Please note that this post is an excerpt of the webinar hosted by our sister company, The Landlord Code, where our co-founders coach DIY landlords how to avoid problem tenants and maximize rental profitability. Get access to more training like this in our (free!) private Facebook group HERE.
The $200,000 mistake that a client of ours made. This is a $200,000 mistake he made that could have been avoided and today we are talking about how you, Mister or Mrs or Miss Landlord can avoid making the same mistake this renewal season.
I think it’s also important to mention that this $200,000 mistake was actually, could have been a lot worse. $200,000- It’s hard to believe. – $200,000 seems like a lot of money and it definitely is, but this mistake actually would have been worse. It could have been worse. There was a lot of potential for it being worse. All right, let’s get in. First, we’re gonna tell you the story. We’re gonna tell you what happened. Now, this was a previous client of ours. He had a property outside of our service area. So it was not in an area where we could have leased or managed it. He had a realtor lease it who set him up with a lease that did not protect him and he thought about using a property management company. He called a few out, he got some quotes. This was a very high end property, I’m forgetting the rent. It was either 10 or 12,000. – He was renting it. Ironically he took less money than he originally, yet multiple applicants for this property and yet he rent it to this party for less money than he could have gotten. – Because he thought they were gonna be good tenants. – For $10,500 a month, yeah. – Okay, so forget about all the fair housing discrimination and not taking the first qualified. Forget about how– We don’t know where that fell in line or how that fell in line. – Forgetting about that part of the story, what happened was he rents it and he thought about using a property management company and he decided against it. He decided they’re too expensive. I can do this myself. He moved to another state and he did what we see so many of our DIY clients do. He said, “I have a handyman “who can take care of this property. “It was my house, “I know how to take care of it. “I don’t need a property management company.” – And that works well until the handy man called and said, “I’m pretty much in over my head here “with what I have to do” and he hadn’t even scratched the surface. – So these tenants were in the property, If I recall correctly, about three years, maybe three and a half years and when it came time to move out there was tons of damage, tons and tons.
Christopher, why don’t you just tell our audience here the level of damage, the types of things. Oh, I think we glossed over the fun part. This is a celebrity, rented to a celebrity. We’re not gonna give the names, but it was a situation. – Yeah, so I think what was really eye opening as I mentioned as we were getting started was that when I showed up to the property, I Uber’ed there back when Uber was a thing. I Uber’ed there. – And this was all pre-COVID. – And I saw two giant debris boxes. Out in front of the house that were filled to the top, in addition to like a line of garbage cans that were just overflowing with stuff and these are not like your debris boxes that you’d see in front of like a remodeled house. These are like construction site, hotel construction site size debris boxes in a gated community and walking into that property, you just saw the carpets initially trash okay, and then you walked through the kitchen. The kitchen was the stone countertops, trash, the wood cabinets, trash. The toddlers televisions coming off the walls. Going upstairs to the large owner’s bedroom, There was literally like glitter paste inside the carpet that was not coming out and then there was like, I guess, I don’t know, the tiles of the carpet were stained with die from other things that had been going on, and then in addition to all of that, what the biggest issue I think even after all the aesthetic stuff was all of the internal damage to their property. Which included plumbing. The mass, the large owners bathroom. They actually, there was a leak. This is an interesting thing to talk about because there was a leak. And it was a glass enclosed shower and glass enclosed showers you need to remember that there’s silicone to basically seal the stone to the glass. So that had failed and what happened is that water had been leaking over the course of this tenancy, through that seal into the structure of a shower and basically destroyed it. There was so much dry rot, but literally I poked my finger through the wall into the shower, and that’s not even an exaggeration. That’s what happened. So that was like the biggest, and for me eyeopening thing that I saw. In addition to that outside of the house, there’s even more debris. There was a whole breezeway that was like, probably like 25 feet by a hundred feet just filled with toys and junk and things like that and they had drilled into the concrete decking around the pool without using a professional to put fencing in there and so then that whole thing needed to be redone and they had burned something on the concrete outside of one of the bedrooms – And how do you do that? – Like, the level of damage that they did, I couldn’t even believe like how they actually did damage and then there was this one room, I remember this one room, It must’ve been their party room because it was destroyed. All four walls, the ceiling, the ceiling had water stains and dirt stains and glitter and all kinds of stuff. – Lots of glitter. All kinds of stuff going on in there and then there was one garage bay that just totally ripped apart. – And then wasn’t there something in the kitchen? There was a big mystery that could not solve and we’ve seen, our team has seen a lot of different types of damage, but there was something that had been done to these stones in a way that it didn’t make any sense, right? – But they probably put grease, hot grease on the stones ’cause it stained it and degraded the stone in a way that nothing other than a super hot material that had been just thrown down on it would have done. It was just crazy. So, that all had to be taken care of. So not to mention that all their appliances were pretty much like almost all but destroyed. – So this is in a very high end neighborhood and this is in a neighborhood where a lot of celebrities live. So this is not like your everyday rental and it’s not like a shoddy house that just fell apart. So this was extreme damage, but here’s what we’re talking about today. We’re not here to sensationalize you with the story, though it is quite a story. – Let me just say one thing, this house had like 10 or 12 bedrooms and bathrooms. It’s so many. And I think it had eight bedrooms and 12 bathrooms. It was huge and every one of those rooms, including the common areas was damaged. Like, you had to go in there and touch every single space in that house, completely touch it. – So the amount of damage totaled up at first going in, we were estimating 90, 100,000. It was like, it was more like 200,000, but there are a lot of lessons to take away from here. This did not have to happen. So what we’re talking to you guys about today, we are in renewal season. Wherever you are in the United States, most real estate markets are at their strongest time during the spring and most real estate markets, the rental markets move in tandem with the sales market. So if it’s a strong sales market, it’s a strong rental market and a lot of leases are written around this spring season. Which also means if you’re writing your leases now, annually, this is when you come up for renewal seasons. – So let me just break that down into layman’s terms. So during the spring months you generally can rent properties faster. So, less days on market and for more money. So increased
ROI is inherent just based on that and you want to always have your leases reset to this time of year. – Right, but so this is the highest volume. I’m saying, this is why we’re teaching it right now because most people have the majority of leases. A lot of them are coming up now. So, the renewal process is one of the most frequently underrated and forgotten about and brushed under the carpet elements of the leasing cycle that we see DIY landlords do. We also see property management companies not handle this and I’ll give you a hint right here. If you’re working with a property management company and they’re not charging you substantially for renewal they are not doing the things that we’re about to tell you you need to do to protect your asset, okay? So it’s not a good thing if your property management doesn’t charge renewal. If they’re not charging, they’re not doing it. They’re not charging, they’re not paying attention. – And for you DIY landlords out there that have the great tenant who never calls you with issues or problems, you especially need to make sure that you inspect the property on renewal. Even if, as the term comes up and you wanna like to get people on a 12 month cycle, but as it comes up, anyone to start scheduling those renewals probably 30 to 60 days off in time of renewal. – So let’s cover the three things we’re gonna cover today. So one, during renewals we want you to inspect the property. Two, you’re gonna wanna do a legislative check and three, you’re gonna wanna look at your ROI, your budgeting and your capex budget.
So those are the three things we’re gonna talk about today and we’re gonna talk about the ways that this would have influenced this landlord’s journey in a different way had he taken these steps because this landlord thought those were great tenants. Barely heard from them. – Barely heard from them. – Not a good thing. – Always always paid rent on time. Mostly because they had a business manager paying the rent for them. But so let’s just talk about these
Number one, the inspection of the property. So, when your leases are coming up for renewal at the end of that term, you should give your tenants notice. Say, “Hey, look, “I’d love to renew with you “and this is the time where I need to do an inspection” and when you go do the inspection you’re gonna be looking for things that are like different maintenance. Things that they may have seen or you might just need to address because they haven’t noticed it, right? And while you do that, you notice things that are not functioning or could cause damage or destroy the health of your property. – Right, so it’s important to know when you’re doing this annual inspection, every state has different rules about inspections, right? So in California for example, a landlord is not allowed to just go in and willy-nilly inspect a property. You have to have a specific reason. The tenant has a right to quiet enjoyment of the property and we’ve had DIY landlords who we’ve worked with over the years and who we stopped working with because they would repeatedly show up at the property and get into the property. – Why? To inspect it ’cause they’d heard something. – So every state is different, but it’s specifically in California, you definitely can’t just show up. I’m willing to bet in most states you can’t just show up. – But having a reason like making sure that the smoke detectors are functioning or are in place. Oftentimes we’ll go into a property for example, we’ll see smoke detectors or carbon monoxide detectors are just missing because they start beeping in the middle of the night. – Raise your hand if you did not throw one of those things off the wall– – Yeah, exactly, so the tenants just take it off. They don’t put it back up. So this is the time we’re like, “Oh, that’s off. “I’m gonna hire somebody to go put that back on for you “and put a new battery so that doesn’t, you know, “drive you crazy in the middle of the night again.” – Yeah, so step one, you’re gonna inspect the property. You’re gonna go in there with a habitability reason, safety reasons, why you are checking out the property. Now, in the example of our story that we’re giving you this landlord lived in another state.
So would it have made sense for him to fly out and do the annual inspection? Maybe, but probably not. So if you’re a DIY landlord and you’re managing your property remotely you don’t personally have to do it. You can have a proxy go do it for you, but you need to have a process and you need to know what this person is supposed to be inspecting for. So in the case of our cover story here, had this landlord performed an annual inspection or had he hired a property management company who was performing annual inspections, this damage would have been caught way before it got to the $200,000 level. Way before. – Oh, for sure. If they had gone through the property and looked at that shower stall, they would’ve noticed that there was an issue and they would have been able to say, “Hey, listen, you can’t use that shower “for about two or three weeks “while we go get it fixed, taken care of” and that would have saved this client a significant portion of that $200,000 for sure. – ‘Cause we’re talking about 200,000, but what we’re not talking about is the emotional stress and the amount of his time that it also took to not only oversee the rehab project, but to then oversee and pay for the attorneys, to be writing the letters back and forth, to go to mediation, to understand the risks involved in having to go to big boy court because the dollar amount was so substantial and for him to learn the hard way, how often landlord side on the side of the tenant and how much more likely they are to side-The court, I’m sorry. – The court err on the side of the tenant, but just to point out one thing, so had they done an inspection and just using a shower stall as an example, you know, a tube of silicon caulking is significantly less expensive than doing a full shower demo rebuild based on, you know, the damage that this shower faced.
So he might’ve been able to, you know, get away with maybe a $1000 worth of fixing versus I don’t even know how much. – Not to mention would’ve noticed all the unauthorized occupants. All the whatever glitter parties going on there. It all would’ve been stopped. – The burnt concrete. – Well you know, maybe that could have been saved. So an annual inspection would have saved all that for this landlord. So the second thing we want you to consider as we’re here in renewal season is — – Sorry, legislative check. The legislative check. You want to make sure that you are in compliance with your local and state legislation as it pertains to renter law. – So no matter what state you’re in annually little things can change. New disclosures can be required. We all know right now there’s a lot of COVID legislation going on. That’s regulated both at the federal level and on the state by state and even on a County by County level within your state. So we’re seeing a lot of questions come up in the DIY landlord Facebook groups that we’re in, where people are like, “I don’t even know, “what’s a landlord association?” So everyone’s got one. Even if you live in a tiny town there’s whatever the nearest big town is. There’s some kind of landlord association near you. So you want to Google it. You can always call your local realtor. You can call a local property management company ask them who the groups are. There’s not usually a lot of money to join, but by being a member of your local landlord association you will be on the know. You will be on the up and up about these new legislative changes. So a couple of examples like where we are, these are little things that come up that could end up costing you a lot.
So we had a flood disclosure came up a couple of years ago. That’s now a requirement. – Bed bug disclosure is another requirement. – We had, because of all the fires here in California, there’s now a requirement that garage door openers are battery backup and not just hardwired. So let’s just flush out a worst case scenario. Let’s say you’re a DIY landlord. You’re not aware of this change. You’re not using an up-to-date lease and you’re not doing your annual legislative check. Well, guess what? If your home were to catch on fire and like, heaven forbid, something bad were to happen and you hadn’t complied with that, well, how do you think the insurance companies are gonna look at that? It’s not a good situation. So you as a landlord, you’re in the landlord business, you are responsible the same way for someone owning say, a restaurant is responsible for the latest unemployment laws. You as a landlord owning your rental are responsible to know the latest updates in the legislative check. and there’s no better time to do that than to set up your process, to have it done annually along with your annual inspection, your annual renewal. It’s time to do your annual legislative compliance check. – And here’s a pro tip. Anytime there’s a natural disaster or something major that happens in the world, usually there’s legislation that comes nationwide that will, has to be incorporated in lease documents or sales documents. I just talked to a Texas realtor this morning and now some of the lenders are requiring second inspections based on the freeze that just happened last week because that’s a new thing and that’s actually probably gonna become, you know, par for the course. It’s gonna be something that they’re gonna have, the standard now in Texas. – And that’s interesting ’cause Texas is, as most people know, is one of the least regulated States versus where in California, one of the most regulated States. So to see that even one of the least regulated States is making changes. It’s just a small example on why I know everyone’s eyes gloss over when we talk about legislative compliance, but for our clients, our Foundation Homes Property Management clients, it’s part of our annual service and something that our team is always checking on to help make sure you’re protected.
If you’re a DIY landlord, you need to make it part of your annual process. – Yeah, and here’s the great thing. As long as you join one of these groups or get on their email list and someone there is geeking out on new laws and they’re always sending you emails for the most part. Well, they are, that’s their job. It’s to like pay attention and they’re I say geeking out, but they’re paying attention to what’s happening and they’re gonna send you an email, it’s like, “By the way, this is happening “pay attention to it”. So you don’t have to necessarily always be doing the research. You just need to be in touch with the person who is. – On the email list. – Exactly. – And don’t send it to spam. – Yeah, don’t send it to spam. Don’t unsubscribe. Don’t unsubscribe. You want to be on that list. – Okay, so then the third thing we want you to consider annually during your renewal season is an ROI check. – ROI check. Now this, I always say you want to see how your property is performing based on the rental you’re getting. Remember, this is an investment property. It’s also a business so you want to run to like one. I always recommend doing an ROI check on a quarterly basis, but for the purpose and an ROI could actually be as own training. In fact, we’re doing for some of our platinum clients for Foundation Homes, we’re doing an ROI consult for a select group of those of our portfolio, where we’re gonna go into detail about the performance of their property, but for the purposes of this show and this training today, we’re just going to talk about it as looking for things that you need to budget for going forward, like capital improvements. So when you walk through the property, you might identify you know, things that you want to take care of maybe next year or budget for to take care of next year.
Like a new deck or painting the exterior of the property or upgrading your appliances as an example. – So the rule of thumb that a lot of people know is you need to budget about 1% of your properties approximate value for repairs and capital improvements. But we actually did a deep dive study of about three years worth of data because that didn’t sound right for the portfolio. We manage homes varying anywhere, a million up to $4 million. We’re like, “Well, that’s a lot of money”. So we actually did a deep dive into our numbers to see how much are our clients actually spending on maintenance and what it came out to is about half a percent. So the rule of thumb that we’re putting out there is if you own a property that, let’s call it 500,000 or less then you’re probably closer to that half a percent of that property’s value annually to be budgeted for repairs and capex, but if you own a higher end rental property, above that number you want to be looking at more like half a percent. Did I say half a percent? 1% so, if it’s under 500, half a percent if it’s over. There’s probably a gray area in between, but these are approximate numbers that annually you want to take the time to look at. “What did I spend on my property this year? “What did I bring in? “How much am I making? “What’s my forecasted revenue. “My forecasted rent increases, “my forecasted property value acceleration “and how much do I need to be saving “to save up for these big ticket items?” Like you mentioned like a roof, like a water heater repair, like a kitchen upgrade. – Yeah and all these little things that come up. So I’m at our house, I manage all the fixing, things that need to be fixed. – They just get fixed magically – The maintenance stuff and so– – I don’t think so. The fix-it fairy comes– – I tested this half a point, half a percent theory just looking back at all the improvements and repairs and things that we’ve done at our house and I keep my house pretty maintained and it actually worked out, maybe not every single year am I spending that half a percent. But if I look at it and amortize it over the lifetime of our ownership of the property, it works out to be half a percent.
You have to start thinking about things like, “Okay, I painted the house last year” or “I bought a new garage door opener” or “I had to make a fix to the pool” or “My landscape, I had to do some trimming back “with my trees and landscaping”. You know, just little things that sort of starts to add up. Some of them are large expenses. Some of them are small expenses, but overtime it does add up and you definitely want to make sure that you are tracking that number one, that number two, budgeting for the big ticket items because when those happen like a roof or a deck or a water heater or sewer lateral line, these are expensive items. You wanna be prepared and not thrown off, go “Oh my gosh, I’ve got to come out of pocket a significant amount of money here. – And I can’t afford this. – I can’t afford it. – And then now you’re mad at the tenants and now you’re mad at the property and really, it could just be as simple, honestly as setting up a little side pot savings account with your banking account. So you’ve gotta set it and forget it. You could set up an automatic bank transfer. So I think in our case, our property is gonna be projected like four or 500 bucks a month. We need to set aside for that. – Exactly. – It doesn’t have to be complicated. – Your house could be awesome. It could be brand new, but anticipate it’s gonna need work and then if you anticipate it, it will be set up. – Okay so, and to recap if you don’t want your own glitter party and $200,000. –
Wait, I think glitter parties are awesome. There’s been several properties that we’ve worked on that had glitter parties. – Yes. – We no longer have those properties. There’s something to be said about it. – Yeah, well, it clogs the drain. That’s what happens, is like glitter goes in there and then the plumber comes to us and says “Another glitter party”. – Yeah, to recap, at renewal time, so after the initial term of your lease as it’s coming up, schedule the renewal and inspect the property. The second thing you want to do when you’re going through the renewal process is make sure that you do a legislative check to make sure that your current lease or lease that you’ve been on is in compliance and if it’s out of compliance or needs some updating, this is the time to do it and the third thing is to do an ROI check and start thinking about budgeting for capex. Look for the things that you’re, the big ticket items that are gonna be coming up down the road and you’ll have visibility into it while your tenants in there. The upside of that whole scenario is that you have someone that’s paying you rent that’s gonna continue the cashflow. You can start saving. So if you haven’t started saving yet start saving today. –