All Forum Posts by: Troy Zsofka

@Eric Monkewicz -

@Clifford Paul offers solid advice that it is better to charge something non-refundable. However, in NH it would be wiser to add to the monthly rent rather than charge an upfront fee.

@Matt Lefebvre is correct that the security deposit may not exceed 1 month's rent.

But can you charge a pet deposit if you have your heart set on it? Sure, you can charge a pet deposit. You can also charge a mailbox deposit, an appliance deposit, heck you can even charge a lightbulb deposit if it floats your boat. Charge as many as you like; just make sure that they don't total more than 1 month's rent. However, it's most practical to charge 1 month's rent as security without limiting it by specifying what it covers. It can be used to offset any debts owed to landlord by tenant stemming from the tenancy. There is no advantage whatsoever to earmarking a security deposit.

For pets, we charge $25/month per pet. We increase the rent by that amount from lease commencement. We do not call it pet rent, and we do not remove it if the pet dies, moves out, or subsequently becomes a service animal or emotional support animal. We explain that it does not cover damages caused by the pet, and that the security deposit will be withheld for such damages. For example, if the rent is $1,275 and they have a dog and a cat, we explain that we will rent to them and accept their pets at a rental rate of $1,325. Keeps it simple down the line. 

We do not allow cats that have not been fixed, and we do not allow cats that go outdoors in the more populated areas where fleas may exist, because it is our understanding that NH makes it extremely difficult to charge a tenant for insect infestations that they caused, even though our lease states that they will be responsible for the expense of remediation of any infestations that occur during their tenancy.

We require the following for dogs:

1) No dogs under 1 year old. (There are very few things in this world that I like more than puppies, but they tend to eat houses.)

2) All dogs under 3 years old must get a certificate of completion for basic obedience training (puppy school) within 6 months of move-in. (The kind of person who is going to raise the kind of dog that you want living in your property is not going to have a problem with this).

3) Tenant must carry $500K coverage per occurrence for the liability portion of their renters insurance, and must name landlord as "additional insured". (Tenants without dogs carry $300K liability coverage. The difference in annual premium is negligible.)

4) Tenant may not obtain additional pets without the approval and written consent of landlord. (Naturally, if they obtain additional pets of which we approve, rent goes up another $25).

This has worked well for us, and the additional rent that we collect from the $25/pet amounts to several thousand dollars per year.

Oh yeah, by the way: The above is not legal advice and you should seek the advice of a local attorney. The information provided is merely the opinion of a non-attorney and should not be relied upon to make any decisions.

Happy investing,

Troy

@Nate Wilson - 

A few observations about your numbers; especially with regard to your description of the property being "kind of in the ghetto" (I think "D location" when I read that):

-W/S: This seems low for a 7-unit. Are the tenants in some units paying their own? Does the city bill them directly or do you have to back-bill?

-Electric & Heat: These numbers are identical? Seems odd so thought it might be a typo.

-Vacancy: A small multi in a D location is going to have more turnover than just about every other residential asset there is. While they may rent easily, you have to consider the time between tenants. I would consider running my numbers at higher than 5% to account for this, or at least do some more digging: talk to owners of other properties in the neighborhood, review ACTUALS rather than pro forma estimates if you haven't already (more on that later). By the way, turnover cost is going to be a recurring theme in my comments.

-Credit Loss: You don't have this in your list, but you should. This type of property is going to experience some tenants who don't pay rent, and you are going to have the financial equivalent of a vacancy while you evict them. A small multi in a D location is going to have more Credit Loss than just about every other residential asset there is. Whatever amount of rent goes unpaid from when they stop paying until you get a Writ of Possession and have them removed, is Credit Loss (don't foolishly think there is any chance whatsoever of recovering it from them). The time that goes by before you have a new tenant in place, is Vacancy. The money you spend while vacant and fixing the damages they did before the Sheriff locked them out is Repairs & Maintenance. If it's in a D neighborhood, you're going to have more of all of these.

R&M: Again, in a D location, you can expect more than $45/month in average repairs. If not, that's great, but assume the worst when underwriting, and double your current figure at least. Also remember that Vacancy will be exacerbated by the degree to which R&M is an issue caused by tenant quality. The more repairs are needed between tenants, the longer the vacancy drags out. And yes, to be through and consistent, it is my opinion that a small multi in a D location is going to have more R&M than just about every other residential asset there is.

CapEx: Capital Expenditures are big ticket items that degrade over time (roof, heating systems, etc). They are generally not caused by tenant quality issues; however, items such as flooring and appliance replacement certainly can be. 10% seems high, but I don't know the condition or age of the building system components, and hey, at least the pro forma assumes worst-case on this line item. Okay, the "small multi in a D location having more X" thing doesn't necessarily apply here, but don't expect major capital improvements to boost value (and/or rents) as much as would be the case in a better location.

Management: 7%, really? Keep in mind that higher turnover not only means higher Vacancy and Repairs, but it also means Leasing Fees (for a 7-unit, each vacancy resulting in a 1-month leasing fee is equivalent to 1.2% of GSI). If you have a management company that is going to charge you 7% of collected rents, and no leasing fees, I can't decide whether you should jump for joy, or run for the hills because it's too good to be true. Personally, if I were to buy a property like this, where tenant quality is going to make it or break it, I would want quality management in place, and I would be willing to pay for it. In fact, I would try to negotiate a turnover disincentive (for example, they get bonuses based on lease renewals, rather than getting paid more every time someone gets replaced).

As you can see, almost every item above is affected by the fact that your property is "kind of in the ghetto". Usually, D location properties look great on paper but the higher vacancy, credit loss, and repairs keep reality well below pro forma. Furthermore, do you expect value and rent appreciation in this neighborhood?

As far as your question about the money that builds up from Repairs, Vacancy, and Capital Expenditures, it is normal to hold onto the CapEx (that's why it is also called Replacement Reserves). The Vacancy and R&M figures are for underwriting purposes. However, until you have enough in your reserve account to handle a large capital expenditure that might be looming, keep feeding that account. Ask yourself how long the roof has left, the heating systems, etc. I think your $25-30K is probably more than safe.

Another thing to note: Take your mortgage payment out of your expenses. It's not an expense, it's debt service having to do with your financing situation, and it has absolutely nothing to do with the performance of the asset. Taking it out will also allow you to more easily calculate Cap Rate and DSCR.

The Cap Rate on this property (using your numbers), is 8.07%. An 8-Cap in a D location needing renovation of a couple units? I think it's overpriced if the neighborhood is truly how you describe it. I also don't think it's even an 8-Cap because the expense assumptions are too low. Hitting it with a 60% OER gives a Cap Rate of 6.4%. In reality it should be even lower because Vacancy & Credit Loss are NOT Operating Expenses. They come out of Gross Scheduled Income to derive Gross Operating Income. Sure, some would argue that since you have the utilities split off, 60% OER is way too high, but that really all depends on how the tenant quality affects R&M. Let's try this (and I think this is generous): 10% Vacancy and Credit Loss; 50% OER: Cap Rate = 7.25%; CoC = 7.87%. Do these numbers justify a "ghetto" 7-unit that may not appreciate over time but is likley to be a PITA to own?

Of course, all of this is conjecture without knowing what the numbers really are. Have you seen a T-12, or just a pro-forma? Have you told the seller that you intend to see the applicable schedules of his tax returns (K-1 or Sch E) as part of the contract contingency? Did your spreadsheet originate from numbers provided by the listing agent, the seller, or your own due diligence?

A bit of a disclaimer: my experience is limited to direct ownership of SFR, as well as analysis, underwriting, and LP investment in large multi and other CRE asset classes. I have never owned a 5, 7, 10, or 16 unit property because, in case you didn't guess it already, I believe that a small multi in a D location is going to have the most risk and least upside than just about every other residential asset there is.

Please make sure to dig into the ACTUAL numbers before you make any investment decisions. If the seller is unwilling to provide them, walk away.

Good luck and happy investing,

Troy 

Hello @Madeline Lamour

Here's a breakdown of what to expect in NH:

-Commissions: Buyer's agent receives a portion (typically half but not always) of listing agent's commission paid by the seller. Of course, if you are buying an off-market or FSBO, there will be no listing commission to split; so if you have buyer's representation, their commission will be on you.

-NH State Transfer Tax Stamps: $15/thousand of purchase price, split 50/50 between buyer and seller (unless agreed otherwise); so typically 0.75% of the purchase price paid by the buyer.

-Settlement Fee: $595-795 depending which title company you hire to close the transaction

-Owner's Title Insurance Policy: Roughly 0.2-0.3% of the purchase price

-Recording Fees and other Misc: Another couple hundred dollars

Fees that will only be present if you are using a mortgage to purchase the property:

-Origination Fee: Varies and is typically represented as a percentage of the loan amount

-Lender's title insurance: Another roughly 0.2% of the loan amount

-Appraisal: $500-650

-Misc Junk Fees: Processing, credit report, flood cert, etc etc etc: A few hundred to a thousand dollars depending on the mortgage company

Costs that are not fees but still need to be settled at closing:

-Prepaid interest (if there's a mortgage)

-First year insurance premium

-Impounds to set up tax and insurance escrow accounts (if there's a mortgage that escrows T&I): A few month's worth of each

-Prorated taxes, water, sewer

-Heating fuel remaining in tanks

Welcome to New Hampshire, and happy investing,

Troy

Hi @Ann Bellamy - 

I had always thought that NH municipalities generally don't allow for water to be billed to anyone other than the property owner.

Apparently I am incorrect? Do you find that it varies by town/city?

It would be nice to be able to shift this expense to tenants since water/sewer on a single family can easily run north of $1k/year, and letting them pay for their usage would incent them to conserve.

Thanks,

Troy

@Richard Lovering - 

There are a few things to consider in this situation.

First, while well-intentioned, opinions from investors outside NH can be inaccurate and misleading; as different states have different L/T laws and leanings. NH is a relatively landlord-friendly state compared to many others. While @Marcia Maynard gives solid advice, WA has a reputation for being super tenant-friendly; whereas my experience in NH is that our courts are less inclined to tell landlords what they can and can't do with their own property, so long as the proper procedures are followed precisely and the landlord adheres fully to all applicable statutes.

If the tenants are in a lease term, they can not be evicted for cause not stemming from violation of lease provisions, nor should they be; as they entered into that lease in good faith that they would have a place to live at least until the expiration of the term. If they have violated any of the provisions of the lease, that is a different story. However, your desire to renovate, or the current owner's desire to sell the property, does not supersede the tenants' rights under the lease agreement, and you inherit the terms of that lease when you buy the property.

If the lease does not include the use of the basement and the garage, the owner (or you after you close) can petition the tenants to remove all of their belongings from those areas, but the tenant would presumably have the right to comply and thereby not compromise their continued rights to the first floor (basically, a lease violation that is curable, if cured, is no longer grounds for eviction). Furthermore, it can get a bit wonky if the lease does not specify as to the garage and basement one way or the other, and their use of these areas has been tolerated for some period of time. Seems to me from your representation that these tenants may be the type of people who will take whatever they can, then deem themselves entitled to it, and then be rather unwilling to let it go once they become accustomed to having it. Good luck with that if such is the case. Deal with it objectively, professionally, and firmly to the point.

Also, if they are in a lease term that does not include a non-smoking provision, you can not demand that they stop smoking until the term of the current lease agreement expires. While doing so might seem at first glance as a reasonable compromise, it isn't. Once in place, contracts are not negotiable, nor should they be (as I will revisit in a bit).

On the other hand, if the tenants are month-to-month (or once their current lease term expires), a 30-day notice can be issued to terminate the lease, and the sale of the property requiring the unit to be vacant (if done by the current owner), or the desire to renovate (if done by you), should suffice as reasonable cause to terminate (this is one area where some other states may differ substantially from NH). However, this does not mean that they will be out in 30 days. What it does mean is that, if the notice is properly issued, and they do not comply by the expiry date of the notice, you can then commence the eviction process; which will take about 6-8 weeks assuming you execute it perfectly and the judge doesn't decide to grant something called a "discretionary stay" (their way of being the nice guy at your expense). Make sure that you issue your notice with an expiry date corresponding to their rent due date. Many landlords don't know this, but (at least in NH), if you terminate in the middle of a payment period (say on the 20th if rent is due on the first), the tenant is not responsible to pay for that partial month. Same goes the other way - if a tenant issues a notice to vacate that takes effect on the 10th, and their rent is due on the 1st, they are responsible for the entire month.

Another thing to consider here is your desire to change the terms of your purchase agreement by requiring the unit to be vacant (this is similar to the idea that you should be able to renegotiate the terms of the current lease agreement and require the tenants to stop smoking). While I have no doubt that your intentions are sound, you have to look at this from the perspective of the seller. He or she entered into an exclusive sales contract with you (and removed the property from the market) based on a set of terms that presumably did not, at the time, include the first floor unit being vacant prior to transfer of title. To use the inspection to add new contingencies to the contract that are unrelated to the inspection, is not really on the up and up. Again, I have no doubt that your intentions are above board, but you should recognize that this decision should have been made before the seller tied up the property under contract with you in good faith that the agreement would be honored, and I would suggest that the risks of your understandable oversight should be borne by you, and not by the seller through a renegotiation of terms this far into the process. In other words, your opportunity to require that the 1st floor apartment be vacant prior to closing has passed, pure and simple. Sure, you can always try to renegotiate the terms of any contract, but you have to ask yourself if that is the reputation that you want to create for yourself moving forward. If I were the seller, and you brought this up this far into the process (after I had granted an inspection extension on good faith that you would honor our agreement), I would give you the option to close according to the agreed upon terms, or forfeit your earnest money. I always honor my contractual obligations (even if I've made an oversight that I regret), and I expect the same from the other party to the transaction.

I'm not trying to be a jerk; just offering my perspective of how this looks to an outside party. I also don't believe that you are attempting to get one by on the seller, just maybe a bit new to how contractual agreements are supposed to work between parties acting in good faith. Now, if your agreement was contingent upon your satisfactory review of all current leases, and that contingency has not yet expired, that becomes a different story (still pushing it if all of the leases are the same but you only want one tenant removed, but at least better than using the inspection contingency to add this stipulation). Also, if something significant is revealed during the inspection, and you want to trade remedying that issue for a vacant first floor, that could be an option, but the issue should be material and not exaggerated, and the seller should have the option to remedy the inspection issue instead of making the trade.

Lastly, and somewhat unrelated, you should always require that any security deposits, and interest accrued on such deposits, be passed on to you at closing. Even better, have the interest accrued be paid to the tenants prior to closing (with documented acceptance by the tenants, of course) so you can then start from a clean slate with depositing the security and tracking interest. If a tenant is displeased with your actions after the property is sold, this is one avenue they can use against you if it was not handled property, and the damages awarded for improperly adhering to the security deposit statutes can be costly. I only bring this up because it seems inferable from your post that the first floor unit is, in fact, under a lease term, and you will therefore likely have to deal with removing these tenants yourself once that lease expires. You don't want to give them anything to get you on if they decide to try.

Happy investing,

Troy

The above is not legal advice and you should seek the advice of a local attorney. The information provided is merely the opinion of a non-attorney and should not be relied upon to make any decisions.

@Ann Bellamy is correct.

@Rick M. - while NH may not have a statute specifically addressing pet deposits, the security deposit statute is clear that only 1 month security can be held.

In other words, according to my understanding, you can charge a pet deposit, you can hold last month's rent, you can even hold a deposit for window curtain replacement if you like. Charge as many deposits as you want, and call them whatever you like, so long as they don't total more than 1 month rent.

Personally, I hold 1 month security and charge additional rent for pets.

I know that a lot of landlords take security and last month. They are breaking the law.

Just my opinion; I'm not an attorney.

I highly recommend Buildium, but it's much more than electronic rent collection.

The syndicated listings is super helpful. Once I have the description and pictures in the system, I can list the property in a couple mouse clicks and it goes to pretty much every rental site there is. Still have to do craigslist manually though :(

Buildium also replaces Quickbooks with a very decent bookkeeping system and fairly robust reporting capabilities.

As far as the rent collection, the tenants can set it up be a one-time payment or to recur monthly, weekly, bi-weekly, etc. They can also pay rent with a credit card. The EFT from bank account is $0.50 per transaction, the credit card is 2.75%. You can set it up that the tenants pay the fee, or that you do. I have it set so that I pay the 50 cents if they use a bank account, but they pay the 2.75% if they use a credit card.

The further beauty of it is that once they make the payment, their lease ledger is credited, and the transaction hits your bank account ledger and P&L (DR cash, CR rental income). You literally don't have to do anything in regards to processing rent payments, but you can see any tenants that haven't paid.

If they don't pay on time (according to the parameters that you set), the late fee gets charged to their account automatically and a rent reminder and late fee notice email goes out to them. You can customize this email however you want, and you can set up another email a certain number of days past-due that will inform them that demand for rent and eviction notices are going to be generated. Once set up, these emails all happen automatically. There's all kinds of versatility in automatic correspondence. I have it set up so that an account statement goes out via email 5 days before rent is due so they get a reminder (why anyone should need a reminder that their rent is coming due is beyond me, but...)

There are all kinds of other features as well. Some of them are additional cost such as electronic leases, mobile inspections, etc. I personally don't use those. I like to go over each provision of the lease with the new tenant, in person, and we only manage properties we own so we don't need the inspection reports.

As a whole, Buildium makes my life a lot easier and I think it's worth every penny.

One more thing I forgot.

We get most of our inquiries via email. I send the following reply to each one, and the ball's in their court to call. This eliminates probably half of the people who showed interest through craigslist, apartments.com, zillow, hotpads, etc.

Hi,

We start the process with a phone conversation to go over details about the rental, answer any questions that you may have, and do a quick prequalification to make sure it’s a good fit before setting up a showing.

Please call at your convenience.

Best regards,

Troy

The way I look at it is if that email scares them off, they likely have qualification issues; or, if they're not interested or committed enough to want to make that phone call and go through the process, I don't want to waste my time on them.

@Jeremy G. - 

I agree that your rents are likely too low.

My properties are single family homes, most in smaller towns than the Manchester suburbs, and our average rent is about $1,250/month. One advantage that I have in the smaller towns is the lack of quality single family rentals available, and I have been finding that my rents are increasing substantially when I have turnover, which isn't very often (average tenancy is over 4 years).

When I have a vacancy, I have very little difficulty filling it with quality tenants, but I don't get as many calls as you are reporting.

I take a look at what else is on the market and price mine towards the higher end because my properties are in much better condition and have nicer finishings than my competition. I disregard those few properties that are priced astronomically high because the landlord lives in la la land, and I make sure that my rent is justified based on what the home has to offer. I want it to be the best value on the market so I can get the best tenant quickly, but I don't want to price it any lower than necessary to achieve that. 

I then set up showings, back to back, 20 minutes apart, on the same day. Before I add someone to the schedule, I prequalify them over the phone, including telling them all of the things that might turn them off (snow removal and lawn care on them, renter's insurance requirement, pet policy, no fridge or washer/dryer provided, etc), and then I ask them to email me the day of the showing to confirm that they'll be there. If they don't email me, I don't show up. If I'm there anyway showing it to other prospective tenants and they come, I'll let them take a look at the property, but I am highly unlikely to rent to them since they've shown that they didn't follow through on a simple thing that they agreed to do. 

The over-the-phone prequal is a huge time-saver. If I determine that they don't meet the 3.5 times rent in gross income, or they've been evicted, or if they can't see themselves renting a place where they have to shovel their own steps, or they aren't willing to provide a fridge, or if they simply refuse to answer my questions, we're done in 10 minutes over the phone and both parties save the time of doing a showing.

In theory, I like the idea of open-house group showings. Much less time-consuming, and you can just relax in the kitchen and answer any questions people have. However, can't do that if the place is currently occupied by a tenant who is moving; as we have an ethical responsibility to accompany everyone through the house to look after our tenants' belongings. Also, individual showings allow us to get a better feel for the people based on their behavior and comments.

@Mary M. - 

NH does not have a law like Oregon where we have to rent to the first qualified applicant, as far as I am aware.

However, if we did, or if I invested in Oregon, I would absolutely do open-house group showings and ask people to drop their applications into a box if interested; so that I could choose the applicant with the strongest qualifications, since I received all of the applications at the same time. 

I think that law is ridiculous. I get that it was implemented to protect people from discrimination, but it's a huge overreach. It's basically saying that you, as a landlord, are presumed to have a high propensity towards discrimination, so we're going to enact legislation that removes your ability to choose the tenant so that you are no longer even able to discriminate, whether you would have or not.

For example, I get 3 applications that have similar income, job history, rental history, and credit.

Person A had dirty clothes on, a passenger seat littered with McDonald's wrappers, didn't take their shoes off until asked to do so, had grime under their finger nails, etc.

Person B was a loud mouth type A personality who started telling me how things were going to be.

Person C was clean and respectful and asked if it would be alright if they created a mulch bed with plants and flowers in front of the deck.

If Person A or Person B sees the house first, and they meet my written objective qualification parameters, I, by law, have to rent to a slob who may trash my house, or a jerk who may cause arguments, disturb neighbors, or make my life difficult in any number of other ways? And I don't get to rent to the person who is going to take pride of ownership in the property, improve the landscaping, take care of my asset, and stay for a long time?

That's BS legislation. We should be able to choose whomever we want, for any reason we determine, so long as it's not for a reason that is considered to be discriminatory under the law towards a protected class. Slobs and jerks are not protected classes, and I should be able to make the subjective decision not to rent to someone whom I believe to be such.

Okay, done ranting, but terrible legislative overreach.

Hi @Liz Murphy

@Tucker McCarthy took the words out of my mouth (keyboard, whatever...).

The only other thing you'll need to do is request a Federal EIN; also simple.

I don't see why having it in an LLC would help, but I'm not an atty. Definitely something to ask your atty to see if he has a cohesive answer. If he doesn't, I would start to become concerned about why this simple possession case is taking so long (3 months for an eviction case with no clear end in sight is long in NH in my experience, unless the plaintiff messed up something procedurally). Perhaps it's because the former owner wasn't a tenant so it's more complex than a simple non-payment of rent issue? Or, perhaps it's because attorneys like to drag things out because they stop getting paid when the case comes to conclusion...

Good luck