borhoods attract bad tenants. But don’t go to extremes and buy mansions, because the price-to-rent ratio doesn't work. For example, a $200,000 house in my town rents for around $2000 a month, or one percent. But a $1,000,000 house will not rent for $10,000 a month. And keep in mind that people who rent an expensive house are usually short-term tenants building a house or looking for a house to buy. You will lose money renting to them, because vacancies cost you money in lost rent and cosmetic touch-ups. OF THE BATTLE. Desirable tenants treat the house as though it were their own home. They pay their rent promptly, fix small problems, and rarely contact their landlord. I would rather leave a property vacant for a few months until I find a good tenant than rent it to just anyone to get it occupied. Talk with prospective tenants to determine if you are comfort- able with them. (If they qualify on paper, my gut feeling about someone is the most important factor in my decision whether to rent to them.) Try to see what condition their vehicle is in, including the interior. If they don't take care of their own property, they won't take care of yours. Have them fill out a detailed rental application. Do background checks, including criminal and eviction. Call employers to verify information. Call previous landlords (but be aware that their current landlord may praise them to the skies because they want to get rid of them). Be mindful of their credit if it indicates a pattern of late or no payments. Usually minor convictions can be overlooked, unless they do not disclose it on the application; non-disclosure of anything is an auto- matic rejection. A prospective tenant once told me that he was convicted of shoplifting from Babies R Us because he didn’t have the money to buy diapers. I approved him, and he turned out to be one of our star tenants. GOOD MANAGEMENT COMES FROM EXPERIENCE. Experience comes from bad management. If you learn from your mistakes, you can become a great landlord. You might even enjoy it! There’s nothing like a tenant who moved away and comes back wanting to rent from you again (that’s happened to us three times), or a tenant thanking you by saying, “it’s hard to find a good landlord.” • NO. 5 FINDING GOOD LONG-TERM TENANTS IS 90% NO. 6
You get none of these when you flip a house or sell it after just a few years. Here are six more tips to know about investing in the single-family rental space: YOU NEED CASH RESERVES. Don’t drain your savings buying a house. Set aside money for maintenance, property taxes, and insurance. Don’t forget that during vacancies you’ll also have to pay the mortgage and utility bills. Air conditioners, furnac- es, and appliances break. Roofs leak. Wood rots. Paint peels. You can repair these as they occur, or you can pay a lot more later. If you defer maintenance, or worse, ignore it, it will cost you in at least three ways: 1. Little problems can become big problems. For example, a water leak today will become a major repair later; 2. Good tenants are usually not interested in living in houses that need a lot of repairs, so you could end up renting to undesirable tenants at a reduced rent. Bad tenants will cost you far more than any repairs you could have made; NO. 1 NO. 2 DON'T DEPEND ON APPRECIATIONS. Real estate can lose value. We bought a house in Manassas, Va. for $85,000, and 15 years later we tried to sell it for $69,000 but still got no offers. Four years later we sold it for $299,000. Two years later the market crashed, and it was back to $85,000. NEGATIVE CASHFLOW IS A DEAL-KILLER. If your monthly cost is $1,200, and your rent is $1,000, you are losing $2,400 per year. When expenses go up, but you are charging top rent, you’ll be deeper in the hole. And when the central air conditioner dies or the roof needs to be replaced, that will be thousands more out of your pocket. DON'T BUY CHEAP HOUSES. Buy the best house in the best neighborhood you can afford (within limits). Good houses in good neighbor- hoods attract good tenants. Bad houses in bad neigh- NO. 3 NO. 4 3. When you sell, if you do not make repairs, you will get less than if you had maintained the house.
Single-Family Rentals: What You Should Know
BEING A GOOD LANDLORD IS KEY TO CASHFLOW.
f you’re an investor considering single-family homes, plan to be invested for a while. This niche of REI is a long-term investment. Your profits come from three sources: I
1. increased cashflow as you raise the rent 2. increased equity as your tenant pays off the mort- gage 3. potential appreciation
W.J. Mencarow has been investing in real estate and notes for over 35 years. He offers a free 8-part ecourse on real estate note investment at www.PaperSourceOnline.com.
50 | think realty magazine :: november / december 2019
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