E-Renter News

5 Advantages of Owner-Occupied Neighborhoods

Specialization is one way to streamline your business practices. So, certain landlords focus on lower-end units; others on apartments, still others prefer duplexes. All have their advantages and disadvantages. For many landlords, buying income properties in mostly owner-occupied areas is one key to their success.

Why?

1. Higher demand. Owner-occupied neighborhoods tend to be nicer and more stable than areas with more rentals. Parents like raising children in stable surroundings, so there is higher demand for rentals in these neighborhoods.
2. Lower crime rates. Fewer people moving in and out means less crime, because neighbors get to know each other better. You’ll have less vandalism, too.
3. Stable tenants. Owner-occupied neighborhoods naturally mean more stability. Your tenants in these neighborhoods are more likely to settle in and stay for longer terms.
4. Steadier rents. Your single-family-home tenants in nicer neighborhoods won’t be comparing their rent with their neighbors—because the neighbors own their house. You’ll face fewer rent reduction requests in these stable areas.
5. Higher quality tenants. Nicer neighborhoods and homes attract higher-income tenants with good credit. And because they really want to live in the neighborhood, these tenants will be less likely to cause trouble, and more likely to take care of the property.

These are just a few reasons to consider investing in owner-occupied neighborhoods—while home prices are still lower than just a year or two ago.

The Most Important Thing is to Have One!

None of the landlords we know would dream of renting their property without a legal agreement between themselves and their tenant. However, difficulties such as too many vacancies, cash flow problems or even friends and family who call on us for help can lead to changes in procedures—like agreeing to rent an apartment or house without a formal agreement.

This is a mistake. There are too many ways that this arrangement can harm the property owner—and there are few advantages to renting without an agreement. Landlords must follow rental laws, and tenants have more rights than ever before. If a dispute arises—even with someone you know and trust—the lack of a rental agreement will work against you. Oral agreements can be legally binding, but difficult or impossible to prove.

A rental agreement is used when the tenancy is for a short period of time, such as a month-to-month agreement. A lease binds the parties for a set period of time—usually a year. During this time, the rent cannot be raised, and other terms of the lease are in place until it expires.

Month to month leases are beneficial to the landlord during good rental markets—because an unstable or difficult tenant is easier to replace with a better one. In difficult markets or in areas with high rental turnover, many landlords prefer the security of knowing the tenant is bound to a one year lease.

More Renters, More Landlords, More Complaints

Certain areas of the country are reporting increased rental market activity, as a result of the struggling U.S. economy. While it is still true that vacancies are up and rents are lower across the U.S., more foreclosures and a decline in lending are turning more former homeowners into renters—and more inexperienced property owners into landlords.

News reports show that even homeowners with good credit are being foreclosed upon; as a result, landlords could start seeing tenant applicants with otherwise excellent credit reports. They might not be accustomed to renting a home, so landlords are advised to communicate terms and conditions of rental agreements clearly.

Homeowners change paint colors, add or remove landscaping, and change out lights and other fixtures as they wish. Renting after homeownership is a different experience, and reminding your tenants about what you expect will go along way in preventing conflict and property damage.

An increasing number of vacation homes are entering the market as rentals. Owners, who purchased the homes for their own use, or to rent for short-term vacation rentals, are finding the economy has changed their plans. Unable to find enough vacationers to pay the mortgage, they typically try to sell their second homes, and then finally turn to renting them. The number of vacation homes available for long-term rentals is skyrocketing, according to a report—and by people who never considered they’d have to rent out the property.

These new landlords are adding to the changing rental property landscape, as are new investment property owners, taking advantage of foreclosure sales. This increase in newbie landlords is leading to a corresponding increase in complaints about fair housing and discrimination.

This year has been a wild ride for landlords, but just like at the amusement park, all rides eventually come to an end.

Allowing Unlimited Guests is a Big Liability

Now is a good time to look closely at who is coming, going, and staying at your rental properties. When times get tough, tenants are more likely to throw open their doors to their friends and family who are between apartments, evicted, or foreclosed upon. The problem is that these tenants are also opening you, the landlord, to liability.

Why would a landlord who is diligent about screening every tenant allow anyone with an unknown background to live on their property—even temporarily—as a “guest” of a tenant?  Landlords and property managers should never allow unlimited guest stays for any tenant.

Even if a particular tenant has never caused trouble, pays rent on time, is quiet and clean, their friends and family members may not be. Trusting your tenant and trusting their friends are two different scenarios—and as property owner, you have an obligation not only to yourself, but to your other tenants and the surrounding residents as well. Even if you have not approved a tenant’s guest for living in the rental unit, you could still be held responsible for any criminal or dangerous behavior.

Smart landlords include a visitor and guest policy in their lease agreements, stating how long tenants may have guests—usually seven or fourteen days. Some rental agreements state that no guests are allowed for more than fifteen days out of any thirty-day period, to keep friends from moving in and out.

If you have a guest policy for tenants, enforcing it is vital. Don’t make exceptions for certain tenants—such a practice can lead to charges of discrimination or unfair treatment. It’s easier to explain that you have to apply the same rules to every tenant.

If you do not have a guest clause in your rental agreement, don’t sign another one until you add it. You want to avoid the problem of tenants piling their friends into your rental property without your permission—which is more likely in a down economy. Unknown guests can become unofficial tenants—a potentially dangerous, but completely preventable situation.

Check out These Unusual Items and Save

Conducting inspections or scheduled maintenance at a rental property is your chance to check for signs of trouble around the grounds or in common areas. Whether you handle maintenance yourself or hire a handyman for the bigger jobs, you might want to cover the small fixes yourself—it’s a good way to save money.

Landlords are never bored because there is always something to fix, tighten, touch-up, clean up, or patch.  Beyond the basic tools you’ll want to carry with you (channel lock pliers, hammer, measuring tape, wrenches) here are a few unusual items you might want to include in your landlord tool box:

Old English Scratch Cover: Use on natural or stained woodwork to cover minor dings and scratches that tenants inflict on your molding, cabinets, or paneling. It really works—use the light or dark shade to match the woodwork, dab it in and let it dry, then wipe off excess.

Touch Up Paint Applicators: We like the plastic bottles with shoe-polish-type spongy applicators. Just fill them with your rental units’ paint colors, label them and refill as needed. Or, just load up a small, air and water-tight container with paint and throw a clean paintbrush into your toolbox to cover inevitable paint scuffs and chips.

Garbage Bags: You will likely encounter some trash around your rental property every time you go to inspect, so be prepared with a selection of bags--try paper compostable bags for yard waste, and help your business go greener.

Cordless screwdriver: Keep one, along with several different sizes of bits, in your toolbox. There is always something loose in a rental property!

Rhino Glue: Reports we get say this is one of the best bonding adhesives on the market. Temperature changes and moisture don’t affect its durability--landlords find hundreds of uses for this product.

FastCap 2P-10 Adhesive and Cover Caps: another strong adhesive product, and caps that stick to just about any surface, so you can cover holes in walls, cabinets, countertops and floorboards quickly and easily. They come in many colors and wood grains.

Analyze Variable Expenses Regularly

The standard equation for figuring out profitability on a rental unit is rent income – expenses = loss or profit.

Expenses include depreciation, interest expense, and operating expenses. Depreciation of the building is tax deductible. The cost of your property, minus the value of the land, is depreciated over 27.5 years. Each year, you deduct an equal portion from your taxable income on your return.

If you have a mortgage on your property, the interest paid is tax-deductible, as are operating expenses attributable to your rental property business—but since we are not in the tax-advice business, make sure you check with your tax advisor or tax attorney about just what is and is not deductible, as well as how the laws affect your personal situation.

Depreciation, mortgage payments and interest are fairly fixed, predictable expenses. Operating expenses, however, can be all over the place. So much depends on where you live, the condition of your rental property, the damages inflicted upon it by tenants, the cost of labor, weather conditions in any particular year, and more.

Operating expenses are the biggest unknown in renting property, but they are also the only expenses you can really control. Controlling variable expenses is the only way to increase cash flow if you cannot raise the rent or refinance your mortgage—both options that are not available to many landlords, especially in this banking and rental environment.

Analyze your variable expenses regularly. Is it time to take over property management yourself? Or to search for a management company that offers lower rates? What about the value your landscape and handyman providers give you? Are there lower-priced providers that would love to have your business?

With the business climate hurting form the recession, there is no better time to renegotiate your agreements and contracts with service providers—or to search out new, lower-cost relationships. Just about every industry is hurting—so it’s likely landlords can find alternative contractors in every category.

Checking in on New Tenants Pays Off

Successful rental housing owners we know are judicious about inspections. They always perform a move-in and move-out inspection; most also do periodic inspections, like fall and spring, to make sure all systems are in good working order before severe weather hits.

But once the move-in inspection has been performed, and the tenant’s possessions are in place, the next scheduled inspection could be six months away—and a lot of bad things can happen in that much time.

That’s why we think the 30-day inspection is a very good idea. It’s like the one your automotive dealer does for you when you buy a new car. It makes sense to let things settle and run for a little while, and then check in to see if anything is going wrong—before it’s too late to stop it.

One Pennsylvania landlord reports that she lets new tenants know up front, and in the lease, that she will conduct an inspection 30 days from the day the lease is signed. “I learned the hard way,” she says. “Far too many times I discovered running toilets, leaking pipes, or pet damages at the six-month inspection. It finally dawned on me to check in on new tenants much sooner.”

Another advantage of the 30-day inspection timeframe is to set up realistic expectations with your new tenants. Letting them know you will be in their rental unit that soon sets you up as the boss. Good tenants like knowing that the property is well cared for—and those who have nothing to hide won’t mind you checking things out a bit!

U.S. Department of Justice Files Suit in South Dakota

Last month, as a result of complaints filed with U.S. Department of Housing and Urban Development (HUD), the US Justice Department filed a lawsuit against a South Dakota property owner. The charges against T.K. Properties, L.L.C., are for violating the Fair Housing Act by discriminating against three families on the basis of race.

According to the lawsuit, filed in US District Court of South Dakota, the company created a hostile housing environment for the tenants, one African-American family and two white families, at an apartment complex in Sioux Falls.

HUD investigated the tenants’ complaints and found reasonable cause that discrimination had occurred. The matter was turned over to the Justice Dept. The resulting lawsuit seeks to prohibit future discrimination as well as monetary damages for all those harmed the defendants’ actions, and a civil penalty against T.K. Properties.

According to the lawsuit, certain of the apartment complex’s managers used inappropriate language and harassed the tenants, and even asked other tenants to file false police reports against them to back up eviction attempts. The tenants refused, so a manager filed the false report. The tenants reported the discrimination to the complex’s owners, who did nothing to curtail the activities of the managers. After the managers made additional voice mail threats, the police were called, and ultimately, the three tenants went to the U.S. Department of Housing and Urban Development (HUD) and filed formal complaints.

The Fair Housing Act is to be taken seriously. Landlords and property managers must educate themselves about this federal law, know what is considered discrimination, and take care to treat all tenants and applicants equally.

Begin with the First Phone Call

In a down economy, it’s more important than ever to perform tenant screening. Vacancy rates are climbing, and some landlords have been tempted to skip this important step. They are learning the hard way that it never pays to do so.

Start the tenant screening process as soon as your telephone rings in response to your advertisement. If your ad was done well, the prospective applicant already knows the basics: that you will conduct a tenant background check and tenant credit check, whether or not you allow pets, and the size of the unit.

Even folks that know they won’t pass a background screening will still call you—they often think they’ll sneak through or that if they’re nice enough, the landlord won’t perform the tenant background check. It’s wise to repeat your screening policy when you have a prospective tenant on the phone. It’s okay to let them know that if they do not meet your standards for employment, credit history, rental history, and criminal history, they will be rejected.

If you have a size limit for pets, state that during the call. Landlords report that even when they state a 20-pound limit, tenants still ask, “What about my English Sheepdog?” If you don’t want a dog that large in your rental unit, say so, and move on to the next call.

The initial phone inquiry is a good time to start establishing a good landlord tenant relationship. Briefly review your house rules, letting the prospective tenant know what behavior you expect. You can also give them an idea of the amenities and level of care you take, and the service they can expect from you.

You can get a feel for tenant’s level of cooperation and personal responsibility by the questions they ask in your very first conversation. If your prospective tenant passes the phone screening, move on to a formal lease application, including notification that you will conduct a background and landlord credit check.

New Realities for Landlords

One sign of a tough rental market is that landlords are offering perks to tenants to get them to stay. Some rental property owners are turning to incentives like flat-screen TVs, new carpet, upgrades in kitchens and bathrooms, or cash rebates, while those in oversaturated markets are finding rent cuts necessary.

It’s easier than ever to comparison shop the housing market. Tenants need only go as far as their laptops to see what other property owners are offering—and despite the hassles of moving, many will go where the deals are. Check out your local rental scene, too—you might find out that the reason you’re losing tenants is because you’re one of few property owners who is still charging a pet deposit.

Some landlords are softening credit requirements to deal with the reality of more competition for tenants, as well as tenant credit issues due to job losses. As the number of mortgage foreclosures in the U.S. skyrockets, former homeowners are looking to rent, and are seeing less stigma attached to a foreclosure.  Only you can decide if you will adjust your standards in the short term, but do continue to perform credit checks on tenant applicants—it’s the only way to know if they are credit worthy to your standards.

Should you offer cash or TVs as incentives? Knowing what your local rental market is doing is the best way to decide. Do your research to see what other property owners are offering, and be prepared to incentivize your good tenants to persuade them to renew a lease. Don’t be afraid to ask, “What can I do to keep you?”