December 13, 2022
Last Updated
In this week’s episode, Podcast Host, Property Manager & Business Owner, Andrew Schultz, chats about what to look for when investing in your first multi-family rental property.
What happens when your tenant gets offered a new job out of state? Find out what to request from your tenant in order to continue their lease.
Last, but not least, a tenant approaches you and tells you that their employer will be paying their rent. Find out what kind of information to request from the employer.
Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlord’s podcast. This is episode number 393, and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about buying your first multi-family property, what to do when a tenant’s employer wants to pay the rent, and what to do when a renter is offered a job out of state. We’ll get to all that right after this.
Voice Over: (00:26)
Welcome to the Rent Prep for Landlord’s podcast. Now, your host, Andrew Schultz.
Andrew Schultz: (00:31)
Tax season will be here. Before you know it, do you know about one of the biggest tax cuts that landlords can use during that time? I’ll give you a hint. It has to do with bonus depreciation. Learn more today at rentprep.com/blog.
Voice Over: (00:44)
Water cooler wisdom expert advice from Real Estate pros.
Andrew Schultz: (00:53)
All right, we have a ton of things to talk about this week. We’re gonna go ahead and jump right into our first segment, which is water Cooler wisdom. This one comes to us from Reddit. Let’s go ahead and jump in. My fiance and I are buying our first investment property soon in the Philadelphia region. We have about $40,000 in savings, and we’re looking at properties in the Port Richmond area. Do you have any advice for us on what to look or watch out for in a multi-family property? We’re both debt free and we really want to start seeing our money work for us instead of sitting in a bank. Well, first of all, congratulations on considering your first investment property. The wealth available in real estate is more accessible than pretty much any other form of wealth in my opinion, and there’s a reason that so many people choose real estate as an investment, and that’s because it’s a good investment most of the time when it’s managed properly.
Andrew Schultz: (01:41)
The first piece of advice that I have for you is to work with a real estate broker or agent that understands how investment properties work. You’re going to wanna have an agent that understands different types of property, knows a little bit about landlord-tenant law, and understands how cash flow works, as well as has a good general knowledge of the investment property industry. If you’re working with an agent that only sells single-family homes in luxury markets and the investment properties that you’re looking for are multi-family properties in distressed markets, you obviously have a mismatch there and you’re not going to be working toward the same goal. Next, you need to understand the market that you’re buying in. What exactly do I mean by that? Every market has grade A, B, and C properties. A properties are typically going to be brand new or newer and have amenities and things of that nature that make them the most desirable properties for renters to live in.
Andrew Schultz: (02:30)
B properties might be a little bit older than the A properties. Maybe they don’t have all of the same amenities that an A property would have but are still a good mid-tier property, and C properties are generally the properties that are older and might be in need of some updates or maybe the rents are artificially low for some reason, something along those lines. There’s also A, B, and C neighborhoods. Your A neighborhoods are typically going to have those nicest properties and the highest rents followed by your B tier properties and finally, your C tier properties, which is typically where you start venturing into either more distressed areas or things of that nature. Now, you will find some B and C properties in Class A neighborhoods, which typically means that they need to have some updates done to them to bring them up to what a class A level property would be.
Andrew Schultz: (03:15)
These are typically what we would refer to as a value add property, and if the rehab numbers make sense, these can make excellent investment properties either as a buy and hold or as a potential rehab and resale. Once in a while, you’ll find an A property or a B property in a C neighborhood, and that’s generally because somebody’s over-improved that property. Oftentimes, the numbers don’t work on these properties because the seller wants more than the property’s worth given the area, or there may also be rent caps at a certain point in the neighborhood, which can make it difficult for the properties to cash flow, so you really have to watch out for properties that are a higher class than the neighborhood that they’re in because those don’t always make the best investments. A good real estate agent should be able to help you decipher whether you’re in an A, b, or C neighborhood and whether you’re looking at an AB or a C property within those neighborhoods to help you find the best potential investment property deals.
Andrew Schultz: (04:07)
Everybody always talks about finding the diamond in the roof. That’s exactly what we’re talking about here. Just because something’s listed for sale does not mean that it’s a good investment. Your real estate agent should also be able to help you run the numbers on these properties to determine whether or not it’s going to cash flow or not. So depending on how astute you are as an investor, you may be looking for numbers such as cash-on-cash return or cap rate, or debt service coverage ratio, and your agent should know what all of these are and how to compute them and know what the standards are in the various markets you’re looking at. Sometimes you’ll see a property that, yeah, it’s a, it’s got a great cap rate, but it’s got a great cap rate because it’s in a war zone and you need to understand that, and a lot of times you’ll look at numbers and the numbers, you know a piece of paper will stand still for anybody to write on it, so you need to make sure that the numbers actually make sense for the property that you’re purchasing.
Andrew Schultz: (04:57)
Essentially, your agent should have an expert-level knowledge and be able to share that knowledge with you. That said, agents don’t earn a penny until you purchase a property and that property actually closes. So with that said, please be considerate of the time of the agent. If you’re looking at 25 properties and you’re putting in zero offers, any agent that you’re working with is going to start rethinking working with you. Please be considerate of the time that the agents are putting into these deals too. Understand that, yes, that is their job, but until you actually close on something, they’re working for free essentially, eventually you’re going to need to learn this skill for yourself as well, which is why it’s a good idea to partner with an agent that understands and can kind of show you the ropes on something like this, because eventually, you’re going to start venturing into the off-market deals, the auctions and things of that nature where you’re not necessarily going to have someone there to help you with your numbers or to double check your numbers or something along those lines.
Andrew Schultz: (05:53)
And while we’re here talking about the numbers, you do need to make sure that you’re running the numbers on your properties prior to making an offer. If you’re out there and you’re making offers on properties when you have no idea what the rehab costs are going to be, you really have no idea whether or not that property is going to cash flow once you own it. I understand that sometimes we’re operating off unclear information and that sometimes we have to use best-guess numbers, but you need to make sure that your best guesses are at least coming close to what the actual costs are going to be. One of the main things that sinks property investors is not taking into account all of the costs associated with property ownership such as rehab, even beyond rehab, even beyond the mortgage, the interest, the taxes, and the insurance.
Andrew Schultz: (06:33)
There are a lot of other expenses that you need to be accounting for. Make sure that you’re setting aside cash for both normal operational repairs as well as setting aside funds for capital repairs such as roof replacement, hot water tanks, furnaces, things of that nature. Don’t forget things like utilities. If you’re including the water on an apartment or even if you have a vacancy, there’s going to be a gas or possibly even an electric utility that needs to be accounted for there. Landscaping and snow removal should be factored in. Waste management might be a line item that you need to factor in as well depending on how that’s handled in your area. Essentially what I’m saying here is spend some time thinking about going through all of the various expenses that are gonna pop up on this property over the course of the year and make sure that you’re accounting for all of that stuff in some fashion.
Andrew Schultz: (07:17)
That’s the stuff that you don’t account for and that’s the stuff that winds up syncing your investments and making them less profitable. So spend some time on this to make sure you’re hitting all of your needs when you’re analyzing your property numbers. I would also caution you to get a home inspection. You know that during the last couple years, a lot of people have been opting to waive their home inspection contingencies in order to make their offers more appealing. Stop doing that. In many areas, the market is starting to shift and we’re not necessarily seeing 10 or 12 offers on every property that hits the market. Now, especially with the rising interest rates, your offer should still be competitive but not so competitive that it has a negative impact on you after you own the property. Even if you have a home inspection that’s just for information purposes and allows you to walk away from the contract, if you’re not happy with the property, that’s still substantially better than no home inspection.
Andrew Schultz: (08:09)
Even if the seller states they’re not going to do any repairs as a result of the inspection, it’s at least a good idea for you to have that inspection done so you understand what it is that you’re buying. I think that’s some pretty solid advice for anybody looking at buying their first investment property. Understand the neighborhood you’re buying in, understand whether or not the property’s actually going to be a good investment, and understand what the property is from a physical standpoint and what work it’s going to need after you take possession of it. Again, good luck to you as you start on your investment journey. Moving right along, we’re gonna jump into our second water cooler wisdom. This one also comes to us via Reddit. Let’s go ahead and jump in here. My prospective tenant says that his employer’s company will be paying the rent.
Andrew Schultz: (08:52)
This is a new situation for me. Also, I can’t find very much information on the employer’s company. They don’t have a website, just a tax ID and a brief OpenGov ny.com listing. What sort of changes in addition should I make to a typical lease agreement? Is there anything I should ask or request from the employers? Company listens in New York. Thanks for your input. So the way that we would typically handle a situation such as this would be the same as pretty much any other application for a rental property. What I mean by that is that the tenant still needs to qualify for the rental on their own. We would screen the tenant using the same written criteria that we would for any other tenant, and the tenant still needs to meet all those criteria in order to qualify for the rental, so the company can be on the lease as well.
Andrew Schultz: (09:37)
You might want the company on the lease as a responsible party, or you may want them listed as a guarantor on the lease. Depending on your state laws specifically, you may find out that there’s extra hoops that you need to jump through. If you’re trying to evict a company from a property, this is something that a good real estate attorney can probably advise you on relatively easily, especially if it’s an attorney that deals with landlord-tenant issues pretty frequently. Here’s the thing, corporate rentals can be very, very difficult to screen. For a small company, I would recommend screening both the tenant as well as the ownership of the company and get a personal guarantee from the owner of the company. So in this instance, I would probably have the tenant, the company, and the owner of the company all listed on the lease, or alternatively, I would list the tenant and the company and I would have the owner of the company on a guarantor agreement.
Andrew Schultz: (10:23)
Both of those would probably be sufficient for this purpose. For a larger company, you have a little bit more to go off of. Larger companies will have a D N B score, which is essentially a credit score for businesses. The D n B score is what other companies look at when they’re trying to decide if they wanna do business with a company or how much credit they want to extend to a company. It seems that these tend to be more common with larger, more established companies than with smaller companies. And another option for a larger company could be a receipt and review of a CPA-prepared financial statement. Now, obviously, you’re looking to make sure that the company’s in good shape financially and can afford the rental obligation, but this is going to require you to also understand how to read a financial statement. And a lot of companies, especially large public companies, financial statements may not be the most easy thing in the world to read and understand.
Andrew Schultz: (11:11)
Realistically, many public companies are not going to default on a lease term. The reason for that is because it’s going to be all over the news and it’s going to look absolutely awful for them if they’re out there not paying rent to some residential landlord that they signed a lease agreement with. Think back to the beginning part of Covid when Cheesecake Factory and Victoria’s Secret and a bunch of other retailers basically decided not to pay rent on the space that they were renting. In all of these malls all over the country, there was an immediate media backlash and those companies got dragged through the mud both on social media and in the media and through their stocks. Obviously, that’s a much different situation than this, but I think that you can see that there is a risk in this scenario. Before we talk about risk mitigation, I do wanna mention renting to insurance companies.
Andrew Schultz: (11:56)
We’ve actually had a couple of situations pop up over the years where an insurance company will reach out to us and ask about renting one of our properties on behalf of an insured party of the insurance company who suffered some sort of a loss and has been either displaced for their home for what they’ve been displaced from their home for whatever reason. Typically, the insurance companies are going to be looking for quick placements. Oftentimes they’re looking for lease terms that are shorter than one year in length, but they’re also willing to pay more for those short-term leases. So you may be able to bump your monthly rent up a little bit to make up for the fact that that lease may not run a full year. Some companies will also pay more if you’re able to provide the home in a fully furnished manner, and we’ve had very, very good luck working with insurance companies in the past.
Andrew Schultz: (12:39)
Again, we screen the tenant and the tenant has to meet the qualifications just the same as any other tenancy, and then we sign a lease with both the tenant and the insurance company listed as responsible parties. Oftentimes, things take longer than expected for the tenant to get back into their regular residence, typically due to construction delays and things of that nature. The nice thing is the insurance company will often come back to you and ask to extend that tendency out, and you’re still collecting more than what your typical base rent would’ve been if you hadn’t rented to the insurance company in the first place. So insurance deals can be very, very lucrative. Now, let’s talk a little bit about risk mitigation. If you live in a state that allows you to have either additional security deposit or some additional months of rent on hand, this is an excellent way to mitigate some of the risks in a scenario such as this.
Andrew Schultz: (13:26)
Some states don’t allow this New York state being one of them, so be sure to check your state laws and find out what’s applicable to you. But if you’re able to collect an additional security deposit maybe two months instead of one month, or you’re able to collect some rent money upfront, that does help offset these risks because in the event of a non-pay, you have some funds to draw against. This is an excellent risk mitigation technique. In a situation such as this where there’s some uncertainty or there’s some information that you can’t screen for, at the end of the day, you wanna be running to an actual human being and not just a company. You want someone as a point of contact inside the company other than your tenant in case something goes wrong during this tenancy. If you’re going to sign a lease where there’s a corporate guarantor, my strong recommendation is to make as many people as possible responsible for the lease.
Andrew Schultz: (14:14)
So if you can get the tenant, the company, and the company ownership all signed on that lease, that’s a great position to be in. If you can get the tenant and company on the lease with a personal guarantor from company ownership, that’s still a great position to be in. What you don’t want is a lease that’s just between landlord and company. That leaves things way too open and puts you in the potential to be in a lot of risk. And as a final note, if you’re in a situation where a company’s running a unit from you and they have rotating staff members or something along those lines that are using the unit, you need to make sure that the company’s updating you whenever the tenant inside the unit changes. Realistically, you should be screening everyone who’s living inside that unit, but oftentimes you’re going to get stuck with a name and a phone number. The rotating staff units tend to require more work to manage due to the nature of the rotating workers. My recommendation would be avoid those types of corporate rentals if possible, or make sure you mitigate your risk if you do decide to go that route.
Voice Over: (15:14)
Forum quorum where we scour the internet for ridiculous posts from landlords and tenants.
Andrew Schultz: (15:23)
Last but not least, we have our forum quorum segment. This one comes to us via Reddit as well. It was a very Reddit-heavy episode today. Let’s go ahead and jump right in here. One of the two tenants on our lease has been offered a new job out of state. They’re now actively seeking new housing in their new state. They have nine months left on the lease, and the other tenant is planning on staying. I understand life changes, but I’m concerned with the remaining nine months of lease. Should I cooperate with the rental verifications coming in from the new state, I don’t wanna cooperate and thus allow him a free pass on leaving. So I’ll start off by saying, yes, I would be cooperative with any rental verifications that are coming from the new state as long as they’re being sent over with a signed or a lease from that tenant.
Andrew Schultz: (16:06)
This tenant is going to move whether you want them to or not. They’re not going to turn down a job just because they have a lease with you and you really don’t have any control over whether or not somebody decides to move, but you can respond to the move-out. That said, just because they moved doesn’t mean that that releases them from their liabilities. Hopefully, your lease states that the tenants are jointly and severally liable for the lease, which would indicate that the tenants are both jointly and individually responsible for that entire rent amount. So if your moving tenant stops paying rent, the remaining tenant is still responsible for that whole rent amount. Now, if the remaining tenant can’t afford the rent, this is where things start to get interesting. The first question I would have would be, how did the tenants screen? Can tenant B now afford the apartment without tenant A?
Andrew Schultz: (16:52)
If tenant B cannot afford the apartment, you may wanna offer them the ability to break their lease. Now, the alternative is that tenant B scrambles to either find another roommate, which may or may not go well or tenant B winds up scrambling to make sure that you get your rent money on a monthly basis, which typically winds up ending in an eviction, rather than go through that entire process and have several months of lost rent. As you go through that eviction, you’re better off talking to the tenants upfront and offering them the ability to terminate their lease if they simply cannot afford this rental. Once the first tenant has left. At the end of the day, this puts you back in control of the asset quickly, which allows you to find new tenants that do have the ability to pay the rent and rent to them.
Andrew Schultz: (17:32)
Your outgoing tenants would still be responsible for the rent until such time that a new tenant has placed, so hopefully, this helps you mitigate your losses as well. Now, of course, that’s a perfect scenario that we just outlined there, where someone’s gonna continue to pay rent on a unit even after they’ve moved out of it, but that’s not always how things pan out. Going back to tenant B for a moment, if tenant B’s able to afford the apartment, you have the option of allowing tenant B to rent the apartment without tenant A on the lease. Essentially terminate the lease with both tenant A and tenant B, and then write a new lease with just tenant B. I probably would not do this until the lease naturally came up for a renewal because that leaves tenant A on the hook for that rent through the next lease renewal, so when the lease comes up, at that point, we would screen tenant B again to make sure that they still meet all the qualifications and then release the unit to just that tenant. It’s worth noting that some states do have laws in place that require you as the landlord to do everything that you can to mitigate damages in a circumstance such as this. Here in New York for instance, we have to actively market a rental and attempt to place a new tenant in the event that a rental goes vacant while it’s under lease. Every state has a little bit different laws on this, so make sure that you take a look and see what the requirements are In your state.
Andrew Schultz: (18:46)
Have you joined the free Pent prep for Landlord’s Facebook group? We’re just over 13,000 members, and of course, that means we’re on the hunt for 14,000. So if you have a question or a situation that you’ve never encountered before or you just need to bounce an idea off a big group of housing providers, this is the place. If you haven’t had a chance to check it out yet, do it today over at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions so we know how you found us. That pretty much wraps it up for this episode of the Rent Prep for Landlord’s podcast. Thank you all so much for listening. We truly do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate, and you can help us to reach our goal.
Andrew Schultz: (19:28)
If you heard anything in this week’s episode or any of our other episodes that will help somebody that you know, please do us a favor and share it with them. If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com. From there, you’ll find links to everything going on with me over at Own Buffalo, as well as other projects that we’re working on. Grab a free copy of our deal analysis tool today over at whatsdrewupto.com. There’s no obligation and it comes with a companion video showing you how to use it. If you’re looking for top-tier tenant screening services, head on over to rentprep.com. There are multiple products to choose from, including a tenant-paid option, and if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of Rent Prep for years now, and it’s definitely changed the way that we screen our tenants. Check that out today over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t want to miss. Until then, I’m Andrew Schultz with ownbuffalo.com for rentprep.com, and we’ll talk to you soon.
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