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...

When it comes to influencing someone’s behavior it’s a lot easier to set the desired ground rules from the beginning than it is to change a habit once it’s already established. Anyone who has struggled to correct a bad golf swing knows this, as does anyone who has raised a child.

Buy-and-hold real estate investors should bear this principle in mind when it comes to dealing with tenants. At the end of the day you are a service provider and the tenant is your client. Good tenants are a key component in your long-term investment strategy. That said, it’s important to realize that you have a leadership role in maintaining the landlord-tenant relationship.

The desired endgame is a happy tenant who is content with the property, stays long term, and who willingly agrees to fair, periodic increases in rent which are in line with inflation and the local housing market.

I always look at a new tenant as a great opportunity to shape a desired set of behaviors that will make my life easier, and will also make it easier for me as a landlord to provide a quality service to the tenant. In my opinion the following are the “big four”:

• Pay on time
• Take care of the property
• Alert me early about small problems that will turn into big problems (evidence of a roof leak; a problem with the air conditioner)
• Refrain from bothering me about small problems that will stay small and that the tenant can safely tackle himself (a toilet that runs, a burned out fuse, a leaky faucet)

The four desired behaviors in the bullet points above should be objectively laid out in your lease agreement, but in practice I’ve found that there are shades of gray in managing them, as there are in all human interactions.

Let’s look at each one in turn:

• Pay on time: The average person has a lot of financial obligations placed upon them every month. Telephone bill, gas, car payment, entertainment, and a myriad of other priorities compete for the tenant’s paycheck. Your job is to show them that every month paying the rent is in pole position when it comes to prioritizing. Your tenant’s mindset needs to be: it’s annoying to have my cell phone disconnected, but late rent payments will result in my eviction. But if your tenant views the phone company as the real priority she’ll start turning to you for a little slack when she’s having a touch time making ends meet. Once you let this happen one time you risk establishing a habit that will be impossible to break. This is an area where you need to be consistent and tough.

• Take care of the property: You can do some role modeling in this category before the place is even rented out. Be meticulous with cleaning the property before you show it. Take care with the landscaping. Show that you care about how it looks. If you show a property that is dirty and unkept you will be sending a clear message that you don’t care about it. And if you don’t care about it why should they?

• Alert me early about small problems that will turn into big problems: A water stain on the ceiling or a weird sound out of the AC unit should prompt an immediate phone call. And you can encourage this by acting immediately when they call. This is in your best interest. You want to catch a roof leak before it causes major damage (or, heaven forbid, causes a mold problem.) Note that these calls should be rare. If they’re not then it’s likely that you have a deferred maintenance problem.

• Refrain from bothering me about small problems that will stay small: This is a tricky one, because it is, to an extent, the flip side of the point above. You want to get a phone call when the tenant expects that a major problem has arisen, but you don’t want to be getting a call every time a knob on a kitchen cabinet comes lose. One way to deal with this is to ensure that there is a provision in your contract stipulating that the tenant will be responsible for the first $____ of any repair that you make on the property. I generally set this at $100 using standard language from the Texas Association of Realtors lease agreement: The Tenant will pay Landlord or any contractor Landlord directs Tenant to pay, the first $100 of the cost to repair each condition in need of repair, and Landlord will pay the remainder...

Related posts

• Send your tenants to the bank
• Act early on mold problems

Houston has had a few recent back-to-back murder-suicide incidents in the immediate aftermath of the terrible events at Virginia Tech. 

You might have heard about the event at NASA which got some national coverage.  But unless you live in Houston it’s unlikely that you heard about a second killing, in which a tenant who was on the verge of eviction killed the property manager at the apartment where he lived.

The second event was the one that really got my attention.

Stop for a moment and think back on how you thought about landlords before you became one.  From the point of view of the tenant, you, as a landlord, are in a position of enormous power and authority.  It may not feel like it at times - especially as you’re wrestling with taxes, eying interest rates, and dealing with contractors – but you are in control from the vantage point of the families who live in your houses.  You own the walls that surround them, the roof over their heads, and provide the shelter that keeps them safe.   

You invest in real estate in order to secure your financial future.  And if you’re like me then you’re into real estate because you enjoy negotiating, you like crawling around under houses, and you’re into making deals.  But in your rush to build equity and wealth don’t forget about the lives that you touch every day – meaning: don’t be cavalier with the influence that you wield. 

This is a reminder that being consistent, clear and fair with your tenants is a key to building good relationships.  And building good relationships is an important key to being a profitable buy-and-hold investor. 

But sometimes that isn't enough.  The one thing that all of these instances have in common is that the perpetrators were mentally ill.  Dr. Peter Marzuk, associate professor of psychiatry at New York-Presbyterian/Weill Cornell points out some warning signs in a recent ABC news interview, including:

• Past history of violence
• Loneliness and social isolation
• Stalking and other antisocial or criminal behavior
• Paranoid behavior

Pre-screen your tenants well.   And even after you've done your due diligence trust your gut.  If you feel that you’re in danger then listen to your instincts.  As Malcolm Gladwell explains in his excellent book Blink, we sometimes know things even when we don’t know why we know them. 
 
Note:  The strange thing about this post is that I actually sat down with the intention of writing something funny to comply w/ Pat Kitano’s call for funny submissions for the upcoming Carnival of Real Estate.  But for some reason this is what came out.  Oh well; maybe I'll be able to write something funny tomorrow.  But to lighten it up a bit here’s a funny clip.  I’m told that I’ve been living under a rock and everyone in the universe has already seen this, but I just saw it yesterday and thought it was hilarious. 

I write a blog and run this website, so it’s obvious that I’m a fan of technology.  But a part of me (a big part of me, actually) is still pretty conservative.  I think I was one of the last guys still carrying around leather a Filofax with all my handwritten notes and phone numbers – something that I’ve just recently given up.  

Set up a business checking account.  This is a step that the majority of readers will already have taken.  Sign up for online access.

Set up a second account earmarked especially for deposits, and link it to your first account.  Most major banks will allow you to do this; from personal experience I know you can do it with Citibank, Bank of America, and Washington Mutual.  

Print a book of deposit slips for each unit that you own.  Bank of America allows you to customize the slips, which lets you put the property address on each slip.  

When you sign a lease with your tenant give him or her an appropriate number of slips along with their copy of the lease (12 slips for a 1 year lease).  Instruct the tenant to deposit directly to the bank. This can be done either by going to the counter, going through the drive-through, or mailing to your branch attn: DEPOSIT.

On the first of the month go online and check your deposits.  As they arrive transfer them from your deposit account to your main account.  

• Safe. It all works because the tenant never has your primary bank account number.  The tenant only has the deposit account number, and you’ll keep this account at a zero balance by transferring the deposits to your primary account as they come in.  
• Easier recordkeeping. This method creates an effective electronic paper trail.  You can view/print/save the scanned pdf’s of the deposit tickets and checks online from the conveninece of your desk.
• Convenient for the tenant. Bank of America is big here in Houston w/ over 350 branches.  Choose a branch that gives your tenants lots of options.  Plus – they’ll walk away each time with a deposit confirmation, which gives a bit more peace of mind than dropping a stamped envelope in the mail.  

I was recently interviewed by Dave Dugdale who runs Rentvine.com, an online resource for landlords and rental applicants. RentVine lets landlords post their vacancies for viewing by perspective tenants. New start-ups like Dave’s and aggregators like RentMarketer are filling a much needed niche in the industry by allowing landlords to use technology to connect directly with applicants. This is a good example of technology bringing transparency and efficiency to the market.

Check these two sites out. And if you’re interested in the interview you can listen in the player below. 

Illicit activity is something that every landlord needs to be on the lookout for, and the methamphetamine (“meth”) epidemic that hitting some regions is adding new twists to this concern.  
The Sandusky Register in Ohio recently reported a story on the woes of a landlord there who is facing the economic blow of discovering that a tenant in one of his investment properties was running a meth lab .  

Aside from the obvious social and economic costs to the landlord, a meth lab has a particularly destructive impact on the building where it is housed.  Toxic chemicals can permeate any porous surface: drywall, wood floors, carpet, ceilings – practically all of the materials that go into building a house.  

The best case is that this will turn into a nasty cleaning bill.  Worst case – depending on how long the activity was going on – is that your rental property becomes a teardown candidate.  

A meth lab isn't the only type of illicit mischief that your tenants might be getting into; I'm sure you could come up with a list of shady activities that that would make you life difficult if you were to make the mistake of signing a lease with a bad apple.  But in many ways criminals aren't too creative, so there are some patterns that may tip you off that something bad is going on in there.  Here are four things to look out for:

• 1:: Tenant pre-pays rent: six months or even a year.  This is a tough one.  Investors know that cash is king, and it’s tough to turn down a big pre-payment.  But be aware that there may be a darker motive.  By paying several months in advance the tenant may be sending you a signal that you don’t need to come around for a while.  Not all pre-payments are sinister in nature (I’ve accepted prepayments before) but when an applicants offers it should cause your antenna to go up.
• 2:: Tenant pays exclusively in cash: Again, cash is king – but resist the temptation to look the other way.  Nuff said.
• 3:: Lots of traffic at odd hours:  You’ll notice this if you live nearby, but you might not if you don’t.  That is, unless you make an effort to – which you should.  
• 4:: Tenant never contacts you:  I don’t get a lot of calls from my tenants, so it’s not like my phone is ringing off the hook in the middle of the nights or I’m schlepping around unclogging toilets.  Far from it; well maintained investment properties inhabited by responsible, well screened tenants are very easy to manage and require very little of my time.  But that said – every blue moon I’ll get an inquiry from even the lowest-maintenance tenant I have.  Be suspicious of a tenant who never ever calls you, not even once.  That guy might be sending you a message that he doesn’t want you coming around.  So go check him out.

There are some other things to look for specifically when it comes to sniffing out meth labs.  If that’s a particular concern in your area then check out the KCI Anti-Meth site.  

Yesterday’s the Wall Street Journal ran a first page above-the-fold article on tenant/landlord litigation over mold, which reminded me of an experience I had last year. 

I got a call from a tenant who lives in a single family patio home complaining of discoloration on the ceiling of the home’s second bathroom.  I went over to take a look and was fairly surprised at what I found – the ceiling which was bone white when I rented the property to the family a little more than a year ago had turned into a kaleidoscope of dark moldy colors. 

If you’re a Houston landlord then this isn’t something you want to see.  For the uninitiated: mold is big business around these parts.  Houston is basically a big paved over swamp.  Hot summers.  Lots of rain.  A good environment for both mold, mold remediation firms and for personal injury lawyers.  This has been a particularly hot issue in Texas since a jury awarded $32.1 million (later reduced) to a family whose home was infested with mold. 

So I called AMC Engineering & Environmental Services to come and take a look at the place.  The set up some equipment, took some air samples, charged me what seemed at the time to be an annoying amount of money, and eventually produced a clean bill of health for the property; the quantity of airborne particles in the bathroom being “less than the overall quantity of fungal structures identified in the outside ambient air.”
The report went on to state that there is no “absolute criteria” regarding mold and that the recommendations of the report were based on “standard environmental microbiological and industrial hygiene practices.”

Which brings us back to the Wall Street Journal report (note: the WSJ article is available online, but only to subscribers).  The science of mold is a pretty fuzzy one (sorry, couldn’t resist at least one pun) and the references frequently quoted in suits are a maze of conflicts of interest.  One frequently cited paper from the American College of Occupational and Environmental Medicine which was written by a group of experts who paid experts for the defense side in mold litigation. 

The punchline (for me, anyway):  You know this.  And your tenant probably knows too.  My wife is a physician and I’ve learned one interesting fact over the past few years: it’s not the bad doctors who get sued, it’s the obnoxious ones.  I don’t have the data to back it up, but I suspect that the same applies to landlords.  If you tenant brings up a health related issue then look into it.  If need be do an evaluation and show them the all-clear certificate.  It’s a good investment. 

I find it interesting that one finds so many references in the popular press about the horrors of being a landlord. 

Consider this blurb that appeared recently on Money.com:  

• “…if you can't imagine yourself answering late-night calls about clogged toilets, your choices come down to holding your property vacant or selling.”

Or this gem from the MSN finance page: 

• “…Just when you thought being a property magnate was going to be glamorous, that late night phone call from your tenant saying they have left the bath running and flooded the place is just what you didn't need.”

Note that these comments were written by journalists, not by real estate investors.  Experienced investors will know that if you’re judicious about selecting your tenants and if you maintain your properties responsibly then your landlord duties won’t overwhelm you.  I’ve yet to receive a call in the middle of the night. 

Sure there are challenges to landlording, and yes things will break – but establishing a good relationship with your tenants and finding a handyman that you trust go a long way towards helping you maintain your work life balance.