What’s the first thing that a deal partner or investor is going to ask you when you pitch them on a project? “How am I going to get my money back.” So that makes your exit strategy the key to your proposal.
If you’re at all a regular reader of this space, you know that I’m a hawk for cash flow. Regular, boring, methodical cash flow.
Not only that, but I have been boldly proclaiming far and wide now for over a year that southeastern Michigan is THE best investment real estate market in the country for buy-and-hold cash flow investors.
And it continues to get BETTER.
The real estate market here is still in absolute gridlock. The absence of any meaningful activity in the first-time-homebuyer niche, driven by the lack of available financing, has the market here at a standstill.
Since first-time homebuyers can’t buy, the people in those first-time-homebuyer homes can’t move up, and so on and so on up the property price chain. So we remain in a state of gridlock.
And inventory continues to rise: foreclosures are still coming onto the market in large numbers, and non-foreclosures are increasing as well through the natural course of lifestyle changes.
And it’s these non-foreclosures that are presenting the opportunity.
You see, the prices of these non-foreclosed homes are being dragged down as the entire market suffers with the glut of homes on the market. Completely updated homes that are in move-in condition that as recently as 2005 sold for $140,000 are now listed in the $85,000 range and lower and aren’t even getting any showings, much less offers.
And that means that homes in spectacular school districts that historically were untouchable as rental properties, because at their prices they wouldn’t cash flow, are now available. This is almost a problem.
Because some of the houses that I’ve looked at are actually too nice to be rentals. It’s a good problem to have, isn’t it?
And that’s the case with my latest acquisition.
Here are the details:
City: Harper Woods
School District: Grosse Pointe
Style: 3 Bedroom, 1.5 bath bungalow
Basement: Full partially finished
Updated kitchen, refinished exposed hardwood floors
New roof and windows
Central air and 2 car garage
The best part is the price: $60,000
The second best part is the rent: $1100 per month
This is another house that I should have rented before I close on it.
Take a look at the video and you’ll see why. And I found SEVEN more houses just like it.
You can see the rest of the house here:
Yesterday I started a discussion on how finding, screening, and selecting tenants is Critical Success Factor #2 for being successful at owning rental properties. And I began to discuss the four steps that need to be taken to screen and select successfully.
I talked about step 1 yesterday. That was Set expectations up front.
I’ll finish up with the rest of the steps today.
2. Do not advertise your unit for rent too early.
You heard that right. You can advertise too early and cost yourself a ton of unnecessary time and aggravation. Here’s why. Renters generally work on about a 30 day cycle, so they typically start looking for their next place around the time they giving notice on their current rental.
So what this means is if you advertise too early (before it’s ready to rent), you’ll waste a ton of time showing the place to lots of people that will need to or want to move faster than when your house will be available. On my first couple of rentals I thought that I would be slick and put a sign in the window the day I closed and keep it there through the time it took to do the rehab.
I can’t tell you how many people that I showed those houses to. I ended up renting them both to people that – guess what – had just given their notice and wanted to move in about 30 days. So trust me on this. Put a sign in the window, but not until the time is right.
3. Hold an Open House
Do not do individual appointments to show the unit. Ever. It took me two rent-ups to figure this out. Advertise the heck out of your units during the week, and drive all of your calls to a 30 minute “Rental Open House” on either Saturday morning (not too early!) or Sunday afternoon (in the fall I plan the time around Lion’s games). This saves you time and effort and creates a sense of urgency because you’ll get all of your prospects there at the same time. I’ve actually had one bidding war and one near-fight at my open houses, and I can consistently rent out my units after just one of these open houses.
3. Check References
After you go through the trouble of collecting the information, you need to call ALL employment and past rental references. I go back five years for both. There is no substitute for doing this yourself, because I’ve gathered more information from the tone of voice from these references than you’d believe.
4. Require Full Payment Before Handing Over the Keys
And finally, do not hand over the keys until they are 100% paid up in terms of first month’s rent AND the security deposit. Not having all the money necessary to move in needs to be one of your screening devices. The rationale – they knew they were moving, so if they couldn’t save up enough money to pay you up front, what makes you think that they’ll be capable of managing their money well enough to pay you on time every month?
If you use these four steps every time you rent one of your units, you will substantially decrease the likelihood that you’ll end up with a deadbeat tenant.
And that’s a good thing, because my primary goal in structuring my business is that I wanted to sit back and collect checks every month, and not get any calls from renters.
If you need to know more about my particular strategy and methodology for pursuing residential rentals as a business, then you need my “The Set and Forget Metro Detroit No Hassle Suburban Rental Property Bootcamp“. It goes through the rent-up and EVERYTHING else that you need to know to be a successful rental property owner.
That’s harsh I know. And the way that I run my business it’s not at all accurate, because I have some of the best renters that you could imagine.
But think about it – you have a house that’s worth, say $100,000. You’ve bought it, done some work to it, and you’ve made sure that you’ve complied with the rental-unit laws in your city.
Then you spend time looking for someone to GIVE the house to. Someone that has absolutely no vested interest in your property whatsoever. And someone that’s not going to tell you about anything that needs to be done until it directly inconveniences them.
How’s that for a fair trade-off?
While that may sound harsh, it really is the truth. And if you choose poorly you can end up with a very unpleasant and expensive situation.
And in my view that’s what has spawned the “tenants and toilets” phrase and it’s the primary reason that most people are scared to death of owning rental properties.
Which is a crying shame, because it doesn’t have to be that way.
And even with all of this, most of the rental property owners that I know STILL, unbelievably, don’t put much effort into screening their tenants.
As I discussed in a prior post, Critical Success Factor #1 for being successful in owning rental properties is property selection. That included not only area, but configuration, condition, and amenities, such as a/c and appliances, as well. My strong belief is that it you get this right you can substantially reduce your risk of getting a bad tenant, because a better house draws better tenants overall.
Since I define success in this area as tenants that pay on time and never call me, I therefore categorically state that Critical Success Factor #2 is Tenant Selection and Screening.
And if you get CSF #1 right, this part is actually pretty simple to accomplish with a couple of steps.
1. Set expectations up front
I have a detailed rental application, and I do a strict background check that includes credit, employment, past rental references, and a nationwide criminal and sex offender search. I charge an application fee, up front, in cash, to cover the cost of the background check, and I charge the maximum security deposit allowed by law in the state of Michigan. I tell my tenant prospects all of this up front, and this screens out a significant number of people.
Stay tuned for Part 2 of this Post . . . . .
If you need to know more about my particular strategy and methodology for pursuing residential rentals as a business, then you need my “Set and Forget Metro Detroit No Hassle Suburban Rental Property Bootcamp”. It goes through the rent-up and EVERYTHING else that you need to know to be a successful rental property owner.
Here we go again.
Don’t you just love it when someone asks your opinion of something that you actually happen to know a LOT about, you give them the answer, then they proceed to argue with you?
It happened to me again last week.
And unfortunately it was one of those I-already-made-the-decision-so-I’m-only-asking-you-because-I-want-to-validate-in-my-own-mind-that-I-was-right kind of questions.
I’ll spare you the details, but the person bought a trashed out house in a marginal area that he’s planning to fix-up and rent. He bought it because he couldn’t believe that the house was THAT cheap.
I didn’t have the heart to tell him that it was because nobody else wanted it – because it was in a bad location.
So I thought that I would take the opportunity to discuss what I consider CRITICAL SUCCESS FACTOR #1 in being successful in owning rental real estate.
And that’s LOCATION.
You can’t fix it.
You can’t change it.
And you can’t convince anyone else to like it.
So don’t buy in those areas.
Here’s an anecdotal research technique that I used a while back to determine the good/bad line for location.
I have taken almost a couple of hundred applications for my rental homes, and what I have done is driven by the homes and apartment buildings that these applicants were moving from.
I looked at their dwellings, I looked at the areas, and I even made appointments to see some rental homes and apartments in those areas.
Because I COMPLETELY understood what my tenants were moving AWAY from.
Once I understood that, then the location decision was a no-brainer.
This works because it’s simply a variation of the strategy of finding out what your customers want and giving it to them.
In this real estate market there is no good reason to buy a property that you plan to hold and rent if it needs any more than about $2500 worth of work.
It’s just not necessary, because there are so many great properties on the market – and I mean listed on the MLS and STILL occupied – that will cash flow as a rental at or near full asking price.
I took a quick look last night at one of the cities that I track and in about five minutes I identified six properties that met that criteria.
But yet every week I hear about and get emails from investors that are seriously negotiating on properties with mold, with foundation problems, and even one with termites (Yes, there are homes with termites here in the Midwest. Not many but they do exist.)
And I shake my head and ask “why?”.
Because the last three properties that I purchased needed, all together, a grand total of $3500 worth of work. And that amount included one electrical upgrade from fuses to breakers ($500) and one black-pipe gas line ($750). The rest was paint and minor stuff like smoke detectors and basement stairway hand rails.
But the two things that really don’t make sense about taking on these huge projects are the repair costs and holding costs.
Think about it. You buy a home for $20,000 and you put $20,000 more into it to turn it into the nicest $850 per month 3 bedroom rental house in town.
How are you going to get your money out? The new lending rules say that you can’t refinance based on appraised value until 12 months after purchase, so your $20,000 in repair cost gets to sit locked up in the property for an entire year when it could be off earning greater returns elsewhere. Heaven forbid that you used a line of credit for the rehab – you’d have negative cash flow from day 1.
But you’d still have the honor of having the nicest $850 per month 3 bedroom rental house in town!
The second problem is holding costs. You obviously can’t rent the property while you’re working on it, and even a small renovation project can take upwards of 60-90 days, so at a minimum you need to pay taxes, insurance, utilities, and maintenance/yard care for two to three months, and you may even have principal and/or interest if you financed the purchase.
The striking thing is that if you do the math you’re realize that holding costs for three months of rehab can amount to the rental profit on a property for up to three years.
So in other words, by doing a big rehab on a property that you want to rent and hold, you’ll need to rent it out for up to three years just to break even on the holding costs.
Why would you want to handcuff yourself like that?
Contrast that with the no rehab houses that can be bought off of the MLS. As I have written here in the past – I collected a deposit for the most recent one that I bought before I even closed on it, and the weekend following the closing I traded the keys for the first month’s rent. So there was virtually no gap between buying it and putting it into profitable service.
Which would you rather be? Profitable in month 1, or profitable in month 37?
I’m a recovering finance guy, so for me it’s obvious! 😉