E-Renter News

Q: What’s the best thing about collecting rent every month?
A: Collecting rent every month!

Cash flow is the life force of any business—and in the real estate investment business, your rental properties provide a nice inflow of cash every month. Unlike a retail business owner, you don’t have to wait for a customer to walk in your door and buy something. And instead of the service business owner’s fight for new clients, your tenants come to you needing a home to live in. And you get to open your mailbox or bank statement and see the money coming in.

The challenge is to find new ways to keep rental property expenses down—which is the best way to improve cash flow. Keep in mind, that even small profits add up—and profit is absolutely necessary. Losing money by paying too much for a property, taking on big mortgages or paying out too much in expenses—even for the short term—can cripple your rental property business.

Cash flow can help you grow your business. Having cash on hand means you can take advantage of new opportunities—like transitioning from smaller properties to larger properties. Or purchasing a ready-to-go building instead of a fixer-upper.

When you buy properties at the right price, and the rents pay the mortgage, taxes, insurance and other expenses, you will have positive cash flow. Conversely, if a property is not making a profit, consider getting rid of it to return to positive cash flow. And remember, the promise of potential profit and increasing value does not equal cash flow.

A tax-deferred exchange allows taxpayers to sell income property and replace it with a “like-kind” property. If you are selling an investment property with the intention to reinvest in another investment property, you might be able to avoid capital gains taxes on the sale.

Section 1031 of the Internal Revenue Code allows such exchanges, which permit the postponement of capital gains tax payments when another property is purchased within a specified time period. Income property investors can use it to defer taxes when they sell an apartment building, for example, and buy land to build a new duplex on.

This has been called the most powerful wealth building tool available to taxpayers. For landlords, it’s an important tool to increase the size of your real estate holdings. It’s also a good way to sell non-income-producing property, like land, in exchange for income-producing property, like a rental house.

In theory, an investor could continue deferring capital gains on investment property forever, avoiding them completely. But as with any tax rule, following the 1031 Exchange mandates to the letter is a must.

What property qualifies for 1031 Exchange?

What properties do not qualify for 1031 Exchange?

• Property purchased to fix up and “flip”
• Vacation or second homes not held as rental properties may not qualify—check with your tax advisor
• Personal residences

Important Information on 1031 Exchanges:

• There are certain disadvantages of 1031 Exchanges, regarding losses and depreciation. Check with your tax advisor.
• Every taxpayer’s situation is different. Check with your tax professional for more information on whether the 1031 can benefit you.
• The limitations and requirement of 1031 Exchanges are complicated and should be undertaken with the guidance of an expert.

Maggie is a landlord facing her first eviction. She asks, “My tenant owes me four months’ rent. Can I sue for the back rent once the eviction is finished?”

First, it’s not a good thing when a tenant goes that long without paying rent. The more serious landlords we know post a “pay or quit” notice on the very first day the rent is late. Others wait longer, hoping the tenant will come up with the full amount. But four months? It must have been tough to get that tenant out of the rental unit.

Whether a tenant owes four days’ or four months’ rent, is it possible to collect any of it once you go to the eviction process?

That depends a lot on where you live. Suing in small claims court can be worth the effort in some areas; in others, the odds are against the landlord ever collecting—even after winning the claim. Why?

1. If the tenant isn’t paying rent, they probably don’t have any money to pay a claim, either.
2. Collecting debts can be a full-time job, which is why there are professional collection agencies. You could certainly hire one, but they might not be any more successful than you. And if they are, they will take a cut of your money.
3. See if you can hire a service to send a letter to the tenant stating if the rent is not paid, they will be turned over to a collections agency. These services usually charge a fairly low, one-time fee. Whether or not the money is collected, a mark will go on the tenant’s credit report.
4. Check with a tax professional about whether or not the lost claim can be considered a tax write-off.
5. Depending on the amount of money owed, a collection agency might be the best idea. Check the terms and conditions carefully, and understand completely whether you pay for non-collection and what percentage of the recovered sum you will actually see.
Ask your fellow landlords about their experience collecting back rent in your area.

We know plenty of landlords who could be considered the original environmentalists. You know the type: they re-use fixtures, cabinets, carpeting, paint, and flooring in any way they can. They used to be considered “cheap,” but their way has always been better for the environment.

And now, “green” people are a whole section of the demographic landscape. Many landlords are specifically appealing to them, knowing that these folks tend to vote with their dollars. They will choose a place to rent based on its greenness.

If you’d like to borrow a few tricks from green landlords, and appeal to environmentalist renters, here’s five things you can do:

1. Re-use as much as you can. Keep usable fixtures and materials out of the landfill. It’s perfectly fine to let prospective tenants know that you recycle and re-use. Most of your environmentalist renters are shopping at thrift stores, anyway—they’re accustomed to used merchandise.
2. Host a "stuff swap" every six months or so. Allow tenants to display things they no longer need or want, and pick up the same from their neighbors. Offer to take leftovers to Goodwill, the Salvation Army, or other charity re-selling organization.
3. Install bike storage. More and more folks are turning to bikes as an alternate (or even their only) form of transportation. Don’t make them lug their bikes up several flights of stairs or chain them to light poles. Providing bike racks is the way to go—and if you remove a parking space or two to accommodate bikes, even better!
4. Switch to a green lawn maintenance company. Chemicals and pesticides are no good around kids and pets—and the groundwater and streams can benefit from fewer fertilizers.
5. Provide opportunities to recycle. You can probably order bins and even composting containers from your waste disposal service company. People will recycle if given the opportunity--and it might even cut your garbage pick-up bill.
6. Reduce water use. Replace water-wasting toilets with new reduced-flow models, install aerators on faucets, and switch to low-flow shower heads.

Due Dates
Many tenants have difficulty with the concept of due dates for rent. If rent is due on the 1st and late by the 3rd, is it really due on the 3rd? Plenty of people will interpret it that way, so plenty of landlords deal with this issue by allowing no grace period—rent is due on the 1st and late on the 2nd. This policy, while rigid, eliminates a lot of headaches.

If a tenant moves in on the 10th of the month, some landlords elect to prorate the first month’s rent and have subsequent rent due on the 1st of each month. Other landlords would have the rent due on the 10th of each month.

Prorating
To charge a tenant rent for 15, 20, or 25 days of occupancy, just divide the rent by 30 to obtain a per-diem rental rate. (Use 30 days as standard.) Then multiply by the number of days left until the 1st of the following month, when the full rent is due. For a $1200 per month rent, the daily figure would be $40. A tenant moving in on the 10th owes 20 days rent, or $800.

Late Fees
Depending on your state, late fees for delinquent rent payments may or may not be allowed. Often laws allow “reasonable” late charges . How will you know if your late fee is “reasonable?” Often, you won’t know until a tenant complains.

Ask other landlords in your area about average late fees—or search around the internet and you’ll find plenty of opinions. Some landlords charge flat rates; others do percentages. A 5% late fee on $1200 rent is $60. That’s enough to keep some tenants right on time. A $25 flat fee might not be much incentive. Some landlords charge by the day, increasing it as the days tick by.

If you plan to charge your tenants a late fee, state it clearly in your lease. For example:

Rent is due on the 1st of each month, and is considered late on the 3rd. Beginning with the 3rd day of the month, a $10 per day late charge will be assessed. On the 11th day of the month, the per-day late fee increases to $25, and a pay or quit notice will be issued.

Grace Periods
States that regulate late fees also specify that they cannot be charged until after a 3, 5, 7, 10 or other number of days after the rent is due. Some states require you give notice that late fee will be charged. Check your local and state laws regarding grace periods.

Accepting Late Rent Payments
If you have tenants who consistently pay rent late, along with the fee, they could feel that the rent isn’t “really late.” You should let them know in writing that late rent is late rent, and you will report their late payments as such.

Waiving the Late Fee
Most landlords would tell you “don’t do it.” Not even once. But waiving a late fee, just like whether to charge one in the first place, is completely up to you—it’s your money, after all!

What do you do when a good tenant is a couple days late on her rent because she was laid off? While some landlords would evict their grandmothers over a late rent payment, others won’t evict tenants no matter what. Most landlords probably operate somewhere in between these two extremes.

Here are a few tips from some understanding landlords about what to do when a good tenant is late with the rent:

1. Talk to the tenant: Quick communication is key. Don’t wait, and don’t ignore the problem.
2. Consider the market: If you’ve had trouble filling your vacant rentals, you might give the laid-off tenant more time to come up with the rent. It’s still cheaper and easier than kicking her out and getting a new tenant in.
3. Find out the bottom line: Is the laid-off tenant going to receive unemployment benefits? If so, that’s a good sign. Is she planning on staying in the area and looking for a new job? Does she want a different lease, or  out of the existing lease? Answers to these questions will help you make good decisions.
4. Consider offering a month-to-month lease: This gives you the most flexibility. If she finds a new job, you can always start over with a one-year lease.
5. Remember, she's a good tenant:  If there have been no other problems, complaints, or property damages, you might be better off to just add your late charges and let her stay.
6. But, don’t be a pushover: Just because you are willing to work with this good tenant doesn’t mean she's in control. Be firm, be clear in what you will and will not tolerate, and back up your words with actions.

Every situation with every tenant and landlord is different. If working with a good tenant who is having a tough time works for you, by all means do it. If it doesn’t, you’re under no obligation other than fulfilling your responsibilities under the lease.

There is a right way and a wrong way to handle tenant move-in/move-out inspections—and the wrong way can cost landlords lots of money. And who has extra money to lose in this economy?

So don’t make the classic landlord error of handing a new tenant the keys to your rental property, along with a move-in checklist to fill out. It’s up to you, the rental property owner, to ensure that the inspection is done correctly.

Here are some dos and don’ts on how to properly conduct a move-in inspection with a new tenant—before you hand them the keys!

1. Do conduct the move-in inspection with the new tenant. Don’t allow them to go through your rental property unaccompanied prior to moving in. And do have everyone present who is on the lease .

2. It’s not a bad idea to have your own witness, but don’t make it look as though you’re “ganging up” on your new tenant.

3. Do document the entire process with a camera and/or video, which can serve as your “extra witness.” And photos are a necessary part of the move-in inspection. Video is even better, since voices and comments can be recorded.

4. Do pay extra attention to areas that have problems, such as scratches in the floors or stains on the carpet. Bent window blinds, loose hinges, and dents in the walls should all be recorded.

5. Conversely, do pay extra attention to pristine areas of the rental unit for comparison when the tenant moves out. Spotless carpets, perfect hardwood and linoleum, and smooth walls should be pointed out.

6. Do have all tenants who signed the lease sign the inspection check list, and initial each page. You, the landlord, should do the same.

7. Don’t hand over the keys until you do all of the above and tell the tenant verbally and in writing that you expect them to take care of the rental unit.

8. Do make the consequences for damaging the rental property very clear in the lease and on the move-in inspection sheet.

1. Reducing Crime: Landlords keep neighborhoods safer when they install exterior lighting, keep shrubs and trees trimmed neatly, and provide their tenants excellent locks. By keeping a close eye on their properties and encouraging tenants to do the same, landlords help discourage criminals from gathering in and around their properties. Keeping rental property clean, neat, and in good condition keeps criminals away, too.
2. Providing Jobs: By patronizing local stores and service providers like attorneys, property management companies, landscaping and cleaning companies and contractors, landlords help keep local economies stronger.
3. Assisting Other Landlords: Experienced landlords are often mentors for newer landlords, helping keep another successful business in place.
4. Being Professional Business Owners: By demonstrating good business practices, landlords can be examples for the community. Good landlords make every rental property owner look better; conversely, bad landlords make them all look worse.
5. Improving Quality of Life: By taking good care of their rental property, landlords contribute to an improved quality of life for their tenants and the neighborhood, too. Pride of ownership shows—and it’s contagious!
6. Contributing to Tenants’ and Children’s Well-Being: Safe and attractive housing helps both tenants and their children feel good about where they live. This leads to improvements in other areas of life, like school attendance, grades, lower crime, and even self-esteem.
7. Providing Safe Housing: By law and by doing the right thing, landlords must make the housing they lease safe and maintained. Nobody deserves to live in housing that contains fire hazards or safety problems.
8. Providing Affordable Housing Alternatives: Millions of Americans are having economic difficulties. Landlords help people live well for less money than it takes to own a home.
9. Providing Accessible Housing: For elderly, disabled and other special-needs people, landlords are often the reason they are able to live on their own rather than in group housing. Providing rental housing that is safe and accessible is so important to millions of people.
10. Keeping Families Together: Affordable housing often makes the difference between families staying together and splitting up, or even living on the street. And, landlords who allow pets do a great service by keeping them with their families, rather than in shelters.

Martin is a landlord who’s in way over his head. It happened so quickly, he didn’t see it coming—and now he’s committed to meeting with three of his tenants to try and sort out an escalating game of finger pointing.

Here’s the background: When Betsy, a new tenant, moved into the downstairs unit of his building, she immediately began complaining. First, it was the dishwasher; then, the refrigerator. After appeasing her and replacing both appliances, Martin found himself fielding phone calls at all hours to report her latest grievance: the tenant upstairs, Charlie.

According to Betsy, Charlie is too loud. “He stomps on the floor and plays his music at the highest possible volume.” Martin had a talk with Charlie, who insisted he never wore his shoes in the house and that his music is at a perfectly reasonable volume.

Martin reported this back to Betsy, who insisted he “do something” about Charlie. What Martin did was to ask a third tenant, Abby, about the other two. Abby is a long-term tenant who causes no problems to Martin. Abby said that Charlie's music might be a little loud from time to time, but that Betsy is overreacting.

Betsy’s next move was to call the police when Charlie had friends over for dinner. “His dishwasher is too loud, too,” she said. Martin didn’t know how next to proceed, so he asked all three tenants to meet with him in order to “straighten the whole mess out.”

Why is this a bad idea?

1. It demonstrates to tenants that if they complain enough, they will get what they want—attention. It could be that Betsy is just a complainer and likes to push people around and get her way.
2. The meeting could spiral out of control. Martin is not a trained mediator, and has no experience in de-escalation tactics. He is not well-equipped to handle a three-way complaint session.
3. It’s not Martin’s role to play peacemaker. He is the landlord and his responsibility is limited to making sure tenants uphold the lease agreement.

Most everyone who’s ever lived in multi-family housing knows that you can hear your neighbors, and vice versa. But that’s not the landlord’s problem. If you have tenants like Betsy and Charlie, resist the urge to help them get along; they need to work out their own issues.

The BP Deepwater Horizon oil spill in the Gulf of Mexico continues to affect businesses and residents in Louisiana, Mississippi, Alabama, and Florida. Unceasing media attention is keeping vacationers from the white-sand beaches and vacation towns dotted along the coast.

Would-be visitors to gulf coast beaches are cancelling reservations at vacation homes—and rental home owners are losing income. Despite the fact that most beaches have been minimally affected by the spilled oil, bookings for some rentals is down 30%, 40%, even 60% from last year.

While lobbyists discuss economic and tax relief packages for local business owners, and vacation rental owners are identified as “a specific group” that would be protected and allowed to file claims with BP, beach front communities and vacation rental owners are working hard to convince visitors to follow though on their vacations.

Here are some tips to keep visitors coming when a crisis of any type hits near your vacation rental:

• Share information. For example, Gulf Coast rental home owners are promoting the Fishing & Seafood hotline, which offers information for guests who might be hesitant about eating Gulf seafood or fishing in the Gulf.
• Communicate beyond typical levels: Reassure guests who’ve already booked that you’ll do whatever it takes to take care of them. Listen carefully to concerns and address each one. Be very patient with guests who are worried about their vacation, and give them plenty of time to make up their minds about keeping their reservations.
• Be transparent: It’s no good to pretend there is no problem. But if it’s something most folks can deal with, then telling the truth up front won’t hurt the situation. Gulf coast vacation home owners have been posting photos of the beach on their websites to prove there are no tarballs washing up.
• Let others vouch for you. Encourage recent guests to post their photos and write reviews of their visit. Recent updates will help booked guests feel comfortable.
• Don’t discount your prices, but be prepared to offer concessions. What do you or your guests have to lose if you offer a free night with 5 paid nights? Or a refund if the beach closes after your guests arrive? You could even throw in a dinner certificate to a local restaurant to entice guests to honor their reservation—whatever it takes, it will pay off in the end.

Natural disasters affect ecosystems as well as individual businesses’ financial situations. If negative media attention is hurting your vacation rental business, it’s up to you to increase your marketing efforts, communicate thoroughly and honestly, and keep your guests happy. Your hard work will keep your income from declining.