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the official publication of the american apartment owners association
Editor in Chief Robbie Cronrod
Marketing Manager Alexandra Alvarado
Designer Vera Gavrilova
CONTENTS The Power of an LLC for Landlord Asset Protection 06
Advertising Kit Baker-Carr
Contributors Alexandra Alvarado Bradley Barth, Esq. David Spooner Georgianna W. Oliver Kathelene Williams, Esq. Kelly Parsons-O'Brien KimWannamaker Lauren Lieb
Multifamily Property Insurance: 6 Reasons Now is the Time to Shop
Celebrities Are on the Move. Why Should You Care?
Matt McFarland Matthew Sloley Richard D. Gann, JD Stacy Conkey Victor Mejia
Should Investors Be Concerned About Inflation?
How to Invest in Real Estate 100% Remotely
Setting Tenant Criteria During Tough Times
Meet the Clugstons! House Hacking Pros
Contents Continue on Page 4 >
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Welcome to the reboot of RENT Magazine. The American Apartment Owners Association is excited to introduce a new digital version of its quarterly magazine. As RENT continues to grow and offer interesting, relevant and informative insights into the rental housing industry, we at AAOA know you will enjoy browsing and bookmarking articles and advertisements that may help you today or in the future. You will always be able to reference archived issues while looking forward to the ever-expanding scope of helpful, educational and entertaining content provided by our contributors and editorial staff. Most importantly, RENT is for you, and we look forward to your input, suggestions and even criticisms as RENT continues to grow.
Automating Property Management in 2021
Predicted Tax Increases
Collecting Rent During a Pandemic and Beyond
Tired of Being a Landlord? Consider Passive Investing.
One Time One of My Tenants …
Public Safety Communications Requirements for Certificate of Occupancy
3 Important Reminders About Illegal Steering
Smart Locks and Access Control: Today’s New Standard
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If you own real estate in your own name, all of your assets and life savings are at risk and could be lost to a creditor due to an unforeseen liability. It’s important for all property owners to engage in proper asset protection planning. The Power of an LLC for Landlord Asset Protection Asset protection is the process of organizing your assets, prior to a liability, so that you are protected from an unforeseen liability. Asset protection is best done when the “seas are calm.” Owning real estate for investment, especially residential and commercial real estate is inherently risky. When you are an investment property owner, you must consider your liability footprint and protect yourself accordingly.
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Insurance is your first line of defense and you must have the proper amount of insurance. However, insurance is not the end-all to keep you away from harm. Your insurance may not cover a liability or you may not have enough insurance. There is zero correlation between the amount of insurance you have and the amount of a lawsuit against you. I don’t know where it came from, but there is a myth out there that a living trust provides asset protection. Let me be clear on this. Your revocable living trust provides ZERO asset protection. It is not an asset protection tool.
Limited Liability Company. When an LLC owns the property and there is a judgment, it’s against the LLC and not you personally. This is a big difference. An LLC guards you from “inside” liability and “outside” liability. An inside liability pertains to the activities that are connected to the property, such as a tenant issue, a worker getting injured on the property, or a dog biting someone on the property. An outside liability is when an event happens away from the property like a car accident. Someone coming after you for an injury due to a car accident can look at your assets such as property to satisfy a judgment. So the LLC has two-way protection. Think of it as a protective box around your property.
A better way to own investment property is in a
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When it comes to forming an LLC, there are important issues to consider. You need to pick the proper jurisdiction for your LLC. Just because you own property in Kansas does not mean you need to use a Kansas LLC. You can pick any jurisdiction for your LLC and some states have more robust asset protection provisions than others. It’s important to understand the different state asset protection laws and choose wisely. The operating agreement of an LLC is an important document to understand. This document lays out how the business will be managed. Not all states require an
operating agreement, but in some cases if you don’t create one you default to the off- the-shelf operating agreement and this is not always in your best interest. Also, the language that goes into the operating agreement should be precise and include asset protection provisions. Many people make the mistake of adding language and then not following what they laid out. Then when there is a creditor attack, the operating agreement is a point of weakness.
Treat your property like a business and put the proper legal structure in place.
Bradley Barth, Esq. Partner BarthCalderon, LLP (714) 704-4828 ext. 114 firstname.lastname@example.org
ASSET PROTECTI ON I S BEST DONE
WHEN THE SEAS ARE CALM.
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MULTIFAMILY PROPERTY INSURANCE:
How do savvy property investors know they are getting the best deal? There really isn’t any way to know for certain, unless you research your market. You may end up uncovering savings, but not having buyer’s remorse is reward enough. If you relate to any of the below points, it may be time to consider shopping your insurance:
2. Looking to Grow Not many real estate investors go into the industry without expecting to grow their business. If you start with just a few units, sticking with a local agent that you already know is not a bad thing, but if you are looking to grow and expand your portfolio, it’s likely your local mom and pop agency will not have the markets to grow with you.
1. Haven't Shopped Since Pre-COVID If you haven’t shopped for over a year, then it’s worth it to see what kind of property insurance rates are out there. While some carriers have increased rates, there are also many carriers that are offering discounts to properties that have been properly maintained and updated.
3. Disappointing Claims Experience Everyone thinks it, and it’s okay to say it: insurance is a necessary evil. You hope to never have to use it, but when you do, you’re glad it’s there! But a bad claims experience can put an even worse taste in your mouth – you paid all that premium, and for what? Maybe your agent didn’t know what to look for in the policy, so they couldn’t tell you what gaps in coverage you had. Reading the fine-print is also a necessary evil – for agents! Making sure you are with an agent who pays attention to the little details can help save you time, money, and maybe some tears.
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6 REASONS NOW IS THE TIME TO SHOP
4. Different Brokers have Different Markets There are thousands of insurance carriers across the world, and no one insurance brokerage has access to them all. Most insurance carriers require a brokerage to sign a contract, committing a certain amount of premium will go to said carrier, to gain access to their program. Brokerages that specialize in insuring multifamily properties and rental dwellings are much more likely to have access to specialized programs that will best fit your needs.
Replacing roofs, wiring, plumbing (pipes, not toilets), and HVAC Installing a sprinkler system Connecting a central-station or local fire alarm Getting a burglar alarm Installing security cameras painting, making the units look prettier, but building system updates can save you money, and lessen your likelihood of claims. These updates directly affect your insurance premiums: Now, small improvements won’t make a difference like replacing windows, 6. Updated Your Property If you have recently made an investment into improving your property, those improvements may get you a better rate. Insurance carriers give better rates to properties that are well-maintained, are safe for tenants and visitors, and have active building systems that deter the #1 type of multifamily property claims: Fire. It’s important that you be prepared for what to expect during the quoting process. Here are a few helpful tips to make sure you are getting the most out of your experience:
5. *Crickets* From Your Agent Are you not getting the response or service you expect? Of course, no one is perfect, and everyone makes mistakes, but if you’re having consistent issues with your agent’s lack of response, that is reason enough to see if there is a better fit for you out there.
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(Continued from page 11)
MULTIFAMILY PROPERTY INSURANCE
Provide 3 years of loss history Agents are mediators. They must provide you with reasons you should switch carriers, but they also must be able to convince underwriters why they should consider insuring your property. Due to the extreme increase of property claims in the industry, more and more carriers require written proof from your current insurance carrier that you have not filed any claims. While this information isn’t required up front, you’ll likely be asked for it at some point. To be blunt: If you’re unwilling to share this information, you’re not likely to be prioritized by the underwriter – and getting discounts will be even less likely.
Expect to answer some questions Your current agent
Conclusion: You have to be willing to give, in order to get! Trust that the agent knows what they are doing. Any information you provide to the insurance agent is strictly confidential and will not be shared with anyone other than the necessary underwriters. These underwriters are also bound to confidentiality rules. Of course, it is okay to not know something, but if you’re truly wanting the best insurance premiums available, agents will expect you to know some basic information about your own property. The questions that are asked of you are for your own good and knowing (or finding out) the answers will end up saving you money!
already knows everything about your property, but
a new agent won't. Expect to answer
questions such as: When does your policy come up for renewal? If applicable, what year did you last update the roofing, wiring, plumbing, and HVAC? What carrier are you currently with?
I F YOU TRULY WANT
THE BEST PREMI UMS
GET READY TO ANSWER QUESTI ONS .
Lauren Lieb Senior Commercial Risk Advisor
InsuranceHub (678) 812-2516 LLieb@insurancehub.com
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Howdosmartlandlordsget insurancefortheirrentals? Theyleaveittous-theexperts. Weknow property insurance
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CELEBR ITI ES ARE ON THE MOVE . WHY SHOULD YOU CARE? The trend continues with more celebrities choosing to leave their houses in the hills for rolling hills of their own. It makes sense that the 13.3% tax rate in California (which may be going up to 17%) would be the main reason celebrities and real estate investors are heading to low tax states. In fact, California and Hawaii are the only two states with a tax rate over 10%.
Why should you care? Whether you like it or not, celebrities have influence and can change the way renters view a city or state. When a celebrity leaves California’s sandy beaches, iconic landmarks, and job opportunities, people notice. Now, if you have property in California don’t worry, California will always have its appeal. After leaving mainly due to high tax rates, Gene Simmons already returned to the California real estate market less than
a year later buying a not too shabby $5.8 million Malibu vacation home last month (pictured below). What is interesting is where celebrities are choosing to go to and their plans to move their businesses and start entertainment hubs of their own in cities that are tax friendly. These could be locations to invest in now as these states and cities may experience more growth in the near future. Here are some more notable celebrity moves in the last year.
Last year, Gene Simmons from KISS packed his bags and moved out of his giant $22 million Beverly Hills mansion to escape the ever-growing California tax rates. He traded in the Southern California estate for a more tax-friendly 24 acre-ranch in Mount Rainier, Washington. Gene Simmons Sells $22M L.A. Home, Buys 24-Acre WA Ranch
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Joe Rogan | Austin, TX The famous podcaster host, MMA commentator, and comedian Joe Rogan left California four months ago wanting to escape high taxes and pandemic lockdowns. He’s already moved his podcast studio after signing a $100M deal with Spotify and plans to start his own comedy hub, attracting the top comedians in the country, some of which he has already convinced to move to Austin. Kanye West | Cody, WY Kanye West purchased a $14M ranch last year. Kanye has also moved his multi-billion-dollar apparel company, Yeezy, which was originally headquartered in Calabasas, CA. Kanye’s main reason for moving is California’s business regulations which he feels are stifling his creativity and charitable ambitions. He’ll also save a significant $15M in state income taxes. Donald Trump | Palm Beach, FL Trump’s recent move back to his Florida Mar-a-Lago Resort came as no surprise, but in this case, the citizens of Palm Beach raised concerns that his move might decrease property values, by attracting his lawless supporters. 28 years ago, Trump converted the 126-room mansion to a club and promised the city he would not live there. The Palm Beach town council voted that he is in fact allowed and considered him an on-site employee, not just a resident. Elon Musk | Austin, TX As one of the wealthiest people in the world, Elon Musk has become a household name. Musk recently sold his four- home complex in Bel Air for a total of $62 million and in December moved to Texas, where he is building a new $1 billion Tesla plant on 2,000 acres of land. The business move will result in an explosion of job opportunities (he’s hiring 10,000 people by 2022) and an increase in property values. He even announced plans in March to build his own city, Starbase, which will encompass Boca Chica Village to house the growing population he anticipates. P A G E 1 5 |
SHOULD MULTI FAMI LY I NVESTORS BE CONCERNED ABOUT I NFLATI ON? Multifamily investing is a crucial sector of the economy. Multifamily investments are less likely to be affected by shifts in the stock market, and prices make slow and gradual changes over time, almost never displaying the volatility of typical investment vehicles.
In the uncertainty of the economy since the emergence of Covid-19, the multifamily market has remained relatively solid. Still, no one knows what the economy will look like in the next year, so it is imperative that investors try to make informed decisions to protect against the unknowns of the near future. Luckily, there is one trait that many investors can count on regarding multifamily assets, and that is the defense against inflation. In the most simplistic of explanations, inflation is when prices of goods and services rise across a period of time. Inflation can occur in an economy when “demand” exceeds the given “supply”, or when the cost of materials causes a hike in production costs of the supply. Whatever the cause may be, there is a noticeable decrease in purchasing
power for the consumer, being that they must now pay more money for the same amount of goods and/or services they used to pay less for. Now, while it may raise an alarm in the heads of many a consumer, inflation isn’t all bad. As a matter of fact, a little inflation is actually a sign of a healthy economy. Prices that slowly inch higher tend to encourage people to purchase more, since they speculate that they will be “buying in” while the price is low. This, in turn, creates a positive trend in economic growth, which can be felt across many facets of the economy. But, as is the case with most things, too much inflation can cause chaos in an economy, and may even cause it to crumble in extreme cases. That isn’t the cue to start panicking
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H I GHER PR I CED GOODS AND SERVI CES TEND TO CAUSE THE PR I CES OF HOMES TO R I SE AS WELL .
though. Believe it or not, the pandemic has caused demand for goods and services to fall slightly, and the current inflation rate sits around a low 1.4%. For reference, the United States Federal Reserve typically sets the annual inflation goal at 2%, which is considered to be in that “healthy” range mentioned earlier. At this point, you may be wondering why utilize multifamily investments as a hedge against inflation when inflation poses no immediate risk. Well, as it turns out, the Fed has taken all of the stress that the pandemic has placed on the economy into consideration, and has since updated its policy to allow inflation to surpass the healthy 2% threshold. That’s why many of the more financially savvy folks who invest seek to diversify their portfolios with investments that hedge against the effects of inflation. While Hollywood may make it seem as though the stock market is
all there is to investing, the truth is that both commercial and residential real estate are not only just as popular, but can oftentimes be more solid acquisitions to make, with multifamily having a slight edge in terms of peace of mind than your typical residential plot. Ready to hear the good news about inflation? Historically speaking, periods of inflation are actually a benefit for multifamily investors. Since multifamily properties are real, physical assets, the value of a property is determined by its condition, any improvements made, and rental potential - all of which are completely unfettered by the ups and downs that plague any stock or bond. More importantly, while most goods or services can be willingly given up in times of economic distress, people will always need to have a place to live. This ensures that multifamily properties will not only stay afloat in even the worst of
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times but actually remain profitable. A multifamily property can see income returns from rent payments, parking, and other fees associated with the property, and that’s not taking into account any appreciation of value. Then, there is the actual effect that inflation has on the multifamily market, which some may find surprising. With an economy that has rising inflation, the higher prices of goods and services tend to cause the prices of homes to rise as well. As previously mentioned, the simple fact that people will always need a place to live, and if increased home costs put purchasing a home out of reach for consumers, then the multifamily market sees an increase in rental demand.
As counterintuitive to an inflated economy as it may
investments in your portfolio. Morality aside, an economy with increased inflation seems to only benefit the savvy multifamily investor through secure income sourcing, increased demand, and the ability to raise rent prices to exceed any increase in expenses. Not to mention that a significant portion of apartment financing utilizes a fixed-rate loan structure, making monthly payments predictable and unaffected by the state of the market. All in all, the multifamily market space is truly one of the strongest pillars of the United States economy for a reason.
come across from the consumer standpoint,
higher rental demand also means that the asking rate for rent can also increase. This is a crucial factor to multifamily investments being a hedge against inflation. Increasing the rent ask serves to offset the increased operating costs and expenses, which then cushions the investor against loss. In addition, higher rental rates sometimes lead to an increased value of the asset itself, further providing financial security during such a strenuous economic period. While some may hope multifamily investors don’t get too eager for inflation to rise, it’s definitely not something to worry over if you have strong multifamily
Matthew Sloley Head of Content Janover Ventures email@example.com
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HOW TO I NVEST I N REAL ESTATE 100% REMOTELY AAOA members, Stacy Conkey, shares how she successfully grew her multi-million dollar portfolio out of state.
If you have been struggling to find real estate deals in your hometown market you are not alone. Even when you find deals, the sellers are often asking way too much and it could seem like the world is working against you. You may spend countless hours searching and quickly end up running out of deals to consider. The numbers seem to never work, and it can feel like an uphill battle. And it makes you wonder, “Is it me? Am I doing something wrong?” It’s not YOU, it’s your market! Real estate markets are like tides in the ocean. Sometimes the tide is low and there are infinite opportunities for you to invest in, also known as a buyer’s market. However, now the tides are high, competition is fierce, and other sharks swimming in the waters are fighting over the same fish to eat. If you are in a seller’s market you may be forced to sit and
wait sometimes years without landing any real estate deals. Traditional real estate investing advice teaches a “wait in your home market even if it’s a competitive seller’s market” type of strategy. Well, that doesn’t have to be the case. I have been doing real estate investing outside my home market for almost two decades. I live in San Diego, California. Besides the great location, and living in sunny California, there are zero cash flow deals in my home
market. I didn’t want to leave my home to build a real estate portfolio so I adapted and started investing in other markets, 100% remotely.
MARKETS ARE L IKE TI DES I N THE OCEAN .
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complicated. Over the last 17 years I’ve simplified the process by creating a reliable method with 4 key steps: 1) Select, 2) Investigate, 3) Close, and 4) Manage. I use this system for all of my acquisitions, whether I'm buying apartment buildings, small multifamily properties (2-4 units), doing BRRRR deals (Buy, Rehab, Rent, Refinance, Repeat), or even wholesaling. Below I break down each of these steps. Obviously there are many more details that one article simply can’t delve into, but I hope this will give you an idea of how remote investing can be achieved.
Without stumbling upon remote real estate investing I would have never been able to grow my portfolio. I have invested in 14 different markets across the United States, and it has been the best decision of my life to branch out and find opportunities out of state. Remote real estate investing is the simple process of finding the right cash flow markets online, researching those markets, and then finding deals. It is not as complicated as you might think it is, in fact, it can actually be easier. Instead of waiting for the markets to turn where you live, you can go out and find solid cash flow markets to invest in right now. My process is simple, and only requires a laptop, a phone, WIFI, and a nice hot cup of coffee. I invest in markets where the tides are right, prices are low, and there are plenty of opportunities to invest. When the tides change, I am left with a competitive edge and the right numbers. With all the benefits of remote investing, why don’t more investors do it? Without a system in place, remote investing can get
Why Remote Investing Over
Diversify It allows you to branch out and diversify into many different opportunity markets. Find Deals Quicker You can find deals quicker because you are not limited to just one market. Find Better Deals You can find better deals because your options are open and you have more opportunities to consider. Live Where You Want You can live wherever you want. It allows you to invest in cash flow markets you don’t have to live in.
STEP #1: SELECT In the Select Phase we are selecting our markets, our team, and getting deal flow coming in. The first step is to research different markets and weigh P A G E 2 1 |
Grow Your Portfolio It provides you with a
strong and consistent deal flow, so you can grow your portfolio even faster.
the pros and cons of each market. Note, you can browse deals from multiple markets at the same time, but it does take time and practice to really understand a market, so I suggest starting small and branching out as you go. Conduct market research based on your investment strategy and then choose a solid cash flow market to start looking into. For example, if you are looking at buying 2-4 unit properties, look for markets that have steady or growing populations, job growth, and meet the one percent rule. The one percent rule means that the monthly rent is equal to or greater than one
If you are looking to buy apartments, you should still consider population and job growth, but also evaluate market cap rates and whether they are a fit for
usually somewhere in between the current NOI/Cap Rate and the future NOI/Cap Rate. Once you have selected a market start building your team of professionals local to your chosen market. This involves finding and interviewing realtors/brokers, general contractors (if rehabbing), inspectors, and property managers.
what you are trying to accomplish with your investing strategy.
For example, are you looking to invest in a value add or stabilized property? A stabilized property has market occupancy rates and rent rates similar to other properties on the market. To find the value of these properties simply take the property’s Net Operating Income (NOI) and divide it by the average Cap Rate for that type of property. If the property is not stabilized, and is below the current market occupancy and rates then the value of the property is based on its potential or value add. For a value add property you must identify what expenditures you’ll need to get the property stabilized and determine a fair price,
STEP #2: INVESTIGATE Once you select the
market(s) you want to invest in, put your team in place, and have deal flow, it’s time to start crunching numbers and making offers. You may need to place multiple offers until you get one accepted. Once your offer is accepted you’ll enter the Investigate Phase. During your inspection period, you’ll need to investigate everything about the property - the ARV (after repair value) and how much renovation it needs (if applicable), the current rents, the market rents, and the actual condition of the property from an independent ASHI certified home inspector’s point of view.
percent of the total purchase price of an investment property.
Article continues on Page 24 >
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ALTHOUGH MOST ACTIVITI ES CAN BE PASS IVE , YOU MUST KEEP YOUR F I NGER ON THE PULSE OF YOUR BUS I NESS . Either way, it’s fairly simple. Of course, you’ll need to wire your closing funds to the title company, but that’s standard. STEP #4: MANAGE The last step will be different depending on The title company can hire a mobile notary in your hometown. They will email them the file. The notary will schedule a time to meet you at home or wherever you choose. You’ll sign all documents in front of the notary and they’ll send the signed package back overnight to the title company.
The title company can email you the closing package. You print it, sign everything that does not require a notary, and take the handful of pages that do require a notary to your local bank to get notarized. Then overnight the package back to the title company with the label they provided. company to close, so how does it work when you are doing it remotely? There are two ways, and it’s largely up to the lender and title company: things you do in between the inspection period ending and the deed becoming yours. For example, getting your financing in order, setting up insurance, signing agreements with your contractor and property manager, and getting everything needed to the title company (like your LLC docs). I like to refer to this phase as the “herding cats” phase. If you have closed on real estate before you already know it is a little chaotic, but this part is no different whether you’re investing at home or remotely. However, you are probably pretty accustomed to going in person to the title
YOU ARE F I ND I NG OUT WHAT I S "REAL " ABOUT YOUR REAL ESTATE DEAL
There are three potential next steps:
Everything looks good and you are moving forward. Things are not as good as you thought and you request a price reduction. Things are not good at all. If it doesn’t work out how you like, just walk away! There’s nothing like the power of saying
STEP #3: CLOSE This one is simple because you did all of the hard work already. The Close Phase of our process includes Pre- Closing and Closing. “no” in a negotiation. When you back out of the deal within your inspection period, you get your earnest money deposit back.
Pre-Closing includes all the
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what your strategy is. If you’re buying a performing, stabilized building, the Manage Phase relates to “managing the manager”. This means getting all of the information to your property manager such as security deposit information, lease agreements, etc. If you’re buying a rehab property, the Manage Phase starts with managing the rehab, and then once the renovations are complete, it’s managing the manager. I remember when I was a new investor and heard the term “passive income”. I misunderstood the term to mean I would be completely passive. Although most of the activities are passive, the
Conclusion I hope you’ll use this
one thing you always need to do for your business is keep your finger on the pulse of it. How do you do that? By reviewing the monthly property management reports, paying attention to everything on it (particularly maintenance and repairs), and asking your property management company about any expense you are not aware of. Not only will it give you information about what is going on at your property, but it also lets the property manager know you are paying attention, which reduces the risk of them running unnecessary expenses through your P&L statement.
information and allow it to start opening your mind to investing in a new way that will allow you to expand your portfolio, make better purchases, and ultimately create financial freedom.
Stacy Conkey Founder "Multifamily Real Estate Investing" Facebook Group Click here to follow
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SETTI NG TENANT CR ITER I A I N TOUGH TIMES One of the most challenging aspects of being a landlord is choosing the right tenants. You may find yourself in a rush to fill a vacancy, but experienced landlords know it’s always best to find an applicant that meets all your criteria even if means waiting.
This article will cover why setting written criteria is important, what criteria may help you find the renter you want, and how to work with tenants financially impacted by COVID.
Why Set Written Criteria
How do you decide when to deny a rental applicant? You may be thinking to yourself, “I know a bad tenant when I meet one” or “I run a credit and background check”. Although it may seem obvious to you when to decline an applicant, to outsiders such as tenants, attorneys, and court judges, it could look like you are discriminating against a particular type of tenant. In fact, watchdog organizations and some tenants will intentionally apply for multiple rentals and sue the landlord or
property management companies that decline
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them for the rental, claiming they were discriminated against due to their protected class. The success of these lawsuits often comes down to whether the landlord or property manager can prove they treat all rental applicants equally regardless of their protected class. Although your intention may be to treat everyone the same, proving it can be a challenge. A good way to show you are complying with the Fair Housing Act is to set and share written criteria for your rental with all applicants. Then, if you decline an applicant you can point to a specific reason and show you have applied the same criteria to all your renters. You may want to consider sharing the criteria on the rental listing and during the first interaction with the interested applicant. Including the criteria early on can prevent you and the applicant from wasting time. What Criteria to Consider The criteria you choose to consider depends on what you think will help you determine whether the
ALTHOUGH YOUR I NTENTI ON MAY BE TO TREAT EVERYONE THE SAME , PROVI NG
IT CAN BE A CHALLENGE .
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renter will pay rent on time and follow your lease. You should also factor in the average renter in your area and what is reasonable for the type of rental you have. It's also a good idea to discuss your rental criteria with an attorney near you. Although there are dozens of criteria you could look at, here are the top five you may want to consider:
You may have heard a 3:1 income to rent ratio is ideal, but it does not factor in the cost of living in your area nor the applicant’s debt. Consider the following scenario: John Smith makes $3,000/mo and rent is $1,000/mo, but John pays $900/mo for his auto and student loan. That leaves him $1,100/mo. Is this enough for him to cover his cost of food, gas, utilities, etc.?
Looking at the individual’s net income (income - rent - debt) will give you a better picture of how tight money will be for your tenant should they move into your rental. You can find the renter’s debt on their credit report. Note, if your rental is in an area where you are required to consider applicants with housing vouchers like Section 8, you should count the housing voucher as income. Some states like California and New York also require you consider all sources of income, including social security, child support, and other types of government assistance. Regardless, you can always require the applicant to verify the income. For example, a letter, a recent bank statement showing the deposit, paycheck stubs, or W-2.
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Credit Many landlords set a minimum credit score requirement. Credit reports typically break down the score into red, yellow, and green ranges. For example, the FICO Score, commonly used by all three credit bureaus for rental screening, ranges from 300-850. They consider a 549 and below very poor. You don’t have to follow their guides, but it’s a great place to start. A credit score can help, but it doesn’t always tell you everything you need to know. Some landlords use collection agencies to help them collect rental debt that arises from an eviction, unpaid rent, or damages. Collection agencies will then report the unpaid debt on the applicant’s credit report. You may want to include a requirement that the applicant has no outstanding rental-related collections. You can also require the applicant not to have any line of credit that is currently 60 days or more past due, which shows a negative payment trend. Late rent could be next!
Evictions Most tenant screening companies will pull a 7-year eviction history for you. When it comes to setting your criteria, you may want to consider whether the eviction judgment was paid, which shows the tenant may have recovered financially and is responsible enough to pay their debts. Keep in mind that as of 2017 evictions no longer affect an individual's credit score unless they don’t pay the judgment against them and the landlord uses a collection agency to report it on the credit report. Landlord References Landlord references can give you the additional information that credit and background check reports don’t provide. If the tenant refuses to provide references that alone could be a reason you may want to disqualify them. Questions to ask previous landlords include: 1) What was the rent amount? 2) Did they pay on time? 3) Were there any damages to the property?
FICO Credit Score Chart from AAOA.com credit report.
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How and When to Make Exceptions You may be tempted to make an exception for an applicant who is doing their best to recover financially, especially if the situation they were in was out of their control. It's a good idea to prepare for these situations ahead of time, by establishing conditional approval criteria. For instance, for applicants with no credit history, you may want to require extra security deposit (within the legal limit in your state, if any) or a guarantor. Or if your applicant’s credit score
and 5) Did they violate the lease in any way?
is low, but they qualify for LeaseGuarantee, you could require them to purchase LeaseGuarantee, which essentially guarantees your rental income should they stop paying rent. If the conditions are approved by your attorney, the same for all applicants, and part of your written criteria, you are in the clear. The Bottom Line Having written criteria you apply equally to all applicants will reduce your liability, provide transparency, and make it easier to select tenants that will be more likely to follow your lease. Although it’s not required by law to have written criteria, it can help back up your rental decision if a tenant ever disputes it. Lastly, run any changes to your policies by your attorney, to ensure you have covered your bases.
Public Records Public records include bankruptcies, state and federal tax liens, and civil judgments. Most landlords are unaware that tax liens and civil judgments are no longer part of a credit report, so it’s important to order a separate public record report along with an eviction, criminal, and credit report. Tax liens, recent bankruptcies, and outstanding civil lawsuits can mean financial liabilities that may impact a tenant’s ability to pay rent.
Alexandra Alvarado Director of Marketing American Apartment Owners Association (866) 579-2262 firstname.lastname@example.org
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MEET THE CLUGSTONS ! HOUSE HACKI NG PROS
Lauren and Kyle Clugston represent a new generation of house hacking pros that are finding creative ways to break into the rental industry. In just 3 years out of college, they've created a profitable rental portfolio and they’ve documented their entire investment journey on YouTube and Instagram, amassing over 30,000 followers.
Alexandra (AAOA): I love your YouTube series that documents your investing journey. The whole time I was watching, I wondered, is this a full- time gig or do they have jobs too? Your renovations seem so intense at times I imagine it’s hard to juggle both. Lauren: Yeah, we get it all the time because it's a video series that makes it look like we’re working the whole week but really it's compressed down into basically just weekends. We both have full-time jobs I'm in higher education marketing. Kyle: And I'm a Jersey state trooper. So we basically just don't have much free time right now. Alexandra (AAOA): I can imagine! How and when did you get started?
What’s house hacking? According to Lauren, it’s a way to turn your primary residence from a liability into an asset by living in your own multi-family property. The Clugstons launched this simple strategy right out of college, and it's working. They've shared their journey from the start with the world, recording everything from analyzing new deals, to rehabbing the properties they’ve purchased, to filling vacancies - and they both have full-time jobs! Their story has inspired young and seasoned investors alike to rethink their investment strategies and get motivated to grow. Here is their interview with AAOA's Director of Marketing, Alexandra Alvarado.
Pictured is the Clugston's first duplex property purchase in 2017.
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Kyle: I was always fixing the stuff that would go wrong in the rentals that we lived in with our friends in college and Lauren was always researching slowly in the background about different investment strategies and what to do with your money. I like fixing things and being super hands on. It wasn't until after we graduated that we both came together to form the formula that we have now, which works so well.
amount of money saved just because I'm a saver.
And the kicker is if we do it right, we'll basically live rent free.” And he agreed! Alexandra (AAOA): It sounds like you make a good team. So Kyle, you do the handiwork, and Lauren you do more of like the deal analysis? Is that right? Lauren: I would say we both do the property search and analysis, just because to be honest, that's the fun part and we both like to do that. I handle all the admin stuff that has to do with banking like applying for the loan and making sure they have all the documents and then once we close, Kyle takes over and does the renovation. Kyle: From our first property to now our process has evolved and eventually we want to be more hands-off on renovations, focusing on managing the property and hiring help. For example, I'm not driving out to do maintenance calls anymore, but when we first started, we both did everything because it was fun and exciting, but as we're growing and treating this more like a business, we are realizing that it's best for us to delineate tasks.
And I thought we can either put all this money down on a house or we could figure out some way to invest it, so I just Googled what to invest in in your twenties. And I found a Brandon Turner article about real estate investing and house hacking. After reading that, I came to Kyle and asked, “What do you think about buying a two-family fixer- upper, you’ll renovate it, and we’ll have tenants rent out the other side.
Lauren: We wanted to buy a house and I had a decent
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Click below to watch a clip of the interview!
Kyle: The last few years we’ve been house hacking to break into the more expensive markets that we wanted to get into so we could leverage our positions later and utilize ourselves as our own bank. By living in the unit, we were able to get into these more expensive properties with a lot less down. We only put 3.5% down on our first property. We actually just bought another two-family that we will be house hacking and we're renovating it right now. That will probably be our last time living in our investment properties. Lauren: We are planning on outsourcing a lot more. So after this property, we will be strictly just managing the rentals. And I'm going to try to not have him lift a hammer! Alexandra (AAOA): It seems that house hacking and BRRR (buy, rehab, rent, refinance, repeat) have been your favorite strategies, how would you define house hacking? Lauren: House hacking is a way to turn your primary residence from a liability into an asset. There are a few ways you can do it. You can either buy a single- family home and rent out the rooms to roommates or on Airbnb. Or you could buy
Alexandra (AAOA): When it comes to having a team that you've set up, who's on your team and how did you find your team? Lauren: It's definitely a bit of trial and error. It's really important to have those people in place because once you do find that person for your team, you almost forget how good they are because it requires such little energy on your end. We're at the point now
where I can just shoot a text to our real estate agent, our lender, and our insurance guy and that's the trigger they need to then go do their jobs. There's not a lot of back and forth because we've worked with each other for so long that we all kind of get each other. Kyle: Now our renovation team looks totally different than it did in 2017, it's definitely a moving target. In regards to that - for people getting started, don't get frustrated or down on yourself. If you're having trouble finding people to fill certain positions that you need filled, it'll come with time. Alexandra (AAOA): You've lived in the rentals that you're also renovating. Now that you’ve done that for some time, what are your future plans?
THE LAST FEW YEARS WE ’ VE
BEEN HOUSE HACKI NG TO BREAK I NTO THE MORE EXPENS IVE MARKETS .
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