I’ve been working with a lot of builders and builder’s agents lately to deal with some of the inventory that is getting a bit stale. A lot of builders are finding themselves in the “Accidental Landlord” position and it’s certainly not at all the worst place for a builder to be… and not just because the rental market is a better place than the courthouse steps!  I think right now seeing a builder who puts their inventory on the rental market shows that they solvent enough to weather negative cash flow for a bit (cash flow being operative words here- some cash flow is better than no cash flow!).  It also shows that the builder either has a solid relationship with their bank to convince them to convert their construction loans into something more permanent or waive restrictions in the existing loans on leasing properties.  Even better yet, I am in negotiations with a builder to manage a portion of his townhouse community that have been on 30-year fixed loans from the beginning!  Holy foresight, Batman!

It’s funny; I’ve yet to meet a builder who wants to be a landlord.  Even the builders I work with who are just finishing up rental projects don’t want to run the day-to-day operations of being a landlord.  All builders want to do is build!  Hmmm…

So, this blog series is my attempt to get some pertinent information out to people who want (need?) to think about the considerations that go along with new contruction rentals!

Eleanor

]]> http://www.rental-restoration.com/new-construction-rentals-the-prequel/feed/ 1 http://www.rental-restoration.com/re-keying-so-expensive-but-heres-an-awesome-new-product/ http://www.rental-restoration.com/re-keying-so-expensive-but-heres-an-awesome-new-product/#comments Fri, 09 Oct 2009 02:33:27 +0000 etrainor http://www.rental-restoration.com/wp/?p=1 Here in the city of Seattle, it is required that the locks be changed between tenants.  Our local locksmiths often charge at very least a $79 trip fee, plus $12-15 per cylinder to change the locks.  Yikes. (Rental Restoration charges a flat $92.50.)

Kwikset has developed a new secure  cylinder that anyone can change with the tool that comes with the cylinder.  This would be great for high-turnover units and multi-family buildings.  More information is here—->  http://www.kwikset.com/SmartKey/

Very cool!

Eleanor

There are a lot of reasons why I created a company that works exclusively with professional property managers and landlords…  the biggest one is:  THEY KNOW WHAT THEY ARE DOING… and <gasp> they are paying attention even when tenants aren’t! It’s no secret that even the best tenants don’t know how to take care of a house as well as an owner would hope.  For example, swapping out furnace filters to ensure a long life for a furnace isn’t really a priority– or sometimes even a thought!

I’m lucky to work with a lot of conscientious property managers who are very busily scheduling work to ready the properties in their portfolio for the winter.  What kind of work is coming in?

Gutters. Here in Seattle, having gutters that are free of obstructions and in good shape as we head into rainy season is paramount!

Furnace filters. Replacing a furnace is expensive!  Keeping up with clean furnace filters every three months (or less- depending on the type of filter and use level) and having the furnace serviced every two years will make it last longer.

Decks. As I said in my last post, decks need love after all the summer wear and tear!  Here in the PNW, transparent stains will barely make it a whole year before their water-resistance integrity really starts to fail.

Pressure washing. Any leftover debris or oils on the sidewalk and steps can cause hazardous conditions– at least here in Washington, it’s up to owners and PMs to limit the liabilities here!

Weatherstripping & caulking. Always a good service to provide whether the owner pays utilities or not!  In my own home, I wouldn’t turn on the heat this month until I had one of my guys go through and refresh the caulking and replace the weatherstripping (and I even had my attic access stairs re-insulated this year… must be the economy, but I’m hyper-wary of heating costs this winter!).

I’ve also helped two clients write letters to their tenants reminding them that it is the tenant’s responsibility to take necessary precautions to winterize their homes, what they need to do in the event of snow and ice, etc.

What else are you doing to get your portfolio ready for winter?

Eleanor

It costs about the same- and sometimes less.  At Rental Restoration, we’ve been able to arrange awesome deals with our vendors and subcontractors.  For example, our electrical work runs at just $85/hour with no trip fees or minimums.  If you’ve ever sent an electrician out to change out a bum GFCI outlet, you can appreciate how nice it would be to get a bill for just $85 plus materials!  Plus, there’s the element of what your time is worth.  If you have to coordinate five vendors to turnover a unit, how much time are you spending doing that and what is that time worth to you?  Most PMs I know would welcome the oppty to spend their time getting new properties instead of sitting on a locksmith to get a job done… only to have to do the same thing with the painters.

Here’s an update on our latest projects…

In July and August we had so many mini-reno’s from tenants turning over.  Did a ton of whole-house interior painting, installing new flooring, replacing countertops and plumbing fixtures, carpet cleaning, re-keys etc.  The property managers we worked with loved being able to just make one phone call to make it all happen!  And the properties we worked on seemed to rent quicker with their fresh face-lift.  Prospective renters are getting picky with all the choices they have to choose from!

As you can imagine, we’ve been doing a lot of exterior work lately.  Suddenly, everyone wants their deck sealed to battle the upcoming weather!  I’ve worked with so many deck products over the years (before becoming a GC, I owned many properties and was a property manager too).  I finally found a product I really, really love.  It’s called Superdeck and for those in the PNW, you can get it at Dunn Lumber.  Love this stuff.  Great coverage and its triple oil formula really soaks in.  I’m hoping my clients can get 3 years out of this stain, as opposed to transparent stains that tend to need a coat every year and most other semi-transparents that need coats about every two years.

Rental Restoration has also done some landscaping haulouts for those properties where the tenants tended to “let things go” over the summer.  We’ve been able to go in, thin everything out and clean it up so that next spring everything comes back nicely.

Rental Restoration LLC is a general contracting firm that focuses solely on rental properties in the Seattle area.  To fully introduce you to the company, I’ve prepared a little Q&A- which I’ll publish in shorter chunks for your blog-reading pleasure:

Wait, I thought you were a property manager!

Yes, I worked with Seattle Management Group Real Estate for a little under a year.  The brokerage is owned by some old friends who needed help with marketing and business development.  Prior to working with them, I was involved with residential and capital construction, an active landlord, and real estate investor.  While working with them, I realized how much time PMs spend managing vendors instead of managing properties!  I started Rental Restoration while still working at SMGRE and continued to learn more about what property managers need in a reliable contractor.  In the spring, I left SMGRE to focus full-time on Rental Restoration.  I no longer manage properties (except my own!) or hang my real estate license with any brokerage.

What exactly does Rental Restoration do?

Rental Restoration is the only general contracting firm in the area that focuses strictly on rentals.  We understand the need for speed, affordability, excellent communication and quality.  I created this company with a crystal clear vision of providing services that would make the lives of property managers easier!  Rental Restoration offers affordable maintenance, repair and renovation of rental properties.  We do everything from simple handyman service calls to major updates to rental properties.

Do you do the work in-house or do you subcontract?

Right now, we have 8 employees with varying specialties.  We’re able to handle most services in-house.  However, we also have negotiated special rates with journey-level plumbers and electricians to offer our clients an affordable solution when the nature of the service exceeds our on-staff crew.  My business partner and I have been in the construction and real estate field in Seattle for many years and we have an extensive network of specialty subcontractors such as roofers and appliance repair.

Do you have a website?

Of course!  You can find Rental Restoration at www.rental-restoration.com.  We’re adding some new functionalities to the site such as client log-in, so you can place work orders, check the status of work and look at the billing.

MORE Q&A TO COME!

Are you excited about having your very own reliable contractor or what?!!?!?!?

All best,

Eleanor

Days on Lawn is how long a home sits for rent by owner.  I’m seeing a lot of homes coming on the market – and sitting on the market– from “Accidental Landlords” and new landlords whose rental rates are a bit unrealistic.  These well-meaning folks don’t have the resources to analyze the current rental market to set an appropriate rent, market the property beyond Craigslist, or properly show the property and therefore they accumulate far more Days on Lawn than necessary.

I genuinely feel compassion for people who are trying to rent out a home right now without professional advice.  As I’ve said so many times in my blog posts, I think it shows a great deal of savvy to see homeowners trying to ride out the market by renting rather than selling and new investors taking advantage of the opportunities to build a rental portfolio.  However, I wonder how often this savvy goes unrewarded because the house never actually sees a tenant… or the house has so many Days on Lawn that the owner grows evermore exhausted and market-weary.

The Days on Lawn phenomenon has an impact on all of us in the rental market.  Many of the property owners I speak with on a daily basis have been doing their homework in preparation for renting their property by running their own comparative market analysis on Craigslist.  They look at CL to find similar properties in their area to get an idea of what rent might be appropriate for their property.  Unfortunately, CL doesn’t tell you how long a given property has been vacant or how much comparable homes ACTUALLY rented for.  So, while the house down the street might be advertised for $2800… you don’t know that this is week 31 on Craigslist.  In my latest post on luxury rentals, I show how the math pretty clearly favors dropping the rent a few hundred dollars to attract a tenant immediately rather than playing a waiting game at a higher price.

I’m not saying Craigslist isn’t incredibly useful!  Of course, Craigslist is part of my arsenal of tools to help clients set a rent range.  Like any tool, however, it’s only useful if you know how to use it well.

A well-respected member of the real estate community here in Seattle recently said that the most important words in real estate have gone from “Location, location, location” to “Drop your price”.*  For the moment, this is as true for the rental market as it is for the sales market.

*(Alright people, before you jump in on that one, I think we all know location will always be king!  It is simply an illustration of the times.)

Her:  I have a great job (Viking stove).

Me:  Yes, I know you have a great job (Viking stove).

Her:  Do you have any idea how much I spent on my new new blonde highlights (radiant heat floors)?

Me:  Your highlights (radiant heat floors) are very warm and inviting…  and I know how much you love them, but suddenly every single gal (new property on the rental market) has gorgeous blonde highlights (radiant heat floors).

Her:  I’m the total package!  (My house would go for $1.3m on the sales market!)

Me:  Oh sweetie, I know you are– let’s go to Ray’s for Happy Hour to watch the sunset and have a cocktail.  (Yes, it really is a gorgeous home.  Let’s sit down and pencil out cash flows.)

It’s no wonder there are so many luxury rentals on the market.  Last summer I put my Ballard Cape Cod on the rental market because the thought of losing $60k in cold, hard cash was unbearable to me.  I can’t imagine the thought of losing several hundred thousand!

Pulling your property off the sales market in favor of the rental market shows a great deal of moxy and resolve.  Your sensibilities tell you that you can ride out “today’s market challenges” (my go-to euphemism) if you make some adjustments to your plans and don’t lose your head.  You’d rather see some cash flow on the property than not.  Excellent– all makes great sense.

And now for the math…

I wish the math looked like this:  House A has an approx sale value of $500k and House B has an approx sale value of three times that amount.  House A’s rental value is $1800 and therefore House B’s rental value is also three times that amount.  If only!  Recently, we’ve been finding that House B’s rental value is more around $2800 (NOT always- it greatly depends on a lot of factors, which is why you should always consult a professional)… and about the same as House C’s rental value, although House C would fetch around $1.0m on the sales market.

Rental values just don’t take the same exponential trajectory, which is very difficult to reconcile for owners of higher-end homes.

Here’s some more math:

House A lists Jan 1, 2009 on the rental market for $4000/mo.  House B, with somewhat similar features down the street lists for $2800/mo.  Feb 1, House B is rented at $2800/month.  After two months, House A lowers the asking price to $3500 and then two months later on May 1 rents for $3300.  By Feb 1, 2010 House A has generated $33,600 and House B has generated $29,700.  Not to mention the fact that House A’s owner didn’t have the headache and heartache of having a house sit empty for a few months.  Now, if you were a landlord with the long-term in mind, then maybe waiting for $3300/mo makes sense.  But MOST OWNERS WITH LUXURY HOMES ON THE RENTAL MARKET DON’T INTEND TO BE LONG-TERM LUXURY LANDLORDS!  It just doesn’t pencil out to be a long-term luxury landlord.

I came to my own painful realization in this market.  I’m going to lose money.  I had to ask myself whether I wanted to hemorrhage or bleed slowly.  And then I figured out a timeline… and within that timeline formulated a plan to mitigate those losses.

There still is a luxury rental market and a good deal of people who want and need to live in larger homes with more features.  However, the supply has far out-paced the demand recently and those consumers have a great deal of choices.  Make sure consumers will be “into you” by setting the price appropriately.

Is there a code that requires me to install window coverings for a tenant?

In many urban areas, this is included in Landlord/Tenant code, but not in Seattle.  However, you have to ask yourself if you’d rather be the one to put holes in the walls or trim or would you rather the tenant perform his own handywork?  Also, if you plan on putting the house- or any adjacent units- on the market before the end of the tenancy, do you want to be in control of the exterior appearance?  It’s absolutely possible someone will want to use a Union Jack flag as a curtain.  (Obviously, if there is a requirement for neutral window coverings already written into a community’s CC&Rs then you’re covered… but all of the SFHs and townhouses I’ve seen lately in Seattle don’t have HOAs.)

Do I have to install a washer/dryer?

Nope.  However, your place will rent much faster with a washer and dryer already installed.  And again, do you really want a tenant doing a bad washer install and ending up with water soaking through the sub-floor?  Here’s a good idea:  Get your property manager to find some decent units on craigslist for a couple hundred dollars and have them installed by someone you trust to do it right!  Write up an addendum to the lease that says that the w/d are provided for convenience only and tenant use is at their own “risk”-  as in, “We’ll remove it if you want us to, but if it breaks during your tenancy, we’re not fixing or replacing it.”

Who does the landscaping?

The leases we use state that it is the tenant’s responsibility to maintain the yard in “good” condition.  It goes on to say that the landlord can, at the tenant’s expense, hire a service if the tenant fails to do so.  However, a tenant’s idea of “good” and an owner’s could vary greatly.  We recommend that with new construction, properties that will be marketed for sale during tenancy and properties with specialty landscaping, the owners provide a service as part of the rent.  Most property management firms have great relationships with vendors such as landscapers and can obtain services at a very reasonable rate.

Eleanor

I’m continuing to have daily meetings with SFH owners who feel like the price opinions I’m giving them are a little on the low side.  I’m always willing to start a house on the high side, but if I’m hearing crickets or getting negative price feedback from potential tenants within 7-10 days, that’s a clear indication we’re too high.  I still think the SFH rental market in Seattle has the potential to jump back up in the summer as it usually does…  although in this market, predictions are dicey at best.  We have to stay on top of this thing on a week-by-week basis.

What are you seeing???

Eleanor

For the purposes of this first blog in my New Construction Rentals series, I’ll focus on actual questions I’ve fielded from builders recently, in no particular order:

Should I really rent this out?  I won’t be able to sell it as “new” next year!

To be honest, I am thinking that the townhouses completed in 2008 and 2009 will still be the “new” townhouses in 2010 and 2011.  Why?  Well, I’m just not seeing a lot of ground-breaking out there for new developments… as in, there won’t be too many vintage 2010 units with which to compete!

I always ask builders (and Accidental Landlords), “Would you rather hemorrhage or bleed slowly?”  It was a question I had to ask myself last summer when I was trying to sell a house I’d just finished remodeling.  Did I want to immediately lose at least $60k or did I want to rent it out and lose about $500 a month?  The choice was clear… it would take about 10 years of losing $500 a month to equal out the immediate $60k loss- which is to say nothing about the tax implications of carrying a rental during that same time frame!

How can I keep it looking new?

Across the board, there’s no better defense than CAREFUL TENANT SCREENING.  Of course, you have to stay within Fair Housing Act guidelines, but performing thorough tenant screening is paramount.  The better the tenant, the better condition they will leave the unit!

Aside from that, you’ll want to work with a property manager or other professional to anticipate where the most wear and tear occurs.  Number one on this list is carpet and flooring, of course.  For one builder, I found some inexpensive but handsome padded benches to put near the main entrance and emphasized with potential tenants that the owner would appreciate that shoes not be worn in the house.  Although there’s no way to monitor it, this idea is among several tricks and incentives you can use to get tenants to comply.  (For my money, there is no worse flooring solution for a rental than carpet… but more on that later.)

Walls and appliances are next on the “Most Likely to Sustain Wear and Tear” list.  Walls are easily patched and painted.  However, today’s stainless trend brings challenges to rentals because few renters know how to properly clean stainless.  In my own kitchen, my dishwasher has swirl scratches in the stainless veneer where my well-meaning housekeeper tried to give it a good scrub.  I now have a “Care and Feeding of Your Stainless Appliances” handout that I give to tenants along with a bottle of the best cleaning fluid available.

Tomorrow, we’ll tackle a few other new construction questions.

Eleanor