Why Buy?

 

If you’ve been looking for a house to rent, then you know how hard it is. Almost nothing’s available in Ukiah, and the houses that are, feel overpriced. Rather than wasting time looking for a rental or spending too much for a house you don’t really want to live in, I have a suggestion: purchase your own home.

If this makes you raise an eyebrow in curiosity, read on. What are the criteria for considering home ownership over renting? Purchasing your first home is a huge decision. Obviously it’s one of the largest financial decisions you’ll ever make, but it’s also one that will change your lifestyle, and it’s not a decision you can easily undo.

Before you hand over tens of thousands of dollars in cash for a down payment and commit yourself to monthly payments of $2,000-$4,000, you need to be certain you want to be a homeowner and that the home you’re considering is, in fact, the home you want to be in. This doesn’t mean you’re committed to this house for life, but you should be committed to staying there for several years.

With that in mind, be sure to find a house that can grow with you, at least initially. If you and your spouse are newlyweds planning on having six children in the next six years, a two-bedroom house that feels roomy today will soon feel crowded.

How do you know if you’re ready to own a home? Let’s start with the basics. First, you must have access to a down payment, whether you find a loan designed for a first-time homebuyer or a more conventional loan requiring a 20 percent down payment. And then, of course, you’ll need enough money to pay the monthly mortgage payments, including tax and insurance.

On the plus side, your rent won’t go up—and if interest rates eventually drop below the rate you secured, you can refinance the loan and reduce your monthly payment a bit. In addition, most of your mortgage payment and property taxes are tax deductible. In today’s world, the after-tax cost of mortgage payments, taxes and insurance on a starter home are very likely less than your rent would be.

Unfortunately, there are some additional expenses that come with home ownership. You’ll need to maintain your new castle. Although the commitment is significant, in my experience, it’s worth it.

When you think about home repairs, your first thought might be, “Hey, I’m pretty handy. I can take care of things myself.” But unless you’re a licensed contractor, roofer, plumber, electrician, and appliance repairman who knows how to lay carpet and install tile, you’re likely to need professional help from time to time. Because while you can repair a broken gutter, eventually your water heater will need replacing, your carpet will wear out, and your roof will leak.

To determine the amount you need to budget to maintain a home, I recommend saving 3 percent of the purchase price for repairs and upkeep. If you don’t spend it this year, set it aside for the future. Obviously this number depends on the age and condition of the property in question, but it’s a good rule of thumb. If you buy a 75-year-old farmhouse in poor condition, 3 percent won’t be enough. If you buy a new home, your maintenance costs for the first several years should be minimal. Regardless of what type of home you buy, you should plan on some maintenance expenses.

To sum it up, if you have sufficient funds for a down payment and enough income to afford mortgage payments, taxes, insurance and maintenance—and you’re in a relatively stable financial position with the ability and desire to stay in one place for the next several years, consider buying a home. Just think, when you want to hang your Great Aunt Mathilda’s portrait, you won’t need to ask permission from anyone except your spouse.

If you have questions about getting into real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

 

Avoid Scams

Most of us think we won’t be duped by a scammer, but these people are good at what they do and desperation sometimes causes us to bypass our common sense. With the rental market in Ukiah as tight as it is, people are frantic to find a place to live, which can cause them to take risks they usually wouldn’t consider.

While I’m reluctant to write an article about this—because it will educate scammers as well as potential victims—this is so common now that anyone of a criminal nature already knows about it.

Here’s how the scam works. Let’s say you need to find a place to rent. The last four rentals you called about were rented yesterday, and then you see an ad on Craigslist and it sounds perfect. You call the number and a sweet-sounding lady answers the phone. She explains that the house was listed for sale, but the listing expired. She gives you the address but insists that you NOT talk to the real estate company. She says she’s not happy with her agent and does not plan to re-list.

She apologizes that she can’t meet with you because she’s on the East Coast with a dying relative, but suggests that you go by the property and peer in the windows. If you like it, send a check for the security deposit and first month’s rent.

On move-in day, she says she’ll have a friend meet you at the residence with the keys. You give notice at your current residence and prepare to move. You pack up everything you own and call your five best friends with pick-ups to bring your belongings to your new home, only to discover the house is already occupied by the people who bought it and closed escrow two days ago.

Bottom line: your $3500 is gone and everything you own is in the back of friends’ pick-ups. I would like to tell you what to do in this situation to recoup your money. Unfortunately, I can’t because there is no way to know where to find the scammers who took your money and ran.

The best advice I can give you is to be skeptical. If someone is not available to meet you at a property and provide you with access to the interior, that should raise a red flag. Even then, things can go wrong. The current tenant can pose as the homeowner and run the scam. When your Spidey sense (think Spiderman) starts tingling, pay attention. If someone asks for cash rather than a check, be skeptical. If the rent seems too low, be skeptical. If you’re told to peer in the windows instead of getting a tour, be skeptical.

If you want to know who owns the property, ask your Realtor—he or she can check county records and find out. Talk to the neighbors to see what they know.

Realty World Property Management manages about 800 residential units. Right now, as soon as a rental unit is vacated, it is leased to a new tenant almost instantly. This is partly because we keep properties in excellent condition, but the truth is, landlords who do not keep their properties in great condition are also able to rent their properties quickly.

The moral of the story is: if a rental situation seems too good to be true, it probably is.

As a side note on the scam issue, if you’re wiring money when buying a house, be sure you’re sending it to the right account. Realtors’ and escrow company emails have been hacked and the hackers are sending false wire instructions for clients to wire money to. Be aware, get independent verification of wire instructions before you send money. To the best of my knowledge this has not happened in Ukiah…yet.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.

Why Rental Agreements Beat Handshakes

While I like the idea of confirming an agreement with a handshake rather than a contract, I’ve seen a few too many handshakes turn into fisticuffs to recommend them, especially when the agreement involves an asset worth several hundred thousand dollars. This week’s column is dedicated to answering questions from a reader about how to minimize the paperwork involved in renting your property, or more to the point, why you shouldn’t.

The reader asked, “What is the minimum paperwork (contract) a landlord should have a tenant sign? What should be included in the contract? How important is it to have a contract? What are the legalities? What if no contract has been signed?”

Given the value of the property you’re allowing a tenant to use, I’d rather focus on all the things a lease agreement should include, rather than figuring out the minimum contract you can get away with. While the law doesn’t require a contract when leasing for less than a year, why wouldn’t you protect your asset?

Our lease agreements include provisions that cover the following:

  • Property address
  • Term of agreement (when it starts and ends)
  • Cost of rent
  • Who pays which utilities
  • What the property will be used for and by whom
  • Whether pets are allowed
  • In a multi-unit property, what the house rules are (e.g., noise, parking, etc.)
  • Adhering to state and federal laws
  • The tenant’s responsibility for the actions of guests
  • Whether the tenant is allowed to sublet
  • If the tenant stays past the end date of the contract, that the contract remains in force
  • Who is responsible for what maintenance and repairs
  • Whether the tenant is allowed to alter the property (e.g., paint, renovations)
  • Clarification of who is responsible for damages
  • Under what circumstances the landlord may enter the property (how much notice, etc.)
  • A prohibition on the tenant re-keying the property without approval
  • A prohibition on tampering with smoke and carbon monoxide detectors
  • Clarification that the tenant must insure his own personal property
  • What happens if the landlord does not deliver possession of the property, as promised
  • A prohibition on having illegal drugs in any form on the property (including medical marijuana)
  • What happens if either the tenant or the landlord does not live up to his or her end of the agreement
  • What happens if a tenant only moves half way out: vacates the premises but leaves enough personal property that it isn’t clear whether the property is occupied
  • Clarification that the tenant can expect his or her personal information to be used to run a credit report
  • What happens to the security deposit, and that it cannot be used as the last month’s rent
  • A clause about attorney’s fees stating that the prevailing party pays for legal fees up to $1,000
  • A standard waiver stating that if part of the lease becomes unenforceable, only that clause is void—the rest of the agreement remains intact
  • Notification of legal notices: where to send them and how (e.g., certified mail)
  • Clarification that if the landlord waives a right, it is only that right that time (allowing your old dog to move in with you does not permit you to adopt a wild puppy when your old dog passes away)
  • Megan’s Law Disclosure: a notice stating you can go online to determine if any sex offenders live nearby (UPD has a program called Nixle that will send you notices about all kinds of interesting safety and law enforcement facts—at ukiahpolice.com)
  • The procedure required to terminate the contract

I’ll share information about addendums next time.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

 

Real Estate Investing – Part IV: Commercial Property

This summer I’ve written three “Real Estate Investing” columns covering single family residential properties; duplexes, four-plexes and apartment complexes with fewer than five units; and larger apartment complexes (with up to sixteen units). I recently received a request to write a column on investing in commercial real estate, so here you go.

Commercial property is not for the faint of heart. It’s not too different from the other types of real estate investing, but because of the longer depreciable life there are lower tax benefits and the bigger investment makes it a bigger risk (if you’ve heard of the risk/return trade off, that’s what I’m talking about: bigger risks can lead to bigger returns or profit. Of course, bigger risks can also lead to bigger losses, so it’s best to do your homework to minimize risk where possible.)

When investing in commercial real estate, you’ll want to run a thorough background check of any potential tenant(s), including a credit check and rental history. Don’t give the keys to anyone until the history and credit check come back clean. I’d also screen potential tenant(s) for business experience for the type of lease you’re offering. For example, if the whole reason a potential tenant is opening a restaurant is because his sister-in-law says he’s a great cook, the business plan may not be sound.

Although you may feel uncomfortable asking specific questions about the person’s business plan (especially if you haven’t done this type of lease agreement before), you’d be negligent not to inquire. When turning over an asset worth hundreds of thousands, or even millions of dollars, you want to be certain that the prospective tenant can and will perform the full agreement.

In commercial real estate, you’ll deal primarily with two types of leases: gross leases and triple-net leases. With a gross lease, the landlord is responsible for most expenses, including taxes, insurance, and routine maintenance (the tenant fixes things he breaks). With a triple-net lease, the tenant takes care of virtually all expenses, including taxes, insurance, and all maintenance.

There are pros and cons with both. As a landlord, a primary benefit of the triple-net lease is not having to deal with much property management. You’ll get no calls about a broken window or clogged sewer on a Saturday afternoon. However, if your tenant doesn’t keep up with routine maintenance over the course of several years, the long-term damage can be substantial. And, if the tenant’s business struggles, routine building maintenance is likely to be one of the first expenses to go. Sometimes the ill effects of poor maintenance are not immediately obvious, so trying to recoup expenses years after a lease begins is difficult (bordering on impossible).

As a rule, finding a tenant for a commercial building can take more time than for a residential property, so vacancies can last longer, but because commercial leases are typically multi-year contracts, vacancies are less frequent. As you consider negotiating a commercial lease, it will likely be quite different from the experience you may have had with a residential lease. Commercial tenants may be more along the lines of, “Have attorney; will travel.” If you’re lucky enough to have a major credit tenant (e.g., major grocery store, federal agency, national chain store), you’ll benefit from additional foot traffic and more stable rent. If your building allows for multiple tenants, a major credit tenant will attract other tenants. Because they know they bring these benefits, major credit tenants often play hardball when it comes to lease negotiations. They expect their rents to be lower  than other tenants, and even than operating costs for that space. Depending on how much lower, you’d be smart to play ball.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Real Estate Investing – What Are My Options?

When it comes to real estate, you can invest in several types of properties. The question is, why would you? Well, because it can pay handsomely.

A reader asked, “If I were interested in investing in real estate, where should I start?” Well, there are several different types of real estate investments: single family homes, duplexes to four-plexes, residential buildings with five or more units, commercial real estate, raw land, limited partnerships, or notes secured by deeds of trust.

Today, I’ll talk about single-family homes. While many of the investment issues are common among all types, most folks start with single-family homes. Bear in mind, all consideration of buying a new residence applies to buying an investment property. Do your due diligence: complete all recommended inspections and listen to your realtor’s advice. Remember, lower priced properties will have a much better rent-to-price ratio. A $200,000 home will probably rent for $1,200/month, while a $750,000 home will likely rent for $3000/month. In addition to a better rent (income)-to-price ratio, you’ll probably have shorter vacancies with a less expensive property. More people are in the market for a $1200/month property than for a $3,000/month property.

For the purpose of this column, I’ll assume we’re talking about a $200,000 house in good condition. You should anticipate expenses in the neighborhood of 3-4 percent of the purchase price per year, or $6,000 – $8,000 per year. This includes taxes, insurance, and maintenance costs. Taxes alone are about $2,400. Now, you won’t spend the additional  $3,500 – $4,500 every year, but the year you need a new roof, paint inside and out, and new carpet, you’ll make up for any money you didn’t spend in previous years.

On a $200,000 house with 20 percent down, your monthly payment will be about $800. I recommend that you treat the expenses mentioned above as a monthly bill. Take $550/month and put it in a separate “reserve” account, so you’ve got the money you need when that paint job or property taxes come due.

On the upside, you’ll have depreciation (a non-cash expense) as a tax benefit. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. As long as you take good care of the property, it will last many years past the “depreciable” life. Consequently, depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income tax expense to the tune of $150-200/month. This savings pretty much offsets your negative cash flow, and income tax savings IS a cash savings. You can reduce your withholding or your quarterly tax payments to provide cash to deposit to your reserve savings account for future property expenses.

So now, you own a $200,000 rental property that takes no significant time to manage or maintain, and that has about a break-even cash flow. You invested $45,000 (a 20 percent down payment plus $5,000 in closing costs), and your benefit is the potential appreciation in the value of this property. If values rise at three percent a year, that equates to $6,000 per year on a $200,000 house—that means you made $6,000 on a $45,000 investment or a 15 percent return. This is called leverage. Compared to other investment options, real estate looks pretty darn good!

In addition to the increased property value, over time rents will also increase. And while expenses go up with inflation, mortgage payment (your biggest expense) won’t go up over time. The bottom line is, if you can afford to buy a $200,000 rental today, by the time junior heads to college in 10-15 years, you should have an asset capable of paying for much of his education.

If you have questions about real estate or property management, contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Who Pays for What: Renters v. Landlords?

Before I jump into the topic of who pays for what on a rental property, let me say that contracts trump all. If you sign a contract that gives away your rights or requires you to pay for uncommon expenses, it doesn’t matter what’s “typical.” You have to comply with the contract.

When you own a rental property, you are expected to pay for upkeep resulting from general wear and tear. For example, you are expected to repaint every few years and replace carpet every several years. You are expected to take care of safety hazards and problems that make the house uninhabitable such as faulty electrical wiring, a malfunctioning sewer system, broken appliances, and inadequate heating. You are expected to patch the roof if it leaks and call the gas company if there’s a funny smell coming from the propane tank.

Renters, on the other hand, are expected to fix things they break (or that break as a result of actions by people they invite to the house). They are also expected to maintain cleanliness inside and out, which may include yard work.

While this sounds wonderfully black and white, it isn’t. Property management companies try to clarify the relationship between landlord and renter as best they can, while providing services for both. Property managers charge landlords a service fee that includes a wide range of offerings, often including the following:

  • Marketing (to get the property rented)
  • Thorough application processing
  • Rent collection
  • Preparation and posting of notices
  • Property inspections
  • Management of inquiries, service calls, and complaints
  • 24-hour emergency service
  • Itemized monthly statements
  • Expense management (ensuring taxes, mortgage payments, and insurance are paid on time)
  • Property maintenance

Property managers often charge for coordinating repairs because that coordination takes time. Landlords who choose not to employ property managers and do not care to deal with maintenance issues will sometimes allow the renter to coordinate a repair and deduct the cost of the repair from the monthly rent. While this may seem like an equitable arrangement, you have to ask yourself: is it fair that the renter was not compensated for the time it took to coordinate the repair? And the murkiness begins.

Property managers inspect rental properties periodically for safety and habitability. However, they (or the landlord) can’t just stop by and ask to tour the place because they were in the neighborhood. If, during a scheduled inspection, the property manager believes the renter could easily be featured on the television program, “Hoarders,” the renters can be evicted.

Another not-so-black-and-white area is the definition of “emergency.” On behalf of landlords, property managers must address emergencies immediately, but property managers and renters sometimes define “emergency” quite differently.

True emergencies affect the safety or habitability of a property, like a burst water pipe, a plugged sewer main, or no electricity or heat in winter. Inconvenient non-emergencies include a dripping faucet that’s driving you crazy, one burner on the stovetop that isn’t working, or an air conditioner that will only cool the house down to 90 degrees on a 110-degree day.

Some common questions from renters include:

  1. Q: I locked myself out. Can you come and let me in?
    A: Yes, the property manager will let you in. If you require assistance on the weekend, there’s often a bigger service charge than there would be during the week when the office is open. If someone has to be paid overtime to let you in, you’ll probably be on the hook for that expense, rather than simply paying for the cost of a key replacement.
  2. Q: My smoke alarm is chirping; is it broken?
    A: No, your smoke alarm’s not broken, but it does need attention. The battery is likely low and letting you know it’s time for a replacement.
  3. Q: My electrical outlets aren’t working. Can you come right now?
    A: Yes. It’s likely a tripped breaker, but if you don’t want to mess with the circuit breaker, the property management’s maintenance team can.

If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Real Estate Investing – Part II

Last week I shared information about investing in real estate, specifically purchasing a single-family home for use as a rental. This week, I’ll share why duplexes and four-plexes can be even better investments, if you have the funds.

I’ll use a four-plex as my example. In Ukiah, you can purchase one for about $450,000 and expect rental income of $3,800 – $4,200 per month. That’s a higher rent-to-income ratio than you can typically find with a single-family home. And duplexes and four-plexes are still easy to finance because they qualify for the same preferred financing as single-family homes, so you can get a 30-year fixed rate loan (not true for most other types of real estate investments).

Because of the lower monthly rent, it is often easier to find tenants for duplexes and four-plexes, but the turnover can be higher. Obviously, you’ll want to fill vacancies as soon as possible, but be aware, having a vacancy is sometimes better than having a bad tenant. Screening tenants thoroughly is essential to your emotional and financial happiness, and your neighbor’s niece and her boyfriend should not be exempt from the same scrutiny all prospective tenants should face. I am biased as the owner of a property management company, but I’d say the work required to find and keep good tenants can be reason enough to consider hiring a property manager.

More living quarters means more people and more maintenance. Four-plexes are ideally suited to small families, adults looking to share expenses, or individuals who want a little extra space. Having all these people living in such close quarters (sharing walls or ceilings/floors) can sometimes lead to disputes, and unless you hire a property manager, it will fall to you, as landlord, to address them.

A four-plex will not require four times as much maintenance as a single-family home, but it will require more. As with a single-family home, you only have one roof to patch, four exterior walls to paint, and one driveway to seal. However, with a four-plex, you have four toilets to unplug, four heating/cooling units to maintain, and four sets of appliances to fix when they break.

As a smart investor you must include these maintenance costs into your planning. Anticipate expenses of about 3-4 percent of the purchase price per year, or $13,500 – $18,000. This includes taxes, insurance, and maintenance costs. While you won’t spend this much every year, you will over time. And when you need the money, you don’t want to dip into junior’s college fund to get it. Create a reserve savings account and pay into it each month.

Happily, you’ll benefit from your property’s depreciation, which helps offset your cash expenses. Depreciation is a bookkeeping expense that allows you to deduct the value of improvements over time. Depreciation is only a taxable expense, not a cash expense. This means, you have the ability to save on your income taxes and this savings should offset the cash expenses noted above.

So, now you own a $450,000 rental property with a break-even cash flow. You invested $95,000 (a 20 percent down payment plus $5,000 in closing costs), and your benefit is the potential appreciation in the value of this property. If values rise at three percent a year, you’d make $13,500 on a $95,000 investment or almost 15 percent. Not too shabby.

In addition, rents will likely increase over time. And while expenses go up with inflation, your mortgage payment won’t. The bottom line is, if you can afford to buy a $450,000 rental today, in 10-15 years, you should have an asset capable of paying for junior’s college tuition (or more rental properties to earn more income).

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Why Invest in Real Estate?

If you are in the fortunate position of having a little money to invest, or if you are just curious about investing, here’s a bit on real estate as an investment. Before I get started, I’ll remind you that I am neither a financial advisor nor a tax professional. I am not advising any action; rather I am sharing my opinion and my rationale when I invest. This should not be your only education on investing before you go out to buy that 67-unit apartment complex. Take the time to learn about the pros and cons in more detail before you put up Junior’s college fund or your retirement.

Compared to other investment options with similar risk, real estate offers some excellent advantages. Real estate provides cash flow based on rent, and a tax shelter from depreciation. (A quick definition of depreciation is a measure of how much of an asset’s value has aged or has been used up.)

If you are the type to do your own improvements, maintenance, and repairs, you can spend relatively little to increase the market value of your investment property and/or the amount you can charge for rent. Even if you don’t do your own repairs, as long as you keep the investment property in good condition, real estate generally increases in value over time.

When I evaluate an investment property, I expect rents and market value to go up at about the same rate as inflation over the long term; bear in mind that real estate isn’t like trading stocks. Real estate comes with high transactions costs: you won’t find a broker willing to handle a real estate transaction for $39.95 and it also doesn’t happen this afternoon.

When I’m on the purchasing side of a transaction, I generally assume the transactions costs will be about two percent of the purchase price (i.e., loan fees, escrow fees, title insurance, and closing costs). If I’m on the selling side of the transaction, I expect to pay closer to seven percent of the sales price (i.e., brokerage fees and closing costs).

However, even with high transaction costs, I think real estate is a great investment. Once I own a property, I can leverage it (borrow a large percent of the purchase price). Rental income should be sufficient to cover the loan payments and other expenses including taxes, insurance, maintenance, utilities, and management fees. Depending on the property type, with a 20-30 percent down payment, you should be able to at least break even with cash flow.

Then, since depreciation is based on the   purchase price of “improvements” (a real estate term that refers to everything except the land for a given property, so I’m talking about any structures, paving, etc.), you should have a tax loss of about two percent of the purchase price. That taxable loss creates a tax savings that will probably provide at least a four percent after-tax positive cash flow. To put that another way: usually you have to spend money to reduce your taxable income, right? So, with real estate, you don’t have to spend money to reduce your taxable income because depreciation does it for you. No cash outlay, but reduced tax burden. Win/Win.

If you went to the bank and purchased a Certificate of Deposit (CD), your return would likely be a tiny percent of the same money invested for the same period in real estate. However, unlike the CD, the real estate investment provides you with no guarantees. We’re talking about the risk/return tradeoff: the higher the risk, the greater the potential return. There’s also a risk to not investing: the opportunity cost of giving up the potential income.

When it comes to investing, you have to think about lots of factors. Is this a short-term or long-term investment? If you need this money for Junior’s college fund next year, I wouldn’t invest in real estate. Real estate is not a “liquid” investment (you can’t turn it into cash easily).

If you are interested in a long-term investment and real estate appeals to you, talk to your financial advisor and/or tax professional. Every property is unique. Every transaction is unique, and every person’s financial situation is unique. Two investment opportunities that appear similar may have different financial structures, tax structures, maintenance requirements, risk factors, and more. Be a careful shopper.

If you’re interested in acquiring a list of potential investment properties, call your realtor. Trust me, your realtor will be happy to help you.

Next time I’ll write about 1031 Exchanges. If there’s something you would like me to write about or if you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

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Being a Good Landlord

Owning a home isn’t right for everyone, which is why many people invest in rental properties. This week I’m sharing my thoughts on how to prepare a home to be rented, and what it means to be a good landlord.

To prepare a home for rent, consider these six suggestions:

  1. Really clean your house. As mentioned in a previous column, we all know that other people’s dirt is dirtier than our dirt, so make sure your place is CLEAN. We’re talking about a “mother-in-law visit” clean, not the old “dust and vacuum” clean. Have carpets and window treatments professionally cleaned.
  2. Make sure the home is in good repair. Fix leaks. Replace broken parts. Deferring maintenance can actually cost you money. The additional problems from an unfixed leak can get very expensive.
  3. Put in attractive, hardy, low maintenance landscaping that’s appropriate for the property. A dirt patch is hardy and low maintenance, but hardly attractive or appropriate for most properties. A field of delicate flowers is beautiful, but not hardy or low maintenance.
  4. Make sure all door and window locks are in good repair, and re-key locks between tenants. Paying $50 to re-key locks is a small price to pay for the peace of mind that you’ve protected your new tenants from someone who might have an old key to the property. Hope for the best, but plan for the worst.
  5. Take pictures of your property. Good pictures make for good marketing. They also serve as a record of the condition of your property before it was rented to the current resident. Some memories are faulty. It’s always nice to have proof.
  6. Consider who would be happy living in the property in its current condition. If the house is in good shape, then responsible renters will likely be interested in renting from you. If the house isn’t in good shape, consider maintenance that would make a nice difference and attract the type of applicants you’re looking for.

So, the house is ready to rent. If you’re a new landlord (even if you’re not), how can you be a good one? Being a good landlord includes following these six rules:

  1. Start with a thorough application. Ask about income, credit, rental history, and other relevant details. Once the applicant provides this information, VERIFY it. As a long time property manager, I have seen some interesting attempts at deception.
    On rental history, for example, if a tenant isn’t paying in a timely manner or is a complainer or isn’t taking care of the property, the current landlord might be motivated to give that tenant a sparkling recommendation. Why? Because if someone else will rent to the tenant, that tenant will vacate their current property. That’s the reason you should talk to the last two landlords.
    On employment verification, even if you call and get “ABC Company” and a stellar recommendation, consider further research if you’re unfamiliar with the company. Call back in a few days and see if “ABC Company” answers or if “Joe” (the brother-in-law) answers.
    Run a credit check and then read it. If you don’t know how to interpret it, ask someone who does.
  2. Use a well-written rental agreement. Make sure you leave no doubt about who is responsible for what. Include more than just the financial details (security deposit, monthly rent, length of the lease). Be clear about who pays for utilities. Are you pruning the roses or is the tenant expected to do so? How many people can live in the home? Are pets okay? Do you have a pool or hot tub? Is it mentioned in the agreement? If you Google “residential rental agreement,” you’ll find lots of sample rental agreements. Review them to find an agreement that’s right for you.
    On the utilities issue, you should require the tenant to show proof that they’ve put the utilities in their name as soon as they occupy the property. Trying to get back payments is a hassle that can and should be avoided.
  3. Rely on a Move-in Checklist. A checklist protects you and the new tenant. The tenant has the opportunity to note any deficiencies (e.g., whether a window was cracked when they moved in to avoid being charged for it later), while a landlord can later refer to a signed checklist that indicates the tenant didn’t see anything amiss when they took occupancy.
  4. Install carbon monoxide and smoke alarms, and brace the water heater before you rent the property. Protect your investment and your tenant with these inexpensive and legally required safety precautions.
  5. Maintain the property. Be sure to keep on top of regular maintenance. Don’t wait for a change in tenants to keep everything in good working order.
  6. Be responsive. Being responsive doesn’t mean giving in on every issue or being at a tenant’s beck and call. It means responding appropriately when your tenant requests information or repairs.

This blog wouldn’t be complete if I didn’t mention how much to charge, and yet, there’s no easy formula. I will say that I charge a security deposit and first month’s rent. Why don’t I charge first and last month’s rent? Because, the rent can only be used for rent and no other reason. Be aware that the security deposit cannot be more than twice the monthly rent for an unfurnished property. If you’re not sure what to charge, do a little market research; find out what are other properties in the area renting for.

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