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February - Investment Real Estate
REAL ESTATE in COLORADO

Beginner Lessons For New Landlords

By JULIE BENNETT

Jill and Ronald Lake's retirement plan has hardwood floors, French doors, 19 bathrooms and lots of potential problems.

About a year ago Mrs. Lake, an elementary-school reading specialist, and her attorney husband decided they'd lost enough money in the stock market. "We wanted an investment with a more positive return," she says, "one we were sure would appreciate."

The Glenview, Ill., couple formed a partnership with Mr. Lake's brother and sister-in-law, then spent months searching for perfect apartment buildings -- fairly new, with brick construction, in good neighborhoods, within walking distance from decent shopping and public transportation. The trio of three-unit apartments they recently purchased in the trendy Wrigleyville area of Chicago fits those criteria and contains extras like oak stairways, fireplaces, French doors opening onto faux balconies, back porches and parking spaces.

They also contain nine apartments full of tenants -- tenants who call Mrs. Lake frequently about matters as important as leaking toilets and as trivial as burned-out light bulbs. "I started out wanting to be nice and would drive into the city to respond to their every request. Now I'm learning to be less crazed," she says, while sorting through a ring of labeled keys in the foyer of one of her buildings.

She opens the door and heads straight to the apartment's kitchen, looking for the second item that drives new landlords crazy -- rent checks. When they bought the buildings, all nine apartments were occupied by new college graduates, like the three young women who had rented this three-bedroom, three-bath unit, she says. But one of the roommates had just moved out, taking with her the living-room furniture and, it seems, all semblance of order. The departing tenant had mailed in her rent check, but the others hadn't and now it's the 13^th of the month, and Mrs. Lake is getting anxious.

"We give them all a five-day grace period," Mrs. Lake says, "and then I start calling. In my whole life, I've only had one check get lost in the mail. It seems to happen to these kids on a monthly basis." There, on a counter strewn with wine bottles and dirty dishes, are the two missing checks.

Mrs. Lake's demanding tenants and monthly rent dance are all too common. According to Donald Beck, author of "Down to Earth Landlording," (Skyward Publishing, 2004) most new landlords get so discouraged by tenant complaints and late or nonexistent rent checks that they give up and sell out after only three years.

The apartment market itself is booming and should continue to grow, says Robert J. Sheehan, chief economist for the National Apartment Association (NAA) in Alexandria, Va. According to the NAA, the country has 15.9 million apartment units. Like Mrs. Lake, 85% of the owners of small buildings with two to four units, are individuals.

Mr. Beck, who owns 100 apartment and townhouse units in the Philadelphia area, says he "loves" new landlords, because so many of them of them are willing to sell cheaply when they exit the business. He almost gave up his first rental 25 years ago when he was a 34-year-old schoolteacher with a baby on the way and a single condo unit to rent, he says. "My first tenants came straight from church to look at the unit, and they were such a well-dressed family I never ran a credit check. The very next month, no rent came in, and I had to go to court to evict them."

Mr. Beck includes the story in his book because, he says, for new landlords to have staying power, they "must learn from others' mistakes, because your cash flow won't last long enough for you to make them all yourself."

Here are some landlord lessons for beginners from Mr. Beck, experienced landlords and other experts:

Lesson No. 1. Find the right tenants. New landlords must select solvent, solidly employed renters capable of sending their checks in on time and must not exclude anyone protected by federal Fair Housing laws -- racial minorities, the disabled, single mothers with children, etc.

Mr. Beck solves this dilemma with a list of stringent screening criteria he applies to all applicants, including their rent and employment histories. One month's gross salary, for instance, must equal one month's rent. If they pass muster, he runs a credit check and makes them pay for it. "Then I call their previous landlord, because their current one may want to get rid of them so badly he'll lie," he says.

And if the applicants live nearby, he'll make an unannounced visit to their present home. "I let my nose do the walking," he says. Federal law prohibits him from turning down prospective tenants just for being messy, but he says his visits often uncover real problems, like undeclared pets. "Since I started this system, I've had better quality tenants," he says.

New landlords may screen tenants themselves or may elect to pay a percentage of the first month's rent to a real-estate broker to run ads and conduct interviews and credit checks for them. Mrs. Lake started the screening process herself for the apartment the late-paying young women are vacating, but after two trips into the city in two days, she hired a broker who lives in the Wrigleyville area.

Lesson No. 2. Set the right rent. You can easily check ads and visit comparable apartments to figure out the market rent for your unit. The tricky part is collecting enough money upfront to cover any damage the tenants cause while they're there.

"Once people leave, forget about getting more money from them," says a Chicago attorney who has owned rental property for more than 20 years and asked that his name not be used. "I just had tenants whose electricity was turned off a few days before they moved out. When I opened the refrigerator, I almost fainted. I had to buy a new one, and I'm out the $800."

If you charge a security deposit equal to one month's rent, the attorney says, you can always assume the tenants will use it to cover their last rent check, and you'll have nothing left to replace the carpet they're ruined and to repair the walls they've filled with nail holes. Instead, he says, insist on a security deposit equal to two months' rent.

Lesson No. 3. Know the law. "Every Landlord's Legal Guide" by Marcia Stewart, Janet Portman and Ralph Warner (Nolo Press, 2003) has state-by-state summaries of landlord-tenant laws, plus a CD-ROM full of all the forms and documents you'll ever need. Rules on evictions, for instance, vary from state to state and sometimes city to city. Mr. Beck says he was able to evict his first nonpaying tenants from a unit in a Philadelphia suburb in a few weeks; in Chicago, the process can take six months to a year.

Lesson No. 4. Know how to fix toilets. Or find somebody who does. Mrs. Lake's tipping point came when a tenant asked her to change the light bulbs in the cathedral ceiling of his living room. She hired a handyman on an hourly basis to make minor repairs and compiled a list of phone numbers of professionals -- plumbers, heating and air-conditioning repairmen, etc. -- that she carries everywhere, in case of real emergencies.

Mr. Beck, whose rental units are now his main source of income, likes to find a jack-of-all-trades tenant in each building with whom he can exchange a rent reduction for everyday maintenance. "The best tenant is a certified plumber," he says, "because 90% of your problems are water-related -- sinks, toilets, showers, etc."

Lesson No. 5. Find experienced landlords who will share their mistakes -- and their successes. The NAA is a federation of 160 state and local affiliates that hold educational classes and networking meetings. The Chicagoland Apartment Association, in Schiller Park, even has a Landlord Hotline (1-312 922-3067). Hotline coordinator Leona Barth says the most commonly asked question is, "Do I have to pay interest on security deposits?" In Illinois, that answer is yes.

You can find other rental property owners associations and resources at: www.landlord.com.

Lesson No. 6. Don't expect a fast return on your investment. The Chicago attorney says he paid $50,000 in 1983 for a Victorian house, carriage house and barn in Lincoln, Ill., which he converted into six apartments, now renting at $450 a month each. He has no mortgage and, after paying expenses like utilities, taxes, insurance and routine maintenance, nets $10,000 a year.

But as Mrs. Lake points out, apartment buildings do appreciate. The attorney, who is planning an extensive renovation, says, "Even if I just get a break-even cash flow and sell the apartments in 10 years for $1 million, I'll be real happy."

-- Ms. Bennett is a free-lance journalist based in Northbrook, Ill.