All Forum Posts by: Michael Hayworth

I love waking up to find money dumped into my account. And I love having all my tenants  (except a few I inherited) on autopay. As a landlord, it makes life much easier just having the money automatically show up in my account, rather than depending on the mail, or on tenants to show up, then handling checks and cash.

To new landlords: people are often surprised how much work this business involves. Wherever you can automate things and cut out wasted time or inefficiencies, do that. We just tell all tenants who want to apply that the rent in the listing is for autopay, and if they want to mail  checks or pay cash, it's an extra $50/mo. No one ever wants to do it the hard way. 

Your state or city laws may vary, etc. etc. It's probably illegal in several blue states. (I'm surprised that even collecting rent at all is still legal in some states!) But wherever you can make your life easier, do it!

You can certainly require a tenant to use the sort of payment system you want. At least, you can in Texas, where the OP is located. 

However, it has to be part of the lease terms, and if you inherited the tenant, you're bound by the existing lease. Change it on renewal.

We don't absolutely require electronic payment, but we say our stated rent includes discount for electronic payment. If you want to pay cash, money order or some other crap that requires more work on my bookkeeper's part, it's $50 extra per month. This is a business. If a tenant is making more work for you, it should cost them more.

Yes, it's a legitimate business expense, with them as independent contractors.

And yes, you're supposed to send every contractor you use a 1099, but in the real world, it's not always possible to be perfect about that. No set of books is going to be perfect. Tax laws are so voluminous, and the real world is complex enough, that any judgment call could be questions. What you're mainly trying to do is avoid an audit, and have a reasonable basis for all your decisions if you do get audited.

We put expenses like that down as Day Labor. Loads of contractors use day labor for cash. If it's a minor part of your expenses, you're probably fine. If it's a ton of cash expenditures and starts to look like potential fraud, then you're probably not fine.

I'm honestly not sure how the market is going to crash in my area, when we have around 800 new people every day moving into the area, and all of them need someplace to live, and new construction isn't keeping up. And even in the last big correction, a "crash" was more like a 5% to 20% drop in value, depending on your area. It's not like stocks, where an Enron can go to zero.

But if/when we have a correction, I'll probably use it as an opportunity to buy more properties. Any smart investor keeps good cash reserves.

You, on the other hand, are going to be overextended on this deal. I don't know your market, but I don't think I'd do a deal like that unless I had a great day job that ensured me that I could pay the mortgage on this property no matter what. I'm also concerned about jumping from owning 1 SFR to doing a 4plex new build. I'm a GC, and while $500K sounds high to me (maybe you're building a luxury property, which would be more exposed to a correction), I know that no matter what a project is budgeted at, you're likely to go over. I'd be very cautious in this deal.

Maybe slight disagreement with some of the above. Certainly doesn't hurt to get them out. But you're probably looking at significant renovation costs if you do.

I inherited a tenant in a situation like that. Rents are certainly lower here than in L.A., but she was paying $950/mo for a house that, fully renovated, would've rented for $1600 at the time. HOWEVER, I would have to spend $25-30K, to get the house in condition to command that rent. 

We told her we wanted to renovate the house, because we need to significantly raise the rent. We settled on raising her rent to $1100/mo, and we would do no repairs unless there was a safety issue or something required by law. Had her sign an updated 1-year lease.

The next year, I raised her another $100/mo, and again the next year.

I like the idea of renovating the house and getting higher rent, but the additional rent I'd get would be something like a 5-year payback until I get to break-even, and by that time, those renovations would need some rework due to wear and tear anyway.

So I've been happy just collecting her rent and not doing much on the house, letting that area continue to increase in value, and when I do finally renovate, I'll probably sell for a significant profit. 

That situation may or may not work for you, but it might be worth considering.

@Scott Schober, what area is this in? I own a fair amount of small multi-family in Tarrant and Parker counties.  The way rents have been lately, a rent of $770 on a 2-BR tells me either:

1) You're in a pretty rough area. (I just rented some newly renovated duplexes in a C-class area and had people lining up at $900/mo).

or

2) The units themselves need a lot of work.

or 

3) The units are fine, the area is OK, but the previous landlord hasn't raised rents to keep up with market.

Number 3 is ideal - you have immediate value add. Number 1 or 2 bring cautions of their own. Be sure you figure for renovation costs if the units are rough.

Good luck,

You're getting some good advice above. I have invoked similar things to @Colleen F.'s "happy clause" with a few tenants, and @Andrew B. is right that your tenants are full of [what he said.....I've gotten nastygrams from the mods for talking like a contractor too many times already, so I'll clean it up here].

But I really think the main issue is that you're trying too hard. These guys may be "professional tenants" or they may just be people who naturally take advantage of others. But when a tenant like that senses weakness and unclear boundaries in a landlord, that landlord will never get any peace.

I try to be a really responsive landlord. But we are also really clear about boundaries, and about what is an emergency, what's not an emergency, what's my responsibility and what's the tenant's responsibility. It doesn't always feel "nice" telling someone that no, that's not an emergency and you'll get to it in the next few days, but it does help establish clear boundaries. And it keeps you from fielding dozens more phone calls down the road that would occur when they feel like they can take advantage of you.

Good luck!

Oh, and @Scott Rogers is right. Drains and dryer vents don't connect. Do they have one of those steam dryers that has a water fitting and drains into the washer drain? If so, any leak in that system should be a tenant issue with their own dryer, not something you're responsible for. If you really have a drain running into the dryer vent, you need to get it corrected.

I'm not really a go-to-meetings guy, but the Propelio meetup and the Roddy Roundup (which they renamed a couple years ago, and I don't remember what it is now) are the best ones I've visited, and that friends who are more group-oriented like.

It doesn't look like you're a member of the DFW Real Estate Investment Facebook group. That's a very valuable place for local information, and often discussion of the various networking group meetings as well. There are several other good FB groups focused on DFW as well, but that's probably the best, most active, one.

I own a contracting firm with 12 in-house crews working 50 hours a week, 52 weeks a year, as well as a plumbing company. I deal with more permits and inspections in a month than most people will deal with in a lifetime. The idea that permits, licenses, and inspections make work better is simply laughable. What they mainly are is an industry protection scheme promoted originally by union plumbers and electricians and now continued by all the licensed trades to keep outsides from cutting into their profits.

First, most building inspectors are just about useless. They are typically guys who failed in the trades and decided they would go become an inspector. Can't tell you how many inspectors I know who "used to have" a plumbing business, electrical business, or whatever. I've never met an inspector - and I know dozens of them - that I'd trust to frame a new build, plumb a bathroom remodel, or wire a room addition. If they were any good, they'd make way more doing the work than inspecting the work. 

Second, there's no way they actually understand the entirety of the IRC, so they all develop their little picky things that they will call out on every visit. Most of these little picky things have nothing to do with overall quality. So contractors learn, "Oh, this is in Bill's zone. Be sure to add extra expanding foam in all the corners, but be sure to miss one so he can have something to point out to you. Then ask him about his fishing boat." Doesn't add a thing to the overall quality of your job. It's just part of playing along with the legal game.

Sure, they can recognize really terrible work and may save someone from that. But with REI groups, Angie's List, HomeAdvisor and all the other referral sources out there, the only reason you'd be hiring a terrible contractor is if you picked the absolutely lowest bidder without regard to references....don't do that.

As for licensed contractors, I have seen truly abysmal work performed by licensed contractors - not just tradesmen or journeyman, but guys with master's licenses in plumbing or electrical. They're good at passing a test. Maybe not so good at installing plumbing so it doesn't leak. Texas, where I live, doesn't have licensing for general contractors. We've had a huge construction boom here for years, even when the rest of the country was in the dumps. If we've had a rash of houses falling down due to lack of GC licensing, I've missed it. Meanwhile, some states feel they need to license painters. Your tax dollars at work, protecting homeowners from a bad paint job. (Not really, the licensed guys still often do crappy work.)

People say permits don't cost that much. That's simply not true. The cost of permits is not just what the city charges you. It's that you're then required to use a licensed electrician to do simple crap like move a vanity light, or install a can light. And that licensed electrician either reports to a master electrician, or uses an RME (Responsible Master Electrician) to pull the electrical permit, and that guy wants to get paid. So the light that your handyman could relocate for $50 now becomes 3-4x that. 

Want to install a new tub and plumb it? Any decent handyman can do that work in a day, probably at $50/hour or so. But pull a permit and now you have to have a licensed plumber, who's got a master plumber upline to pull plumbing permits, do the work at $150/hour. Except you still need your handyman, because God knows a plumber isn't going to actually install and caulk the surround on the tub. 

Permits kinda make sense for really large jobs, where contractors might be tempted to cut corners. They definitely don't make sense on the average bathroom or kitchen remodel, or other typical cosmetic work. 

Now all that said, would I trust a $40K job to a handyman? Probably not. But different people use that term in different ways. In our area, it means "a guy who does mediocre work in a bunch of different areas." But I hear in other areas, people actually use it with pride. So maybe your guy is one of those.

All that said, if you've had multiple reputable contractors - emphasis on reputable, make sure they're that - tell you they'd skip a permit on your job in that particular area, with that set of circumstances, I'd be a lot more likely to listen to them than a bunch of internet strangers (me included).

I have made a hell of a lot more money from investing in sketchy areas that were ripe for gentrification than I ever could have from cash flow alone. 

If you have some positive cash flow, and you're OK with holding onto the property for awhile, and you're able to invest in your local area so you avoid the concerns about out-of-area investing (and you're in freakin' San Diego! It's not like people are gonna quit wanting to live there!), then that seems like a much better investment than trying to invest in Omaha or someplace to get a slightly higher monthly cash flow.