These are things I didn’t really give much credence to until I started investing in Real Estate. I share them with the hope it will raise awareness for those just starting out.
These five items are targeted to those of you starting out who will become landlords in the process.
Note that if you think that the lease option exit will not make you a landlord, you are mistaken. While you do seem to get a higher caliber of character as a tenant-buyer (probably because as they have more money on the line), you still have to do most of the same babysitting duties as you do with a straight rental unit.
There is no “if it ever happens”. You will eventually have to evict someone.
People who seemed so nice moving in are the very same ones who will be saying how terrible you and your apartment are to the Judge when you are in court.
I knew this was a possibility when I bought my first property, but by the time I got to 20 rental units, it seemed I had to start the eviction process more often than my lawnmower.
I have really only had to go through with a full blown eviction a few times, but I have had to serve “pay or quit” notices at least 30 times. As with a lot of things in Real Estate investing, the things you really don’t want to do, are the very same things that you most urgently need to do.
Getting a good attorney to guide you in this area is crucial. If you don’t serve papers correctly, or miss a step in the process, they may hold the case over for a later date, costing you money as the defaulted tenants continue to live in your apartment. And once they know you are taking them to court you have zero chance of the tenants willingly paying you anything.
2) Paperwork, bookwork, and paying bills will take a lot of time.
Before I started obtaining properties, I could bang out my monthly bills in about 15 minutes. It now takes me over two hours, just to get bills for the properties written out every two weeks.
I really should be assigning this task to someone else, but never seem to get around to it. I have to admit that part of it might be my controlling nature not wanting to let go of something so integral to the business.
Paperwork and bookwork take a lot of time too, getting the paperwork done for a new tenant or tenant buyer to move in involves: a lease,lead based paint disclosure, move in move out sheet, welcome letter, and a schedule of security deposit withholding fees.
Most of these I have multiple copies of, but they all need explaining when turn over the keys.
My brother who is my partner in the majority of our properties is in charge of the bookwork. We use Quickbooks as our accountant seems to speak to that software very well.
Even with this premium software package to speed our bookkeeping, I am sure my brother spends no less than five hours a week on entering information. This is mainly due to the fact that we have several rehab projects that generate a lot of receipts.
The properties are costing us ten hours per week just to keep the papers in order and get bills paid. This doesn’t even include the periodic phone calls and letters to the tenants.
3) Advertising expenses will be a lot more than you think.
The classified ads we place are a lot more expensive than I thought they might be. When I have vacancies, it is normal for me to ring up a classified ad bill of over a $100 before we get the right person in.
Now there are a lot of places where you can advertise for free, like posting flyers at the local convenience store, or on Craigslist, but for us the newspaper classifieds out pull the free ads by about 4 to 1
When you have an empty apartment that is costing you $150 a week to hold, you want to generate as many leads as possible as quickly as you can. Newspaper classifieds becomes a necessary expense.
4) You will have to clean and touch up most apartments after tenants move out.
The law allows for “normal wear and tear” to an apartment. What this means to you is that you can’t force the old tenants to make the place move in ready for the new ones.
Some tenants are really good about leaving things in good shape when they leave, but in most cases you will need to have someone go through and clean the apartment after they have left.
In my experience no one ever cleans the stove.
You will be able to deduct for some cleaning and repair expenses, (I do deduct for a stove cleaning) but this is a built in cost to apartment turn over.
5) You will need to keep a bigger reserve amount than you think.
“Reserves” is the money that is set aside each month for replacement of things like a worn out carpet. The problem is that the big ones can take a huge bite out of your checkbook. A water heater will set you back about $300 if you install it yourself. A furnace can easily be $5000.
Even if if you have reserve amount of $50 a month being set aside, a new furnace will take over eight years of reserves to pay for it. This assumes you don’t use the reserves for anything else during that time, which in eight years, is pretty unlikely.