Archive for November, 2009
5 Reasons Why Rental Properties are the Best Form of Passive Income
I, like many people, own stocks, bonds, mutual funds, IRA accounts, foreign currencies and a couple forms of passive income. Wow that sentence had a lot of commas! However, if I was to draw you a pie chart depicting how much of my financial portfolio is divided up between all of the above mentioned assets and real estate, we would be looking at approximately 90% real estate holdings and the other 10% divided among everything else. Perhaps the only reason why I don’t have 100% of all my wealth in real estate is because I was “told” not to. I personally don’t see a problem with throwing all of your eggs in one basket so to speak, but with all the talk of “playing it safe” over the course of my financial education, I reluctantly decided to diversify. And thus I now own the typical mutual fund, a separate Roth IRA, a few hand picked stocks, 3 Million Iraqi dinars (which aren’t worth very much – I bought them while I was in Iraq, trying to speculate on a strong Iraqi economy rebound…maybe someday), and some loan notes I made to people in the past (which I now realize that I don’t care to be a lender anymore). There are several reasons why I love real estate over all the other assets.
1st Reason.
My money is (relatively) safe, tied up in the equity value of the home. I don’t live in a major city where home prices have dropped like a rock nor do I buy real estate that is priced for the upper middle to upper class citizens in my area. I tend to stick with properties in the lower middle to lower class areas of town. Does this make me a slumlord? No, I don’t think so. I believe a slumlord is someone who treats his tenants badly and neglects to do proper repairs on the home when needed. By owning the lower end to the bottom of the real estate market, there’s really nowhere else for the price of the property to go, but up. At least, as far as I have experienced. My home values have been generally stable over the last couple of years and I have had several offers to purchase them from other landlords in town.
2nd Reason.
My properties not only generate a stable source of monthly income through rent, but also might appreciate in value over the years. Several of my properties tax values have increased. That doesn’t mean they will sell for higher than I paid for them but obviously the county tax man believes they are worth more today than when I bought them. I view this as a double reason to love rental properties. You get the added benefit of watching your net worth rise, like owning an IRA, without having to make monthly contributions to it.
3rd Reason.
Someone else builds your equity in the property. If you did your math correctly (like i suggested in this article http://www.landlordsanonymous.com/2009/10/invest-in-the-right-rental-property/), then you should have someone paying the bank off for you and allowing enough for you to realize a nice little profit each month. Not only will the home’s net worth increase over time (hopefully), but your property equity will increase so when you go to sell the property one day, the banker won’t get to keep as much of the profit if you still owe a mortgage on home.
4th Reason.
Tax benefits! Holy cow. There are so many tax benefits when it comes to dealing with real estate. Gas for your own personal vehicle (as long as you use it for business purposes), repairs and improvements on the property (which increase value), and mortgage interest deductions to name a few. I will post another article on the many different tax benefits to owning rental properties.
5th Reason.
You have a real, solid, honest to God piece of property you can drive up to and place your hands on if you feel like it. I don’t know about you, but I feel sort of helpless owning a mutual fund. I have no say in anything except to buy, sell, or hold. In the field of rental properties, if I have a problem with a tenant who is not holding up to his end of the bargain, I can evict him/her and find a better one. If I want to inspect the property to see how it is being treated, I have the right to. Can you approach your mutual fund manager and ask to inspect what he’s been doing for the last year with your money? Sure you can view specialized reports, but can you get your specific questions answered and have your input taken seriously? I’m not a control freak, but I like knowing that I do have some sort of control being in the rental property business.
These are just 5 quick reasons why I love holding rental property to increase net worth. It’s definitely one of the best “vehicles” someone could use to get to where they want to be in life. Please leave a comment and let me know what you think!
My first property to get a tenant with a Section 8 HUD voucher
Out of the 38 properties I’ve managed to accumulate in this business, I must say that my favorite is definitely the one that is currently occupied by a tenant with a Section 8 voucher. The rent is always paid on the first of the month via direct deposit into my bank account and I never hear from the tenant except for the one time each month when she calls to see if I recieved her $100 check in the mail. The Department of Housing and Urban Development (HUD) pays her rent, or at least most of it and she is left with a small payment amount of $100 each month to me to cover the rent that the government won’t pay. So far this has worked out very well for me.
About ten months ago, I was approached by a lady named Stephanie who was needing a place to stay and was looking for a 2 bedroom house or apartment for her and her daughter. She currently lived in an apartment in the next town over that was in a bad side of town and was looking for somewhere more safe to move into. I normally have at least one or two properties vacant at any given time and it just happened that I had two available for her to look at. I showed her the first and she told me it would be too far out of town to live and so I took her to the one located right in the middle of town, which she fell in love with immediately. She told me that she had a Section 8 voucher for government assistance and wondered if I would accept her because of it.
Now before this, I had only heard about Section 8 or HUD vouchers or whatever you want to call them just a few times previously and to be honest, I had no clue if I could or if I should accept the voucher. So I told her I would be glad to have her as a tenant if only I knew what was required of me as a Landlord in order to receive Section 8 vouchers. She told me that it’s not too much hassle on my part (and she was right!) and that the property I was showing her was well within HUD’s standards to lease out to her. I agreed to rent the property to her and she made a phone call to her case worker to set up an appointment for us to show him the property.
A few days later, I received a phone call from some lady that works for the government who was calling on behalf of the HUD inspector and she confirmed a day and time for him to come by. I met him and Stephanie at the house on the day of our appointment and he had a clipboard in hand. I was sort of nervous about it and wondering if my property would be verbally abused in the process of his walkthrough but to my surprise there was little he had to say about it. I had to fix one window that had been painted shut many years ago (it was a safety concern) and supply a new fire extinguisher (doh! How could I miss that?). He gave me a week to get the repairs completed (even though it was taken care of the same hour he left) and returned after 7 days to my approved house.
We handled the paperwork right there in the kitchen. I was signing document after document. I felt like I was joining the Army again! All I had to do was supply a lease agreement that I normally had my tenants sign before moving in. He brought the rest of the contract paperwork. After 20 minutes of signing and explaining the position of the HUD/Section 8 standpoint, he left and I had my first tenant with a HUD voucher! I was glad to join the club. Stephanie has turned out to be a really great tenant and always has a pleasant way about her (I would be too if I only had to pay $100 rent each month!) . The rent for her particular house is $550 a month but HUD will only pay $450 so she is left with the balance of $100 each month which she always pays in a timely manner.
Even if Stephanie had turned out to be a rotten tenant and skipped town in the middle of the night, the government would continue to pay the rent on the property until I found a new tenant to replace her. The lease is typically for one year on a HUD backed property and it can be renewed as long as the tenant is willing to remain after the year is up. So far Stephanie has talked about sticking around for a long time and I hope to keep it that way!
Evicting Tenants!
OK, it’s illegal to board up the property with your tenants still inside and burn the place to the ground to collect the insurance money and solve your bad tenant problem at the same time, but I can understand why some landlords feel like doing this every now and then! I doubt any of us are really any good when it comes to arson anyway so let’s avoid the slammer if we can. It seems that every law out there is written in the tenant’s favor and for protection from the “evil” landlords. I’ve never really understood why this is.
You can ask any landlord or property manager which tenants are problem tenants and which are excellent tenants. They all have their favorites and their not-so-favorite tenants to deal with. Any landlord or property manager with a lick of sense will do everything they can to keep a good tenant happy. In the past I’ve discounted a month’s rent when a good tenant of mine was in a legitimately bad situation. He was never late with the rent or even complained about anything. He took great care of the property and even increased it’s value by adding some fencing and updated the ceiling fans. I didn’t even realize the interior improvements until I revisted the property a year later to do an annual walkthrough inspection.
It’s a pain to have to evict a problem tenant. Usually it’s for the reason of non-payment of rent. Rarely is there any other reason, unless they are totally destructive of your property. No matter how bad the tenant is, I still get the feeling that I’m doing something terrible to someone who’s in a bad situation when I go to evict them. This is a feeling that you will have to overcome in this business, or at least supress it. You cannot afford to let someone catch a free ride in this line of work or you will run into trouble with your own creditors. It all boils down to you or them that has to face the music . I’d rather it be them. I’ve played it too safe and responsible to let someone come along and try to ruin my credit that I’ve built over the years.
Now most of the time, problem tenants deserve a good slap in the face. They will avoid your phone calls, not come to the door when you drop by, or will hit you with a billion excuses why they can’t pay their rent. It’s amazing how many problems can develop for a tenant that you just met a few months ago who acted like they had it all together. Soon after, you realize that is a front they use on all new landlords they meet. They’ve always had the same problems but some of them have gotten very good at decieving unsuspecting “evil” landlords into allowing them to lease out their property. This is why it’s imperative to do your background checks and call the references listed on their rental application.
Before I evict a tenant (it’s usually been after a month of not receiving the rent payment plus the late fees on that rent), I will take a notice of eviction and tape it to the front door if the deadbeats aren’t home. My eviction notices basically let them know that they have exactly 48 hours to catch up their rent or I will file for eviction at the local Magistrate Court and hold them responsible for the filing fees plus all unpaid rent due. This generally gets a response from them one way or another and I usually get a sad story about this and that, but oddly enough they have some money to hand over. It may be the full amount or it may only be a partial payment. It’s up to you whether or not you want to accept any partial rent payments (I usually will if it’s a large portion of the rent owed) but just know that if you decide to accept the partial payment you cannot go forward with trying to evict them legally. Generally you cannot try to evict someone if they have paid you anything towards rent within the last 30 days, even if it’s as small as $50.
If you do not hear from the tenants at all then make one last trip over to the property to make sure they haven’t abandoned it. Sometimes you will have people flee into the night and the house will be empty of all possessions, except a load of unwanted items and trash here and there. If this is the case then the problem is solved. Use their security deposit to hire someone to clean it up and get the unit rent ready again. If there is anything left from the deposit then apply it to the unpaid rent balance. You’re still at a loss more than likely, but at least you don’t have to go file at the Magistrate Court now.
The Magistrate Court eviction process is really not that difficult as some people might think. Perhaps it is in other areas but I can only speak for my county. In my area, I have to pay a $69 filing fee for the complaint and then list the reason why I am evicting the tenants and also the amount the tenants owe, plus late fees. The Magistrate Court will send a deputy or some other type of law official out to the property and will serve them with an offical eviction notice from the county. There will be instructions on the notice of how they can dispute the eviction if they feel they are being treated unfairly. Usually they don’t have a leg to stand on. Either they paid the rent or they didn’t. The Magistrate Judge could really care less for the reason’s why the tenant didn’t pay unless it was the fault of the landlord for not providing a particular service that was supposed to be provided (like heat). In some cases tenants can rightfully withhold some rent if the Landlord doesn’t fulfill his side of the lease (usually by providing some type of amenity). The tenant has seven days to respond or the Landlord can legally take back his/her possession of the property.
Whatever you think or feel about the situation of evicting someone from one of your properties, just know that you WILL run into this from time to time. Do your best to always treat your tenants fairly but remember that you have bills to pay as well and if someone is not paying their rent, then they are actually robbing you of the money that you could be earning off of some other tenant that would be happy to lease your property. In most cases, the Magistrate judge will side with the Landlord if he/she can prove the tenant has not paid the rent or has committed some other offense that violates their end of the lease. Don’t be afraid of going to court and fighting for yourself if the tenants actually want to dispute the eviction. You won’t need a lawyer or anything in small claims court, unless you feel that you would be more comfortable with one. You will more than likely win the suit and will be awarded all rent due and then you can garnish the wages of your former tenants until you have been repaid in full!
Feel free to leave a comment and let us know of your bad tenant problems below!
Keeping Your Properties Occupied!
If you have multiple houses or apartments that you rent out then it’s very important to make sure your properties are not sitting vacant. The bankers will want their mortgage payments every month whether you have all or none of your properties leased out.
There’s a rule of thumb that I tend to go by when staying on top of vacancies. I try to make sure that I am running somewhere between a 90-95% occupied ratio with my properties. You never want to be at a full 100% booked up status unless you are just starting out and only have a few properties to work with. The reason why is because if everything you own is currently rented out then you may be leaving money on the table. There’s definitely a reason why you don’t have any vacancies and that’s because you’re too cheap. What if you are missing out on an extra $2,000 each month because all of your properties are rented under value? 
On the other hand, you certainly don’t want to be on the other side of the stick and have only a small fraction of your properties rented out. This is obviously a disaster waiting to happen! If you’re properties are not being leased out it’s because of a few different reasons. First of all, the property might be considered substandard by all the prospective tenants you show it to. Make sure the property is up to par in that all the appliances work, the unit is clean and any damage from the last tenants has been repaired properly. The main reason why you’re rental property is not leased however, is more than likely the price! Check your prices and adjust accordingly.
If you are experiencing more than 10% of your properties being vacant for more than the standard amount of time (a month), then you might consider lowering your rent in order to get them filled. If you have everything booked up and have to keep turning away new prospective tenants think about raising the rent on some of your properties coming up for lease renewal.
My First Tax Lien Investment!!
Success!!
I purchased my first property tax lien in September 2009 (two months ago from this writing). I spent $4,500 at the auction in order to win the bid. The original tax bill was only $480 but the bidding wars got the price up to where it ended up at pretty quickly. I was nervous because there isn’t much to be said or taught in schools (even the business schools) on the subject. I first learned about tax lien investing by reading and listening to Robert Kiyosaki’s Rich Dad Poor Dad books and cd’s. I admit I was skeptical at first because of all the ridiculous scams and hype a lot of people are selling these days but I decided to go along with it. I will give you a run down of exactly what happened from when I won the tax lien to when I was repaid in full with %20 interest!! I will probably go into more detail on tax lien investing itself in another related blog post.
Last year, when I was educating myself on this great new opportunity of tax lien investing mainly through the Rich Dad books (I never attended one of their seminars but I have read several books and listened to about a dozen CD’s of the franchise) I decided to visit the local tax lien auction and just observe. I had the money to begin investing that day but I wasn’t yet comfortable with the idea of forking out a couple of thousand dollars in a auction style manner. I’m a cold, calculating, young, business man (or at least I like to think I am), and yelling out large sums of money while an auctioneer takes me for a ride doesn’t sound like something I would be interested in. It just doesn’t give me enough time to think and react ya know?
I didn’t place any bids that day but I definitely learned a lot! I got to meet a few locals that visit the tax lien auction every month and attempt to grow their wealth and real estate empire by a few more properties. I asked a lot of questions. Specifically, I asked a lot of Georgia specific questions because the information you learn in the books and online only teaches you so much. You must know exactly what the law says in your state. And so I learned.
I came back again in September ready to do business. I had saved up $10,000 in cash in my frivolous account at the bank for the express purpose of investing in this auction. I have seen some bids go up to $50,000 so I knew I couldn’t hope to get some of these property tax liens but I was willing to drop 10 Big Ones to try. I started researching a whole month out all the properties that were going to the tax lien through the local paper. I did my homework on each of them, tallying up the properties tax values and taxes owed, etc. There were about 50 properties in all.
On the day of the auction the majority of the properties had been paid up and were removed from the list to bid on. Shucks!! I noticed there were only about 15 people who bothered to show up for the auction that morning and I began to see a few familiar faces I saw from my last visit. I figured these guys to be the “high rollers” in the crowd. I was worried that I wouldn’t be able to win an auction due to these rich old clowns but that all subsided as soon as the bidding began. Some of these guys could care less about bidding at all. Most of them came with just a few properties in mind and you knew it when it was their property on the listing. They hooped and hollered out their bids without care or caution until the other bidders backed down. One listing went for $30,000 that morning. However, it was for a $125,000 (tax value) piece of land that spanned over 100 acres. I’m sure it must have been worth closer to $200,000.
I participated in placing bids on just a few of the auctions that the high rollers didn’t seem to care much about. However, I figured there was a reason why these fellas didn’t care much about them and so I backed off when they did and some other citizens kept the bidding going higher and higher. Finally, I noticed a property that was worth about $45,000 and the bidding started at $480 (what was originally owed in taxes). It was 6 acres of timber out in the boondocks of the county lines that I had never really ventured out towards but I remembered that the land was purchased just 2 years ago from the records on file for over $50,000. It had to be worth something right?!? I went for it. It came down to just me and one of the other “high rollers” (one who I had been making friends with before we got started) and eventually he backed off and let me win the auction. I was thrilled and then a little scared thinking to myself “What have I just got myself into?” And so I owed the county tax man $4,500 for the winning bid and make a trek to the bank for the cashier’s check and promptly returned.
Now the original owner of the property had exactly one year from that day to repay me the $4,500 plus 20% (900) for the penalty fine in the state of Georgia. The owner basically owed me $5,400 in order for the lien to be removed. If for some reason I did not receive the entire $5,400 by the end of one year I could legally foreclose on the property and keep the 6 acres for myself to resell at a much higher price than what I paid for them or keep the land for whatever use I seemed fit. It is the owner’s responsibility to seek out the tax lien holder (the county mails them a registered letter giving them your contact info in order to pay you back). I made sure it wasn’t my responsibility to go track down the original owner looking for my money. It’s not. And I’m by no means a detective.
After just two short months I received a phone call from the property owner who was very eager to remove the tax lien from her property. She sent me a partial payment of $3,500 in the mail last week (I thought it might bounce but it cleared!), and the rest of the payment will be made next month for the extra $1,900 owed. After I receive the second payment the tax lien will be removed and I cannot claim any right to the property. I view this situation as a win either way it would have turned out. I could have technically purchased a $45,000 piece of real estate for $4,500 – which is exactly 1/10th of the value, or in my case, make a cool 20% return on my investment in less than 90 days. I can’t wait for next months auction!
Writing Articles for eHow and other commission friendly websites
My wife and I started writing articles for the website www.ehow.comback in September 2009. We are thrilled so far with the results we’ve seen. eHow is basically a “how to” site that provides guides and instructions for just about everything under the sun. I read about this website over a year ago and learned that the writers receive compensation for the revenue they produce for the site because the site shares it’s profits with it’s contributors. I made a huge mistake however, when I signed up to start writing for them and ….well…didn’t!!
If I had at least wrote one article…one measly 300 word article, I would have changed my hobby interests immediately. No I wouldn’t have walked away from real estate investing by no means but I would have started writing for this website a whole lot sooner. This website is definitely legitimate and pays on time!
By chance, I happened to stumble upon the eHow website again almost a year later to the day. I decided to finally give it a shot and wrote an article. It took all of 15 minutes and I published it. A few days later I revisited the site and noticed I had made a small commission on my article. You do not make anything for just writing articles and publishing them but you do make money if someone comes across your article and clicks on the advertisements that are planted all throughout your article. Obviously, somebody had read my article because I had over 25 views and a few cents deposited into my eHow account.
This got me excited and I researched about the potential this site has and was floored. There are folks who have thousands of articles and are making thousands of dollars every month off of their articles through eHow. That’s CRAZY!! This is passive income at it’s finest people. Imagine having a thousand articles sitting on eHow with your name on them and every month you are making a thousand dollars for doing nothing at all. You write the article once it pays you for the rest of your life!
I started contacting various eHow writers through the forum this site has and asking them if they would mind giving me some details about the earnings they have experienced and most writers were eager to respond. It seems that the average you can expect on a typical eHowarticle is around $1 per month. That might not sound like a big deal. I mean to write a decent article you have to devote at least 15 minutes to an hour at the most. Who wants to be paid a buck for that amount of time right? Well think about the long haul. The article will pay you roughly $1 every month for the rest of your life. Over the course of the first year you have made $12 and over the course of 5 years it’s made you $60! Can you get excited over earning $60 for 15 minutes to an hour?!? What about 10, 20, 30 years…that’s $120, $240, and $360 dollars respectively! Wow! That little article will work for you around the clock, night and day to keep bringing home the bacon, meanwhile you’ve actually forgotten how to do exactly what you wrote about doing because it was so long ago.
With this new insight, Heather and I jumped in head first. We haven’t wrote many articles, but so far to date we have wrote 52 articles on eHow (took us a little over a month – and yes we are somewhat lazy and hard to motivate at times). I’ve heard of folks that single-handedly write 150+ articles a month and that’s by themselves! Heather and I tag team one account and we are falling behind the power writers, but that’s ok. We just received our first eHow payment today for the sum of $54.02! Not bad. If we stopped writing today and never visited the website again, our eHow account will probably pay us anywhere from $50-60 a month from now on through our Paypal account. That’s $600 a year folks. Our goal is to continue writing and try to accomplish at least 1-2 articles a day. That’s reasonable and hopefully our laziness won’t get the best of us. As long as eHow keeps sending us the checks I don’t see how we could stop. I can see these checks growing month after month and it’s very exciting!