Prepare For The Worst

Posted by neil on June 23, 2012
General / 6 Comments

Any real estate investor with experience in managing tenants knows that non-payment of rent is an issue that has to be dealt with from time to time.

If you are thinking about buying your first rental property, good for you!

Owning a rental property is a lot of hard work, and the experience may not be as glamorous as what you see on TV. However, if you have the discipline and stamina to deal with the issues that come up, you will be well on your way to success.

As a new real estate investor first starting out, you should know that at one point in time, you will encounter problems with collecting rent.

Non payment of rent can come in different forms.  Here are some of the different ways…

1) The rent is due on the 1st of the month, and your tenant is late in providing you the rent. (cash, cheque, or electronic transfer)

2) You deposit a rent cheque on the first of the month and the rent cheque bounces (is returned by the financial institution due to non sufficient funds)

3) Your tenant does not have the money to pay rent, and does not provide you with the rent money for that particular month. 

There are so many factors as to why tenants sometimes don’t pay their rent on time.  Some are real, legitimate reasons, where as other times, the reasons are not sound and in fact are very flaky.

As a new real estate investor you must know that you have to…

“Prepare For The Worst”

Meaning…

Be ready for the first time that you do not receive your rent on time from one of your tenants.  It will happen to you at some point.  The only question is when.

We all learn our lessons from different life experiences.  Some of us learn faster than others.  Whether you learn slow or fast doesn’t matter.  What matters is that  you learn, and evolve and make changes in your real estate business so that you are prepared for the next time when one of your tenants does not pay rent on time.

How to prepare for late rent payments

Get familiar with your local Landlord and Tenant Governing body.  In each City, State, Province and Country the legislation regarding how Landlords and Tenants can interact with one another differs.

Get familiar with the forms you need to serve to your tenant when non payment of rent occurs.

The point that I am trying to make is that you need to become familiar with these forms before a non payment of rent issue ever happens to you.

You need to be armed with knowledge for when you do encounter a situation in which one of your tenants is not paying their rent. You need to be comfortable with the forms, you need to be able to understand them, and be able to navigate them easily.  You need to know how to fill them out properly.  You also need to know the rules surrounding when you are allowed to submit the forms to the tenant if they are late with their rent.  You need to know how many copies you need to retain and how many copies you need to present to your Landlord and Tenant Governing body.

Practices that I have Incorporated

It has taken me over 6 years as a real estate investor to learn one very important rule. This rule is to always have printed out and on hand the necessary forms and paperwork that needs to be served to a tenant in the event that they do not pay rent on time.

I have these forms printed out and I keep them in my ‘real estate’ binder, so that I can quickly access them.

I have learned with experience that I have to do this because I have been involved in multiple situations in which rent was not paid on time.

When I look back, the longer that I waited to collect the rent that was owed, the more problems occurred as a result.

As such, I have learned from my own experience to be proactive and to be prepared.  That is why I now carry these forms with me.

I have learned to prepare for the worst.

In preparing for the worst, I am becoming a better real estate investor.

How have your experiences been with collecting late rent payments? If you do not own a rental property yet, what scares you the most about non payment of rent?  Leave your comments below.

Best Regards,

Neil Uttamsingh.

 

 

 

 

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How To Use Leverage To Buy Your First Rental Property Part Two

Posted by neil on June 17, 2012
General / 8 Comments

All smart real estate investors use leverage to purchase rental properties.  In Part One of this article series, Real Estate Investor and  GTA Property Manager Todor Yordanov of Proact Investments gave his take on how real estate investors should use leverage when buying rental properties.

The H.O.P.E. Program is also a great way to help you find the money to buy a property.  H.O.P.E. has helped more than 12,000 people get homes who never thought they would be able to.  The Program has helped even those people with BAD credit get approved.  It is one of the best Rent To Own Programs out there as it gives access to thousands of property listings for Rent To Own homes.  CLICK HERE to enrol in The H.O.P.E. Program or to have your credit fixed.

In Part Two of this article series, Real Estate Investment Specialist and Mortgage Agent, Aneta Zimnicki of My Mortgage Sherpa gives her opinion on how leverage should be utilized by real estate investors when buying investment real estate.

If you missed Part One, a reader of First Rental Property asked the following question:

Question: Most down payments come from secured line of credit or sometimes called HELOC, the question is do investors pay down the loan or leave it? 

Answer brought to you by Aneta Zimnicki:

Using a secured Home Equity Line of Credit (HELOC) as downpayment for investment property is a great sophisticated investor strategy.  You essentially are borrowing money to make more money, your return on investment is infinity, a true ‘zero down’ scenario.   You may know people who have a psychological barrier about debt in general, and are keen to erase debt, no matter what kind. But if the cost of borrowing is less than the income it produces, why would you not want to use it?  

So, is it worthwhile to pay down the HELOC? Let’s look at some math.  Typically today, you can see a HELOC at prime(3.0%) + 0.5% or prime +1.0% and, typically payments are interest only.  At 4.0% for example, $10K will cost you about $33/m. If you properly acquire cashflowing properties, this cost of the interest only HELOC is covered and most likely, you have extra income left over.  No need to be subsidizing the loan, it pays for itself.  Also, the interest cost is tax deductible (because the funds are borrowed for investment purposes), bonus!  For these reasons, savvy investors do not have any interest (pun intended!) in paying down their HELOC.  

The cheapest way to fund a downpayment is always cash, it is always best to exhaust that first before moving into HELOC usage.  You want your money working the hardest for you.  But you also want to find out, during your mortgage planning stages, if you can carry the HELOC loan for your future purchases, it is a delicate balance between income and debt service.  A mortgage broker who specializes in investment property mortgages, such as yours truly  :o)  can help you with the big picture. 

Some HELOCs are standalone, and some are bundled within a re-advanceable mortgage. For the re-advanceable product, every dollar in principle that is paid down in the mortgage is accessible on the HELOC side.  Usually the mortgage is a pretty competitive rate and the HELOC is slightly higher rate.  Paying down your re-advanceable mortgage aggressively with extra cash you may have acquired makes most sense if your mortgage is at a high interest rate otherwise, why not just use the cash for a downpayment for your next income property?  Consider your re-advanceable mortgage like a cheap loan. 

Another good use for your cash is to pay down your consumer debt, such as credit cards, unsecured lines of credit and car loans. That debt and interest is not tax deductible and eats into your debt ratios. It simply does not make sense to chip away at a 3.5% HELOC if you have colossal loans elsewhere.   

For tax purposes, it is highly recommended to keep personal and investment portions of a HELOC separate, ideally in separate accounts.  In this way, you can prove clearly to the tax authorities what your cost of borrowing is for investment.  If you have one of those HELOCs that is one account only, you may want to keep a portion of your accumulated cash in savings rather than paying down the HELOC. Because, if you sunk that money in and then draw it out later for your personal use, you tainted your accounting system. From experience with my clients and feedback from my accountant who works with many real estate investors, the tracking of interest in this situation is abysmal and you open yourself up for scrutiny and audit.  Not worth it, in my opinion! 

As a real estate  investor who is starting out, your goal is probably building up a portfolio.  In this phase you will be using debt to help you fund your portfolio.  There will be a day when your goal shifts to retirement income from your investment property, then paying down mortgages and HELOCs is appropriate in this case, to maximize your income.   

 

Aneta Zimnicki is a passionate real estate investor and mortgage agent, specialising in investment property mortgages.  You can check out her website My Mortgage Sherpa for more information.

Happy Investing!

Neil

PS: The H.O.P.E. Program has helped more than 12,000 people get homes who never thought they could, helping even those people with POOR credit get approved.  This is one of the best Rent To Own Programs out there as it gives access to thousands of property listings for Rent To Own Homes.  CLICK HERE to enrol in The H.O.P.E. Program or to have your credit fixed.

 

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Why Real Estate Investors Fail

Posted by neil on June 06, 2012
General / 6 Comments

 

Over the past several years, I have met a number of real estate investors who have owned real estate for a long time.  A long time in real estate terms can be 25 to 30 years.  During this time span, it is very possible that the mortgage for the rental property has been pay off in full.

The one commonality that these long time investors have, is that they have created cash flow for themselves.  Now, because their mortgage is paid down, they are able to reinvest the cash flow from their rental property as they so chose.

The smartest real estate investors in my mind are the ones who held onto their rental properties over the long term, and did not sell their investments, no matter how tough things got.

They are the smartest investors because they have created an income stream for themselves that will always be there, just as long as their rental properties stay rented.

Here lies the greatest problem that most real estate investors face.  Most people don’t stick it our for 25 to 30 years with their rental properties.  Most people in fact sell their properties when the going gets tough.

Any experienced real estate investor will tell you that the going can get very tough.  There will be times in which you wonder why you ever became a landlord.  There will be times in which you might be losing money in the thousands of dollars, due to repairs, maintenance and vacancy.  Things may seems like they will never improve and that you will continue to lose money as you maintain your rental property.

Most people break and throw in the towel by selling off their rental property.  This is the biggest mistake that you will make as a real estate investor.  You can never give up.  You must be committed for the long haul.  If you are committed and you stay the course for those 25 to 30 years, you will have won the real estate investing game.

You will have an asset free and clear of a mortgage that will have gone up in value and that will be providing you with cash flow.

So if you are a novice real estate investor, you must consider the following….

When you buy your first rental property, never sell it.  Keep it for the long term and enjoy the cash flow that you earn each month when your mortgage has been paid off in full.

Best Regards,

Neil

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How to use leverage to buy your first rental property

Posted by neil on April 19, 2012
General / 4 Comments

Hello Everyone,

Most experienced real estate investors do not use any of their personal funds to purchase rental properties.  It is not uncommon for experienced investors to own dozens of rental properties, yet at the same time having never used a single penny of their own personal savings.  These investors have mastered the concept of leverage, and that is what allows them to continue to buy multiple properties. To help you understand leverage a little bit better, I have asked one of my fellow real estate investors to answer a ‘reader’s question’ for you.

Here is the question that one reader had recently submitted:

Hi Neil, great info.

RE:  First Rental Property

Most down payments come from secured line of credit or sometimes called HELOC, the question is do investors pay down the loan or leave it? 

Regards,

J

Great questions,  J!  Now to answer the question, here is a response from an experienced and trusted real estate investor, Todor Yordanov.  Todor himself has used the concept of leverage in his real estate investing career, and has some advice to offer “J” and any other novice investors thinking about using leverage…

Take it away, Todor!

Hi J,

Todor here.

This is an interesting dilemma

Many beginner investors will use money from a Secured Line of Credit as a down payment for their first or second investment property. A Secured Line of Credit, also known as HELOC (home equity line of credit) is a Line of Credit secured against your home.

Typical interest rates on these Lines of Credit are around prime plus 1%, thus making it very affordable to borrow funds. Given the fact that your equity is “just sitting there” and not working hard to make you more money and also the record low interest rate to borrow against it makes it very attractive option to use as a down payment.

Back to the question!

You already purchased a property that cash-flows positive every month. Now do you only pay the minimum, usually interest only, on your line of credit and keep the rest in your pocket or do you also try to pay down the principle as well.

This entirely depends on your objective for the property, your exit strategy and how the property performs. There are no wrong answers, but there may be wrong decisions.

Accounting, taxation and ultimately where your “pay cheque” comes from will determine the right answer for you!

Here are some things to consider:

  • Your monthly cash-flow and what you do with it. If the positive cash-flow covers all expenses and you have enough left over to pay down the principal on the Line of Credit, then why not? Some investors rely on cash-flow to cover their living expenses, i.e. full-time investors.
  • Taxation – Are there any tax advantages in paying down the principal?
  • Your long term and short term objectives.

It is entirely possible that you are planning to retire in few short years and “just want to pay everything off” and live off the rental income. Paying down debt may be right for you.

But also look at it this way: You are using cash-flow money (profit) and in fact re-investing it back into a Line of Credit or principle pay down. Will the money work hard for you? Can you do something better with your profits? The answer will be different for each investor.

Perhaps you can split your profits. Use some to pay down debt ( mortgages, Lines of Credit, credit cards) , use some to re-invest, use some to have fun. After all you should reward yourself for working hard and creating income streams that work.

Eventually after 25-35 years the mortgage will be paid off and hopefully the value will be significantly higher, which will more than cover your original down payment. But typically after 5 years the property’s value is high enough to allow you to refinance at the new value, get a new mortgage and take your original down payment back.

Right now money is “cheap”. The borrowing costs are so low, that the more I can borrow to buy income producing properties, the better. You still have to be very careful to get into the right properties, in the right locations. The type of properties that give you:

  • The highest possible monthly cash-flow
  • Excellent potential for Equity appreciation
  • And solid tenants that pay your mortgage every month

 

As long as I have a property that can service all the debts associated with it and still provide me with positive cash-flow, I’ll keep it in my pocket and re-invest it for now.

I hope that helps to answer your question, J.

-Todor.

Todor Yordanov is a long time real estate investor with a focus on long term cash-flow properties that provide superior returns to his investors. He regularly blogs on his web site www.ProactInvestments.com 

Happy Investing!

Neil

 

Would you Buy a Home 0-3.5% Down or find a Rent to Own Home if you could?  Or do you just need Credit help?

The H.O.P.E. Program will work hard, getting you as close as possible to getting that 0-3.5% down home loan no matter how bad your credit is from the start.

CLICK HERE to be contacted about The H.O.P.E. Program or to have your Credit Fixed!

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How NOT to be an asshole landlord

Posted by neil on March 18, 2012
General / 15 Comments

Hi Folks,

Did you know that, the more of an asshole you become towards your non paying tenant, the more of an asshole they will become towards you?

This post is going to spark some controversy no doubt.

If you are someone who is looking to buy your first rental property, one of the things that probably freaks you out the most is non paying tenants.

Over the years, I have talked to a lot of new real estate investors.  Two of the things that make people very afraid about investing in real estate are:

1) Non Paying Tenants, and

2) Property Management

If you purchase a rental property, and hold that property for any gs rolex day date 118135 36mm mens automatic watch length of time, no matter what Country or City you are located, chances are that eventually you will encounter tenants that are late with their rent.

Like many real estate investors, if you expand your portfolio by purchasing more than one rental property, you increase the likelihood that you will have tenants that are late with their rent.

Most experienced real estate investors and educators will tell you that when a tenant is late with their rent, you have to be very strict with them and lay down the law.

Many say that if tenants are even one day late with their rent, you should send a notice for eviction.

Well, in my opinion, that is a big pile of Bullplop!

I bought my first rental property 7 years ago, and only 7 years later I figured out something very important.

I have discovered that when it comes to the vape Líquidos collection of rent, that:

“the more of an asshole you become towards your non paying tenant, the more of an asshole they will become towards you.”

There is much more to this of course, however, for this post, I want to keep you with these wise words…

Once again, they are:

“the more of an asshole you become towards your non paying tenant, the more of an asshole they will become towards you.”

In part II of this blog post I will share with you my findings on how NOT to be an asshole landlord when it comes to the collection of rent.

Now…Enjoy this very funny video of Pearl The Landlord.

[youtube]http://www.youtube.com/watch?v=9OVt7xEZHxo[/youtube]

ps: If you are looking to buy your first rental property, sign up to my blog today.  Simply enter your email address in the top right hand corner of the blog.  You will receive tips from experienced real estate investors on how to buy your first rental property!

 

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Priceless Tips From An Experienced Real Estate Investor Part 2

Posted by neil on March 03, 2012
General / 4 Comments

Hi Everyone,

A major reason why people do not invest in real estate is because they have many questions that go unanswered.  In an effort to answer questions from my readers, I have implemented, Priceless Tips From An Experienced Real Estate Investor.

Already we are on Part 2 of this series.  I have no doubt that this article series will continue on for a long time, as the questions from you the readers will continue to come in.

As time goes on, I am going to have other experienced real estate investors take turns in answering your questions.  However for now, it is I who will be providing the feedback on these questions.

So here we go.

I got an email yesterday from another reader.  This reader wanted some direction on how to move forward with real estate investing.  Once again, to protect their confidentiality, i am going to be referring to them as, ‘Reader’.

Here is the question that the Reader sent.  I have included their question in BLUE Text.  My answers to their questions are in RED Text.

Here we go…

“Hey Neil

I am currently in my first home and am soon going to be buying a larger one now that the family has grown. I am considering keeping my first home as a rental property. (Great idea so far.  Definitely hold onto all the real estate that you can.  Let’s read on…) However, I am not sure what is the best way to go about with the mortgages. Here’s what I am thinking my 2 options are. (In the coming weeks I am going to be having guest posts from Mortgage Brokers who help people finance their first rental property purchases.  Stay tuned for those upcoming posts. However, for now, let’s answer the questions at hand…)
1) Take out a line of credit and use it as a down payment on the larger house house and pay off the remaining mortgage on the home I will be renting out. 
2) Remortgage my current home and use the equity as a down payment on the new larger one
In the first scenario, I would have a mortgage on my new home, and a line of credit on my rental property. (Reader, this first scenario that you outline is not a bad one.  The benefit of having a line of credit on your rental property would be that your monthly carrying cost of that property would be reduced versus, if you had a mortgage on that property.  For example, if you had a line of credit on that property, all you would owe monthly would be the interest payments.  Versus, if you had a mortgage on the property, you would own interest and principal.  The disadvantage to this is of course when and if interest rates go up, your monthly carrying cost will increase, as the interest that you owe each month will go up.)
In the second scenario, I have a mortgage on my new home and a mortgage on the rental home. (I personally like this option better.  I had the option of putting a line of credit on one of my rental properties but opted not to.  I opted not to because I like the idea of mortgage pay down.  As the years go by, and the longer you own a rental property, you are always delighted to see the mortgage balance come tax time because it is always a little bit lower than it was the previous year. Fast Forward 5 years and you see significant mortgage pay down)   Which way is better for taxes? I know with a line of credit, i would have more flexibility with making payments in case i had problems collecting rent, but i’m not sure if I get the same tax breaks. Do you have any recommendations?
Any info would be great, thanks”
(The one thing that I have learned over the years is that taxes are complicated!  Your tax advantages or disadvantages can be dependent upon where you are geographically.  I would recommend asking an accountant that has experience in dealing with clients who are real estate investors.  Whenever I have a question related to taxes, I always refer to my real estate accountant.  The best place to find an accountant who is competent with real estate related questions, is to get a referral from real estate investors who are currently utilizing this type of accountant. )

Reader, I hope this information helps to answer your questions.  For those of you with questions, please keep them coming.

Until next time…

Neil.

ps: If you know anyone who would be interested in reading my blog, please tell them about it.  Feel free to Tweet the article using the icon above or share the link on Facebook.

pps: don’t forget to read part one of this series titled, Priceless Tips From An Experienced Real Estate Investor

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Priceless Tips From An Experienced Real Estate Investor

Posted by neil on March 01, 2012
General / 1 Comment

Hi Everyone,

If you really wanted something, and you were able to get this “something” for free, would you take it?

Take a moment and think about that.  I am not trying to trick you. I would hope that your answer would be an astounding….”YES!”

You are in for a treat because I am going to give you this ‘Something’!

This ‘something’ is advice!

Not any old advice, but advice on real estate!

This post will be the first of many posts devoted to answering questions from you, the readers of First Rental Property.  Moving forward, I will also be asking some experienced real estate investors to provide their answers to your questions.  This will allow you to have a diverse array of opinions.

Below is an email that I got from one of my readers today.  They were asking for my opinion on a number of topics.  I thought that it would be best to publicly answer all of these questions so that more of you could benefit from reading these answers.

So here we go.  Here is the email I got today…

To protect their identity, I will be referring to them as….”Reader”

Reader:
“Hi Neil
In 2010 I purchased my first rental property!  I used the equity from my primary residence through a SLOC to put a 25% deposit on my first rental property.  Now that I am enjoying being a real estate investor my husband and I would like to purchase two other single family homes within 5 years. 
The SLOC that I have is 150k some was used for the deposit and the rest personal use.  Now my question for you:Does it make sense to consolidate the SLOC and my current principal residence mortgage (3.5% variable term ends 2014) and change my mortgage to a re-advancing mortgage (pay applicable penalties), then wait to accumulate the necessary funds to purchase investment property # 2 and then repeat the process again? does this make sense or is there other ways of doing this?
Neil:
Secured Lines of Credit (SLOC) are nice, but readvancable mortgages (a.k.a. matrix mortgages) are even better!!  For those of you that do not know, there is a difference between regular secured lines of credit and matrix mortgages.  The basic difference is that with secured lines of credit, your available credit limit is capped.  Whereas, with matrix mortgages your available limit continues to increase as you pay down your mortgage.  All things being equal, for every dollar that you pay down on your mortgage, you gain an additional dollar in credit.   Bottom line this means that as you pay your mortgage down over the years, you have a lot more credit available to you.  For example, if you paid your mortgage down by $10,000, your credit line portion will increase by $10,000. 
This is a sweet deal for real estate investors! Essentially, as you pay down your mortgage, you are generating more funds through your secured line of credit that you can use to invest in real estate. 
The reader asks:
“Does it make sense to consolidate the SLOC and my current principal residence mortgage (3.5% variable term ends 2014) and change my mortgage to a re-advancing mortgage (pay applicable penalties), then wait to accumulate the necessary funds to purchase investment property # 2 and then repeat the process again?”
Neil:
My answer to this all depends on how much available room the reader has on their secured line of credit.  Personally, I am not a fan of paying penalties when you don’t have to.  So, ‘Reader’, if you can avoid paying penalties, please do so.
If you have enough room on your secured line of credit currently to buy your second rental property, do it.  You can always do this and then wait until your mortgage term ends in 2014.  At this time, once the mortgage term has expired, you can then convert your secure line of credit over into a matrix mortgage and avoid paying any penalties.  That is what I would do, if I were you…
Too often I see people get super impatient and want to buy so many properties in a short period of time.  They get focused and buy, buy, buy everything in sight.  When the dust settles one of two years from the purchases…they are left owning a pile of hot garbage.  That is, their real estate portfolio resembles hot garbage.  Vacant units, tenant evictions, under market rents, repairs and maintenance bills, and the list goes on…
The Reader asks:
“Does it make sense…to…repeat the process again?”
Neil:
I say, why the hell not?!  If you want to keep on buying properties, and they are good properties, do it.  That is of course, if that is what you REALLY want to do.
 The Reader asks:
Final question: fixed rate vs variable what are your thought on that since the fixed rates are not a big difference to the variable rate mortgages.
Neil:
Variable. 
Reader asks:
“BTW would you consider writing blogs on how to purchase your second or third rental property”
Neil:
Reader, that is an interesting question.  My answer to that is no.  What I might very well do is write blog posts going forward on why people should not buy their second or third rental property.  Thanks for the idea! Stay tuned, and thank you for the questions Reader.  I hope that I answered all of your questions.  If not, please let me know!
What do you think about the ‘Readers’ questions?  Do you have similar questions yourself?  If so, let me know, and I will either answer them myself, or have one of my trusted and experienced real estate investor friends answer the questions for you.
Until next time…
Neil.
ps: Do you know anyone that would benefit from reading my blog?  If you do, don’t keep the blog a secret!  Tell them all about it.

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How To Read a Credit Report

Posted by neil on February 27, 2012
General / 7 Comments

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!

 

 

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3 Must Haves In Lease Agreements

Posted by neil on February 26, 2012
General / 6 Comments

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

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How To Buy A Rental Property In the Right Location

Posted by neil on February 25, 2012
General / 1 Comment

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!

 

 

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