Understanding what an income property costs on both a yearly and monthly basis are important considerations for the real estate investor. In addition, knowing the operating cost of each unit is important, as it helps determine the bare minimum rental rate.  No one ever said owning income property was cheap! There are many expenses that need to be taken into account, such as:

1. Mortgage payments
2. Taxes
3. Utilities (if included)
4. Maintenance and repairs
5. Management
6. Insurance
7. Legal and professional fees

Using a spreadsheet, an investor will lay out all of these costs for a year.  Adding them together gives the investor a figure known as the Gross Operating Expenses (GOE).  It may be necessary to estimate some figures, based on previous years, capital improvement plans, and other factors.  An example of this would be the need for a new roof on a property in a previous year causing a higher than average maintenance cost for the year.

Expenses for things such as taxes, utilities, and insurance are probably going to go up every year.  This inflation needs to be accounted for in the GOE.  Based on data available at the time of this writing, the average inflation rate on a per year basis since 1914 is 3.43%.  [InflationData.com] Using a figure of 5% is therefore well within reason.

Once a GOE + Inflation (iGOE) figure is determined, an investor will have a rough idea of what a building will cost to own and operate for a year.  This figure will then be divided by the number of units in the building, giving the Annual GOE for each unit (uGOE)*.  Further dividing the uGOE by 12 months delivers the Monthly Unit GOE (muGOE)*.  This may seem like a headache, but you can’t get where you want to be without knowing where you are starting!

The muGOE should be the absolute bare minimum that would be charged for rent, assuming the property never turns a profit!

Knowing what a building costs to own and operate over the course of a year is important to the investor, for planning purposes, as well as in the event of a building sale.  Knowing what each unit costs to operate on a monthly basis is just as important, as it will help determine the minimum acceptable rental rate, assuming the market will support it!

* These abbreviations are not standard, and are used only to assist with the flow of the article.

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

Having a tenants gas, electric, or water service get disconnected is a serious situation that must be addressed by a landlord quickly, but fairly.  A tenant that has let a utility bill lapse to the point of disconnect is probably experiencing a severe financial hardship. If they have not let their rent lapse yet, chances are that is going to be happening sooner than you would think.

In addition, not having a utility turned on leads to the tenant doing whatever they have to to get by.  For instance, a tenant without electric will be using gas that much more - in addition to cooking, they may be using it for light, or even  for heat if you have an electric furnace.  A tenant without gas will be using their electric for all their cooking needs, including open hot plates, and possibly other unsafe cooking devices.  In addition, they may overload outlets with electric space heaters.  A tenant without water may not be taking care of their own hygiene needs as often as necessary.  In addition, in some areas (Buffalo and Erie County specifically), a property can be foreclosed on if there is a large outstanding water bill for too long!

There are some things you can look for to ensure that utilities are on.

Most utility companies will leave several notices and door hangers at the meter or on the door stating the service may be disconnected, or that the service has been disconnected.  If you see a door hanger from a utility company, you should check the status of the utility!

On a water meter, you may find a lock in place at the meter if the utility is turned off.  However, many areas will simply turn the water off at the curb.

On a gas meter, you’ll want to ensure that the gate is open, allowing gas to flow through.  Many utility companies also put a tag on the meter with the date it was installed, serviced, etc.

The picture to the left shows an open gate - one that parallel with the piping.  A closed gate would run perpendicular to the gate, and would probably be locked by the utility company.

Electric meters are generally tagged to prevent entry, with the colors of the tags meaning different things.  For instance, in the Buffalo / Erie County area, a grey tag means that service is active.   A yellow tag means that service is not active.

On an older style electric meter with the dials, you may notice the dial spinning, which inducates the service is active and being used.  However, fi the electric main is turned off inside, this dial should not be spinning.

Dealing with a tenant who has had a utility turned off can be a challenge.  In your lease, you should outline the requirement of what utilities the tenant is responsible for.  In addition to spelling out what the tenant is responsible for, you should also have a clause stating that the utilities must be active for the duration of the lease, and that their bills be paid in timely fashion.  If a tenant is failing to keep utilities active, you would then have the grounds for an eviction.  It may seem cruel to consider evicting someone when they are at such a rough spot in their life, but the damage they may cause to your rental as a result of the misuse of other utilities should be enough to convince you it is time for them to move on.

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

(This post is part of our “Landlord Basics” series, which seeks to help the new landlord / investor understand some of the basics of tenant relations and property management. Click here to view the entire Landlord Basics archive.)

Tenant screening is an important, but often overlooked, responsibility of the investor.  Prospective tenants are not always truthful on their rental applications (assuming one was filled out to begin with!).  Because of this, it is important to check prospective tenant references.  This is a quick and dirty guide to the questions you should ask.

Before you start making phone calls, I suggest doing reverse phone number look ups on all references.  Whitepages.com offers a reverse search.  Generally a business number will come back to the business address, and a landlord will come back to an address as well.  However, you may see some numbers that come back to “disposable” cell phones.  These instantly throw up a red flag to me, because it could easily be someone covering for a prospective tenant.

Rental applications should, at a minimum, include workplace references and previous landlord references.  Some applications also include a personal references section, where prospective tenants can give you the names of a couple friends who will tell you more about them.

When calling a previous landlord, there are several questions you can ask to help you get more information on the tenant.  Some landlords will answer questions over the phone, and some will require a fax and a signed release of information from the tenant.  You  DID include a release at the end of your application, didn’t you?

• Were there any other people on the tenant’s lease?
• What was their address? (They should know this relatively quickly, or they could be a bad reference)
• Was their rent $xxx? (Give an amount other than the correct amount and see if they correct you - otherwise this may be a bad reference!)
• Is their rent current?
• Are they being evicted / have they been evicted? (If rent is not current, this may be why they are looking for a new place!)
• Did they have any pets?
• Were there any complaints from other tenants?
• Did they cause any major maintenance issues?
• Would you rent to this tenant again?

Workplace references are generally going to end up going to the Human Resources department of any larger company, and will have to be sent via fax.  You’ll need the signed release from the application for this fax as well.  Employers are very limited on what they can give you, but you can request more information (such as pay stubs) from the tenant.

• Is the employee’s address _________? If not, please provide correct address.  (Give address they are currently using on their application.  People tend to update workplace records quickly when they move, so they continue to get paid!)
• When did the employee start?
• What is their position?
• Are they full time or part time?
• What is their current pay rate? (Check against the application and pay stubs)

Tenant screening can be challenging, but it is important to check out a prospective tenant fully and completely before turning over a very costly asset to them, your rental property!  Not completing a tenant screen can cost thousands in evictions, lost rent, and repairs.  It’s impossible to catch every bad apple, but proper screening will certainly reduce the number of bad apples you have to toss!

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

Many investors take pride in having a strong sense of “do it yourself” when it comes to maintenance tasks that pop up in their investment property.  This isn’t necessarily a bad thing, but when does the amount of time required of the investor outweigh the cost of having a contractor come in and do the work for them?

First and foremost, there are some tasks that should be tackled by a contractor without hesitation, either due to job difficulty, licensing requirements, permit requirements, or hazardous nature of the work.  A good example of this would be upgrading an electrical service.  In many areas, a certified electrical contractor has to pull a permit from the municipality, and the work can not be completed by the investor or just a handyman.

Figuring the actual time value of money for the investor can be challenging, because there are many variables.  Is the unit occupied, and it’s just a minor task that needs to be completed (perhaps a leaky faucet)?  This unit is still generating income, and the work isn’t preventing the unit from being rented, so this may be more worth the investors time.  The exception would be if it is cheaper to have a handyman do the job while you concentrate on another task, such as seeking a new investment deal.

Another example would be a unit with a bad hot water heater.  Some areas require a licensed plumber to do this work.  However, many areas do not.  If the unit is vacant, the tank needs to be replaced prior to tenant placement.  Assuming it can legally be done by the investor, this work could be done in his “down time”, if he was so inclined.  However, if the unit is occupied, the tank needs to be replaced as soon as possible.  In this instance, unless immediately available to do the work his/herself, the investor is better off hiring a contractor to get the unit back up to par.

Lawn mowing is another prime example.  Some investors have tenants mow their lawn.  Other investors hire it out because it takes too much time, and would take time away from other activities.  I know another investor who always mows the lawns, because it gives him an opportunity to check on the property and he finds the work relaxing.  Im this instance, he finds it worth his time to be a presence at the property, even if he is just doing a quick mow.

Every investor needs to decide at what point it is better to let someone else handle the job, so they can work on other tasks.  It isn’t always an easy decision.  However, in some instances, it needs to be done because of time constraints or money lost completing the task that could be generated completing another task.  Taking the time to decide what you can and can’t handle, and not getting in over your head, will save you a lot of headaches, as well as time and money, in the long run!

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

(This post is part of our “Landlord Basics” series, which seeks to help the new landlord / investor understand some of the basics of tenant relations and property management. Click here to view the entire Landlord Basics archive.)

Showing apartments can be a headache if you don’t have a system down for scheduling showings and preparing yourself for the showing.  Not being prepared can have a negative impact on your showing, and potentially lose a renter.  Take these steps to get ready for a showing, starting with scheduling appointments!

Scheduling appointments should be done in such a way that you have multiple people coming to see the apartment if possible.  Some prefer to do it one by one, but an open house setting will allow more people to see it in less time, meaning fewer trips to the property with a higher chance of finding a renter.  You may want to plan for a couple different times that fit your schedule, and then offer the option to prospects as they plan to come see the apartment.  Make sure to take down a name and phone number!  You may also want to have prospects bring a pay stub to show current employment.

The day before the showing is scheduled, call the people who have planned to come and confirm that they still plan to attend.  When leaving a message, the prospect should be required to call back and confirm.  A good sample message is “This is Tom from XYZ Apartments, calling for Jan to confirm the apartment showing on May 7 at 4PM.  Please give me a call to confirm at 555-1234.  If I don’t hear from you, I’ll assume you are no longer interested, and I won’t go to the appointment, so please call today to confirm. Thank you!”  I like to use this message because it forces an action from the prospect.  If they don’t call back, you can safely assume that they were not interested, and if you don’t have anyone who is confirmed then there is no reason to go out to the property.

The day of the showing, take a few minutes to put together paperwork that you will need.  This may include flyers, signage, rental applications, agency disclosures, etc.  Having all the paperwork together ahead of time will reduce your stress because you will know you are ready when the time comes.

Once you arrive at the showing, set up your signage and lay out your paperwork.  Take the time to prepare the apartment.  For ideas on how to prepare, take a look at these 5 Tips For Improving Open Houses.  Greet people as they come in, but allow them to look around the apartment on their own.  Answer questions they have, and rate their interest level.  Offer the rental application to them, as well as a pen.  Many people will want to take it with them, but most of the time these applications don’t end up coming back in.  The better bet is letting them know the sooner they fill it out, the faster it will get processed.

A good showing can bring you many prospective tenants!  Having a plan before you walk in will help you feel more organized and confident, and this will be picked up by the prospects.  Remember that filling the apartment is important, but finding the right tenant is equally, if not more important!

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

As a real estate investor, you already know that a vacant apartment does not make money.  Vacancy rate, the percentage of all apartments in your portfolio that are vacant at any time, is generally figured on a year or more of data, based on the number of units that are occupied and vacant monthly. Occupancy rate is the number of occupied units, and is often used because it is seen as more “positive” than vacancy rate.

An example would be having 20 units total, with 15 occupied in January, leaving 5 units vacant in January.  When figuring vacant units, you should include units that are vacant and ready for showing / move in, units that are being turned over after a tenant leaves, and units that are not rent-able due to needing repair or renovation.  This will give you the most accurate figures available.

Assuming you are looking at a 20 unit portfolio, that would mean that every month you have 20 units that are potentially available for rental.  Over 12 months, you would have 240 unit-months.  The formula for this is Number of Units * Number of Months = Number of Unit-Months.

Taking a full year of data, you can figure the total number of units vacant by simply adding up all the units that were vacant each month over the year of data.  Using our sample data, our Number of Vacant Units would be 35, over the course of the year.

Once you have your Number of Unit-Months and your Number of Vacant Units, calculating vacancy rate is simple.  The formula is Number of Vacant Units / Number of Unit-Months = Vacancy Rate.  Using our sample data,  35 / 240 = .1458 or a 14.58% vacancy rate.

Calculating the Occupancy Rate is simple once you have the vacancy rate.  The formula is 100% - Vacancy Rate Pertentage = Occupancy Rate.  Using our sample data, our occupancy rate would be figured as 100% - 14.58% = 85.42%.

Having a good idea of your vacancy and occupancy rates will give you an indication of how strong your portfolio is performing.  It may also help you determine what you need to do to make your portfolio more profitable.  For instance, if you consistently have one building that has vacancies, you may consider selling it and reinvesting in a stronger rental market.

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

(This post is part of our “Landlord Basics” series, which seeks to help the new landlord / investor understand some of the basics of tenant relations and property management. Click here to view the entire Landlord Basics archive.)

One of the best parts of being a landlord or real estate investor is collecting the monthly rent check.  Deciding what forms of payment you will accept can determine the amount of work you will have to do on the back end.  Some payments are more beneficial than others, but ultimately most investors elect to use multiple methods to make the tenant’s life (as well as their own) easier.

Pre Printed Deposit Slips - Set up a deposit only account with your bank, and offer tenants pre printed deposit slips with the account number and all the information printed on them already.  You can also print the tenants name and unit on the deposit slip.  This method works incredibly well if your bank lets you see the scanned check or deposit slip online, because you can easily see who paid and how much.  In addition, the tenant will receive a receipt from the teller at the bank.

Checks - Many tenants will want to mail you a check.  The benefits of a check are numerous.  The tenant will be able to see that the check has been cashed, so no receipt is necessary.  Checks can be mailed to a PO Box or an office, so there is no need to meet the tenant every month.  In addition, you can look at the post mark on an envelope to see if the tenant paid the rent late.  One major problem with checks is the fact that if it bounces, you will incur a fee from your bank, which you will have to attempt to collect from the tenant.  A tenant who is struggling to pay rent and is being hit by an additional fee by the investor is also being hit by non sufficient funds fees from their bank, and they can begin to spiral out of control.

Money Order - Money orders are very similar to checks.  They can be obtained at many grocery stores, gas stations, banks, and even the post office.  In addition they are time and date stamped at the time of purchase, as well as the envelope’s time stamp, so you will see when the tenant paid and if they paid late.  Money orders are paid for up front by the tenant so they won’t bounce, however, the tenant may cancel the money order.

Credit or Debit Card - In today’s day and age it is becoming more and more common for people to not carry cash, and use a debit or credit card for their day to day transactions and in some cases monthly bills.  The biggest pro to using credit/debit cards is the convenience to the tenant, and to the landlord.  There are a few cons, however.  The landlord will have to set up a merchant account to be able to accept the credit cards.  If you have a physical office, you’ll want to be able to swipe cards.  This generally means an equipment charge will be incured.  You may also want to be able to take cards over the phone, which may cost more per transaction.  In addition, every transaction will be hit by a 2% to 3% fee + $0.20 to $0.30 transaction fee.  This is a decision that a landlord really has to put some thought in to, as the number of fees incured effects the bottom line.

Cash - Cold hard cash is always nice.  You don’t have to wait for the funds to clear, and it’s an instant payment.  Make sure to double count the funds to make sure it is all there.  In addition, you need to issue a receipt to the tenant so there is proof of payment.  There are a few cons to consider.  For instance, carrying large sums of money can be dangerous, especially if people know that you make a monthly collection run around the same time of the month.  In addition, landlords incur the expense of traveling to collect the rent, taking it to the bank for deposit, missed appointments with tenants who were supposed to be home, and more.

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

As promised, I’ve come up with a Condition Inspection Sheet which can be downloaded and used for your rentals!  This form breaks every room down into detail, and also includes information for electric, gas, and water meters, as well as appliances.

Condition Inspection Report

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

Cap Rate, short for Capitalization Rate, is a formula used to help determine the value of rental property.  Investors will use the cap rate of a property to help determine a good or bad deal, since it is based on market values (recent sales of similar properties) in the area.

Cap Rate is determined by dividing the net operating income (NOI) by the sale price (SP).  The result will give you a percentage, which is your cap rate.  For instance, a duplex in buffalo bringing in $450 per month per side has a gross operating income of $10,800.  After taxes and some minor repairs, it is determined that the NOI is $9,000.  The property is listed at $65,000, but having a shrewd real estate agent, the final sale price is $60,000.  Using our sample figures, we come to a Cap Rate of 15%.

To determine a cap rate prior to a sale, have your real estate agent pull recent sales figures for similar properties within the last few months.  This will also help you and your agent determine the amount you want to offer for the property.

Determining a good cap rate is influenced by a few factors.  First and foremost will be the local market.  Real estate is localized, so a good cap rate in Buffalo may not be good in Miami.  Sometimes, you may find a difference in cap rates from one area of the city to another!

In addition, buyers and sellers want to see differences in cap rates.  A buyer is looking for a higher cap rate, because that means they are getting more net income out of a property for less of an investment.

Sellers are interested in a lower cap rate, because they want to receive more value for their property.  However, too low of a cap rate may cause a property to sit on the market for an extended period, so the seller is working on a slippery slope between fast sale and best sale price.

Cap rate is not the only thing that needs to be considered in the purchase of an investment property!  Investors must be careful to evaluate each property purchase based on itself as well, considering factors such as structural soundness and operitability of the mechanicals (electrical, plumbing, etc).

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.

(This post is part of our “Landlord Basics” series, which seeks to help the new landlord / investor understand some of the basics of tenant relations and property management. Click here to view the entire Landlord Basics archive.)

Tenants come, tenants go.  Over the course of your career as a real estate investor, you’ll likely see a lot of tenants come and go, both good and bad.  Being able to protect yourself when a new tenant comes and an old tenant leaves is important, especially when it comes to returning the security deposit.  Having a move in and move out condition inspection reports will help you document the state of a rental before and after tenant use.

A condition inspection report will cover the status of every room in a rental, in great detail.  Everything from walls, floors and ceiling, to windows, doors, and closets should be inspected for damages, to ensure working order, and cleanliness before a tenant moves in and again after the tenant leaves.  Discrepancies can then be charged against the tenants security deposit, to help cover the cost of repairs, cleaning, and replacements.  Appliances should also be

In addition to a condition inspection report, photos should be taken of each room, and those photos should be saved digitally and preferably prints made as well.  Comparing photos before and after is often easier than comparing two sheets of paper, sometimes several years apart, to determine what you meant when you wrote something down.  In addition, photographic evidence of the unit before and after may be admissable in eviction or small claims court if the need arises.

Move In and Move Out Condition Inspection Reports are an important part of any landlord or investor tool kit, and should be implemented as part of your move in and move out systems.  Later this week, I’ll be posting a sample report which you can use!

Andrew Schultz is a real estate agent and property manager located in the Western New York area.  His articles on real estate investing and property management can be found at www.andrew-schultz.com.