12 Real estate investment tip for great renters and landlord-friendly leases.

Owning rental property is one of the best investments you can ever make. In fact, 94% of millionaires surveyed say they have significant real estate holdings in their portfolio. Yet many people with the means to buy rental homes are intimidated by the prospect of dealing with tenants. But with a little strategizing, you’ll attract great tenants who pay on time every month, putting plenty of money in your pocket as rents and home values go up. Many people chose to enlist a property management company to have them handle it all, like Vienna Property Management. But whether you outsource a property manager to eliminate all your renter headaches or chose to take it on yourself, you should understand these strategies to get the best renters and earn the highest rents.

1. Put a big sign in the front yard advertising the rental, listing the features (2 bedroom/2 bath, big garage, fireplace, new carpet, back patio, etc.) but not the price. You’d be surprised how many people find rentals through signage, and will be intrigued to find out how much you’re charging. You can even put a few directional signs at nearby busy cross streets to pull in traffic.

2. The phone number on the sign should ring to a voicemail that details all the specifics about the property – including price, credit requirements, whether you allow pets, the deposit amount, and when it will be available to show. The voice message can also offer your email address so they can contact you that way – which is far more efficient than phone calls.

3. Very soon, your phone will be ringing. But instead of driving out to the property every time someone says they’re interested (and hoping they show up,) host two scheduled open houses every week. That way, whenever a potential renter calls, you can tell them that there will be an open house on Wednesday night between 5-8pm, or Saturday between 10am and 2pm, etc. 

4. When you call these potential renters back, get their email address and send them plenty of photos of the inside of the home, a detailed “spec sheet” that lists the features, average utility costs, and rental requirements. Also, you can email them an application to be completed and brought to the open house – or emailed back to you ahead of time. 

5. Advise potential renters that there’s a fee for submitting an application – about $15 to cover the cost of pulling their credit history. This will weed out all the applicants who aren’t serious or motivated enough to put a little bit of “skin in the game. “

6. I suggest you avoid renting to friends or working out special deals, trades for work performed, etc. Those almost never work out! Keep it simple and clear and do not deviate from a smart business arrangement. 

7. Talk to your neighbors, letting them know the property is for rent and give them one of those spec sheets you emailed out. People love to get their friends, coworkers, or family members as neighbors instead of some random person, so they’ll be happy to spread the word.

8. Once you have your open houses and have a few great renters who are interested, you (or your property manager) will pull their credit. But don’t forget to do a criminal background check on them and call their employer and references to verify everything. If you’re ready to offer the property to someone, give them a small window (maybe 48 hours) to sign the lease and bring a significant good faith deposit toward the first month’s rent. That way, they won’t be able to waste your time or even worse, sign the lease but then walk on you when it’s time to move in.

9. You can generate interest for your rental and sweeten the pot for a renter by offering some fun bonuses they normally don’t expect. For instance, offering free cable television or Internet for six months or a gift card to a grocery store once they move in will garner interest and put you ahead of other rental options- your competition. Remember that you want as many serious, motivated, and realistic people to apply as possible so you can make a great choice – not settle.

10. Keep the rent low to attract plenty of great tenants but you can make up for any perceived losses by negotiating utilities and extras. Write into the contract that the tenant pays for landscaping, water service, etc. to recover a few dollars. Prorate an early move in date before the first of the next month to gain a chunk of change. Write in the contract that they’re responsible for small fixes – perhaps, under $50 – so you won’t have to deal with changing every light bulb, fixing every clogged toilet etc. 

11. Keep rent low but have high penalties for late payments in the contract. If a tenant does what they’re supposed to do, they’ll benefit. But if they start paying late or miss payments, you’ll be well compensated for your time and inconvenience. 

12. Yearlong rental contracts have little benefit to the landlord (in certain markets) because if a tenant is going to move out, they’ll do so anyways. So consider a month-to-month lease with slight rental increases built in – like 5% every six months. Keep the increases small so they barely notice but explain this is how you can afford to charge lower rent from the start. It’s much easier – and cheaper – for them to stay put and not go through the hassle of moving all over again.

If you have any questions or just would like to know what rents are going for in a certain neighborhood, give Vienna Property Management in Rocklin, Ca a call – they’re great people and do a wonderful job turning rental properties into efficient cash-flowing investments!  

Calculating the right rent for your investment property.

Owning rental property is one of the soundest investments you could make, to the extent that 90% of millionaires have income-producing property in their portfolio.  But making day-to-day decisions to manage those properties can be challenging if your not properly informed.  There is no greater decision than what rent to charge a new tenant.

If you read all the books on real estate investing, they cite a general rule as industry standard: To calculate rent, take 1.1% of the home’s value.  That means if your rental property is worth $100,000, the rent should be $1,100.  If it’s a $200,000 rental house, the rent will be $2,200. 

Universal axioms like that are dangerous when you’re talking about real estate because there are no “one size fits all” solutions.  For instance, good luck getting 1.1% in California, where the median home price is much higher than the rest of the country.  The good news about owning property in California is that our appreciation rates are much higher than the rest of the country during healthy markets – as we’ve seen with nearly 25% appreciation since 2012 in the Sacramento area.  Also, whether you’re renting a house, a halfplex or duplex, condominium, or apartment in a building you own has a huge impact on what rental price is appropriate. 

Assuming that you have a single-family residence or halfplex or one side of a duplex (not a condo or apartment) in a decent neighborhood in the Sacramento region, how do you price your rent?

First off, let me cover the three priorities of any landlord to frame the conversation.

In reality, you have three goals as a landlord, in this order:

1. Avoid vacancies.

2. Get a renter who pays on time and doesn’t trash your unit.

3. Get a renter who stays long term.

A renter who stays long term and pays on time helps minimize time, energy, and money-consuming transitions, where 90% of your work as a landlord will occur.  Of course you want someone who takes reasonably good care of the property so your fix-up costs (above their damage deposit) will be minimal. 

And vacancies?  Those are the enemy of the landlord – the monkey wrench that throws all of your calculations on profit out of whack.  Point blank: vacancies kill landlord profits. 

The reason I bring this up is because too often, landlords try to charge the highest monthly rent they can manage, thinking it’s good business to boost their monthly income as high as they can “get away with.”  But in reality, charging rent that’s above fair market value is detrimental to their business model.  Why?  They’ll have a smaller pool of applicants (who may have shaky credentials,) the tenants will move out more frequently or cause more problems, and it will take longer to rent the unit – all factors that contribute to a high vacancy rate.

Imagine that we have a house in a neighborhood where most similar properties rent for $1,200 a month.  At that price it’s easy to find good renters so let’s say the unit will have a paying tenant 12 months a year.  That equals $14,400 a year in rental income.  But if the landlord gets a little greedy and tries to charge $1,300 a month in rent it takes longer to find a tenant or they move out before the year is up.  If it’s occupied 11 months out of the year at $1,300, that comes to $14,300 a year profit.  If it’s vacant for two months, the total profit is only $13,000.  It doesn’t seem like much, but any benefit of trying to squeeze an extra $100 a month in rent is wiped out by even one month’s vacancy.

So as we determine a price for your rental property, we have those three goals in mind. What we want to offer is a rental price that is fair, a win-win for both the tenant and the landlord.  I even like to price my rentals slightly below market value because I attract far more applicants.  I can take my pick of those with the best credit score, income, stable jobs, etc. and I end up earning far more profit by eliminating vacancies, evictions, maintenance, etc. 

Here are the steps in determining the rental price that’s best for you:

1. Compare apples to apples.

When researching what other similar homes are going for, make sure you look in the same neighborhood and at the same type of property.  Don’t compare a condominium to a house, a unit in Granite Bay to one in Citrus Heights, etc.

2. Look into Craig’s List and other websites.

Do your homework online by looking into Craigslist and other websites that advertise rental properties.  This will give you a good sense of what other landlords are charging – your competition – and what options a renter has.  You’ll come up with an accurate range – low, average, and high rental prices. 

3. Talk to neighbors.

Knock on a few doors, announcing your intention to rent the property and inquiring what rents are going for in the neighborhood.  You may be surprised at the answers!

4. Add or subtract for amenities.

Honestly assess what your property has to offer.  If you have new appliances, new carpet, and a hot tub, you may be able to charge slightly more than a unit with old amenities in worse condition.  But you still shouldn’t get too happy adding extra money to fair market rent just because your property is in good condition – that’s almost a necessity.  It will help you attract more and better applicants, but definitely subtract off the rental price if your property is outdated or needs work.

5. Test the market.

As you put your house up for rent and start advertising, listen carefully to what the market tells you.  If you get no calls or interest, your price is way too high.  If you get a few people looking but none want to rent it, they’re finding better and cheaper properties to rent.  The more interest you generate, the closer you are to the fair market value price.  

6. Have a set schedule of price reductions every week or two.  That way, you’ll know you tested the market so you’re not leaving any money on the table, but you’ll get it rented soon without those dreaded vacancies.

7. Talk to a property manager.

The most efficient way to make these rental headaches disappear is to hire a property management firm.  A well-established company like Vienna Property Management in the Sacramento area has an intimate knowledge of rental prices, a pool of tenants looking, and all the marketing channels you need.  If you think big picture, their help will free up your time and energy and eliminate vacancies, evictions, etc. – saving you money overall even with their small fees.

If you need any help or would like some advice about pricing your rental property, give Vienna Property Management a call (916-520-1712) or email.  They're great people and do a wonderful job turning rental properties into cash flowing smart investments!

The lessons Warren Buffet wants to teach you about real estate.

The world’s third richest man has something he wants to tell you.  He’s practically imploring you to listen as he dispenses a parcel of the wisdom that’s made him the third-richest man in the world.  We hardly need to check his resume to convince us to listen, but the billionaire Chairman of Berkshire Hathaway and Svengali of investing has this message for you:

Buy real estate.

Of course it goes deeper than that, as there’s a right way to buy real estate and a lot of wrong ways.  Thankfully Buffet, always generous with sharing his philosophies, has left enough breadcrumbs for us to decipher his formula.

The biggest breadcrumb recently came in his annual letter to Berkshire Hathaway shareholders; a highly anticipated forum to pick his brain about the year’s fortunes, the market, and always-general advice about money the average person can chew on.  In this year’s letter, Buffet makes no mystery about his thoughts on real estate, "Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates."

So let’s pretend we had Warren Buffet in front of us and could ask him the basic questions about real estate and finance most Americans have.  I’ve assembled his answers from his annual letters but also interviews and articles.

Why buy now?
He’s oft quoted as to why now is a great time to buy, "It's a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate's too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now."

Is it better to buy real estate now or stocks?
"If I knew where I was going to want to live the next five or 10 years I would buy a home and I'd finance it with a 30-year mortgage... It's a terrific deal."

How about buying rental properties?
"If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it's a leveraged way of owning a very cheap asset now and I think that's probably as an attractive an investment as you can make now." He’s also said, "If I had a way of buying a couple hundred thousand single-family homes I would load up on them."

What should we be cautious of when buying rental properties?
In this year’s shareholder letter, Buffet tells the story when he was a young man and bought a recently foreclosed 400-acre farm in north Nebraska.  He knew absolutely nothing about farming but had a family member who did ready to step in, and he did know about money.  What he understood was that there was value to the property as an asset because of the goods it could produce, and that those goods would increase in value as time went on.  He factored a humble 10% profit but the real boon was long term.  Now, the property is worth 5 times what he paid and profits have been much higher than expected.

So “focus on the future productivity of the asset,” Buffet advises.  In terms of real estate, that equates to the inherent value of the property in the market, not how much the property price will change in the short term.  “I thought only of what the properties would produce and cared not at all about their daily valuations,” Buffett said. “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard."

With all the changes in the economy and the recession, is real estate still a sound investment?
Buffet still lauds home ownership as delivering on its basic benefit: that homes increase in value over time, and insists that still applies, in fact, more than ever.  "It's a totally sound premise that houses will become worth more over time because the dollar becomes worth less," he said at a Congressional hearing on the financial crisis.  But that doesn’t mean there won’t be fluctuations, and the recent real estate bubble was caused by overconfidence that prices would never go down, the ease of getting multiple homes, loans without proper income documentation, and no-money down loans, leading to greed in every sector that eventually serves as the pin that popped the bubble.

Is it better to wait cautiously for the perfect time to buy real estate?
If there is one thing Buffet teaches us it’s that there are micro markets within any market, and always deals to be had so there is no wrong time to buy, but there’s definitely a right time to buy.  Starting back in 2008 he admitted that buying when prices are low always feels risky and unpredictable because no one can tell what prices will do in the short term, but that’s exactly the best time to get in.  Once consumers wait until there’s some stability and predictably to the price curve, the bottom – and the best deals - are already over.  Luckily, we’re still in an ideal buying environment as prices are still low and interest rates are great, but that won’t last for long.

"If you wait for the robins, spring will be over," says Buffet.

Should people stretch to buy their dream home?
That’s the perfect formula for failure, according to Buffet.  Too often during the financial crisis homeowners spent more than they could afford, with volatile adjustable payments and stretched to every dollar of their income just hoping for short-term gain.  That’s the recipe to lose money.
"A house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender -- often protected by a government guarantee -- facilitates his fantasy. Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."

So what three factors are most important when buying real estate?
Warren Buffet believes the three most important elements to buying a home as a great investment are: a fixed mortgage, affordable payments, and holding on to it for the long-term.  By keeping payments affordable (and stable) and looking to keep it for the long haul, you basically allow the asset to bear fruit for you.  "If home buyers throughout the country had behaved like our buyers,” Buffet says, “America would not have had the crisis that it did."

Does he practice what he preach?  
Warren Buffet, The Oracle of Omaha, is worth around $50 billion dollars according to recent Forbes estimates, but still lives in the 5-bedroom home in Nebraska he bought 52 years ago for $31,500.  That sounds to me like a he takes his own advice!