Rentec Direct - Property Management Software

I have numerous friends and family in the area that I regularly have property management conversations with.  The most popular recurring topics are usually around how long X property has been vacant, or how bad X person’s last tenant was.  The bad stories are always far more fun to tell, or at least more entertaining to listen to, it seems.  It got me thinking though, I rarely have bad tenant stories to talk about, and I never have vacancies longer than a couple weeks.  As such, my fellow landlord’s stories are always far more interesting than mine.  My friends and family always ask how I get so lucky.  Somehow I’m not entirely sure luck has much, if anything, to do with it.  After speaking with fellow landlords, and some of our rental software users I’ve come to the conclusion that the following listings and policies can account for most renter and vacancy issues.

It starts with the listing.  Do your listings set expectations appropriately?  

For instance, if your listing states that you do tenant screening, this immediately weeds out most prospects who know they won’t pass a background check.  Conversely, if there is no mention of screening required everyone who cannot get approved elsewhere is going to apply for your property, only to use your time and energy to ultimately be rejected when you do the background check.

Do you charge an application fee?  Almost every state allows it and it is common practice as it pays for your screening expenses.  If you do, mention the application fee on the listing.  This will weed out all the applicants that can’t afford a small application fee.

Eliminating unqualified tenants at this step saves you the maximum amount of time and money.  Instead of showing the property to unqualified applicants, you can focus on fewer more qualified applicants.

On to the application.  Do you let your applicants cheat?

Whether you do online applications or paper applications, the application should be thorough and ask lots of pertinent questions.  The most basic of questions should include full contact information, SSN (if allowed), birth date, employer, at least 2 most recent landlords, previous rental details, emergency contacts, employment information, and common questions about criminal felonies and bankruptcies.  All this information should also be collected for any additional adults that will be in the home.  A prospective tenant not willing to fill out an application entirely is not a serious renter and grounds for disqualifying the applicant.  Also, if any answers do not match what you pull on the background reports, that is an instant red flag.

Don’t be a pushover.

Do you get phone fishers calling asking about your properties, only to ask before they’ve even seen the property if you will take a lesser amount?  The correct answer to that question any time before an application is returned and the property has been displayed, is always “NO”.  Considering a rent concessions before you’ve met the people and before they’ve seen the property tells the tenant you don’t have much confidence in the property.  This leads to “can I pay rent late again this month”, and “I was really hoping it would be OK if my 12 cousins from out of town could stay just a couple more months..”.   

If however, after you’ve met the tenants, if they have already passed your qualifications and need a concession to close the deal, that is the time to make a concession.

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Nathan is a member of Rentec Direct who provides property management software, tenant ach payment processing, and tenant screening for property managers and landlords nationwide.

This topic applies to every property manager in the room, private landlords, and brokers who manage properties.  It's a serious step taken by Uncle Sam to increase regulations and requirements on an industry which is already FAR too regulated and taxed.  I for one am not excited about even more paperwork to run my simple property management business.  I encourage any affected to call, write, or email your local representative and ask for their support in repealing this unnecessary law.  There are many organizations out there, such as NARPM, which are already taking the fight to congress and could use help.

There are two separate 1099 issues that should be repealed

1. New 1099 requirements going into effect in 2011 for any person who receives rental income
2. Expansion of 1099 requirements going into effect in 2012 for all businesses who make payments of $600 or more to any payee

2011 Change for Landlords
Earlier this year Congress passed H.R.5297 which expanded reporting requirements for owners receiving rental income beginning in 2011. Specifically, Section 2101 establishes that, “a person receiving rental income from real estate shall be considered to be engaged in a trade or business of renting property.” This change will now require any person who receives rental income to file a Form 1099 for payments of $600 or more in a given year for each service provider. The new requirement does not include purchases of goods. Prior to this legislation, only real estate professionals such as those working in property management were considered to be in the “trade or business of renting property,” and thus required to file 1099 forms with the IRS for these types of payments.

Exemptions were included in the legislation for military/intelligence personnel, those whose rental income is no more than a “minimal amount”, and for those who would experience a “hardship”. The second two exceptions have yet to be properly defined by the IRS.

Reasons to Repeal this Provision:

1. Creates an unnecessary paperwork burden for homeowners
2. Increases the paperwork that service providers must now handle
3. Further complicates the Federal tax system which will inevitably lead to reporting mistakes and subsequent fines on homeowners who are already struggling with a difficult economy

2012 Change for Property Managers
Earlier this year Congress passed H.R.3590 which is a health care bill that has nothing to do with property managers and business, other than the fact that they sneaked in requirements for small businesses.  This bill expanded reporting requirements for all businesses beginning in 2012. Specifically, it requires the filing of Form 1099 for any business (including independent contractors and those who are self-employed) that makes a payment of $600 or more in a given year to any payee for goods and services. A separate Form 1099 will need to be filed for each payee. Payments to tax-exempt organizations are not included in this new requirement.

There have been several attempts to repeal this 1099 requirement but so far none have been successful. It’s unclear if there will be any further repeal attempts before the end of 2010. Click here for more information from Bloomberg Businessweek on recent repeal attempts.

Reasons to Repeal this Provision:

1. Creates an unnecessary paperwork burden for property managers
2. Increases the paperwork that goods and service providers must now handle
3. Will force small businesses and independent contractors to spend a large percentage of time and money simply to track payment amounts and submit 1099 requests
4. Further complicates the Federal tax system which will inevitably lead to reporting mistakes and subsequent fines on small business owners who are already struggling with a difficult economy
5. The housing industry is going through a difficult period, this is not the time to modify tax reporting requirements and further exacerbate the situation

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The author is a founding member of Rentec Direct, an property managers, and a business owner.  Rentec Direct provides property management software which includes ach for landlords, tenant screening, and online documentation and file storage.

Given the current fragile state of the economy I participate in a lot of conversations about "what if".  What if the economy collapses?   What if it turns around and begins it's path upward?  So then for us landlords and property investors is it best to have our properties paid off free and clear, or should we have them mortgaged to the hilt? 

The answer really depends on what is going to happen with the US Dollar.  If you take a look at the last few years, obviously the USD has not fared well.  The USD is no longer money and hasn't been for a long time, it's currency backed by nothing.  The same goes for the world currency.  History has proven over and over that fiat currency has a 100% failure rate.  It typically fails in the form of moderate inflation, followed by hyper-inflation, until the currently is completely worthless.

In Zimbabwe for instance their fiat currency just recently inflated well over 200 MILLION percent.  Can you imagine it costing trillions of dollars to buy a loaf of bread?  This example has repeated itself with many countries throughout history who adopted a fiat currency.  This is the fate of every fiat currency in the world, including the USD.  The only question remains is: when?

When that day comes, be it next year, or 10 years from now, will it be best to have all your debts paid off or have a ton owing?  I'm really open to AR members ideas here.

My own opinion is it's going to be best to have everything leveraged.  If moderate inflation continues, as each year passes you literally owe less on your properties.  A $200,000 loan today will be like a $100,000 loan in 5 years if inflation presses on.  If (or when) the USD goes into hyperinflation, a $200,000 loan will cost a mere couple cents to pay off in the future.

However the flip side to the coin.  What if the USD started deflating?  The exact opposite would happen.  It would be much harder to pay off a loan because we would be earning less.  Rents would go down along with other commodities.  This would be very bad, and likely the best place to be in this situation is in a free and clear position with properties.

So how likely is deflation to occur?  There might be momentary blips; however, the entire arc of power in DC and Wall Street do not want deflation to occur.  It's bad for government and it's bad for banks.  Since the government and the banks have complete control over money supply, and therefore complete control over inflation/deflation it seems unlikely. 

Inflation on the other hand seems extremely likely.  Each dollar the Fed prints, and each new loan creates more fiat currency.  Every dollar printed (or in reality, created from thin air), slightly devalues all existing dollars.  Since the government is running a huge deficit (the largest in history) now in the trillions, they have to print money faster than they are spending it to remain in business.  So they are creating money faster than ever before and inflation will adjust to compensate with some of the highest inflation we've ever seen in the USD.

I'm not a betting man necessarily; however, if I had to place wagers I would certainly go with the odds.  What would you do?

--- about the author ---

Nathan is a landlord and property investor who founded Rentec Direct which provides free software for landlords.  Because of the importance of thorough screening for prospective tenants, we have integrated tenant screening directly into the software so in just a few clicks a complete and comprehensive background check including previous evictions can be done on any new tenants.

If you've been a landlord, or broker managing someone's properties, for any amount of time one of these stories might sound familiar to you.  A common myth landlords often have is that general repairs are going to be their biggest expense with a property, aside from the obvious tax+mortgage payments.  That is very very wrong.  The largest expense for most landlords is actually what they typically consider their biggest asset, their tenants!  Not all tenants, but based on some of the info I'll elaborate on below, a single bad tenant can turn a property that's been wildly profitable for 10 years into a loss really quick.

The tales range from losing a single month's rent to losing a year's worth of rent, or more.  Read the comments below and conclude for yourself.  Then keep reading to determine how to avoid these catastrophes with your own properties.

Tenant Protection Laws
"The absolute worst experience we ever had was two college students referred to us by my husband's uncle. They trashed the place, stopped paying rent after the first two months and were really, really difficult to evict because it was winter, and at that time the state had laws protecting tenants from being pitched out into the cold. The final insult, of course, was that when they did sneak away in the dark of night, they turned off the heat but not the water -- so we had frozen pipes to deal with on top of the garbage and filth."

Never ever again..
"My boss has a rental that I got put in charge of, and I will never do that again! It was an older couple with their 20-something-year-old daughter, and they lived in filth. They had two dogs, one cat and a chicken that all lived in the house. I guess the animals didn't like to go outside, so by the time they finally moved out there were mountains of dog, cat and chicken poop in the house. We ended up having to go to court to get them out and then go to court again to get two months of rent and more of a deposit."

Drug use and damages
"We had druggies (highly recommended by family/friends in our church!) who glued pennies to the walls, stuffed Cheetos into the shutters, stapled small pieces of cardboard to the inside window facings, disassembled the outdoor flower bed and brought all the bricks inside the house, poured water into the floor furnace, causing it to rust out (we have a 1928 home in Tulsa, Okla., which was beautiful), used the drapery for cleaning rags, used wood staples to anchor a large, outdoor inflatable toy inside the living room and left their drug paraphernalia in the closet when they moved. We've spent thousands in cleaning and replacement costs."

Smoke damage and dead yard
"Rented to a well-to-do couple with a 2-year-old, solid references (so we thought), and we paid a rental agency to monitor the property and collect the rent. These people paid on time. However, they had a kitchen fire due to the stove being so filthy, thousands of dollars in smoke and fire damage, completely melted the door off the microwave, wouldn't set up the sprinkler-system timers to water automatically, so the entire yard died, completely tore out shrubs and cracked the upstairs master-bath sink washing a bowling ball. They didn't have a diaper pail, so they just tossed the wet diapers (from second child born while in the home) in a corner on the carpet of the baby's room (gag), took every window covering and tore out the alarm system contacts on all the windows. My favorite one: They drove their car through the wall in the garage into the downstairs guest bathroom. All toilets in all three bathrooms had to be replaced because they were stained black. Never could figure that one out."

Drug manufacturing
"I had rented to a mother and two boys (ages 3 and 7) who were supplied to me by the Department of Social Services. They were on a plan (two-year max) to help down-and-out single moms/dads get on their feet. I thought this was a good plan. Then the constant traffic started coming to the house apartment: 10 p.m., 1 p.m., 2:30 p.m., 6:30 p.m. The smell from the apartment was horrible, and I eventually found out she was making and selling crack cocaine from my apartment."

These stories I found on landlord discussion forum are mild in comparison to some of Robert Kiyosaki (Rich Dad Poor Dad guy) stories.  He talks of some severe liabilities into the hundreds of thousands of dollars landlords sometimes find themselves in.  For instance, is a property you rent is then used to create meth, in some instances it is required of the landlord to strip the walls, flooring, and anything else that may have come in contact with the meth product or fumes and replace it all.  That's tens of thousands of dollars in most cases.

While a typical bad tenant might skip out on a month or two rent or cause some light damages, the really bad ones create problems like you just read about here; sometimes worse.  These expense range from a few thousand dollars to five, and sometimes six digit figures in extreme cases.  Take even your most profitable property and assume you loose 3 months rent from a long eviction process; subtract a $3,000 loss from it, is it still profitable?  Take the same property and place someone who destroys the interior; subtract a $9,000 or $15,000 loss from it, is it still profitable?  What about a $30,000 loss if you end up with a meth lab inside your rental?

These are of course nightmare scenarios for landlords, and for most it's the exception rather than the norm.  But this economic climate has put a lot more people into desperate situations.  This means, more renters that would have been ideal are skipping on rent, or causing losses of 3-9 months for landlords after forcing them through the courts for eviction.  Even more tenants are picking up drug use, or even drug manufacturing habits to provide for their family.  All this spells trouble for landlords.

This all paints a pretty bleak picture doesn't it.  It doesn't have to be that way.  Do your due diligence BEFORE renting to a new tenant.  Run a complete background check on all adults, and check their existing living conditions wherever they live now.  It's absolutely vital to move in only quality tenants, because we are all far better off leaving a property vacant for an extra month and taking the time to get a better tenant than risking losing far more with a bad one.  Read up on how to properly screen a tenant before moving in your next tenant.  Maybe even check-up on your existing tenants if you didn't screen them properly in the first place.

--- about the author ---

Rentec Direct provides property management software free to landlords and property managers.  Because of the importance of thorough screening for prospective tenants, we have integrated tenant screening directly into the software so in just a few clicks a complete and comprehensive background check including previous evictions can be done on any new tenants.