Expect to see more of this issue...

As the presidential election looms, the issue of immigration - particularly illegal immigration - will move into the spotlight.   This has implications for all Americans, but it may have a particular relevance for landlords. 

An article in today's New York Times discusses the issue of local statues which impose penalties on landlords who rent to illegal immigrants.  In particular the article chronicles the story of Riverside, New Jersey, which is re-thinking legislation which it passed a year ago which criminalized employing or renting to an illegal immigrant.  The law has had the unintended consequence of driving away residents in large numbers, which has had an unexpectedly large impact on local businesses.  It appears that citizens who once lobbied for the law are now re-thinking their position. 

From the landlord's point of view, this is a sticky issue.  I live in Texas, a border state.  Regardless of your political affiliation it's obvious that illegal immigrants are firmly woven into the economic and social fabric of our society here.  I'm trying to imagine operating under legislation which requires me to ascertain an applicant's legal status.  Is that SSN real or bogus?  How about the ID card that the applicant has provided?  Or the driver's license?

There is an easy solution that many landlords will turn to: just don't rent to anyone who seems "suspicious".  This, obviously, is a law that invites investors to turn to discriminatory practices. 

I'm not a policeman or a Immigration Service agent.  That's not my job.  I'm a real estate investor, and part of being an investor is to offer safe, affordable housing - places where families want to create homes - and to do so profitably.  I'd strongly disapprove of a law that tries to turn me into a government enforcement agent. 

These are bad laws, and landlords should be vocal in their disapproval when they pop up locally. 

I'm interested in your opinion on this issue...

There’s a conventional wisdom out there that higher-end properties bring good tenants and lower end properties bring problem tenants. In my experience, this isn’t necessarily true. Ask most buy-and-hold investors about what makes a good tenant and many will respond by recalling a specific tenant that they wish was the model for all their properties.

In my case, my example was in one of my most inexpensive properties; the tenants were a young family with no credit and not a lot of resources, but their references checked out and I rented to them, more or less, based on gut feel. And they were the best tenants I ever had: took great care of the place (flowers in the front yard), made minor repairs on their own and never were late paying the rent. Plus, they were a pleasure to deal with.

Your goal as an investor is to create a portfolio of properties filled with this kind of tenant. Identifying, attracting and retaining them is one of the most important factors to ensuring your success as a real estate investor. Getting the wrong tenant in your property is expensive in two ways: not only does it cost you money in repair, vacancies, and lost revenue – it can also cost you dearly in terms of investor burnout. Get a bad tenant or two and you’ll be ready to throw in the towel in no time, but if you develop a knack for renting to the right people then on the average month managing a property is as easy as cashing the rent check that shows up in your mailbox (on or before the first of the month!)

So what happens when you get a bad apple? Well don’t sit on your hands; take care of the issue. What follows are some fairly broad generalizations, but that’s how I conceptualize problems. Most of the situations I have dealt with fall, roughly, into these three categories:

In all of these cases the key is action. Good relationships don’t happen automatically; you have to work at them. But if you establish a good relationship with your tenant early in the process then it’s easy to maintain, and will help to make your investing profitable and less stressful.

Related Posts:

• Four tips for sniffing out illicit activity in your Investment Property
• Navigating the Eviction Maze
• Avoiding Investor Burnout

The normally laser-focused Pat Kitano showed me yesterday that it’s actually okay to write the occasional off-topic post. So here’s mine: a word of warning to you unsuspecting consumers who might be considering purchasing a Gateway (soon to be Acer) product.

The customer experience when you’re buying something from Gateway is brilliant. Smooth, efficient, friendly – my representative had me whipping out my credit card in a jiffy.

Then come...the problems.

My beautiful matte black widescreen 22” LCD monitor looked groovy coming out of the box, but once I plugged it the image flickered and flashed so badly that I thought it was going to give me an epileptic seizure.

Then comes...the real fun part.

I won’t bore you with the details (and they're many), but suffice to say that I spent multiple hours on hold waiting for someone from the returns department to talk to me. And I'd already spent multiple hours on the technical service chat line, where I was instructed to download all manner of patches and software in a futile effort to fix the problem.

This was all, well, pretty annoying. With every human being that I managed to speak with (all of them obstructive and unhelpful) I emphasized that I didn’t want an exchange (I wanted my money back) and that I didn’t expect to be charged a restocking fee. I was assured that I wouldn't.

Then I got my credit card statement. By now most of you see this coming. Bam: $50 restocking fee.

Another phone call. Another period on hold (this time shorter). And I’m finally curtly informed that Gateway reserves the right to charged me a 15% restocking fee, and they’re not going to waive it regardless of what any Gateway representative had previously told me. Case closed. And if I don’t like it then I can take the case to arbitration. Bye.

Lesson learned: be careful when doing business with a company that’s in its last death throes. Gateway, once an innovative dot.com darling, has seen its stock price collapse from a high of $84 down to the current level of $1.87. Gateway has finally thrown in the towel and is being acquired by Taiwan based Acer.

A note of caution to Acer: an embattled company like Gateway often manages to acquire some dysfunctional cultural traits that are difficult to root out and fix. In this case it’s a clear pattern professional front-office hospitality designed to lure orders followed by a phalanx of curt back-office trolls brandishing consumer-unfriendly policies to obstruct any poor sap (like me) who’s trying to return one of Gateway’s lemons.

This, clearly, is a deliberate strategy.  Had I suffered a single long hold time or had to deal with one rude return agent I could understand - maybe someone was having a bad day.  But when it consistently happens over and over...well that's no coincidence (especially compared with the cheery efficient folks who took my order.)

This is a penny-wise but dollar-foolish method of maximizing revenue. Yeah they’re going to keep my fifty bucks (which I suppose will help their bottom line) but believe me I’m going to tell anyone who will listen that they need to avoid Gateway (and Acer) products like the plague.

Acer will have some cultural problems to root out when they take the reins; I hope for their sake that they built this into the acquisition price.

Hudson Sangree with the Sacramento Bee recent wrote a story about a customer who decided to take Gateway to court over a defective computer and Gateway's subsequent customer service stonewalling.  I exchanged emails with Hudson and he indicated that he's received a lot of contacts from Gateway customers who have had similar experiences. 

Ironically, the plaintiff in the case, Dennis Sheehan, describes himself as "a retired real estate investor".  It's clear that real estate professionals need computers...so hey maybe this post wasn't so off-topic after all. 

-------------------

Epilogue [October 7th]: Subsequent to the events above I issued a formal complaint to American Express, the card I used for the purchase.  They temporarily suspended the $50 and promised to investigate with Gateway.  Today I received a letter indicating that American Express has issued a credit for $50 to my account to resolve the complaint.

This feels like a victory of sorts, I suppose, although I suspect that American Express is eating the cost.  However, American Express is a $72 billion company (market captialization) whereas Gateway is a $700 million company - around 1% of American Express' size.  As as a pattern of complaints develops concerning Gateway, customer-focused companies like American Express will start to reevaluate their relationship with the offending vendor. 

The moral: consumers who suffer a blatantly abusive experience with a vendor should look to their credit card company for recourse if dealing with the vendor directly yields no success. 

Real estate investing is all about relationships and dealing with people. In this column I’ve written about the need for trust in order to build long term symbiotic relationships. I’ve also written about using contracts to build a solid legal safety net.

So...which is it? Back in the ‘60s a management theorist Douglas McGregor originally wrote about two theories about managing relationships: Theory X, which is a negative view that assumes that people are inherently lazy, dislike work, and need (want) to be controlled, and Theory Y which argues the opposite – that people are self-motivated and will choose to seek responsibility and do good work.

So...do you control and corral your relationships with contracts (Theory X) or do seek relationships based on trust and mutual interest (Theory Y).

Well..both. And that answer isn’t as wimpy as it sounds. I’m not sitting on the fence; there’s a role for both trust and clear legal boundaries (contracts) in each relationship. This applies to you and your investment partner, you and your broker, you and your property manager - basically any of the many relationships that you have to develop and nurture as a real estate investor. 

Basically there are four possible combinations, but only one good one:

• No Trust + No (or bad) Contract = This is a train wreck waiting to happen. Expect to see your partner in court sooner rather than later.
• No Trust + Good Contract = You can keep your partner on his toes with an airtight contract, but it’s a litigious, tense way to do business. Expect to grind your relationship (and your nerves) into powder.
• Trust + No (or bad) Contract = George Bernard Shaw said that “the road to hell is paved with good intentions”. Trust is crucial, but we don’t always communicate well. If you don’t deal with the legal details then expect poor alignment, misunderstandings, and friends that turn into enemies.
• Trust + Good Contract = Voila. Finally. Combined trust with a thoughtful legal framework and you have a better chance of achieving a streamlined partnership that can focus on solving problems.

Related posts

• You want to be a hippo, not a whale shark
• How can contracts help me to build solid relationships?

Real estate investing software is what EquityScout is all about. Ironically, it's not something that I talk about a lot in this blog. There's a reason for that. In my view real estate investment software is a tool - one of many - that can help investors to reach their goals. Much more important that the tool is the thought process that it supports. That's what I write about - the though process - and readers who identify with the thought process and the philosophy end up check out the tool.

So that said, what are real estate evaluation tools useful for?  Here's a few thoughts:

• Real estate investment software adds discipline to the investment process. Buying real estate, by its very nature, can be an emotional process. And that's ok; gut feel and intuition are qualities that are crucial to successful investing. But discipline is equally important. Software can bring some structure to your decision making process.
• Real estate investment software forces investors to explicitly state their assumptions. GIGO :: garbage-in-garbage-out. You can punch in assumptions to make any investment look like a barn burner - but if you're buying a starter duplex in Los Angeles for $500k that rents for $2,500 per month then you're actually going to have to assume a 20% appreciation rate for the investment to break even. And you're actually going to have to type those numbers - "20%" -  into the model. Being forced to explicitly articulate your assumptions in this way can be a good gut check - and sometimes can be just the wake-up call you need to get you to take off those rose colored glasses.
• Software helps investors to compare dissimilar investment opportunities. Should I buy a fourplex, that duplex around the corner, or a couple of single family homes? I have a different view on each, how do they stack up?
• Real estate investment software helps geeks to pull the trigger. This, for me, is the big enchilada. I'm an engineer by training, which means that sometimes I can't spell too good (as some of you will have noticed from the occasional typo on this blog) and that I need to see some numbers before I can get off of the fence and take action.

Read here to see more pros and cons of the real estate software approach.

• Look before you Leap
• Five Things to Remember when Running Economic Analysis
• Is a Real Estate Investment Software package right for you?

Most of the housing laws in our country were designed with the general intent of protecting our citizens from powerful interests and ensuring a fair playing field.  This will strike most fair-minded people as a reasonable proposition...but at some point most long-term real estate investors will realize that, in the eyes of the government, they fall into the "powerful interests" category. 

I've stated before that real estate investing is all about dealing with people - that's one of the ongoing themes of my writing.  Even the most savvy negotiation, however, will eventually end up in a situation where she needs to understand relevant state laws concerning evictions. 

The eviction process can actually be completed fairly quickly if - and that's a big "if" - the landlord knows the law and follows the rules of the game.  Every landlord should review the relevant State requirements.  Here's a general flowchart for the process in Texas, my home state. 

In my opinion, the most important step in this process is the first one: the Pay or Quit / Cure or Quit step.  These are the notices that identify the problem in writing (rent not paid, dog on premises, excessive noise, whatever) and inform the tenant that eviction in imminent if the problem isn't remedied. 

It's my belief that most people are generally reasonable.  (Note:  If you have a tenant that defies this norm then you probably need to take a look at your applicant screening process.)  A tenant who gets behind on his rent might simply need to have expectations clearly set out; every month he needs to pay for his cell phone, car note, and other expenses - but nothing comes before keeping a roof over his head.  Paying you needs to be his first priority every month. 

The Pay or Quit notice is a legally mandated step in the eviction process in most states, but it can be more than that.  A sharply worded Pay or Quit notice should be the first arrow in your quiver to negotiating a successful resolution without going to court.   If the tenant complies then you can avoid the expense and inconvenience of proceeding with the eviction process, and then you can reconsider your options at lease renewal time. 

Related links:

• Establishing Ground Rules with your Tenants

There it is. The gauntlet is thrown down. For all to see in a public forum here is my speculative trade of the quarter. Storm clouds are on the horizon, foreclosures are up, and it’s going to get worse before it gets better. That said, it’s my view that the market in general has overreacted to the recent volatility in lending and has disproportionately punished companies like Countrywide [NYSE: CFC], who have become the whipping boys of the current crisis.

Countrywide’s 52 week high is $45.26, so now bouncing around $20 it looks like a bargain, in my view. The company’s price-to-earnings ratio is around 5.5, which is in the basement of the industry, whereas the operating margin of 32% puts it at the top of its peers. This, combined with my general consensus that the Chicken Little’s are ruling the day makes me think that this is a stock worth buying.

Is this an investment? No. It’s rank speculation. If I’m wrong about the direction of the market I’m going to take a bath on this one, but in my view the upside outweighs the downside. And as I’ve stated before, it’s my belief that speculative positions should play a role in most portfolios.

But a public declaration like this is something of an experiment for me. I’ll revisit in six months; depending on how things play out I’ll either proclaim myself a genius or offer a bunch of explanations (to my readers and to my wife) about why I was wrong.

I’ve often stated on this blog that real estate is an endeavor that rests largely on the investor’s ability to build and maintain relationships: with buyers, sellers, real estate professionals, tenants, neighbors, and a host of other stakeholders.

The keys to managing relationships are of course numerous and complex. There is one that we often overlook, however: the contract.

Robert Frost said that “good fences make good neighbors”. The same can be said for a well written contract. Clear, honest communication is one of the things that helps build and maintain relationships, and there’s nothing like putting your intentions down on paper if you want to expose potential future rifts and conflicts.

I just entered into a contract with my Realtor to manage a multi-family property that I bought with her assistance. This is an agent that I’ve worked with for years and we’ve developed a healthy, symbiotic relationship based on trust and mutual benefit. We do a lot of things off the cuff (just get it done and we’ll settle later) just because it helps us to stay flexible and get things done. However, that’s not how I wanted to handle this particular arrangement.

In my opinion there are a couple important things to remember about contracts.

1) Sweat the details and address the hard issues head on. By spelling things out you make your intent clear. Your goal is to write a contract in which there is very little latitude for interpretation. The process of writing the contract can do wonders in terms of partner alignment. In my opinion, the definition of a good contract is one that sign and then stick in a file and never look at again.

2) One size doesn’t necessarily fit all. You’ll often start with a standard contract, say for property management or residential lease. Don’t be afraid to adapt or modify to suit your unique situation. For example – what I need from a property manager differs fairly significantly from the service that most full service property managers offer (I’ll write about this in a future post) so I’ve tailored our agreement appropriately.

For critical agreements (like joint investment partnerships, etc.) it’s always important to get counsel from a qualified lawyer (which I’m not). But some of this stuff you can do yourself. There are great references on the web that have contract templates. A new one is the Microsoft reference which has all sorts of contract templates from FindLaw.com, including a Property Management contract .