The following is a letter to our 15 year-old Grandson, Jack who asked how we became successful landlords.
We can tell you are well on your way to being a successful businessman, by asking for our advice. So here goes!!!
Getting Started to Financial Success
- Sit down and make a list of life goals.
- Read the books Rich Dad Poor Dad and The Millionaire Next Door and put the author’s advice into practice.
- Start doing a monthly budget. Take a good look at where your $$ goes and start making saving, a lifetime habit.
- I can’t say enough about this basic life building block … marry a woman who wants to support your millionaire next door habits. Make sure she is a person who has your value system and your religion. Otherwise … as fast as you make the money, it’ll be gone.
There are two kinds of DEBT, loans that lose you money like credit card debt, and car loans. Mortgages, on cash flowing properties will make you money. Rentals make the tenant pay the mortgage, while you amass the principal reduction and property appreciation.
- Avoid banks, become a member of a credit union that pays you to keep your money there.
- Then become a Costco member and get their Visa card that pays cash back, 4% on gasoline, 3% on restaurants, 2% at Costco, and 1% on everything else. Your Grandma and I get $350 to $850 cash back every year!!!
- Establish the habit of making a “To Do List” listing everything you have to get done long and short-term. It helps to brainstorm things to be done. Number each item and prioritize them. By all means, start accomplishing the tasks, then you can start drawing lines through each task and adding others. Make work your friend, and accomplishments will begin to pay off!!
- Anyone can cut a budget down, but it takes a special person to figure out a way to make more money!! So, do both!!
So, if owning rental properties is one of your goals, here’s a beginner’s guide.
Please Note: Every paragraph without an asterisk at the end of it, has saved us lots of $$$.
Every paragraph followed by an asterisk has cost us lots of $$$. The best lessons Learned are those that cost you thousands.
Buying a Rental Property:
We specialize in 3 bedroom, 2 bath, 2-car garage, block wall, stucco, tiled roof houses with a powerful HOA. We like HOA’s because they are a good enforcement arm. Also, we like houses less than 10 years old, for maintenance reasons.
Avoid two story houses, because of maintenance issues. When the water pipes upstairs burst where does the water go? How do you replace a screen on the second floor? Pigeons like to roost on two-story roofs and make huge messes that are hard to clean up. Older tenants will not want to climb the steps. Need I say more?
Never buy a rental property with a pool.
The farther your rental properties are away from you the harder they are to control.* (We used to be in five states, now we’re only in two.)
Pick a rental that’s 15 minutes or less away from, Home Depot, Lowe’s, Starbucks, and Target. Every franchise business does demographic studies of the neighborhood before they invest the big bucks. You’re after “Yuppies,” tenants with a job that like to spend money. Those businesses will have found them for you!
Another aspect that never fails to produce a good neighborhood is the quality of the local public schools. The higher the rating the lower the crime, and the more desirable the area and the higher the rents will be.
Check out the prospective city for the growth prospects in jobs and population increase. The census bureau has records on the fastest growing zip codes. The Phoenix metro area has a big growth engine. They have railroads, plenty of freeways, six-lane boulevards, multiple colleges, lots of hospitals, a huge number of call centers, a massive number of huge warehouses, thousands of snowbirds, pro football, baseball, and hockey teams – the Cactus League (with at least 10 baseball stadiums), a NASCAR track, Boeing and Intel, multiple casinos, the state capital and Sky Harbor Airport to name a few employers.
The closer to the city center, the higher the property values are, and the larger the rents. 30 miles from downtown is commutable and more affordable for a beginner. That’s the location we are in – Buckeye, Arizona, the 5th fasting growing town in the country!
We also tend to pick single family homes within 5 to 10 minutes of a freeway. Tenants like quick transportation access to shopping and their jobs.
Be aware that real estate runs in 7 to 10 year cycles going up (peaking) and then going down, just like the stock market. Real estate agents preach “Location, Location, Location”. Greg says, “Timing, Location, Timing, Location!” In my opinion, buying the house at the lower end of property values in the right location when everyone is selling is optimal.
Give the house a good smell test. If it smells like mold, avoid the place. Most every other odor can be cleaned up easily.
Talk to the neighbors and gather information on the neighborhood like break-ins, drugs, and the HOA.
Does the house fit your budget? Make a list of the estimated cost of repairs before the purchase, and then add 20%. Add to that amount, taxes, insurance, escrow costs, and the purchase price, to see where you stand. Then study ads in your neighborhood to determine the RENT. Simple addition and subtraction will tell you if you’re going to make money.
Check the HOA for a balance sheet for its current and potential debts.
Avoid neighborhoods where renters out number homeowners.
Drive around the neighborhood with your window down, on a Friday or Saturday night around 10 pm to 12 pm and scope out what’s going on. If it’s party time, find another neighborhood.
To find out who lives there, you can drive by the local elementary school and check out the kids on the playground. For a better check, check out school buses and watch who gets on and off. A demographic variety is fine, but do the kids look like gang members?
We like to avoid neighborhoods with nearby industrial complexes, because we don’t know what kind of Hazmat activities are going on in there.
We also don’t want to own property in flood zones. Check with your insurance company or government agency to see if your prospective rental is in a flood zone.* Also, ask your insurance agent to see if they’ll insure the property as a rental.
You can check on the net for crime rates and sexual predators that live in the neighborhood.
A good rule of thumb that works well, if you’re financing the rental property is: if the house costs $100,000 it should rent for close to $1,000 per month or more. Banks require that landlords put 20% down, and charge at least ½ percent more than they charge homeowners. That starting point allows you to use the rent to pay all the bills, like the mortgage, repairs, property taxes, capital improvements, HOA fees, fire insurance, etc., and still accumulate a positive cash flow.
Call the County Assessor to determine the property taxes on your property, as a rental. Some counties charge more tax for landlords than owner occupants.
Have the house inspected by a professional inspector, listing all the defects.* Check with the HOA to see if they allow rentals.*
Check to find out what your house will rent for. Then make a proforma listing all expenses and income to see if you can make your purchase profitable.
Join the Apartment Owners Association immediately and start reading their magazine cover to cover every month! Use all their forms like credit applications, leases, move-in and move-out forms. Go to their semi-annual seminars and meet with their authors and vendors. Collect the business cards of their eviction attorneys.
Before You Put the House Up For Rent
Repair everything in the house to function – garbage disposer, dishwasher, lights, 110v outlets, doors, drawers, refrigerator, stove, microwave, stove vent, A/C, garage door opener, gates, toilets, sink drains and windows, etc. I mean everything. Paint the walls, ceilings, moldings, doors, and cabinets as necessary. A clean house rents right away.
A reliable house is created when everything works correctly when the tenants move in. We get very few maintenance calls as a result of our system. That’s why we can be rolling stones all over the USA!
As to landscaping, we tell all the tenants we like our houses to look like we live there. So, all dead plants are replaced, and any irrigation system is repaired. We like drip irrigation to come to every plant. Landscape the front and back.
Leave nothing to chance a lawsuit, remove all debris, and check for mold and tripping hazards. Install automatic LED lighting in the backyard.*
Advertise only on the Craigslist with several pictures of the outside and inside. We like Craigslist because most all of the respondents are yuppies, with jobs. Newspaper ads attract a different demographic and cost money.*
Once a week during the time you have it advertised, check Craigslist to see if your property has been relisted by criminals as well!!!*
After a week, if you’re not getting one or more calls per day, the rent is too high. Drop the rent once a week $50 to $100 until the phone starts to ring two to three times a day.
Many houses are managed by property managers; this can become an issue if the property manager in managing more that 50 houses. Generally, the bigger they are, the slower they are on communication and repairs. If the property manager has more than ten properties of their own, they tend to cherry pick the tenants for themselves!*
Collect all the owner’s manuals for all the appliances in the house. Put them in a folder in a kitchen drawer and show the tenants where they are.
Install a small fire extinguisher under the kitchen sink. Point it out to the tenant.
Install Schlage exterior door locks and deadbolts all keyed alike. Buy only locks that allow you to rekey them with a simple tool. Rekey all the locks immediately after a tenant leaves.
In the event you need kitchen cabinets, contact Costco and get their vendor in Florida to make them. All their cabinets are made of Baltic birch plywood, and assemble easily. We’ve used them on three houses, installing them ourselves. Granite countertops add to the desirability of a property.
Buy only Maytag washer/dryer sets from the 80’s. These older units are built tough in comparison to tinny stuff being sold now. Being we own so many of them, I’ve learned how to repair them.
Few modern tenants do normal housework any more. So, we only provide a 17 cubic foot Whirlpool refrigerator with all our houses. I like the ones without a fan blowing on the condenser below. This one has the old fashioned condenser going up the back of the refrigerator. That way I don’t have to disassemble the back of the refrigerator to clean out the fan and condenser of massive amounts of dust.* (Just 6 months ago, I rolled out an old side by side with three huge shovelfuls of filth under it!)
In every rental I install an 18” wide by 10 to 12 foot long shelf in the garage, approximately 5 feet 6 inches off the floor. This shelf helps organize our clean up when the tenants leave.
Editor’s Note: Be sure to watch for Part II in next month’s issue where you will discover how to find a good tenant and maintain profitability!
Greg and Eileen Charles are rental property owners and members of AOA.