RENTAL INCOME EXPOSED!–FIRST MONTH, FIRST PROPERTY (Ep. 5)

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The Acquisition

The first POS property was prospected from Craigslist and was acquired from a burnt out landlord who was treading water with the amount of deferred maintenance and number of properties he was carrying, all while working for UPS.

I give him credit. He was working harder than most–and doing the right things, maybe he just bit off a bit too much, too early. That’s what it takes to get this thing off the ground sometimes.

Nice guy, and I got a lot of advice and promises from him, but he left a mess, and I assume rightfully so, being that I purchased this duplex on discount.

property inspect
This is an insurance inspector. He was thorough. “Thorough” is another word I use for *******. He was thorough.

I also got some great ideas as far as “necessary” lease provisions that deal specifically with these types of properties.

They may be overkill to the average person, but have saved my a** in a few instances, and for that I am thankful.

Stuff like, have, and let me know what your cell phone number is, if you move out unexpectedly I can throw away your crap. Don’t park on the front lawn, mow said lawn. Don’t start a meth lab, etc. It sounds ridiculous, but it’s not.

On that note, every inherited tenant I’ve had has been trouble. No exceptions.

Of the three inherited tenants, one left unexpectedly (see above), one bolted prior to eviction and stole my gas stove and air conditioning units, and the third left when I filed for eviction and then pulled the trusty “cash for keys” on them.

The tenants I have screened, to date, have all worked out, save one, with no major issues.

property one wood
I was sooo thankful i was getting a TON of firewood with this buy. I wish I had known the fire place had been blocked in.
OLYMPUS DIGITAL CAMERA
Fire wood haul off, x two trees:  $400.00

 

My Initial Screening Tools:

  • Tried a front lawn sign.

This approach received the worst referrals. Red flags were abundant and not even worth the time to screen. After the sign was destroyed the third time by people who were pissed that a unit was just rented, I stopped using it, and haven’t since. It was very entertaining, but very annoying. And then it was destroyed for the last time.

  • Craigslist

For this demographic it has actually worked quite well.  It doesn’t matter what I put in the ad, I still get the same questions regardless. What is the deposit, number of rooms, square footage, do I screen, etc, etc.–newsflash–it’s all in that ad you just read.

I really believe it’s because they have no clue what to say.  I save canned ads and photos for turnover and that’s it.

Overall, craigslist works well for my demographic level, and it’s easy. Plus, they have to have access to a computer and an internet connection. Yes, I’m serious, I’m not trying to be rude.

  • My Smartmove.com.

This is the screening site I started with, and still use.

I don’t get a dime from them either. The only time I have had a major issue, the site wasn’t to blame—in smart move’s defense, it was a straw lease.

Smartmove allows you to enter the characteristics of your properties, your parameters, everything. And your tenants pay. Another level of screening, they have to have a credit card, an email, and commit to something. Again, I’m serious.

  • Realtor

Just kidding. I’m too cheap to lose one month’s rent. (this also applies to property management–for now).

  • Makeshift Interview

This one is key, and doesn’t cost you anything but time.

Make sure you meet them at the property (confirm one hour before leaving or don’t go–better than 90% flake out)—and just start talking.

I don’t care if you have zero skills, just start talking, about anything.

People will show their hand faster than you imagine. It’s incredible. Just give it time. 10-15 minutes should do it, and you’ll see all types of crazy if it’s there.

My Organizational Plan:

LLC formation:

  • A Series LLC to hold each property in a separate “company” that doesn’t do “business” with anyone. The individual series/business holds a single property, and therefore, cannot likely be sued–and if it is somehow, successfully, the judgment can only be extended to that single asset.

This LLC is the ghost. No one knows about it but you and the title company.  If you’re overly crafty, or a conspiracy theorist, make it even harder to nail down by “renaming it” with a DBA or “Doing Business As” filing, or place it in a trust.

  • A second, separate LLC is formed, that only executes leases and other contracts. It’s the only entity that is an “active” business.  It holds no assets other than deposits.

This is the pawn. Everyone knows about it, and it’s prominently put out for the ensuing massacre, on your lease.

  • A manager, me, or my partners and I, who act on behalf of these “corporations,” and are released from liability if the corporation is involved in litigation, like it should be.

The LLC setup also allows for easier closing when liquidating properties, as they can be sold as a business, with only minimal business filing fees required as opposed to traditionally higher and more complicated traditional home sale “closing costs.”

PROPERTY ONE IN PERSPECTIVE:

property pool
1900 sq foot: 1200 sq ft 2/1,700 sq ft 2/1, with a pool (oh, and fire wood)

Positives: Purchased on a discount, area slated for historic status (which has basically amounted to a lot of maintenance, and nothing else thus far), separate electric and gas, but common water.

Expenses:

$315 dollar inspection that ballooned a bit, since it was a “duplex.”

(Everything tends to balloon when people find out you’re an investor)

$400 for a trailer, utility type.

$308 LLC filing (The Pawn)

$308 LLC filing (The Ghost)

$250 for a trailer full of used cabinetry.

$27   for a Business PO Box.

Income: None. Would have received prorated rent, but the sale occurred at the end of the month.

Rental #1: Set by previous lease at $675.00 per month.

Rental #2: Prior lease, $500.00 per month, but vacant, and filthy.

Total: -$1608.00

I sunk approximately $13k initially into the acquisition of this one.

The potential rent met a GRM of approximately 2.5-3, which isn’t too shabby.

I knew there would be some renovation up front to get it to the point where I could sleep at night. I can usually get away with a major facelift for around $2500.00 per duplex unit, barring unforeseen issues, particularly with the mechanicals:  plumbing, electrical, HVAC.

I acquired the property knowing the downstairs tenants were behind on rent, and this would be a trend until they abruptly moved out—and stole my stove and AC units.

They were lovely people.

I was about to close, meet the tenants for the first time, and hit the ground running as a landlord.

I was also about to find out how ill prepared I was.

Things were about to get interesting.

Post Blog Brew:

property beerModern Times, a wonderful Amber IPA.  If you’re ever in San Diego treat yourself to a couple of these.  High ABV, nice bite.

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