Without getting into a huge discussion on economics, the market rental rate will be determined by several factors.  One of these factors include supply and demand, where the number of available units may cause prices to go up in a desirable area, or lead to a “price war” in an area with many open units.  Another factor is the ever increasing cost of expenses related to the property.

Some areas have rent controls in place, which determine the maximum amount that can be charged for a specific type of rental.  These are generally found in metropolitan areas, and there are many arguments both for and against.  For questions on local rent controls, contact the municipality which the rental property is in.

When determining the price for a rental unit, the first consideration is making sure all expenses are covered.  Be sure to include things such as mortgages, taxes, utilities, repairs, insurance, and management.  This is called the Gross Operating Expense for a property.  However, this isn’t specific enough for our needs.  It is necessary to know the gross operating expense, per unit, per month!  For assistance in determining these factors, see the article on “What Do Your Rentals Cost You?”

Once the gross operating expense per unit per month is known, research is done to determine what the current market rate for similar rental units is in the area.  Comparisons should be based on rental units with the same number of bedrooms, with similar amenities,  and within a reasonable distance (a few blocks in the city to perhaps as wide as an entire county in a rural area!)  Below are three different methods for determining rental rate, in order of least to most technological.

1.  Newspapers & Rental Fliers – This is pretty straight forward.  Pick up the newspaper, flip to the classifieds, and see what other landlord are avertising for similar units.  Rental Fliers are often posted on bulletin boards in public areas, such as grocery stores, community centers, libraries, and in college areas, student unions.

2.  Real Estate Agents, Property Managers, Other Investors - This one is a bit more technologically advanced, as it requires picking up a telephone in many cases.  Real estate agents who are familiar with investment properties will often also know the local rental markets as well.  Property managers may not be willing to hand out information willingly to the “competition”, but will readily respond to requests for more information about an apartment from a potential renter.  Other investors can be contacted via local investment clubs.

3.  CraigsList and Rent-O-Meter – These two can provide a wealth of information very quickly.  Most metropolitan areas have their own CraigsList site, which can be found at www.craigslist.org.  If you aren’t posting your listings here, shame on you!  With a couple clicks, information can be found on apartment listings throughout a city or region.  Using Rent-O-Meter at www.rentometer.com is also a simple service.  By entering the address of the rental, number of bedrooms, and current rental rate, the data is compared to other rentals in the area.  Information such as median rental price, low price, high price, and distance are all provided.  In addition, there is a map showing where other units are located in relation to the unit being priced.  This site does not take into account any amenities, however.

Keep in mind that comparisons should be as close as possible – in bedrooms, location, and amenities!

Once research is compiled, a fair rental rate can be determined based on the data.  A fair place to start would be in the upper third of the price bracket, which will draw a more interested potential tenant, and allow for negotiation room if necessary.

Rental markets change over time.  Being aware of what a rental unit costs to operate, as well as the local trends, will keep a sharp investor on top of the market.  Using the three mthods outlined, a strong comparison of available rental units can be made, and a unit can be priced properly.

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.

(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.)

From time to time as you purchase buildings, you may inherit tenants that come along with them.  If a tenant is paying their rent on time every month and taking care of the property, this is a very good thing.  However, if a tenant is not taking care of a property, it can cause issues down the line when that tenant moves out.  Some of these tenants will pay rent on time every month, and never call with concerns.  Others will make themselves more evident by either not paying rent, calling constantly, or both.

A tenant who is not paying rent should be evicted.  This really shouldn’t come as a shock, since you purchased the property as an income property, and a tenant not paying rent is not generating income.  This is the easy bas tenant decision to deal with.

A tenant who is paying but is not taking care of the property is another issue.  This could be an issue as simple as not cleaning properly, or not taking care of the yard.  Generally these tenants will respond to a formal letter requesting them to clean up their act. Over the course of several years, the “non-cleaning’ tenant could cause serious damage, such as mold build up.

However, some tenants do physical damage to the property.  For instance, some will throw things into the walls and create holes.  Another example would be a landlord story where the tenants knew they were being evicted the following day, so they removed both hot water tanks and both furnaces from their duplex (other unit was vacant), and sold them for scrap.  The repairs can become very costly very quickly!

So, what do you do?  Should you keep a bad tenant?  If a tenant is causing physical harm or destruction to the property, an eviction could be in order.  Catching them early in the destruction of the property will only SAVE you money on the inevitable rehab.  However, if it is an issue of cleaning, it may be better to send a strongly worded letter or make an appearance to tell the tenant that things need to change, or they will be facing an eviction as well.

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.

When selling in Western New York, plan ahead for the following expenses:

• First and foremost, all taxes, water bills, liens (such as mortgages), need to be taken care of.  Generally a mortgage will be satisfied as part of the proceeds of the sale.
• Real estate commissions
• Attorney’s fees on average are currently $500-$600.
• Transfer Taxes – In Erie County, this is $9 for every $1000 of the sale (broken down into $4 for NY and $5 for Erie county).  For example, on a $130,000 sale, there would be a transfer fee of $1,170.
• Title Search costs of $400 to $500 if you have your original abstract.  It could cost significantly more without!
• Survey costs of $350 to $400 for an average city or suburban parcel with a copy of the survey from when you purchased your home.
• And generally another $500 in miscellaneous expenses that pop up along the way.

This list is not all inclusive, and the figures may vary depending on who you use to complete various aspects of the transaction, but the core principal remains the same:  Plan ahead for closing costs!

(Thank you to contributing editor and real estate broker Ken Nagel for his assistance on this article.)

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!

This is a guest post from the team at RentingYourHome.  RentingYourHome provides quality information to landlords about prospective tenants, and helps landlords screen potential tenants.

Get ready for this spring by tuning up your rental properties! Completing preventative maintenance helps limit surprises and keeps overall operating expenses (and tenant complaints) lower.

• Air Conditioning. Schedule professional service. Check that the unit is still level and clean and has proper clearance. Remove any trees, debris, or trash that obstructs the unit. Adjust the main duct dampers if needed.
  
• Humidifier. If you have a humidifier operating during the winter months, turn the unit off and close the water supply.
  
• Duct dampers. Adjust dampers for a switch from heating to cooling as necessary.
  
• Ceiling fans. Check ceiling fans and reverse fan direction for summer operation.
  
• Roof. Visually inspect the roof for any damage. Trim trees as necessary. Inspect roof vents for damage or bird/wasp nests.
  
• Gutters and downspouts. Clean gutters and make sure downspouts are attached and extended.
  
• Chimney. Visually inspect for any damage to the cap, flash, or masonry. Check for bird/wasp nests.
  
• Exterior of the house. Check condition of paint, caulk and putty. Open outside hose connection shutoffs so you can water the garden, wash the car, etc.
  
• Termites and pests. Schedule professional inspections and service as needed.
  
• Sprinklers / Irrigation. Service and start system for lawn and garden.
  
• Decks. Clean and seal as needed. Normally decks need to be resealed every 3-5 years in order to preserve the wood, look, and protective finish.
  
• Attic. Check for signs of leaks, mildew, or condensation.
  
• Basement. Check for signs of leaks, cracks, movement, rot, or mildew. Consider a dehumidifier. Clean the dehumidifier and start operation as needed.
  
• Sump pump. Test sump pump to make sure it removes water from the hole and discharges water away from the base of the house.
  
• Water heater. Draw sediment from tank as needed.
  
• Refrigerator. Clean coil, clean drain pan, and check drain.
  
• Range hood. Clean filter and wash fan blades.
  
• Bathroom exhaust fans. Clean grill and fan.
  
• Bathroom tile. Check grout, caulk, and tile for damage. Caulk or repair as necessary.
  
• Septic system. Schedule professional pumping and inspection at least every 2 years.

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!

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!

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.

Sample Vacancy Rate Data

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.