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2012 STUDY GUIDE
Taken from one of the best selling real estate books “Buy It. Rent it. Profit!”
Becoming a Successful landlord/ property manager are the fundamental principles to building a
successful property management empire. While the Seven Disciplines of Success guide you, as a person,
we will use the Seven Wisdom Keys to Becoming a Successful Landlord to guide us in our business, like
our North Star. They are the principles that have helped me learn from failure and become successful
not just as a landlord, but as a businessperson. For that’s what you are building, a business.
In the Chapters to come, we will deal with some complicated scenarios and talk about some of
the risk involved with investing, as well as the benefits. It can be overwhelming, but remember, this
book is here to serve as an operating system for you to refer back to. But there is a lot of work to be
done, and you have to be willing to get started, and stick with it. Remember, to beat 100% of people,
you have to show up, on time, with a plan, execute the plan, and finish what you start! Now, before we
get into the nitty gritty details of buying and renting property, let me share with you those 7 Wisdom
Keys to Becoming a Successful Landlord and the top 10 Pitfalls I see landlords deal with. Be encouraged
and learn from these pitfalls. And ask yourself, isn’t success worth the risk of occasional failure?
The Seven Wisdom Keys to Becoming a Successful Landlord:

Get Educated. You are already taking the first step to getting education by reading and studying
this book. But it doesn’t stop here. Always keep learning. I am a recognized trainer and literally
“wrote the book” on property management, but every week I continue my education. I keep
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reading, I keep asking questions, I keep learning. All the wisdom you need to succeed already
exists. All you need to do is expose yourself to it.

Always be Professional. You will learn later in this book how your professionalism has a direct
impact on your cash flow. Not being professional hurts your ability to lease a unit and hurts your
renewal rate. I’ll teach you later in this book how to be firm, but professional. Professionalism
also extends to your team and you, as the leader, must set the example and the standards for
professionalism. This means your team’s personal appearance and attire, to how they answer the
phone, to the expected response time to tenant requests.

Systems. The third key to becoming a successful landlord is to put systems in place and follow
them. Systems allow things to be done consistently, correctly and take less time. This will
increase your profitability and decrease your mistakes. Once you have systems, follow them!
One of my all-star students, Michael, now owns a 30 unit apartment complex valued at over $2
million dollars. He is also now an instructor at The Landlord Academy, teaching other students
how to achieve the success he has. He shares with them how when he bought his property he
purchased the Landlording 101™ Operations Manual as his system to manage it. But each time a
situation would happen, he would put his own spin on how to handle it. For example, when a
tenant was late on rent, he decided it would be nicer to send a nice note reminding the tenant to
pay rent before issuing a Notice to Pay or Quit which might scare them. He ended up increasing
his collection times significantly. He learned that every time he deviated from the system, things
went wrong. I’ll share the same systems Michael uses with you later in this book. They are
designed from years of experience managing rental property.

Build a Team. A key to your success will be your team. You will need experts in various fields
to help you invest and manage profitably. Look for team members that have the same values,
work ethic and goals you do. Review the Seven Powerful Arts I shared with you in Chapter One
and see if they meet you criteria. Remember, as you proceed on your journey to success you
can’t take everyone with you. You need team members who will contribute and help you move
forward in your journey, not ones who will be like stones in your pockets weighing you down.
Each team member should contribute to the team, either in their field of expertise, or by providing
encouragement or inspiration. Assemble your team like a “Dream Team”. Anyone who lived in
the 1990’s remembers the USA Olympic basketball Dream Team. Michael Jordan, Magic
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Johnson, Larry Bird, a team of greats, that together were unstoppable. Assemble your Dream
Team to be unstoppable. A team that works together wins.

Time Management. Time management is key to any business, but none more so than rental
investing. You only have a certain number of hours in any day. It’s what you choose to focus on
during those hours that will determine your success. When many of us start our journey, we will
still have full time jobs, so our time will be even more precious. Time management doesn’t mean
working more and sacrificing your family or your health. That is not a long term strategy for
success and won’t get you far. I always organized my time by prioritizing. Cash flow activities
come first, actions to minimize my expenses comes a close second. I balance activities that bring
in cash flow today and will pay the bills, but also carve out time to work on projects that will
increase my wealth down the road. You always want to keep moving forward.
o
As the leader of your team, it’s also important to help your team manage their time.
I use a Weekly Focuser checklist to list out the top 5 things each team member must
accomplish each week for the team to collectively meet their goals. This allows us to all
be on the same page and also allows me to check up on each person’s progress.

Maximize Income, Minimize Expenses. You will hear be repeat this mantra again and again in
this book for it is key to your success. Later in this book you will learn how to maximize your
income, by setting proper rental amounts and handling late rent decisively. You will also learn
how to minimize expenses, by reducing turnover, implementing preventative maintenance to
avoid avoidable repairs and more.

Set Goals. In property management, goals will provide you benchmarks to achieve, like 97%
occupancy or 90% on time rent collections. Setting these goals and using them to measure your
performance provides you critical foresight to areas you need to improve before it becomes
disastrous. For example, measuring your occupancy rate and seeing it is below your goal lets you
know that your cash flow will be lower than expected. Now you know that leasing should be on
the top of the priority list, and perhaps that you should hold doing new landscaping that month
until occupancy is higher. Goals should be specific and measurable, not vague. Make more
money, isn’t a goal. How do you specifically measure that? Increase rents by 10% on your
property as leases come up for renewal is specific and measurable.
o
Goals also allow us to set our sights on major projects and break them down into smaller
steps we can work on each week. They provide us a compass point we can chip away at
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each week. Goals also allow us to measure our progress and celebrate our successes.
Many of us who are ambitious never stop to celebrate our accomplishments. By the time
we reach a goal, we have already set our sights on something bigger. Ambition is great.
It keeps you moving forward. But don’t overlook the important of stopping and
celebrating your achievements. This helps increase your confidence and you will have
more courage to take on bigger goals. It also lets you stop and enjoy your success for a
moment, which will make you only more energized to take on the next mountain.
Acknowledging goals met is especially important for your team. They need to know they
are recognized and rewarded. For instance, when I closed on my first apartment
complex I never stopped to celebrate. I was already headlong into the next deal I wanted
to close. I never stopped to celebrate with my team our accomplishment. I let a great
opportunity to increase all of our confidence and get the most motivation possible from
our accomplishment before jumping into the next deal. This doesn’t have to take a along
time or be expensive. A dinner together to celebrate can suffice. Think of it like putting
money in the bank for the next time you need some encouragement to draw on. Now, I
make a habit of stopping and celebrating my team’s and my own success.
Always return to these Seven Wisdom Keys to Becoming a Successful Landlord as you proceed on your
journey to wealth. They will serve to keep you on the right path.
Getting a Good Deal
Now that we have learned and began to implement some of the disciplines learned in Chapter
One, we can begin to focus on perfecting the craft of real estate investing. Let’s begin by turning our
attention to the Seven Wisdom Keys to a Good Deal:
Seven Wisdom Keys to a Good Deal
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Target the NOI of the Property. Understand the rental market to determine the Net
Operating Income long term. The Net Operating Income of a property is the amount of revenue it will
generate for you. Knowing what the present NOI is, knowing what you can do to increase it, and
projecting what that number of dollars will be in the future is absolutely essential to being a successful
landlord. You will learn about NOI and what it means to you, as an investor, in Chapter Three.
Target the Middle Income Demographic. Why do I say middle income? First, they are
typically the largest sector of employed individuals in an area. There are far more middle-income jobs in
any area than there are low-income or high-income jobs. These middle-income jobs produce enough
income for a person to pay rent, but not always enough for the person to buy a home. They make up a
large portion of the rental market. The national average is thirty-six percent of households earn an
income somewhere between $20,000 and $50,000. According to a recent article on bnet.com (Business
Network), even inner cities have the same percentage of moderate to middle income households as the
national average.
Targeting this group makes sense because those individuals and households tend to remain
within that income zone. They statistically don’t move to lower or higher income brackets. As a result,
they are often long-term renters and will provide you with a stable tenant base. Generally, as the cost
of living increases (and therefore their rent) their salary will just keep pace with those increases, again
insuring a stable tenant base for you. Typically this demographic is locked in wages and buried in debt,
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leaving them with a very fixed income. With the middle income class growing, demand will only
increase for more affordable rental housing. Generally speaking the middle-income group is the most
stable one to target.
Target the Correct Unit Mix. As above, knowing the key demographics is crucial. If you are
targeting middle income families, it is important to know not just what those middle income families
earn and are likely to spend on housing, but how many people live in their household.
For the area you are considering purchasing in, you will need to find a building that can best offer the
correct mix of units (studio, one bedroom, two bedroom, etc.) for the type of households in that area.
Target Added Value Properties. In Chapter One, I stated that this book is not about fixing
and flipping. That doesn’t mean that you shouldn’t buy a building with an eye toward upgrading it or
renovating it at some point. Added value properties are those in which it is possible, with sometimes a
little and sometime a lot of effort and money to increase its value through renovations. Why target
added value properties? The simple answer is that if you do the right kind of analysis you can come up
with a property that is undervalued—whether because the current owners don’t understand the trend
in the rental market in that area and are not collecting the maximum rents they possibly could, or
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because some aspect of the building has fallen into disrepair and you could restore that building to its
optimal level and increase the Net Operating Income.
Target Expenses: The easiest and most effective way to target expenses is to control not
only what cash comes into the property but to also control what costs go out. The easiest and most
effective way to do this is through having a good maintenance plan, as well as educating yourself in the
subject of preventative maintenance techniques. We will discuss this in-depth in Chapter Eleven.
Remember, when it comes to preventative maintenance on your rental property you must inspect what
you expect!
Target Economies of Scale. Economies of scale means, for our purposes, the more units you
have the less expensive and time-consuming certain things become. For example, if you ask a painter to
paint the exterior of two single family homes you have he might charge you $2,500 per home. If you
have a duplex, he might charge you $3,500 to do the whole thing. That equals $1,500 per unit which is
much less than the price for single family homes. This is economies of scale. It costs the painter less
time and material to paint a duplex than 2 single family homes would so the cost per unit is less. Savings
such as this example are common with vendors.
Target the Right Team. We talked already about how important team is.
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Among the members of the team you will need are:

Small Business / Asset Protection Attorney

Eviction Attorney

CPA with Experience in Taxes for Rental Investors

Title Company

Lender

Maintenance Team

Realtor or Broker

Education and Resources
The last one is where this book and my Landlord Academy can help you. If you can’t find an
answer in this book or on our website, you can always call The Landlord Academy for any additional
questions you might have.
In the pages ahead, you will get more specific advice about why you need each of these people
on your team, how you can locate them and what to look for in each.
Another Perspective
So far, we’ve been talking a lot about what you should do. Another way to look at this is by
talking about what you should avoid. I’ve been in this business for a while now, and I’ve seen good
owners/ landlords/property managers and I’ve seen bad ones. Even the good ones make mistakes but
the key is learning from them. Here’s a list of what I consider the Top Ten Pitfalls Landlords Face:
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1. Not continuing to become educated
2. Not following the proper Landlord Systems
3. Not following Fair Housing Laws as it applies to Landlords
4. Not understanding how to properly tenant screen
5. Not understanding the main components of a well written lease
6. Not performing a Rental Market Survey at minimum once every three months
7. Not staying on top of Maintenance issues
8. Not building the proper Team and Network infrastructure
9. Not enforcing your rules and regulations
10. Not treating the business of Landlording as a business.
Let’s look at each of these individually.
1. Education keeps you out of trouble in many ways; for example when I first started in
the property management business I found out quickly that ignorance was costly.
When you consider that not understanding how to properly deliver a tenant notice
under the local or state laws can cost you when the tenant who you are trying to
remove gets to stay an extra couple of days and sometimes weeks this all adds up.
Each day the tenant stays without paying rent costs you. Most of the mistakes that I
see landlords make over the years can be contributed to them not staying educated in
an ever-changing profession.
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2. Having proper Landlord operating systems, like systems in any other business, is
extremely important. They are the backbone of your operation, allowing you to be
efficient, productive and consistent. As a landlord you will need these operating
systems through every landlording phase from dealing with a prospect tenant to
moving out. You run your systems, and your systems will run your business.
3. Many landlord lawsuits are a result of a Fair Housing violation by the landlord and
the crazy thing is landlords don’t even know they are violating these laws. Fair
Housing is a federal law you must comply with and violations can be costly. We will
talk more about this subject more in detail later to make sure you are equipped to
comply with the Fair Housing Act
4. Tenant screening is one of the most important process in the landlord business and is
one of the most overlooked or skipped processes. The most common mistake I see
made is to move someone in to a rental because you needed to fill a vacancy. You
either have to evict the tenant a few months later because I chose to over look issues
on the prospect tenant’s application or deal with other issues. Not properly screening
tenants always ends up costing the landlord more money in the long run. When you
factor in the eviction fees as well as the fees associated with getting the rental rerented far out exceed the cost of allowing the unit to stay vacant for an extra month.
Trust me, you soon learn that it is far easier to stick to your qualifying criteria and
waiting to get a good tenant in the rental versus moving someone in just to fill a
vacancy.
5. Your lease is the first major line of defense. It pains me to see investors work so hard
to purchase their first rental investment run only to then watch the investment’s
wheels fall off soon after taking over the property. If you have a very small child who
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needs to still sit in a car seat, and I told you that the car set that you have was recalled,
I know that you would get rid of the seat and get a new one, one that would protect
the child. The same thing holds true with an investment property. Why would you
trust your most valuable investment to a poorly written lease? Your investment is as
useless as a castle with broken down walls. Your lease is the very first line of defense.
It is the contract that binds you and the tenant spelling out all the rules and regulations
as well as clearly spelling out the terms of that agreement.
6. Rental Market Surveys are probably the single most important area an investor needs
to have a strong grasp of. This is where a lot of investors make their first costly
mistake. If rental income makes up 99% of Net Operating Income that a rental
property can produce, which you will learn about in depth in the next Chapter, then
you as an investor must do your homework to make sure you are charging the right
rent amount. If you are undercharging, you are just throwing money away. You will
learn about rental market surveys you can use to keep your rent on target.
7. Maintenance issues: When it comes to maintenance the old saying “an ounce of
prevention is worth more than a pound of cure” holds true. When it comes to owning
investment property it helps to be very proactive with maintenance. You will learn in
this book to perform routine maintenance checks on your rental units. Most investors/
landlords pay attention to the building only when there is a problem like a leaky
faucet or a toilet that is not flushing correctly. Being proactive and addressing these
items when they are an acorn and not an oak tree will help maximize income and
minimize expense.
8. Not building the proper team and network infrastructure: A wise man once told me
that “If you’re the smartest person on your team then your team is in trouble.” In real
estate we talk a lot about leveraging, and most of us think of leveraging as a financial
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term but it doesn’t just apply to financing. You have to learn to leverage relationships
that you develop. I see so many would be investors and would be entrepreneurs stop
short of their goals because of their lack of understanding of how to properly leverage
relationships. You will always be just one contact person away from your goals.
Understand that someone close to you may be holding the key that will unlock the
door to your success! I will stress the important of team again and again in this book.
Remember, if you want to go fast, go alone. If you want to go far, go with others.
9. Enforcing your rules and regulations: As a landlord performing day to day operations
this should be your call to arms. Where a lot of landlords make critical mistakes is
when they allow the tenants to dictate the business relationship. Remember this is a
business; there is no place for weakness. You must be professional and you must also
stay in control of the tenant relationship as well as your property. Routinely ask
yourself if your are you running the property or is the property running you? Stay in
control.
10. Not treating the business of landlording as a business: This is a business, more
importantly it’s your business. And it should be treated like a business. You
wouldn’t show up later for work at someone else’s business or miss deadlines. You
wouldn’t throw away someone else’s money by not reducing expenses. Why would
you do anything less for your own business, the one that can provide you long-term
wealth and financial freedom?
I’ve shared with you some of the keys, both to bettering myself and to guiding my
business, that guide me in any market and under any conditions. Part of the key to my success
is that I’ve always followed these principles no matter how down on my luck I was, or
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sometimes even more tempting, no matter how much money someone offered me. If a person is
not guided by wisdom or principles, then I rather not waste time with them. I know in the long
run I will save myself major headaches down the road.
I’ve chosen to spend a lot of focus in the first two chapters on self-development to
prepare you mentally for your success. Now, in the chapters that follow we will focus on
locating target areas and evaluating rental properties.
“If we don’t start, it’s certain we can’t arrive” – Zig Zigler
To truly master the skills of property management, you must first
learn the 5 phases of property management
5 Phase of Property Management:
1. Acquisition
2. Implementation
3. Stabilization
4. Growth
5. Exit Strategy
Phase I – Acquisition:
The purchase phase of the investment property is one of the most important phases. This determines
how successful the property navigates the other four phases. From a financial standpoint, it highly
depends on how well the property was purchased using what investors call the income approach
Phase 2 – Implementation:
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•
In this phase, the property manager’s main goal is to implement the proper management
systems.
•
There are two types of systems:
1. Hard systems
2. Soft systems.
Soft System
Hard System
Phase 3 – Stabilization:
•
Stabilization occurs soon after Phase 2 has been completed. Stabilization involves the ability to
control the property’s income and expenses.
•
In order to accomplish this, the property needs to control several key components:
1. Occupancy
2. Rental Rates
3. Turnovers
4. Delinquencies
5. Maintenance budgets
•
Once stabilization has occurred, the property can begin to focus on growth leading into Phase 4.
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Phase 4 – Growth:
•
During the growth phase, the property manager is focused on maximizing the income and
minimizing the expenses.
•
Maximizing income is accomplished by growing the NOI of the property while minimizing
expenses through careful budgeting and both routine and preventative maintenance.
•
Once income has grown, you have essentially increased value leading to the final phase, Phase
5.
Phase 5 – Exit Strategy:
•
The final stage is when the investor feels that he/she has reached the desired return on
investment. Once this phase has been realized, the investor looks to either sell and reposition
the returns into a greater investment or cash out.
•
Think of it like a real life game of monopoly. The goal is to buy a green house, then another,
until you have 5 green houses. You then cash them in for a much larger income producing red
hotel!
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Characteristics of the Above Average Real Estate Investor
•
Knowledge of reading numbers (i.e. financial statements)
•
Vision
•
Learn to see the positive and negative qualities in everything
•
Become aware of what is not obvious
•
Be careful…even in small matters
•
Learn to read the NOI, determines true value
•
Strong grasp of rental market
•
Strong grasp of the due diligence process
Working with Investors
•
Working with investors is like planting a tree.
–
•
The more you understand the tree and take care of the tree, the more fruit that tree will
bear.
Working with investors is no different.
–
The more you begin to work with investors and the more skilled you become with
understanding the art of investing, the more you’re able to take care of the investor and
the better the rewards for the investor and you.
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The Win For The Investor
•
Peace of Mind
–
Knowing that they have made a good decision with the investment
–
The asset is well managed
–
A plan from purchase to sale to re-investing the profits for larger profits
–
Growing Value
–
Watching the income the property produces increase over time
Win For Real Estate Business
•
Working with a successful investor brings more investors
•
Steady income that can be counted on
•
–
Ability to increase that income over time
–
Commission income that is generated when the property is sold
–
The key here is “Income Streams”
–
No other facet of Real Estate can generate as many income streams as property
management.
This process is repeated again and again increasing the involved participants income and overall
wealth!
Income Streams
•
The opportunities that can be generated are endless.
•
Here are just a few:
–
Major Income Streams
•
Management Fees
•
Application Fee
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•
Leasing Fee (1st Month Rent)
•
Renewal Fees
•
Late Rent Fees
–
$$ grows larger the more units you add
–
Commission From Sale
–
Major Income Streams
–
Listings
–
Sales
–
Referrals
–
Greater commissions on apartment buildings
–
Would you rather sell a home for $250K or an apartment building for 1.8% - 3%
commission?
–
Key - Attract the Serious Investors
–
Serious investors need serious property management services
–
Serious property management firms truly understand all aspects of investing for income
producing properties
–
More than just a steward of the property
–
A skilled property management company should provide services such as:
–
Buyer’s Agent: Help to advise on the purchase of investments
–
Property Manager: Operate and maintain at the site level as well as increase value
–
Sales Agent: Assist on the sale of the investment property
–
Most investors will follow the monopoly theory:
–
5 Green Houses = 1 Red Hotel
–
5 Green Houses = 5 listings
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–
1 Red Hotel = larger sales commission & management fees
–
Remember: The values go up when you consider the red hot hotels
Control
•
•
•
Control is the main reason why investors choose real estate.
–
When an investor chooses stocks, they choose to allow the control to be in someone
else’s hands.
–
The Investor ultimately is not involved in the very important decision process.
–
Real Estate, on the other hand, allows the investor control over their investment and
with an ever changing investment landscape
–
Control is a must!
Types of Control
–
Choosing Which Property to Invest In
–
Rental Rates
–
Tenant Selection
–
Expenses
–
Overall Cash Flow
Strategic Evaluation of a Target Area (SEOTA)
–
Great deal of control over the type of investment
•
Middle Income
•
Luxury Rentals
•
Low Income
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•
Single Family Rentals
•
Duplexes
•
Mid-size Apartments
•
Large Apartment Complexes
Control Over Rental Rates
–
The ability to increase rental rates, as well as decrease rates, offers control to generate
value of the asset with periodic increases to the rent
Control Over Tenant Selection
•
By establishing good, sound qualifying criteria, the Investor can insure that income is collected
on time and that income levels are met.
Control Over Expenses
•
The ability to control expenses will have a positive effect on the Investor’s Return On Investment
(ROI).
–
By decreasing the expenses, you ultimately increase the value of the investment.
–
Control over expenses will determine whether the investment becomes an asset or a
liability!
Control Over Cash Flow
•
The controls previously mentioned all work together to create one very important control, that
is control over Cash Flow!
Where is the Danger for the Investor?
•
Before investing cash, the Investor must determine their level of risk.
–
–
With every Investment there is risk. The more risk, the greater the ROI should be for the
Investor. The less risk typically implies a smaller return.
Example of a less risky investment would be a bank account.
–
Dangers that investors face include:
–
Population changes
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–
Household growth
–
Investment Rates
–
Job Loss
–
The ability to forecast these dangers is a very important skill every Investor, Property
Manager, and Real Estate Professional should master.
–
We will discuss the process in which these dangers are evaluated and forecasted.
The wise see danger ahead and prepare for it while fools go blindly on and suffer the consequences –
King Solomon
Value Added
•
Find an “under valued” asset
–
•
Purchase the asset on the income approach (valuing the property solely based on the
income the property is currently generating.)
Maximize the income and minimize the expenses through skillful property management
This process over time will increase the value
•
Under Market Rents
•
Low Occupancy Rents
•
Out of Control Expenses
•
Indecisive Tenant Base
•
Deferred Maintenance Issues
Chapter Three—Finding Target Areas and Evaluating Properties
In real estate investing, you will hear constantly “buy undervalued properties.” This makes a lot
of sense, but there is more to it than just buying undervalue property, assuming you can find one.
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Unfortunately I have too many students who come to my Landlord Academy after the property they
bought at 30% below market value turned quickly from a dream deal into a nightmare. I remember in
particular one student Anthony. He came to my class sweating bullets. He was one step away from his
first investment property being foreclosed on. He had recently purchased an 8 unit apartment complex.
He shared that he did what all the books he read advised, he “jumped in and got his feet wet”. He went to
real estate boot camp and heard about a small 8-unit property for sale at 30% under market value. When
he saw the line of prospective buyers lined up to make a bid, he quickly wrote out a deposit check and
“jumped in.” After all, everyone was clamoring to make a bid; he didn’t want to miss this great deal.
And it was “undervalued” just like all the books said to look for. Right? Well, the unit Anthony
purchased consisted of studio and one-bedroom apartments. That would have been great if they were near
a college or university or someplace with a high percentage of young singles; instead the area in which
the units were located had an average size of 4.3 persons per household. Well, families with 4+ people
don’t live in studios and one-bedroom apartments. Anthony had a very, very small pool of prospective
tenants from which to draw, and ultimately, the majority of his units sat empty. King Solomon,
considered one of the wisest and richest men to ever live, wrote a proverb that said, “An empty stable
stays clean but there is no income in an empty stable.” This applies to rental units as well. They might
stay clean, but unless you have a tenant in there, you have no income.
The 30% equity Anthony had when he purchased the undervalued property was quickly lost to
vacancy costs, as he had to make mortgage payments with no income coming in from the property.
Needless to say, the property was unprofitable. You might think he should have questioned more
diligently why that property was so undervalued and done some additional digging to determine why the
previous owner was willing to make such a great deal. You’d be right! Unfortunately for Anthony, he had
read a book on rental property investing that strongly advocated the “buy undervalued” advice. Only once
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he enrolled in my courses did he realize that there is a much more effective and comprehensive system for
evaluating the potential profitability of rental property.
To return to my game analogy, Anthony was playing checkers. He saw an opportunity and he
jumped on it. Unfortunately, he was only able to advance one square—from being a prospective owner to
an owner. That was as far as he got. Instead, he should have been looking several moves in advance. He
should have already done his research and planned not just to be an owner, but now how will I be a
landlord and rent my units? You might think this story is unrealistic but it is unfortunately a true story,
and I see it time after time. Remember again our 5th Law of Gold. Anthony took the advice he read and
trusted the excitement of other investors at a boot camp as evidence this was a good deal. For all
Anthony knows, all those other investors lining up to make a bid were just as inexperienced and
misguided as he was. Now, later I’ll share with you how Anthony and I strategized on finding tenants for
his property, but for now just remember, there is more to buying rental investments than buying
undervalue.
Most books like the one Anthony read teach the reader to look for the investment property. All
they focus on is the building itself, but the truth is that in the decade that I have been in the rental
investing business bricks and mortar have never paid me rent. By that I mean the building does not pay
the rent; people pay the rent. That is why most investors have trouble filling vacancies on their rental
property and their cash flow suffers. I want you to think about rental properties in the way a big business
like Wal-Mart thinks about their customers. You have customers, just like Wal-Mart does. Yours are
your tenants.
Have you ever been to a Wal-Mart and noticed that according to the demographics in that
particular area there were different items on the shelves, particularly in the front display areas? In one part
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of my city, before you even get in the doors at Wal-Mart the outside is lined with plants, gardening tools
and patio furniture. Fifteen minutes away, in another part of town, the outside is lined with children’s,
plastic swimming pools and portable grills. Wal-Mart will not stock any items that the demographic in
that particular area will not purchase. The first Wal-Mart I mentioned is in a part of town where the
demographic is homeowners who research shows buy items to landscape their homes. Most of the homes
in this area have in-ground pools, so they don’t buy a lot of plastic pools.
The second Wal-Mart is in a part of town with a large percentage of renters. The rental homes in
this area do not have a lot of pools and research shows the demographic purchases a lot of plastic pools
and portable grills. Wal-Mart understands the importance of knowing what each store’s demographic
needs are and then they go about filling that need. If big businesses like Wal-Mart pay attention to
demographics shouldn’t we? After all, Wal-Mart has deeper pockets to absorb mistakes than you or I do!
That’s thinking several moves in advance. I can’t just look at a property, I have to look at the people in
that area and determine if it’s a product they will rent.
That’s what my method of property selection allows you to do—think farther ahead. I use the
acronym SEOTATM to identify this step-by-step process. It stands for the Strategic Evaluation of a Target
Area. As the first of my Seven Attitudes told you, you have to have a vision. Only when you know what
you’re looking for will you find it, and employing my Strategic Evaluation of the Target AreaTM will
allow you to do that consistently to avoid the kind of surprises that had Anthony.
SEOTATM Defined
SEOTATM stands for the Strategic Evaluation of a Target Area. Notice that again, we’re going to
be thinking strategically. Unlike Anthony, we’re not going to make those one jump at a time moves that
may result in us getting boxed into a corner or jumped by economic circumstances. Instead, we’re going
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to very carefully consider all aspects of an investment before we purchase anything. Now, I know you
might not like the sound of having to apply a process involving research and analysis because it sounds
like its going to slow you down and take awhile to get started. Not necessarily. The SEOTA™ is simply
a system to follow. In fact, I find that once I’ve identified exactly what I am looking for, I can find it a lot
faster.
Notice that the last words in our process are “Target Area.” That’s right. The first phase of this is
to select the general area you are looking for investment properties in. We are not ready to target specific
properties yet. We’ll get to that, but let’s not put the cart before the horse. We should have some sense
of where the most profitable locations are within a region before we waste time running numbers and
visiting specific properties. I know, even if you are a beginner in real estate, you’ve heard the cliché
location, location, location. Well yes and no. Location is obviously key, but with rental property be
careful at whose opinion you are listening to. A nice neighborhood with rising home values may be a
good location to buy a home it, but may not be an attractive rental area.
When we perform our SEOTATM analysis, we will be taking a look at key demographic and
economic indicators that reveal whether or not an area is worth investing in. These indicators are:

Building permits

Employment

Average Household Size

Demographics

Psychographics

Mortgage Interest Rates

Market Rental Rates
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
Occupancy Rates
We’ll examine each of these individually, and I’ll give you suggestions on how you can collect this data
Whether your goal is to own one or one hundred properties, the basic principles of SEOTATM
remain the same and will serve you well.
Step One: Find Your Target Area
The first goal of the SEOTA™ process is to identify areas that are good rental markets to invest
in. Then along with identifying the right target areas, the information you assemble in your SEOTA™
will provide you a clear picture of who your potential tenants are and what they need. Will you be selling
patio furniture or plastic pools?
Begin Sidebar
Your Most Costly and Extravagant Expense
Here’s a little secret I’ll share with you. I’m kind of lazy. Not in a bad way, things usually don’t
come easy to me so I know I have to put my work in to achieve results. But I’ll be honest, I usually prefer
to spend my day playing golf than working. So, I’ve learned to not just work hard but to work smart. I
heard before that the Army always gives the laziest soldier a new task because they know he will find the
fastest, easiest way to get it done. Then that becomes their system. That’s my kind of plan. I like to find
the fastest, easiest way to get something done. Of course, you can’t be sloppy in your work, but there is
nothing wrong with getting something done in the most efficient, fastest way possible. That’s good
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business, because in business your most costly and extravagant expense, and the one that doesn’t show up
on any financial sheet, is your time! Learn to work smart!
End Sidebar
The first step to locating a target area is to evaluate the key indicators of an area.
These key indicators will have a positive or negative effect on the supply and demand of housing.
Evaluating them will identify the areas with the strongest rental markets.
1. Building Permits: We look at building permits to help track growth. We evaluate the various
types of building permits, from single family homes, multi-family, office space and retail to paint
a much clearer picture of the health and stability of the local economy at the micro level. It also
helps you forecast supply and demand. They help you see growth in advance because they are
pulled before building begins so you can get an idea of what’s coming.
2. Employment: Where there is employment, the need for affordable housing is sure to follow.
Strong employment also increases your demand for affordable housing. Over time, this can be a
key indicator of who your target demographic is. A strong demand for housing can positively
impact your occupancy rates and give you the ability to steadily increase your rents over time,
increasing the value of your property.
3. Average Household Size: This is used to help determine the proper unit mix. If you learn the
average household size is 3.7 persons per household, then pursuing a building which has a mix of
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studio and one bedroom apartments won’t work. Remember Anthony and his mistake?
Identifying average household size helps you avoid Anthony’s pitfall.
4. Demographics: Demographics determine who will rent from you. It gives you age, gender,
income level, etc. It helps you get a picture of who your prospect tenant will be. When searching
for demographics also note the total population of the area and how fast it is growing. More
people means more people looking for a place to live.
5. Psychographics: Psychographics determines why someone will rent from you, or why they will
not. Demographics tells you who they are, psychographics tells you what they want. Knowing
who the typical renter is and anticipating their needs in advance on what amenities they will want
(garages, covered parking, pools, in unit washers and dryers walk in closets, close to highways,
bus transportation) will also help you focus on the right kind of building for your market and
dramatically reduce the likelihood of vacancies.
6. Mortgage interest rates: These help to evaluate and determine market cycles. If rates are at an alltime low, more people will be qualifying for mortgages and therefore less likely to be in the rental
market. When the money supply is tight and lenders are cautious and interest rates are high, that’s
when you’re in the best position as a rental property owner. Conversely when rates are low but
lending standards are tight for the middle to moderate income demographic this demographic will
typically be forced to rent.
7. Rental Market survey: This is a vital tool used to identify the base rental rates in the area
according to the respective unit size. By looking at the rental rate history it helps you determine
where rents are currently and where they will be in the future. Sophisticated investors don’t buy
property based just on where rents are now, but also where they will be in the future. Here is a
sample market survey chart for areas in Florida:
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Year
Avg Low Avg High Avg Rent Occupancy Rate
Pinellas County
2002
$704
$733
$718
94.86%
2004
$738
$768
$753
95.46%
Palm
Harbor
2002
$736
$778
$757
95.02%
2004
$793
$832
$813
95.37%
Based on this information, you can identify certain trends in the marketplace, and use this
to predict what will happen in the upcoming years. Both Pinellas and Palm Harbor counties in
Florida are seeing an increase in rents and stable or slightly increasing (and high) occupancy
rates. In combination with the other factors listed above and below, you can see why the SEOTA
process is so valuable. It gives you the ability to forecast into the future. It’s like a farmer. A
farmer will plant his seeds in fertile soil and forecast the best time to plant his seed to produce the
most crops. Rental investing is the same. You want to forecast the conditions to plant your seed
in a property that will produce maximum results.
8. Occupancy Rates: This is the percentage of currently rented units. This helps you forecast how
many vacant units to average in your numbers so your financial calculations are based on
accurate vacancy estimates. If you are significantly off in this estimate, it can have a serious,
negative impact on your expected cash flow.
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Where Do I Get This Information?
This is where you will like that I am a bit lazy. I’ve found the fastest, easiest places to find this
information. And in today’s world of technology, it’s getting easier and easier.
 The Landlord Academy website: Go to the investment property page on our website and there
you will find many resources at the top of the web page labeled “SEOTATM TOOLS” there you
will find tools to help you find SEOTATM information. The good news about this hot list is that
the information provided is all free.
Throwing It All Against the Wall - Literally
Ok, so now you know what to look for. What exactly do you do with this information? It is, after
all, a lot of information. Well when I started reviewing the areas around me to find a target area, I did
what seemed natural to me. Later, as others saw my work, they thought I was either very strange or a
genius. (I’ll let you decide for yourself in a minute.) Because I am dyslexic I tend to prefer pictures and
visual information versus written. My wife always laughs at me because when I assemble anything, I
skip the written directions and just look for the picture and that makes more sense to me. So, when I
started analyzing areas to find my target, I got a big map of my city and hung it on the wall. Then I took
stickpins with colored ends and began to place them, by color, where building permits were being pulled.
Each color represented single family, multi-family and retail development. Then I knew I was looking for
strong, middle income, rental markets. So, with more colors, I marked areas with lower average incomes
and high population density.
When I stood back and looked at the wall, it didn’t take a genius to see that the pins tended to
gravitate in certain areas. I can’t say I was looking for one particular ratio or comparison. I was more
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stepping back to look at a big picture of where the forecasted growth areas were. Then I looked for
opportunity. Now, opportunity, like beauty, is in the eye of the beholder. Generally opportunity is going
to show up as something inconsistent on that map. To me, opportunity showed up in lots of middle
income employment growth in an area, like a warehouse and hospitals, and an overabundance of single
family homes with, in comparison, a lack of multifamily complexes. Doctors aren’t the only people who
work at hospitals. You have technicians, janitors, administrative staff and more. These middle income
jobs are in that same demographic that we discussed is finding it hard to buy a home. If affordable
housing is lacking in the area, that spells opportunity to me. Its simple supply and demand. Even if you
plan to buy a single family home and rent it, as long as the rent is affordable for middle income, it’s going
to be in demand. These areas became my target areas.
Sidebar
Don’t get too discouraged if you find a “perfect” target area, only to find when you start looking for
properties that everything is overpriced. That simply means the institutional investors may have beaten
you to the area and once word got out they were buying up property, prices went up. That happened to
me too. I found a perfect part of town, only to find I was a day late and a dollar short. Just keep looking.
Remember the Third of the Seven Attitudes, be diligent. Don’t give up.
End Sidebar
You now understand how important it is to look to the future trends that will determine whether
an area is worth investing in. Let’s say that you have done some initial due diligence work to determine
that this is a place worth investigating. Not only do you live in a nearby community to San Francisco, but
you’ve done some homework and learned that from 2003 to 2006 there was a net population increase of
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187,000. That means that each year 62,300 people moved into San Francisco. One of the most obvious
questions to ask then is: Where are all these people going to live?
The second step in our process is to identify the demographics of the target area of San Francisco.
One of the elements we want to identify is the employment prospects these new residents are likely to
face. What kinds of jobs are they likely to secure and what will those jobs pay? In our target area, retail
trade jobs were the most plentiful, and therefore the most likely type of employment new residents would
be able to find. The average annual salary for such work was $26, 264. The other significant employer
groups besides retail were administrative support, waste management, temporary service, and call centers.
The average annual salary for the rest of these employment sectors was $24, 801.
With that data in hand, we could envision a little more clearly what our demographic group was
going to be able to afford for housing. By thinking a few moves ahead (forecasting) instead of just
looking in at current market trends, we determined that interest rates would rise, construction costs would
continue to rise, and those new arrivals who based on our analysis of the largest employment segments,
will not be able to afford San Francisco homes on their income. They will be entering the rental market.
Our SEOTA analysis shows up this could be a strong rental market. By doing a Rental Market Survey,
we can see rents are rising each year steadily. So, we can predict that we will be able to raise rents
periodically to keep pace with changes in the cost of living and keep our profits rising.
We also had to consider what kind of units would best suit this future market. By doing our
SEOTA due diligence work, we will be able to make educated, strategic decisions. We won’t be
responding to unanticipated changes, but riding ahead of the curve. For that same period (2003-2006) we
learned that the growth in single family and multiple family housing (based on the number of building
permits issued) was 28.7% and 15.99% respectively. That’s a good thing—single family should outpace
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multi- family. This means there won’t be be a surplus of available rental units on the market. The
demand will remain strong for rental units.
Addition strong points of a target area are the following things that are important to middle income
families. Remember, you have to think like your prospective tenants and their needs, which may be
different that your needs.
-
Close to transportation, highways, etc.
-
Close to public transportation (bus lines, subways, etc.)
-
Close to retail and shopping
-
Close to large employment centers
Here is a checklist you can use as you being your evaluation of a target area. I like to organize my
SEOTA information into a three ring binder. I use this checklist as a table of contents that also serves as a
quick reference summary of the SEOTA details.
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THE RENTAL INVESTOR’S OPERATIONS MANUAL™
SEOTA CHECKLIST
Target Area:
Preparation Date:
_____ Tab 1: Basic Area Information & Map
_____ Tab 2: Building Permits (i.e single family, multi family, commercial)
# of Multi-Family _____
# of Single Family _____ # of Commercial _____
_____ Tab 3: Employment
Largest Employment Class
Avg. Income
Second Employment Class
Avg. Income
Has the employment been stable in the local area?
Any impact from national employment anticipated? Comments:
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_____ Tab 4: Average Household Size & Income
Average Household Size
Average Household Income
_____ Tab 5: Demographics & Psychographics
Annual Medium Income:
Summary/Comments:
_____ Tab 6: Mortgage Interest Rates
Current Mortgage Interest Rates:
_____ Tab 7: Market Survey
Studio Avg. Rent
1 Bdrm Avg. Rent
2 Bdrm Avg. Rent
_____ Tab 8: Occupancy Rates
Current Average Occupancy Rates
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Step Two: Narrowing Your Focus to Targeted Subject Properties
The SEOTATM process helps you to determine whether or not a particular area is one in which
you should consider finding an investment property. Once you’ve taken that preliminary step, it is time
to narrow your focus to looking at specific rental properties that are for sale. You’ve already done a
great job in eliminating wasted time, by narrowing down the area you are looking to invest in. This
serves as a protection against getting sidetracked into looking at every “great deal” someone wants to
pitch you. And I promise you, once people find out you are a real estate investor you will be pitched
deals left and right. Knowing that I was focused on first, rental investing and second, knowing the area I
was focused on saves me tons of time not chasing my tail. I stay focused on my goal.
A mortgage broker can help you determine what you can afford to purchase based on the
amount of money you have available for a down payment. I’ll talk later about ways you can get started
if you don’t have any money of your own to invest. Then your professional team, i.e. broker or realtor,
can start feeding you deals that fit your budget and are in your target area.
Again, if you have done your SEOTATM work well, you will have a checklist you can quickly
consult to determine if a property in a particular area is worth pursuing and evaluating in detail. It will
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give you a bright line test to see if a property warrants further evaluation. For example, if the unit mix
doesn’t match the average household size of the area, it might not be worth your time.
If it passes you initial SEOTA check, the next thing to look for is it the property produces cash
flow. Does it produce enough income to cover the expenses? Now, this can take a little more
investigating. One of the biggest opportunities you have is that now, by reading this book and
understanding how to correctly evaluate a property, you will see a lot of opportunities that other
investors overlook. Many investors, even successful and sophisticated ones, look at the financial bottom
line of a property, which is usually provided a calculation called CAP Rate or Cash on Cash Return. If the
rate isn’t high enough for them, they discard the property and move on. However, we are going to look
further at what makes up these calculations and see how often diamonds in the rough are overlooked.
First, let’s continue down our step-by-step approach to evaluating a property and stay organized.
We have all our SEOTA information on our target area, our demographics, employment information,
etc., organized in a three ring binder with our SEOTA Checklist summarizing our findings at the front.
Now, as we look at properties for sale in our target area I recommend you complete the following
Property Snapshot Form™ to summarize the basic property information you need to know.
Sidebar
Beginner’s Safety Net
1. Look for Add-Value Properties. An Add-Value Property is a property in which the current owner
does not realize the full potential of the property they own. This potential is realized through
the rental rates. Typically these add-value properties are located in areas where there is a
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greater demand for rental units than there are units currently available. This supply and
demand is caused by various economic conditions we will discuss later in the book.
2. Look for Properties that are at most fifteen years old. (Anything older than that, unless it has
been recently renovated, is going to end up costing you more in repairs and upkeep. Older
properties typically require more extensive repairs to major systems like roofs, electrical,
plumbing and heating, cooling.)
3. Look for properties with pitched rather than flat roofs. (Flat roofs collect moisture. Moisture
causes rotting. Rotting requires repair or replacement.)
4.
Depending on your geographic location look for homes that are masonry block or brick. (Wood
framed buildings and wood-sided buildings are more costly to maintain, are susceptible to
termite and other damage, and are a higher fire risk.)
End Side bar
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Step Five: Examining The DNA Strand of a Property
Now, the next thing we will evaluate is the financial make-up of the property. Now, science
never was my best class, but I watch CSI and the Discovery Channel so even I know what DNA is. It’s a
person’s genetic make up. What makes them who they are. I am now going to teach you the financial
DNA of an investment property. The fundamental make up of a property’s financial performance. First,
let’s learn what the DNA is. Then, I’ll teach you how to inspect each component of the DNA to see if you
can make this property produce more than it currently does. Understanding how the DNA is calculated
also greatly reduces your risk of getting “one pulled over on you”.
For example, one of my students came to class after having bought a property that looked like a
good deal on paper. It was a duplex, with each side renting at $995 a month, which was sufficient to
cover the mortgage and expenses each month, with some to spare. Well, my student shared with me
that after he closed on the property, and went to collect the monthly rent, one of the rent checks was
only $765 a month. He asked the tenant why he didn’t pay the full rental amount and was told that he
did, his rent is $765 a month! Well, my student checked the lease and sure enough, while the rental
amount was $995, there was a separate agreement that stated as long as that tenant mowed the grass
and handled the landscaping of the duplex, his rent would be reduced in compensation. My student
was stuck with this for seven more months, until the tenant’s lease term was up.
In a proper due diligence, and my student now knows this, you should review bank deposit
records to verify exactly what was deposited on a monthly basis and also a full tenant file review to
learn of any other agreements or history you are taking on as the new landlord. I myself have been
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guilty of rushing through and not dotting all my “I's” and crossing all my “t’s” during acquisition. And
trust me, you pay for it later. When you’re in the middle of assembling all this information in a short
timeline, it can be easy to overlook something. This is why I created a Due Diligence Action Checklist, to
make sure every detail, big or small, is covered. I’ve provided you this very important form in the
Appendix of this book so you don’t overlook any of these important steps during acquisition.
So, let’s move on into the DNA calculation. But don’t worry you don’t have a background in
Calculus. All we’re going to be doing is some simple adding, subtracting, multiplying, and dividing. I
promise you, if I can do it, you can do it! Remember I am highly dyslexic so numbers don’t come easy to
me, so I’ve broken down this section in an easy to learn and execute format.
First we will go over all the DNA key terms and formula. Then we’ll put these definitions and
formulas to work in a practical application.
The DNA Strand
GPI (Gross Potential Income)
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Your main source of income is the rents you take in. The GPI is the maximum possible rental
income you will collect if all of the units are being rented. You calculate it on an annual basis. So, you
would add up the rent on each unit and times the amount by 12, to calculate twelve months of
collections. If you have a duplex, each side renting out at $950 a month. You take the total rents you
will collect each month ($950 x 2), which would equal $1900. Then times the $1900 by 12 to calculate
the annual total, which would equal $22,800. So your Gross Potential Income, GPI, would be $22,800.
VAC (Vacancy Loss)
In a perfect world, you would have all of your units rented all the time. That’s not always going
to be case, so we have to allow for some vacancies when we are putting together a future financial
forecast for the property. This is known as your vacancy loss. We also have to assume that not everyone
will pay all the rent all the time. We call this loss of income collection loss. The average vacancy rate
used is 5%. It’s more accurate to actually have determined the average vacancy rate in your target area,
which is a step of your SEOTA. You don’t want to be surprised with a higher vacancy rate than you
expected. Now to determine what vacancy loss means to your property evaluation in dollars and cents,
take your GPI (the total yearly rent of all units added together) and multiply that figure by your vacancy
rate. So, continuing with our duplex example, let’s assume an average vacancy rate of 5%. We would
multiply our GPI of $22,800 x .05, which would equal $1,140. This $1,140 is our vacancy loss expected
for the year.
GPI x .estimated vacancy rate = VAC (Vacancy loss)
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.
GPI – VAC = EGI
Effective Gross Income (EGI)
Effective Gross Income is defined as your total income from possible rents minus VAC and
collection loss.
OI (Other Income)
Other income is defined as money received from sources other than rent. Washing machines
and dryers, vending machines, parking fees, application fees and other sources of income are examples
other income (OI).
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When you add your OI to your EGI you get your Gross Operating Income
EGI (Effective Gross Income) + OI (Other Income) =
GOI (Gross Operating Income)
The GOI is the total amount of cash the property has available to pay expenses.
GPI – OE (Operating Expenses) = NOI (Net Operating Income)
Any expense incurred in operating the property is considered an operating expense. Some of
these are fixed and others are variable. An example of a fixed operating expense is property taxes. You
know what that dollar amount will be. A variable operating expense is something like eviction costs, you
know you will pay them but you don’t know how often you will have this cost or what the total will be.
Typically a seller will provide you with the total Operating Expenses of the property. However, I always
add 3-5% onto their total. You can also have a home inspector or maintenance technician take a look at
their expense total and see if it’s in the ball park of reasonable. Later when we inspect the property in
more detail, we will go over expenses with a fine tooth comb.
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GOI - OE = NOI
When you take your Gross Operating Income and subtract your Operating Expenses, you get your Net
Operating Income. Think of this as the difference between your before taxes income and your actual
take home pay. NOI is the income remaining after all expenses are paid, except for your mortgage
payment. NOI is a key figure in all the calculations of a property’s value from here on out .
SIDEBAR:
Net Operating Income, like the diagram above, is like blood to the body. You take away blood from the
body the body dies. Considering the formula for NOI is GOI – OE, what makes up GOI. That’s GPI, less
Vacancy. Well, what makes up GPI – that’s right, rents! Rents make up 99.9% of your Net Operating
Income, take away rents from the property and property dies. One of the biggest mistakes I see
investors make is taking the NOI of a property at face value. If 99.9% of the NOI is made up of rents,
doesn’t a property’s rent schedule warrant a closer look? You will be amazed at how many properties
are under performing because the rents charged are too low. This is where my background as an
apartment complex manager comes is worth its weight in gold. It’s commonplace in the apartment
industry to do monthly market rent surveys. You call nearby complexes and check out what their rental
rates are to make sure you are not too high and not too low. It seems so easy, but I promise you that
you will see again and again properties for sale where the rents are not inline with the current market
rents. This is a great tip for you to know. Where many investors will pass right over a deal, because the
CAP Rate or Cash on Cash Return look too low. You, as an educated investor, know to take a closer look
at what makes up all those fancy formulas, and that my friend, is rents.
End Side Bar
NOI – RRA (Replacement Reserves Account)
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RRA is designed to save for replacement costs of items that wear out and must be replaced, such as
roofing, boilers, exterior paint and parking areas.
NOI – RRA – DS (Debt Service)
Debt Service is defined as or better known as your mortgage payment.
GPI – VAC = EGI + OI = GOI – OE = NOI – RRA – DS = BTCF
When we put this all together, we get Before Tax Cash Flow (BTCF). This is the cash flow the property
will produce, before considering taxes.
The DNA of Investment Property
•
Here you will learn how to properly evaluate income producing property to its core. Like with
the human body, the DNA will tell us much detailed information about the body. The same will
occur here as we examine an Investment property’s DNA.
•
GPI – VAC = EGI + OI = GOI –OE = NOI – RRA – DS = BTCF
CAP Rate Formula
•
NOI/VALUE = CAP Rate
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–
CAP Rates are primarily used to help estimate the value of income properties. A CAP is a
measure of absolute return.
–
Example, if a property has NOI of $100k and the price is $1m, the $100k returns at 10%
on the $1m asking price
–
Rule of Thumb: The lower the CAP, the higher the price.
Equity Divided Rate Formula
•
aka Cash on Cash Return…BTCF / Equity
•
Cash on Cash (CC) differs from CAP Rate when you use leverage, i.e. mortgage. Example, an
investment property returning $15k after the investor makes the mortgage payment and having
equity, i.e. down payment, of $103k returns 14.5% ($15k/$103 = 14.5%)
•
As you can see, an Investor increases his or her return by using leverage (i.e. other people’s
money)
Breaking the Investment Value Code
•
•
Can You Break the Code?
–
CAP Rate Formula is NOI/Purchase Price
–
CC Formula is NOI – DS = BTCF/Equity
–
DCR Formula is NOI/Annual Mortgage
–
What Do All These Formulas That Determine Value Have In Common?
What All These Formulas Have In Common is…
*NOI*
And rent makes up 99% of NOI! So, if you don’t rent, you don’t know NOI and
if you don’t know NOI, you don’t know much about the value!
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Who Will Live There?
7 Keys For Successful Phone Skills
1. Get the Caller’s Name
2. Be Present to the Conversation
3. Slow Down!
4. Ask for Prospect’s Needs
5. Determine 2 or 3 Preferences of Your Caller
6. Talk About Benefits, Not Features
7. Tell Them What’s In It For Them to Make The Appointment
Tenant Screening
If your prospect’s application comes back meeting all your criteria except for the credit score, you can
still approve them if you want. My suggestion is to require them to prepay the last month’s rent. Be sure
to have them sign something indication why they had to prepay last month’s rent. Remember, you
always want to consistently document every transaction. If you don’t approve the application, you are
required by the Fair Credit Reporting Act, which is a national regulation, to provide the prospect with a
letter informing them they were not approved and telling them what agency you used to process their
credit, and providing contact information so they can obtain a copy of their credit report. This is the law.
The Art of Marketing
•
It is very important to note that a property manager must perform their Market Survey on no
less than a monthly basis.
–
Keep pro-active in developing marketing strategies
–
Setting rental rates
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–
Offering concessions
–
A property manager’s main focus, when marketing, is to understand the prospective
tenant’s needs in advance.
–
The demographics will tell you “Who” is your prospect tenant.
–
Until you understand the who, you will not be able to market to them
–
Once you have discovered the “Who,” then you must understand their psychographics,
this is the “Why”
–
Why they choose one product over another.
–
This information will help the property manager a great deal when creating a marketing
program for the rental.
Gathering Marketing Data
•
•
When gathering marketing data, it is best to focus on Price, Product, People, Promotion.
–
Price: What type of rental rates can the area bear
–
Product: How does our rental unit (or units) compare in the marketplace? Is our rental
what the prospect needs – does it appeal to their needs?
People:
–
Do we have a strong grasp on “Who” our prospect tenant is?
–
Is the property manager and their staff able to, not only anticipate those needs, but are
they trained well enough to close once those needs have been anticipated?
–
Promotion:
–
What does the signage on the property say about our brand as a property management
company?
–
What does the curb appeal on the property look like?
–
Is it inviting?
–
What is our message to the prospective tenant?
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–
What is the call to action for them?
–
Once the property manager has looked at the Price, Product, People, and Promotion, it
is important for him/her to create a marketing plan that will speak directly to the
prospect’s needs.
–
It needs to say “We have what you need – We are fully capable of handling those
needs”
–
The call to action which is converting the prospect into a tenant.
How to Master Your Market
•
The steps used to master your market is much the same as those used in the strategic
evaluation of the target market (SEOTA) process.
•
In the financial section of this course, you were taught how to gather this information and
process it to help make a sound purchase of the investment.
•
Using the information to match your targeted renter to a particular rental that will meet their
needs and price points.
•
From there you determined the type of Rental Investment that fit their needs.
•
Based on the information gathered during the SEOTA, you put the property under contract.
•
Now the process shifts a bit from matching the target renter to a rental type to converting the
targeted renter to a prospective tenant and we must fill our vacancies with that prospect.
Define The Market
•
Target Market: A group of people in a geographical area that make up a community.
Prospect Tenant: A more precise group of people that are in the Market for your particular
product
•
Housing Market: The rentals vary based on the types of single-family, duplexes, condos for rent
and apartment communities.
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•
Such variations can be financial, Housing availability, and demand factors.
•
Your market must be mastered before you can create an effective marketing strategy.
Factors That Impact a Market
•
There are many factors that can impact a market. Here are a few segments every real estate
professional must keep an eye on as well as future forecasts and shifts in the market:
–
Economic
–
Governmental
–
Location
–
Supply and Demand
Economic: This segment mainly consist of the study of job growth patterns, unemployment rates,
income growth, access to credit, inflation, and home ownership affordability
•
Governmental: This segment can include local environmental regulations, zoning classifications,
property taxes, landlord tenant law, land use and building codes.
•
Location: This segment reveals the areas volatile to sudden change, like sudden loss of jobs,
weather and climate change (e.g. flooding or earthquakes).
•
Other factors to examine are the location’s attractiveness to employment. Employment will
play a large part in population growth.
•
Supply and Demand: This segment is largely affected by local conditions in housing affordability,
income and wages growth, and housing stock of all types (Single-family, condo, apartments,
etc).
Fair Housing
Race – treating someone differently due to their origin, characteristics, physical traits, or
appearances
Color – treating someone differently due to their skin pigmentation being lighter or darker than
yours
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Religion - treating someone differently due to their belief, observance, devotion, or practice of
religious faith. This protected class includes the lack of a religious belief.
National Origin - treating someone differently due to their place of birth or their ancestors’ place of
birth
Sex - treating someone differently because they are a man or a woman
Familial Status - treating someone differently due to the presence or expected presence of children
under 18, pregnant woman, or individuals securing the custody of children under 18
Disability - treating someone differently due to a mental, physical, or sensory disability, AIDS/HIV, or
persons recovering from addiction
•
Additional Protected Classes
–
Familial Status
–
Persons with Disability
Best Practice:
There may be additions to the protected classes depending on what city and state your rental
property is in. A landlord should research their state and city Fair Housing Act for any additional
protected classes.
•
Charging higher rent for families with children
•
Charging a higher security deposit for families with children due to more wear on the apartment
•
Discouraging applicants with children citing safety reasons
Rental Application Process Revealed
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Who Will Fill Out the Application?
•
The application is completed by the prospect tenant.
•
The best practice is to allow the prospect to fill out the application themselves.
–
This way, if mistakes are made on the application, you will not be held responsible.
Many leases will have a clause that states, “if the application is not filled out correctly, a
breach will occur.
–
Applicants Should:
–
Fill out application completely and legibly
–
Verify for accuracy
–
Be willing to pay the application fee
–
Most companies require applicant to be at least 18 years of age.
–
Joint credit applicants are typically only charged one application fee
–
Property Manager Steps when processing the application
–
Verify application for accuracy and completeness
–
Process the application immediately (see the tenant screening online at
www.thelandlordacademy.com)
–
Deposit the Application fee checks the same day (See the TLA property management
software (posting checks)
–
Check the applicant’s drivers license to verify the identify of the applicant.
Laws that Govern Tenant Screening
•
The laws that govern the Applicant screening process
–
Fair Credit Reporting Act (FCRA)
–
Fair and Accurate Credit Transaction Act (FACTA)
–
Equal Credit Opportunity Act
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Fair Credit Reporting Act
•
The Fair Credit Reporting Act (FCRA) is designed to promote accuracy, fairness, and privacy of
information in the files of every "consumer reporting agency" (CRA). Most CRAs are credit
bureaus that gather and sell information about you - such as where you work and live, if you pay
your bills on time, and whether you've been sued, arrested, or filed for bankruptcy -- to
creditors, employers, and other businesses.
•
The FCRA gives you specific rights in dealing with CRAs, and requires them to provide you with a
summary of these rights as listed below.
•
You can find the complete text of the FCRA, 15 U.S.C, 1681 et seq. at the Landlord Academy’s
web site (http://www.landlording101.com).
Fair and Accurate Reporting Act
•
This legislation provides consumers, companies, consumer reporting agencies, and regulators
with important new tools that expand access to credit and other financial services for all
Americans, enhance the accuracy of consumers' financial information, and help fight identity
theft.
•
These reforms make permanent the uniform national standards of our credit markets, and
institute new, strong consumer protection and free credit reports.
Equal Credit Opportunity Act
•
The Federal Trade Commission (FTC), the nation’s consumer protection agency, enforces the
Equal Credit Opportunity Act (ECOA), which prohibits credit discrimination on the basis of race,
color, religion, national origin, sex, marital status, age, or because you get public assistance.
•
Creditors may ask you for most of this information in certain situations, but they may not use it
when deciding whether to give you credit or when setting the terms of your credit.
Not everyone who applies for credit gets it or gets the same terms: Factors like income, expenses, debts,
and credit history are among the considerations lenders use to determine your creditworthiness
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•
This law provides protections when you deal with any organizations or people who regularly
extend credit, including banks, small loan and finance companies, retail and department stores,
credit card companies, and credit unions.
•
Everyone who participates in the decision to grant credit or in setting the terms of that credit,
including real estate brokers who arrange financing, must comply with the ECOA.
•
For a brief summary of the basic provisions of the ECOA, go to www.landlording101.com.
How to Make Sure You Comply
•
The Property Manager may elect during the tenant screening process to use a third party
screening company. These companies provide:
–
Services for making calls and inquires
–
Provide a consumer report (also known as a Credit Report)
–
As a CPMS, The Landlord Academy provides services for you (see tenant screening
video)
Best practice:
It can not be emphasized enough that it is the property manager’s responsibility to uphold the laws
that govern the tenant screening process. Many States define protected classes in many different ways,
so be sure to check with your local & State Laws
Common Criteria Evaluated During Screening
•
The most common information that is checked while performing prospect screening include:
–
Credit History
–
Income
–
Rental History from previous landlords
–
Eviction Records
Criminal Background
How Does Property Manager Establish Criteria
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•
It is highly recommended that careful thought go into establishing the criteria. Once
established, the criteria is usually revealed in many ways. They include:
–
Creating a flyer or form with the criteria listed (See Operations Manual for Template)
–
Posted Signage with criteria listed
–
Website with Criteria Listed
Possible Outcomes of Screening Process
•
A Property Manager will need to understand that there can be several outcomes to the
screening process. These outcomes include:
–
Approved – Tenant will be moved in
–
Approved with Conditions – May become a tenant if other criteria are met
–
Denied – Will not be accepted as a resident
–
Approved with conditions means that the property manager will need to:
–
Ask for a larger security deposit
–
Require the prospect to obtain a Co-Signer
–
Approved: Contact the prospect tenant and let them know that they have been
approved. This can be accomplished by:
–
Sending a letter of approval
–
A Phone call
–
With the TLA screening program, the prospect can get an approval within minutes. In
this case, the property manager will need to have a lease signed as well as collect the
security deposit.
–
Approved With Conditions: After property manager reviews the application, there may
be additional conditions. If so, the property manager needs to:
–
Send a letter stating the additional conditions that must be met
–
Personally call applicant letting them know of the further conditions
–
Approved With Conditions: (cont.)
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–
Tip: You may want to give the applicant up to 5 days to decide whether or not they will
rent the unit.
–
Denied: If the applicant is denied the property manager will want to:
–
Call the applicant to let them know of the decision
–
Immediately send a letter that shows the applicant the contact information of the credit
reporting agency (CRA) that provided the adverse information
–
See example of Adverse Action Letter (Phase #2 Form 2C)
–
Tip: Do Not disclose specific information to the applicant. They must deal with the
credit reporting agency themselves.
–
The final step is to fill out the Move-In (M/I) form. This form includes:
–
The agreed rental rate
–
Any concessions offered
–
Pro-rated Rent if any
–
Security Deposit
–
Pet Fee, if any
–
Application Fee
–
Where the tenant can get their utilities turned on as well as proper phone numbers
–
The tenant’s new address
–
See Applicant Approval Checklist
–
Phase #1 Form
–
Best practice:
With single family homes, there are break-even ratios. This means there is only one source of
income unlike a duplex which has two rental units creating two sources of income. So with single family
rentals, needs to be at least the same amount as the rent to cover unforeseen damages.
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How Do I Process a Tenant with No Social Security #?
•
January 2003, Housing and Urban Development (HUD) issued a memo that explained under the
Fair Housing Act (FHA), it is unlawful to screen applications on the basis of race, color, religion,
sex, disability, and familial status.
–
•
HUD’s memo does provide that requiring housing applicants to provide documentation of their
citizenship or their immigration status during the screening process does not violate the Act.
–
•
This act does not, however, create a protected class based on an individual’s citizenship
status.
What the act does require is that the same process be applied to all applicants.
What can a Property Manager do?
–
Require Applicant to provide documentation of their citizenship or immigration status
during the screening process
–
Establish a policy denying the applicant who is legally in the US but cannot prove that
they will have the legal right to be in the US during their lease term.
–
What can a Property Manager do? (cont.)
–
An example of this is the expiration date on the VISA that the applicant has expires
before the lease ends.
–
Set a policy of not renting to any applicants who does not financially qualify.
Best practice:
–
Be consistent in the screening process. This means requiring all applicants to provide
the same information
–
Always document the reason why you denied an applicant
–
Make sure you always keep a file of denied applicants just in case an applicant files a
discrimination claim against you.
–
What a Property Manager Can Not Do
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A Property manager may not set a policy of “Not” renting to anyone who:
–
Is applying for US Citizenship
–
Falls within certain categories of non-US citizens (example – non-immigrants or
refugees)
–
Types of Proof of Citizenship
–
Property managers may ask to see documentation to prove that the applicant has the
right to be in the US. Asking the applicant to provide such documentation within 72
hours is typical.
–
Types of Proof of Citizenship (cont.)
–
Ask to see your applicant’s
–
Passport
–
Birth Certificate
–
Or any other proof of citizenship
–
VISA Paperwork
–
Should state reason why applicant is in US
–
The Type of VISA
–
The VISA Expiration Date
–
Types of Proof of Citizenship (cont.)
–
Tip: It is common practice for the Property Manager to ask for an additional security
deposit when an applicant, who is otherwise approved, does not have a SSN.
–
However, if the applicant’s spouse has a SSN, an extra security deposit may not be
required.
Incert from the book Buy it. Rent it. Profit! Chapter Seven—Attracting the Right Tenants
Remember before we said bricks and mortar don’t pay rent, people do. Your tenants do. Since
rent is our key source of income, choosing the right tenant to pay the rent is a key element in profitable
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management. Once of the most costly and unexpected costs you can have is high turnover. Not only do
you lose money on the vacancy of the unit, but you have to constantly ready the unit between tenants
by painting, cleaning carpets and changing locks. You have advertising costs and if you have a lot of turn
over, you will inevitably be evicting some of them, so you have eviction costs. I am consistently asked by
landlords how to reduce evictions, how to get tenants to pay on time and how to get tenants to follow
the rules. I’ve heard some pretty creative strategies on getting tenants to pay rent from so called
experts on landlording. They say to offer then a ceiling fan if they pay on time, give them a discount in
rent for paying on time, etc. These strategies may work, they may not, but personally I am an advocate
of steering clear of the tricks and gimmicks to get a tenant to pay their rent on time and focusing more
on getting the right tenant in the first place. One that you don’t have to trick into doing what they are
supposed to do, pay their rent on time. The number one way to reduce evictions and get paid your rent
on time is to get the right tenant in the first place.
Readying Yourself to Rent
Along with readying your unit to be rented, you will need to ready yourself as well. There are a
few key decisions to make before we are ready to start talking to prospective tenants. We need to
decide:

What will you charge for rent?

What is your application fee?

What is your security deposit?

Are you requiring first and last month’s rent?

What credit score are you requiring?
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
What type of criminal records will you accept, if any?

Are you allowing pets? If so, what kind and what will you charge for a pet fee?

Are you paying utilities or is the tenant?
In the market surveys you conducted during your SEOTA and due diligence process, you have
already determined what the average market rents are. You also learned what the typical security
deposit amounts and application fees in your target area are. You also have an accurate, complete
list of your expenses so you can make sure that minimally your rental amount will cover these
expenses. Use this information to determine what you can command in rent in your target area and
what you can ask for regarding security deposits, etc.
Another decision you will have is how you will equip your rental unit. What type of floor,
bathroom and kitchen faucets, sinks, etc will you provide? To decide this, we have to remind
ourselves to keep our prospect tenant in mind. It’s easy for us to select things we like and think are
useful. However, we have to keep the demographic and psychographics of our prospect tenant
front and foremost. What do they like? What do they need? Imagine that you and I both own
duplexes next door to each other in a part of town where demographics show that most the
residents are young to middle age with average of 2-3 children Our duplexes have identical floor
plans and we are in identical condition. We are charging the same in rent. The only difference in
our properties is that I have tile floors and you upgraded to high, quality Berber carpet. Who will
most likely rent our unit first? Well, psychographics tell us that statistically the larger family
demographics prefer tile to carpet. So, I will inevitably rent mine first. Understanding
psychographics helps us know what will help tenants rent from us. I learned this first hand on a
project I was working on where we were completely renovating all the units. Since we were
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replacing everything, we were allowing tenants to choose if they wanted carpet or tile. After the
third time we ran out of tile, I decided to check into the matter. I suspicious someone was stealing
supplies or something. After I checked all the records, I saw that our tenants, most of who had
larger families were choosing tile 5 to 1 over carpet. Anticipating your prospect’s needs and wants,
their likes and dislikes in advance, will allow you to be in touch with your prospect tenant. This will
dramatically reduce any vacancies. Remember our Wal-Mart discussion? It’s deciding plastic pools
or lawn furniture.
Sidebar
Single Family Homes
I recommend for landlords renting out single-family homes that you ask for a security deposit
minimally equal to one month’s rent. Single family means just that, one household. You have more
risk because you can only rent to one tenant at a time and little mistakes can be more costly. If your
unit is not rentable while you are repairing things, you don’t have any other units bringing in income
to help pay expenses.
End Sidebar
You want to decide these things in advance so that when you begin taking inquiries about the
rental you have answers, and consistent ones. We’ll talk more about Fair Housing in a moment and
the importance of consistent answers.
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Next, we want to make sure that you are ready for contact. I am going to again and again
remind you how important professionalism is to your property. Your first chance to show your
professionalism is how you handle incoming phone calls about your property.
Always have your property’s information readily available so you are never caught off guard
when a prospect calls. Information you will need handy is:

Address of property

General area of town the property is located in and nearby attractions, etc.

Type of dwelling (single family, duplex, multi-unit, etc.)

Square footage

# of bedrooms and bathrooms

Amenities (washer/dryer, pool, garage, etc.)

Pets allowed? If so, what kind and what is the pet fee?

Rental Rate

Security Deposit required

Application Fee
When you receive phone calls about your rental, use a Phone Card. Your goal will be to get as much
information about the prospect as possible from this first phone call. You can use this information to
help pre-qualify them by explaining the rental rate, application fees and security deposits. Phone Cards
not only allow you to be organized but they give you contact information so you can follow up with
prospects who called you to encourage them to come view the property.
Here’s a sample Phone Card:
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Wisdom Key to Phone Skills
Get the caller’s name! The more personal you are the better the chance to close the deal with your
prospect. You can’t get personal if you don’t know their name! One study showed that 34% of callers
did not hear their name during the conversation. Establish rapport. The first step in doing this is to get
the caller’s name and use it.
This is Jane. The
leasing agent I
mentioned in
Chapter One who
was such an
encouragement to
me. She was also
the best leasing
agent in the
business. Note how
she is smiling and
friendly as she talks
on the phone to a
prospective tenant.
End Sidebar
If your caller is interested after you give the rental details, the next step is to pre-qualify your prospect
tenant. Remember, waste of time if our most costly expense. And if waste of time if our most costly
expense, then the price of gas is probably our second highest cost! You don’t want to waste your time
or your gas going to meet prospects to show them your rental if they don’t qualify.
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To pre-qualify your prospect tenant, use your Qualifying Criteria. Your Qualifying Criteria is your
list of minimum standards. Common criteria include the minimum credit score you will accept,
minimum monthly income, if you will accept criminal records, if you require any rental history, etc. I’ve
provided a sample Qualifying Criteria in the appendix of this book. You will need to adjust your criteria
from target area to target area. You may need to lower your minimum credit score or income in certain
demographic areas or you will not find any renters that meet your criteria. But, the sample will serve as
a guide for you.
When you pre-qualify your prospect tenant over the phone, be polite about it. Don’t interrogate
them. I like to start by explaining, “I know your time is important to you. Before you take time to come
out to view the property, let me share with you our qualifying criteria to make sure you are comfortable
with it. We require…” Most people will not waste their time or their money on an application fee if they
know they won’t pass your standards.
If you have a model unit or are onsite, you will use a similar form to your Phone Card, for faceto-face meetings which is called a Guest Card.
Appointment scheduled:______________________________________________________
If a prospect does not schedule a meeting or return your call, use the information you collected on the
Phone Card or Guest Card to call them. Some people may be on the fence about renting your unit. Your
call may be enough of a demonstration of interest to them that they decide to make a decision and rent
from you.
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Showing Your Unit & Closing the Deal
As well as readying ourselves, we need to ready our unit for show. Studies show that most people make
up their mind about renting somewhere within the first few moments of seeing it. If this is the case,
then we can see how important our prospect tenant’s first impression is.
To make a good first impression, we should pay close attention to our curb appeal. This is how our
property looks from the street and how it will look to our prospect tenant when they first arrive. To have
good curb appeal:

Clear away any trash from your yard or curb

Make sure the grass is cut

Make sure there is no junk or old items in the yard or visible

Have a good paint job

Make sure the window dressings (curtains, drapes, blinds) look nice and consistent from the
outside view

Have some landscaping, if possible, and keep it trimmed and in good condition
You may also want to arrive early to show the property. One time I didn’t arrive early and pulled up at
the same time my prospect did only to find a dog had gotten into someone’s trash can and it was strewn
across my front yard. Not a great first impression.
Appeal to the Senses
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We also want to have the inside of the property appeal to our prospect tenant’s senses. Studies also
show that impressions are triggered by not juts visual, but other sensory responses.

Light candles or have a pleasant air freshener

Vacuum away any footsteps so nice, clean vacuum line show in the carpet

Have light refreshments, bottled water, cookies, etc.

Play soothing music like jazz, classical or nature sounds

Have lighting bright enough the prospect tenant can see in all rooms
If you are thinking to yourself that this is common sense, go view a few rental units. You will see, like I
do, that many landlords do not even have electricity turned on so you can barely even see, much less
were there any pleasant smells or music!
A Tip for Staging Your Rental Unit
A tip I always give is to take a day and visit luxury apartment communities in your area. Act like
you are looking to lease and let them take you through the whole experience. Pay attention to how
their units are decorated. The multifamily industry spends a lot of money to stay up to date on the
demographics in their area and what they like. You may not be able to afford, nor can your tenant’s
afford some of the items they display, but you can get a general idea and emulate it more cost
effectively. Also pay close attention to how they show the unit. Most luxury leasing agents are well
trained in showing a unit and closing a deal. In the industry we call this “shopping your competition”.
Leasing Toolkit
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If you will be traveling to and from your property, and don’t have a model set up, pack a leasing
toolkit to keep in your car so you are always ready to show your property.
Leasing Toolkit Checklist:

Silk Plants

CD Player with CD

Air Freshener or Candle and Lighter

Shower Curtain

Muffins/Cookies

Vacuum

Fair Housing Poster

Coffee Maker and Supplies or Bottled Water

Yarn

Cardboard Cut Outs
Now, some of these items might sound a bit odd. Let me explain. Things like silk plants or a shower
curtain are good “fillers” that help make a place seem homier. You want to help your prospect tenant
envision your unit as their home. These things also can help disguise some of your unit’s features that
may not be the most attractive or you haven’t had a chance to repair yet, like re-caulking a bathtub or
covering a carpet stain. Of course you will need to repair these things before the tenant moves in, but
since we are dealing with first impressions here, filler’s can be a good tool.
Yarn and cardboard cut outs also help you overcome a very common hesitation prospective tenants
have. Many times, prospects hesitate because they are not “sure if their furniture will fit”. Yarn can be
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used to measure and layout furniture, as well as cardboard cut outs in the shape and size of typical
furniture like a sofa, bed, etc. These are well-know tools of the trade.
Leasing Notebook
I also recommend that you have all the items you need to be prepared to lease you unit if the prospect
is ready to close the deal. You never want to have to get back to someone and risk losing the deal. Be
able to close them on the spot. Your notebook should include:

Floor plans of your unit(s)

Community information

Photographs

Maps of city for tenants new to the area

Applications

Guest cards

Qualifying criteria forms

Move in cost sheet

Leases

Pen and paper
You may not be familiar with some of these tools yet, but we will cover them later in this chapter.
Showing Your Unit
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The most powerful thing you can do to lease your property is to realize that your rental unit is
not the product. The experience your prospect has with you is your “product.” Anyone can provide a
rental unit. You can’t control the other rental properties in your area. What you can control is the
experience your prospect has with you.
Wisdom Keys to a Great Experience

Luxury Service. People of all income levels like luxury service. It makes them feel appreciated. I
like to offer my prospect tenants beverages and snacks. Aside from making them feel respected
and appreciated, it also helps make sure that they aren’t distracted by being thirsty or hungry. I
know my demographic works, sometimes physically demanding jobs. If they rush from work to
view my rental unit, I don’t want the visit cut short or them be distracted because they are
thirsty or hungry.

A “Tour” of Model Unit. Anyone can “show” a unit. Instead give a “tour”. And call it that, a
tour. Tour the area, the outside and the inside of the unit. Even if you don’t have a model unit,
use your leasing toolkit to set up your vacant unit like a model.

Professional Management. All tenants want to be treated with respect. If you seem
unorganized and unprofessional in the beginning the type of tenant’s you truly want renting
your unit will be turned off by your unprofesionalism. They want to rent from someone who
they can trust to be responsible, provide them a quality place to live, and respond quickly to
their needs.
A True Example
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A great example of this is on an apartment complex I own called The Palms Apartments. It’s a midsize complex with 32 units. There is a similar complex across the street. Recently a young couple
came to view our apartments. We greeted them and offered them a “tour” of the property. They
told me that they had just left the complex across the street. They went their first because it looked
a little nicer from the outside. (They had nicer landscaping than us at the time.) The landlord took
them to an empty unit, unlocked the door and told them to have a look around and come get her
when they were done. They said we were much more professional that they felt more appreciated
and respected. They chose to rent from us. This is a true story of the reality of real estate.
Be a Leasing Megastar
Pay attention to your personal appearance. Be neatly dressed, well groomed and aware of your
personal hygiene. Have a good attitude. Don’t let having a bad day come across in your demeanor and
cost you a deal. Have good listening skills. Your prospect tenant will ask the questions to clue you in to
their needs. Develop closing skills. Ask for the lease, close the deal. And follow up. You work hard to
generate leads. Work hard on following up and closing them.
As Dale Carnegie said, “You can make more friends in two months by becoming interested in
other people than you can in two years of trying to get other people interested in you.” The same
applies for leasing. You can lease more rentals by becoming interested in your prospect’s needs than
you ever can by trying to get the prospect tenant interested in your rental.
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The most important key to closing the deal is to be proactive. When you are done showing the
unit, ask them if they would like to rent the unit. If they do, the next step is to process their application
and screen them.
Sidebar
Safety in Showing
1.
Make a copy of Photo ID. If you do not have a copy machine available, request the
prospective tenant bring a copy. If they ask why, let them know it’s for safety.
2.
Always let the prospect enter the unit in front of you. If you go in first, they can push you
inside and slam the door, trapping you.
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Note how Andrea allows the
prospect tenant to enter the
unit in front of her.
3.
Do not close the door. Leave it open.
4.
Turn the dead bolt. If you flip the dead bolt, if the prospect tries to slam the door and trap
you inside it will not shut and bounce open giving you a few seconds you might need to
escape.
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Turn the deadbolt so the door cannot
be slammed shut.
5.
Always keep a clear line to the door. Don’t let a prospect box you in a closet or behind a
wall.
Note the position of Andrea, the
leasing agent. She is not letting
the prospect box her into the
kitchen area. She has a clear line
to the door out.
6.
Let someone know where you are. In fact, make a phone call to someone or call out to a
neighbor where your prospect can hear you. This let’s them know someone is aware of your
whereabouts and will miss you if you are gone for long. This may deter someone who was
considering attacking you by making you a less easy target.
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End Sidebar
The Application Approval Process
The first tool you will use is your Qualifying Criteria which we discussed earlier. Even if you went
over this information on the telephone with them before meeting them. You should now officially
provide a written copy of the Qualifying Criteria to your prospect. Let them review it, then sign it and
return it to you. Many people will stop here, before wasting their application fee, if they know they will
not qualify. This is good, you don’t want to waste you time either. This checklist also serves you well to
comply with Fair Housing which we will discuss in-depth at the end of this Chapter. It shows you apply
the same criteria and standards to everyone.
After the Qualifying Criteria is completed, have your prospect complete an Application. This
form is a must and cannot be overlooked. Information shouldn’t be taken down casually or in any other
format than on the official Application. Why is this so important? The application is the cornerstone of
your tenant’s file. It authorizes you to run their credit and perform a background check, as well as
provides you all their contact information. If you have to evict or report money owed to a collection
agency, you will need the information on the application. So make sure it’s complete and legible.
Next, make sure you collect your Application Fee. This amount should minimally be enough to
cover what it costs you to process the application. You can charge more than that, as long as it’s a
competitive rate in your area. I see a lot of people get overly greedy with their application fees. Don’t
price it so high it deters people from applying. After all, the point is to rent the unit and collect rent, not
an application fee.
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A technique to closing a deal is to go ahead and have your prospect sign a lease or collect their
Security Deposit, or do both, if you can. You want the prospect to mentally decide they want to rent
from you. Most people do not like to be in transition. They want to know where they are moving so
they can get utilities transferred, plan to move, register their kids for school, etc. Though their lease is
dependant on their application coming back approved, you want to go ahead and “close the deal” by
collecting their Security Deposit and having them sign a lease if you can.
Tenant Screening
Whey is this SO important? Tenant screening is critical to reduce problem tenants and the cost
of high turnover. Key things you will review in the screening process are:

Credit Score

Eviction Check

Criminal Background Check

Rental Collection Search, which shows if they owe any other landlord money

Employment Verification
Again, you should have already decided what your minimum standards you will accept and what you will
deny when you created your Qualifying Criteria. Now you are just gathering the information to see if
the prospect meets your standards.
Sidebar
Mobile Tenant Screening
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In today’s world of technology, we are lucky to be able to tenant screen from anywhere, at any
time and get an almost instant response. You can go to www.thelandlordacademy.com and process an
application from anywhere via the Internet. You can also fax in applications. This makes it much easier
to approve a prospect quickly. When I first started in the business, it took about 3 days to get an
approval and in the meantime I would lose my prospect when they found something cheaper or closer
to their work, etc. Today’s world of technology makes tenant screening accessible from anywhere.
End Sidebar
If your prospect’s application comes back meeting all your criteria except for the credit score,
you can still approve them if you want to. My suggestion is to require them to pre-pay the last month’s
rent. Be sure to have them sign something indicating why they had to pre-pay last month’s rent.
Remember, you always want to show consistently so document this.
If the application comes back not approved, you are required by the Fair Credit Reporting Act,
which is a national regulation, to provide the prospect with a letter informing them they were not
approved and instructing them what agency you processed their credit through and the contact
information to obtain a copy of their credit report. This is the law. Here is a sample letter:
Sidebar
Why Skip Tenant Screening? It Doesn’t Cost You Anything
Skipping the tenant screening process can honestly be one of the biggest mistakes you can
make. And I never understand why landlords skip it. After all, you collect an application fee from your
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prospect tenant. This will cover you are charged for the screening process, so why would you skip
something that not only protects you , but doesn’t cost you anything?
End Sidebar
Don’t Judge a Book By It’s Cover
Some of the worst mistakes I’ve made in getting good tenants are when I first started out, I
would judge someone based on how they looked. One time I watched 2 young guys pull up to a rental.
They pulled up in an older, rusty car that had shiny rims on it. When they got out I saw they were in
their early twenties and had their baggy jeans hanging down low, white tank tops on and lots of tattoos
up and down their arms. “Oh Lord,” I said, “These are horrible prospects, what a waste of my time.”
Not knowing how to decline without being out and out rude, I showed them the unit. They liked it and
filled out an application. As I processed their application, they passed all the criteria and were
approved. So, I moved them in with many reservations. Later I learned that if I had declined to show
them the unit based on their looks, I could have also left myself open to a Fair Housing complaint. As
well, I would have missed moving in two of the most dependable, respectful tenants I’ve ever had. They
worked minimum wage jobs, at Home Depot, and they liked to wear their pants baggy and show their
tattoos. But they paid rent, on time, every month. They never caused me a disturbance problem. They
didn’t have a lot of furniture, but they kept their unit clean. I even pulled up one day and saw them
helping an elderly neighbor carry groceries into her home. In contrast, I once worked on a luxury
property. When I took that job, I thought, “I’m going to have it made. I’ll be renting to the rich people.
This will be a piece of cake.” Boy was I mistaken.
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Many clean cut men in fancy suits driving BMWs were some of the worst tenants I’ve had. They
had good paying jobs, but they paid their rent consistently late. And they had loud parties, left trash in
all the common areas when they used them, and left more damage to their unit than their security
deposit would even cover. So, don’t judge a book by its cover. In fact, don’t judge your prospects at all.
Just follow your approval process and let it do its job. It will weed out the undesirable tenants far better
then you can with your opinions.
Sidebar
I’m often asked how to handle the following situation. Say, you receive an application from someone
who looks like a marginal approval. They have an okay job, and some rental history. Then you receive a
second prospect tenant who looks far better. What can you do? You process whoever’s application is
turned in first with an application fee. You can’t pick and choose who you think looks better to process
first. And again, don’t assume person who looks more qualified will turn out to be. Always follow your
systems, they will always work better than your opinions will.
End Sidebar
Tenant Files, Record Keeping and Reports
•
Right Side/Back to Front
–
Application Screening Report
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•
–
Move-In/Move-Out Inspection Report
–
Rules and Regulations Form
–
Lease Addendums
–
Guest Card/Phone Card
–
Application
–
Lease
Left Side/Back to Front
–
Qualifying Criteria
–
Copy of Any Checks Received
–
Copy of Any Notices Given During Occupancy
–
Copy of Any Work Orders During Occupancy
–
Copy of All Receipts for Repairs
–
Receipts for Any Monies Received
–
Copies of Any Correspondence w/Tenant
–
Tenant Contact Notes Page
When Can They Move In?
Solid Lease Checklist
•
Must be State Specific!
•
Must be well-written.
Lease Breakdown
•
Recognizes all parties involved
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•
Uses the correct legal names
•
Recognizes all occupants of legal age and requires them to sign the lease
•
Has Abandonment Language
•
Has Security Deposit Language
•
Has Radon Gas Language
•
Spells Out the Duration of the Lease Term
•
Beginning Date
•
Ending Date
•
Required Methods of Payment
•
Check
•
Certified Check
•
Money Order
•
When rent is due
•
Amount of late fees
•
Where payments are to be made
•
Clearly spelled our return check policy
•
Causes for any legal action
•
Acceptable use of premises
•
Termination procedure and requirements for submitting notice to vacate
•
Hold over
•
Terms and conditions of rental increase
•
Spells out duties of landlord vs. tenants regarding maintenance and upkeep
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Additional rent” Language
If the rent is paid after the _______ day of the month, a late charge of
$__________ will be due as additional rent. Any payment that you owe to us is
rent under this lease.
CONDO/HOA ASSOCIATION PROPERTIES LEASE LANGUAGE:
If the leased premises are included in a condominium association or home
owners association, you agree to abide by its bylaws, rules, and regulations
including as they may be amended and that failure to do so is a violation of this
lease.
Occupancy
•
Permissible Occupants
–
Person on lease may occupy rental property on a full-time basis
–
Subletting
–
Not recommended
–
Anyone residing in the unit should be on the lease and in agreement with landlord
End of Occupancy
•
Renewal
–
Thirty Days Notice Options
–
Month to Month after lease expires
Condo and Homeowners Association Rules
•
Tenant must follow rules of the association
•
Association rules can change at will
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•
Failure to abide by their bylaws, rules, and regulations is violation of the lease
Last Word On Leases
•
Sample of Single-Family Rentals
•
Sample of Multiple Unit Rentals
•
Each State has laws pertaining to leases
–
Attorney review suggested
Addendums
•
Additions to the Lease on a Separate Document
–
Specific property or tenant
–
Example: Pet Addendum
–
Rules and Regulation Form
–
Comprehensive and Detailed List of Rules
Common Recordkeeping Files
•
Here are the most common files that a property manager should have:
–
Current lease files (ongoing – need to be locked)
–
Inactive tenant files (dead files, hold for 5 years)
–
Work Order/Service Requests
–
Vendor Files (Hold for at least 2 years)
–
Commission/Payroll files (hold files according to State law)
–
Incident Report files (hold for 5 years)
–
Month end files (Maintain 12 months)
–
Fair Housing/ADA request for modification & accommodation (hold for 2 years)
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•
*Note: See Phase 6 in Ops Manual
•
Move-Out Tenant File
•
All previous files
•
Written 30-Day Notice from Tenant
Or
•
Notice of Nonrenewal
•
Completed Move-In/Move-Out Inspection Report
•
Copy of Notice to Impose Claim on Security Deposit
•
Certified Mail Receipt
•
Documentation and Photos of Damage
Maintaining the Property
•
Maintenance is a very important part of property management. A good maintenance program
will:
–
Increase tenant retention
–
Increase property performance
–
A skilled property manager will also know that a well maintained maintenance program
will also have a positive impact on the property’s financial health
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–
Program includes:
–
Process to include maintenance efficiency. If working with outside contractors, property
manager will need to insure that the vendors are reliable and provide good service
–
Property manager needs to make sure vendors show up on time
–
Property Manager needs to inspect what they expect.
–
Always follow up with the tenant with regards to work that has been performed.
–
It is important that the tenant feels that the maintenance issue has been resolved.
•
These days, processing work orders, writing purchase orders, cutting checks to vendors as well
as tracking work that has been performed on the rental properties has been made easy with the
evolution of property management software
•
The responsibility of providing suitable learning conditions falls on the shoulders of both the
owner and the property manager. Here is what a property manager must do to insure suitable
living conditions:
•
Property Manager and staff should focus on:
–
The proper way to take work orders including the gathering of information
–
Property manager needs to be well trained on processing work orders using the
property management software
–
Property manager needs to be aware of the cost of tenant turnover
Right to Enter the Home
•
Many States have laws stating that non-emergency entry may be answered within a certain
number of days or hours. Other States say that the notification must be reasonable in nature.
•
Keys to Non-Emergency Entry
•
Always provide the tenant with proper written notice
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•
You should keep a copy of the notification or approval in the tenant file
•
You should document any oral approvals
•
Do Not force entry for non-emergencies
•
Every State allows a property manager/owner to enter the rental unit for emergencies.
Typical reason to enter for emergencies include:
•
If you see smoke coming from the windows
•
If you detect water leaking through doors, floors, or walls
•
Gun shots
•
Loud screaming
•
Entry for Repairs – Gaining entry to make maintenance repairs is common. Here are
some keys to remember when gaining entry:
•
Give as much notice as you can
•
Fully explain the work that will be done as well as who will be doing the work
•
Follow up after work has been completed
•
(Note: See Maintenance Request in SW)
Occupancy Issues
•
Note: Tenant screening companies can help detect illegal occupants
•
Note: Criminal Monitoring System
•
Note: Find Out if this is offered by Courtney’s company.
•
Having a well written lease with proper clauses that protect the property owner and property
manager is very important. Such clauses as it pertains to occupancy include:
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•
Lease Clause that states the limit on occupants and requires the property manager’s and
owner’s permission for allowing sub-leasing or assigning. It is not common practice to allow
subletting.
•
Lease clause that states that all occupants on the lease will be held joint and separately for
actions that include:
•
Non-payment of rent by one party – both will be held responsible
•
Breaking the Rules – If one breaks the rules, both occupants may be held responsible
•
Have all occupants of legal age sign the lease
•
If adding a new occupant to a current lease, follow these simple rules:
•
At least one original occupant should remain in the rental property
•
The new applicant should always be subject to the tenant screening process as well as pay the
application fee
•
The application should be reviewed before the additional occupant is allowed to move in.
•
Best practice: If property manager is aware of an illegal occupant, management may view this
as a non-compliance of the lease rules and regulations. Therefore, proper notice can be given to
the tenant for breaking the rules. The 1st notice should be courteous in nature allowing the
tenant to remedy the non-compliance.
How To Deal With Criminal Activity
•
There will come a time as a property manager that you will have to face a situation on one of
your properties where criminal activity has taken place by either the tenant or a tenant’s guest.
•
Every well written lease should have a provision citing that any and all criminal activity is
considered a breach of the lease contract and can result in an eviction suit being filed against
the tenant.
•
As a property manager, here are a few techniques that you can use to reduce criminal activity.
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–
Be Proactive. If you receive noise complaints, don’t just dismiss as a minor issue. Noise
complaints can often turn into more severe being broken by the tenant.
–
As a property manager, here are a few techniques that you can use to reduce criminal
activity.
–
Be Proactive. If you receive noise complaints, don’t just dismiss as a minor issue. Noise
complaints can often turn into more severe being broken by the tenant.
–
Follow up. You will always want to follow up after any letter has been sent out with a
personal visit or a phone call.
–
The conversation should focus on the rules that have been broken.
–
–
Your prompt response as well as follow up will show the tenant that this type of
behavior will not be tolerated.
Drug Activity
•
Be careful to never overlook the obvious signs regardless of where the prospect is located; low
income or luxury homes. I have seen illegal drug activity in both neighborhoods. Here are some
warning signs to help the property manager:
–
An overwhelming increase in the amount of traffic at night and on the weekends.
–
An overwhelming increase in the amount of traffic at night and on the weekends.
–
Visitors coming and going with short stays
–
Tenants and visitors sitting in their cars for long periods of time
Always Involve The Authorities
•
For your safety, as well as paper documentation of the event, when dealing with criminal
activity, a property manager should always involve the proper authorities. Always remember:
–
To file an incident report. In the report, you will want to explain what took place.
–
Obtain a copy of the police report. Attach the report to the incident report and file with
the tenant’s lease file
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–
Document any and all conversations with the tenant. Proper documentation is key if
you ever have to either evict the tenant or appear in court.
What Do I Do When My Tenants Break The Rules
Rental Income – The Life of the Investment
•
Rental income is the life line to all income producing properties. Rents are the largest source of
income. For the property manager, collecting rent is the most important of all tasks given to
them.
When Rent is Due
•
Getting the rent in on time is extremely important to the economic health of the property.
•
Timely rent payment allows the owner to pay operating expenses on time (e.g. mortgage).
•
Keep in mind that for single-family homes, on time rent is extremely critical inasmuch as a
single-family rental is a break-even ratio.
•
Simply put, it only has one source of income to pay down expenses; unlike a duplex or small Apt.
building, where there are several sources of income.
First, let’s talk about the most important process you need to master as a landlord: rent collections.
Think of it this way: The main source of your income from your property is from rent, and without
proper rent collection, you can’t do anything else you need to do in order to keep the building running.
The terms of your lease will specify the date the rent is due, which is typically the first of the month.
Most landlords also include a grace period in their lease.This is a period of time after the due date
during which rent will be accepted without a late fee. A typical grace period is until the third day of the
month, or perhaps the fifth day of the month. If rent is not received by the end of the last day of the
grace period, late fees go into effect and the rent is considered officially late.
How Do I Collect Rent
•
Determine Due Date and Grace Period
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•
–
Due: First of the Month
–
Grace Period: Third or Fifth of the Month
–
All tenants should be on the same schedule
–
Too difficult and time-consuming to track different due dates and grace periods.
–
When you’ve collected rent, do the following:
–
Step 1: Make photocopies of check/money order
–
Step 2: Post check in the ledger
–
Step 3: Immediately endorse all checks “For Deposit Only”
–
Step 4: Deposit all checks ASAP
Late Rent
–
Spell out clearly the terms and conditions of the rental payment, including the late fees.
–
Be very persistent; always remind tenant when he/she is late
–
Follow procedure consistently in all cases
–
Pay or Quit Notice
–
Run delinquency report to see who is late on rent
–
Prepare a notice to pay or quit
–
Check state laws for notice timeframes
–
Notice To Pay Rent or Delivery Possessions
Best practice:
Be careful when mailing notices with timelines, particularly pay or quit notices for rent. Some judges
have ruled that since you mailed the notice you have to allow 5 extra days on the expiration date to
allow for mail time.
•
Pay or Quite Notice (cont.)
–
Run another delinquency report on the next business day after your pay or quit notice
expires.
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Amount on the three-day notice should equal the rent owed only, unless your state allows you to
specify that any late fees are considered additional rent
•
Partial Rent
–
If you choose to accept partial rent, still follow the steps to send the pay or quit notice.
–
Issue the notice for the amount still owed.
•
•
Returned Checks
–
Policy should be spelled out in the lease.
–
Note in the tenants file and rent roll ledger and consider that tenant unpaid and
delinquent
–
Note all persons name on the lease on the dishonored check notice
–
Send Dishonored Check Notice via certified mail immediately
–
Include late fees and NSF charges as indicated in your lease
–
Include Notice to Pay or Quite for the amount that was not paid
Follow the steps for an NSF check:
–
Send Dishonored Check Notice to Tenant
–
Make a copies of the notice, bank’s notice of insufficient funds, and bad check for
tenant’s file
–
Update tenant’s account ledger to reflect nonpayment
–
Add tenant’s information to your monthly NSF log
Late Payment
•
For most property managers, rent is late as of the first of the month. Some lease agreements
allow for a grace period. Grace periods could be:
–
1st thru 3rd of Month
–
1st thru 5th of month
Best practice:
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For single family rentals, it has always been my preference to have the rent in by the 1st and late
on the 1st with no grace period. In Florida, after the tenant receives the late rent notice, it is the
“3 day notice to pay rent.” The law actually gives the tenant 3 days besides. After the 3 days
are up, I can begin the eviction process. Since I didn’t allow a grace period, I am able to start the
eviction process a lot earlier.
•
There are several reports that can be used to review delinquent rents. The two most popular
are:
–
Delinquency Report
–
Rent Roll
–
The Academy’s SMART Property Management Software has made it extremely easy to
review and begin the necessary process to collect the rent.
–
Delinquency Report: This report will list the names of the tenants who are late as well
as the following information:
–
Current and Previous Balances
–
Full names of lease holder
–
Contact information of lease holders
–
Rent Roll: A rent roll is one of the most complete reports for providing tenant
information. This report includes:
–
Unit number or address
–
Current and Previous balance
–
Full name of lease holders
–
Contact information of lease holders
–
Amount of security deposit
–
Move in Date
–
When lease expires
–
Whether tenant is month-to-month
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•
With the TLA Property Management software, the property manager is allowed to customize the
reports to fit their individual needs.
Techniques To Eliminate Delinquent Rent
•
In order to insure that the tenant understands that management is on top of rent collection,
timely procedures are a must. Here are the most standard operating procedure collecting rent.
–
Late Rent Notice
–
Courtesy call
–
Eviction Notice
•
Late Rent Notice: This is a notice reminding tenant that rent will be due on the 1st of the month.
This notice is usually sent at the end of the prior month to a tenant that has been late in the
past.
•
Courtesy Call: It is also standard procedure for the property manager to call the tenant before
the 1st of the month as a reminder that the rent is due.
•
Eviction Notice: This is given to a tenant alerting them that the rent has not been received and
that the following actions may be taken:
•
file is to be processed and sent for eviction
•
Full payment is required within a set period of time; usually 24 hours
Handling Return Checks
•
If a tenant has paid with a check and you have received notice from the bank that the check has
been returned, you must consider the rent for that tenant to be unpaid and late.
•
A late fee and any bank fees will need to be charged to the tenant.
•
The property manager will need to:
•
Contact the tenant by sending a letter as well as a phone call.
•
The letter should include a statement identifying the specific notice for non-payment of rent (i.e.
3-day notice of non-payment of rent).
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•
Tenant will need to bring the full amount in cash, money order, or cashier’s check within 24
hours.
•
Some property management companies will allow the check to be re-deposited.
•
It is also common practice to have the tenant pay only by money order in the future.
•
•
The TLA property management software will not allow payment by check if the tenant has a
prior NSF thereby eliminating the chance of another NSF check.
Collection after Move Out
•
To continue collection efforts of unpaid rent after move out, a property manager may elect to:
–
Have a third party collection agency attempt to collect unpaid balances of former tenant
–
Handle collecting money owed in-house.
–
Ask Tenant Screening company to provide info here on the steps needed to handle
collections.
–
The most common practice to collecting rent balances due by former tenants is to have
a third party collection agency handle it
The Art of Rental Increase
The Art of Rental Increase
•
As stated previously, rental income typically makes up 99% of the revenue, especially with
single-family rentals. Therefore, the ability to increase the rents at the end of the lease period is
key to increasing property value.
•
Rent Increases will help to:
•
Meet owner objectives pertaining to value and cash flow
•
Upgrade the property
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•
Recover any loss
•
Cover rising costs
•
Increase the Net Operating Income (NOI)
•
As a property manager, you will often find yourself in the position to justify rental increases.
•
Here are some techniques you can use to help:
•
Stay Positive. Convince the tenant that the increases are to benefit them as well. Increases will
help to add:
•
Better landscaping
•
continue to provide the best in maintenance service
•
Allow additional upgrades to the property
•
You will also want to show the tenant that you appreciate them as a tenant. It is common
practice for a property manager to have a lease renewal program.
•
Such a renewal program can include the following with the renewal of the lease:
•
Free Carpet cleaning
•
Free Microwave (with signing of 12 month lease)
•
Free touch up paint
•
Appliance Upgrade (with signing of 12 month lease.
Rent Collection
Rent is the largest source of income for a rental unit, so prompt collection of rent is vital for success of
any property manager.
Rent due dates:
Most rents are due on the 1st day of the month and late the day after. Some prop. Mgrs. Allow for a
grace period. If renting single-family homes you may want to do away with your grace period, as singlefamily homes only have one source of income.
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Late fees:
Late fees are usually imposed on the day the grace period expires, when ever that is. Typical late fees
can range from $25-100
This will depend on the type of rental unit. Single-family, condo, apartment.
•
Getting the rent in on time is extremely important to the economic health of the property.
•
Timely rent payment allows the owner to pay operating expenses on time (e.g. mortgage).
•
Keep in mind that for single-family homes, on time rent is extremely critical inasmuch as a
single-family rental is a break-even ratio.
•
Simply put, it only has one source of income to pay down expenses; unlike a duplex or small Apt.
building, where there are several sources of income.
How Do I Collect Rent
•
Determine Due Date and Grace Period
•
Due: First of the Month
•
Grace Period: Third or Fifth of the Month
•
All tenants should be on the same schedule
•
Too difficult and time-consuming to track different due dates and grace periods.
•
When you’ve collected rent, do the following:
•
Step 1: Make photocopies of check/money order
•
Step 2: Post check in the ledger
•
Step 3: Immediately endorse all checks “For Deposit Only”
•
Step 4: Deposit all checks ASAP
Late Rent
•
Spell out clearly the terms and conditions of the rental payment, including the late fees.
•
Be very persistent; always remind tenant when he/she is late
•
Follow procedure consistently in all cases
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•
Partial Rent
•
If you choose to accept partial rent, still follow the steps to send the pay or quit notice.
•
Issue the notice for the amount still owed.
•
Returned Checks
•
Policy should be spelled out in the lease.
•
Note in the tenants file and rent roll ledger and consider that tenant unpaid and delinquent
•
Note all persons name on the lease on the dishonored check notice
•
Send Dishonored Check Notice via certified mail immediately
•
Include late fees and NSF charges as indicated in your lease
•
Include Notice to Pay or Quite for the amount that was not paid
Best practice:
For single family rentals, it has always been my preference to have the rent in by the 1 st and late on the
1st with no grace period. In Florida, after the tenant receives the late rent notice, it is the “3 day notice
to pay rent.” The law actually gives the tenant 3 days besides. After the 3 days are up, I can begin the
eviction process. Since I didn’t allow a grace period, I am able to start the eviction process a lot earlier.
Techniques To Eliminate Delinquent Rent:
•
•
In order to insure that the tenant understands that management is on top of rent collection,
timely procedures are a must. Here are the most standard operating procedure collecting rent.
–
Late Rent Notice
–
Courtesy call
–
Eviction Notice
Late Rent Notice: This is a notice reminding tenant that rent will be due on the 1st of the month.
This notice is usually sent at the end of the prior month to a tenant that has been late in the
past.
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•
Courtesy Call: It is also standard procedure for the property manager to call the tenant before
the 1st of the month as a reminder that the rent is due.
•
Eviction Notice: This is given to a tenant alerting them that the rent has not been received and
that the following actions may be taken:
•
file is to be processed and sent for eviction
•
Full payment is required within a set period of time; usually 24 hours
How to Conduct a Move Out Inspection
•
After the property manager has received all keys, the property manager should walk through
the vacated rental.
•
Any and all damages should be logged and deducted from the security deposit.
•
Make every attempt to schedule a walk-thru appointment with vacating tenant.
•
In some States, it is the law to have the vacating tenant present during a move out inspection.
•
It is common to inspect:
•
Floors
•
Kitchen area appliances, counters, cabinets
•
Bath tubs and toilets
•
Fire Places
•
The carpets should be vacuumed and hard surface floors cleaned. There should not be any trash
behind.
Best Practice
It is wise to document move in/move out inspection not only with the inspection form but to take
pictures and video before and after the lease term (records should be kept according to State law).
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Evictions 101
Key Steps to an Eviction:
•
One of the most challenging aspects of property management is the handling of the eviction
process. We will outline the most common steps a skilled property manager takes in processing
an eviction against a tenant.
•
Prepare the tenant file. Gather the pertinent information needed for the eviction. In most
States, this is a copy of the notice. For cases involving non payment of rent, you will use the Pay
Rent or Quit Notice.
•
You will also need a copy of the lease agreement as well as the application. Keep a copy of any
written correspondence between you and the tenant.
•
Be prepared for the tenant to answer the eviction by writing a letter to the judge stating why
they should not be evicted. If the judge feels the letter is valid, this may trigger a hearing and
possibly delay the eviction.
•
Most often the eviction is resolved before going to trial. If the tenant remains in the rental, the
case would need to go to trial.
•
Most often the Judge will immediately decide the case. A lot of this will have been decided well
before the eviction took place, as far back as the move-in meeting.
•
•
How well you communicate the rules and enforce the lease agreement will help to keep most
evictions off your books.
•
•
Having good documentation and being well organized throughout the tenant’s lease term will
greatly improve your chances of success as well.
•
Keep in mind, even after winning an eviction suit, you cannot touch the tenant’s personal
belongings until a Judge issues a judgment and allows you possession of the rental unit.
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•
TIP: Do Not employ any self help tactics. You will find yourself being sued by the tenant. This
can end up costing more in the long run.
•
What you can do is offer the tenant what is known as cash for keys where you are offering the
them cash to vacate the rental unit.
•
Most property managers are finding that this is less costly and a less cumbersome process as
well.
Valid Reasons To Evict:
•
Tenant not paying Rent
•
Severe damage to rental property
•
Providing false information on rental application or lease
•
Non-Compliance of rental agreement
•
Sub-leasing or assigning the lease without written consent by the property manager and owner
•
Illegal pet where there is a no pet policy (except a service animal for a person with a disability
•
Illegal occupant
•
Either way, you will need to make sure that the tenant agrees to the terms as well as signs a
notice to vacate.
•
Note: You should consult an eviction attorney – TLA has a list of eviction attorneys in your State
•
Note: Have Students choose from a list of States on our website to download the landlord
tenant law in their perspective State
Security Deposits in Depth
•
At the end of the lease, a property manager must process the vacated tenant’s security deposit.
•
Many States have guidelines on how to handle this process.
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•
Each of the timelines vary form State to State but usually give the property manager 14 to 45
days after the vacated tenant leaves to return the security deposit.
•
As a Real Estate agent, there are additional State requirements that a property manager must
follow. It is important to check with your local State law that governs the process of handling
security deposits
•
A property manager’s quick response in sending the proper notice is essential in reducing the
number of security deposit disputes between property managers and tenants.
•
When working for owners, it is very important that the property management company has a
set of operating procedures designed to process the security deposit within the parameters of
the law.
Security Deposit Claims:
•
Understanding the Facts
–
Do not charge for normal wear and tear or damages you cannot prove
–
Do not charge the tenant unpaid or accumulated late charges. Judges dislike late
charges.
–
Always use and perform your Move In Move Out Inspection Report.
–
Document move in condition with photos and/or have tenant sign Move In Move Out
Inspection Report.
–
Think about the risk and cost of fighting a tenant dispute. It may be easier to settle.
–
Do not ever respond to an attorney yourself. Have your attorney review the situation
first and respond for you if necessary.
Deductions for Unpaid Rent:
•
When a vacating tenant moves out, a property manager can deduct any rent owed from the
security.
•
Deducting from the security deposit to pay a rent balance during a lease term is not common
practice by skilled property managers.
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Security Deposit Timeframe:
•
A skilled property manager will process the security deposit within a 5-10 day period to avoid
any legal requirements.
•
Most States require security deposit refunds, or the letter stating why deductions are being
taken from the security deposit, within 30-45 days.
Some States will require an even earlier notice if the property manager is taking any part of the security
deposit
Interest to Be Paid on Security Deposit?:
•
Look to your State’s landlord tenant law as it applies to the requirement of depositing security
deposits into an interest bearing or non interest bearing account.
•
Check your local State laws with regards to licensed real estate professionals handling of
security deposits.
–
Many States, like Florida, require a Real Estate professional performing property
management duties to either work through a licensed broker or obtain a broker’s
license themselves.
–
It is imperative that licensed professionals check their local laws.
Types of deposits:
•
There are a few types of deposits here are a few that are common:
•
Pet deposit
•
Last month’s rent deposit
•
Extra deposit
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Glossary Terms
1. Accrued interest: this is accumulated interest that is simple or compound and has not yet been
paid.
2. Annual: something that occurs once each year.
3. Appraisal: an opinion or estimate of a defined value of a detailed described property as of a
specific date.
4. Appreciation: this is an increase in a properties value.
5. Arrears: something that is paid late.
6. Assessed value: this is the value established by local authorities for the purpose of assessing and
collecting ad valorem taxes.
7. Advertising: this is a non-personal promotion of your rental home in a mass media that is openly
paid for by you.
8. Advertising strategies: this process begins with describing and identifying your target audience.
The next step for you is for you to set up specific objectives and then decide on the advertising
budget.
9. Amenities: specific items offered at your rental home in addition to the rental space. I.e. pool
washer and dryer, garage.
10. Adjustable-rate mortgage (ARM): this is a mortgage that has an interest rate and payment that
will change from time to time over the life of your loan, based on changes in a specified index.
11. Amortization: this is the process in which the loan payment consists of a portion which will be
applied to pay the loans accruing interest. With the remainder being applied to the principal. Over
time this loan’s interest portion decreases as the loan balance decreases, and the amount applied
to principal increases so that the loan is paid off in the agreed upon time frame.
12. Appraised value: this is an opinion of a property’s fair market value; it is also based on an
appraiser’s knowledge, experience as well as any analysis of the property. (see chapter ‘s 4-5)
13. Benefits: a feature that has a unique advantage for the prospect tenant.
14. Balance sheet: this is a financial statement the shows a persons or a properties assets, liabilities,
as well as net worth and cash-flows.
15. Balloon mortgage: This is a mortgage loan that will require the remaining principal balance that
will need to be paid at a specific time period. Example, a loan can be amortized as if it were to be
paid over a thirty year period, but may require that at the end of the 5th year the entire remaining
balance of the loan should be paid back.
16. Basis points (bps): In a percentage point there are one hundred basis points. The word “basis
point” is most commonly used in the financial world to describe percentages that include
hundredths of on percent.
17. Beneficiary: This is the lending entity under a trust deed.
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18. Bond Market: This word is usually refers to the daily buying and selling of the thirty year
treasury bond, a lender will follow this market as the bond yields go up and down, so the fixed
rate mortgages do approximately the same.
19. Bridge loan: this type of loan is short-term financing and is looked to be paid back within a short
time period. The interest rate on this type of loan is often higher.
20. Cash-out refinance: this process happens when a borrower choices to refinance a mortgage at a
higher amount than the current loan balance with the intention of pulling out the cash for personal
use.
21. Closing: In many states, a real estate transaction will not be finalized until it is “closed”
documents need to be signed by all parties involved and recorded at the local recorders office.
Typically if there is any money to be exchanged it will happen at this time as well.
22. Commercial Mortgage –Backed Security (CMBS): This is securities backed by pools of
mortgage loans on commercial real estate properties.
23. Commitment: this is an agreement, often in writing, between the lender and the investor i.e. the
borrower, to loan cash at a future date, subject to any specified conditions.
24. Credit history: This is a record of a person’s repayment of debt. Credit histories are examined by
mortgage lenders as one of the underwriting criteria in determining the investor’s credit risk.
25. Credit report: this report will show a persons credit history and is prepared by a credit bureau
and used by lenders in determining a loan applicant’s creditworthiness. If the investor is raising
capital i.e. cash then the capital contributors may want to know the creditworthiness of the person
raising the cash as well.
26. Credit scoring: this is a process used by many landlords and property managers, that uses
recorded information about the prospect tenant’s credit history the report should give an accurate
picture of the prospects ability to repay debt.
27. Capital gain: this is when the seller has realized a profit after the property has been sold, at a
price higher than the original perches price.
28. Cash-flow: this is the income produced by and investment property after the investor has paid all
operating expenses as well as the debt service, i.e. the mortgage payment.
29. Cash-on-cash return: this is the return the investor will receive based on his original cash
investment. It is the relationship between the investor’s annual cash flow and the total equity
position on top of any acquisition cost associated with the property.
30. Comparables: these are recently sold properties that are similar in features to the investor’s
subject property. These comps are used to apply the sales comparison approach in the appraisal
process.
31. Compound interest: this is the interest that is calculated on the principal of a loan, plus accrued
interest that has not yet been paid, as opposed to simple interest that is calculated only on the
loans outstanding principal balance.
32. Conventional loan: this is a loan that’s not insured nor guaranteed by any agency of government.
33. Cost approach: this is one of the three approaches used during the appraisal process: cost of any
improvements less any accrued depreciation is added to the estimated market value of the land to
arrive at the estimate of the properties value.
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34. Contract for deed: this is a contract that states that the purchase price is paid in installments over
a period of time, during which the buyer has possession of the subject property but the seller will
keep the title unit the contract terms are meet. This contract is usually drawn between individuals.
35. Corporation: this is a legal entity or organization that is created under the local law, whose
rights of doing business are the same as those of an individual. The entity has continuous
existence until it is dissolved in accordance with local state legal procedures.
36. Cycles: the process in which events repeat themselves on a regular basis; this may be a business
cycle, economic cycle or a real estate cycle.
37. Capital: Cash or goods used to acquire other cash or goods.
38. Debt: this is something that is owed by one individual or a legal entity to another.
39. Debt service: this is the monthly or annual amount of the amortized loan payment that is made
up of principal and interest.
40. Depreciation: this is a loss of value over time that is experienced by an investor of real estate
assets.
41. Discount point: this is 1 percent of the loan amount that is charged by the lender upfront to
increase the yield to the lender.
42. Discount rate: this is the rate that is charged to the member banks when they borrow cash from
the Federal Reserve Bank.
43. Department of Housing and Urban Development: They are also known as HUD.
44. Due diligence on subject property: this is the process in which the investor will need to
investigate the subject property physical standing as well as its financial standing.
45. Duplex: this is a two-family dwelling with the units placed side by side or one above another.
46. Delinquency: this happens when a payment has not been made by the agreed due date.
47. Economic rent: this is the rent a rental property will generate when running at its highest
efficiency.
48. Equity: this is an investors cash position is a property; the difference between the properties
current market –value and the outstanding mortgage balance on the property.
49. Escrow account: this is an account established to hold cash typically belonging to others.
50. Eviction: this is the legal process in which the owner typically the landlord will attempt to
reclaim possession of the rented unit.
51. Equilibrium: this is a condition of an areas stable property values; also a balance of buyers and
sellers.
52. Fair Housing Law: this is a federal law prohibits any discrimination in the sale, rental, financing,
or appraisal of most types of housing.
53. Federal Housing Administration: this is a federal agency that will insure loans made by
approved lenders to a qualified borrower in accordance with its regulations.
54. Freddie Mac: they are an organization that operates much like the FNMA to provide a secondary
market for any mortgages that are issued by the members of the FHLB system.
55. Fannie Mae: they are a privately owned corporation. They were originally created as a federal
agency, to provide a secondary mortgage market.
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56. Federal Reserve (The Fed): this is a central banking system that is designed to handle our
nation’s economy.
57. Foreclosure: this is a process in which a court action that is initiated by the mortgage or a lender
for the purpose of having the debtor’s real estate sold to pay off the mortgage or lien.
58. Fixed expenses: these are cost that are most often permanent and may not vary much from year
to year. I.e. real estate taxes, insurance for fire, theft and other related hazards.
59. Franchise: this is a private contractual agreement to run a business in a uniform way. This may
include using a designated trade name and operating systems.
60. Income approach: this is a process of estimating the value of an income-producing investment
property by attempting to capitalizing the net operating income that the investment property
produces.
61. Interest: this is the rent that is charged for using someone else’s money.
62. Interest rate: this is the annual rate that is charged to the investor by a lender for use of that
lenders money over a given period of time.
63. Lease: this is a written or a oral contract between the landlord know as the lesser and a tenant
known as the lessee, this contract will transfer the right to exclusive possession and use of the
landlords real property to the lessee for a specified period of time.
64. Liquidity: this is the ability for an investor to convert the equity portion of an asset into cash.
65. Loan –to –Value: this is the mathematical relationship between the amount of a loan and the
purchase price or appraised value, whichever is less.
66. Leverage: the use of other peoples money to finance the purchase of an investment.
67. Liabilities: this is debt that an investor may be liable for.
68. Market value: this is the most probable price at which a property will most likely sell.
69. Mortgage broker: this person is known as a semi fiduciary who acts as an intermediary between
the borrower and the lender for real estate loans, thereby earning a fee.
70. Net operating income (NOI): this is income that remains after the investor pays all the fixed and
variable expenses associated with the investment property.
71. Percentage: this is an expression of parts of 100.
72. Point: this is 1 percent of the principal amount of the loan.
73. Prepayment penalty: this is a penalty that is charged to the investor i.e. (.borrower) the fee is
usually a percentage of the loan amount when a loan is paid in full in advance of the maturity
date.
74. Real Estate Investment Trust (REIT): this is an unincorporated trust that is created to invest in
real estate that must have at least 100 investors, the management; control and title are in the hands
of the trustees.
75. Real Property: this term means the rights of real estate ownership; often called the bundle of
legal rights.
76. Recapture rate: this is the percentage of a property’s original cost. It is returned to the investor
as income during the property’s remaining economic life.
77. Rent control: this is enforcement of local governments to establish equitable rental rates. Not all
states have such laws.
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78. Rent schedule: this is the current or pro-forma rents under a subject property leases.
79. Return on investment (ROI): this is an annual percentage derived from dividing all the cash
invested into the net after-tax income.
80. Replacement cost: this is the cost associated with the cost to build an improvement with the
same utility as the subject property using today’s construction techniques and materials.
81. Secondary market: this is a market place in which mortgages and trust deeds are traded.
82. Sales comparison approach: this is an appraisal approach that compares a subject property with
three or more similar properties that have sold more recently; dollar adjustment are or made to the
other comparable sales price to make them more identical to the subject property and arrive at the
estimated value of the investor’s subject property.
83. Security deposit: this is the amount of money collected at the beginning of the lease to help to
offset any monetary loss to the landlord in the event of the tenant’s defaults in regards to the lease
agreement.
84. Subleasing: this is the right of a primary tenant to rent a property to another tenant, usually
The liability is maintained and continued from the primary tenant.
85. Taxable income: this is the net income after the allowed deductions and adjustments, on which
the tax rate is applied.
86. Tax credit: this is a credit that is applicable directly against taxes due; a 100 percent deduction.
87. Tax shelter: this is a phrase that is commonly used to describe some of the tax advantages of real
estate investing offers. Such as deduction for depreciation, interest, taxes and ext...
88. Tenancy by the entirety: this means that the joint ownership, recognized in most states, of
property acquired by husband and wife during marriage. On the death of one spouse, the survivor
will automatically become the sole owner of the property.
89. Tenancy in common: This a form of inheritable co-ownership under which each owner holds n
undivided interest in the real property.
90. Title insurance: this is a policy insuring an owner or mortgagee against loss by reason of defect
in the title to a parcel of real estate.
91. Triplex: a building that is composed of three dwelling units
92. Trust: this is an agreement appointing a third-party trustee to hold property for a beneficiary,
under specified terms and conditions.
93. Trustee: the appointed third-party operator of a trust.
94. Trustee: the originator of a trust.
95. Time value of money: this is recognition that, over time, money in hand is capable of growing
and becoming more valuable; money to be delivered in the future is currently worth less than its
future value.
96. Underwriting: this is the process in which the evaluation of the borrower’s credit, collateral
value and the risk involved in make the loan.
97. Vacancy rate: this is the percentage of the total space that is unoccupied at the subject property.
98. Value: this is the power of any item to command other goods in exchange; the present worth of
future rights to income.
99. Yield: this is the income or the profit that is earned on an investment
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TLA-study guide TM [Type text]
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