7 Survival Tips for the Accidental Landlord

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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How to Make Hard Money Financing Work- for Landlords

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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“How Should We Spend $300M?”

Pam Bondi

Pam Bondi - FL AG

As a part of the $25 Billion national mortgage foreclosure settlement with the Big Banks, Florida is getting about $300 Million to keep homeowners out of foreclosure.  That part of the cash HAS to be spent on foreclosure prevention programs.

Florida’s Attorney General, Pam Bondi, is looking for suggestions on how to dole out these funds.

The hitch is, the money MUST be spent on foreclosure prevention programs like housing counselors, assistance hotlines, mediation programs, legal assistance, anti-blight projects and consumer protection programs.

Guess what?  Florida has already tried these… with very limited success.

Mediation Program Terminated

Back in 2009, Florida courts started requiring lenders to participate in mediation prior to taking back a home in foreclosure.  Every homeowner was given a chance to sit down at mediation before facing a judge.

In December 2011, the Florida Supreme Court terminated the program.  Turns out, only 4% of cases eligible for mediation ended in any kind of a settlement, and most of those cases ended in the homeowner signing a “deed-in-lieu” back to the bank.

Foreclosure Hotline Defunct

Back in 2008, the Florida Bar set up a hotline to help homeowners facing foreclosure, staffed by hundreds of volunteer attorneys offering pro-bono services through the Florida Attorneys Saving Homes initiative.  Attorneys would help negotiate with the lender at no cost to the owner.

The hotline number is out of order, and the website has been hijacked by spammers.  But luckily, Google shows 1.6 Million other results for “Florida foreclosure hotline”.  So there is no shortage of places to get advice…

Anti-Blight Projects

Ever heard of “NSP houses”?  The Neighborhood Stabilization Program is a muti-phase federal give-away to “stabilize communities that have suffered from foreclosures”.  The Feds gave several billions to state and local governments in block grant money.  BUT, the feds required the locals to buy houses from the Big Banks at full asking price (that’s right.. it was actually another Wall Street Bailout, despite the name).

The homes could then be rehabbed or demolished, to help  eliminate blight.  But theNSPfunds COULD NOT be used to directly help buyers or people in foreclosure.

Unfortunately, after a few years, everyone finally realized if you buy an REO at full price, before the market has hit bottom, then use governmental contractors for the rehab, the homes end up being so expensive that nobody will buy them on the back end.  So hundreds of NSP houses that COULD have gone to investors and then new owners or tenants are instead sitting empty…. not exactly stabilizing the neighborhoods.

Housing Counselors

Just last month, HUD announced another $42 Million in housing counseling grants to 468 organizations, with the goal of helping people keep their homes.

But that money goes to staff positions… not homeowner relief.  And while $42 million is a lot… it averages out to a just a single staff position for each agency.  And how many counselors do you really need to tell people that if they can’t afford their home, foreclosure is inevitable?

You Really Want to Prevent Foreclosures?

The “Foreclosure Crisis” is entering its 5th year.

At this point, how many people facing foreclosure really need a lawyer, counselor, mediator or hotline to educate them on their options?

People losing their homes to foreclosure in 2012 fall into one of two camps.  They either:

  1. Can’t afford to make a mortgage payment (lost a job, got sick, etc); or,
  2. Are Strategically Defaulting because they are hopelessly underwater.

There is only one rational solution for these folks.

Give up the home.

For RentI know it’s harsh, but these people need to become renters.  Home-ownership isn’t for everyone…  especially, well… those who can’t afford it.

So why not use that $300 Million to convince the roughly half-million Floridians in foreclosure to give their house back to the bank and become tenants?

“Willing to sign a deed and move into a rental house?  Here’s $500.  You now have your first month’s rent!”

Give em’ Cash-4-Keys and turn them from foreclosure defendants to viable tenants. 

Cash for KeysIn most parts of Florida, investors are buying up bank-owned properties in droves, and these investors are looking for new tenants. 

A homeowner in foreclosure can move across the street into an identical house, and rent for just half of what they were paying on their 2006 mortgage.

Six months from now, the Big Banks will have all the foreclosure houses back and they can figure out what to do with all that shadow inventory.  Probably sell it to investors that will fix them up and rent them out to all the new tenants.

And the foreclosure crises will be over.

Any chance whatsoever of this happening? Er…. No….  None.

But give Pam Bondi’s office a call at (866)-966-7226, and let her know what YOU think…

 

 

 

 

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