Monthly Archives: May 2012

7 Survival Tips for the Accidental Landlord

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Nothing says “future distressed seller” like an Accidental Landlord.

Becoming a landlord by choice can be an excellent, intelligent financial decision.

But turning into a landlord because the property you thought would flip quickly just couldn’t sell…. Well that usually just sucks.

Too many investors screw up the calculation on their acquisition price or rehab costs, and then find themselves with no choice but to rent out the property and mitigate the damage.  Or they found a title problem.  Or a foundation issue that doesn’t impact safety, but prevents a sale.  In these cases, the flip usually needs to become a rental.

A cash investor usually has no problem doing this. Even accounting for professional property management, property taxes, insurance and maintenance bills, most cash investors are going to have positive cash flow at the end of the month with a rental property.

The problem is when you used leverage to buy that flip.

Most people don’t believe this, but even with a hard money loan, you can make a nice profit off of a rental property.  IF you were conservative with the loan amount, IF you had enough skin in the game, and IF you don’t have a short-term balloon.

So what’s an Accidental Landlord to do?  Here are some Emergency Tips:

Rent Quickly– the longer the house sits empty …  or the longer you wait to list it or market it as a rental … the less likely you are to make a profit.  So market as a rental as soon as you realize that’s the only viable option. 

Price it Right.  Then price it right.  This goes hand-in-hand with Rent Quickly.  Do some quick market research, see what the rental comps are… then price 10% below the market to get someone in right away.  Waiting a few months to rent the house out will hurt a lot more than dropping the rent right away.

Rent to the Right Tenant.  Losing a tenant (or cleaning up after one who trashed the place) is a sure way to kill profits.  Screening takes time and money… and requires experience.  But it is a smart investment to do a background check and credit check.  You may not care if they were 30 days late on a Visa bill…. but you want to make sure your prospective tenant hasn’t left a trail of jilted landlords.

Consider Professional Management.  We are a DIY nation.  But are you cut out to be a landlord?  Do you like early calls on a Saturday?  How will you handle the inevitable emergencies?  Do you feel comfortable with the screening, billing and collecting process?  Managing tenants is a BUSINESS.  Are you set up for that?  If not, find a good property manager.  Delegate.

Talk to an Accountant.  You need to know what you can and can’t expense on a rental property.  If you are used to flipping, you may not have a clue how depreciation works.  But it’s an important part of the profit equation for all buy-and-hold strategies.  And you have to recapture depreciation when you sell, so you might as well learn how to benefit from it.  You also need different record keeping for your rentals than for your flips.  So don’t forget to call the CPA.

Talk to a Lawyer.  Sure, you can use an off-the-shelf lease agreement.  Just fill in the blanks and hope for the best.  But do you understand your state’s landlord-tenant law?  Do you know the rules for escrowing a security deposit?  Or what notice you must send for non-payment?  Or what the Fair Housing Act requires? Again, most flippers try to get by without a lawyer on the team (except for at closing).  Landlords always need competent legal counsel.

Call your Insurance Agent.  Make sure the policy you bought to cover your rehab and flip will work.  It usually won’t.  You need to insure the property against damage and yourself against liability.  If a guest of your tenant gets hurt… you will get sued.  And you want to make sure your tenant understands they have to insure their stuff—that’s not usually covered under your policy.

What other tips do YOU have for an Accidental Landlord?  What does a flipper need to know if they suddenly find themselves with a rental property?

Please leave a Comment below!

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Plays 2 Run- Politics and Foreclosure Tactics

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I love political commentary. Especially from those who identify and label bullshit.

One of my favorite guys to listen to is Alan Kelly (@playmakeralan), the CEO of Playmaker Systems and author of The Elements of Influence.  He does a great job of weekly breaking down political bullshit on The Morning Briefing- POTUS.

Alan frames his discussion in terms of “running plays”.  The plays he discusses are not limited to politics– they work in business as well.  They are the methods of advancing ideas, controlling markets, positioning products, and beating the competition.

In his system, Alan identifies 28 “Plays” (a stratagem, one of a finite set of discrete strategic maneuvers).  They are each labeled, defined and thoroughly discussed.   If you love strategy, game theory, and competition, get the book and visit the site.

Here are 9 of Alan’s Plays and how we regularly see them run at a foreclosure auction.

PASS-Exit the Marketplace.  The strategic withdrawal from the marketplace. From time to time, an investor’s war chest gets empty… or close enough.  Rather than show up at the sale and risk making a wrong move, the investor can take a vacation, focus on other investment strategies, or just go to the sale and hang back.  This strategic retreat allows the investor to live to fight another day.  Retreat… regroup… redeploy.

PING-Hint and Hide. The oblique reference or suggestion, enabled either by a player’s mere presence or its implied interests in topics, events and developments. The investor who wants to control a segment of the auction may strategically bid on properties that don’t fit his investment profile… just to throw others off.  Showing interest in everything can mask the investor’s true intention.  Bidding on farm properties when you are a single family home investor.  Buying the raw land out from under the developer.  These are not direct attacks, but simple hints that a competitor needs to look out for you.

RED HERRING–Send Off Course. Action drawing a competitor away from its preferred position or intended course of action. How many times have you heard investors at an auction asking each other about a sinkhole, or whether the property was occupied, or whether the roof was shot.  This might be genuine curiosity… or it could be a Red Herring.  The beauty of this Play is that you never know…

JAM-Gum Up the Works. Disable or disorganize another player’s activities or communications.  Investors love to distract their competition during the sale.  Asking them questions, calling their phone, or otherwise running a pick play to prevent them from bidding on the property up for grabs.

CHALLENGE- Exhort Others to Action. The public appeal, suggestion or demand by a player.  Investors love to push their competition off a property.  Sometimes directly, sometimes indirectly.  The open challenge “Come on, you know you want this one” can get in another bidder’s head just long enough that they don’t bid on time…. or even better yet… push them into buying a mistake.

BAIT-Taunt, Provoke a Reaction. The overt provocation of another player through action or information. People who are taunted get angry.  Angry bidders make mistakes.  Provoking the competition usually results in them making a poor choice.  The Information Bait is a little more subtle, but just as effective.

DRAFT- Follow, Feed-Off, Then Try to Pass.  The attempt to feed off another’s energy, innovation or best practice with the intent of overtaking.  At foreclosure auctions, we call this Piggybacking… the investor who doesn’t do their homework, but simply outbids someone who knows what they are doing.  It takes less energy to draft… but its also easier for the lead car to put you in the wall when you try to pass to the outside.

PLANT- A Secret Ally. A trusted and confidential ally- usually disguised or undisclosed to the opponent, who is placed to seed information.  This doesn’t work well at small auctions, and a plant can only be used once per player.  But we often see new plants at our sale conducting whisper campaigns.  Especially when new bidders with lots of cash show up.  Be cautious of the friendly person chatting you up at the sale…

CRAZY IVAN-Turn and Attack Unexpectedly. The deliberate invitation or initiation of an attack.  Crazy Ivan is one of my specialties… the suicide maneuver for tactical advantage.  Remember Hunt for Red October, where they spin the sub? I love leaving everybody in the room wondering what the hell I am thinking. We buy so many houses that it starts to get predictable, which invites Drafting.  Crazy Ivan just keeps it real…


 So what other games and plays do you see at foreclosure auctions?  What works… what doesn’t?

Please respond in the Comments Below!

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How to Make Hard Money Financing Work- for Landlords

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I love buying foreclosures with cash. Nothing beats the flexibility and certainty.  But financing can also be an incredible leverage tool.

With flipping, borrowing usually works well.  Buy, fix and flip quickly, and you earn easy profits, even with the high costs of a hard money loan.

But what about the buy-and-hold investor?  The landlord looking for steady income?  Should leverage ever be a part of the equation?

I used to think that it was a really bad idea to borrow for buy-and-hold.  But I’ve changed my mind.

When you run the numbers…actually do the math… financing makes a lot of sense for income producing property.  The leverage REALLY helps the returns.

Now… where do you get a loan?  Credit today is tighter than hipster jeans.  And even if you qualify for investor financing, Fannie Mae caps the number of properties you can finance as an investor.

So, for most investors, the only real financing option is hard money or private financing.

That’s usually 12% money (or higher).  So how can you possibly make money on a rental if you are paying loan-shark rates?

Well… the math is actually pretty simple. Hard money works.

It turns out you can STILL make money on your buy-and-hold properties, even if you are borrowing 12% money…actually, you make MORE money than if you paid all cash.

SIDE NOTE: This is GREAT for people with Self Directed IRAs.  You can buy rental properties with leverage.  While banks won’t give you the “non-recourse” loan the IRS requires, a hard money lender is usually happy to lend based on the value of the property– with a large down payment.  And again, the math gives you a much better return on investment.

Now, first you have to accept the difference between Return on Investment (ROI) and Cash Flow.

Because with hard money, you are really going to dent your monthly Cash Flow… but you are going to increase your overall ROI.   This just means you have to look at the long term, not the short term.  Of course, since most buy-and-hold strategies are designed to look at the long term anyway….

In Florida, I can readily find hard money at 12% interest.  Usually, that’s a 50% LTV Hard Money(Loan to Value)… I have to make a 50% down payment, and can borrow the other half.  The hard money lender wants a short amortization schedule… full repayment of all principal and interest in 100 months.  (Or they want a short term balloon, which requires a refinance in a couple years… not a great long term plan.)

Again, 12% sounds like an exorbitant rate and results in a really high monthly payment, right?

So… how can the hard money loan POSSIBLY be better than all cash?

Here’s the simple math:

EXAMPLE:
$100,000 Property
$1,200 Monthly Rent

  • Assume 4-months of rent to pay property manager, taxes, insurance, vacancy and other expenses. (Conservative, but simple). 
  • Ignore depreciation, cost allocation, and other tools that actually make financing even more attractive.
  • Ignore the possibility that rent and property values should go up over time- that’s common to both calculations.

Cash Return on $100k property rented at $1,200/month:
$1,200/month x 8-months = $9,600 / $100,000 invested = 9.6%

Cash Return using 100 month / 12% interest / 50% down payment:
$50,000 Loan: 100-month amortization=$793.29 per month ($9,520 per year)
$1,200/month x 8-mos. = $9,600 – $9,520 loan = $80.00 / $50,000.00 = .0016% 

Ugh… which would you prefer?  A 9.6% return… or a tenth of a percent?

Hold on a minute. 

So far, we just calculated your cash flow as a percentage of the amount invested.  It’s not an accurate picture of your overall ROI.

Because every month, your tenant is helping you pay off the hard money lender. 

On a 100 month amortization, a huge chunk of the monthly payment is reducing the loan principal.  And that reduction is adding to your equity value (independent of any appreciation in rents or the property value).  Here’s what your $50k loan looks like over time:

For the mathematically challenged, this looks like a bunch of gobbledygook.

What it shows is the investor who borrowed hard money (even at an outrageous 12%) makes a little less ROI in the first three years than his “all cash” counterpart.

But then in the 4th year, the return for the leveraged investor passes the All Cash investor… and it steadily gets better.

Over the course of 8 years, all other factors being equal, the Investor with a hard money loan made an average of 11.72%, while the cash investor made a steady 9.6% return.

That means the leveraged investor had a 22% better ROI than his all cash counterpart.

BUT…

The REAL difference is what happens at the end of the loan.

Because the leveraged investor could afford TWO houses with his 100k (two $50k loans with $50 down payments).

So after 8 years, the leveraged investor has two houses, both paying rent, both with fully paid off loans.

And the ROI for the leveraged investor is thereafter DOUBLE that of the cash investor.

Let’s Summarize your choices:

1.  An all cash purchase of a rental home.  Pay $100k, rent it for $1,200 a month, and make a steady 9.6% return on investment after paying all property management, taxes, insurance and maintenance bills.  (Plus the rents and property value hopefully go up over time)

OR

2. Borrow 50% hard money at 12%.  Buy two houses.  Enjoy an average of 22% higher ROI over the first 8 years…. then 100% higher ROI than under the cash option (and still enjoy appreciating rents or property values)

The Moral of the Story?

Even leverage at loan-shark rates can compound the returns for long term, buy-and-hold foreclosure investors!!

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