Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for the 'Rental Property' Category

12.27.2008
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Creative Commons License photo figure credit: tifotter

Since I’m currently out of work and home during the day I get tasked with tenant turnover and must wear the Property Manager hat. I have to say it’s been fairly successful this time around and I haven’t been too discouraged by the potential tenants. One thing that has been nice is the feedback I am getting from the people at the showings. They are impressed with the apartment and find it to be clean and welcoming. They also have indicated that what we offer for the price is reasonable.

This is the third time we have listed our unit on Craigslist and we also have a simple yard sign for the second time. We found that advertising in the newspaper was expensive and didn’t yield great results. We found that by being able to post photos on the internet, people know what they are getting before they take a look thus saving everyone’s precious time. I have shown the apartment about 9 times. More than half had seen the Craigslist ad and the rest were drive-bys.  I had only one person fill out an application so far and a handful of people take an application. In contrast, last year we had 4 applicants and ended up with the 4th one for a variety of reasons: bad credit, decided not to move, and vanished into thin air! 

We have found in the past that unless someone is willing to fill out the application on the spot, he is probably not interested. This is not always the case. I did have one person view the apartment twice and our current applicant took the application and dropped it off the next day.

Until today everyone who scheduled an appointment has shown up. Today I have had 2 no shows which makes me very angry. Although I did not have any plans, if we did not live in the building it would be annoying and time consuming to have come to show the apartment and have a no show. Common courtesy is a good quality in a tenant. These people, if I hear from them again, now have red flags.

For our applicant screening we have been using a service called Clear Screening to conduct credit and background checks. I have found Clear Screening to have great customer service and they provide a good product for a fair price. We can run credit reports for $14.95 and criminal reports for $21.95 (plus court fees).  Criminal reports do take a lot longer to process than credit reports, which are instantaneous. To qualify to pull someone’s credit, I initially had to prove I was a landlord by providing them with information on me and my property. After approval, all of my applicant checks are conducted online.  We also ask the applicants to fill out a credit report authorization form.  Even though I had not used the service since last year they were able to reactivate my account so I could screen the next round of candidates.  As we have learned in the past credit checks are invaluable tools to screen perspective tenants. We have had to decline an applicant for less than satisfactory credit. More recently we have had instances where perspective tenants operated on a cash only basis making it more difficult to screen. I have to commend them for living a credit-free life in our increasingly credit-full world. Two methods we have used in these cases are verification of bank balances and verification of past payments to various creditors.

Another often overlooked aspect of tenant screening is reference checks. It seems obvious to verify employment, but it is often difficult to call a complete stranger and ask for a personal reference. I have found that although these calls are often awkward to make, they do speak volumes about people. Although your friends may not say a lot if they think you may be a less than satisfactory tenant, people tend to speak volumes about people that they trust and feel are upstanding citizens that would work out well in your building. I have found this part to be very rewarding because these references are typically very telling of how a tenant will work out.

Despite the fact that some people will set up appointments and not show, there are other people that you can get a sense for, from the first meeting. Obviously some part of this job involves your gut feeling. In some sense by having me personally screen the tenants and MITBeta only seeing the written screenings it gives us a balance and objectivity. On paper someone may be questionable but the way they conduct themselves, their dealings with others, etc. are also a great measure of the way they will live in and treat your property.

Epilogue: I believe we have made the right decision with our next tenant and they are moved in as I write this. The end goal of every landlord is to have a longterm tenant that is respectful of her property and pays the rent every month on time.  I hope these new tenants are very happy here for a long time. I know they hope to be and are very excited about the move. I’m happy to be offering housing to someone who is as excited to live in my house as I am. People who are happy to be where they are tend to treat their aparment as if it were their own. But as is the nature of the business… only time will tell.

11.24.2008
fall scene

Creative Commons License photo figure credit: controltheweb

We had a slight altercation this week with the neighbors. As I sat to eat breakfast I looked out to the sound of leaf blowing. I was somewhat astonished that my neighbor (a renter of the house next door) was blowing the leaves from his side yard into my driveway. Now I may have not noticed this new pile of leaves if not for the fact that we had cleaned up the whole back, side yard and driveway over the weekend and had filled about 15 leaf bags. Trusting in the decency of humanity I made the assumption that he was putting the leaves there for ease of picking them up after he was finished. Plus with a toddler covered in syrup I was in no position to run out and approach him about the situation and what his plans were.

Fast forward a few days. The leaves sit where they were blown, in our driveway. The landlord for the property is parked in the driveway. I run out to have a word with him. I calmly explain that his tenant had blown leaves into our driveway and I did not appreciate that since I had already cleaned all my leaves and the leaves in his side yard were his responsibility. He proceeded to tell me (remember I am 8 months pregnant) that they were my leaves because they fell off my tree and it was only fair that I picked them up. He also told me that he is a very busy man (aren’t we all) and didn’t have time for fall maintenance. I told him it is not my fault that leaves from a tree in my yard fall into his yard. Unfortunately that is how leaves work. My mother-in-law knows this all too well. The winds are never kind to her and leaves often end up piling up in her yard regardless of where they fell from.

I thought this whole conversation was mind boggling and was at a total loss for words. He even offered me some leaf bags so that I could pick them up myself. How nice…

Of course MITBeta was not very happy with this outcome and being the diplomat that he is went back out to have a word with our neighbor’s landlord.  As I watched from the window I saw them chatting for a while and then I noticed them picking up the leaves together. It took them about 10 minutes total and MITBeta reported back to me that the landlord had apologized to me for our earlier conversation.

What do you readers think? We feel that raking leaves is an unfortunate but necessary evil of having glorious shade. It’s Murphy’s Law that he who has no trees will have all the leaves blow into his yard. But I’m pretty sure the leaf code suggests that I do not need to go get those leaves from my neighbor’s yard. We like trees and will suffer with fall clean-up because we are too frugal to pay someone to do it for us, whether I’m pregnant or not. How about you? Do you loathe raking? If you own properties, do you use a landscaping company to clean your properties?

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11.13.2008
Rainy Window

Creative Commons License photo figure credit: Nictalopen

Having just settled in to the reality of ScrapperMom’s layoff, we learned this week that our tenant for the last year will not be renewing his lease.  Assuming that ScrapperMom gets no new work and that it takes us at least a month to rent the apartment, this leaves us with 38% less income in December than in November.  The only thing keeping us even next month will be the raise that I got last month.  This means that all of our savings and discretionary spending has gone to zero in the upcoming budget month.

Thankfully, we have planned well, and have an emergency fund that can get us by for quite a long time under the present circumstances.  Having just received that raise, there is no reason to expect that my job is not secure for some time to come.  Though with a paying down low interest debt in favor of boosting our savings and emergency fund.  We are still overpaying a couple of our loan accounts, and while it’s not by much, I may still have to bring these down to the minimum payment until our income rises again.

  • I’m glad that I have resisted the urge to invest given the down market.  While a great long term opportunity, this would have tied up cash that we may need to have available in a long term investment.
  • I wish that we had made it a priority to increase our savings sooner, despite the fact that we still have some debt.  This would have given us more confidence and breathing room in the current economy to know that we can weather the storm.
  • I wish that we had not bought an alligator.  We’re now feeling more stuck than ever, and I’m amazed out how quickly our fortunes have turned.
  • We’re not ruined yet, so we’re going to be looking for new ways to trim our expenses.  Many of our recurring expenses, like our Netflix or DirecTV plans can be trimmed by $5 or $10 per month.  Two months ago I would not have thought that this would make much difference, but now that every dollar matters so much more it may be worth doing.  On the flip side, we’ll be looking to stir up new business in the form of a new tenant, as well as looking for ways for ScrapperMom to bring in some new engineering work, or perhaps investigate some new opportunities.

    Have you or your families been affected by the economic downturn?  Do you have any ideas for us to trim our expenses or boost our income?  Let us know what you think in the Comments Section below!

    My Worst Nightmare

    Creative Commons License photo figure credit: tinyfroglet

    In Part I one this story, I told the story of how we came to own our current home, how we financed it, and how we found ourselves upside-down on our mortgage.

    The original loan on our house had a clause that said that we could not refinance or pay off the loan for at least 6 months.  Recognizing that we got a rather lousy interest rate because of our lack of documentation, as well as the fact that we would have to refinance anyway, we went ahead and refinanced as soon as we could.  Just about 6 months and a day after we signed our original home loans, we signed two more loans — one for 80% of the value, our first mortgage, and one for 10% of the value, our 2nd mortgage.  Because it was only 6 months into the original mortgage, the appraised value of the house did not change.  Both of these mortgages are 30 year fixed loans with decent interest rates.

    In the time since we refinanced, rates came down considerably, and we tried to refinance again into a lower rate.  The appraisal that we got in the process was the first strong clue for us that trouble was brewing: the appraised value was about 10% lower than what we paid, despite the fact that we had undertaken substantial exterior cosmetic improvements (curb appeal).  We were unable to finance into the very low rates that we available a little over a year ago since we now owe more than the property is worth.

    Having unknowingly saved ourselves from the current mortgage crisis, we also did the smart thing and consolidated the 3 credit cards that I talked about in Part I into one card.  Every few months or so, I get a set of checks from my Chase Platinum card with offers for 0% interest for a year, 3.99% for 2 years, or 4.99% for the life of the balance.  We opted for the 4.99% deal.  Since half of the improvements made with the money on this card are for a legitimate business expense, we can deduct half of the interest payments on our taxes, which further reduces the effective interest rate.  In the time since we completed this balance transfer, we have paid down 3/4 of the original balance.  Because the interest rate is so low at this point, and half tax deductible, we have slowed our aggressive pay down of this account in favor of building up some savings.

    So while we are not in any trouble with respect to continuing to make our mortgage payments or servicing the debt or our improvements, we are still in a pickle.  We are looking down the road at the needs we have for housing, especially in light of our growing family, and are not all that pleased with the options we have available:

    • We can sell our house, but we would have to come up with between $30,000 and $40,000 to cover the difference between what we owe and what the house is worth.  This would wipe out our savings, and we would be just about starting over financially.  We would have to find a place to rent as well while we save money towards the down payment on a new house.
    • We can buy a single family house now, and keep our two family, renting both units.  The trouble with this option is that it would also wipe out our savings, putting us in a precarious situation if any emergencies come up.  Another problem with this plan is that the market rents for our two units is less than the combined mortgage, insurance, and utility rates we would have to pay out each month.  This is what makes the property an Alligator.  Each month we will have to feed it hundreds of dollars to keep it afloat.  This could actually be seen as a really great investment, a forced savings plan of sorts, since we will eventually get this money back when we sell the house.
    • The default option here is to keep doing what we’re doing.  That’s fine for now, but we live in a 2 bedroom apartment, and depending on the gender of our next child, may only work out for a short period of time.  The real downside to this plan is that we may miss out on some great real estate deals as the market bottoms out.  Under this plan, we can save for a new house over the next several years.  However, there is still the issue of the 2nd option above.  With any luck, rents will rise over the next several years to offset the continuous payments we will have to make into the house, but we can’t bank on that.

    We made two major mistakes along the way with the purchase of this house. We bought an over-valued asset at the height of a market bubble. We failed to adequately assess the income versus expenses for a rental property. In our defense, we bought the house for the reason stated in Part I: to be able to afford to live in the area we wanted, close to other family and in a decent neighborhood. But in retrospect it was an investment that will not provide the returns that we could have achieved using other investment vehicles.

    What would you do?  Do you see options that I haven’t seen?  Are you feeding an alligator? Let me know what you think in the Comments section below, or click here if you’re reading via an RSS reader or by email.

    Don't Feed the Alligators

    Creative Commons License photo figure credit: timtom.ch

    Nearly 7 months into starting this blog, I have finally gotten around to a post concerning the name of this websiteScrapperMom and I have an alligator on our hands, and here’s the story of how we got into this situation and our options for getting out.  I have avoided this topic for some time because, as you will see, it is a particularly painful story for us, but one that has taught us many important lessons.

    Three and a half years ago I left my job as a nuclear plant operator in search of more (or less, depending on point of view) exciting opportunities.  Our previous house was bought because of its close proximity to the power plant, which is, like most nuclear power plants, in the middle of nowhere.  We started a search for a new house, and laid out a set of criteria.  When our search revealed that we could not afford to buy what we wanted, where we wanted, we turned to a more creative solution: we would look for a multi-family home so that rent from one unit could help to offset the mortgage on the property as a whole.

    To be clear, we were not looking for anything extravagant.  In early 2005, home prices in our market were just reaching their peak (unbeknownest to us, of course) and even a modest home was beyond our financial reach.  We considered renting, as well as purchasing a condominium, but decided that this would be exceptionally difficult with our two Great Danes.  Since multi-family homes usually cost less per unit than a single family home, or even a condo, it seemed to be a good compromise for us — one that might eventually even develop into a nice investment down the line.

    In the Spring of 2005 we found a nice house in a nice community, one with walking access to a number of different services.  The house is close to the local commuter rail, hospital, community swimming pool, conservation area, etc. The previous owner of the home had completed a number of major updates to the 1920 structure, including wiring, roofing, the conversion of the attic into a bedroom, etc.  The house was in need of a number of cosmetic updates, mostly relating to the exterior.  Compared with the other homes on the market that we had seen, this home was a bargain.

    We plunked down 10% of the purchase price from the proceeds of our previous home sale.  We financed the rest of the cost through a 3/1 ARM and a home equity line of credit.  I was actually still between jobs at the time, but our excellent credit allowed us to obtain a no-documentation loan, which meant that the bank took our word for it that we made enough income to cover all the costs of the home and then some.

    Many readers here are probably cringing after having read the last paragraph.  After all, this story so far is very similar to that of thousands of people who are presently losing their homes, and has all the danger signs: bought an overpriced home at the height of a market bubble, took out a variable rate mortgage, did not have full income, easy credit was available without documentation.  The only saving grace in this scenario was a decent size down payment.

    Within a few months of moving in, we had found a great tenant who was willing to look past the cosmetic issues of the house in favor of its inner beauty, as well as the other attributes I mentioned above.  Since I had secured a stable job, it was important to us to remedy the blemishes to be sure that we would not have difficulty renting in the future.  We got a couple of quotes for vinyl siding, new energy efficient windows on the 1st floor, and two new porches.  The most reasonable bill was about 8% of the value of our home.  We financed these capital improvements on a combination of 3 different credit cards.  (I know you’re cringing now.)

    Around this time, the bottom started to fall out of the over-inflated market.  Since we bought this house, we have added approximately 8% to the value, while at the same time the market has plummeted.  My best estimate at this point is that home’s value has fallen almost 20% from the sale price, meaning that on paper we have lost almost 30% of its value in just 3 years.  This leaves us upside-down on our mortgage — meaning that we owe more on our mortgage than our home is worth (see picture above), in credit card debt, and feeding an alligator month after month.

    If you haven’t already, consider subscribing so that you are among the first to know how this sad tale ends up.  Do you see redemption ahead, or bankruptcy?  Have you ever had to deal with a similar situation?  Please share your thoughts in the Comments section below or by clicking on Comments.

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