Especially with low-income properties tenant selection can be more of an art than a science. With a high end property a property owner may simply not consider anyone with a FICO score under 650 and income over 4x the monthly rent. With low income tenants this is  not possible, or if you insisted upon super strict inflexible selection criteria you would be looking at very high vacancy rates.

Because of this a landlord should have their eyes wide open to each and every piece of information they can get from the tenant starting with the phone call responding to your advertisement. Things to look for on the phone are:

-Are they polite?

-Do they use foul language?

-Do they hem and haw at the questions you ask or are they serious about finding a new place to live.

This brings me to my next point. On every phone call I want to know 3 things:

1. When are you looking to move? Many times people aren’t sure, and I don’t want to waste time with these people. The most efficient use of my time is to deal with people that will be putting a deposit down on an acceptable apartment as soon as they find it and they are also looking for an apartment within the next 2 months. (no more than 63 days out). I will then ask the follow up questions about why they are moving. You will be shocked to hear what they say and you can learn a lot from this question.
2. How many people will be living in this apartment?
3. Do you have any pets? I do accept pets with the exception of some breeds of dogs. If I am uncomfortable with a dog I mention that my insurance company won’t allow the dog. A tip from my years of experience screening tenants; if someone says they have a “lab mix” it is almost always a pit bull mix. I always ask to find out exactly what the dog is mixed with.

When I set up an appointment I always make the tenant confirm the appointment 1 hour before we are scheduled to meet. This serves a few purposes. First of all the prospective tenant will not show up a large percentage of the time. I tell the tenant that I will not leave for the appointment until they call to confirm. This will save you a lot of time and gas. Secondly you are testing them. This is a very simple test, but if someone agrees to call you at 1pm on Thursday and they can’t get that simple small promise taken care of, they will be a bad tenant. Personally when this happens I save their number in my phone as “no show” and the date. That is the last time I will give to them. Their calls will not be picked up or returned and I will use my time dealing with people that do what they agree to. Ironically I have noticed that these people call on my new listings sometimes months and years later, and this suggests to me that they move too often for my liking. I get to save time by not responding to them on my new listings as well.

The above is all about the phone call, but when they arrive to look at the property there is a lot of information that can be useful as well. That will be covered in part 2.

However, as the economy has slowly been recovering so has the real estate industry, especially the property management field.  Though there is still great work to be done and improvements to be seen, much repair has taken place since the recession began several years ago.  As the economy recovers, spending will also increase and demand for both residential and commercial leasing will also improve.  This is turn increases the need for and productivity of property management services and companies.

The responsibilities of a property management team consist of leasing procedures, building maintenance, rent collection, tenant management, trash removal, building security and more, and it is important to meet the requirements of each of these areas in order to succeed in this particular field of real estate.  Headache Free Real Estate ensures that each of these factors are completed in the most efficient and professional way, and it is because of this that we are able to continue to grow along with the economy.  It has been projected that the property management industry’s revenue will continue to grow in the year 2013 as it did in 2012, and we look forward to seeing this positive transition continue.

Some tenants feel that their landlords do not respect their space, are invasive and do not give appropriate notice before entering the property.  On the flip side, however, there are also landlords who feel that tenants are not respectful of the space they are renting, destroy or damage property, or even lock the property managers out.

It is for these reasons that a rental lease is so important for all involved, as this written agreement will clarify all that is acceptable and unacceptable for both parties. Tenants need to be aware of all of a landlord’s expectations, especially since a lease often states that a landlord is allowed to enter a unit to inspect and charge accordingly if the property is neglected or needs repairs due to the renter’s actions.  Taking the time to fully read your rental contract and clarify any questions is the key to preventing future scuffles or misunderstandings on the rental property.

In a perfect world, property management would always be smooth sailing, but as with anything else in life there are bound to be some issues or disagreements.  That is why Headache Free Real Estate provides property management services throughout Marlborough, MA and all neighboring towns and cities- we free those who are interested in investing in rental properties from the burden of actually managing the units and tenants.  We have some of the best professional experience in management services, completing everything from maintaining the property to filling vacancies and collecting rent.   Headache Free Real Estate wants to keep every investor happy and achieving high cash flow and passive income.  We strive to succeed both as investment partners and property managers, and we make sure that all tenants are respected but also aware of what is expected of them.

Headache Free Real Estate has had more than its fair share of experience with property management in and throughout the towns surrounding Marlborough, MA,  even offering full management services to properties that we do not have any ownership of.  We felt that these tips were not only helpful to those who may become future renters, but they are the key to creating a solid foundation in a landlord/tenant relationship.

So, what are some of these suggestions?

1) “Put Your Mouth Where Your Money Is”- When on the search for an apartment, it is important to remember that it can be very competitive and there is often a large pool of candidates that the property’s landlord must choose from.  Providing financial papers upfront when you first meet the landlord and view an apartment of interest shows that you are both prepared and invested in this place.  These papers also allow the landlord to check your credit score and information more quickly since everything is readily available.  Having a good credit score is also a huge plus, as it ensures that you are financially stable and will be reliable when it is time to collect rent each month.

2) “Bigger is Better”- The longer the time-span of the lease, the more money there is coming into the landlord.  If you are a tenant that knows you will end up staying at an apartment beyond 12 months, letting the landlord know ahead of time can give you priority as a renter.  At the end of the day, a landlord strives to fill vacancies with reliable tenants as well as reduce the overall turnover.  The longer the lease, the better it can be for both the landlord and the tenant.

3) “Respect the Territory”- This may seem like an obvious statement, but it is something that tenants sometimes forget.  A landlord’s choice for their property’s tenants can be challenging, but showing that you are a respectful and responsible person throughout your stay (as well as upon first impression) is of the utmost importance.  Basic things such as paying your rent on time, keeping volume levels reasonable, respecting your neighbors and their space and repairing anything that you damage or break will all lead to a good rental history as well as a potential reference from your landlord should you want one in the future.  The less problems you cause, the better the relationship overall and the happier the property will be as a whole.

Property Management certainly is not a field that is right for everyone, but it is always good to know what a landlord should look for in a tenant and how a potential tenant should approach the rental process.   Our management of properties and its tenants has a proven record of success and satisfaction by those who invest with us, and we excel in keeping tenant turnover rates as low as possible.

Capitalization rate (or “cap rate”) is the ratio between the net operating income produced by an asset and its capital cost.

Very frequently an investor will come to me asking what kind of Cap Rates my company offers. This is an important question, but one that also frustrates me a great deal. The frustration stems from the fact that the Cap Rate is derived from 2 numbers, the purchase price, and the NOI (net operating income).

While the purchase price is easy to factor into the cap rate, the NOI is where things get a little tricky.

Head Ache Free Real Estate operates very differently than just about every other place that has investment property for sale. The main difference is that our NOI actually includes ALL of the expenses. Literally every other place that I have looked does not include all of the expenses. I invite you to look around and compare them to us.

Due to the fact that we pride ourselves in providing a truly comprehensive picture of the income and ALL of the expenses, our NOI will appear lower than some of the alternative properties. This can be the case EVEN WHEN OUR NOI IS ACTUALLY HIGHER.

NOI and Cap Rates have to be apples to apples to get a true comparison. Unfortunately in the world of investment properties, most sellers will not show you the full picture.

Aside from understanding all of the expenses involved in operating a property one must also look at the condition of the property as well. This is not a question of whether it is pretty or not. The important factors to look at are the main mechanical systems like the plumbing and the electrical components along with the structure of the building. Purchasing a building with a great Cap Rate but also a lot of deferred maintenance won’t do you any good as an investor, as addressing these issues can destroy your ROI.

In summary, when you are shopping for a good Cap Rate, make sure you are comparing apples to apples. I like to say “an 8 CAP at Head Ache Free Real Estate is equivalent to a 15 CAP on the MLS.”

Every week we get prospective investors who come to us looking for what we have to offer; passive income through the ownership of rental properties.  A lot of times these investors are brand new, and they are very attracted by the huge cash flow projections that larger buildings can offer.

While it is true that a larger building may produce a larger cash flow, there are many advantages to going a little smaller and buying a duplex that are often overlooked by new investors. Let’s take a look at a few of them:

1. 2 Families are easier to sell. This is for a number of reasons but primarily because:
2. 2 Families are easier to finance. This makes it easier for a future buyer to purchase, and it also benefits the owner by having a more favorable loan. Both LTV (loan to value) and the interest rate will typically be much better for the owner of a 2 family than for the owner of a larger building.
3. Owner occupied buyers will consider buying a 2 family, again making it easier to sell. An owner occupied buyer can get a very favorable owner occupied loan if they choose to live in it, whereas with a larger building it doesn’t matter if you live in the property or not as far as the bank is concerned. Any property over a 4 family is considered a commercial property in the banking world.
4. 2 Families rental properties got hit extremely hard by the real estate market collapse. Throughout the Greater Boston Area and especially where we work (Marlborough, MA), prices for 2 families have gotten extremely low compared to larger income properties. 2 families have over-reacted with the housing crisis compared to 5-20 unit properties.
5. Tenants stay longer in 2 families than in larger properties. There is far more turnover in larger buildings, and therefore far more turnover expense.

The bottom line is that projected cash flow is not the one and only factor to consider: It is important to strive for great monthly cash flow, however, be sure that you are looking at the whole picture when you are considering buying an investment property.

This struck me as interesting. While I am sure that this gentleman would have accepted the property had I given it to him for free, he did not see the value of investing any real amount of money or work into this 3 family. He knows only what he saw. His sight told him that the property was in very bad condition, and that the neighborhood was a low-income rental type neighborhood. He would not want to deal with things that were uncomfortable to him and his sight told him to run away.

When you use your vision of what the building can do for you financially, instead of your sight of a neighborhood you might not want to live in, you can create some profitable opportunities for yourself. We looked at the building and saw what the siding guy saw, but we also have the vision that if managed effectively, this building could have tremendous value. When the rental income from the building supports all of your expenses and provides significant cash flow each month I try to disregard my sight and trust my vision.

There are 2 main components that can turn an unsightly building into a winning investment. The first is to make sure your numbers are accurate. Your rental income projections must be spot-on, as well as your expense projections. Verify this data by running rental comps and seeing apartments for rent in the area or talking with a reputable rental agent. Ask for proof of rent received from the seller, and copies of rental agreements. In addition you can verify all expenses from the seller of a property before you buy. Politely demand proof of all expenses including water/sewer bills and common electric. Property taxes can be found through public record, and you can get quotes on insurance and lawn care/ snow removal. Keep a close eye on any major deferred maintenance as this can derail your cash flow as well.

The second component is the management of the property. None of the numbers matter if you don’t collect the rent. If you have problems with vacancy or delinquent tenants you will have a loser of a building. Especially when dealing with low-income properties we highly recommend dealing with a full time property manager that has a history of successfully managing properties in the area you are investing in.

Once you have an accurate picture of what the numbers will look like, trust your vision.

Here is a story from personal experience. I had a lump sum of money that I didn’t want to be at risk of the whims of the stock market, I wanted to earn monthly income from that investment and I wanted an investment that was tangible. In this day and age of “forensic accounting” and Bernie Madoff, I love the fact that I can literally touch the building I own, not own a piece of paper that can be manipulated by CEO’s and boards of directors that I don’t know.

Here were the options that I perceived for myself:

• Stocks: Risky. Not consistent. No consistent monthly income or very small consistent income in dividend stocks
• Bonds: Rate of return not high enough
• CD: Rate of return not high enough

Balancing my desire to avoid risk while also bringing in monthly cash flow, real estate was the solution for me. The trade-off was that I had to become an effective property manager, and that has lead me to where we are today at Head Ache Free Real Estate.

Real Estate provides me with the following:

-Monthly income (cash-flow)

-Equity Accumulation which builds my net worth over time in 2 distinct ways

1. Debt reduction. This is my “automatic savings plan”. Every month when I pay my mortgage on my property, the principal is reduced. Over many years the debt that I have on the property is wiped out altogether and I own the property free and clear. In essence my tenants have purchased a valuable asset for me. This is the most sure-fire way to get wealthy over time that I know of.
2. Property Appreciation. I don’t like to speculate on what property will be worth in the future, I look at it as an added bonus. We invest for cash-flow, and if the property appreciates over time then we are additionally happy. As I write this in 2012, property looks like a bargain to me, so I am cautiously optimistic that properties purchased today will be worth considerably more 10 years from now
3. Tax Advantages. Consult your accountant, but, my experience owning rental property has been a very positive thing as far as taxes are concerned.

No other investment that I have come across offered me what real estate has, and I am very happy with it. Consider your long-term objectives for the investment dollars you have and choose the investment that suits you best.

#1. Be Available to show your properties

Tenants, especially good ones, have jobs. They will need to see an apartment outside of the hours they are working. Some will see your apartment at 10AM on a Tuesday others will prefer 6:30PM on a Thursday while some will want to do a showing on the weekend. If you are available to accommodate showing when the prospective tenant is available, you will have a significantly lower vacancy rate.

#2. Do NOT be overpriced or even at the very top of the market.

I did not realize exactly how sensitive the tenant pool is to even slightly overpriced rent before I started managing properties full time. I was amazed at responses from ads when I lowered a $975 rental just $25. Vacancies hurt a property investors’ bottom line significantly and keeping units full is of the utmost importance when being a property manager.

Vacancies are not only missed revenue, but are also a pain in the butt and a lot of work to deal with. If your properties are overpriced it will take significantly longer to fill them which means more showings (time, effort, gas), and tenants will not stay as long causing more turnover which in addition to more showings also increases the wear and tear on your property. Tenants are not always careful about your walls/paint/door hinges/anything while moving furniture. Turnovers can put a beating on your property.

When I started in this business I was very focused on being right at the top of what the market would bear regarding rents. I saw it as weak and lazy to charge a lower rent in order to keep your tenants happy and prevent them from moving. It was a mistake that I have learned from and our below industry average vacancy rate is to show for it.