All Forum Posts by: Troy Zsofka

Nice find. My father bought a hoarder house years ago at auction that no one else wanted to touch. The gentleman who had owned it prior collected everything and the yard was full, including more than 70 lawnmowers, over 120 bicycles (not kidding), and an interior that was almost as bad. He had worked at the town transfer station his whole life and brought home anything and everything he apparently thought had value. Took a skidsteer and 7 fills of a 40 yard construction container to clean it up. Once empty it was in decent condition and needed relatively little in rehab. Flipped it, and it got foreclosed on about a decade later, in much diminished condition. I picked it back up as an REO off the MLS in 2012, rehabbed it again, and now own it as a rental. It gets my attention when I see a house full of abandoned belongings. People can't seem to see though the mess, so I'm likely to pick it up for significantly less than otherwise, and emptying out costs relatively little.

@Eric Army

I've done the math on vacation rentals and they've never seemed to make sense to me. I think that if you could rent it out during more than one season it may be worthwhile, but the conversation that prompted me to do the math was in regards to having a house on an island off Maine called Vinalhaven that we visit frequently. I determined it to be one of the rare instances regarding real estate where I would prefer to rent than own.

In that situation, we could probably expect to rent a house out for the same amount each week that one might otherwise get per month if a typical 12-month lease (on an equivalent house, or a house that costs the same to purchase and rehab). Sounds great at first, but goes downhill from there. For example, if you rent it 12 weeks out of the year (just as a baseline for comparison), you're bringing in the same revenue as with a 12-month lease. However, with a year-round tenant, they pay the utilities, they take care of lawn, snow, trash, and cleaning, and they provide their own furnishings. With a vacation rental, you would have to pay for the landscaping, cleaning (every week between tenants), utilities, etc. AND you would encumber the additional expense (whether hired out or the opportunity cost of your own time) to find new lessees each week. Furthermore, if it's a summer rental, you'd have to winterize the house for the winter, which in my opinion is bad for houses (feeze/thaw expansion and contraction is bad for interior paint, wood floors, etc). If it's a winter rental, you'd have the additional expense of heating the place. Furthermore, not sure on this one, but I'm willing to bet that your insurance company is going to charge a higher premium for vacation rentals for both the casualty and liability portions.

All of this suggests that you would need to lease it for enough weeks out of the year to compensate, above what you could expect to make on a year-round rental of the same acquisition and rehab cost, for all of these additional expenditures. So unless it is a 2-season rental (something in the Lakes Region that is also near enough to ski-resorts to attract some winter renters), I think you'd be hard-pressed to make the cash flow equal a 12-month lease type of investment with the same cost to acquire and stabilize, let alone achieve the additional cash flow necessary for the hassle of a vacation rental to be worthwhile. Maybe a cabin in the White Mtns with no heating system, some sort of pump-type well, and a strict carry-in carry-out policy would yield greater ROI, but how much could something like that rent for?

It is my estimation that people who own vacation rentals are typically purchasing them for their own use and then renting them out alternatively to recapture some of the costs of ownership ("I rent it out several weeks per year and it pays the real estate taxes") and perhaps get some write-offs on repairs and improvements.

@Claudio Golia

As far as condos, take a close look at any that you consider. We own a single family home in an HOA called Eastman in Springfield/Grantham. It's beautiful. Private lake, golf course, hiking trails, cross-country skiing, restaurant, fitness club, you name it). Unfortunately, the monthly rent it brings in is maybe $50 more than it would be if it was outside the Eastman Community Association, but the HOA fees are over $3K per year. It's like paying real estate taxes twice. Needless to say, it destroys the cash flow. It literally brings the Operating Expense Ratio (with assumptions for Vac, Mgmt, R&M, and CapEx included) from a desirable 42.2% to a painful 69.47%. I'll sell it to you for 15% under FMV if you're interested...

Just my 2 cents on this chilly October morning.

@Renee R.-

Yes, that is exactly what I'm saying (do not look to collect any funds at all with the eviction).

The point is to get them out of your house so that you can lease it to someone better, rather than have them still living there while you wait for another hearing to argue in court over the amount of monies due

Also, you still have the security deposit to keep for October rent. If there are other monies owed, you can take them to small claims if you feel it is worth the trouble.

Right, I don't think it will too tough of a sell to the tenants if you put it that way. The question is how long it will take to capitalize your investment based on your savings. It would have to be 5 years or less for me.

@Doug N. - 

Perhaps you're right, but I would bet that pushing the heating costs on the tenants will result in a rent decrease that is less than the fuel savings; so you will get a net-positive gain. One reason for this is because having the tenants bear the cost of utilities will tend to lower those costs, due to what I call the "Buffet Rule" (as in Chinese food, not Warren). It states that tenants (and people in general) will consume more of something that they don't have to pay for. In other words, when the tenants pay the bill, they will shut their lights off and turn their thermostats down. Therefore, a tenant can absorb the utility costs without an equal reduction in rent without affecting their budget, because the utilities will cost less than they did when the landlord was paying.  

Besides, what @Sean OReilly is saying is that it will at least insulate him from volatile energy costs. I tentatively agree with that. Truth is, however, that increased heating fuel costs, even if borne by the tenants, will still affect the landlord to some extent. If the tenants' expenses go up dramatically, they will have a harder time paying rent. You may find that you need to drop rents a bit in order to retain the tenants, in which case you will effectively be subsidizing their fuel costs (because the underlying cause of the rent decrease was a fuel cost increase). 

A lot of moving parts here that make it difficult to execute a completely objective analysis. My take is that if you can do it relatively cost-effectively, and the increased NOI capitalizes that expense in a relatively short amount of time while also boosting the value noticeably (by holding CAP Rate constant), it's worth doing. The fact is that if it does one it will do the other. For example, if it increases cash flow enough to pay for itself over 5 years, and the market CAP is 10%, it will, by definition, increase the value of the property (from a strictly income approach appraisal perspective) by double the cost of the improvement. I would argue that it would then be worthwhile. Conversely, if it takes 10 years to pay for itself through the increased cash flow, then it will increase the value by the cost of the improvement only, and it probably isn't worth doing.

True that. So you just need to figure out the cost of doing so and add it to your renovation cost estimate. Then you still need to figure out what the rents will be with the heat on the tenants so you can properly calculate all of your pro-forma ratios upon stabilization.

NH has no Late Fee statute. However, I agree that it would be plausible for a judge to determine that the late fee is unreasonable even without a statute. I charge $50 across the board. My average rent is $1,153 so it's less than 5%. I want it to hurt enough to incentivize timely payment, but to be reasonable enough not to destroy my relationship with a tenant when I charge it. I also have had tenants who routinely pay rent a week late and include the $50. It reminds me of the people who run to H&R Block each year and pay hundreds to get their income tax return 3 weeks earlier. Both are fiscally irresponsible, but I'm happy to collect the extra $50 each month if that's the way they want to roll...

No idea @Sean OReilly. It has been our policy just to stay away from duplexes with common utilities (and we haven't invested in anything other than duplexes and SFRs). No incentive for the tenants to conserve. I do agree, however, that if you can remedy this, you could potentially add value to the property (lower expenses means higher NOI means higher value at same market CAP rate).

However, one thing to keep in mind: You can not expect to get the same rents once you transfer the utility expense to the tenants. You'll need to do some comp research to determine what the rents will become. For example, if transferring the utilities costs to the tenants saves you $10K/year, and the new arrangement calls for rents totaling $5K less per year, you have saved $5K. You then look at how much it costs to effect this change, and you can see how quickly your investment is capitalized (if it only costs $10K, you've recouped it after 2 years). You can also look at how it changes the value of the property overall (if, at the market CAP rates, it's effect on increasing NOI results in a value increase of $10K, then it's worth it in that regard as well).

Tough thing is, you'll probably be doing other renovations as well to increase rents, and/or existing rents may be low already when you purchase it; so you'll have to try to tease out the effects on rents from just the utilities transfer (and they will be lower than with the utilities included). You should be able to do this by finding good comps in the area with and without heat included. Given where you're looking to buy, however, you may have difficulty finding enough comps to determine this confidently.

Another simpler option that I know a lot of landlords employ is putting a max setting on the thermostats. Of course, that isn't very exiting is it?

@Ann Bellamy is correct on not going after any arrearages during the eviction process. This means leaving the Statement of Claim blank, and this strategy was explained to me by a NH eviction attorney, and was hinted at by a NH judge.

Reason being: It gives them something to appeal. They can bring in all sorts of arguments regarding the amount owed, and then another hearing will be scheduled to sort out the disagreement. Meanwhile, you don't have possession of the home. So, the best way to handle it is to keep the eviction clean and simple (no statement of claim), get them out so you can replace them with a good tenant, and then go after the arrearages in small claims court. Yes, it will be difficult to find them to take them to small claims (it's your job to locate them to be served by the Sheriff), but your chances of actually being paid the arrearages are slim even if the judgement from the eviction hearing finds that they are due. Even in that case, if (rather when) they do not pay, you will have to locate them for the Sheriff to serve them to go back to court. Just because they violated a court order does not mean that the authorities are going to make any effort to enforce - and in our experience, they don't. Furthermore, in our experience, you can take them back to court multiple times and you'll end up getting $5 per week, which they then won't pay, and you'll finally end up realizing that it isn't worth it. Best thing to do is evict immediately upon non-payment, keep their security deposit to cover most of the losses, swallow your pride and eat the rest. The opportunity cost is simply too great to try to get blood from a stone. The difficult part is not letting your soft side give them the benefit of the doubt and allow them to get too far behind in the first place. 

On Thursday Oct 29th there is a NH eviction seminar in Manchester. I attended it a while back, and I learned enough that it was worth the $149. Search for J. Durante Education Services LLC and you'll find it.

Good luck

@Renee R.,

The lease is really the best place to set the stage for these sorts of things.

I found out, from a Judge during an eviction hearing, that you can not include the late fee on the Demand for Rent, unless the lease clearly states that all fees become part of rent once incurred. Now, of course, my lease states that. My lease also states that I may accept partial payments without cancelling the eviction, and I add that to the eviction notice as well. I have heard that this will hold up in court, but I have not yet been in the situation to find out for myself. Like @Ann Bellamy mentioned, my lease also specifies that all payments will be applied to outstanding fees before being applied to back or current rents.

What I am unclear on, and I would greatly appreciate input from others, is whether or not I can simply send updated lease verbiage to tenants whose leases have expired (and are therefore month-to-month), without getting their signatures, or if I have to take the time to approach each of them individually and get them to actually sign the new lease. I am adding things to my lease relatively often (a couple of times per year at this point), so it would be nice to just "inform" my tenants of the changes rather than to get their signatures. The real estate attorney I use for title and closings advised that I need signatures, but I'm not convinced.