Rental Housing Journal Colorado
July 2015 - Vol. 7 Issue 7
2. Ask the Secret Shopper 3. Behind the Leasing Desk
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1Q15 PAYROLL TRENDS AND FORECAST The BLS’s annual benchmark payroll revision exercise was very generous to Denver this year, upgrading 2014’s job creation totals from an initial estimate of 36,300 to 47,400. This strength carried over into the New Year as first quarter growth clocked in at a 50,200-job, 3.8% annual rate, up from 4Q14’s robust 46,700-job performance and the largest onequarter gain recorded since 3Q00. Solid headcount gains were posted across industries led by the health care and construction sectors, which combined for growth at an astounding 21,100-job, 9.4% rate. There is some evidence of a slowdown in the energy sector, but related cuts were unlikely to have exceeded a few hundred net jobs. Seasonally-adjusted data were healthy but suggest that a moderate slowdown is in the works. This series recorded only a 7,200- job net gain in the January—March period, down continued on page 5
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Real Estate: What’s In It For Me? Pt. 1
any people are interested in real estate, but don’t really know much about it. They know that it seems that a lot of people have made a lot of money in real estate (or achieved other goals using it), and they wonder if maybe there could be something in it for them, too. National REIA wants to help you understand a little more about the real estate business and real estate investing. We’ve developed this report so you can get an overview of multiple investing strategies and determine whether any of these areas of real estate business or investing sound interesting to you. All of the
strategies in real estate we cover in this report are actually used by REIA members. When you join us at a monthly meeting you can talk to us and learn even more. Here are some areas of real estate discussed in this report: • Landlording • Wholesaling • Rehabbing/Retailing (Flipping) • Discounted mortgages and notes • Private money and hard money lending There are many more things you can do in real estate, including being a real estate agent or broker, an appraiser, or a home inspector, and
buying/selling on creative terms. Although these are beyond the scope of this report, we at REIA would be happy to discuss these with you as well. Real Estate Business vs. Real Estate Investment Is real estate a business, an investment, or both? The correct answer is “Yes.” The “business” of real estate is generally referring to an ongoing, hands-on strategy. This is usually done using techniques like wholesaling, retailing, and flipping (buying/rehabbing/selling)
continued on page 8
How Extreme Self-Confidence Can End Up Working Against Entrepreneurs
More Introspection Is Needed For Long-Term Business Success, Says Former Naval Officer and Business Leader
T
he entrepreneurial spirit may be taking a hit these days.
Studies show members of the Millennial generation appear less interested than previous generations in starting their own businesses, preferring instead to find work with established companies. In 1989, 11.6 percent of households headed by someone younger than 30 held a stake in or owned a private enterprise; today that percentage is 3.6 percent, according to a recent Wall Street Journal report. Randy H. Nelson finds that troubling, but perhaps understandable. “The statistics show the odds of success for a new business are pretty dismal,” says Nelson, author of the continued on page 4
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RENTAL HOUSING JOURNAL COLORADO
E
sk the Secret Shopper
ach apartment community has certain features and benefits, which are the selling points of that particular community. It could be its location, friendly staff, spacious floor plans, beautiful landscaping or affordable price; just to name a few. Yet even with the most fabulous features, there will be times when the apartments you have available won’t seem to meet the needs of your prospective renters. The following question from a leasing consultant addresses this issue: Q: We have several vacant apartments right now and I know I’m supposed to try and rent all of them, but how can I rent to someone when it doesn’t seem like the apartment will really meet their needs? A: Things are not always what they “seem.” Many times you may have the tendency to make an assumption about what you think someone needs based upon your limited perspective, frame of reference or belief system. For example, you might have 2 bedrooms available right now that are all located on upper floors. If a family with small children comes in, you might automatically assume that they are not going to be interested because you think they won’t want to deal with the stairs. On the other hand, you
could have all first floor openings and your prospective renter could be a single woman. You might think women living alone only want upper level apartments because you believe they feel safer off the ground. Therefore, when you have a single woman seeking a new home, you may not try to sell her on a first floor location because you don’t think it will meet her needs. Until you truly get to know your prospective renters and determine what is most important to them, you really don’t know what they need. You are merely making “assumptions.” It could be that the husband of the family mentioned above travels a lot. The wife may prefer an upper level apartment as she is frequently home alone with their small children, and would feel safer living upstairs. The single woman might have a lot of equipment that she has to bring home from work each day, and does not want to deal with constantly lugging it up and down the stairs. It’s important to remember that every person who walks through your door is as unique and special as each one of your available apartments. The term “one size fits all” may work when you are buying a stretchy article of clothing.
However, when it comes to helping people find a new home, no apartment will fit the same two people in the same way. For those times when you have prospective renters with needs you just cannot meet, send them to a sister community and/or offer to pay them a referral fee for anyone they refer who rents. Since things are not always what they seem, you never know when a prospective renter who does not end up leasing could be a source of referrals for months, or even years to come. If you are interested in leasing training or have a question or con-
cern that you would like to see addressed, please reach out to me via e-mail. Otherwise, please contact Jancyn for your employee evaluation needs: www.jancyn.com ASK THE SECRET SHOPPER Provided by: Joyce (Kirby) Bica Former owner of Shoptalk Service Evaluations Consultant to Jancyn Evaluation Shops E-mail: shptalk2@gmail.com Copyright © Joyce (Kirby) Bica
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Behind the Leasing Desk with Heather Blume Dear Heather, I have worked for the same property management company for several years and have worked my way into a good salary, benefits, and a Manager in Training role. With this role comes great responsibility, including taking on the challenge of supervising employees. The downside to this role is that I don't really have the autonomy to really fix some issues that drive me crazy within my office and for the most part, my hands are tied when it comes to disciplinary action issues because that is my manager's responsibility. You see, I have a coworker that has a variety of health issues and it is known within the office and management, so therefore, we have to accommodate. I have no problem with this for the most part. My issue is that she calls out a lot. When I say a lot, I mean it is to the point of being predictable. Even my maintenance staff make jokes about her calling out so much. For instance, I will get a text that tell me how she's not feeling well and how it's ruining her weekend. First off, this is rather annoying because I frankly don't care what she is doing on her days off. Secondly, this irritates me even more because in my eyes this is a set up for the inevitable call out for her return to work from her weekend break. Not only that but she won't hesitate to share with you that she suffers from several ailments at the same time and all of the details of them ...I am not trying to belittle her health conditions but I honestly have never met anyone with more issues that prevents them from working in my life! I have brought these frustrations to my manager's attention many times. The response I get is very HR (which I understand) and it's typically something like "you have to accommodate by giving breaks during the day or allowing her to go home early or come in late". Seriously?! Can't I just get a Leasing Agent that shows up and isn't a Web MD nightmare? Although her call outs have been less frequent than before, it's still predictable and if she does show up, she is so loopy from her medications it makes it difficult to work with her. My manager has told me to send her home if she comes to work loopy but frankly, I need her in the office and can't afford to
be alone in the office any more than I their employer upon termination, it's a very sticky situation. On one hand, already am. How do I balance my feelings of frus- if any other employee pulled this tration and disbelief in her legit "sick behavior, you'd do the write ups and days" and still be in compliance with the terminate them. On the other hand, law and not on the wrong side of an law- it's going to cost you much more in suit? Some days I believe she is ill and the legal and public relations arena other days I think she just didn't want to to get rid of this person than to let get up out of bed and come to work. She them half ass their job. From a comhas even mentioned that she knows my pany view point, you're picking up manager can't fire her because she could the slack, so they aren't out anything sue based on her medical issues. I know and they don't have to deal with the we all have a right to call out sick but I problem. Second, you have to make sure just feel like it's predictable and abusing that very policy that is meant for those that even through your dissatisfacthat do have medical issues that truly tion with this employee that you are inhibit them from working normal shifts not making the work environment or performing daily tasks. How do I hostile so she will leave. She can sue overcome these feelings of not believing the company for that as well, and a her, not feeling confident in her atten- lot of those kinds of suits are being dance, not feeling confident that her ail- won currently, plus with the health ments are severe enough to prevent her issues she has, she'll have the sympafrom working or performing her duties, thy on her side. Problems all around and yet knowing that I have to accom- on that front. Third, if she comes in "loopy" on modate her call outs and deal with it? her meds, you really should send her home. I know this puts additional Please Help! Sick and Tired of those who are stress on you, but remember that some states are verbal contract states ALWAYS Sick and Tired and what she says in her inebriated Dear Sick and Tired of those who state, you and your company can be held legally liable for. On top of are ALWAYS Sick and Tired, Wow! This is a really horrible which, any contract that she signs situation and I can imagine that you with a resident might not be valid if must be thoroughly frustrated, even she, as a company representative, is more than your letter sounds. It's in an altered state. Plus, in such a always difficult to work in an envi- state, she could write a contract for ronment where you feel there is either the wrong amount of rent or someone who is shirking their the wrong lease term, and once the responsibilities, and working in a resident has signed it with her, you're property management office with bound to that contract. Send her that sort of a person is extra hard home when she's a threat to your because our days move so fast that NOI. So let's talk about some solutions. once you get behind, you never feel One of the things that you menlike you can catch up. First, while I very much sympa- tioned is that you can't afford to be thize with your situation, I have to alone in the office anymore than you concur with the "very HR" response already are. This may just be the that you've gotten so far. Employers background of a staffer talking, but MUST make accommodations to sick one of the quickest ways to call employees under federal law, but attention from the corporate office to more than that, this particular the escalated degree of the problem employee has already placed a not- is to call your local staffing agent so-veiled threat against them. when she calls out, or when you Whenever you have an employee have to send her home sick. The corwho KNOWS and has the audacity porate office might not notice the to say that they know they can sue stress that it puts you under to not
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Rental Housing Journal Colorado • July 2015
have her there, but they WILL notice the stress that staffing costs put on your budget. This is a risky solution, however, so it might be worth it to just contact your office about ASKING for staffing. It will have a similar effect, and won't potentially get you in as much trouble as just calling a staffing agent without approval will. Now here's the good news People who are frequently absent or who do not seem to connect with their workplace rarely stay there long term, so she may be on her way out. Also, if she's made the lawsuit statement, that might be what she's really looking for, and when you do not provide her with the grounds to sue, she'll move on and look for another rube to play this game with. How you, as a manager in training, handle a situation like this can be a defining moment for your career. You can take the path of secretly hating your coworker (and believe me, MANY of us take that path, as it's the easiest), or you can try to ignore as much of the situation as you can and realize that you can only do what you can do in any given day, or your can try to reach the employee on a personal level. The last is the hardest to do, but also the most long term rewarding of the options presented. To open communication you have to re-foundation some modicum of trust between the two of you. I would start by giving her massive positive reinforcement on days when she doesn't call out sick or come in loopy. Extending yourself as a mentor and trying to have a different relationship with this employee might encourage her to come to work more often and to call out less. As for managing your feelings on the issue, my best advice to you is to step back and take some deep perspective on the issue. I want you to ask yourself if it's really worth you caring if you believe her or not? If it's worth carrying anger and spite over something you cannot prove and something that in the long run continued on page 6
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Extreme Self-Confidence ...continued from page 1 Amazon best-selling book “The Second Decision: The Qualified Entrepreneur.” (www.randyhnelson.com/ book) “Half of new U.S. small businesses fail in their first five years, and 70 percent have gone under by year 10. That’s not exactly a new trend, but what is a new is that each year in the United States more businesses now are shutting down than are being started.” But Nelson, who developed leadership skills as a Navy submarine officer and has a track record of starting and building successful businesses, says there is a reason for those sobering statistics. Anyone can become an entrepreneur. No qualifications are required. If more entrepreneurs understood the ramifications of that – and took steps to compensate for their weaknesses – the odds of success could improve, Nelson says. One problem is entrepreneurs tend to be extraordinarily confident, which can blind them to their weaknesses. Nelson remembers that early in his business career his wife asked if he knew what he was doing. He assured her he did. Since then, experience taught him he was wrong. “The truth was, I didn’t know what I didn’t know,” Nelson says. Over time, Nelson became what he calls a “qualified entrepreneur.” He says when he looks back over his
25-year entrepreneurial career that he could clearly identify four components of the qualified entrepreneur, and recently he added the fifth component, self-awareness, which is an important piece of each of the other four. • Entrepreneurship People who become entrepreneurs are usually brimming with self-confidence, Nelson says. That helps them when it comes to making that “first decision” of starting a new company, all but ignoring those sobering odds for failure that would dissuade many others. The entrepreneur optimistically thinks: “I know I can do this.” • Career-Long learning Entrepreneurs think growth all the time for their businesses. They preach their vision to employees and hire the best talent to help them reach their goals. But are entrepreneurs growing their skillsets as fast as their companies grow? If not, they risk becoming the wrong person in the wrong seat, with the very employees they hired to take them to the promised land asking: ”What value do you bring to the company?” • Leadership The importance of good leadership is paramount to business success, but not all leaders are created equal. Nelson breaks down leaders into four types. The “urgent/reactive” leader thrives on an almost crazed atmosphere where he or she can ride to the rescue, put out the fire
and move on to the next problem. There isn’t much time for introspection and no real vision. An “ever optimistic” leader starts from the belief there is nothing he or she can’t do. “Yes, we can do that!” is the typical answer from this type of leader… leaving it up to their staff to figure out how, even if accepting the new business takes them away from their core focus. The “reflexively pessimistic” leader plays to survive, not to win. This leader has been toughened by hard times, and always worries about the economy’s effect on the business, Nelson says. In some industries easily battered by a downturn, this style can be effective. But if maintained too long, the pessimism becomes a selffulfilling prophecy. The final leadership style, the “steady/proactive” leader, is the one every CEO should strive to become, Nelson says. This type of leader values productivity and profitable growth above all things, knows how to achieve both and can course-correct no matter the difficulty. “They understand both offense and defense, and can shift between them as cycles dictate,” Nelson says. • Life cycle A business has different needs at different stages of the corporate life cycle. The qualified entrepreneur must recognize that. The startup stage is where many entrepreneurs thrive. Creating something from scratch is what they are about. Needs and challenges change, though, as companies enter growth or expansion stages. The entrepreneur’s needs change, too, because entrepreneurs have their own life cycle, Nelson says. First, there’s getting the business started, and then there’s the seconddecision stage when the entrepreneur needs to choose what role he or she plays in the business, and whether others might be better equipped. There’s also a third decision when entrepreneurs realize work infringes too much on family and personal time, Nelson says. “To avoid regrets later, you have to consider whether you need to make a stronger commitment to a more balanced life.” Finally, there’s the end stage when the entrepreneur is finished with the current business and must decide what is next. Having experienced the “exit” twice in his career, Nelson has
come to realize that after the sale only a few lives really change. Everybody else goes on with their normal day while the entrepreneur, much like a retired athlete, must figure out how to function without leading their entrepreneurial venture every day. “Ideally, entrepreneurs and CEOs would be more knowledgeable than everyone we manage,” Nelson says. “That’s rare, though. The rest of us would benefit from a better understanding of the vast reaches of what we don’t know, and a dose of the humility that goes with it, and this is where the self-awareness component comes in.” • Self-Awareness Entrepreneurs need to know their strengths and weaknesses, and how they affect the business, Nelson says. Unfortunately, that’s a trait they often fail to develop. His suggestion: Surround yourself with people who know more than you (entrepreneurs, leaders, and coaches/advisors who have been through all the life-cycle stages the entrepreneur is navigating through) and learn from them. Once you have a clear understanding of what you do and don’t know, you can decide your next steps. Will you continue to lead the business directly; take a supporting role and let someone else lead; or move on to create another business?
Randy H. Nelson is a speaker, a coach, a Qualified Entrepreneur, a former nuclear submarine officer in the U.S. Navy and author of “The Second Decision – The Qualified Entrepreneur” (www.randyhnelson.com/book/). He cofounded and later sold two market-leading, multi-million dollar companies — Orion International and NSTAR Global Services. His proudest professional achievement was at the Fast 50 awards ceremony in the Raleigh, N.C., area when NSTAR, a 10-year-old company, and Orion, a 22-year-old company, were awarded the rankings No. 8 and No. 9, respectively. Nelson now runs Gold Dolphins, LLC, a coaching and consulting firm to help entrepreneurial leaders and CEOs become Qualified Entrepreneurs and achieve their maximum potential. He has a Bachelor of Science degree in Accounting from Miami University, Ohio, and was awarded the Admiral Sidney W. Souers Distinguished Alumni Award there in 2011.
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Rental Housing Journal Colorado • July 2015
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Market Overview ...continued from page 1 from 11,500 during 4Q14 and the smallest one-quarter advance since 4Q11. RCR specified a 98.4% adjusted R2model using U.S. payroll, GDP and metro personal income growth rates as independent variables. The model produces an optimistic forecast for 2015 characterized by stable job growth in the mid– to high-3% area for the balance of the year. But slowing national output and job growth exert downward pressure on the forecast beginning next year. As a result, expected growth rates decline below 3% in 2016 and further in 2017-2018. Nonetheless, Denver job creation should continue to run at 150% to 200% of the national average. Payroll Job Summary Total Payrolls 1,356.3M Annual Change 50.2M (3.8%) 2015 Forecast 49.6M (3.7%) 2016 Forecast 38.7M (2.8%) 2017 Forecast 28.0M (2.0%) 2018 Forecast 20.7M (1.4%) Unemployment 4.3% (Mar.) (Nsa) 1Q15 ABSORPTION AND OCCUPANCY RATE TRENDS Vigorous renter demand for Denver apartment space persisted dur-
ing the winter quarter as tenants occupied a net of 1,021 vacant units during the period, according to Reis, marking the fifth consecutive quarter in which absorption totaled 1,000 or more units. Still, net leasing was off measurably from recent levels, falling 460 units short of 4Q14’s absorption level, suggesting some degree of potential weakening household demand. But much of this can be attributed to reduced new construction deliveries (completions declined by 558 units to 1,285). When the dust settled, occupancy declined only 10 basis points sequentially, settling at 95.6%. Axiometrics surveys of larger, stabilized same store properties also found a 95.6% average occupancy rate in the Denver market. Class-C properties recorded the highest occupancy (97.0%), followed by class-B apartments (95.5%). Class-A assets came under a degree of supply pressure, falling 10 bps sequentially to a 94.7% average. Absorption at new properties continued at a healthy 13unit/mo. approximate average but appeared to subside from the frenetic 20+-unit rate observed during summer 2014. RCR’s occupied stock growth model (ARS=93.0%) is optimistic, projecting absorption totals of 7,131 and 6,665 units in 2015 and 2016, respectively. But supply promises to be
even greater. Although Reis expect supply to decline sharply in 2017, our models don’t see it as deliveries are projected to remain above 6,000 units. Occupancy Rate Summary Occupancy Rate 95.6% (Reis) Red 50 Rank 28Th Annual Chg. (Reis) -0.7% Rcr Ye15 Forecast 94.5% Rcr Ye16 Forecast 94.9% Rcr Ye17 Forecast 94.0% Rcr Ye18 Forecast 93.2% 1Q15 EFFECTIVE RENT TRENDS Effective rents increased at faster than a 7% year-on-year rate for the fourth consecutive quarter during 1Q15, in this case by 7.4% (Reis), third fastest among the RED 50 markets. Sequential quarter growth exhibited a fairly pronounced slowing trend, however, declining from $30 (2.8%) and $13 (1.3%) during 3Q14 and 4Q14, respectively, to just $7 (0.7%) in 1Q15. Although this reflects seasonality to some degree, the impact of growing supply pressure is undoubtedly at play as well. Axiometrics surveys of stabilized, same store properties report a different finding. This service reports average year-on-year rent growth of
7.7%, equal fastest in the current cycle. Rapid rent increases were largely a class-B and class-C phenomenon. Class-B assets posted the fastest gains (8.5%), while class-C gains were near average at 7.7%. Class-A properties chalked down only a 4.9% advance, with just a 0.4% sequential gain, largely due to sluggish growth at properties delivered prior to 2010. RCR’s Denver rent model achieves a 96.2% ARS using two lags of the dependent variable and payroll and home price growth variables as the independent variables. The outlook for both independent variables is for positive but slower growth, producing similar results in forecasted rent trends. We foresee rent growth decelerating from 5.8% y-o-y in 4Q15 to 4.2% in 2016 and 2.8% in 2017. Effective Rent Summary Mean Rent (Reis) Annual Change Red 50 Rent Change Rank Rcr Ye15 Forecast Rcr Ye16 Forecast Rcr Ye17 Forecast Rcr Ye18 Forecast
$993 7.4% 3Rd 5.8% 4.2% 2.8% 2.1%
1Q15 PROPERTY MARKETS AND TOTAL RETURNS Commercial real estate investors were avid pursuers of Denver apartment properties in recent quarters,
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Behind the Leasing Desk ...continued from page 3
Market Overview ...continued from page 5
will not make a difference? My mother once told me that you only have so many pieces in your matched set of emotional luggage, and you have to choose what's worth packing in them. You can't carry everything, so make sure that she's worth putting in there.
acquiring nearly $2.5 billion of assets over the nine months ended in March. A total of 26 properties valued at $5 million or more exchanged hands during the first quarter 2015 for total proceeds of $987.8 million. This compares to 4Q14’s record $1.4 billion aggregate in 33 closed transactions. The average price of units sold during the first quarter was sharply lower, however, falling from $185,967 and $161,746 during 3Q14 and 4Q14, respectively, to $127,999, as the asset mix shifted toward a higher concentration of ;60s, 70s and 80s vintage assets. Cap rates were mostly in the 5% to 6% range, Properties built since 2000 generally traded in the low- to mid5% range. Trophy assets gravitated toward the 5% region. Class-B properties traded to discounts of 50 to 100 basis points. RCR elected to reduce Denver’s generic cap rate by 5 bps from 5.3%
Good Luck to you! Heather
Heather is the Imagination In Charge of Behind the Leasing Desk Training & Consulting Services out of Seattle, WA. An accomplished national speaker, trainer, consultant, career coach, and author of both books as well as countless industry related articles, Heather holds her CAS designation, is NAA Advanced Instructor trained, and has been a member of the NAA Faculty since 2009, serving as a WMFHA, CAM, and NALP instructor since 2009. You can check out more of her musings, podcasts, and class offerings at www.behindtheleasingdesk.com
CONSULTING & FINANCING
to 5.25% to reflect strong buyer interest in metro policies. Employing this going-in yield, a terminal cap rate of 5.9% and model derived occupancy and rent forecasts, we estimate that an investor would expect to achieve a 6.8% unlevered total return on a five-year hold, hampered by the fairly weak occupancy outlook, near the 6.9% mean of the RED 46 markets. Risk-adjusted returns also fell near the middle of the peer group pack: Denver’s rusk adjusted index is 4.47, ranking 26th among the group. Trade & Return Summary $5Mm+ Sales 26 Approx. Proceeds $987.8Mm Avg. Cap Rate (Fnm) 4.7% Avg. Price/Unit $127,999 Expected Total Return 6.8% Red 46 Etr Rank 23Rd Red 46 Rai Rank 26Th continued on page 6
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Market Overview ...continued from page 6
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RENTAL HOUSING JOURNAL COLORADO
What's In It For Me Pt. 1 ...continued from page 1 property. It can be a great way to make a living, but if you stop working at your real estate business, the income will stop too. When we talk about “investing” in real estate, we typically mean buying and holding real estate long-term, which generally means you are acting as a landlord, or landlording. When investing in real estate, we talk about tax advantages, return on investment (ROI), and appreciation. Many people operate a real estate business and invest in buy-and-hold properties at the same time, but it is helpful to keep the two concepts separate in your mind. In any case, you can participate in real estate fullor part-time. Goals: What are your goals? You need to think about this and come up with your own answer before you actually proceed to involve yourself in real estate as a business or investment. Below are some common goals that you may want to achieve through real estate: • Higher income • Tax benefits • Self-employment • Personal fulfillment • Passive income • Increased wealth • Supplemental current income At this point we’ll begin an overview of different types of real estate businesses and investing. National REIA has experts who are involved in these various areas of real estate, and they would really like to speak with you at a monthly meeting. Landlording Description: • Landlording is the purchase of and holding of real estate over a period of time. It is often referred to as “buy & hold” or as the “get rich slow” technique. Pros: • Tax advantages – This is a huge advantage to buying and holding real estate. The government has setup the game in such a way that owning real estate long-term as an investment can save you significantly on your taxes. • Appreciation – Unlike almost everything else that you purchase in life, real estate historically goes up in value, not down. Since real estate tends to go up in value, it can be a great hedge against the increased erosion of your net worth due to inflation. Cash flow – Hopefully you have purchased the property “right,” (with the right terms and the right financing) so that almost every month you have a positive cash flow. Over time, if you own enough properties, this can fully support you and your family. Generally speaking, there isn’t much money left over in the early years of owning a property, but the finances improve as your tenants effectively pay off the mortgage for you. • Leveraging Other People’s Money (OPM) – When you purchase a 8
property using a sensible amount of leverage (borrowing OPM), you are minimizing the amount of money you are investing and getting a higher return on the cash you have invested without excessive risk. You are also using OPM by using tenants’ rent to pay off your loan over time. • Wealth building – Due to tax advantages and that real estate typically appreciates, buying and holding property long-term typically will help you increase your net wealth. It is sometimes referred to as the “get rich slow” technique. Cons: • Tenants – If you talk in depth to experienced landlords, they will probably agree that a majority of their tenants have been good. However, it only takes a few bad experiences to dishearten one on being a landlord. Many people avoid putting on the landlording hat due to challenges such as trying to collect rent on time and property upkeep. • Liability – Landlording increases your chances of being involved in a lawsuit. Most people think the landlord is “rich,” and thus the landlord becomes a target for lawsuits. You can take steps to minimize this risk. • Time intensive – Being a landlord takes time. You can minimize this if you are able to hire a manager. Some way or another the property
must be maintained, managed, kept occupied and the bills paid. • Expenses – It takes money to maintain real estate. You must have the financial ability to replace the roof when it needs replacing, fix damage from a pipe breaking, and weather some of the ups and downs of owning property longterm. Skills needed: • People skills – A landlord deals with a wide variety of people, so you will need to relate to and negotiate with your tenants, repair people, contractors, insurance representatives, bank officials, politicians, etc. • Fix-it skills – Knowing how to repair and maintain your property is invaluable. Whether you decide to do the work yourself or hire someone else do it, you should know as much as possible about how to install drywall, fix a toilet, install a faucet, repaint a property, and so on. • Financial skills – You will need to keep accurate records of the income/expenses associated with each property. This includes knowledge of tax-related issues. It is important to have a good CPA on your success team who will help you in these matters. • Planning/saving skills – This is a specific financial skill but an important one. If you are someone who spends every dollar as soon as it hits your hand, then you will
have problems being a landlord. You must keep a “rainy day” fund for when the roof needs fixing. And you must have the skills to plan the maintenance and improvement of your property. Time needed: • The time needed to be a landlord varies widely depending on factors such as the number of units owned, the kind of property owned (single family vs. multi), and whether you plan to make repairs yourself. Relative to some other areas of real estate, landlording can be fairly time-intensive. Often it will be in spurts. A property may require no time for months, and then need your undivided attention for several weeks in order for you to repair and re-rent it. Cash needed: • Typically landlording requires seed money. How much will depend on your method. Cash required for buying property can be minimized if you are successful in using some creative purchasing techniques. • Once you own or have “controlled” the property, you may need money to fix it up prior to renting it out. • You will need money to keep the property maintained and to pay taxes, insurance, and the mortgage. If you purchased the property “right,” the rents from your tenants should cover all these costs and leave you some money left over for your efforts.
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Rental Housing Journal Colorado • July 2015