First Rental Property

Hi Everyone,

Disaster can be averted if you know how to read a credit report.  A credit report, also commonly referred to as a credit bureau, or credit check is a report a landlord can look at that details the credit history of a potential tenant.

If there is only one thing you take from this article, it should be this:

• ALWAYS run a credit report on a prospective tenant.

Banks lend money to creditworthy individuals.  Banks are not in the business of losing money, nor should you be.  As such, you should only rent your property to creditworthy tenants.

When it comes to reading credit reports, there are 3 important areas for you to pay attention to:

• Is the Tenant Behind with Payments

On all credit checks, you are able to determine if an individual is late on any payments.  All of the credit facilities that the tenant has will be listed on the credit check report.  You must look at individually all of the credit facilities and check to see if the payments are being made on time or not.  If the payments are not being made on time, this is an area of concern.  You need to get clarification from the prospective tenant as to why the are behind with their payments. 

• What percentage of their credit facilities is the prospective tenant using

On most credit reports, it will show the total amount of dollars that the individual has available in credit.  For each credit facility, this will be broken down individually.  For instance, if an individual has a credit card for $5,000 with Bank ABC, the credit report will have details similar to this:

Bank ABC

Credit Card Limit – $5,000

Balance – $4,000

Monthly Payment – $25

For instance, in the example above, this prospective tenant has a $4000 balance on their credit card which has a limit of $5000.  If this was the only credit facility that the prospective tenant had, their total utilization of this credit card (credit facility) would be….

$4000/$5000  (Four thousand dollars divided by five thousand dollars)

This of course equals…  80%

As a general rule of thumb, people with low credit utilization (low percentages) are managing their credit well.  On the flip side, people with higher credit utilization percentages are not managing their credit well, and are at risk of default.  This is not always the case, however, when you are looking at leasing your rental property to a prospective tenant, this is something that you better be paying attention to.

• Are there any collections items?

Delayed payments on a credit bureau can be explained.  For one reason or another, people miss payments on their credit cards or loans.  If it is an honest mistake, and you get a good explanation from your prospective tenant as to why it occurred, it can be forgiven.  However, collection items on a credit bureau is a whole different ball game…

When a collections item appears a on a credit bureau, this means that a tenant once had a credit facility, and essentially stopped making payments altogether.  Since payment on the credit facility stopped altogether, the company to which the credit facility belonged to, reported the individual and the unpaid credit facility to a collections company.  Now a collections company is contacting the individual in order to obtain payment on the outstanding amount owed.

Credit checks are a crucially important part of the real estate investing business.  If you are aspiring to buy your first rental property, you need to become familiar with reading credit checks.  This is something that cannot be taken lightly.  Many experienced real estate investors have paid severely financially by not exercising complete due diligence when investigating a prospective tenant’s credit history…..I unfortunately know this first hand through my own experience.

Don’t be a Dummy like me! Get familiar with credit checks!  Learn how to read them!  Know that they mean!

Until next time…

Neil.

ps: Sign up to the First Rental Property Newsletter.  You will learn from experienced real estate investors how to buy your first rental property!

Hi Everyone,

Just like snowflakes, no two lease agreements are the same.

They are an area of major anxiety for new real estate investors.

Lease agreements are a very important document when it comes to ‘collection of information’.  The document will allow the landlord to collect crucially important information concerning the tenant.

I have spoken to so many new real estate investors after they purchased their first rental property.

So many of these new investors were worrying because they did not have a lease agreement for their new tenant to sign.

Many of these new investors would ask me if I had a usa replica rolex day date 218206 rolex calibre 2836 2813 mens 15mm sample lease agreement that I would be willing to share with them.  My answer in many of these cases was, no.  My answer was no because many of these new real estate investors were trying to seek out the ‘perfect’ lease agreement.

Just like with people, perfection does not exist.  The same applies with lease agreements.

Many experienced landlords that I know use less than perfect leases with their tenants. In fact, I know of a number of occasions in which these ‘veteran’ landlords do not get their tenants to sign leases.  This is not smart, and I don’t recommend that you do this.

In my mind, the lease agreement helps you to organize and collect information.  It is the information that is collected in the lease agreement that will come in very helpful down the road, if and when any troubles occur with your tenant.  Not only that, the information collected in the lease agreement will serve as a point of reference between you and your tenant.

As a landlord, you need to be organized when it comes to your relationship with your tenant. Having an organized lease agreement will enable you to maintain a good working relationship with your tenant. Here are 3 Must Haves that you need to include in your lease agreement:

1)  Your Tenant’s Deposit

When a tenant moves into your rental property, you take from them a deposit.  The amount and rules regarding the deposit vary depending upon where your rental property is located.  In many areas such as the area that my rental properties are located, I collect from my tenant the first and last months rent deposit.  In all of my lease agreements, this amount is in writing and the tenant signs the lease agreement acknowledging that they have provided those funds.

Believe it or not, landlords and tenants get into disagreements about how much money was initially provided as a deposit.  Having your lease to refer to, you can quickly draw reference to it, which will help to eliminate any disputes between you and your tenant.

If you do not record on your lease the amount that was provided by your tenant as a deposit, you do not have any proof that they in fact provided those funds to you.

Remember to always, record on your lease agreement the amount of money your tenant provided you as a deposit.

2) Is your Tenant a Smoker and do they have pets?

This is one of my favorites.  I get a real kick out of this one.  I find this one interesting because many people lie and or do not disclose information here. When tenants lie and or do not disclose all information here, it gives me insight into their character.  The reality here is that some tenants will try to hide from their landlords the fact that they are a smoker or that they own pets.  Any proactive landlord would uncover this lie Hello Puffs very easily.  Site visits to the rental property by the landlord allow the landlord to see if there are any pets or if tenants are smokers.  What is especially entertaining are unscheduled site visits to the property.  If your tenant is a smoker and they have farm animals living in your rental property, you will find this out very quickly after an unannounced site visit to the property.

3) You need to collect 2 forms of Identification (ID) from your tenant

I cannot stress to you how important this is.  Most real estate investors and landlords will collect this information from their tenants on their ‘rental applicaions’ and not on their lease agreements.

At the end of the day, it does not matter where you physically record this information.  What does matter is that you have this information on hand.

This information may not seem that important to the novice investor, however, it is critically important, especially if your relationship with your tenant takes a turn for the worse.

As real estate investors and landlords we are liable for so many things.  If your tenant does not fulfill their obligations as set out in your lease agreement, you have recourse to collect money from them.  Situations can arise in which your tenant does not pay you rent.  You could sustain damage to your rental property by your tenant or by a party known to the tenant.  As well, in many areas, utility bills can go unpaid by your tenant, and you the landlord will be stuck paying the bill, once they have left your property for good and are living somewhere else.

As you are beginning to see (hopefully), collecting 2 forms of ID from your tenant on their rental application or lease agreement allows you to track your tenant if your relationship with them makes a turn for the worse.

If your tenant does not pay you rent, damages the property, and leaves you with unpaid utility bills, by having their ID you will be able to track them down where ever they may be now, and make a claim against them in order to recover your costs.

You could send their unpaid utility bills to a collections company and/or pursue the non payment of rent issue in Small Claims Court.

If on the flip side, you did not collect any ID from your tenants at the time of signing your lease agreement the following could happen…  They could take off from your rental property and leave you with many unpaid bills.  If you have no ability to track their whereabouts through tracking their ID, you would be stuck fronting the bill for all of these missed payments.

New real estate investors will always experience anxiety when it comes to having their new tenants sign a lease agreement.  However getting them to sign the lease is short term pain, for long term gain.

You never want to find yourself in a situation in which you are stuck paying unpaid bills just because you did not take the extra few seconds required to obtain your tenant’s ID.

In summary, the lease agreement is a very important document.  As a new investor,  at first you may experienced some anxiety with regards to getting your tenant to sign it.

However, in the end you will be much better off having a complete and up to date, signed agreement.

Until next time…

Best Regards,

Neil

ps: Sign up to the First Rental Property Newsletter today!  You will receive information from experienced real estate investors on how to purchase your first rental property!

Hi Everyone,

There is a secret to investing in real estate that you need to know.

Chances are, if you have been investing in real estate successfully, you have figured this out.

If you are new to the world of real estate investing, you probably don’t know this by now.

The advice that I am going to offer in this article is straight forward and seems like common sense.

However, you must know that this is not common sense.

This realization has taken me 7 years to fully understand.

It has been close to 7 years since I bought my first rental property.  Luckily, my first rental property purchase was a  great success.  So much so, that I still own that property today despite temptation to sell due to the increase in value that it has experienced.

If you can follow the advice presented in this article, you will be a successful real estate investor, no problem.  All you need to do is focus on the follow 3 principles when you are buying your first rental property.

Here are the principals in no particular order:

1)   Buy in an area experiencing above average appreciation.

When I bought my first rental property, I understood this concept completely.  I purchased a  property in a town with above average appreciation compared to surrounding towns.  This was the smartest move I have made in my real estate investing career as this property will double it’s value within the next 5 years from the time I purchased the property. (property was purchased for $250,990 in 2005.  The estimated value of the property in another five years will be approximately $500,000)

For the most part when people buy a rental property, they are motivated to do this due to two reasons.  The first reason is to build wealth through property appreciation, and the second reason is to generate an income stream.  Speaking of income streams…

2) Your property should cash flow

Notice that I use the word, ‘should’ and not ‘must’.  Here is the reason why…

My first rental property did not cash flow when I first bought it.  In fact, it was a negative cash flow property by about $200/month.  I bought the property because I knew that it was going to appreciate.  I knew that the appreciation of the property would cancel out any small loss I was incurring on a monthly basis.

This was back in the year 2005.  Clearly things have changed since then with our world economy.  As such, we are not experiencing the same levels of property appreciation year over year in many real estate markets.

I say that the property ‘should’ cash flow because it does not ‘have’ to cash flow.  I think it ‘should’ cash flow because you need that cash flow to pay for any operational costs associated with  running the property.

Here is the reality…

If you own a rental property for any given period of time, there will be some repairs and maintenance that you will have to take care of.  Whether it is replacing the furnace, air conditioner, or updating to new wood flooring, there will be some additional cost that you will incur down the road that you have to take care of.

The money required for your repairs and maintenance will either be coming from your own personal funds, from borrowed funds such as a line of credit, or from the cash flow being generated from the property.

A rental property that you purchase ‘should’ cash flow because you will need this cash flow in order to pay for expenses related to the property.

I have used cash flow from my properties to pay for Christmas gifts for my tenants, as well as Welcome Baskets for tenants when they first move in.  The money required to pay for these gifts has to come from somewhere.  If it is not coming from out of your own personal funds, the second best place it can come from is the cash flow generated from the property.

3) You need tenants making an above average income that are low maintenance

This last point is going to spark some controversy no doubt.  But here is the reality.  The controversy that will result from this statement, will be generated from people who own or who have some sort of interest in properites in low income areas.

The plain truth is that, if you have a tenant profile that is making an above average income, chances are is that they will be low maintenance.

Low maintenance meaning that you will not be faced with tenant and landlord issues such as evictions.

I have experienced owning properties with tenants earning below average incomes as well as above average incomes.

If I had the choice (and I do) I would chose to have tenants making an above average income.  Knowing this, in return I would be rewarded with an easy property to manage.

Generally speaking, I believe this to be true because tenants earning an above average income for the most part experience less social problems.

On the flip side, tenants earning below average incomes are peppered with social problems.  (this is not everyone of course.  However, if you stick around as a landlord long enough, you will see what I am talking about)…How is that for a controversial statement?

So in summary, when you are buying a rental property, and especially when it is your first rental property, stay focused on the following:

Buy for appreciation

Remember, you need ‘cash flow’

and…

Get above average income earning tenants!

Until next time.

Regards,

Neil

ps: sign up the First Rental Property Newsletter by entering your email address on the top right hand corner of the blog.  In the First Rental Property Newsletter you will get advice from experienced real estate investors on how to purchase your first rental property!

I used to think that they were trying to make me mad…

Now when I look back, I realize that they were just trying to help me.

I used to have conversations with people who were investing in real estate.  These people were business owners and more experienced at investing in real estate than I was at the time.

I would ask them which cities they were purchasing properties in.   They would tell me right away.  It almost felt like they were showing off.  It felt like they knew something that the rest of the world did not know.  Now when I look back, I think they did know more than the average Joe.

After they told me where they were investing, I now felt that it was my turn.  On almost every occasion, as soon I would tell them where I was investing, I would get the same reaction…

It felt like they were disappointed!

The first few times I was confused by their feelings of disappointment, but as time went on my feeling changed.

I would no longer be confused, rather, I would get mad.

As soon as I told these experienced investors where I was investing, they would all pretty much tell me the same thing.

And this was….“Focus on location.”

None of these people ever directly came out and said, “Your City is not a good one, buy properties elsewhere”.  Rather, I would be told that, “The City probably won’t appreciate at the same levels when compared to other cities.

The cities that they were comparing things to were of course, the cities they they were investing in.

To date, I have invested in 3 different Cities.  2 of these Cities have been outstanding. The appreciation of the properties has been very good and the tenant profile has been reliable and low maintenance.

One of the cities however, has posed many challenges. In this city, I have dealt with numerous repairs and maintenance of properties, little to no appreciation over the past 3 years, dealt with one eviction and have had challenges finding quality tenants for a vacant property.

It took me about 3 years to realize that what some of these critical real estate investors were saying to me was true.  What they were saying was the city that I was investing in was… ‘No Good’.

So now, I have started the process of selling the properties that I have in this city.  I have one listed for sale, and based on the success or failure of the sale, will probably look at selling another 2 properties that I own in this city.

An experienced investor once told me that you have to sell your ‘dog properties’.  What he meant by this was the following:

If a property is not performing to your standards, you have to sell it and reinvest your money somewhere else.

For instance, if the property is not producing your desired cash flow, coupled with the fact that the property is not appreciating at a good level, you must consider selling it.

It never helps when you are incurring high repairs and maintenance costs on the property along with dealing with non paying tenants.

I used to think that during these tough times one should hang on and not give up.

What I have learned is that you get to a breaking point.  If you have properties that are not performing, some event in your life triggers you to take action.

Once you are triggered to take action, you can finally get rid of some properties that have not been performing to your standard.

At the end of the day, if you can maintain properties in your portfolio that are low maintenance, produce cash flow and have good appreciation, this is the best situation that you can have.

In summary, we all get to a point in time where we realize that we have to get rid of under performing properties.  If we hold on to these and never get rid of them, they will burn you out, and the probability would remain high that you would throw in the towel altogether as a real estate investor.

Be smart, and get rid of your garbage properties.

Until next time…

Neil.