Menu
Cart 0

Wall Street Journal gives the usual lame advice to small landlords

Posted by John Reed on

Today’s WSJ has a long article about new landlords going wrong. As with most such articles, It is vague and amateurish. Do new landlords need advice? Hell yes. They are playing with fire.
.
Their first critique is that many new landlords do not “treat it as a business.” That is the useless because it is too vague. 
.
What does it mean? Probably most new landlords are employees, not entrepreneurs. So it’s like saying treat your rental house like you treat your other business. “I don’t have another business. I am an elementary school administrator.” This advice was from a BiggerPockets person. As far as I have been able to tell, BiggerPockets are just people good at creating a web site that looks good to novices. 
.
He says new landlords need to spend 250 to 500 hours to learn the rental business. I guess he has that much stuff to sell. I also have stuff to sell. A prospective owner of a rental house or duplex, which is what BiggerPockets and Reddit seem to be about, should read two of my books: How to Manage Residential Property For Maximum Cash Flow and Resale Value and Checklists for Buying Rental Houses and Apartment Buildings. Will that take 250 to 500 hours? No. More like 10. What are you going to miss for not doing the other 240 to 490 hours? Nothing. There is no such course available and it is not classroom-course-required material. A book or two are enough.
.
How to manage residential Property for Maximum Cash Flow and Resale Value

The second point is that small investors underestimate their costs. Yeah, I have been complaining strenuously about that forever. And it’s not just beginners. Even the experienced guys spout that crap.

The operating  expenses in multifamily buildings are generally 45% of gross rent. They may be a bit lower on a single-family rental house—like 35% to 40%. Operating expenses mean everything other than the mortgage payment. Beginners hear me say that and they swear theirs are only 25% or thereabouts. They are lying. Maybe also to themselves. The BiggerPockets guy discusses that in a vague, impossible-to-understand way.
He also talks about underestimating capital expenses like a new roof or a new fridge. Yeah. The fish tale landlords don’t count those. Uh, you’re not going to count your biggest expense? Very second grade of you.
Bigger says to set aside $250 to $300  month for such big replacements. That’s not right. For one thing, I did not do that nor do I know of any fellow investors who did. The truth is you handle such things by muddling through. He sort of assuming you have that much positive cash flow which he wisely elsewhere said that you do not. That assumes you are at the one rental house or one duplex stage. With more property, you have to analyze your capital items to forecast when you will need to replace them.
.
We bought our current home brand new. Did we need to budget for a new roof and fridge etc,? No. A new roof does not have to be replaced for 25 or 30 years. I think we had our fridge for 20 before we replaced it. So when you buy the building you need to estimate how many years of life remain for the various capital items in and on the house or duplex. What Bigger was recommending is a sinking fund. That was required by lenders back in the day. Condo laws now require it also. But if you only have a duplex, it is sort of managing from the 50th floor when you only have a two-story building.
.
Bigger says you need about $15,000 in cash per property in reserve. That’s a lot of money to tie up earning bank interest. My attitude in my early years was if I accumulated $15,000, I would buy another property. Over time, the properties you bought years ago generally have equity that you can tap to pay for unexpected large expenditures. If the building you are considering buying will need a new roof soon, and you do not have an extra $15,000 lying around, don’t buy that building.
.
Then in the article, we are told that “there is no guarantee that the landlord monthly rent” will cover both the operating expenses and mortgage. “No guarantee!?” I can pretty much guarantee you that if you put 20% or less down, you will have negative cash flow most months and for the year.
.
That is why so many small investors lie. Buying properties that lose that much is arguably rather stupid. But is it simply the fact of the market since around 1970 actually.
.
The next point they make a small investors leave the value of their time out of their return calculations. Managing residential property takes an average 3.6 hours per unit per month. So step one when calculating your return is to pay yourself for those 3.6 hours. If you spend more—like you are your own handyman—pay yourself  for that, too. Then you calculate the return on your investment; equity after the first year.
.
Next adivce, get a consistent screening process for new tenants. “Consistent?” That is not the problem, The problem is it has to be extremely tight and it must apply to every resident. The BiggerPockets guy checked out his tenant, but then let them bring others into the apartment. He had not checked them out.
.
My How-to-Manage book has a chapter on leasing. It has a subhead on roommates. They cannot just move in. They must be screened, and approved, then sign the lease.
.
I rented to a young girl once. She had no credit history so I insisted she get a co-signer who owned real estate in the county. She got her father. We allowed no pets and no residents other than the tenant who signed the lease. She promptly got a cat and a live-in boyfriend.
.
I gave her a 30-day eviction notice. Her boyfriend punched holes in all the walls and broke the windows. My managers and I made a list, signed it in front of a notary, and took photos. The father promptly paid for all the damage.
.
The boyfriend had not done anything wrong before then, but you have to enforce the lease. The people who sue you are the ones who previously broke the lease in small ways. Any lease breaking is an early warning of a million dollar lawsuit tenant. Get rid of the resident and you get rid of the future lawsuit.
.
The landlord business is not for sissies.
.
Another bit of advice is not to get too friendly with tenants. That applies to all managers, coaches, superior officers, landlords.
.
Their final bit of advice is to keep up with changes in laws. The way to do that is join the local apartment owners association or whatever it is called. Also, use the lease and other documents that the association produces and sells. They have a lawyer whose job it is to keep them up to date.

Share this post



← Older Post Newer Post →


Leave a comment

Please note, comments must be approved before they are published.