Finding Prospective Real Estate Tenants

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Once you have acquired a rental property, or converted real estate that you already own to a rental, the next action you have to take, assuming it is unoccupied, is finding tenants.
This may seem like one of the most daunting tasks you have to perform. Difficulty aside, it is definitely one of, if not the most important one you will undertake.

It’s about their qualifications

When I first was thinking about this topic, it was from the perspective of where would I look for good tenants. As I fleshed the idea out further, I realized it isn’t about where to find a tenant. That is the easy part. The trick is to qualify the prospects you find until you are left with a potentially high-quality tenant.
Given this, I’m going to approach this by discussing what I think are the most important qualification factors for prospective tenants, and end with a short discussion on where to advertise.
Here are the qualifications I will discuss:

  • Monthly Income
  • Credit Score/Credit History
  • Rental History
  • References

Please don’t sue me!!

This may be a tad overdramatic, but at the same time, I feel it is warranted. I am NOT a real estate professional, or an attorney. I am pulling from knowledge about the landlord/tenant laws in the states I operate in as well as rules regarding discrimination.
If you have questions related to what qualifying criteria are legal where your properties are located, I encourage you to investigate the landlord/tenant laws applicable to that country or state.

How much income does a prospect need?

This is probably the most important qualifier as it will overshadow any other issue. If you bring in a tenant who does not have enough income, their standard of living, and thus their stability will be negatively affected. This in turn, means that your rental income will be less stable. When a tenant is right on the edge of being able to pay their living expenses, then things start to get squirrelly.
The rule of thumb that I’ve always gone by has been that you should spend from 25-30% of your gross income on housing. Except for high incomes, the closer you are to the higher percentage, or exceeding it, the more likely it is that you will be house poor. In other words, you might be able to pay all of your expenses, but will not have much if any left over afterward.
Having said that, this ratio may be changing, and not necessarily for the better. The higher rents have risen in the past few years, the higher the percentage of one’s income is required to pay them. I heard a recent stat that said the percentage of income being put toward housing in places like San Francisco and New York is upwards of 40-50%.
Places like NYC and SF are outliers and present a unique rental situation that is not ideal for most investors. Most regions of the country are not like that. When I am looking for tenants, I look for gross income that is at least 3 times the rent. That will give a ratio of at most 33%. I have had no problem finding prospective tenants with this income level.

What does their credit look like?

I initially had Credit Score and Credit History listed as two separate topics, but they really need to be looked at in context of each other.
In general, the higher a persons credit score, the more responsible they are with money in general. If they routinely pay all of their bills on time, including any recurring bills like car payments, student loans, etc., it generally means they handle all of their finances the same way.
This topic gets more complicated when you look at credit history in combination with credit score. Someone may have a very low credit score, but it may because their credit history is not very long. This could mean that potentially negative items are having a disproportionate effect on their score. This is not to mean you should simply ignore a low credit score, but potentially ask questions to determine whether it is indicative of a larger issue, or a short-term problem.
This is one area that may be more dependent on the rent that is being asked. Higher rent is going to require higher income prospects, and in general, their credit scores are higher and histories are longer and more favorable.

What is their rental history?

The rental history of a prospective tenant gives a glimpse into their living habits. It may show if they have moved around a lot, and potentially the conditions under which they left their prior residences.
At the same time it is always important to find out the rental history, it may be somewhat unreliable. Depending on the circumstances under which someone left or is leaving their last residence, the landlord may say something positive simply in order to get the tenant out. I’ll leave it to you to decide the ethical bounds of this tactic, just know that it can happen.
It is also entirely possible that looking into the rental history may not yield much information other than confirmation that the prospect did live somewhere, and how much they paid for rent. This may be due to laws regarding disclosure of information or a fear of liability or slander if the tenants were described in a negative light which caused a denial of application.

What do people say about them?

Asking for references on an application is the final piece of the tenant-qualifying puzzle. As with the rental history, your mileage may vary. If you don’t ask, however, you’ll never find anything out.
References may shed a lot of light into people, depending on who they are. If it is a close friend, or relative, you will generally get a largely positive description. If it is a boss or some other person, you may receive more detailed information. Either way, you will need to take what you hear with some doubt, and just try to find the common thread running through the conversation.
If all you have to go on is a reference, then you need to find other ways to qualify tenants. If, however, you are on the fence either way about a prospect, then discussion with a reference may help you make the choice.

Where are these people?

Well, here you are. You have an application put together with questions about income, credit score, rental history, and references. The only problem left is you have no-one to show it to. Fortunately, there are a number of straight-forward options for finding prospective tenants. Let’s talk through a few of them here:

  • Use friends/family network: Spread the word among friends and family that you are looking for a tenant. Give details about the unit that is available and who you are looking for. This can actually work fairly well as people will generally send good prospects along, assuming that your relationship with them is good.

  • Free Online Service, eg. Craigslist: At least in the United States, most major cities and areas have a Craigslist page. You can post advertisements for your available unit and will be contacted by interested parties. This option does require some work as the listings are chronological and will need to be renewed every few days to bring to the top of the list. Also, when setting up appointments, you will have to deal with no-shows. That is the primary downside of this option. Upsides are that these pages get a lot of traffic, and have a wide range of viewers.

  • Paid Online Service, eg. Apartments.com: This is exactly what it seems. You either pay to put a listing up, or you pay to contact people who express interest in your free listing. Either way, there is a cost. Your results may vary. I don’t think these sites get as much traffic as the free ones. Their prices can also be very high per month. My vote is to stick with the free sites.

  • Advertise in Local News papers: Run an advertisement in the local paper. These will usually be a flat fee and will run either once or for a set number of issues. They are generally more costly than the online only services. In some cases, an online ad will be included as well. There are two main reasons to consider running an ad in the paper:

    1. Your property is in an area not well served by an online marketplace like Craigslist.
    2. The demographic in your area does not have computers or widespread internet access.

    You should make the decision of whether to run an ad based on your knowledge of the area. You should be able to figure out if it is necessary by checking for a Craigslist page and seeing what traffic it has referencing your area. If you are out of the area, you will want to go on your property manager’s recommendations and local knowledge.

This should give you a good overview of what factors you need to consider when qualifying prospective tenants. The more information you can obtain about them, the better your decision-making will be. With that comes the caution of being aware of what factors you may not include in your process. These cover the general ones like race, religion, sexual orientation, etc. You definitely need to be aware of the relevant landlord/tenant laws in your area as they will give you specifics.
You should come up with a specific set of criteria that you will apply to all prospects. This will help avoid any perception of bias for or against a prospect.
Once you have this criteria outlined, start advertising using some or all of the methods listed above. My preferred method is Craigslist, as it receives the most consistent and varied traffic in my areas of interest.

What are your selection criteria? Where do you find most of your prospective tenants? Please leave your answers in the comments.

How involved should I be in my real estate investment property management?

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My Real Estate Involvement didn’t stop at the purchase

When I first started my real estate journey, I basically had no idea what I was doing. That is likely true of many people who entered it by accident. I purchased my first condo as a place to live because real estate was going crazy in southern California. As part of the purchase process, I was provided with copies of the most recent financial statements and CCC&R’s for the Home Owners Association (HOA). Honestly, they were not that good, low reserves, high rent to own ratio, etc. This raised red flags for the lenders, which caused a bit of heartburn. I was eventually able to close though. In the year after I closed, there was a special assessment put in place to cover some repairs. There was also talk of another one being necessary.
These factors, along with the fact that it was difficult to get more information about what was happening, led me to join the HOA board of directors. For the first few years, it was as an advisory member, with no voting rights, etc. As time has gone on, I have gotten more involved on the board, in part because no one else volunteered, but also because there were financial issues that put the HOA, and thus, every owner’s investment, at risk, and had to be addressed.

You have to make a choice

As you can see, I made a conscious choice to become more involved with the HOA than simply being an owner. I was willing to put the time toward being a board member because I saw it as a way of protecting my investment.
This same choice is repeated every time someone purchases an investment property. Some people want to be very hands on, and manage the property themselves. In the case of a condo, it is possible to take that to the next level and get involved with the management of the HOA. Other people are either not interested in, or not able to have this level of involvement in their property. This could be due to other work obligations, being an out of town investor, the number of properties they own, or simply a desire to focus on their strengths, which don’t include property management.
Let’s take a moment to look at the different levels of involvement, starting from most involved to least. I mentioned two above, but there is room in the middle for a third. With each level, I’ll talk a little about what they might entail, and why you may want to choose each one.

You manage your property, and then some

If you purchase real estate, and the thought of having someone else be involved with managing it seems foreign, then you probably fall in this category. There is an expectation of higher levels of effort required on your part. You will be finding tenants, coordinating repairs and rehabilitation, and potentially helping out on neighborhood boards or HOA boards where your property is located.
This level of involvement will expand or contract to utilize the resources you have available. It will also be constrained based upon the location of your properties. If they are close, you will be able to manage more of them like this. The more spread out they are, the more likely you will need help.
More properties and larger distances may still allow for high involvement if you either put together and manage, or are part of a team. In that case, you may be heavily involved in some properties, while your team handles others with you having close oversight.
The benefits of this style of management are the intimate knowledge you will have regarding your properties and the connections you gain in doing so. This will also give you a breadth of experience in the different areas of real estate property management. That experience will serve you in the future should you adopt a lesser degree of involvement by knowing what to look for with property management companies.

You bought it, they run it and you check in regularly

This will probably be the 2nd most common group that real estate investors fall into. In this situation, you may do the legwork to find a property and make the purchase, with the understanding that you will have a property manager handling the day to day operations. There is still a range in the amount of interaction that you can have, and this depends on your comfort level. If you are confident in the property manager you have found, it may be possible to simply check in once a month when you receive their financial statements, and either acknowledge a deposit or make a transfer if money is owed for expenses. On the other hand, you may choose to handle some functions, like paying bills, or coordinating repairs while leaving tenant management and rent collection, to the property manager. This and other configurations will break along the lines of standard themes: proximity to property, number of units owned, other businesses, family responsibilities, etc.
The benefits arise in the time that you have to put toward other endeavors, which could be another business or relaxing on the beach with a fruity beverage. The point is, that you have a choice. If you only hand off part of the responsibility, you have the choice to offload those items that are either not you favorite, or are ones that keep you from focusing on higher management functions of your business.
Either way, this choice is predicated on the quality of the management team you have put together. The more in sync they are with your needs and concerns, and with good property management principles, the more responsibility you will be able to give them.
This style may be an outgrowth of the more involved first style. As you become more comfortable with your property management team, you may be more willing to increase their level of responsibility.

Real Estate is part of my investment portfolio

This stage is essentially the set it and forget it model of real estate investing.
You may either choose this stage or it may choose you. If you have a number of different businesses, of which real estate is just one, then you might have a dedicated team that handles it with a lot of autonomy. You may be playing to your strengths here, knowing that the management of real estate is not your strong suit, but you want to have it in your portfolio.
Some real estate investments may put you in this category by their nature. Examples of these are Real Estate Investment Trusts (REIT), or if you are involved in the financing side of the transactions. In both of these cases, you are essentially providing funding for another entity to purchase and manage real estate.
The obvious benefit of this is that you have essentially no management responsibility. Real estate is simply an investment you keep like stocks or bonds or an ownership in another business.
The downside is that if something goes wrong, your investment may be at risk. You have very little latitude to step in and take over. In the event you did have the ability to step in, you may not have enough warning to be able to intervene in time to make a difference.

How to decide, and where do I stand?

Let’s talk about where I stand first. I fall between the full control management and the property manager with oversight. I personally manage the property close to me, as it is relatively low oversight and easy to handle. I also remain on the HOA board, so my involvement is high. For properties that are not close, I use a property manager. Even then, I continue to pay a number of bills and approve work to be done, so it is definitely not a hands-off management style.
Hopefully some of the downsides listed, aren’t too much negative to scare you. There is a long-standing rule that you should only invest in things you understand. You should also do your due diligence before making any investment.
In this context, due diligence is learning as much as you can about property management and real estate. This, in combination with your knowledge of other investments, will guide you to the level of involvement you need to have to be comfortable, and hopefully, ultimately successful with a real estate investment business.
In the comments, tell me what your involvement level is in your real estate investments.

The Importance of Responsiveness in real estate investing

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In any business, there are certain characteristics that stand out with successful people. One of the most important ones in my experience, that is often not mentioned, is responsiveness. This is applicable whether it is you as the investor, or someone on your real estate team, whether property manager, attorney, etc.
In this article, I will talk about:

  • What is Responsiveness
  • Why is it critical that you are responsive
  • Why is responsiveness important for your real estate team?

What is Responsiveness?

According to Webster’s Dictionary,
Responsiveness: 1. reacting in a desired or positive way 2. quick to react or respond

Both of these definitions can be applied in the sense of responding to peoples’ needs, be they tenants, agents, HOA, etc., whether positively or negatively, in a timely manner, and following through if something is promised.

Why is it critical that you are responsive?

The simplest possible answer to this is that real estate investing is a business, and you don’t work in a vacuum. There are other people involved, whether they be your tenants, a real estate agent working for you, a mortgage company, etc., and their ability to be successful in business depends on you and others fulfilling obligations that you make to them.
Responsiveness is really like completing an implied contract. Sometimes this is actually formalized in a agreement, as when you have a mortgage that you agree to pay on a certain date every month. If you do not follow through, there are defined penalties.
Other times, the call for responsiveness is in a more tenuous agreement, like when you tell someone you will do something for them. There is a tacit agreement that you will provide something that they are asking for as it relates to your business. Of course, this could be in your personal life as well, but that probably goes without saying. Some places where this comes into play are with a realtor who may be helping you find or sell real estate, a tenant who calls with a problem, or with an attorney who is helping you with legal documents.
Each of these situations requires you to be responsive because they all need your input in order to do some portion of their jobs, or to maintain their living space. One way to look at this is to think of everyone who needs something from you, as a client, whether an actual client/tenant or not. If you do not provide them information they need, you may miss out on a real estate deal, or miss a legal deadline, or have a tenant leave because they do not feel you are maintaining their unit properly for it to be habitable.
Not being responsive not only can cost you money and/or missed opportunities, but it also reflects on you personally. If people sense that you are not getting back to them in a timely manner, they may choose to not work as closely with you, meaning you may miss deadlines or lose out on an opportunity. There may also be an impact on your reputation, and cause other people to not want to work with you.

Why is responsiveness important for your real estate team?

Many of the same reasons mentioned above will apply to the team of people that you put together to help manage your real estate investment. I would argue that responsiveness on the part of your team is even more critical because they are working with people on both sides of the business. They need to work with you to keep you informed of any changes, needs, issues, etc., and they need to work with clients and other contractors to ensure compliance with contracts, projects, requirements, etc.
One specific area where responsiveness is critical is on the part of a property manager. If you have real estate in a location that is not close to you, and it is being managed, then close communication becomes critical. Since you are not there, you cannot visit the property to check in regularly. The property manager is your sole point of contact, as well as that of any tenants.
If there is a problem at your property, you need to be able to count on the property manager to let you know as soon as possible. This falls under the desired reaction definition, where they know that in an emergency, they need to tell you not just what is wrong, but how they are initially handling the situation, and finally, a long-term solution. If this communication does not happen, then a problem might persist, and/or get worse and propagate into additional problems.
As well, if you issue an order to your property manager, they need to respond either within a reasonable amount of time, or provide an immediate response in which they state a time-frame for action. This is important because some items are time-sensitive and you need to be confident that your directives are carried out.
You can find different examples of critical responsiveness concerning each of your real estate team members.
Finally, the degree to which your team is responsive reflects on you as a business owner. There is actually a twofold reflection on you since the focus is not directly on your interactions, but on those of people you have hired. The first impression for people is that responsiveness is a barometer of how much you and thus your team value other people’s time. The second is more second order, in that if people find your team to not be responsiveness, they may see this as a failing of the team members, but also of you in your ability to train your team, recognize critical business skills, and finally your judgment in hiring the right team members.

A responsive recap

The first thing to keep in mind is that real estate investing is a business. All businesses succeed to a degree by how they manage interactions with other people. One aspect of this interaction is responsiveness, the ability to respond in a desired and/or positive way, or being quick to react or respond to a given situation.
The need for responsiveness applies whether you are completing a task for a client, providing direction or information to someone on your real estate team, or interacting with a contractor.
If you are not responsive to a client, most likely a tenant in the real estate case, then they may very well think you do not consider them to be important. At that point, they may simply stop attempting to work with you, which may mean that problems occur at your property that go unreported, or they may simply move out, either immediately or at the end of their lease. This could mean the loss of a desirable tenant and thus steady income.
If you do not pay attention to requests or issues with neighbors, you open yourself up to potential legal action, property disputes and potential damage to your property.
Your team needs you to be responsive because in many ways, you have the final say on their tasks. If you don’t give approval, everything slows down, deadlines may be missed, and small problems may turn into large ones.
Conversely, you need to have a real estate team that is responsive as well. If they ignore tenant requests or problems, those may turn into more serious issues, or the tenants may simply leave. If they do not respond to you in a timely manner, you may lose track of where a project or property stands, and miss a deadline, or let a project get off track. This can cost you time, money and hassle. Finally, if your team is not responsive with each other, or other contractors, you will likely encounter delays and inevitably pay more for projects or services. More seriously though, in this case, is that your reputation may be damaged and you may lose the opportunity to work with the best people for a particular service or in a real estate partnership.
It is important to remember that just as it is a business for you, it is also business or a material need for your team and your tenants. When you have made a commitment to someone, it doesn’t matter if you are doing this as a part-time gig, or a full-time business, they have an expectation that you will follow through.
If you make the effort to be responsive in all facets of your business, and surround yourself with a team who share that goal, you will likely find yourself with more people wanting to work with you, and better relationships with tenants and neighbors. Taken together, that adds up to a successful real estate business.

Does Real Estate create Active or Passive income?

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Many of the stories you hear about real estate investing refer to it as a way of building a passive income stream. There are other people who insist that it is very much an active income source. You may be thinking, “Why is this even important?”. Let’s dig in a bit and see if we can figure it out.
Here is how I am going to break it down:

  1. Define a Passive vs Active Investment
  2. Is Real Estate Investing Passive or Active?
  3. Why is this an important distinction?

Define a Passive vs an Active Investment

Before I discuss whether real estate is a passive or an active investment, I want to make sure what these investment types are. Here are some quick definitions.

  1. Active Income Source: Income is earned as a direct result of your day to day involvement with the business. A standard 9-5 job is the prime example of an active income source.
  2. Passive Income Source: This is a source of income where your involvement is not required on a regular basis to generate income.

Is Real Estate Investing passive or active?

As I mentioned above, many people think that real estate investing is a source of passive income. From my own experience, I would say that it is actually an active income source. I think it is likely that the actual answer falls somewhere in between, and may shift depending on your personal experience.
If I were to leave it at that, it would be a huge cop-out, so lets look at what factors make real estate investing passive or active.

Passive Income Factors

There are a number of reasons people thing that real estate makes a good passive income source. Here are the ones I think make the best case:

  • Rental income – This is the primary reason that people think real estate is a passive income source. Once you have signed a lease, you should have a check arriving every month from your tenant.
  • Minimal Expenses – Once you have leased a property, your expenses other than a mortgage, taxes and insurance, should be minimal, as they would transfer to the tenant.
  • Long-term tenants – If you have a tenant for a long time, a level of comfort usually develops to where there is less need for your involvement. If it is a good tenant, most problems get solved quickly, and few things crop up on an ongoing basis. They generally pay their rent on time, so you don’t have to follow up to ask for it.
  • Time Investment – Most people feel, and in general it is true, that for any given property, the time involved for maintenance, searching and bringing in tenants, and managing finances, is far less than needed for full-time employment. The more you automate expense payment and maintenance needs, the more you can minimize your involvement and thus make it more passive.
  • Property Managers – If you have a property manager handling your real estate, then your time investment may become even more passive. If you have provided clear direction and procedures for your management company to follow for various situations, then there is less need for your involvement.
Active Income Factors

Just as there are reasons that real estate is a passive income source, there are also a number of compelling reasons that it is actually a very active source of income, meaning you need to be more involved.

  • Number of properties/units that you own – This may be the most basic reason that real estate becomes a more active investment. The more units that you have, the more likely it is that at any given time, a problem will crop up, or you will have a vacancy that needs to be turned around, or a rehab that is occurring. If life would cooperate, these would all synchronize and happen all at once, then you could deal with them and move on, but it doesn’t generally work out that way.
  • Self Managed Properties vs Property Manager – If you do the management of your properties yourself, rather than hiring a property manager, you will spend more time on the process. Instead of simply being able to answer questions and issue orders, you will be doing all the various management activities on your own. This applies especially in the case where you are just getting started with property management and perhaps don’t have many standard operating procedures and workflows in place.
  • Significant Maintenance/Rehab needed – If you have properties that need a lot of rehabilitation work to be completed, then you will need to be more involved. If you are rehabbing a property and have specific ideas for what is being done, you will need to keep a close watch on the work being done.
  • Problem tenants – If you have tenants that give you issues, and potentially require legal intervention, for example, an eviction, they are going to take more of your time. This may be true even with a property manager as they will still require your approval in certain situations to outlay money for legal or other advice.
  • Hands-on Personality – If you have the type of personality where you want to be involved or have a say in all of your investments, then real estate investing can definitely be an active investment. This could range from being more involved with the day to day management of your properties, to taking a position on a home owners association (HOA) board if one of your properties has one. You can really choose how much time you spend in these situations, but they have potential to be significant amounts.
It really isn’t one or the other, but both

As I alluded to before, I don’t think it is possible to classify real estate investing as a purely passive or active source of income. There are aspects of it that fall in each category. The amount of time that you choose to put in to management will determine what the income source is.
It is possible that as you get more experienced, your level of involvement may decrease on a property by property basis. This is because you may put SOP’s into place and have defined work-flows that do not require as much of your input anymore.
On the other hand, you may become more involved as time goes on. This could be due to having more properties, and thus having more management to deal with on a regular basis.
It could also be that as you become more experienced with managing real estate, you see that there are areas where you want to be involved more. This rings true for me in the case of an HOA. I was not very involved with the property until it became clear that the management of the HOA was not very good. The security of the finances of the complex were in jeopardy and thus my individual investment was at risk. For this reason, I chose to become a member of the board, and it has become very much an active income source for me.
The last story also brings up an important point that no one is as interested or cares about your property as much as you do. The more control you want to have and the more you want your property to succeed, the more active a role you will have to take.

Why does it matter

This question should come up as part of your decision about investing in real estate. As with any investment, you want to look at the pros and cons to see if it is right for you. Depending on your temperament and time availability, and how much you see yourself being involved with the real estate management, could help you decide that real estate is appropriate for your investment portfolio.
If you think you will want to be more involved in the management of real estate, but don’t have the time to commit to that, you may consider investing in a real estate investment trust (REIT). This is essentially a fund or group that funds real estate purchases that are managed independently. From the investor point of view, it is like investing in a mutual fund, except it is not stocks or bonds, but shares of ownership in property.
On the other hand, if you have some available time, or would be willing to find time to work in management, then real estate may be appropriate from an active vs passive income point of view.

Recap

Let’s do a quick review of what I discussed, then bring this to a close.
Passive vs Active income is determined by how much involvement you have in earning the money at any given time. The less you are involved while still having income, the more it becomes a passive source.
Real estate investing generates income that falls on a continuum of passive to active depending on a number of factors. These include:

  • Whether you manage the property yourself, or use a property manager
  • The amount of automation you have introduced into your management procedures
  • How long you have been doing real estate investing
  • How many investment properties you own
  • What sort of tenants you have
  • Existing rehabilitation and maintenance needs
  • Proximity to your properties
  • Personal risk tolerance

These factors are all important either before you invest in real estate, or if you are already invested because they affect your profitability. If you are able to put little time in the investment and have it run smoothly and profitably, then the income may be passive. If you have more time or want to be involved, the income will definitely be actively earned. Either way, real estate has to be managed, and treated like a business. Your interest and abilities will determine the success and thus profitability of the investment.

Pets in Real Estate

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Pets are like family, but this is a business!

People who have pets think of them as part of their family. They want them to live with them, and don’t want to have to leave them behind for any reason.
When you become a real estate investor, you must ensure that you don’t transfer your feelings of how a pet should be treated onto your tenants. A pet should be treated as another tenant, and their potential impact on your property must be taken into account.
Ultimately, you will have to weigh the costs and benefits of whether to allow your tenants to have pets in your property.
This post will discuss the following:

  • The benefits of allowing pets

  • The downsides/costs of allowing pets

  • Protective actions to take if you do allow pets

  • When a pet stops being a pet

The benefits of allowing pets: Vote Yes for Pets

The case for allowing pets is pretty clear. If you put yourselves in the shoes of a tenant, their pet is part of their family. If someone is looking. For a place to live, they want to take their entire family to go with them. Many places have restrictions on allowing pets, thus there is a greater demand for units that do allow pets. That would tend to shift the supply vs demand needle more in your favor. How you choose to take advantage of that is your choice.
The other part of that equation to realize is that if you allow pets, you are essentially opening up the entire pool of people looking for housing as possible tenants, instead of limiting it to those who do not have pets.
You may find pet owners to be more responsible. Most pet owners understand that there is a potential for accidents to happen and make an attempt to mitigate problems before they occur.
Studies have shown that people who own pets tend to be more happy and content. Having happy, content tenants is something we all strive for, so if a pet may add to that, what is the harm?

Pets are great, from a Distance

The harm, as they say, is that no good deed goes unpunished. The negatives far outweigh the positives when it comes to allowing pets in your unit.
Let’s run down a list of the potential issues.

  • Excessive wear and tear, cleaning, repair costs: Pets by their nature create additional dirt and waste that must be dealt with. If the tenants are not responsible, this dirt and waste may become a significant and costly nuisance at move-out time. In some places, you may be able to charge a non-refundable pet deposit to cover this extra damage, but it is not always enough. This leaves you with attempting to recoup your costs through other means, either from the regular deposit or through legal means.
  • Conflict with neighbors: Unfortunately, not everyone is as happy to have pets around as their owners. When pets make noise, visit the neightbors unexpectedly and leave gifts in various places, the fallout may spread from the tenant to the owner. If this is allowed to continue, even in a situation where you are not aware of it and then handle it promptly, the perception may remain. It may, in fact, remain long after the tenants have departed. People have a long memory when they are inconvenienced, no matter how insignificant it may seem to you. The point is that the easiest way to avoid this is to remove the source of the inconvenience.
  • Liability Issues: Along with the wear and tear and repair costs, the liability that you take on by allowing pets is probably the biggest deterrent. Liability can come in many forms, but I think the largest area is in relation to pets attacking other pets or other people. Even though the pets are not yours, it is likely you will be named in a lawsuit because you rented the unit to the tenant when they were in possession of the pet, or allowed them to bring the pet into their home.
    This, unfortunately, is not limited to pets that have a bad reputation. Even the most docile dog or cat or bird or what have you, can be provoked on occasion, whether knowingly or not, and retaliate.
    If someone is hurt, seriously or not, it compounds the problem. Best, if possible, to avoid the situation altogether.

Proactive Measures to take if you are going to allow pets

Getting ahead of a problem is your best defense. If you are going to allow pets, then you need to make sure that you do everything you can to limit your potential liability.
A good first step is to think through the type of pets that are appropriate for the living space. A large open property is going to be different than a house or townhouse or condominium. Not allowing pets too large or too numerous for a space may help limit many hassles before they even start.
Ensure that you are complying with any regulations whether from the city, community, or Home Owner’s Association. Many of these agencies have given a lot of consideration to what is appropriate or not in your area. Don’t reinvent the wheel.
Determine what, if any, additional fees a tenant will need to pay if they have a pet. This may be in the form of an additional deposit, which is a one-time payment, or an additional amount of rent due every month. I think the best way to handle this is to characterize the charge as a non-refundable cleaning deposit. If this runs up against some local gov. definition of a deposit, then simply call it a cleaning fee. Be sure to remember that though you might call it a deposit, it is going to be recorded as income immediately due to it not being refundable.
As with many other items, being clear about your rules and regulations prior to a tenant moving in is critical. This starts when you are advertising your unit or property for rent. Make sure that the ad contains any limitations on type, size, number, etc. of pets that you will allow.
The next step is at the time of lease signing. Include any of your personal rules and regulations related to pets. Also include those rules and regulations imposed by any local governing body, whether county or city ordinance, neighborhood or community rules, down to Home Owner’s Association rules.
While it may seem like overkill, as long as they are current, providing this documentation ensures that your tenant is aware of and in possession of the text. This removes great potential for the "Oh, I didn’t know" argument to be raised. One great resource for standard forms, like leases, lead-paint certs, etc., if you are in California, is the California Apartments Association. Here is a link to the National Apartment Association as well, so you may find a local chapter with documents tailored more closely to the location of your property.
Lastly, and this somewhat repeats above, but it is worth it: Document Everything!!
Provide the tenants copies in the lease. Have them sign pet regulation sections of the lease. Have them initial important points within the regulations.
If you are going to allow pets, taking these steps may save you a lot of time, hassle, and potentially, money.

When a pet stops being a pet

This may seem an odd title, but it is exactly what could happen in a couple of situations. It is important because of who considers the pet to no longer be a pet, but instead, something more than. That classification unfortunately mens that you will be forced to modify rules that you have in place already, in accommodation.
In this case, I’m referring to times when you may not be able to apply your pet regulations. These situations are covered by the following regulations:

  • Department of Justice – Americans with Disabilities Act (ADA): Service Animal regulations – The only animals covered are dogs. In cases where this regulation applies, however, there are very strong restrictions about what you may ask. You may ask essentially if a dog is a service dog, and what task they are providing assistance with. That is all. Aside from that, they must be allowed into any areas where you would normally allow the public.
  • Department of House and Urban Development (HUD) – Fair Housing Act: Service Animals and Assistance Animals for People with Disabilities – This is a much broader regulation and is much more likely where you as a property owner may be affected.
    The main points are that you must make a reasonable accommodation for an animal that works, provides assistance, or performs tasks for the benefit of a person with a disability, or provides emotional support that alleviates one or more identified symptoms or effects of a person’s disability.
    A key difference between the ADA and HUD regulations are the ADA is specific to Service Animals defined as dogs, and the HUD regulations encompass those but also include Assistance Animals in a broader context. This means that it is much more likely for a situation to arise where you may have to accommodate an assistance animal.

It is important to note that while the HUD regulations are broader, in those situations, you are permitted to ask for documentation stating what the disability is, and what benefit or service the animal is providing. If those are provided, then you must make an accommodation.
You may run up against this regulation at two different times: When you are attempting to rent the property, or when you have an existing tenant who wants to bring in a pet that they claim is an assistance animal.
When an applicant discloses that they have an assistance animal, as listed above, you have two choices:

  1. You may choose them as the new tenants. If you do this, you are not able to charge them a specific "Pet" deposit, because the animal is not considered a pet. It is considered part of the family, and so the tenant is only liable for any damage not considered wear and tear.
  2. You may choose to pass on the applicant. If you do this, it needs to be extremely clear that the decision had nothing to do with the applicant’s possession of an assistance animal.

If the tenant is already in possession of the unit, you may request documentation of the disability, and the animal’s role in mitigating effects. In this situation, I would definitely have an attorney on hand for review, etc. It is going to be necessary to review the supporting documents provided and ensure that they state an actual disability and role for the pet. If there is a valid disability and role, then you will have to provide accommodation.

Wrapping it up

Well, we’ve covered a lot of topics here. Let’s walk back through everything we went over. The decision to allow pets needs to be a business decision. That doesn’t mean it is easy, as you have to take your personal feelings and emotions out of it.
If you allow pets, you are going to increase your potential tenant pool. The rental unit may be able to command a premium on rent and fees due to the more limited number of places that allow pets.
The reasons not to allow pets are largely due to avoidance of things that could happen were they to be allowed. You may face increased wear and tear, and possibly damage in addition to normal use. This may or may not be covered by the tenant security and/or pet deposit. Long-term hard feelings with neighbors may arise if a situation persists and they perceive that you let it carry on. You may face unexpected liability due to the type of pet you allow, or simply because pets can be unpredictable.
If you do decide to allow pets, first think about the types of pets that are appropriate for a particular rental unit. Next, determine what, if any, additional fees or deposits you will charge a tenant who wants to have a pet. Finally, make sure that you clearly document the rules and regulations from city/county/state, down to community, home owner’s association, and then your personal limitations on pets. Ensure that the tenant has copies of all relevant rules, and that these are signed and initialed as part of the lease.
Lastly, remember that what looks like a pet, is not always a pet. Both the DOJ using the Americans with Disabilities Act (ADA), and the Department of Housing and Urban Development (HUD) have regulations on what constitutes a service animal or assistance animal. In the case of the HUD regulations, you have the right to ensure that a person has a real disability, and the animal is assisting with or mitigating some symptom of that disability. If these conditions are met, then you will need to make reasonable accommodation either when the tenant moves in, or when they want to bring this animal into their household.
Deciding whether or not to allow pets is never an easy decision, especially if you are an animal lover. Real estate investing is a business, and while personal beliefs will always influence how you run a business, you must also be willing to look at the issue from a pure business perspective. In this case, that means considering how allowing pets may affect your potential profitability and liability.

The Role of Proximity in Real Estate Investing

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Proximity vs. Location

When you think about real estate, particularly when looking to purchase a house, I would venture to guess that you’ve heard the phrase "Location, Location, Location", uttered at least once.
"Of course I have, but what does it matter?", you respond.
As Real Estate Investors, part of what we have to embrace to be successful, is a willingness to take a situation and look at it differently. With real estate, there is sometimes too much focus on where exactly you find a property, be it the city, neighborhood, zip code, etc. When you focus so much on the location, and the characteristics of that location, you might not pay attention to what is around that location, or in proximity. This post is going to look at proximity and how it plays into the many decisions a real estate investor has to make.
In this post, I’m going to cover the following:

  • What I mean by proximity

  • What factors of real estate ownership and management are affected by proximity

  • How to overcome proximity challenges

What do I mean by Proximity?

Proximity can be a difficult concept to wrap your head around. To ease into the topic, let’s start with a definition.
Proximity: Nearness in place, time, order, occurrence, or relation.
Basically, how close you are, or a property is to someone or something, has a clear tie to how much affect is felt in the interactions between the two items. A good example of this is the force of gravity. The force of gravity is expressed as the inverse of the square of the distance between two objects. The closer two objects are, the more effect they have on each other.
I am sure you are now asking how in the world that relates to real estate. Just like with planets and gravity, the nearness that defines proximity, has different effects on both a piece of real estate, and people, places and things that it has a relationship with. I think that these effects are equally as important as a list of attributes a particular piece of real estate gains from its location.

What factors of real estate ownership and management are affected by proximity

  • Ownership control – Firstly ownership control is basically how much influence you have over your property. Secondly it is the amount of interaction you have with your property. The closer you are, the easier it is to visit and make sure that everything is running smoothly. You could take this back to the very point of purchase. This should be a major factor in your decision of whether or not to purchase a particular piece of real estate.
    If you desire to be closely involved in the management of a piece of property, then distance must be taken into account. Other ownership functions that come into play include managing your property management team. If they are a significant distance away from you, then phone and email will be your primary forms of communication and oversight. This will require more diligence on your part to ensure that the property is being managed to your standards.
  • Management quality – Whether you manage your own property, or have a property manager do it for you, the proximity of that property to the managing entity will have a direct effect on the quality of the service. The closer and easier a task is, the more likely it will be handled first. If your property is farther away from a property manager than another one that they manage, it is likely that the closer one will receive better attention.
    The management company will naturally focus more on the property that is easier and more convenient for them to access on a regular basis. This makes it extremely important to take into account the location of their office relative your property when selecting a property manager.
  • Profit potential – The potential profit for a property is dependent on the possible rent you can charge as well as the expenses that you will incur in managing and maintaining the property.
  • Tenant Selection – When you are looking for tenants for a property, there are some specific characteristics you are looking for including distance they are moving, adequate income, employment status, etc. A number of the factors that affect the potential tenant pool rely directly on proximity. These include proximity to a higher income area, distance to centers of employment, distance to colleges and universities, etc.
    With a particular tenant, proximity to their previous address is a factor because the farther they are moving, the more risk you take in renting to them. When they are moving a long distance, it generally is a relocation involving a change in employment, and this may not work out in the long run.
    Your number of potential candidates increases when the property is located closer to centers of employment, and to colleges and universities. People want to live close to where they work and/or go to school. They also want to live in areas that are either already established as higher value, or are developing in that direction.
    Proximity works in the other direction as well with regard to prospective tenants. Being close to a high-value area increases the value of your property by association, and thus, the rent that you may be likely to charge. Higher income areas attract higher-income people, who tend to be more stable tenants in the long run.
  • Property Values – The most obvious way that property values are affected by proximity is in the use of comparable real estate valuations used in an appraisal of a property. A couple other factors were mentioned above. The nearness to a higher income area will generally have an upward effect on property values. Also, if there is an area undergoing redevelopment or renewal, real estate in and around that area will tend to see a gradual increase in value if the redevelopment process is a success. Proximity can even be seen as having an opposite effect from the gravity model described above. In the case of proximity to a college or university, some property close to the school may have a lower value than one slightly farther away. This is due to the perceived negative of traffic and crime in and around the school. The properties slightly farther away benefit from the distance of being outside that traffic/crime bubble, and gain from the higher income employment at the school and higher education level of residents of the area, all of which lend to increased property values.

How to overcome challenges of proximity

The challenges you may face that are related to proximity fall into two groups:

  1. Those that are related to the surroundings of the property
  2. Those that are more interaction based, whether with you the owner, a manager, tenants, etc.

The first set of challenges are ones that you need to be aware of when you are first considering purchasing a property, or converting an existing property to an investment property from a residence. Some examples of these are being close to a less desirable area, whether because it is rundown or due to high crime, distance from employment centers, transportation, etc. You need to know about these going in, or have an idea of the conditions around the property prior to purchase. Once you own the property, these are items that you have very little influence over or ability to change. In the case of a property in or near a lower desirability area, your insight into future redevelopment plans may guide your decision to either purchase or pass on a property, or whether to sell an existing property.
The second set of challenges may be avoided or remedied through actions that you take during the course of your ownership. Some examples of these challenges are property management problems, lack of knowledge of issues at a particular property, and a limited tenant pool. The majority of these all stem in one way or another from the proximity of you, the owner, to the property, or a property manager to a property, or lack of knowledge of the positive rental factors in proximity to your property. Sometimes the cure is to find a property manager who is closer to your property. This will make it more likely for them to visit the property more often and increase the level of care. If your property is part of a complex, it may be worth hiring an on-site manager to keep you apprised of activity, whether good or bad. If you are having trouble finding tenants, ensure that you are focusing your search in places with a high concentration of qualified candidates. This might include specifically posting notices around a school, or on a school Facebook page. Don’t limit yourself to just one demographic. Instead, post on a number of sites, or use different keywords that play up the positive attributes of your property that may appeal to these differing groups.

Wrapping this up

When evaluating a potential real estate investment, proximity, or how close a property is to other factors, provides the other half of the equation to the sole physical location of that property.
Proximity factors include distance from the owner/manager and relative distance to high value neighborhoods, schools, shopping, or commercial centers. These factors all impact how well the property is managed, how much it is worth, the tenants you can find, and the rental income you may expect to generate.
Some of these factors are more important when you are first purchasing or converting a piece of real estate to investment property, for example how close other neighborhoods, schools, commercial centers, etc. are, as you cannot change these once the transaction is complete. Others, like finding a property manager or finding better tenants are more fluid, but mitigating such problems may require more effort on your part.
In all of these cases though, what surrounds a piece of real estate and how it interacts with those surroundings, is as important as the specific location of the real estate investment.

Building a Real Estate Investing Team

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If you are going to invest in real estate, you are soon going to learn that you cannot do it alone. There are simply too many moving parts to deal with, and too many specialized things to learn. This is not to say that you shouldn’t learn as much as you can about some or all of the moving parts, but don’t expect to become an expert in them.
In the following paragraphs, I’m going to discuss the above in more detail. Specifically, I will hit upon these two main topics:

  • Why do you need a real estate team?
  • Who should you include on your real estate team?

Why do you need a real estate team?

This may by turns have the most and least obvious answers. The obvious answer that may come to some peoples’ mind is that, “I don’t need a team!!”. When you are starting any sort of a business by yourself, or even with one or two other people, it is generally a tight operation, with people performing multiple jobs, and generally needing to be involved everywhere. On the surface, it seems that this would work equally well in a real estate investing business. Give it a little time of trying to be a jack of all trades, and you may very well run smack up against the first reason for building a team:

Laws and Liability

Real estate, both on the purchasing and the management sides, is rife with rules and regulations that have to be followed. At some point, you are likely to have work performed on a property. If that work goes well, perfect, if not, the question of liability may arise. Who is responsible for whatever went wrong?
In the first case, a real estate attorney and/or a realtor, are going to have a far easier time keeping up with the laws related to buying, selling and managing a property, than you will. This is partly because they have more time to learn the information, but also because there are similarities with other parts of the legal world that cross over, whereas you would have to learn everything. The liability question is simple. If you signed a contract with some for them to provide a service, and there was a problem, it becomes their responsibility and thus, their cost, to rectify the situation. It is a question of time and money.
The next topic is closely related to the issue of time.

Efficiency

I think there is a tendency when starting any business to feel like you have to do it all. As you get busier, part of reclaiming your time is by starting to batch similar tasks together. There are efficiencies inherent in this batching process. This ties into building a real estate team because each of your team members is going to be a specialist, thus what the do are similar tasks all the time. This is far more efficient than you trying to learn a lot of different topics that you may only need to engage in infrequently with your business. This is not to say you should completely forego learning about these topics, but you should focus your knowledge on overseeing work that the specialists are doing. The best examples of this concept are with lawyers and real estate agents. Much of the interactions these professionals have with real estate is through buying or selling transactions which are very standardized. This means they likely have procedures in place to handle these operations quickly and more efficiently than you could on your own.

Organization

The last real driver for building a team to help you is simple organization. When you first start out, with only one or two properties, keeping track of everything that is going on may seem simple. As you add more properties, tenants, and volume, it will become more difficult to keep track of everything.
The larger your business becomes, the more important it will become for you to focus on managing the business, as opposed to managing the day to day specialized tasks. Knowing who to go to for any particular task, and ensuring that others know this as well, means that you do not become a funnel that everything has to pass through to get completed. While it is true that you are responsible for everything that happens in your business, trusting your organization to do their part is integral to your success.
As well, the longer you are involved in this business, the more likely it is that a question will arise that you don’t have an answer too. At that point, your team will become an invaluable resource.

Who should be on your real estate team?

  1. Realtor – Obviously you are going to need someone to help you find investment properties. This is going to need to be someone who lives and works in your area of interest. They need to have many years of experience with a focus on finding properties for investors. There are many differences between what a homeowner will be looking for in a house, and what an investor will look for in a property that they intend to rent out. Having a realtor who understands this up-front is going to save you a lot of time, as they won’t be sending you out to properties that are not good matches for you.
  2. Tax Adviser – I do my taxes by myself. That being said, there have been times when I’ve had questions about various items. It is good to have someone to turn to in the event there is a question you can’t find an answer to online, or you simply need an interpretation of a law by a professional who has likely come across it before. There are likely going to be times when transactions are going to make your tax situation more complicated than the year-in, year-out, income/expense calculations. Buying and selling property brings in capital gains, and accumulated losses, etc., that can be a real bear to figure out. Some years, it just might make sense to take your data somewhere and let someone else do the legwork. Lastly, if your intention is to increase the number of units that you own, and build a larger portfolio, it is going to become more complicated as you go along. For efficiency sake, it may make sense to let a professional handle this aspect of your business because they can do it quicker, and within a set time-frame. It is their job and is scheduled, as opposed to you having to take an increasing amount of time every year. Ideally, this will be a relationship where you can learn strategies for minimizing your taxes that may help you plan your activities for subsequent years.
  3. Attorney – Inevitably, you are going to run across a situation where you need a legal opinion. This could be simply having someone go over the purchase agreement, or sales agreement for you, to reviewing a lease, handling an eviction, or even walking through a foreclosure/short-sale situation. There are a number of services online like Legalzoom, that have many forms and documents you can use, and are appropriate in many cases. Sometimes, however, what needs to be done is a well-phrase letter on the letterhead of a law office needs to be sent to someone to force action on their part.
  4. Property Manager – I will write a more in-depth post about what to look for in a property manager later. The fact is though, that if you are going to purchase rental property that is not close to where you live. A good property manager will handle finding tenants, maintenance of the property, etc. Some items that are variable between property managers are their willingness to pay bills, and utilities. This may be an option for an additional cost. As your unit count increases, it will become more vital to have a property manager you can depend on, as they will be able to ensure that you have good tenants, and that the vacancy rate is kept as low as possible. Quick things to look for are responsiveness, good accounting practices, both for individual properties and as a whole, list of reputable businesses they use for different tasks. Average compensation is about 10% of income, inclusive of rents, late fees, etc.
  5. Contractor/Electrician/Handyman – At some point, you are going to need to have work done on your property. Your choices for this are to do it yourself, find a general handyman, or to find a general contractor. In this case, you get what you pay for, and in fact, what you get may cost you. Due to liability issues, I would recommend only doing basic work, such as painting, drywall, etc. by yourself. Anything beyond that, especially where it includes plumbing or electrical, should only be done by someone licensed and bonded. If you don’t do this, you put your investment and your personal finances at risk, if there is a problem. Find a contractor who comes with a good recommendation, get a list of properties they have worked on and visit them to see their work, etc. Do your homework. A good contractor can save you a lot of money, a bad one can cost you, big time. I list other professions because sometimes, you have one project that you need to have done. If it is specific, like installing a light, or an outlet, no sense paying double for the contractor and electrician. Similarly, for smaller jobs, like painting a whole house or other projects, a handyman can be useful. Take into account the time factor of doing it yourself, vs. paying someone who may be able to get it done faster due to experience. The money you save doing it yourself is spent by the time and possibly extra time it takes you to do it right. They key in all of these situations is to find someone reputable, who is licensed, bonded and insured. This gives you recourse if a job goes wrong.
  6. Real Estate Investing Mentor – You are not going to know everything on your own. Find someone who has been doing this for years, make friends with them, take them to lunch, pay for lunch, and pick their brains. They will have knowledge about tips for finding properties, maintaining them, finding good tenants, contractors, THE LAW, etc. Understand and respect that their time is valuable. Don’t just expect to ask them questions all the time and receive an answer immediately. They are busy, and if successful, will have a lot going on.
  7. Someone with a truck: I say this jokingly, but sometimes, if you are working on a property close to you, having someone with a truck can be a godsend when it comes to moving something, or bringing in supplies. Make it a win/win for them. Don’t expect someone to always help out of the goodness of your heart. This is a business after all. Offer to pay for gas, and/or their time if need be. If they decline, so be it, but always make the offer, it shows that you value their time and assistance.

I am sure there are other people you should have on your team. Hopefully these give you some insight into people you should probably find and try to work with, and learn from. If there are others, ideas are most welcome.