First, you will be responsible for marketing your properties to locate tenants for your properties. While this might seem like an easy task, the challenge is to find tenants who are qualified to rent from you – that is, who have sufficient credit and incomes as well as have a positive rental history. By adequately screening tenants up front, you will help minimize the time you spend collecting rent and making repairs to units damaged by irresponsible renters.

In addition to finding tenants, you will be responsible for managing your renters. You will need to collect deposits and rental payments, respond to service requests, and deal with tenants who cause disruption in your properties. These disruptions can come in many forms, from domestic arguments, to all night parties, to HOA violations, not caring for the lawn, etc.

You will also need to manage repairs and upgrades to your rental properties. Your property management duties may include interior repairs, building upgrades, and maintenance of lawns and landscaping, among many others.

It is easy for real estate investors to spend the majority of their time on property management tasks, rather than on activities that are direct money makers. You might find that hiring a property management company to handle these tasks will allow you to be more productive, and to make more money with your real estate investing ventures. When you are looking for investment properties, it is a good idea to consult with an experienced REALTOR who owns and manages their own rental properties. Then that can help you navigate the process of either assisting you or can provide assistance in locating and hiring a reputable property management company.

Quite frankly, I think there is going to be a cottage industry that will emerge in about 3-5 years for debt collectors to pursue people for the bad debt on mortgages.  Mortgage companies who “took it in the shorts” with foreclosures and short sales will start hiring debt collectors to make good on the deficits we are seeing. We are already seeing where second mortgage holders are pursuing individuals for their loans after foreclosure as an unsecured debt. 

For now, there is some relief, but I don’t expect that it will continue. See if your situation may qualify. Please read more below on mortgage forgiveness as share with us by Kim Kline & Associates. 

Mortgage Forgiveness 

If you owe a debt to an entity and they cancel or forgive that debt, the canceled amount may be taxable.  But in 2007, the Mortgage Debt Relief Act was passed to help homeowners avoid the double-edged sword of losing their house and having to pay taxes on the forgiven debt amount. The Act is in effect for mortgage debts cancelled from 2007 through 2012. The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.   

Is Cancellation of Debt income always taxable? 

• Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
• Qualified principal residence indebtedness.
• Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
• Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
• Certain farm debts
• Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. 

Contact Kim Kline & Associates or your accountant for more information regarding the Mortgage Debt Relief Act – http://www.kimklinelaw.com/home.html

So, let me explain the tenant’s right to quiet enjoyment. When you receive compensation for someone living in a property, Georgia Law clearly states: 

OCG 44-7-1.
(a) The relationship of landlord and tenant is created when the owner of real estate grants to another person, who accepts such grant, the right simply to possess and enjoy the use of such real estate either for a fixed time or at the will of the grantor. In such a case, no estate passes out of the landlord and the tenant has only a usufruct which may not be conveyed except by the landlord’s consent and which is not subject to levy and sale.
(b) All renting or leasing of real estate for a period of time less than five years shall be held to convey only the right to possess and enjoy such real estate, to pass no estate out of the landlord, and to give only the usufruct unless the contrary is agreed upon by the parties to the contract and is so stated in the contract.  

So what is quiet enjoyment? It is the right of the tenant to possess and enjoy as the tenant deems fit. They have the right to be undisturbed. The Department of Community Affairs (DCA) clearly states in their Georgia Landlord Handbook when discussing right of entry into a property that the law has been interpreted as “If the lease does not state that the landlord can enter the apartment, a tenant could legally refuse the landlord access except in case of an emergency.” Now at Solid Source Property Management as well as most leases does state a provision for entry for reasonable timeframes Monday through Saturday with 24 hour written notice. 

But here is the bigger issue. What happens if we get inside and find that they aren’t maintaining the inside? Maybe they have not cleaned, or maybe they have broken something. What can we legally do? The answer is nothing. They have the right to live in any manner that they seem appropriate. 

What I feel is appropriate and what you feel is appropriate is subjective. As long as at the end of the lease term, they return the home in the same condition that it was when they were given possession – less normal wear and tear, they will receive their security deposit back. If they don’t leave in a clean rent ready condition, then we by law can deduct the amount to repair from their deposit as compensation to the owner for the damage. If damages exceed the security deposit, then we can pursue them in collections. But really until they move out, we can’t do anything.

We have had instances where a tenant lived in a manner that I wouldn’t live in, but when they moved out, the property was returned in immaculate condition and received their full security deposit back. This is why it is so important to establish the proper condition of the property at move in with detailed notes and pictures. Then it is really easy to compare the move in and out check sheets and determine the deductions. 

So in reality, unless we have cause to believe that there is an unlawful activity or a known lease violation (unauthorized pet for example) in the property, we allow the tenant to have full use of the property without intrusion. 

We do perform a quarterly drive by of the property and will notate anything that is not being handled properly which is the lawn maintenance or any infraction of the HOA rules & regulations. Remember however, that owners are responsible for the exterior structure of the house which includes – gutter cleaning, yearly shrubbery maintenance, pine straw/mulch refreshing, pressure washing, etc. These items are not the tenant’s responsibility. Tenants only have to maintain the mowing of the lawn and keep the beds free from weeds. Weeds in the lawn are also the owner’s responsibility so some owner’s elect to pay a weed treatment company to assist in the weed control. 

Since the tenant is paying rent, they have rights to the property and these rights must be respected. At Solid Source Property Management, we take great care to act in the best interest of our owners while abiding by the law set forth. We do believe strongly that proper screening typically saves us from a lot of problems in the future.

First, develop a written work plan with your contractor. The work plan should state, in detail, the work that is to be done, the timeframe for completion, and the price that is to be paid for the work. This helps ensure that you and your contractor know exactly what you expect. It’s also a valuable document to have in case the contractor does not complete the work correctly.

Second, pay only for progress. Some contractors will ask for some or all of the fees up front. It’s important get clarity of what you are paying for if you agree to an up-front fee, because it will be difficult to get this money back if the contractor does not complete the work to your satisfaction. Often, you can negotiate a series of smaller payments as portions of the work are completed – this benefits both you and the contractor, because you are more likely to see progress, and the contractor can recoup expenses as the work is being done. We will pay for the materials directly and then do progress payments for the labor.

Finally, make sure that any changes are made in writing. If your contractor needs to extend a deadline, substitute building materials or fixtures, or make any other changes, it’s not enough to rely on a verbal agreement. Your contractor must be willing to commit to all changes in writing.

Other items to consider is making sure that the contractor has the proper credentials as well as insurance – liability and worker compensation. When working with contractors that don’t have the proper credentials and insurance, you put yourself and your home and assets at risk.

This month, we are transitioning to new property management software. This transition has allowed us to examine our base of business and to help us better serve our clients and tenants. What I found as part of our analysis was that 30% of our tenant base has at least one pet. Some actually have multiple pets. 

So what does that mean to you? First, if you are an owner of investment property and don’t want to accept pets, you are significantly reducing the number of tenants that will want to rent your place which will result in longer vacancies. 

So what is a landlord to do? We encourage all of our owners to accept pets with conditions. It has been our experience that if you do not allow pets, the responsible pet owners will go elsewhere and you will still end up with unauthorized pets for those tenants who are dishonest. Unauthorized pets create more damage and are a bigger liability. 

There are certain pets that due to insurance requirements, we cannot accept. Those are the vicious breeds – Alaskan Malamutes, Akitas, Chow Chows, Doberman Pinschers, German Shepherds, Pit Bulls, Rottweilers, Staffordshire Bull Terrier, or Siberian Huskies. The interesting thing is that people who have these breeds are appalled that we don’t accept them. While we are sure that there are many dogs in those breeds that are fine, there are a greater number that have caused problems and our insurance would not cover us should a problem arise. 

Responsible pet owners are happy to pay a pet deposit. We recommend charging a non-refundable portion for the privilege of having a pet and returning the rest provided that the lease was honored and there were no damages. 

We have all our residents sign a pet policy even if they don’t have a pet, so that everyone knows exactly what our pet terms are. It also shares with them the consequences of having an unauthorized pet. We find this comes in handy from time to time. 

We charge based on the weight of the animal the heavier the breed, the more the deposit. Also, we take into consideration the type of dog as some dogs are notorious chewers while others are just helping keep their owner’s lap warm. 

We love our pets and understand that others do too. I hope that this has helped take the fear out of accepting pets in your rental property. 

Merry Christmas from SSPM

So why am I sharing this with you? I learned (or was reminded of) some great lessons on this trip and thought you might benefit from them, but let me finish telling you the story. 

Check in was at 4:00. My parents arrived at 5:00, our son and his girlfriend had gotten here at 3:30, but failed to share with us the condition of the home and left to go get a drink as they had no idea what to do. They actually thought that the previous renters were still there. 

Little did I know what was in store for me when I arrived at 6:00… My mother was madder than a wet cat when I showed up. She didn’t even greet me as she was on the phone trying to find a new rental house. My dad took his dog to a nearby shopping area just to get out of her way. There is really nothing worse than my mother on a tear. 

Now I manage hundreds of rental property. You would think that nothing I could see would offend me or that I haven’t seen it before. Well, I have to say, I was absolutely disgusted. The place looked like a fraternity house after rush weekend and this was after a cleaning crew had been dispatched and had been there for over an hour. I can only image how my mother found it. The previous tenant obviously had a bird in the house as there were sunflower seeds & parrot food all over the house and the half empty bag of the food and lots of bird poop and feathers all over the place. Who lives like that in a high end vacation home? 

My mom had called the owner who was out of state, to share with her about the fact that the place was absolutely a mess and the home was in need of some repair and updating.  The owner stated that she would get a cleaner out there immediately. My mom put up even more of a fuss, so the owner agreed to provide a refund for a little over 1 night’s stay. While on the surface that seemed reasonable, in reality it was a really little consolation to our predicament. 

We had planned on having dinner for 6 at the house, one of the kids was sick and she couldn’t lay down to rest because the cleaners were still cleaning, we couldn’t unload the cars because we didn’t trust the items were safe, we didn’t want to leave our dogs for fear that they would get out, it was a real mess. 

The owner gave my mom 2 options. Half the money we paid and leave tonight or take the 1 night’s refund. Neither of these options really worked for us. So my mom asked me to call the owner when we went out to dinner at 8:30 leaving our son and his girlfriend at the home with the cleaners. 

What struck me the most when I call was the owner’s really un-sympathetic attitude. We knew that she didn’t control the cleaner’s not showing up earlier in the day. We really didn’t expect her to do anything more about that. What I would have expected was a sincerely apology and her asking what else can we do to make you feel better about this. Had she offered to refund our money less 1 night, we would have found another place and been all the happier not thinking ill of her or her rental. She would have had good karma in the world. We really couldn’t afford to pay for another place and lose half of the deposit. After all, none of this was our fault. So basically she had us in a no win position and she knew it. 

So what did I learn through this transaction to be a better property manager you ask? 

• Make sure that the marketing pictures accurately reflect the property. The property pictures on-line really didn’t accurately reflect the condition of the property.

• Always provide the tenant with a way to view the property in advance. Had we seen the property before our arrival, we could have made better choices. Needless to say we are viewing properties this week for next year.

• Be sympathetic & listen. Part of the issue we had with this owner is that they kept running over us when we were trying to vent our frustration. Had she just been quiet and listened, we would have been a little calmer. When a tenant is upset about an issue. Clearly articulate your understanding of the problem and ask if we understood the issue correctly. Then ask what do they feel would have been a reasonable request. Had the owner offered to buy our dinner in addition to what she offered, then we would have probably put it behind us and all been able to move on. As it stands, I am telling everyone I knew and thousands I don’t know about this experience. I am being kind by not divulging the owner, but part of me would like to…

• When you manage a property, evaluate your properties periodically and update the marketing material. We do this after every resident moves out. What was fine when a tenant moved in may require attention when they move out. This home has some serious differed maintenance. I don’t think they have been here in years.

• If you are renting a furnished place (which we don’t do at SSPM) then refresh the furnishings every so often. The beds here are embarrassingly tired and springs are poking out. If you refresh on a schedule, you will have more repeat business and spread out costs over time. The same applies for carpet and appliances in a yearly rental.

•  When you have complaints about the property – check to see if they are accurate. Not every person has realistic expectations about the property, but rather than say – “Well, I have never gotten a complaint…” What you should say is thank you for bringing that to my attention, I will look into it.

• Always collect a deposit. This owner had no deposit from us or the previous tenants. Had she collected one, she would have had funds to make us happy and still not be out of pocket. It also would have provided the tenants with an incentive to clean up the property before they left and not leave it in the condition it was in.

While I know this is a long post, I thought you would find it interesting since the landlord became the tenant and I hope you have enjoyed the story and learned or were reminded of some great lessons. Feel free to comment and share your own story as well.

 All my best!

Clark Howard, popular radio show host and consumer advocate shared in his July 27^th show how to discuss with your landlord a rent reduction, you can read more about his comments by going to http://clarkhoward.com/liveweb/shownotes/2009/07/27/16296/.

About 15% of our owners have been approached for a rent reduction from their current tenant. Not every request was approved, but most requests were. In a lot of cases, once we did the analysis for the owner, we found that their tenant could easily move down the street and pay less.

The cost of the vacancy would cost more than the rental reduction in all cases, so our recommendation was to agree, but put some parameters, like $100 off if paid before the first. This seemed to be a win for all parties. It allowed a good paying tenant to reap the rewards of on-time payment, while keeping the base rent high. It will be much easier to reverse the discount when rental rates climb back up.

Should an owner not be willing to accept a rent reduction, we share with them some ways a longer vacancies impact them. When a property is vacant more than 30 days, the traditional landlord insurance policy may be cancelled. We are seeing this happen more and more. When it does happen, owners then need to purchase a builder’s risk policy which is 4 times more than a normal policy for adequate coverage.

In addition, vacant homes are more susceptible to vandalism and theft. This is one reason we regularly send property managers to our properties so that we can evaluate the condition. Expenses such as mowing, cleaning, and paying the mortgage while no income is coming in, increases the overall financial burden to the owner.

So when we will see improvement? I wish I had an answer. My experience tells me that based on what I have read; it will be another 18 to 24 months. Most people are perplexed by this rental anomaly. With the increase in foreclosures, you would expect that more people would need rentals since they can no longer purchase.

What we are finding is that people are moving in together – multi-generations are living together. This is why 4 bedrooms and above are renting faster than 3 and less. My inventory for 2 bedrooms is not being shown near as much as in previous years. 38% of our current inventory is 2 Bedrooms and that is the highest it has ever been. When I include 2 and 3 Bedrooms it increases to 65% of overall inventory.

So my advice is if you have a tenant, let’s do whatever we can within reason to keep them in the property.

The first thing to remember is that as with any product the law of supply and demand is in effect. The more rentals that are on the market, the more tenants have to choose from, which means that prices trend down. The reverse is also true.

So let’s talk Atlanta’s vacancy rate which is an indication of supply. Currently condos are running between 20—25% vacancy in Metro Atlanta for 2009 and houses are running at 10—15%. These numbers were compiled from over 4000 units from over 40 different local property managers.  As a member of the National Association of Residential Property Managers (NARPM), we get to share this type of information with each other to better serve our clients.

With vacancy rates higher than in previous years, the average time to fill a rental has increased from 30-45 days for competitively priced properties to 90- 160 days for competitively priced properties. This increase in the vacancy time has really put a strain on the market as more and more owners are forced to reduce their rates just to get them filled.

So that brings us to how do we set a rental rate? One thing to realize is the market doesn’t really care what an owner’s mortgage payment is. I find that owners often share with me, “I have to have $xxx in rent to cover my mortgage payment.” So I have to share with them that the market determines rental rates and prices – not how much your mortgage payment is.

In the past 12 month’s we have seen rental rates decrease by an average of $200 per month. For most, that is equivalent to 20% decrease. The rental market is much more volatile than the real estate sales market. We see shifts much faster as inventory comes and goes from the market.

This is why at Solid Source Property Management, every 2 weeks we perform rental analysis on all our vacant properties and make recommendations accordingly. We want to make sure that we are not priced out of the market, but still getting the most rental income we can.

So I wanted to take a minute to share with you why owners need to perform the repairs and some things to be aware of. The number one reason that an owner needs to repair the property is because it is the law here in Georgia and I would assume in other states as well. Section 44-7-13 of the State of Georgia Landlord Tenant Law Official Code clearly states “The landlord must keep the premises in repair. He shall be liable for all substantial improvements placed upon the premises by his consent.”

In Georgia, the only issues I have ever seen a tenant win a legal case for non-payment of rent was when the owner did not make repairs in a timely or professional manner. The law provides a provision for the tenant to withhold their rent in lieu of repairs if the repairs are not done. Other than repairs, there is not another reason a tenant has for not paying their rent. So why would an owner want to open themselves up for litigation and not perform the repair?

I suppose it comes down to cost. I find it funny when I speak with owners and ask them if they would want to pay to live in a property where the sink constantly drips, or the stove doesn’t work, or the HVAC isn’t cooling properly and they reply of course not, but some expect their tenants to. Most property management companies like ours buy in bulk, that means that we get better service and better pricing than a typical individual would get. We do charge a fee to perform the repair or coordinate the request if not done by the in house maintenance staff. Yet, even then we are significantly cheaper on most items and yet the owners still complain.

What they don’t understand is that we hire professionals who have their own insurance, liability coverage, workman’s compensation, and are screened. We do this to protect our owners as well as our company. We have seen issues where owner’s did not use licensed and insured workers thinking that they were saving money only to be sued later by that same contractor for being hurt on the property. I encourage every owner to think carefully about using legitimate companies with the proper credentials.

If you own rental property, this is a business, the repairs are the expenses are deductible and should be done professionally. Don’t be pennywise and pound foolish.

All properties need to be in excellent condition & priced correctly to rent quickly. We are recommending that owner’s update any dated fixtures/lighting, make it look and smell its best, as well as provide incentives for on-time payment. We are also suggesting that owners consider putting some inexpensive staging items in the home like colored shower curtains with matching towels and candles. This increases the emotional response and seems to have a significant impact for approximately $30-45.

As the rental market is very volatile, we are constantly evaluating our rental rates. Unfortunately with reduced on-line advertising alternatives (Rentals.com has bought out most of the smaller more cost effective sites here in GA), we are finding rental comps to be more and more challenging and not as consistent as they once were. In addition, on-line advertising costs has significantly increased, while traffic has decreased. All of this has impacted our ability to attract higher numbers of inquiries.

On a positive note, the applicants that we are getting are slightly better candidates than those of a year ago. We are easily getting double deposit for more risky tenants. It appears that one of the reason for the increase in demand for larger houses is we are finding more and more multi-generational families are applying together. It will be interesting to see how long this trend continues.

For the smaller homes, the competition has always been apartments. Below is an excerpt from another real estate agent that specializes in Multi-Family dwellings – Dale Henson.

“At the end of 2008 average occupancy in all garden apartments in the 11-county market area was 8.6%, down 250 basis points from 91.1% at the end of 2007.”

“The fundamentals of the Atlanta apartment market will very likely not begin a positive turn before mid-2010 or early-2011”

“[The large number of new apartments coming on the market that were started in 2007 & 2008] coupled with a decline in demand due to economic conditions, will push occupancy down to 87% at best by the end of 2009.”

What this means for you and me as investors/owners is that it is going to take some time for the market to turn. Rents will continue to be soft and we will have to become very aggressive in our approach to this issue.