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Real-estate Riches for Cowards

 

 

 

 

 

 

 

 

 

 

Real-estate Riches for Cowards

By Ryan Scott

 

About the book:

Real-Estate Riches for Cowards presents a proven and concise step-by-step approach to making money in real-estate. The information is based on the distillation of fifty years of experience, owning and managing property. The essential topics include selecting the city and neighborhood in which to invest; selecting which house to buy; negotiating the purchase price; financing the property; what to do and not do when preparing a house for rent; managing workers; advertising the property; selecting tenants; managing tenants, evicting undesirable tenants and most importantly, the underlying philosophy of making money in real-estate.

 

About the author:

Ryan Scott lives in Austin, holding a Ph.D. in psychology. Coming from a background of poverty, he became self supporting and went to college by investing and managing real-estate.

Other books he as published are: “Beyond Darkness, The Secrets of a Blind Psychologist,” “Stella” and “A Matter of Attitude.”

Introduction:

This book is written for individuals who want to make money by purchasing a house and renting it out but are afraid because they don’t know how to do it. If you follow the prescriptions laid out in this book, you will make money by Managing and owning property. I have been a small time landlord since 1967 and have made all the mistakes an amateur investor could make, but I survived by learning the hard way. Drawing on my experiences over the past 50 years, I will share what I have learned about buying a house, Financing a house, preparing a house for rent and managing tenants.

Thanks to real-estate, I was able to retire when I was only 37 years old. Now, at the age of 84, I still live a very comfortable life. Using my methods, do not expect to become rich overnight. You might be lucky and hit it big, but my goal to become self sufficient is based on small prudent steps.

You might ask why real estate? Why not rent and avoid the hassle of repairs, etc? Investing in real-estate is one of the few ways an ordinary working person can get ahead. The long term growth of real estate is well documented. I will use several personal examples to illustrate that point.

I now live in a house in Austin that was built in 1933 at a cost of $1,600, information I obtained from the original contractor. I paid $68,000 for that house in 1980, but it is now valued over $650,000. Adjusting for inflation, the original price of $1600 in today’s money would be $28,200. The increased value far exceeds inflation.

In 1957, I paid $10,000 for my first home in Cabrillo Park subdivision located in Fremont, California. Like all first time buyers, I was apprehensive about buying a house. My anxiety was mollified when the real-estate agent reassured me the worst case scenario would result in my having lived rent free. I sold that home in 1963 for $17,500. Houses in Cabrillo Park now sell for $750,000 and up.

A final example is the home I bought in 1969 in Santa Cruz for $8,000. My ex wife eventually sold that property for $500,000.

The above properties demonstrate extreme examples of growth potential. Real-estate values fluctuate and sometimes drop precariously low, but over the long haul they increase. Over the past sixty years, I have bought dozens of houses and have made money on each one.

The major lesson I learned about real-estate is to buy a house and keep it. Eventually, tenants will have paid for the house, and then you will enjoy a constant cash flow that increases faster than inflation. There are exceptions to the rule. Divorce, moving, death, dire emergencies, etc may mandate the sale of a property.

If you take a deep breath and continue to read, you will begin your journey to financial independence, but if you make the wrong choices because of ignorance or bad luck, you could lose money.

Chapter 1: Buying a House

 

The first step in building a strong financial basis is to own your own home. Although this book is written for the purchasing and managing of an investment property, the principles discussed apply to any house you might buy. There are many ways to make money in real-estate, but I will focus on what has worked for me. Now, how do you begin? You will immediately make money if you choose the right house at a bargain price. With that goal in mind, you are ready to undertake your first assignment.

Become acquainted with prices in your area to determine the value of a house you might consider buying. Spend significant time on this project while you accumulate funds for the down payment. Sources of information include your local newspaper, Craig’s list, other web sites and the real-estate multiple listings bulletin, but they reflect the asking price, not the actual selling price. Computer savvy and the ability to negotiate the internet are increasingly important. You can determine the actual value of a house by examining public records for similar houses in the area, adjusting for condition.

Find a real-estate agent you trust, avoiding the liars who will hustle you. Ask the agent a lot of questions, even dumb ones. A good agent will educate you about the housing market, take you to inspect properties for sale and Pointe out significant features including the drawbacks. If you should find the house you want, submit an offer through that agent, but don’t be rushed. Because the agent will make money only if you should make a purchase, you are the one in control. Don’t feel obligated to buy a home through an agent just because he has spent time with you. He doesn’t expect to sell to every prospect so don’t be pressured.

There are many considerations to make when evaluating a house, especially the area. “Location, location, location,” is an often heard comment. In practical terms, what does that comment mean? For starters, buy a house that is near you so you can manage it yourself, keeping aware of what’s happening to your investment. People do buy houses that are far away from them, relying on professional managers, but those managers will take ten per cent off the top of all rents received, sometimes more. Also, when something requires repair, they will use a licensed contractor who will charge an exorbitant fee. All those extra costs could wipe out your margin of profit. Read on. You have just started.

What city or town is a good choice for investment. There is a high correlation between growth and increasing prices. In general the city or town in which you live is acceptable, but some cities are better than others. Cities with a rapidly expanding population are desirable, but declining population centers should be avoided. Static areas are questionable. If you happen to live in a declining area, it may be worth your while to invest elsewhere, relying on professional managers, but if you take that path, factor in the extra cost in your calculations.

Climate change is a factor in selecting property. Because of flooding, hurricanes and title erosion due to worsening weather, avoid houses on water fronts, even though they are picturesque. Also avoid houses lying within the 500 year flood plain or the tornado corridor of the south-west, unless the cost of adequate insurance will leave you with an acceptable margin of profit.

Once you have established your target city, locate the best area in which to invest. Your decision will depend on your level of income. Excellent profits are possible from high end properties in upscale areas, but if you aren’t rich, you won’t qualify for loans so cross those possibilities off your list.

As a beginner, concentrate on cheaper properties. Neighborhoods change. An area that has been historically undesirable sometimes undergoes gentrification. If you should identify one of those neighborhoods, begin your search for the right house in earnest, but don’t overlook houses in other areas.

An example of gentrification is East 12th Street in Austin. Not too many years ago, that street was notorious for drugs, hookers and violence. Consequently the property there was dirt cheap. Over the last 15 years, the character of the area changed. An old house someone upgraded recently sold for $750,000.

Proximity to public facilities will help you get your house rented. If you were a prospective renter, what would you want to be near? Being close to Bus lines, shopping, schools, parks, restaurants, libraries, downtown and work will make your house more rentable. Houses within one mile of a university are highly desirable, destine to become more valuable. Neighborhoods with big trees and well cared yards are a plus.

Avoid houses near noisy businesses, honky-tonk saloons, busy boulevards, stinky operations and high rates of crime.

After you have identified the neighborhood fitting those criteria, comb the area for potential houses to buy, but if you should come across a super good deal elsewhere, disregard any or all of the qualifications discussed above. The condition of a house and its price must be considered. As a general rule, the best looking house on the street is not a good bye because the neighborhood will detract from your house and discourage potential tenants, even though you will have paid a high premium. It is wiser to buy a worse looking house in a good neighborhood because the probability of making money is more likely.

It doesn’t cost anything to make an offer, so bid on numerous properties, offering to buy at a significantly lower amount than the asking price. It is always a good idea to make your offer subject to an escape clause, just in case more than one owner accepts your offer. The escape clause should be vague, like, “subject to a satisfactory inspection.”However, if you should come across a super hot deal, offer the asking price before someone else beats you to the punch. That’s where becoming familiar with prices pays off. If you have a good working arrangement with an agent, he or she will tell you about their new listing before it is put on the multiple lists.

By the time a house reaches the multiple listing, agents have combed over the new offerings like vultures, looking for good deals, but sometimes a winner slips through their scrutiny. It is desirable to get to a seller before he list his property. When I was flipping houses, I would drive around neighborhoods, looking for unoccupied houses. If I found one, I would get the owner’s name an offer to buy. Sometimes, an owner lived far away, unaware of recent values. On more than one occasion, I tied up the property with a bid and immediately resold the house. I would double-escrow the two contracts, closing the deal simultaneously without spending a dime and pocketing a nifty profit. Flipping houses has received so much attention lately, the prospects for making money flipping has declined; too many people on the hunt. A smart investor is like a savvy fox, sniffing out undiscovered niches and loopholes.

 

“Fixer-upper” houses are usually heavily discounted. Because most people are unable to visualize the potential of a house after it has been spruced up, you may buy it far below its market value. A coat of paint, a thorough cleaning and minor repairs will transform a run-down house into a desirable rental. It is always a good idea to make an offer subject to an engineer’s report. Avoid houses with major problems like black mold, faulty foundations, leaky roofs and a variety of other costly problems. In some cases, the seller will be willing to correct those deficiencies. You may undertake the restoration with the help of others, but NEVER clean it yourself. There are cleaning services for that purpose. If you clean someone else’s filth, you will become disgusted with real-estate.

Major remodeling is very costly. Upgrading and creating a modern open-concept home might bring a healthy return, but those kinds of changes are expensive, probably costing more than you can afford.

Look for a house that can be cheaply expanded or changed into a duplex. Many houses have unused areas that could be converted into a living space, basements, attics and garages. For example, I changed a two bedroom, one bath house by converting the garage, making a more desirable 3/2 home that rented for half again as much. Some houses are a natural for becoming a duplex. Any time you make it possible for more individuals to occupy your house, you will make more money. An extreme example is the 6000 square foot triplex I passed on to an ex-wife. The people who bought that house from her created many bedrooms. 23 people now live there, paying $10,000 per month. Divorce is a great way to cleave your wealth. With three divorces to my credit, I should know.

Money spent on selective upgrading usually earns a good return on the investment, 10 to 100 percent. When buying a house, it must generate a healthy cash flow, factoring in mortgages, taxes, insurance, and vacancy and ten percent for future maintenance. Never buy property with a negative cash flow. The loss comes right out of your pocket, threatening your financial stability.

Chapter 2: Finances

The way you spend money is a reflection of your values. If you are a person who is materialistic, buying what you want on credit, new cars, expensive housing, the latest gadgets and living beyond your means, my system won’t work for you, unless you’re willing to change. Likewise, if you support expensive addictions like booze, gambling, dope and smoking, the possibility of investing will disappear in a flurry of self gratification. It is a fallacy to live on credit and waste money, expecting to get ahead. Building wealth is based on frugality, saving, self discipline and working for future goals. In short, keep out of debt and save money. You need to accumulate at least $40,000 for your working capital, achievable by careful money management and working extra.

Maintaining a high credit rating is essential if you intend to invest in real-estate. Credit cards are great if you are smart in the way you use them. The secret is to pay off the statement balance before it’s overdue. Usually you have 20 days of grace before you have to pay. Not only will you enjoy the ease of having a credit card, you will be increasing your credit score without spending a dime on interest. Never be late on your payment, a sure fire way to mess up your credit. Many credit cards offer wonderful incentives, air travel, hotels and cash. With the judicious use of cards, I have flown all over the country and stayed in first rate hotels at no cost to me. Be smart and take advantage of promotional offers. In order to avoid the annual premium of $95, dump the card when you receive the reward points. However, each time you apply for or cancel a credit card, your rating is negatively affected.

There are several ways to finance a house. Conventional loans usually require a twenty per cent down payment and meeting certain requirements. Assuming you have a good credit rating and a record of stability, your net income dictates how much money you can borrow. Payments on debts count against your income, a reason to avoid expensive items on credit, like a new car. If you have jumped those hurdles, you can shop for a loan from a variety of lending institutions. Choose the one that offers the lowest rate of interest with a minimum of upfront money. The loan will be doubled for every three points of interest you pay over thirty years. Always get a fixed rate of interest on your loan because flexible rates could wipe you out with the advent of inflation. FHA loans require a lot of paper work with strict regulations, but the down payment is significantly less.

There are Loans available for a home in which you intend to live, but loans for investment houses are difficult to find. One way to get around that obstacle is to actually live in the investment house for six months.

Owner financing is another way to acquire a house. The qualifications are less demanding and the down payment is lower, but the interest rate is usually higher. When you buy a house, let a title company do all the paper work and give you a clear title. Never buy property on a Contract of Sale or you will have no protection against unscrupulous people. Once I was victimized because of a Contract of Sale. I had been making regular monthly payments to the seller when I received a notice from the original lender that he was foreclosing on the property. The seller had been keeping all my payments for a year without paying the original lender. After she filed bankruptcy, I lost a lot of money, but I learned a valuable lesson.

Assessing the cash flow of a potential investment house is essential. After you determine what other similar houses are getting for rent, subtract all the monthly cost, including mortgage payments, insurance, taxes, ten percent for vacancies and ten per cent for repairs. What is left is your cash flow. The higher the cash flow the more protection you have from failure. If your calculations result in a negative cash flow, move on to the next project. Allowance for depreciation by the IRS is a hidden benefit. Dedicate your profits gained from investments to the funds for your next house.

Undiscovered loop holes can work for your benefit. My career in real-estate was launched by a glitch. The Teacher’s Credit Union was making 70 per cent loans on properties located within the county, appraised by their own man. For properties located in other counties, 60 per cent loans were available, but an appraisal had to be provided by a licensed appraiser or real-estate broker at my expense. The maximum loan available was $15,000. The kind of appraisal was not specified, the loop hole in the system. There are three basic ways of appraising a piece of property, “comparable, depreciation and replacement.” The comparable method is to determine the selling price of similar houses. The depreciation method is determined by taking the original cost minus depreciation. The replacement method determines the value of a house by multiplying its square feet by the square foot cost, reducing the price by the percentage of depreciation.

Armed with this information, I went to Santa Cruz and paid $10,000 for an old 2,500 square foot house in deplorable condition. A broker appraised the house using the replacement method, multiplying 2500 square feet by the cost per foot) $ 10 at that time) to rebuild, arriving at a cost of $250,000. After depreciating the property by 90 per cent, she estimated the house was worth $25,000. The Teacher’s Credit Union lent $15,000 at closing, (60 per cent of $25,000.) I pocketed $5000, the difference between the selling price and the amount lent. This method of buying became so lucrative I bought a house every three weeks during the next year until the Teacher’s Credit Union finally was drained of all the funds available for loans.

Chapter 3: Preparing the House for Rent

Let’s assume you have successfully negotiated the purchase of a “fixer-up” 3/2 house in an upcoming neighborhood on a quiet street near public facilities. You have paid $140,000, 35,000 below the going price for similar houses in good condition. From your $40,000 savings, you have paid $29,000 at closing, leaving you $11,000 for rehabilitation. The engineer’s report indicates no major problems.

After closing, you thoroughly inspect your newly acquired property, observing shade trees in the front yard, but tall weeds and trash littered everywhere. A partially disassembled car is parked in the front yard, not a pretty sight. The back yard is enclosed by a chain-link fence and over grown with weeds. Now you inspect the exterior of the house. The garage door is sagging and looks worn out. The paint is peeling. The trim around the roof has a few rotten boards, the screens are torn and rusted, and one of the windows is broken. Now you walk inside. It needs a complete paint job. Several holes have been punched through the sheetrock. The floors are hardwood, but they are dirty and scuffed. Everything is filthy and needs scouring, especially the two bathrooms. Obviously, slobs have lived here. The kitchen needs to be upgraded, but you are pleased with the arrangement of the three bedrooms. The double enclosed garage has been sheet rocked with a half bath by its rear door.

Repairing the damage and converting the garage into a studio apartment is your goal, but you have only $11,000 with which to work. If you hire a general contractor, you won’t have nearly enough money; but if you are willing to get your hands dirty and become your own contractor, making the house into a desirable duplex is feasible.

Taking on the responsibility of a contractor, you begin to assemble the workers you need. There are many people who are looking for work. Some are good workers, some are ex felons, some are alcoholics, some are older but skilled and some are interested in getting paid but not working. Don’t over-look the women who can do the work. (If you are a woman hiring strangers, stay cautious.) Be on the lookout for someone who can paint and does carpentry work.

Because the initial work requires unskilled labor, you call First Day Worker, requesting two men with good attitudes who are energetic, offering to pay $10 per hour. All of the initial work should take no more than 8 hours, costing $80, but you have to provide equipment and material. Be business-like but friendly with your workers. They want to be respected and respond positively when you show you care, like bringing them tacos and coffee. Normally they do their best work during the first six hours of employment. Hire them on a contractual basis to avoid paper work and additional cost. Temporary workers want to be paid cash under the table at the end of each day. Ask the workers if they could recommend other workers for doing things they can’t. I have obtained my best workers by asking. Do not hesitate to fire an undesirable worker, but do it gently. You may have to go through a number of men before you find someone who will be a reliable handy-man. When you do, you increase his pay.

You make an appointment to meet your new workers at the job site, ready to go to work. Bob is 45 years old and is alert and clean-cut. Jack is younger, but disheveled and hung over. Their first assignment is to push the old broken-down car to the street, and then you call 911 to have it removed. Next you assign Bob the job of removing all the trash and garbage from the house and thoroughly scrubbing all surfaces with trisodium phosphate. Jack’s job is picking up all the trash from the yards, mowing both front and back yards and taking down the damaged window screens.

You take 20 minutes to go for tacos and coffee. When you return, Bob is busily removing trash, but Jack is sitting in the back yard and smoking; not a good sign. Bob eats his taco in ten minutes, but Jack dawdles, attempting to engage in conversation. You tell him he needs to get the job done and it is time to work. Thirty minutes later, you find him sitting down and talking to his girl friend on his cell phone. You pay him $10 and fire him, telling him he needs to go home and take care of himself.

Bob offers to do Jack’s work as well as his own, informing you that he is a framer, but not a painter. He recommends his brother-in-law who is an unemployed painter.

The next day, you test Bob’s skill as a carpenter, having him replace the rotted boards around the roof and fixing the broken window. After satisfactorily completing that job, you instruct him to remove the garage door, frame in the opening, install two large windows, hang a front door and put on siding matching the rest of the house. When he is finished, the garage looks as if it were always a part of the house. It is a good idea to get building permits, but if you try to avoid the building inspector, make sure all the work meets the building code. Inspectors can make your life miserable. After Bob has completed the job in two days, you increase his pay to $15 per hour, costing $240 in labor and $700 for materials.

You negotiate with Bob’s brother-in-law to paint the inside and outside of the house, including repairing the sheetrock. He wants $1500 labor for the job, but you make a counter offer of $1200 with a bonus of $100 if he does a good job. He needs money so he agrees. Never give money before the job has begun. Tell the worker up front you will pay him only when he has satisfactorily completed the work. If he needs material, you supply it. There are crooks who will take your money and run. If you call the police, they will tell you he breached your contract but committed no crime. If you sue the con man and win in court, you will never collect a dime.

A good paint job can transform a house, but you need to resist imposing your unique taste when remodeling and decorating a rent house. You might think a variety of prime colors with a purple bedroom and a pink bathroom are beautiful, but most potential tenants will be repelled. You wisely choose semi gloss latex in light and neutral colors for the interior. Those colors are bland, but they can be easily cleaned and go with any décor, offending the least number of tenants. The exterior paint should appeal to the largest number of people. Soft yellow with cream trim is the most popular choice. Make a note of the name of the paint you choose, useful in the future when the house needs to be touched-up.

You buy the best paint at PPG in five gallons cans to save money. Bob’s brother-in-law completes the work in 10 days, costing $1300 for labor and $700 for paint.

Meanwhile Bob has created a small kitchen area in the garage by utilizing the space used by the washing machine and dryer. He also makes a small addition to the half bath with a raised platform to accommodate a stand-alone shower. After installing a small window unit, the job takes four days at a cost of $480 for labor plus $1400 for lumber, cabinets, plastic shower, window unit, sink, etc.

You check Craig’s list, hiring a plumber who is moon-lighting. Because the kitchen sink utilized the plumbing from the washer and dryer, the amount of work is minimal. The plumber charges$312 for labor and parts.

In order to have the counters in both kitchens installed with new tile, you call First Day Worker for someone with tile laying experience. They send Jose who has a lot of experience laying tile in Mexico. Although he has only a few words of English, he understands what to do. He quickly finishes the kitchen and garage floors with ceramic tile. Then he lays ceramic tile on both kitchen counters, including the splash boards, taking two and a half days to complete the job for which you pay $325 for labor and $600 for materials.

The kitchen cabinets are freshly painted with new knobs, but the stove and refrigerator are basket cases. You replace those old appliances with used refrigerators and stoves from a used appliance dealer, one being an electric apartment size. You pay $1298 and are satisfied that the appliances are white, unscuffed and looked good, guaranteed for 13 months. The delivery, installation and hauling away the old appliances are included in the price. New top-of-the-line appliances pay off in upscale homes, but you are appealing to a class of people who are satisfied with function and reasonable appearance.

You hire an electrician who is moon-lighting. His fee is $300 for installing additional outlets in the studio apartment. You pay $89 for a service call for the central heating and air. The new window screens cost $700 installed. You pay $350 to a professional cleaning service to make the house spick and span, wax the hardwood floors and buff them until they shine. While all the work was taking place, you re-seeded the lawns and water daily. Both yards now look green and inviting. You have paid a total of $7700 for all the work plus an additional $300 for incidental cost, making a grand total of $8000. You set aside the remaining $3000 for future repairs and possible vacancy.

You step back and admire your handiwork. Everything looks neat, smells fresh and completely cared for. You have created a beautiful duplex and a money-making machine. You easily rent the 3/2 apartment for $1595 and the studio apartment for $595, making a total of $2190 per month. Your mortgage payment is $666 monthly, ($118,000 on a 20 year term at 4 per cent.) The taxes are 250 monthly, and the insurance is $134 per month, making your monthly payment a grand total of $1050. Setting aside $250 for future contingencies, your net profit is $790 per month, earning a return of 25 per cent on your original investment. In addition, the amount applied to your mortgage increases your equity each month.

You have made $43,000 on the house you just purchased. The value of the house has been increased to $190,000 thanks to your improvements. Your equity is now $72,000. The new value of the house will appreciate, perhaps at 3 per cent for inflation, increasing by $5700 on the first year. Because you are located in an area undergoing gentrification, the sky is the limit. Remember, a house for which I paid $10,000 is now worth $750,000. Likewise, you can expect your rents to increase, but your mortgage payment will remain the same. Do not be tempted to sell your money-making machine and squander the money. Also, resist borrowing on the equity. Doing that will increase your monthly payment, making it difficult to meet your monthly payments during recessions. My grandfather lost three ranches during the Great Depression because he had levered his equities. Now is the time for self discipline. Set aside all the profits toward your next money making machine. After you have bought 3 more properties, you can enjoy your profits and you will live a prosperous life after only 20 years. By paying an extra $666 each year, you will have the house paid off in less than 15 years. If you get started early enough, you could retire while you are still relatively young.

Chapter 4: Managing Tenants

A “good” tenant pays his rent on time, takes care of the property and doesn’t bug you half to death with constant whining, bitching and complaining. Unfortunately, there are a great number of people who do not measure up to “good” status. This chapter discusses ways of weeding out undesirable applicants, attracting and keeping “good” tenants, managing repairs and evicting undesirable renters.

There are accomplished liars who make a practice of moving into a home, pay no rent or as little as possible, manufacture excuses and make promises they don’t keep. When you finally evict them, they delay the process as long as possible and then move out, leaving your property demolished. When I was a beginning landlord, I was naive, believing that if I were a real nice guy, making concessions, keeping the rent low, making exceptions to our agreement, being patient about late rent and becoming good buddies, my tenants would be grateful and hold up their end. I paid dearly for that misconception. Unscrupulous individuals will interpret “nice guyness” as being vulnerable, prime for exploitation. Be friendly with your tenants, but business like. Avoid close friendships with tenants and avoid renting to a friend. If you have to evict him, you will lose a friend as well as a tenant.

Fortunately, there are measures you can take to protect against the “rotten tenant” nightmare.

Background checks have become standard practice. You can get a better fix on a prospective renter by contacting his previous landlords and employers and accessing his credit rating and police records. Talk with all the references before you make a decision, but beware of a single reference. An accomplice could pose as a previous landlord and give you bogus information. There are fees for obtaining credit and police records, but those expenses should be paid beforehand by the prospective tenant.

Require the prospective renters to complete and application form, disclosing full names, social security numbers, license numbers, references, previous rentals, contacts for emergencies and any other information you deem important. All of the occupants who will live in the home should complete the application form.

There are “red flags” warning of possible problems. Check out the applicant’s car. If it’s dirty and trashed out, you have an indication of the way your house will be treated. If the applicant offers to make major improvements in lieu of paying a security deposit, be on your guard. For example, if someone offers to refinish the floor, the chances are the work will never be done, or if it is, it will be grossly substandard. Without a security deposit, you put yourself in the position to be royally screwed.

Most of my problems with “rotten” tenants cleared up when I required a security deposit equal to a month’s rent. Deadbeats usually don’t have that much money and look for another sucker. You might eliminate a potentially honest and reliable tenant, but you are not running a welfare service. You are conducting a business and cannot afford to subsidize the unfortunates. If you do, you are likely to fail as a real- estate investor.

After so many years of managing property, I am able to ascertain someone’s character and have made exceptions to the rule.

By taking the steps described above, you will have a better understanding of the individuals who will take possession of your valuable asset.

It takes time and patients to complete the screening process, but when you find a “good” tenant, you will enjoy making money and spend little time doing it.

There are several ways to find a “good” tenant, but I don’t recommend using agencies that offer to get renters for a fee. Typically those agencies exaggerate the amount of rent they could get. After you have signed an agreement, binding yourself for six months, you are obligated to pay a huge fee even if you independently find your own renter. You are then encouraged to lower the rent until they are able to find a renter and for whom they will collect their fee, sometimes as much as a month’s rent.

Then, for the term of the lease, they will take ten per cent of all rents collected.

Don’t worry. Your house will rent. If it doesn’t, you are asking too much money, or the house needs to be improved. When you decide the amount of rent to charge, determine the rent other similar houses are getting. If you try to get the top dollar, maybe more, you will have a problem keeping tenants. If you price the rent at the bottom rung, maybe less, you are short-changing yourself and attracting less desirable tenants, but if you charge average rent for an exceptional house, like your duplex, you will have a wider choice of prospective tenants.

Let’s advertise your duplex. Newspaper ads are extremely expensive and not too productive. Zillow as well as other web sites have become the “go-to” media for advertizing rent houses and they are free, but Craig’s List has become passé. Internet sites require following a uniform format describing your property, but you are allowed to fully describe your house and allow many pics of your property. ”For rent” signs can net a prospective tenant.

When composing an ad, include the price per month, a description of the home, a description of the yard, date available, proximity to facilities (Like shopping and schools), special features of the home, including the appliances, and the way to contact you. Here is an example of an advertisement for your 3/2 duplex.

“$1595 for charming newly-decorated 3/2 duplex.

  • Quiet neighborhood with shade trees. Large fenced back yard. Small pets OK.

  • Hard wood floors, Central heat and air, stove and refrigerator.

  • 2 minutes to shopping and schools. 5 minutes to downtown.

*Call owner: 666-666-6666.”

When you are responding to a prospective tenets inquiry, don’t be overly anxious. Acting confident will get better results.

After checking on references of four applicants, you decide to rent to Charlie Smith and his wife, Doris. They have two small daughters, Sally and Susie, and a small mongrel dog name Chuckles, not a barker. Charlie is a beginning accountant who works for a large company. They are saving to buy their own home in 3 years and want a three year lease. Never offer a three year term on a lease or you will be obligated to rent for that period of time, regardless of other factors that could affect rental properties. You can always renew the lease each year. It is a wise idea not to raise the rent on a “good” tenant, unless the increase is minimal. When they move out, you can then jack-up the rent.

You choose Alice DeCarlo for the studio apartment, a freshman at the local college. She has just moved away from her home and has no references or credit history, but her father is a medical doctor willing to sign for her lease.

A lease is a landlord’s best friend. Without one, your legal recourse is severely limited if things go badly. I use a facsimile of an apartment owner’s lease agreement that has 15 pages of requirements, all favorable to the owner. Lawyers have remained awake long nights thinking of any possible contingency one could imagine. Complete all the blanks in the lease and have the leasee initial each page followed by his signature on the last page.

There are situations that need to be spelled out in detail. For starters, if the leasee breaches the contract, he automatically forfeits his deposit. The rent should be due on the first of each month, but allow a 5 day grace period. On the 6th day, charge $100 plus $20 for each subsequent day the rent is late. If you become the “squeaky wheel,” you will receive first attention. If the renters are going to be a couple of days late because of unusual circumstances, waive the late fees if they inform you beforehand.

Always put the utilities in the renter’s name. Never keep it in your name or you will suffer the consequences. In the case of the duplex, Charlie has agreed to have the utilities in his name, and Alice has agreed to pay 30 per cent of the bill. For Charlie’s protection, you agree to be responsible for Alice’s part of the utilities if she fails to pay. If you do have to pay for her, she must pay you the money forthwith or the contract will be breach.

In bold type, state that the landlord may enter the property without notice and confiscate the renter’s property to be held as security for unpaid rent.

Be specific about the other individuals who might occupy your house. If unauthorized people occupy the home, the lease has been breached.

The responsibility for maintaining the yard falls to the tenant. Be specific about the care. For example, the lawn should be mowed every 2 weeks and the grass and plants watered weekly. If you have a lawnmower, let the tenant use it so you can easily keep track of the yard maintenance. If the tenant fails to keep up the yard, hire a landscaping service to take care of the problem. The tenant is liable for those costs. After having to pay extra for the lawn on the first occasion, you probably will have no future problems with your tenant taking care of your yard.

If multiple tenants are sharing a house, insist on receiving only one check from the group with each individual being responsible for the entire rent.

If the tenant wants to vacate the property before the end of the lease, give the option of subletting the house, subject to your approval of the new tenant. Otherwise, he will have forfeited his deposit and is responsible for all the days the property is vacant.

Charlie and Doris love the house and agree to all the provisions of the lease. Charlie asks if curtains and drapes could be provided. Those items are expensive and subject to mistreatment. You tell him that if he buys mini blinds at Big Lot for both apartments and puts them up, he can deduct the cost of the blinds from his next rent, but you need the receipt.

To save your time, instruct the tenants to deposit the rent in your checking account, giving them the necessary information about your account.

Your goal is to eliminate as much time managing your property as possible. Always try to shift the responsibility for getting things done to your tenants. If something minor needs to be repaired, have them inform you of the problem, and then call Bob to fix it. You have made a previous agreement with Bob to provide repairs when needed.

In general your investment property is performing well. Charlie and his family are “good” tenants, but Alice is becoming a pain in the ass. After she has made numerous phone calls, complaining about dead flies, the temperature of the hot water and not knowing how to work the shower, the fingerprints on the windows, the barking dog in the neighborhood and the color of the paint, you inform her if she is unhappy with the apartment, she can leave and you will refund her deposit providing the place is left clean. Usually that offer shuts up a whiney tenant.

On the second month, both rent checks are promptly deposited in your checking account, Alice’s check coming from her father. Five days later, Alice’s new boyfriend moves in with her, driving a motorcycle, playing loud music and tossing beer cans and cigarette stubs around the yard. You tell Alice her boyfriend has to go or she is violating the lease agreement. Avoid confronting the boyfriend. He is Alice’s problem and it is up to her to correct the situation or be evicted. She begrudgingly makes him leave. On the following month, her father fails to send a check. When you ask her what’s going on, she informs you she has dropped out of school and her “lousy” father won’t pay her rent. She tells you she has a job and she will pay the rent on the following week. When she fails to pay, you give her a 3 day notice to pay or vacate the premises which she ignores. At that point, you engage an attorney to handle the case. He notifies Alice’s father of the situation and that he is responsible for damages. Before the case goes to court, Alice has moved out and her father has paid all the charges and late rent, including the attorney’s fee.

When you are able to rent the studio apartment to Edward, a law student with excellent references, you feel fortunate you haven’t lost money resulting from the eviction.

While undergoing the unpleasant task of removing a renter, it’s important to maintain your emotional stability. You have established a process for taking care of problems, so relax and let the system work. If you allow yourself to become upset, angry and vengeful, you are only hurting yourself and exasperating the situation. If you give a tenant a reason to hate you because you have acted outraged and insulting, you will pay dearly with a thoroughly messed up house. It is better to remain composed and compassionate, sympathizing with Alice, telling her you understand the difficulties a young person sometimes encounters. Tel her you wish you could be able to help, but you simply can’t afford to support her. Tell her you are sorry she has to leave because you have enjoyed having her as a tenant, and you hope she reaches an understanding with her father. By remaining detached, you can sail through many vexing problems without becoming overwrought, the secret of successful management. happy and have fun while you are preparing for an early retirement, buying houses, fixing them up and collecting rents.


Real-estate Riches for Cowards

Real-Estate Riches for Cowards presents a proven and concise step-by-step approach to making money in real-estate. The information is based on the distillation of fifty years experience, owning and managing property. The essential topics include selecting the city and neighborhood in which to invest; selecting which house to buy; negotiating the purchase price; financing the property; what to do and not do when preparing a house for rent; managing workers; advertising the property; selecting tenants; managing tenants, evicting undesirable tenants and most importantly, the underlying philosophy of making money in real-estate. About the author: Ryan Scott lives in Austin, holding a Ph.D. in psychology. Coming from a background of poverty, he became self supporting and went to college by investing and managing real-estate. Other books he as published are: “Beyond Darkness, The Secrets of a Blind Psychologist,” “Stella” and “A Matter of Attitude.”

  • ISBN: 9781311649324
  • Author: Ryan Scott
  • Published: 2016-06-06 18:05:07
  • Words: 7501
Real-estate Riches for Cowards Real-estate Riches for Cowards