Rental Woes: Cleaning Up the Mess

Real Estate Investing 1 Comment »

Well today hasn’t really been a good day in my real estate quest. I own a double wide on the outskirts of town, and had some renters that I just evicted. They had been consistently behind on their rent, and finally only paid for half of last month’s rent, and nothing for this month. So today, we were in the house trying to clean up after them.

The rotten meat in the refrigerator sure was a nice touch. Not to mention the dog feces in the master bedroom. But what really got me was the destruction of my bathroom door, and several pieces of trim in the house, and the bottoms of walls that had been scratched up from the tenant’s pet. You might be thinking, “Well Jeffry, why did you allow them to have a pet in the house?” And the answer to that is that the dog was illegal. The contract did not allow for a pet, nor did they attempt to modify the lease, pay a pet deposit or anything.

I guess I am just venting with this post, but I would like to be able to connect with my readers who invest in real estate, and let them know that I am a real person, and that I have struggle with bad renters just like the rest of us. Anyways, keep your heads up out there, and I will try to keep mine up as well. The rental market here is still strong, so I hope to have it rented out again soon. But I think I am going to put it up for rent or sale, and just see what happens. ‘Til next time…

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Notice to Vacate: My First Time

Real Estate Investing, Property Management 1 Comment »

There comes a day in every real estate investor / property manager’s life when they have to issue a notice to vacate. Last Monday was my first time. I truly believe that this is the worst part of managing properties; other than perhaps a contractor that does shotty work and still wants to get paid. But truly, in evictions, there are no winners. The tenant loses their residence, and the landlord is typically left with a trashed out unit and an unpaid bill. I am not anyone special, it was the same for me.

This particular tenant was having problems getting their rent to me on time in the past as well. Only one or two months did they pay their rent on time. So, as you probably can guess, they just got further and further behind on their rent, until finally last month they were only able to pay a little over half of what they owed in regular rent, not to mention all of the late fees. The good news is that they did in fact leave without me having to go to court and get the eviction finalized. With just the notice to vacate, they left the property. This is one area that I think my treatment of them through the problems paid off.

Working with Your Tenants

You know, problems happen, and tenants sometimes cannot come up with their rent in a timely fashion. But I believe if you work with them a little bit, and don’t hassle them too much, they will be more likely to make it a priority to pay you. Now don’t get me wrong here, you still charge your fees and you still send letters, but getting nasty and upset with them is not going to get you anywhere. In fact, in some instances, getting upset with them will cost you more, if they think you are tyrannical, they may trash the place before they leave, and drag you through the eviction process to expel them. I think in my case, the tenants were so ashamed about the whole situation, that they just left.

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Blanket Mortgage Use in Rental Properties

Mortgages, Real Estate Investing No Comments »

As a fellow real estate investor, sometimes deals come along for multiple rental properties, and getting a blanket mortgage for those properties is an ideal situation. I just came over from doing some property rehabbing at one such unit today. The deal involved two duplexes that were several blocks away from each other, that had the same owners. So we negotiated the purchase of these properties (a great deal by the way, some 1% - 1.5% rent to purchase price ratio, after repairs) and set off to our banker to get a loan.

Working with a Great Mortgage Broker / Banker

Again, one of the key fundamentals to doing any legitimate business is having strong relationships with business to business units. Your mortgage broker or banker, any contractors, property managers, etc. must be of very high quality and at the cheapest possible price. I stressed quality first, because in today’s world the best price is often accompanied by some very unscrupulous business practices. Get references, and test your relationships before you do big deals with them. It might be a little more effort, but it is worth it, as you will see in a moment.

Getting the Blanket Mortgage

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Rent Formula and Positive Cash Flow

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If you are investing in rental properties like me, you need to make sure you have a rental formula that works for the property of interest and provides positive cash flow. There are several different formulas that you should consider. One is a formula for calculating an offer price based on expected rent, one is a vacancy and maintenance formula, and another is a calculation on net cash flow/income generation on the property.

Simple Offer Price Calculation for a Rental Property

Some experienced investors have a complicated formula for calculating their offer price. While this usually lends itself to a better decision, I like to make a simple calculation first. If the bid price is going to be near this calculation, it might be worth it to continue estimation of repairs, etc. but sometimes you can just ball park the rest. But most investors like to look at a rental property this way:

1% x Offer Price = Expected Rental Price

This is a good rule of thumb to get you started. Now, I have offered on properties where I am looking at 1.5% or greater, in which case I don’t spend too much time estimating repairs. The cash flow is so good, you can absorb a goodly number of repairs and still make quite a bit of money.

Vacancy and Continuing Maintenance Equation

Another thing to consider is the vacancy rate and continuing maintenance that your new rent property will need. Here’s a general rule of thumb:

75% of the Rent is kept by the investor, 25% of the rent is spent in maintenance and vacancy.

Now I have seen the hassle and problems that surround renting properties, and I tend to lean toward 1 year leases, just to try to minimize issues related to vacancy, moving a renter out and advertising for a new one, etc. If you really need to get a property rented you might consider doing a 6 month lease, but I would focus on getting 1 year leases.

Net Cash Flow / Income Generation

I threw in this just for some additional help, but it shouldn’t be that hard to figure out.

Rent - Maintenance - Vacancy + Depreciation (usually 30 straight line depreciation) + Tax Deduction on Maintenance, Office Supplies and Mileage

So my recommendation is to take a part of your house as an office (for tax purposes), that way you can take all of your miles for any trips back and forth from your office (home) to all of your properties. You’ll have to recapture the depreciation on your home office when you sell your home, but its worth it.

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Real Estate Investing for the Long Run, and Taking Action

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This is a good article on getting into real estate investing, and it lines up very similar to my strategies regarding buying and holding. There is an interesting point about today’s lenders looking at the title history on the house you are trying to sell. If it is only a few months ago, it could be flagged as a flipper, and according to this article, that could be a real problem. It would be worth doing some investigation of your own to find out if you lender would have any problems with you flipping a house, or if they have any problems in general with a house that has been purchased recently when evaluating the loan of a new buyer.

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Lease with Option to Purchase

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You may remember the articles I wrote in the past on Residential Lease Option and Residential Lease Purchase. These were how to articles to give you ideas on how to further your marketing effort of a particular property by opening up more options for you to get into buyers, and not just renters. And often, with these contracts, you will end up getting the house back anyway, as most people with bad credit who are unable to buy (and therefore in the market to do a lease option or lease purchase) will likely still have bad credit at the end of the lease period. But I wanted to go a little further with this post and tell you about a hybrid deal that I just recently completed.

I manage a property for an ex-business partner, who has now moved out of state. We were looking to rent the property, but with the property being a middle income type property, the rent we needed to get was just a little out of range of the typical family that would be interested in such a property. So I marketed the property as a “for rent” or “for sale” property and told perspective clients that I would be interest in a lease option contract. We were not as interested in a lease purchase agreement because we wanted to make sure we got a good chunk of change up front, as it serves to put the buyer into the property, and we expect less damage to the house if someone has some money in it up front (something to lose).

Well, it took two months to find a buyer, but we finally negotiated a deal with a nice couple with one child. The deal was interesting as it had some of the mechanics of both a lease option and a lease purchase agreement. In the end, the details of the deal were as follows:

  • Option fee of $2,750 up front from the buyer
  • $875 per month in rent
  • $50 per month credited to buyer at time of exercising the option to buy
  • 3 year lease agreement
  • Final purchase price of $96,700

So, as you can see, in a typical lease option, you would get the initial option fee, monthly rent, lease term agreement, and a final purchase price. Whereas in a lease purchase, you would get a higher monthly rental fee, with part of it being credited to the buyer’s purchase price, a lease term agreement, and a final purchase price. So the hybrid we did here is creative, and it met both the need of the seller and the buyer.

So this is just one example of how you can use creative finance to more effectively market your real estate holdings. This hybrid lease option / purchase is just one of many ways to open up the available buyers / renters in your area.

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Real Estate Rehabbing

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Have you ever asked yourself, what is rehabbing? Or been to a meeting, and wondered what real estate rehabbing was? Some people talking about remodeling, and other ways of fixing up a house, but they are using the terms incorrectly. Simply put, real estate rehabbing is the act of restoring a house to its previous condition. Remodeling, on the other hand, is the act of upgrading or improving the property in some way as has not been done to it in the past. Some examples of remodeling are:

  • Adding a new room to the house.
  • Adding a garage or storage shed.
  • Tearing out a standard bath tub and replacing it with a large, jacuzzi or garden tub.
  • Adding an island to a standard kitchen.
  • Replacing carpet with hardwood floors.
  • Replacing A/C window units with central heat and air.
  • Significant landscaping upgrades.

On the flip side, when you are talking about rehabbing a property, generally you are talking about things that are really necessary to fix, things that are obvious eye sores or code violations, such as:

  • Replacing worn out carpet with new carpet.
  • Re-painting the interior/exterior.
  • Replacing a dysfunctional dishwasher with a new dishwasher of similar size and capabilities.
  • Fixing or replacing a leaky roof.
  • Fixing worn out plumbing and electrical.
  • Replacing non-working light fixtures and faucets, etc.
  • Mowing the grass and removing weeds.

So you see, in the first group, when we are talking about remodeling, we are talking about significant upgrades and improvements to a house. Improvements like adding rooms, central heat and air conditioning can actually increase the value of the house. But when you are strictly talking about rehabbing, all you are doing in that scenario is fixing only the things that really need to be fixed, you aren’t adding any value to the house, you are simply preparing the house to sell at market value. Often, when you remodel, you end up spending more than you stand to make by when you sell the house (unless of course you wait for years and let the property appreciate). So I normally go for properties to rehab, because you can get them cheap, spend a minimal amount of money in repairs, and then get market value for the sale of the property.

So to recap, just remember that rehabbing is just fixing the things that are broken or old in the house, and remodeling is making significant upgrades to the house. If you found this article interesting, sign up for my RSS feed to get free, automatic updates as they become available in your favorite RSS reader. Don’t know what a RSS feed is? Learn more about property rehabbing

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Realtor License Commentary

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If you have been following this personal finance blog, you know that I work in real estate, and hold a realtor license. I had received some feedback from post Realtor License via email that I think would be helpful to the community. In this article I explain my thoughts on why you should consider having a realtor license, regardless of whether you intend to become active in real estate investing or any other realtor activities. This email came in from a person who was thinking about getting his license here in Texas. The following is an excerpt from the email he sent me:

Just read your realtor license post and couldn’t agree more w/ the benefit of holding such a license.  You mentioned that it cost you about $800, did you use take an online or traditional class?  Also do you have any resources that you found really useful while going through the process?  And how long did it take you to obtain the license?  I am in TX and really considering getting my license specially since I might be putting my home on the market soon.

To which I responded with:

Thanks for the contact. I completed my prelicense education online via It was the cheapest online method I could find. Make sure that the school you choose is listed on the TREC approved list of education providers at

The process is pretty simple. TREC provides a 1-2-3 type list here: For the education part, I recommend buying a package that gives you all the hours you need. If you have some college, you can follow TREC’s method to send in your transcript, and not have to take the full 210 hours, you’ll just have to take 150 hours. I went with the 150 hour option.

After you complete the TREC steps, then you need to negotiate with a real estate broker to allow you to hang your license with them. Once you have one, it is a simple form to send to TREC saying you will be working for them. That will activate your license and you will be ready to go.

This is just a basic help guide to making sure you have a checklist of exactly what to do to acquire your realtor license here in Texas. Before you go, take a moment to sign up for my RSS feed, and get automatic updates to everything going on here at Personal Finance Resources.

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How Does a Contract for Deed Work?

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If you have ever thought about selling your house via an owner financing arrangement, you may have thought about doing a contract for deed.  But just how does a contract for deed work? It may be easy for a realtor to advise you to use a contract for deed when you are making inquiries, but telling you how exactly to do one is another story. Luckily, I have done this type of contract before, so I can give you the details.

The Basics of a Contract for Deed

A contract for deed, in a nutshell, is a cross between a true mortgage, and a rental agreement. In this scenario, the buyer agrees to make a certain number of payments at an agreed priced, while the seller agrees to sign over the deed to the property at the end of all payments. In essence, the seller is giving the buyer a mortgage on the property, but not delivering the title to the property until the mortgage is completely paid off.  It is highly recommended to get a contract like this notarized, because the seller is not going to be filing the agreement for public record. The agreement is strictly between the buyer and seller, and to all other parties attached to the property (e.g. the county clerk’s office, any lien holders, etc.) it is still fully owned by the seller. In most cases, the seller is using the contract for deed as a “wrap-around” for their existing financing.

Contract for Deed Problems and Cautions

If you are the seller, be careful using this method of owner financing. If your existing mortgage has an alienation (or due on sale) clause, then your mortgage company has the right to call the note in full upon the discovery of a new owner. These days, most conventional mortgages contain a clause like this, however FHA financing does not contain this clause, and you can do a contract for deed.

If you are the buyer, request a copy of all current and future mortgage statements from the seller. You want to make sure that the seller isn’t taking your money, and not paying the mortgage. You could, and others have ended up losing their home this way, as the mortgage company forecloses on the property.

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Investing in Mobile Homes

Real Estate Investing No Comments »

Investing in mobile homes? You are probably thinking, yeah, I would never do that. But the honest truth is, you can make a lot of money investing in mobile homes, especially with today’s market. Today, I just want to give you some key points as to why investing in mobile homes is good, and how it can make you money.

  1. Mobile Homes are Cheap
    Duh! I know you already know this, but think about it for a second. If you can rent a mobile home for say, $500, and your total PITI is $250, then that is double the money every month!
  2. Because Mobile Homes are Cheap, You can Rent them Cheap
    People are always looking for cheap places to live. If you work a deal for a trailer in a good area of town, it will only take minimal advertising to get it rented. I have a 1 bedroom 1 bathroom duplex in a good area of town right now, and I get many calls every week!
  3. Your Risk is Low
    This is especially attractive for the investor who is just starting out or who doesn’t have much cash. You can buy these deals cheap, fix them up for little to nothing, and have just a small monthly payment to contend with. Just imagine the difference between the mobile home that sits vacant for two months at $250/month, vs a mid-sized house that sits vacant for two months at $650/month. Big difference.
  4. Often, You will get Cash or a Money Order/Cashier’s Check
    I have a couple of renters right now (one is in a double wide trailer) that often pay with this method. It just ensures that you get your money, and don’t have to hassle with processing a check (which could be a returned check, :( ).

Now for the downside. Many investors would contend that a mobile home depreciates over time, and thus is not a good investment. While this may be true in the long run, any mobile home with land that is in good condition will sell fairly well. But even if it doesn’t, you can always work an owner financing arrangement with a good tenant, and get at or more than market value for the property. Further, don’t buy new mobile homes, go for ones that are a few years old and get them at a significant discount.

Also, some investors would say that mobile home tenants are “trailer trash” or a hassle to work with. My answer to this is simply to screen your tenants before signing a contract. They probably don’t know as much as a middle class renter will know, but you can teach them. Screen them, rent to them, then educate them on what you expect as an owner and the importance of paying on time. Most tenants that pass the screening will do their best to work with you.

So there you have it. Low risk, high margin, maybe a little bit more TLC, but overall, I put my stamp of approval on investing in mobile homes. I have one myself, and I would do it again in a heart beat. My payment is about $350, and I am charging $600 in rent. And this is on a10 year note!

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