’t burst a leak, it just wouldn’t stay lit. If it doesn’t stay lit, the water doesn’t get hot, if the water doesn’t get hot, the tenants get upset, I had an upset tenant.

Now for the extended story!

Why It’s Good To Have Contractors On Speed Dial

You never know when or what will break and that’s why it’s important to have people to call when things eventually do stop working. Whether it’s a fridge, a furnace or a hot water tank, over the years I’ve gathered a group of dependable people I can call in case of an emergency.

Last week was no exception, except for timing.

This is the part that’s problematic as a landlord. Timing.

It was last Wednesday just before 10 at night I got the text from the downstairs tenant at one of my properties that the hot water tank was out. It was pretty unlikely it quit at 10, it probably quit sometime during the day, or even first thing in the morning and I understand it’s not something they may know immediately about, but from a cost effectiveness stand point, I wasn’t going to call a 24 hour plumber to show up at midnight and pay huge charges for what I suspected would be a small problem.

That’s where the timing appeared to go down hill.

The next morning at 8:30 I called our favorite plumber and explained what the problem was. Much like triage in emergency, he had to decide where my “emergency” fit in his day and since he had two people with no water, I came up as number three on the list of importance.

This I understand, but the next problem was, he also had two other appointments he couldn’t change the next day, so things looked tight. But he was going to get back to me later in the day, once he found out how long or how short the other jobs would be.

So I settled down and by late in the afternoon, I still hadn’t heard from him. Now I wouldn’t say panic set in, as I know not having hot water can be a pain, but it isn’t life threatening, but then the upstairs tenant texted me.

I Was Given The Ultimatum

He wasn’t happy. He also informed me that going 48 hours without hot water was unacceptable. Now this is where things could have gone horribly wrong, and it’s also where the lesson comes.

First, to my knowledge at this point it wasn’t 24 hours, it was less than 18 hours earlier I first found out. So maybe someone there forgot to tell me the day before?

So rather than taking a defensive aggressive stance, (and this is what I also recommend you do), I defused the situation by agreeing with him, explaining what I was doing and going as far as to explain to him that if I hadn’t heard back from my plumber by noon tomorrow, I would either bring someone else in or personally come fix it myself.

That’s when he gave me the ultimatum of either it was fixed tomorrow or he was bringing someone in at my expense.

If you know anything about hot water tanks, they aren’t extremely technical products. Usually there is only a couple of things that go wrong and they typically can be fairly inexpensive to fix. However, they are awful expensive to replace and it’s often easier for someone to recommend a replacement than to simply do some quick trouble shooting or even replace a cheap part with fingers crossed.

The last thing I needed was for the tenant to bring someone in and to get a $1,200 bill for the installation of a new hot water tank, so again I reassured him it would be dealt with. I called my plumber again and ended up in voicemail, so I left a quick message explaining where things were at.

Why We Love To Work With The Same People Over And Over

Finally around 6:30 that night my plumber called me, he had just finally fixed the second emergency and wanted to come to the property to check the tank. Whew.

As I mentioned earlier there are typically only a few parts that quit on hot water tanks. The most common is the thermo couple which simply triggers the gas flow as it cools down. When it doesn’t work, it doesn’t trigger and hence, no hot water.

Thermocouples are not expensive. they are usually $20-30, which is way less than the cost of replacing a large tank! They are also not hard to replace.

They can usually be swapped out in 15-30 minutes, so my fingers were crossed.

By 7:30, my plumber called me back to confirm yes indeed it was the thermocouple and everything was back up and running, life was once again good and the tenants were happy.

Now as I mentioned, it only takes about 15-20 minutes to change the thermocouple, so why did it take him an hour? Well again, this is why it’s important to have trusted go to people you deal with.

After he changed the thermocouple out, he didn’t want to leave. He wanted to make sure it stayed lit and the tank heated up properly. So while he’s waiting, he hears water running in the toilet. When he questions the tenants they say it’s been like that for a while!?!?!?!?!?!? Sigh.

So he proceeds to replace the flapper and saves me money in the long term. By the time he’s done he’s able to check the tank, it’s still lit, the water is getting warm and his job is done above and beyond the normal call of duty.

The TakeAways

So what did we learn from this? Well first, you really need some trusted contractors. This can be hard as so many of them come and go, so many just aren’t up to snuff and so many simply rip you off.

But when you do find a good one, you need to make sure you hang on to them for dear life! I refer all of our contractors/repair folks to people all the time. I need them to stay busy to stay in business and to get tons of referrals from me so they in turn look out for me whenever they can as well.

Second, you shouldn’t power trip on your tenants when they get their backs up against the wall. Did my tenant have a legitimate beef about the hot water. Well, I can understand his side, he may not have know I only heard about the problem late at night, he may not have known I was actively working on it and he may not have known I really was trying to get it fixed.

I could have put him in his place, I could have matched his aggression and called his bluff (currently we have less than 1% vacancy rates in our city, so I would have very little problems replacing him and most likely at a higher rent), but I took the high road and worked with him and explained I was doing everything under my power.

This is part of the landlord business that landlords need to understand. You want to work with your tenants as good tenants can make your life easier. Getting angry back may have made me feel better momentarily. I could have shown him who was boss and that I was the property owner and that he had no right to question me, but it wouldn’t have served anyone.

In the end, he was ecstatic with the plumber coming after regular hours, he was happy with me for getting it dealt with and he will most likely be a very content minimal problem tenant for as long as he stays with me, because he knows I am being pro-active and dealing with any issues.

So, have you ever found yourself in similar circumstances? If so, how did you deal with it? Could you have dealt with it better? Let me know your thoughts on how I handled it and if you found this helpful for future reference!

Raising Your Rents, Without Raising the Roof

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Increasing Your Rent Without The Ruckus

Rent increases - positioning them with tenantsLast article I talked about how stupid we tend to be as landlords. We have a great property, we treat our tenants well and yet you still feel bad about raising your rents to help cover our own increased costs.

Tenants understand costs increase, they know taxes go up, the can relate to increased insurance costs, but what they won’t tolerate is greed or abusive rent increases. It’s a pain in the butt to move, but if they feel wronged, it’s worth it to them.

On the other hand, if they feel like they are in a good spot, the increase won’t put them in the poorhouse and perhaps most importantly, it’s a fair rent increase, they typically have no problem staying. As always, it also requires common sense.

If vacancies are skyrocketing and rents are dropping everywhere else, you can be assured your increase will definitely have a higher chance of causing them to bolt. So know your market and understand the local laws and regulations regarding increasing the rent you charge your tenants and increase it when applicable.

Because when or if the market does slow later and you have a vacancy, you will definitely have to lower them to keep attracting tenants.

It’s All About Positioning

I was recently coaching a landlord through this and it all starts with positioning. She hadn’t raised rents for several years and was missing out on as much as $300 per month of additional rental income. Her current tenants were good, so throwing a $300 increase all at once at them was going to be a little unfair.

After all she didn’t want them to leave, she just deserved fair value for her property.

The lesson from that is, if you are paying attention to your local rental market, you’ll have a pretty good idea of the local vacancy rates and whether rents are increasing or not. If you pay attention to this, you can deal with more gradual increases which benefits both the landlord and the tenants.

When it comes to a strong rental market with vacancies dropping and demand for units increasing, it’s very important for you to be paying attention to how the market is changing. You need to have an idea of how much rates are increasing so you don’t get left behind and this is also where your positioning starts.

When I refer to positioning, I’m talking about putting yourself in the best light. The position that helps you, while at the same time puts you in a position to still provide good value for your tenant.

In this example, if you’re finding rents have gone up $100 per month for properties equivalent to yours, you start off with that in your written letter to the tenant. Now I’ve always advocated trying to get top dollar for your property initially. I believe having one of the nicest rental units in the area helps set you apart, helps get you better tenants and helps you garner higher rent.

You may already have been $100 higher to start with if you followed this process and if you are, you’re in a great position. Because you don’t have to raise your rents $100 this time, if you show your tenants how much others have raised their rents and end up only raising yours $50 or even $75, you’re still the good guy.

If you haven’t been following this process, you can still use this technique, but you won’t be quite as far ahead, but an increase is an increase!

Sample Letter of Rent Increase

So let me give you an example of some wording you can use, and feel free to copy and use this where you need to!

As you’re most likely aware local rents have increased over the last year as the costs of everything from taxes to insurance have increased. After doing some research we’ve noticed rents in this area have increased by $100 per month and in some places even more.

Now while we value you as tenants, we need to cover some of our increased costs and remain competitive in the market. So rather than giving you a big $100 jump per month, we’d like to reward you for being good tenants and only increase the rent by $75.

At this price, you are still getting the property for less than similar properties in the area. We hope you find this fair and again, we really appreciate having you as tenants.

How does that sound? Does that make sense to you?

You’re starting by talking about increased costs. You segue to rents increasing by $100, and possibly more and then you increase the rent by less than the average coming out as as the good person.

You’ve positioned yourself as not only looking after your interests and trying to cover your costs, but also letting them know that you value them and that you’re trying to help by not increasing the rent as much as you possibly could.

Now depending on the market, you’ll need to change the number where they’re bolded to the appropriate values, but that’s part of your homework. Now just to make sure you get the impact of this $75 per month increase, you have to understand it becomes an extra $900 over the course of the year and that $900 can cover a lot of your costs. If you have a suited property and increase both suites by $75, that’s $1,800 to your bottom line by the end of the year.

If you haven’t raised your rents in several years, rents may have increased by $200, $300 or even more per month since the time you originally rented your space out. If rents have increased even $100 per year for each of the last three years, you’ve missed out on $7,200 worth of income. If your property was suited, that’s $14,400 in lost revenue because you didn’t increase your rents. 

Now this is assuming you raise them them maximum amount, but that’s to make a point. The point being, you’re leaving money on the table!

Guarantees and Rules

will tenants leave if rents increaseNow there is no guarantee this will work every time. You may have some tenants that simply cannot afford the increase.

Whether they are just getting by, whether your property wasn’t quite working for them, there will be times when people will move out on you leaving you with a vacancy. This isn’t a bad thing.

If that’s the case and you’ve done your homework, you now have a very solid idea of what the local rents are and if you have a great property, you will be getting an even larger increase than the potentially discounted rent you offered your tenants.

It can be sad to think about losing tenants and the extra work involved in having to prep the property for new tenants, going through the screening process, starting over with new people and the concerns about whether you picked the “right” tenants, but as I’ve also mentioned time and time again, landlording is a business. And you have to run it like a business.

Which brings us back to the rules your business has to work under. Make sure you understand all the applicable local rules for rent increases. There can be caps on increases, timelines for increases and many other variables you’re required to know when it comes to increases.

Some areas have rent controls in place limiting how much rent can be increased per year. Usually these are tied to inflation and they are typically far less than the market will bear. If your region is restricting your increases with rent control laws, you need to consider increasing rents the maximum allowable each year so you don’t get left behind.

Often you cannot retroactively increase, so if you don’t do it now, you lose it forever, so don’t miss out. Other areas have specific legislation about timelines for notifications to tenants about increases and how often rent can be increased.

My location requires 90 days notice of a rent increase (which must include three full months) and I’m only allowed to increase once every 365 days, or once per year. Your local landlord tenant laws may be similar or may be more restrictive, so make sure you look into that as well before you attempt to increase your rents.

An illegal increase may not necessarily result in fines ( in most cases they are simply void), but if you’re not sure find out. Usually it just results in resetting the clock and delaying when the rent actually increases.

Finally, some areas also have caps on how much rent can be increased in a year. This too can cause issues if you miss out as you cannot stack multiple years if you missed out. So again, become familiar with the local legislation.

If you’re going to be a successful, educated landlord, you really do have to run it like a business and this means rents changing to reflect the market. These days those changes are typically going to be upwards, so you need to stay on top of your market!

Hope you enjoyed this article, if you have any hints or tips you can share with the other landlords that visit us, be sure to leave a comment below and thanks for reading this far!

Why Are Landlords So Stupid?

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Why Landlords Don’t Think Properly

don't be stupid landlordsDon’t worry I don’t get a free pass on this either! I’m just as guilty at times as other landlords and because I know all this, it actually makes it worse!

Example, tenant tells us on the first they will be a couple days late, so what do we do? They have some good history with us, we have a good relationship, so we say that’s fine, thanks for notifying me, let’s just get this resolved by the 4th.

The problem is we have set a dangerous precedent. They are going to be late, there are no repercussions to them and they now know if something comes up in the future, all it takes is a call to get a few extra days.

What we should have done is read the riot act, within reason, explained how the bank won’t accept a note from my tenant in lieu of actual cash money and that this cannot happen again. Then follow it up with a letter going over all of this again as a reminder and for their tenant file, in case anything comes up again.

It’s not that we’re jerks that we need to do stuff like this, it’s because of human nature. We have to remember to protect ourselves and our assets, but we don’t think properly. We think stupidly.

We tend to worry that we will upset the tenants, so we play nice. Which while being kind hearted, is actually stupid, because tenants understand costs rise. Which brings me to the next area of landlord stupidity.

Why Won’t We Raise Rents?

Again, no free pass for me as I don’t always do this either, and it comes back and bites me as well.

Even if we don’t raise our rents on a yearly basis, our costs still go up, don’t they?

Maybe right now we are getting a break on mortgage costs as rates are still so low, but as I look back over the last ten years I am definitely paying more for taxes, my insurance has not gone done on any property and utilities, labor costs and general costs of business have also definitely risen.

Yet we (I’m generalizing all landlords here) are afraid of passing these costs onto our tenants. Sure we’ll increase rents if tenants leave and we sure as heck drop them if the market slows down, but why do we give longer term tenants a free pass?

Landlords Action Steps

One of my goals with this site is to make you a better landlord. The articles I write, the stories I tell, the intent is to teach you, to educate you and to help you avoid mistakes I made or that I see so often from other landlords. It’s also to help make you more profitable.

So here’s an action step for you. Let’s call it a challenge even. If you’ve owned your rental property for  at least two years, and haven’t raised your rents, take a look back through your taxes, through your insurance and through any other costs that you may be incurring for your property. Have they gone up?

If they have, have you passed the costs onto the tenants? If you haven’t, your action step is to learn your local rules for rent increases and determine if you can raise your rent to cover your costs at the very least.

You may be handcuffed by local landlord laws covering rent increases, locally here I can only raise the rent once every 365 days. So if I just signed the tenant up six months ago, I cannot pass on an increase for six more months.

You may be handcuffed by timelines, locally I have to provide 90 days notice which includes three full months for a rent increase. Since today is the fourth of March, I cannot pass a rent increase on to a tenant now  until July 1st.

You’ll need to learn if there are any restrictions like these or worse rent controls restricting or guiding you as to how, when and how much you can increase your rents. Start looking into these today and next article I’ll explain how to write your rent increase letter to make you look like an awesome landlord while at the same time you’re increasing the rent!

Final Thought

I understand that some regions of the country have higher vacancy rates and raising your rent just causes tenants to jump ship, but a reasonable increase to cover your costs rarely causes a good tenant to leave.

Think about this, you’re providing a safe secure home for someone and you’re taking all the risk of covering the payments, being able to qualify to even purchase a property and long term hopefully using it as a retirement vehicle. You should be able to pass the rising costs onto your tenants who have the ability to leave in a year, who don’t have to qualify for a mortgage and who fall back to you if a fridge or stove breaks.

$25, $50 or even $100 a month helps you cover increases, provides you more cushion if something does go wrong and helps make your business just a little more profitable. So take that action step to determine if you need to raise the rent and the process/timeline for you to follow.

Bitterly Cold and Depositing Rent Without Going Outside

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Depositing Rent Checks

WU-EnglockupSorry for my absence, but it’s hard getting back into writing articles when you’ve been out of it for a while. Fortunately as I was sitting here making money on my rental properties, I came to a realization.

Depositing rent from my desk sure beats wandering out to the bank in freezing cold.

I’m not sure where you’re located as I know many of you are from warmer locales like Florida and California, but where I’m at it’s freaking cold. Yet I’ve deposited almost $2,000 today without stepping outside and it’s not even 10am here yet. And rent day isn’t officially until tomorrow!!

So what’s the secret? It’s called Interac e-transfers and if you can get your tenants to start doing this it can be a huge time saver for you. Sure there’s nothing like having cold hard cash in your hands, or a stack of post dated checks, but when it’s minus oh my freaking god outside, not having to either meet the tenant in person and not having to go to the bank suddenly become a welcome relief.

Now before you go making this mandatory for all your tenants, there are a couple caveats. Not all banks offer this service and both parties need to be set up to do online banking.

Your first step is to ensure your bank has this option before you go getting the tenants onto it.

It can be called Interac transfers, email money transfers or several other cute names, but here’s the basics of how it works if your bank supports it. With just your email address and a secret question/answer combination people can send you money. That’s how hard it is.

Yes there is some extra steps on the tenants end to set you up as a payee, but overall it is amazingly simple.

It’s far less painful than setting up automatic deposits via your bank account and it’s safe and secure. So if you haven’t looked into it and want an easy way to make deposits, check into it!

Analyzing Rental Properties – Rental Neighborhoods

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Choosing The Right Neighborhood

Successful investing in rental properties leaves cluesHere we are on part three of analyzing rental properties, hopefully this is helpful for you if you’re planning on expanding your portfolio or just getting started in the landlord business and plan on purchasing your first property.

If you missed the first two articles, I’d suggest you backtrack and read them first, you can find them at these links, Analyzing Rental Properties Part 1, Analyzing Rental Properties Part 2.

So what is the right neighborhood? To be fair there is no specific right neighborhood and it can vary from state to state, province to province and city to city, but there are clues to what areas tend to work better.

Following the Clues

When purchasing a rental property there are a couple key considerations you need to think about. First and foremost is cash flow.

Cash flow requires two things, healthy rents and being fully rented as much as possible. If you generate $500 cash flow a month that’s great, but if you’re vacant four months every year you end up losing money. If you only generate $100 cash flow a month, but are vacant even one month a year you could also be going in reverse.

Ideally you want properties in high cash flow areas or properties that have the opportunity to provide multiple streams of income. This can be basement suites or multiple units.

Alternatively you can look at single family homes if the monthly payments are very low and rents are great, but this can be a challenge and leaves you open for extended vacancy periods with no income coming in.

The second area to consider is a good rental population. This is where so many potential investors fall down.

You can have the best rental property in the world waiting to be rented out, but if there are no tenants, it just sits there vacant with you feeding it. This is where the economics we talked about in the first article come into play.

In healthy areas where economies are growing workers tend to migrate to the area and they tend to be renters when they arrive. Often the healthiest areas in these places are districts with good access to industrial and warehouse areas.

The reason for this is they provide the largest supply of potential renters and renters like to be close to their work. Many people moving to new cities or towns who rent are typically blue collar workers or laborers and these are your prime candidates for many landlords.

They tend to stay tenants for longer periods of time and they are plentiful which gives you more applicants to choose from when you are vacant and leads to less vacancies.

Finding amenities close to rental propertiesThe final considerations are transportation and amenities. You want good transportation services nearby so it is convenient and you want shopping also to be handy for items like groceries.

An example of this is our furnished rental properties that cater to working men. They all have multiple buses that stop within a couple blocks that will take them to the industrial areas or other main work areas (downtown core, secondary industrial areas).

They are also located close to main transportation corridors if they have their own vehicles that can get to the North, South East or West of the city quickly. And we have nearby grocery stores, pharmacies and even restaurants that are all within a  short walking distance. These features create a benefit of saved time and convenience and tend to help us keep tenants for longer periods.

Good cash flow, a large pool of potential tenants to fill your property and proximity to transportation and amenities are all keys to successful rental properties. They aren’t the only keys, and these alone won’t guarantee success, but they will make the process easier.

So, if you haven’t purchased your first rental property yet, start including these in your parameters when searching. If you already have a rental property, how many of these three attributes do you already have in place?

Not having all three isn’t a guarantee of failure, there are always successful rule breakers out there, but the more you have the easier it can be.

Not having great cash flow can be compensated with you occasionally funding the property, perhaps the cash flow is compensated by great appreciation.

Not having a large supply of local tenants can be worked around by setting up relationships with relocation companies that provide rentals for large local companies.

Not having amenities can be compensated by…. hmmmm, well hold it that one may be more of a problem, but it can depend on the area and what people are used to, but you get the idea.

So, for those you with rental properties already, take a look around and see if you have these requirements and then let me know if you have them by accident or by plan by leaving me a comment below!

I look forward to hearing from you and I would also like to know from those planning on becoming landlords int he near future, did it help? Were these last three articles useful and applicable to you? your feedback will help ensure future articles and series can help everyone the most possible, so thanks for your input.

Analyzing Rental Properties – Neighborhoods

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Location, Location, Location

Continuing on with my series on analyzing rental properties I started by talking about doing some homework before you jump in.

We started it by looking at the local economics of where you’re potentially looking to purchase an investment property. Economic factors can help ensure the chances of your rental property being a success are multiplied, so if you’re just starting with this post, you may want to go back to part 1 Analyzing Rental Properties – The Economics

In this post I’m going to talk about neighborhoods which help ensure a steady stream of tenants and even better odds of hitting a home run with your investment rental property.

next door rental propertyAs the old adage in Real Estate goes, the three most important parts of buying Real Estate are location, location and location, although when buying rental property, it’s not the same location as buying your personal residence.

So many would be landlords see a house down the street from where they live come up for sale and they get the idea that it would be ideal as a rental property for them. Nine times out of ten, it’s not. In fact it could be the worst decision you make as a landlord and has the ability to permanently scar you.

The Pain

I’ve been there. I purchased the house beside mine years ago to help out the little old lady who wanted to move away. We tried to help her sell the property, but the market was very flat at the time and she was on a deadline, so we did what we felt was right and bought it os she could move on.

We were already experienced landlords with a couple years under our belt, so we knew it would work. Except with a high mortgage and low rents we new we would have some cash flow challenges, but if we could make it last a year, then we could sell it, yeah that’s it!

So we went ahead with it. We repainted, we fixed up some minor issues and we had a great property, just no one to rent it. Now since fortune favors the brave (or the uneducated initially), we managed to find some people who drastically needed to sell their home due to foreclosure issues and needed help getting back on their feet.

We were able to set up a win win solution where we took over their current home’s equity and renovated it, put it on the market as it was in a much higher demand area and sell it quite quickly. At the same time we moved them into the property beside us, used a portion of the equity as a down payment for a rent to own scenario for them and it all looked great.

They were actually paying less per month, we were making a few dollars as rent to own properties have higher rents and we had a bundle of cash from the flip of the other property. Everyone was winning.

They seemed like nice people, we got along quite well and several times they even joined us out back on our deck for a beer or glass of wine during the summer. Then the wheels fell of.

One of the burdens they had to deal with in their lives was a severely mentally handicapped daughter . She was fifteen years old, but mentally only reached the capacity of a two year old. Needless to say, but helping her and managing her was a full time job for the mom. Plus they had another son, so their days were full.

It started when they asked if they could get a dog. Pets are great therapy for children and apparently even more so for people with disabilities, so how could we say no? So away they went and picked up a mid sized dog, for a very tiny back yard…

A little more background, our former neighbour kept an impeccable yard. The rumours in the neighborhood was that she snuck out late at night to pull dandelions as we never saw any in her yard and the back yard was beautiful with banks of flowers across the back and a lovely covered seating area to relax in.

renting the property next to you

Well, in no time it was a complete mess. The lawn was dead and torn up, they never cleaned up the dog crap and it went from bad to worse.

Very unfortunately the daughter’s health deteriorated even more and she passed away. We felt awful. They had done so much to make things work for their child, they had given up so many things to make a good life for her and she was taken away by failing health.

The positive we saw on this was with the extra financial burden gone, they would be able to turn their life around and while this left a huge hole in their lives, it would ultimately allow them to move forward. We were wrong.

People Just Think Differently

We were actively growing our Real Estate portfolio plus I was working a demanding full time job at the time, but we wanted to succeed so we made adjustments to our lives. We only had one well used vehicle to save money, we rarely ate out and we scrimped and saved. We thought that was how everyone should think when they are trying to live up to their ambitions and dreams.

You simply adapt to make things work and start to think differently.

Not the renters next door though, although they did think differently than us. What little money they had left they sunk into their daughter’s funeral, which is understandable, but it left them with nothing and when their daughter first became sick (this last bought was over a few months), we did what we thought was the right thing and didn’t pressure them for rent.

We knew they were incurring significant extra costs during that time, the husband wasn’t able to work as much as he was needed at home and we could cover it. So by the time they had the funeral they already owed us almost $6,000. I know rookie mistake, but a compassionate mistake, after all they were not just my tenants… but they were my neighbors too.

Then the husband’s vehicle broke down, so they leased a new expensive vehicle, still not sure where that money came from if they couldn’t pay me. Next we noticed the wife had new shiny manicured nails, a brand new cell phone and they even asked if they could get a second dog!! All expenses we refused to splurge on for ourselves as we were very money conscious. We said no obviously and suddenly we became the bad people for refusing them.

The best part? We had front row seats as it all took place next door.

Finally, we find out from them that the government funds they were receiving to help with their daughter’s disabilities were “suddenly” cut off now that she had passed. Their free supply of money that was obviously just being spent on them now suddenly dried up. Were they thinking it just ran on forever?

This just made the likelihood of us ever getting the outstanding rent back extremely unlikely, so we were ready to pull the plug and evict them. Before that hppened,  they came to us and told us there was no way they could afford to stay in the property and had located a basement suite to move into, but couldn’t get in for six more weeks.

They were going from a 1,600 square foot single family home in a nice neighborhood, complete with a two car garage and a basement, to something under 1,000 square feet. Talk about a change of lifestyle.

I can’t even remember if they were able to get us any additional money during that remaining time they were there, but I know I spent every day hating the idea that money that should have been coming to me, instead was going to the shiny new vehicle in the driveway beside my  older vehicle. It was a very painful daily reminder of how I was being taken advantage of.

When they finally did leave, the property itself wasn’t too beat up, but the back yard was a disaster and we had to completely repaint and re-floor the property. We knew there was no way we could rent to someone next door again and that we needed to sell, so a significant renovation was in order.

Rental property yard after lettign in dogs

In the end, the tenant walked away owing us over $10,000, plus we dropped another $20,000 in fixes and upgrades to sell it. The positive part of this was during the time the tenants were in there, the market had taken a huge upswing and even after all the losses and extra  expenses we still managed to make a healthy profit, but we were just lucky.

The TakeAways

The painful and expensive lesson we learned is that having your tenants next door or even near to you, opens up the door for more problems. Your relationship could evolve from just landlord tenant to a more complicated Landlord/neighbor scenario.

Part two of this is when things do go wrong , and there is no guarantee they will go wrong, it’s much more painful when it’s next door for you to see or you pass by it on your way home from work every day. Yes you get to keep a closer eye on things, but that too has it’s good and bad.

Part three, if things do go bad and it gets to the point where your relationship sours, do you really want your tenants knowing where you live, or having to see them almost every day? Especially if they are spending your money on themselves rather than paying the rent they owe?

Why take a chance?

In all likelihood the neighborhood you are living in isn’t the best location for a rental property anyway. Although the quality of tenants overall may be better in nicer neighborhoods, the quantity is way down.

This can lead to longer times filling vacancies while you are making payments each month on more expensive properties.

When buying in areas more prone to rental properties you have a much bigger pool of tenants to choose from and while you may have to put more work into screening, during tougher economic times you want a bigger base of potential tenants to choose from as vacant months add up quickly.

Also, buying rental properties in rental areas is usually much cheaper than purchasing in prime homeowner areas which can save you money to start with. Buying a property for less money and still being able to get the same amount of income is simply being smart.

Buying an expensive property in an expensive area and hoping to make money may work, but it’s much harder and has more drawbacks.

Most of these neighborhoods frown on renters. It’s the NIMBY mentality or Not In My Back Yard attitude. They complain about illegal suites (which they have a right too), they complain about too many vehicles, they complain about snow not being shovelled in a timely fashion or grass not being cut to acceptable lengths etc. And while these people exist in all neighborhoods, they are much more prevalent in owner occupied areas.

Even if you do everything right, if your neighbors find out your property in the nice neighborhood is a rental, it gets a bit of a social stigma. Yet if you buy in a rental area where you have a huge pool of tenants, it’s just another property in the neighborhood.

Yes you may have a longer drive to randomly check up on your property, but the other benefits outweigh this by so much!

The BottomLine

You have to do what works for you. I’ve given you my example of what can go wrong and I’ve explained why not renting next to you works better. If you’re already living in a rental neighborhood, you may not have an option, or if you’re in a small town it’s hard not be be near your rental, but if you have a choice, don’t make it too close!

The benefits of purchasing a rental property in a rental neighborhood are they are typically a bit cheaper, they typically generate better overall cash flow, renovations cost less, you have more tenants to chose from and they can often be suited providing you with multiple streams of income from one property.

The benefits of buying in your possibly upscale neighborhood is that it’s close, you can keep an eye on your tenants, the initial price is higher so % increases in value reward you more and the class of tenant is typically better.

The negatives of buying in a rental area is you have to do more thorough screening as it’s quantity versus quality, the initial price point is lower so if values increase x% it would be smaller than if on a more expensive house and it may not be near by where you live.

The negatives of buying in your neighborhood that is not a rental area are far fewer tenants to choose from, so longer periods of vacancy, lower amounts of cashflow, renovations are typically more expensive, if the relationship sours, you have to deal with it often on a daily basis and your property can suffer local stigma for being a rental.

There are people who buy near them and run their property successfully, with only one property this may work perfectly for you. However, all the investors I know who buy multiple properties tend to buy them further afield and usually in specific areas designed to generate the best chance of success and the most cash flow and I can’t recall any of them buying the rental next door or down the street from themselves.

And if they don’t do it, why would you?

So, this has been one of my longest articles ever, so I hope you got some value from it, I’d love to hear your comments and stories about your rental properties. Are they in your neighborhood? In rental areas, or next door?

The next article will be the third in this series and will talk about local rental markets, I hope to have it ready for you soon!

FYI, this is how it looked when we were done,

rental property renovated after bad tenants

Analyzing Rental Properties – Economics

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Is It a Good Or Bad Rental Investment?

investing in rental propertiesWhen you’re purchasing a rental property as an investment, you’re really looking for a good long term investment. The problem is, how can you be sure it works, and how can you tell a good rental property from a bad rental property?

Fortunately, there are a few things you can look at to help put the odds of finding a good rental property in your favor. This article will address a few of them.

Before anyone purchases a rental property, they should really do some homework regarding the local economy, the neighborhood they are considering purchasing in and the local rental markets. So yes, there is homework involved.

Economic Factors

I’m starting with economic factors as I feel they are one of the best indicators of long term success for a Real Estate investor or beginning landlord. You really want to choose an area that gives you an advantage.

While it’s true there is rental property in just about every city, county and jurisdiction, these areas are not all created equal and understanding the local economics can give you an unfair advantage over those that don’t. This advantage doesn’t necessarily translate directly to success, but it does make it easier.

Some of the factors I refer to as economic are items like unemployment rates, new businesses coming to the area and even the general age of the local population.

If you look at historical unemployment rates for the area you are considering you’ll find a mountain of potential information. Ideally, you’ll be looking at an area where people are moving to for work and unemployment has been quite stable (low and stable) or has been exhibiting a trend of dropping over the years.

Right off the bat, this makes Detroit a bad choice. Sure you can get into rental properties very cheap, but with extremely high unemployment and not to bright of a future it doesn’t bode well for getting paid rent on time and potential increase in values in the near future.

If you know of new businesses coming into an area, this too can be a benefit. The biggest example currently of this is throughout the Dakotas where the oil and gas industry are working like crazy. While many of the workers will end up being transient and not necessarily sticking around the area, the huge growth in these industries also trickles down to new restaurants, stores and businesses that serve these workers. These businesses have employees who will stick around and will be getting paid.

Another area to look at is the general age of the population. If you have a relatively older population in the area, does that mean a sell off is in the near future as they retire? Will this form a glut of properties on the market affecting rents and values?

On the other hand if the population is relatively young, will they be transitioning to purchasing in five years from renting? Will this put extra pressure on home values going up and lending itself to more growth in the home building industry?

These are the types of questions serious investors look at when purchasing in areas and if you’re serious about being successful, they should be part of your process as well.

I know dozens of investors, very successful investors, who don’t even buy in the same region they live in. they have hand picked cities and towns hundreds and thousands of miles from where they live. it might be daunting, but it also reduces much of the risk.

Other questions to consider;

  • Is the local government pro economic growth?
  • Is there positive in-migration to the area?
  • Are wages increasing in the area?
  • and many more!

Anyway, this is part one of analyzing rental properties, in a few days I’ll add my take on rental neighborhoods and then after that I’ll go into local rental markets. Finally to close it up, I’ll just go over some of the math you can use to determine if the rental property you either currently own, or are looking at has a better chance for success.

So, is this helpful? Can you use this as a starting point in your education as a landlord and in expanding your rental portfolio? I’d love to hear your thoughts and any other ideas you can add.