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What NOT to do as a real estate investor

^eagle^

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I was aksed to write what i learned when i owned my duplex. I would like to share that experience here on this thread to let new people know what NOT to do.

In buying the property I actually did almost everything right. It was a great time. i got great financing and the property was sound and in a great middleclass neighborhood.

After that things got a little out of hand.

1. Do not forgive late fees. I tend to see the good in people and try to help them out. However if you forgive late fees for late payments you are asking for it. the tenant will continually be late as a result and hinder your ability to keep your mortgage current. He will realize he can put you off while trying to pay another debt ot bill.

2. If you do not know how to do something get help or hire a pro. I'm a pretty good number cruncher but Not so much a handy man. Sure I can unclog a toilet or change an outlet but major rehabs are not my thing. If you don't have the skills Hire a professional.

3. Keep a reserve fund for emergencies. I ended up using credit cards. My rents paid 2/3 of my mortgage. I did not build any reserve fund. It would have been great to have that when the hot water heater broke.

4. If you are owner occupied and considering leaving the property to buy another Make sure you update all the major things before you leave. I wanted to put central air and fix the roof and paint. None of these things were accomplished. My flatroof on the back addition cracked and I had a total ceiling collapse. I could not get my rents much higher becasue I had window AC units. the paint began to peel on the property.

5. DO NOT ALLOW PETS. they do almost as much damage as kids! But we have to allow kids! LOL

6. Do background checks on tenants. Don't be cheap on this. The money spent will usher out the riff raff and deadbeats. It's worth the money. I let this one guy in simply because we worked in the same business. in two months he completely trashed my front unit. Including the brand new carpet.

6.5 Which reminds me. Do not use carpet. Use highly durable tile. Let the tenants buy rugs that they can trash themselves.





7. If you find yourself in a finacial hard spot Get help. I ended up 15000 in debt plus medical expenses simply because I thought I could do everything. I went to ONE bank and was told I could not get any equity out of my rental because it had not appreciated enough and it was not owner occupied anymore. So I gave up because I thought all banks were the same.

8. I filed bankruptcy in 2001. the next year real estate prices doubled and even tripled in some areas. Had I held on for another year I could have eliminated my debt but i was so burned out I just let it all go. someone got a great deal from me.

If I remember more I'll post it here but these were my lessons.:smx5:
 
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PEERless

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THANK YOU! "Learn from the mistakes of others. You can’t live long enough to make them all yourself." -Eleanor Roosevelt

Thanks for making these mistakes, so I don't have to. Rep+
 

MJ DeMarco

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Great tips ... Thanks a bunch ... speed+ for you!
 
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^eagle^

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I have a feeling there's a lesson there as well... ;)


that was when I lived in one unit and rented the other.

It was positive in cash flow with both units rented out but I did not figure in vacancy or having idiots as tenants.

Looking back and recalculating it I figure I was losing about $50/month
 

M&T

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Great post.I did some of those same things in the beginning untill I learned my lesson.Thanks for putting it up and if you have anymore please update.No matter how small some details are they can make a world of difference. +++rep
 

NoMoneyDown

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6. Do background checks on tenants.

ALWAYS DO A BACKGROUND CHECK!

BTW, you can actually MAKE money doing this. I was filling my latest rental in May and had 5 serious prospects. I collected $35/ea from them and ran background checks that cost me $25. One was overwhelmingly better than the others. Result ...

( $35 - $25 ) x 5 = $50

... of extra cash flow. Since the person wasn't going to actually rent the place until June 1st, and he got approved on May 20th, I also charged him $20/day to "hold" the place. An extra $200. So, $210 made before a tenant even stepped into the place. Rent is $1200/mo and expenses run about $900 w/a CF of $300/mo. It did need a new garbage disposal and a repair on the range which blew the first month's CF (almost).
 

PEERless

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I took 40+ applications on my condo before accepting someone. @$25 apiece, I paid the mortgage AND did background checks on my 5 best applicants. I considered turning off the power and just taking apps year-round!

Not sure the demand would hold up, though. Also not sure I'd feel good about it.
 
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^eagle^

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some other things.

1. Have the tenant pay the first $25 dollars on all repairs. Write it inot the lease. This will eliminate all the nuisance maintenance and make them think twice about grinding a whole chicken down the garbage disposal.

2. Hire lawn care. Factor this into your budget. Do you really want to spend your time mowing lawns? I have had mixed results in letting the tenant do it for a reduced rent.

3. Add a little flair to the house to spruce it up and increase rents. Things like fancy switch plates, ceiling fans, Doors, and molding add charm and make for high rents.
 

AroundTheWorld

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  • If you live in a medicinal marijuana state, be sure to write something in your lease explicitely stating that you have the right to evict if any federal laws are broken. (Supreme Court in California found that even if it is legal in the state to grow pot, it is still against the law federally).
  • Hire a property manager
  • Make sure you and your property manager are on the same page about all of the above.
  • Hire a property manager
  • And finally, hire a property manager. ;)
 

NoMoneyDown

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I once heard that if you're going to own rentals, you should hire a property manager...does anyone here have any thoughts on whether that's a good idea or not?

I think it is good once you have about 10+ rentals or so to manage, but its all a matter of personal preference as some may not have the time or inclination while others don't mind it at all.
 
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imoz

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My wife and I are thinking about renting out our condo instead of selling it when we move. We have a baby on the way and want to get more space soon. Someone in the neighborhood recently did the same thing and is getting a nice rent, if we can match that rent we will be making 50% more than the mortgage payment! Are there any issues or pitfalls to think about when there is a homeowners association?
 

biophase

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5. DO NOT ALLOW PETS. they do almost as much damage as kids! But we have to allow kids! LOL

I have the opposite opinion. I'd rather allow pets than allow kids. If the people who have pets are damaging your property, chances are their kids will be much worse.

The only thing that pets can do are:
1) leave hair everywhere
2) poo and pee everywhere
3) chew stuff
4) dig yard up

Number 1 is unavoidable but easily solved with a cleaning crew.

Number 2 and 3 are reflections of the owner. They are obviously not taking care of the pet's need or disciplining them. Chances are, their kids also run rampart if the pets do.

Number 4 is pet dependent and also an owner's responsibility.

I have never had to repair and damage from pets, its mostly from the humans.
 

biophase

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some other things.

1. Have the tenant pay the first $25 dollars on all repairs. Write it inot the lease. This will eliminate all the nuisance maintenance and make them think twice about grinding a whole chicken down the garbage disposal.

The downside to this is that the tenant may not call you when something is wrong cause they don't want to pay the $25. Your p-trap may drip, but they don't know how to fix it and they don't want to pay $25. So they just stick a bucket under it for a whole year.

While this isn't bad from a don't hassle me standpoint, you may get a unit with 20 of these little problems when it comes time to re-rent it.
 
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M&T

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Imoz,

For your question on homeowner associations it's really just another party to deal with.I used to live in a townhouse community. Had a pool, greenskeepers,dumpsters.They had an association. The main thing I noticed was the people on the board. President, vice president, treasurer. They could be normal people easy to get along with and helpful. THEN you had the other one's. People who felt powerful to be in that position and wanted others to know they had the power. They would nit-pick about things that did not matter. They would get everyone worked up. Had their own agendas, you get the point. The association can look down on rentals.They see it as a threat to their nice little community.They see renters as outsiders. Remember it is your property, if you want to rent it go for it.Look at all the legal points in the association contract. See if there is anything spelled out on this isue.If not skys the limit!
M&T...
 

^eagle^

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holy crap!

I made Legendary posts!

At least I can serve as a bad example.

new house I bought is great.

going to be a great flip when the market recovers,
 

KyJoe

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All good advice. Manage the property yourself if you can. You can manage it half arse & still beat what someone else will do most of the time. Yes, it can be frustrating. I am told by many that they would love to do what I do, but just couldn't stand it. That doesn't make sense, but I interpret it as "if I could have a free ride I would do it in a heartbeat". The real truth is that working for someone is isn't easy either.
 

TaxGuy

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6. Do background checks on tenants. Don't be cheap on this. The money spent will usher out the riff raff and deadbeats. It's worth the money. I let this one guy in simply because we worked in the same business. in two months he completely trashed my front unit. Including the brand new carpet.

This one almost bit me in the butt my first go-round with roommates...

I had an applicant that seemed perfect for the place, great guy, got along with him right off the bat, then I did a background check and BOOM... REGISTERED SEX OFFENDER!!!!

From that moment on background checks are definitely mandatory and last go-round even had it set where I filtered out candidates and when we picked one we had them pay for the check, did it on the spot and got the first month's rent + security deposit right then and there :cool:

On that note, what services do you guys use? I've heard mixed reviews on Intellius, LexusNexus and IntegraSCAN. The one we used last time was through Tenant Verification Services.
 
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GLC65

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The apartment rental business is a tough business with narrow profit margins. Scumbags can always get in through the cracks and it is just the cost of doing business. I own close to 3,000 rental units, consisting of townhomes and apartments in the midwest and I have seen the worst of the worst. I recently had MJ remove or block out my name on this forum due to scumbags who get evicted looking me up. I rather keep a rental unit vacant than take a chance with a drug user, prostitute, punk, and wife beater. If you are a passive real estate investor, I would not rely on the rental income as regular income that you depend on to make ends meet. Expect the worst case scenario and hope for the best. Some of these deadbeat tenants know more about tenant-landlord-eviction laws than most attorneys. Once they hire legal aid, be ready for a long long ride and possibly a jury trial. You can have a unit tied up for over a year in some cases. One rotten apple can destroy your tenancy base and you might end up boarding up the building. I strongly recommend that you get a non recourse loan and do not personally guarantee the loan unless it is a super blue chip property. I would manage the property myself and not count on others You need to be super conservative and watch your expenses. Service calls caused by the tenant such as a plugged toilet or broken closet door should be charged to the tenant. Do not let anyone but yourself approve a lease and have an interview with each and every tenant. Again, there is no safe proof method of getting a good tenant no matter how careful you are. Keep a distance between yourself and your tenants. Do not invite them over to your home nor befriend them. It is not if the relationship goes wrong, it is a matter of when the relationship does go wrong. Do not have a resident handyman. If you need to have one, pay him what he is due and do not deduct it out of the rent.
 

KyJoe

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That is really well said and so true.
 

1mancrew

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From that moment on background checks are definitely mandatory and last go-round even had it set where I filtered out candidates and when we picked one we had them pay for the check, did it on the spot and got the first month's rent + security deposit right then and there :cool:

On that note, what services do you guys use? I've heard mixed reviews on Intellius, LexusNexus and IntegraSCAN. The one we used last time was through Tenant Verification Services.[/quote]

I would like to know what services work well for background checks also.

You said you did the background check right on the spot? How do people take it when you tell them sorry, but you don't qualify?

Do most people pay with check or is a money order required?
 

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