Maximizing Real Estate Investment: Vision, Financial Considerations, Tenant Relations & House Cleaning

4. Vision Statement All of the houses I decided to purchase had their problems - some big, ugly problems.  Some of these were cosmetic and some were structural - some of the stuff was just nasty.  The fact that owners let their properties get to this point dumbfounds me.  Why would you let your investment get to the point where it is just disgusting?  Perhaps frustration, laziness or lack of caring?  What ever it is, around the corner are people like us who decide to buy it.  People who have vision - who see that with some attention the property will end up being a nice place for people to live. And those people will pay us rent.

5. Financial Considerations The Essential Calculations • If you hate math, real estate investing may not be much fun. As we've said, its a business and as such you’ll be needing to crunch some numbers.  GROSS POTENTIAL INCOME (GPI)GROSS OPERATING INCOME (GOI)NET OPERATIING INCOME (NOI) CAPITALIZATION RATE (cap rate)

6. Your Team MORTGAGE LENDER REAL ESTATE AGENT/BROKER HOME INSPECTOR/ENGINEER/ARCHITECTREAL ESTATE LAWYERACCOUNTANTPROPERTY MANAGERTENANT SCREENING SERVICEHANDYMAN OR GENERAL CONTRACTOR MISCELLANEOUS TEAM PLAYERS: • Bookkeeper • Insurance Agent • Landscape Maintenance • Plumber • Painter

7. That Cost How Much? • Possible Expenses Associated with Investment Property • There are a number of expenses associated with rental property. The exact outlay will vary based on the type of property, condition, use of a management firm and more. Below are items we’ve come up with for your review. You will need to determine annual expenses to calculate NOI and CAP rates. • Commissions Paid to Find Tenants • Property Management Fees (if you use a outside management firm) • Maintenance, Cleaning & Repair • Insurance: Property, Home Warranty • HOA fees • Cleaning (between new & old tenants) • Landscaping, Pool Service, Utilities • Advertising Costs to Find Tenants • Tenant Screening & Background Checks • Legal & Accounting Fees • Property Taxes • FYI: • You’ll want to talk to your accounting pro to know what expenses can and can not be deducted. • Some landlords like to use Home Warranties to help fix repair and maintenance costs. • Purchasing a condo or townhouse may reduce some maintenance costs. HOA fees can offset the dollar savings though.

8. Tenant Selection A few years back, we had a showing of one of the first floors units in a less-than desirable part of town. There were 4 prospective tenants walking around the unit and filling out an application. In stumbles (yes...stumbles) this CLEARLY intoxicated woman. She was standing (I should say "swaying") five feet from me and still the smell of alcohol was so strong it nearly knocked me over. She trips over her own feet, bumps into a wall, then says in a raspy slurring voice, "I luh-ve this apartment. I'll take it." Curious why she was even out walking in the neighborhood and how she managed to meander into our apartment in the first place I asked, "What made you stop by?" She said, "I'm going to an AA meeting across the street." Good plan.

10. Tenant Relations Include them Use a third party Always Keep your promises Respond to their requests quickly Don't be their friend Seek first to understand, then to be understood When they stop paying, act quickly.

14. House Cleaning We found ALL kinds of pot smoking devices on the second floor of the duplex we bought for rentals. I'm talking two glass pipes, flavored rolling paper, a water-bong, a rolling-machine, a grinder and other assorted essentials.

15. OOPS Another potential client contacted our office with the following correspondence. “Please help me get these people out of my house. Have you ever seen the movie Pacific Heights? I am living it. I am not cut out to be a landlord. I am a sucker that people like this pray on. I have been set up from the very beginning. I let them get so far behind on their rent because they came up with this huge story about the tenant’s father dying, the tenant being an only child, and he had to pay for all the funeral expenses. He didn’t want his dad to be buried in a pine box with no headstone. I found out later when his father called me looking for his son that he was very much alive and living in California. His father said, “if you hear from my son, please have him call.”

16. This Could Be You There was an incident at a property where two tenants were so drunk that they had lost the keys to their apartment. They lived on the third floor, so they went out to a Cable truck and stole the extension ladder off the truck. They then went to the second floor and both tried to climb the ladder at the same time up to their third floor patio. The ladder gave way, and they both fell and were seriously injured. The residents requested that they be let out of their lease because they could not get up to the third floor due to their injuries.

17. That Giant Sucking Sound • I am seeing a number of issues with many new investor/landlords. The most common are: • Failure to conduct background screening of potential tenants. • Many landlords are waiving security and pet deposits. • Few investors write a business and marketing plan. They don't treat the project like a business. • Some investors do not have sufficient cash reserves to cover non-occupied times or necessary repairs. I recommend 6 months of operating capital. Do not use credit cards for this. • Many underestimate hold times on property. In the current market, close to 10 years may be necessary to reap optimum rewards. • A lot of landlords do not realize it can take 3-5 months to find a good tenant in the current market. Vacancy periods are long right now due to the large number of available homes. Turnover is high as well.

18. Inspections • Most landlords know the importance of conducting move-in and move-out inspections. Some who are new to the business may not and will likely learn the hard way. • The inspection, with documentation is extremely important for all parties. If a problem erupts it will be a battle of he said, she said and landlords often loose in court. • The move-in, move-out inspection is relatively simple. the landlord and tenant walk the property and the tenant notes any items he or she feel are broken, damaged, missing, in need of repair and such. A move-in/move-out form should be used. Several such documents can be found on the internet and downloaded for free or a small fee. In addition, it is considered wise to take pictures and/or video of the premises as well. We'll talk more about that below. • We are told it is important the tenant fill out the form so there is no question of impropriety. They should also sign and date the form. This form is used prior to occupancy and at the end of the lease agreement and can be used by both parties to establish pre-exiting conditions and/or damage during occupancy. • In an attempt to avoid being sued, or at least to properly defend any lawsuit regarding the deposit, the landlord should always have the move-in/move-out inspection form, the names of the individuals who did the move in/move out inspection, and the supporting documentation (invoices, photographs, vendor statements, etc.) • Today, many landlords take video during the move-in and move-out inspections as a way to document the condition of the property. We are told it is important to date stamp the video and show the property address and unit number at the beginning and end.

19. And you were raised in a tent? • On a very cold winter day a neighbor called me to tell me that one of my tenants had their windows wide open. I pay for the heat. I immediately went to see my tenant who complained that she had the windows open because her apartment was unbearably hot. I glance at the thermostat to see that it is set to - 80 degrees!!!! As I point to the thermostat in an accusatory way, while attempting to control my temper, she says "what is that?"