We spent much of week two of our three weeks out west in the warehouse district of Los Angeles. I was shocked at how large LA’s homeless population is. I was also a bit shocked as how bad the area smelled – stale urine, extreme heat and no rain to wash it away is not very pleasant.
It is really a sad scene given the overall wealth of our country and of SoCal in particular.
An interesting real estate related concept in LA was the number of what appears to be privately owned SRO (Single Room Occupancy or rooming houses) Nice, modern buildings.
So even in this most economically, and probably socially, challenging housing environments, rental owners are able to find workable solutions by providing housing uniquely suited for a specific population.
The third thing I learned while out west for much of July is the most interesting. It has kept me busy for the past three weeks. … More to come 😉
Every year we spend about three weeks in the southwest. Typically it starts with four days at a database developer conference, this year and last were in Vegas. While I was honing my computer skills, my wife offered some classes and coaching for her Vegas area students of the Event Decorating Academy. We then rented a car and headed to Los Angeles to reconnect with vendors that supply the Event Decor Mart.
Carmen put on a couple of more classes and coaching sessions while in LA. The trip ends in Vegas for the ASD trade show. In general, I do not like Vegas. It is expensive, and we are not gamblers or night people. Although one night I did stay up to 11 PM;-) It is also triple digit hot every day.
I always return with a lot of new database techniques and skills. More importantly to this conversation, I am a constant student of the housing industry, taking every opportunity to learn something while away from home.
First takeaway from this year’s trip: Short Term Rentals
We rented furnished apartments in both Vegas and LA through Hotels.com. These are units that the property management has set aside just for this purpose. If you have mid to upscale rentals, this might be an opportunity to increase your occupancy. It appears the going rate per week is around the half the monthly rent, plus a $100-150 fee per rental for cleaning.
Renting an apartment for extended work trips is a heck of a bargain for the consumer. The cost is half that of renting a hotel room in the same area. Plus you get a full kitchen to make your meals, which is important given Carmen’s extreme food allergies, and a washer as you are not going to make it three weeks without doing laundry.
In LA we stayed in a one bedroom at the Apex, just a block or so from the Staple Center. The Apex is a modern glass high-rise with a good sized living room, which Carmen needed for her coaching sessions. In Vegas, we found a place half a block from the Convention Center – two bedroom, two baths, kitchen and laundry with a large living room for far less than the cost of a Vegas hotel.
From an owner’s perspective, weekly furnished business rentals could help owners of mid to upper-end apartments in high demand areas increase their collected rent. I’m sure AirBnB also fits in here.
Municipalities often oppose things like weekly rentals and AirBnB because they cut into the hotel tax revenue. So if you are going to give this a go I would check local ordinances as well as with your city’s taxing authority to make sure you stay on this side of the law.
There was a recent question about the legality of imposing a non-refundable $40 application fee in Wisconsin even if the prospective tenant was providing their own, current credit report.
ATCP 134.05(4)
(4) Credit check fee.
(a) Except as provided under par. (b), a landlord may require a prospective tenant to pay the landlord’s actual cost, up to $20, to obtain a consumer credit report on the prospective tenant from a consumer reporting agency that compiles and maintains files on consumers on a nationwide basis. The landlord shall notify the prospective tenant of the charge before requesting the consumer credit report, and shall provide the prospective tenant with a copy of the report.
(b) A landlord may not require a prospective tenant to pay for a consumer credit report under par. (a) if, before the landlord requests a consumer credit report, the prospective tenant provides the landlord with a consumer credit report, from a consumer credit reporting agency that compiles and maintains files on consumers on a nationwide basis that is less than 30 days old.
Note: Paragraph (b) does not prohibit a landlord from obtaining a more current consumer credit check at the landlord’s expense.
Here, the $40 fee fails on two points. 1) It exceeds the $20 cap, and 2) You can’t charge a fee at all if the tenant is providing a copy of their credit report that is less than 30 days old. Could the tenant forge a copy of their report that they are providing … sure. So I would not rely on that report, but would run my own at my cost. I would also compare the two copies as an honesty check.
How about if you call the fee something else like a processing fee? Can you keep the money then? Again the Wisconsin landlord-tenant law is clear.
ATCP 134.02
(3) ”Earnest money deposit” means the total of any payments or deposits, however denominated or described, given by a prospective tenant to a landlord in return for the option of entering into a rental agreement in the future, or for having a rental agreement considered by a landlord. “Earnest money deposit” does not include a fee which a landlord charges for a credit check in compliance with s. ATCP 134.05 (3).
Some owners feel that they can ignore this and charge the fee to offset the rerental costs. What tenant will go after you in court because you kept 20 or 40 bucks that you may not have been entitled to? The risk here is that if a tenant does sue, you owe the tenants’ court fees and attorney’s costs. So you are risking perhaps thousands of dollars to keep a couple of bucks here and there.
Personally, I find it more important to attract tenants and quickly fill vacancies with the best applicants than it is to recover the minimal amount of a credit report. If I were looking for an apartment I would start with the ones that do not have an app fee. That makes those owners charging the fees less competitive and they will lose more than the fees charged. The old saying pennywise and pound foolish kind of fits here.
A reader writes of the frustration he was having after being charged by the city for mattresses dumped at his property that were not from his tenants. With the ever exploding bedbug problems in urban areas, there are a lot more mattresses hitting the garbage.
We had a similar problem with properties in Milwaukee. At one property mattresses would appear behind it once a month or so even though there were no move outs. We would the get gigged for the $100 repeat litter fine even though we had our clean out crew drive past the property every couple of days and remove any trash well before getting notified by the city. Somehow it seemed the city inspector was there the day the mattress was dropped off each month.
I wanted to catch who ever was dropping the mattresses in the act so I bought a trail camera and mounted it to view the garbage area. Mattresses quit appearing immediately after that. We have since installed trial cameras or wifi cameras at a number of locations. The problems generally stopped upon installation (deterrent effect) In one case we caught a neighbor who is a small contractor dumping. He quit after being given a picture of him unloading his truck in the garbage cart area of our property. I’m sure he is now dumping at someone else’s property to avoid paying the construction debris fees at the self help dump. Most bad happens after dark so Infrared (IR) technology is important for night vision.
A 64GB card holds a lot of images. Set it to overwrite when full and then retrieve the card when there is a problem. These can be mounted anywhere as they are battery powered. A set of batteries lasts three months or so.
If you have a cooperative tenant with internet or provide internet to your building, the other choice is wifi enabled security cameras. The under $100 ones need to be building mounted for the power, but you can upload to cloud storage and keep a month’s worth of images or movies.
Why do my Amazon links start with smile instead of www? AmazonSmile donates a portion of the sale to any charity you select. I chose Children’s Hospital of WI, but there are a million 501 (c) (3) organizations that you can choose from.
Us old timers use the rule of 72 for quick off the cuff financial calculations. I recently ran across a post that explains the Rule of 72 in a clear, useful manner.
I wrote about unit fever a while ago. Recently I was speaking to a buddy and the subject came up. It is worth sharing again.
It is very easy to become a millionaire by investing in real estate…. simply start with five million. Want to fast track your path to being a millionaire? Start with only two million in the bank.
The above joke was originally about farmers, but our life and theirs are far too similar. Both groups provide for fundamental needs, are hard businesses with high failure rates, both businesses rely too much on external factors and are both not well respected by society. Another buddy of mine calls landlords “dirt farmers” and once told me that I should get into the day trading style of real estate.
You lose money in rental real estate by: paying too much for properties, buying at city assessed value for example; failing to consider all the costs associated with running the property, such as city sewer and water fees as well as the costs of compliance with all the rules that affect our industry; borrowing too much; and believing the broker’s or seller estimates of costs and vacancy rates…
The second greatest cause of owner failure is “unit fever” This is where one is fixated on ‘getting to 50 units’ or ‘owning a million dollars worth of real estate’ instead of focusing on the fundamentals of profitability. If your 50 units lose 5,000 a month or that million dollar commercial Class A office is 50% vacant, your checking account will be 100% vacant before long.
There is no “fun” in “fundamentals” no matter how you spell it. Fail at the fundamentals and fail financially.
Your success lies in knowing the true costs of running rental housing and accurate collection and vacancy losses that should be anticipated for the type and location of your rentals. Armed with this you must only buy properties that meet your performance targets within the confines of the economic realities of the market as opposed to some performa a seller provides you.
I remember back in 2005 or 06 when some kid (anyone 20 years younger than me) came to my office, telling me I was doing it wrong and offering to sell me an Excel sheet he had created to show the profit potential of well leveraged near Southside housing. Looking at his demo, I jokingly said ‘By the end of the decade Bill Gates will have to borrow money from you.” to which he replied enthusiastically, ‘Maybe not that rich, but very rich.’
Two years later he and his Excel buddies would be broke, their properties foreclosed and abandoned. But I guess you can’t blame him entirely, some pretty smart people have done major worldwide economic damage with an Excel error.
The truth is the math is so simple all you need is a pencil and paper, okay a calculator may speed it up a bit, but not much.
How do you find accurate answers to costs and vacancy questions? The seller and their broker are probably the worst places to start looking for answers as they are both motivated to make it sound as good as it gets.
In the beginning, you should attend every local, in-person meeting of rental owners in your area. Get there early and talk to every old timer who will give you the time of day. Some will be curmudgeons, beat down by the realities of a hard business. But if you listen closely even they will help on your journey to enlightenment. Just don’t let the negativity wear off on you.
A side benefit from mingling with long-time owners is you may even meet one at the end of their career which offers you a good deal on some properties they are tired of, but of course do the math before committing. I met some people I ultimately bought properties from while networking at meetings. Seek out unusual opportunities as well. I met a group of Southside landlords that met for lunch every day. I bought properties from some of them, got maintenance connections from others and learned so much from all. Today’s new owner has a tool that we did not – Meetup.com. Go check it out.
A regret I have is that I was in the business over ten years before I joined the Apartment Association. I owe whatever success I’ve had to being an active member of the Association. Keyword “active.”
The other important tool for knowing your market is to limit your market. With few exceptions, the properties we own are within a 35 block by 35 block area, with the majority in a 15 block by 15 block subset of that area. I know these neighborhoods better than most people. That is a strategic advantage in both running the properties and buying wisely.
A reader suggests (copy below) that much of the conversation regarding the new HUD directive on the use of criminal records in tenant screening is an attempt to “beat the law.” It is not. Rather it is seeking to answer the question of how do rental owners reduce the disruption and danger of crime at their properties while also addressing the concerns of local governments and neighbors by avoiding renting to those prone to criminal activity.
Back in 2001 our company set a screening criteria that we used with only minor adjustments since. (Copy Below) This was based on researching our failed tenants. At that time, we found that misdemeanor convictions and evictions appeared impactful if they occurred within the past three years and felonies for drugs and violence in the past seven years. I was surprised while reading HUD’s directive on the use of criminal records for screening that it references a report* that states the recidivism rate of criminals drops to the incidents of criminal activity in the general population at 6-7 years. I guess we got that one right from our own data, without the fancy formulas used by the researchers. 😉
Note that HUD permits and perhaps even encourage the lifetime rejection of persons with drug distribution and manufacture convictions. So it seems in HUD’s view, a kid with a misdemeanor possession with intent to distribute conviction can be excluded for is life, while the violent person only for a “reasonable” period of time and the habitual thief never. I question whether permitting the exclusion for drug crimes was done out of recidivism data or if it was a case of political will. I know people who have had drug issues and have overcome those problems to lead productive and successful lives. Many of those charged with possession with intent to deliver often are simply users or addicts selling small amounts to support their habits.
Back when researching our current criteria we recognized that some applicants with criminal histories did not cause future problems. How do you identify those who were not a risk, from those who are? We chose to accept those with a letter of recommendation from their PO despite having convictions. In the fifteen or so years since that policy has been in place, we found applicants with the PO recommendation have a failure rate below that of general applicants. It is unlikely that a PO would put their name to paper if they did not believe in the client.
Our company’s existing screening criteria seemed to be close to the requirements under the HUD April 4th directive. We had to modify it to exclude simple possession drug convictions and theft convictions as disqualifiers. While I believe that both are indicators of tenancies that may fail, neither are permitted today. We also reduced the lookback period on felonies from seven years to six. The report HUD based their finding on said 6-7 years. I do not want to be arguing over being at the top end. And finally, we added more options than PO letters, although PO letters will remain an automatic qualifier if our other criteria are met. Our revised criminal screening is attached below. Use it at your own risk if you wish and remember that I am just a landlord, not an attorney.
The part of the challenge is municipalities attempt to shift responsibility for criminal acts from the criminal to the owner of the house they live in through nuisance ordinances. These laws encouraged owners to have strict no criminal screening policies.
If you go to neighborhood meetings, you will find that most people who live in neighborhoods where your properties are located will be angry if you rent to anyone with a criminal history regardless of the charge or how long ago it was.
This attempt by HUD to solve a problem that was not created by the housing industry (discriminatory law enforcement) creates a solution that makes screening and complying with nuisance laws far more difficult and far more prone to litigation.
All this leads to a tough balancing act for the property owners – far more difficult and involved than simply trying to “beat the law.”
* Megan C. Kurlychek et al., Scarlet Letters and Recidivism: Does an Old Criminal Record Predict Future Offending?, 5 Criminology and Pub. Pol’y 483 (2006) (reporting that after six or seven years without reoffending, the risk of new offenses by persons with a prior criminal history begins to approximate the risk of new offenses among persons with no criminal record).
Affordable Rental Associates’ Revised Screening Criteria (To open the conversation, not for your use without your attorney’s review):
Municipal Convictions* related to manufacturing or distributing a controlled substance, crimes that indicate a demonstrable risk to the safety or peaceful enjoyment of residents or neighbors, and/or property damage: No convictions in 2 years.
Misdemeanor Convictions* related to manufacturing or distributing a controlled substance, crimes that indicate a demonstrable risk to the safety or peaceful enjoyment of residents or neighbors, and/or property damage: No convictions in 3 years.
Felony Convictions* related to manufacturing or distributing a controlled substance, crimes that indicate a demonstrable risk to the safety or peaceful enjoyment of residents or neighbors, and/or property damage: The latter of 6 years after conviction or 4 years after release from custody
Unresolved Cases* related to manufacturing or distributing a controlled substance, crimes that indicate a demonstrable risk to the safety or peaceful enjoyment of residents or neighbors, and/or property damage or charges that may result in imprisonment for more than 15 days: Application will be considered after resolution of the case.
* Criminal record exception will be made for applicants with otherwise acceptable rental history and income upon positive written reference from their Parole Agent or other official on government letterhead. Other factors may be considered on a case by case basis. It is the responsibility of the applicant to supply any supporting information and documentation
Much of the conversation I hear about this new directive is about figuring out ways to beat the law. I’m sure we landlords will come up with something and our lawyers will try to protect us. But lets be realistic. Most rental policies look back 3-5 years. Each town is different, but most people returning from incarceration can only afford to live in low income neighborhoods. Much of this won’t apply to the higher end of the market.
Here is a little recognized fact. About 50% of the people leaving Wisconsin prisons are Caucasians! With the increase of drug felonies and prison time courtesy of the Heroin epidemic, more are released to places like Waukesha, Appleton, Wausau, Green Bay, Janesville, La Crosse, Stevens Point than ever before. Its true Milwaukee has a larger racial component that other parts of the state, but the fact remains, people returning from incarceration will likely live in rentals in the low income neighborhoods of your city. They make up a significant portion of the tenant pool. Figuring out a good way to bring these people back into the market is good business.
Not all of this applies to us private landlords, but we can come up with our own list, run it by the attorneys, and Fair Housing. Please email me your thoughts at billtoday43@aol.com. In some neighborhoods the percentage of people without criminal history is much smaller than those that do.
Second interesting fact. Most people do not re offend. Recidivism is steadily going down in Wisconsin. Most of the people sent back to prison are for crimeless revocations, meaning that a P.O. sent them back because of a rule violation, not a new crime. While caution in rental practices is warranted, fear is not.
Lastly, Felons are among us!!! Its estimated that about 700,000 felons live in Wisconsin and they don’t all live in Milwaukee! But most will live in low income neighborhoods. People on supervision make better tenants than those who are not because the fear of going back is a greater influence on current behavior. They usually double up with family, friends, spouses, or partners. Anybody who owns property in these neighborhoods know the signs. So lets be the leaders we are and get in front of this!
Yes. If the property was previously weatherized and received a cert, all you have to do is record the satisfaction. If not then you must get the certification.
Check the box for “Request for Duplicate of a Previously Issued Certificate of Compliance.” There is a $50 fee, which is less than the cost of a new DILHR inspection.
I wrestled with sharing The New Shame of the Cities as it is written from a political, anti-Democratic perspective, but found it so valuable that I decided to post it anyways. Neither party is exempt from bad actors. Read this from an apolitical view and you will find an equal value.
Milwaukee is prominently portrayed in the article, but the in-depth analysis of what happened to Detroit bears a fitting resemblance to our city. Replace Detroit and with Milwaukee in the passages below. I think you will find it matches our reality too much.The 352 footnotes are as insightful as the story. Some links in the footnotes are stale, but the articles are available by searching the target site.
Because of the middle-class population exodus caused by policies that inflamed race relations, Detroit’s tax base has been in free fall, leading city leaders from the 1960s onward to try repeatedly to regain lost revenue through tax increases.[55] Today, Detroit’s property-tax rates are the highest in America and generally twice as high as the overall average nationwide,[56] establishing a vicious cycle that continues to drive businesses away and cause taxpayers to relocate to the suburbs in still-larger numbers. By 2012, Detroit’s tax revenues—notwithstanding the high rates—were 40% lower, in constant 2012 dollars, than they had been in 1962.[57]
Another reason why Detroit’s stratospheric tax rates have resulted in meager government revenues is because of the city’s rapidly declining property values. Over the past half-century, the total assessed value of property in Detroit has fallen (in inflation-adjusted dollars) by 77%.[58] The median home price in Motown is now just $40,000, and many dwellings in the city’s most blighted areas sell for less than $1,000.[59]
The non-payment of property taxes has also become a widespread phenomenon in Detroit. In 2012, for example, some 47% of all homeowners in the city elected not to pay their taxes — mainly because the city’s cash-strapped government had failed to provide most of the basic services normally funded by such revenues.[60]
(2) Harassing Businesses:
In recent decades, the [people] in control of Detroit have cultivated an oppressive climate for small businesses by instituting a complex constellation of protectionist regulations.[61] In 2013, economist Dean Stansel conducted an “economic freedom” study that ranked the regulatory and tax climates of 384 U.S. metro areas, and found that Detroit placed 345th.[62] The Institute For Justice (IFJ) observes that the massive amounts of “time and money” that business owners must expend in order to comply with “all the regulatory requirements” of Detroit’s “stupefying bureaucracy” cause many aspiring entrepreneurs to “simply give up their business dreams.”[63]
Adds IFJ:
“Multiple inspections and inspection fees, incomprehensible building requirements, expensive, mandatory public hearings, arbitrary discretion by officials, and lengthy processing delays combine to discourage entrepreneurs from undertaking business ventures or improving existing ones. From sign taxes to restrictions on planting trees, the bureaucratic shuffle has gotten so out of hand that one business owner explained, ‘We operate on the basis that we just do what we want to do and the permits will catch up with us sometime.’”[64]
According to one survey, 56% of small-business owners in Detroit are unsure whether they are operating in full compliance with the law.[65]
To be successful at landlording you must approach it as a business. No better way to be innovative than to liberally steal ideas, grabbing the best from other industries and repurposing them for ours. I also have been thinking a lot about starting an incubator for physical businesses in Milwaukee that employee people that have a hard time finding good jobs.
Good artists copy, great artists steal. — Pablo Picasso
This past Saturday John Lee Dumas, who does the podcast “Entrepreneur on Fire” was speaking at the inaugural Young Entrepreneur Convention in Des Moines. If you have heard his podcast you know how great they are. If you haven’t, go take a listen. His format is doing an interview a day with a different entrepreneur, seven days a week. He is an ex-tank commander in the Middle Eastern wars, turned successful podcaster and author.
I find such valuable insights in his stuff that I decided to go to Iowa to see him in person. I did not even look at who the other speakers were. After hearing him speak, if the Young Entrepreneur Convention been JLD alone, the trip would have been worth it.
I was pleasantly surprised at the quality of every one of the presenters.
Kevin Harrington and Carmen Ballering at the Young Entrepreneur Convention
Probably the best known was Kevin Harrington, one of the original Sharks from Shark Tank.
His interesting story: He got his start after seeing a knife pitchman at a county fair and noticing that the Discovery Channel was dark six hours a day in the early days of cable. This was the beginning of “As Seen On TV” and the entire infomercial craze.
Carmen spoke to Kevin Harrington off stage about doing a promo for the Event Decorating Academy. I think what he offered is a valid idea to try.
The other surprising presenter was Jeff Hoffman, founder of PriceLine.com, the company that brought low-cost easy travel to the masses as well as the creator of the airport ticketing kiosk. There was some irony in seeing him Saturday and then having a terrible experience with American Airlines on the way home the next day. His interesting story: He got kicked out of Yale for not having the complete tuition. He solved it by creating a B2B software company even though he could not program himself at the time.
Jeff Hoffman, founder of Priceline, with Carmen Ballering
Two big take aways from Jeff Hoffman: Create BIG goals, envision that you have achieved them and then work backward each step until you are where you are today. That is how he arrived at doing concerts with Elton John, Britney Spears, and NSYNC. He also has produced a profitable indie movie.
The other, which is a to our businesses, is to look at what is occurring outside of your industry and see what opportunities presents themselves. PriceLine.com was based on his reading articles on perishable goods, distressed inventory, and spot pricing.
As I wrote earlier, every presenter was great.
The guy that put the event together was Brandon T Adams. He had created the (3rd?) largest Kickstarter campaigns and is a 2012 Iowa State University grad.
Two of the presenters are from Madison. Megan Watt ,who just released her first book, is a leadership trainer at her company, Dream Catalyst Labs. I paged through the book after hearing her presentation and bought it. The other is Jenna Atkinson, who gave a great presentation on marketing and social media.
Center, Ken Shamrock, “The most dangerous man in the world”, Carmen Ballering, who may just be the most dangerous woman in the world, and Tim Ballering
There were a bunch other presenters during break out sessions that I did not get to see. You can see the YEC 2016 speaker list here.
One that we did see that I did not see a tie into our businesses but was cool to meet as our son-in-law and his brother are both MMA fighters, in fact, Monday of last week the brother, Kevin Vazquez, had his first major UFC fight was Ken Shamrock “The World’s Most Dangerous Man”. Shamrock and his partner were pitching a project to team retiring celebrities with young entrepreneurs.
The event was so great I can’t wait for next year’s conference.
