Featured Posts

How to keep great Tenants without squeezing your margins

August 31, 2016 By Erion Shehaj 3 Comments

A little less than a year ago we got the hardest part right.

Like leasing Sherlock Holmes-es we pored over lease applications, ran countless credit checks, background checks, prior eviction checks, cross reference checks, written and verbal rental and employment verifications and found a great Tenant.

Over the course of the year, our predictions came true. The Tenants paid rent on time, took care of the property like it was their own and even went over an above to improve it without costing you a dime.

Captain Obvious shares benefits of lease renewals

Now the lease is nearing it’s end and it’s time to discuss renewal. We would love them to stay for another year and re-up each year going forward till the end of time. The reasons are obvious – If they renew:

Zero vacancy for another year – This means the amount you had budgeted for vacancies in your cashflow analysis flows straight to your bottom line and who doesn’t like a “healthier” bottom line.
Zero make ready for another year – No matter how great Tenants are, when they decide to move out there will be some make ready costs. Locks need to be rekeyed, carpets shampooed, paint touched up, landscaping trimmed, utilities turned on in the meantime etc. If they renew, no make ready is required so another WIN for us.
Zero leasing commission for the year – When existing Tenants renew, we prepare the lease renewal paperwork free of charge – another perk we offer to our clients to thank them for their repeat business. So if they renew, there’s no leasing or renewal commission you need to pay for another year and guess where the budgeted amount for lease commission flows straight down to? Yessir – Bottom Line.

So now that we’ve established that we definitely want them to stay and renew the important question becomes: At what rental rate? Over the lease term several factors have come into play. If the property is in an appreciating market, county authorities probably gave you a higher property tax bill as a present for your birthday. Ditto from the insurance agent. Plus, over the year the market rate for rents in the area has probably risen. So you want to make sure that your profit margin doesn’t shrink by leaving the rent the same while your expenses go up. And at the same time, you don’t want to leave money on the table and significantly underprice your property.

But on the flip side, the great Tenants will probably not like to see their rent increased. And if requested in a careless manner, they can be left feeling like they’re being punished with higher rent.

Tips professionals use to secure lease renewals and rent increases

In order to avoid losing great tenants and/or facing shrinking margins and leaving money on the table we have a process we follow to secure more lease renewals and rent increases. I’d like to share with you some tips that you can use to do the same with your properties.

Tip 1: Run a market analysis for lease on the neighborhood – If your tenant is more knowledgeable than you are about market conditions, you’ve already lost the argument. An updated market analysis for lease will give you the backup to support your arguments. In addition, it will give you a clearer picture of what the current market rate is for your property and the competition you face. Bottom line: You need to know your numbers because they represent the alternatives your great Tenants have to jump ship.
Tip 2: In an appreciating market, offer a rent increase that’s below full market rent– Think of your offer to renew as a marketing offer and consider the question: Why should the Tenant renew their lease with you? No, your good looks don’t count. Give them a reason, a benefit they wouldn’t get if they moved out and leased another place. Here’s what we normally do: Dear Tenant – After performing a market analysis, the market rent for the property has risen to X. You have been a great Tenant and we appreciate the care you have shown the property. Therefore, we’re prepared to offer you a lease renewal at X-$25-$50. This way it’s a win-win. The Tenants still get below market rent and you get your rent increase and renewal. If they were to move out, they’d likely have to pay market rent and move which we all know is so much fun (not).
Tip 3: Discuss the lease renewal in person or over the phone – Negotiations over email are a recipe for disaster. I think it’s pretty safe to assume that anything written in an email is read to the recipient by an angry antagonistic old man. If you are trying to persuade and influence, do it in person or over the phone where the tone of your voice can convey where you’re coming from.
Tip 4: Make it much more expensive to go month to month – Texas leases have a provision in them that allows the lease to auto-renew on a month to month basis unless either of the parties gives 30 days notice. In your offer to renew, the price offered for a one year or 6 month extension should be much more attractive than the month to month price. Typically, we do $100-200 more to go month to month.
Tip 5: Be a pragmatist but not an appeaser – Lease renewal negotiations aren’t an ego contest. If after reviewing the market analysis, days on market to get a property leased have increased, you may be better off renewing at the same rate. The alternative is to renew at a higher rate but missing out on rent through vacancy which lead to a lower net rent than if you’d just left the rent unchanged. So be a pragmatist and look at the situation through the lens of reason. But don’t be an appeaser and fold just to avoid confrontation. It’s a delicate balance but it can be done.

Everyone is a genius in a rental bull market

July 27, 2012 By Erion Shehaj 5 Comments

The rental market in Houston Texas is hot. Rents have been rising steadily for the last 4-5 years with average time on market dropping to under 30 days. Landlords are in the driver’s seat and the high demand for their properties allows them to ask for longer term leases, higher credit tenants and rent escalations built into the deal. What’s most important is that this rush of demand is fueled by real economic and job growth, not some artificial inflation. Under the current conditions you could literally close on any property on Friday and have a long term tenant in place the following Friday. And he probably had to fight off four or five other applicants to get accepted.

In the current market, it is easy for an investor to feel invincible – feel like they can’t go wrong. All the talk about quality of neighborhood, school district, amenities, upgrades etc. seems irrelevant. After all why would you go and spend 40% more money on a “better property” when you can buy cheaper, lower grade assets for a fraction of the price. With rental demand as strong as it is now, they will both rent out quickly and your ROI will be much higher on the lower end stuff. Right?

Mark Cuban said: “Everyone’s a genius in a bull market. Recessions are the great equalizer”. These are good times for investors but they’re also dangerous times. The euforia produced by the rental bull market can fool shortsighted investors into dropping their guard and skimping on asset quality. Incoming rent will cover all the cracks in your asset selection for the time being. There’s a funny thing about cracks though. No matter how often you patch over them, sooner or later they always show through in times of great tension. So ask yourself this: What would happen to your portfolio if the rental market weren’t this hot? If there were fewer tenants looking for properties and competition among assets, would they pick yours? In other words, would your portfolio withstand the test of time and all the changes in market conditions it brings?

If you are a long term investor, the number one factor you have to seek when building your portfolio is Quality. Don’t listen to the siren calls of cheap properties in cheaper locations. Build a portfolio that will perform no matter the market.

Miguel Angel via Compfight

Who is advising you about your real estate investments?

July 17, 2012 By Erion Shehaj 3 Comments

When you invest in real estate long term, what’s really at stake is your retirement. In the end, the path you take will either lead you to the retirement you want or it won’t. All the metrics us investment guys like to talk about so much – your returns on investment, equity positions or positive cashflows won’t matter at all if they don’t get you over the finish line. It’s a pretty brutal and unforgiving situation, if you think about it. Intentions, efforts and the such are completely irrelevant and worthless if they don’t lead you to the retirement you sought when you started investing.

So that brings up the question: Can you afford to get this wrong? The path you take today, the decisions you make on how, where and when to use your capital today will be the determinant of how far and fast you go. And in the end, the decisions you make are as good as the real estate investment advice you get – or don’t get. So, who’s advising you about your real estate investments?

If you were to ask any real estate agent if they work with investment properties, the answer will almost always be a resounding YES. After all, you’re just buying a house or two and they know how to sell you a house. They can send you a list of properties for you to look over and let them know when they should write up a contract for it. They might even use general and shallow investment terms like: “You will make a lot of money with this” or ” The ROI of this property will be off the charts”. The truth is they don’t know the first thing about real estate investing. And most importantly, they can’t offer you the most important necessary ingredient for success: A well-founded cohesive investment strategy. One that mitigates risk and maximizes long term returns. One that gets you over the retirement finish line. Remember this: Regardless of the vehicle you use – real estate, stocks, bonds, annuities etc – this is ultimately about protecting your principal and growing your capital to a point that the yield on that capital gives you enough after tax income to retire. If you’re just buying a couple of houses, you’re not investing – You’re just buying a couple of houses.

Another alternative for advice is to go to an investment club that offers “educational” seminars about how to invest well. There you could even network with seasoned investors that have a deal or ten you could buy today. These deals have tons of equity that these members are just passing on to you because they like you so much and they’d rather you make the profit off the deal than them. Next thing you know, you’ll be driving Hummers, wearing a lot of hair gel and dark shades. Sounds like a late night infomercial doesn’t it? Look I don’t mean to be cynical – there’s nothing wrong with folks wholesaling deals to each other. It’s a market that’s been around for a hundred years. But this is your retirement we’re talking about here. Do you think you should take advice from someone whose goal is to “flip” you a deal so they can make some profit that month?

When we start working with a new client, it’s usually the start of a lifelong business relationship that has one goal: Accomplishing the client’s retirement goals. Anything short of that, is utter failure and I don’t take that responsibility lightly. Whatever you do, make sure the quality of the advice you get is aligned with the goals you have. If you’re a long term investor, you owe it to yourself to work with a pro that will lead you down the path of success. Your retirement’s at stake.
Photo Credit: Alan Cleaver via Compfight

The driving force behind Houston’s strong rental market

July 11, 2012 By Erion Shehaj 1 Comment

It’s no secret that the rental market in Houston has been outstanding, boosted by ever increasing demand by prospective tenants. Since 2005, I’ve seen rents increase almost 20% as properties get re-leased for higher and higher amounts each turnover. For example, a North Katy home that would fetch $1100-1150/mo six or seven years ago, consistently rents for $1350-1400 these days.

Great, so what’s behind this strong demand for rental properties that’s driving up rental rates in Houston? And most importantly, is this seven year trend just another bubble, a fluke or a fad?

The answer, as empirical as they come, was reported from the Houston Business Journal this morning. Texas jobs have now reached pre-recession levels:

Texas gained 410,400 net nonfarm jobs between May 2007 and May 2012, ranking the state No. 1 for raw change during that period, according to a Business Journals’ On Numbers analysis of U.S. Bureau of Labor Statistics data. The comparison period begins seven months before the official start of the recession in December 2007, meaning Texas surpassed its prerecession job level by a significant margin.

James Carville said it best: It’s the economy, stupid. Texas is a pro business state with a favorable business and fiscal “climate” that attracts successful businesses who create jobs. This job availability creates inward migration into the state which results in high rental demand as these folks need places to live that offer good schools, safety and amenities. So it is not a bubble or a fluke. It’s real growth with economic underpinnings – the strongest and most sustainable foundation for growth of any kind. So should you build a long term real estate investment strategy with quality assets in Texas? No brainer.

Photo Credit: Rick Harrison via Compfight

How to retire in 7 years with real estate investing

July 10, 2012 By Erion Shehaj 5 Comments

Real estate investors’ goals vary in nature: Sometimes it’s about growing their portfolio’s value or income from it to a certain amount. In other cases though, it’s all about time. How can they achieve what they want (retirement, financial freedom, quit the job to stay home with the kids) in X number of years? How many assets do they need to purchase and what level of invested capital will be required? And most importantly, how do all the pieces fit together in a coherent strategy?

Our Blueprint Investment Strategy can answer all these questions.

As an example, let’s look at a case study. Say you have a married couple in their mid 40s with 3 kids who have a combined income of $150,000/year. Their goal is to retire in 7 years with an income from their investment portfolio of $75,000/year. Now you might ask: How are they retiring if they’re only earning half of their current income? True, but think about what their current income funds: Their retirement investments, college funds, additional savings etc. All things that go away when you actually, you know, retire. So in this case, they’ve figured out that their living expenses would be comfortably covered by this $75k goal.

So let’s think this through. Each paid off property they will own at the end of 7 years, will produce about $11k/year in pre-tax income. So they will need to own about 7 debt free properties at the retirement finish line to accomplish their desired income. At an average of $30k of invested capital per property owned, that will require about a $200k investment to acquire a portfolio of properties worth about $980k. At acquisition, each of these assets should have a positive cashflow of about $4400/year that we could use to pay off their mortgages within a 7 year timeframe. If this investor were to use nothing but the positive cashflow to accelerate the payoff of mortgages, she could pay off the entire thing in 12.5 years. Since we’re trying to get there in just over half the time, we need to add more firepower to our cashflow to make the process burn faster. So, for this investor to retire in 7 years with an annual income of $75,000 he would have to invest an additional $1,300 each month to increase the rate of debt payoff.

Usually this is the part where things get very quiet. Because it’s a cardinal sin for an investor to invest money monthly in their real estate portfolio, right? I mean, this should be an income producing strategy not an income spending strategy. Think about it this way. Your real estate investment portfolio is being used as a tool to achieve retirement. So let’s look at all the other tools you’ve been using for the same purpose. Mainly your 401(k). You invest about 14k each year in that thing don’t you? And it doesn’t even come close to producing $75k in annual income and over a million in asset value in 7 years. So explain to me, why is okay to invest that kind of money in an “invest and hope for the best” strategy that might get you to retirement at 65 but not in your real estate investing portfolio?

Photo Credit: woodleywonderworks via Compfight

How to create a six figure income with real estate investing

July 2, 2012 By Erion Shehaj 4 Comments

Have you ever thought about what your life would look like if you could create a six figure annual income from your long term real estate investments? Today’s post is about how the investments we plan and execute today could get you there at some point in the near future.

The math of creating a six figure income from your real estate investments is quite simple. Essentially, there are two, very different routes to get there:

The Blueprint Method we advocate involves fewer properties and much lower risk. The concept is simple but it requires a solid plan and the discipline to execute it. Look at it this way: each free and clear property in your portfolio produces an income of $11,000/year. In order to generate an annual income of $100k you would need to own 9 such properties. But you don’t have the capital to acquire 9 properties with cash today to produce that kind of income. Thing is, you don’t need to. We advise our clients to purchase quality assets with 20-25% down and then use the positive cashflow they produce to aggressively pay down the mortgages one at at time with focused intensity. For a more empirical illustration download the detailed analysis of this domino strategy on a portfolio of nine single family homes. In that example, the entire portfolio worth over $1.25M becomes free and clear in 12 years and produces a six figure annual income before taxes. Can your IRA or 401(k) match that kind of performance? Not only that but the speed of reaching your goal is completely up to you and how aggressive you want to be. In comparison to the Perpetual Leverage Method below this strategy involves significantly less risk for two reasons. First, the number of mortgages you undertake is less than half. Second, these mortgages get paid off quickly in 12-27 months instead of lingering in your portfolio for 30 years. The management issue is resolved as well: Any investor can easily manage 9 properties using management strategies we teach. And finally, conventional loan guidelines allow for any investor to take out up to 9 mortgages so you won’t be locked out of financing using this method.

The Perpetual Leverage Method involves more properties and higher risk. Say you acquire a property that produces $4,000 in annual income after operating expenses and mortgage payments by putting 20% down. If you want $100k in annual income using this method, you have to own 25 such properties producing the same income each. I call it the perpetual leverage method because it involves keeping the properties leveraged for 30 years according to the original loan terms and using cashflow to create the passive income. There are three major downsides to this method. First, the risk to the investor rises with each loan added to the portfolio and since the loans are being paid off on 30 year schedule, the risk is virtually unchanged, throughout three decades. Second, managing 25 homes is not easy and not for everyone. You would think this would allow you to be financially free and quit your job when in reality you’re just changed jobs and became a property manager. Last but not least, acquiring 25 properties is difficult due to loan guidelines that restrict the number of properties with a mortgage any one investor can own.

The next question then inevitably becomes: If it is so simple, why isn’t everyone doing it? Because math isn’t the real issue. It’s a planning, commitment and discipline issue. In order for our Blueprint strategy to work, you have to start with a solid plan, you have to be committed to it long term and finally you have to execute it. Twelve years might sound like a long time from now, but think about where you were 12 years ago. You might’ve started your 401(k) and IRA 12 years ago. Is there 1.2 Million in there now and is it producing six figures a year for you? It’s time to take charge of your future. That life you would live if you were financially free is within reach in a few years but only if you push Start now.

Photo Credit: danorbit. via Compfight