I'm just about to purchase multiple properties in a nearby college town that I and a co-owner plan to rent out.

My question is really in respect to liability for any illegal substances that a tenant may have (we're talking college students here). What happens if the cops find drugs at a rental property of mine? Who is held responsible? Surely this issue has to be addressed somewhere with all the rentals going on the country...

I really would care less except for those damn mandatory minimums....Used to be even if legally you were found to be in possession of drugs, the judge could sentence you to no jail time if the facts and circumstances overwhelmingly indicated that you did not know of such possession. That's not the case anymore...

Any responses would be appreciated...

 

it sould not be a problem if you state something in the lease about you are not responible. im no legal expert, but that sounds like it would cover your butt.

 

Two things you may think about doing. 1. have anybody you want to rent your units -- sign an agreement to have a retail credit report ran on themselves -- if they have any "issues" in their past -- it will show up. They pay for it up front. If they refuse -- say -- "see you later aligator" . This may slow your rentals down in a university town -- -- but so what! -- you will get better renters, in the long run. 2. put Your rental concerns in a "LLC" (limited liability Corporation) -- here in Missouri this is a type of incorperation that limits your liability to strictly the assets of that company (I think -- I am not a lawyer) -- they can not touch your personal assets.

PS -- you need also a good "rental agreement" (contract). there are plenty of sorces for these, which can be modified to fit your needs

 

cpadpl, you are not liable for illegal activity of your tenants as far as breaking laws, you can't control them. You can however have problems with surrounding landlords of other properties that may ask you to "deal" with a bad tenant that their tenant may complain about. It would be more of a civil threat than a legal threat.

See if there is a landlord association in your area and join it. It will help clarify these issues in your State.

I would be more worried about pets than drugs though. They are a far bigger liability with dog bites and stuff.

My family and I own more than 90 duplexes and most of them are on the bad side of town. We have never had a problem with being liable for illegal tenant activites. We have had busts and even murders outside our units but never any problems.

Tenant screening is the answer in this business. Charge an application fee and check their civil and criminal history. Which in most cases can be checked for free in your counties public records website.

In 1999 I did about 22 evictions from my properties for the year. I have only done 1 since July 5, 2000.

Many landlords try to hard or look for too much aggravation. Just keep in mind that almost all tenants tear your places up. Don't do overkill on repairs and updates, make things heavy duty. Look them right in the eye if they don't pay you and tell them you are putting them on the street. I had a big adjustment period when I got in to the business. Roaches don't gross me out anymore. I've seen it all.

 

cpadpl, I forgot you live in Florida. That's even better. Don't worry about a thing. You are not in any way legally responsible for their illegal activity unless you support, encourage or benefit from it in some way. Tenants have more rights to the property here than you do once the lease is in force. Your own tenant can even trespass you from your property. You have no control over drug activites just as you don't from fighting, child abuse or any other crime that occurs.

Also, if you don the eviction right, you can have them out in 12 days for non-payment and about 20 days for non-compliance.

Make your lease as clear as possible without being illegal. I have several good ones that cover everything that I can send you if you wish. I also have community standards and a drug free living addendum that are all legal in this state and stand up in court.

If you need anything I would be glad to help.

Florida is one of the most pro-landlord states as far as the landlord tenant statutes are concerned.

 

Markmizzou -

Thanks for the info. I've set up quite a few clients up in LLCs, so am familiar with the concept. For one or two owner rental entities, insurance most likely will adequately cover the risk.

seacrow

I figured you would answer, just didn't know when. Thanks for the info. This leads me to my next question: We are currently about to by 4 properties. Do you have any recommendations as to making sure we have renters for them (other than the obvious)? My biggest fear is we buy 4 houses and we can't get renters in, then I've got 50% of 4 mortgage payments to make (which I can easily do, I just didn't get into this to pay $500 a month to a bank). Is there anything that you did when you first started out to minimize your risk of that happening? Or do you just have to jump off the cliff so to speak?

Also, I am someone who likes to tweak my risk level on my investments, which is why I buy and sell options on stocks. I am interested in the post-purchase appreciation of this property (real estate appreciation is nice), but I am mostly in this to generate current cash flow with minimal investment risk (i.e. bank provides most of the money), and getting a tax writeoff at the same time. Therefore, I have been conemplating different ways to increase the monthly rent without chasing tenants off.

One idea I had (remember I said this is in a college town, but we will try to market to a young family as there are plenty of those there), is to somehow incorporate a BPO (bargain purchase option) in the monthly rent. For example, they have the option of paying an extra XYZ a month, say $300 for example purposes. If they pay this amount it will count as a direct reduction in the purchase price of the house if they ever want to buy it from us. It would be in the agreement. Once the BPO was agreed to, the extra payment would have to continue the entire lease term (1 year). They could stop when they renew the lease, but any amount paid would be forfeited to us. In the event they decided they wanted to buy the house, the FMV would be established by the average of three appraisals, one obtained by them, one obtained by us, and one obtained by both of us in agreement.

My idea (really) is to get people to fork over as much cash as possible. My hope is if the BPO is reasonably priced enough, that people will do it just for the heck of it, and ultimately they will not utilize it because they have to move somewhere else. If they forfeit the funds, we've made extra money. If they buy the house, we'll get FMV, and they will have "prepaid" a portion of the sale price to us..........Either way, I think I'll be happy....

Your thoughts?

 

cpadpl,

You think a lot like I do. Getting them to fork over as much cash as possible is key. I call it "aggravation fees."

First of all, what type of houses are these? How big? What type of neighborhoods? What type of construction are they?

Lease options or purchase options of any kind can be a little tricky. You have to go with your gut feeling a lot of the time. It doesn't always work out exactly as you plan. I have done it once. A lady put $5000 down for the option and I credited $125 of the monthly rent towards her principle. She moved after a year and I made out well. But the aggravation level was even higher. It cost me a lot more to rehab it for rent when she left since she painted it to her liking etc. planning on buying it for herself.

Renters and potential purchasers are two different markets and rarely cross over. You almost have to be a hardcore seller or a hardcore landlord. Statistically, most lease optionees forfeit and fail. However, some of them get pissed and hire attorneys since they feel screwed. It's a huge hassle.

I have gone back to the basics. I base my intentions on the properties I buy. With the loan programs out today and low rates. There are many people that can't find an affordable home. If I can make at least $600 per month on a house or duplex, I rent them. If I can make $20,000 or more on a remodel and resale. Then I do that.

Don't worry about vacancies, there are no shortage of renters in Florida. We get more every day. Also, you almost always get to keep deposits and many times late fees help too. October is the worst month for vacancies in my area. August and September are slow. The rest of the year I have people moving in as I am cleaning up my mess from rehabbing.

Lease options may work out well for you depending on the property and your market. I would not do it without at least $2000 upfront plus first months rent and a deposit. You can also price the house up front, no need for more appraisals. A balloon is a good idea too. Or you could consider holding a mortgage.

A lot of it depends on condition too. If a house is in poor condition after a move out, sometimes you can rent it "as is".

If you buy them right it is almost impossible to lose. I say try anything.

You also need to do as much work yourself as possible. I do all of my work from fixing toilets to installing AC systems. Or at least find a cheap handyman that offers landlord pricing expecting repeat business. This is the area most people fail in. Make them as heavy duty as possible for rentals or a little more on the cutesy side for sale or options.

My rentals are my full time job and I have three houses I am remodeling at the same time. I love it!

Let me know about the types of properties you are buying and I can give you a better idea of what I would do.

 

cpadpl,

A few more thoughts.

If you are doing this with a partner, I would start with multi-family dwelling first if you can. Houses are difficult to make on sometimes especially for two. Also, it can provide a nice cushion for more if you decide to do so.

To do BPO, I would make sure that the couple is married with at least one child. The husband should be in a stable career of some sort. No truck drivers or waiters. Women should be too, not babysitters or some other thing. Blue collar guys seem to work out best for these. It won't do any good to have a BPO if they can't afford the payment. These homes should be in a popular neighborhood or area and be affordable and financable to begin with. My philosophy on these tenants is if a lender would not qualify them then I won't either. Except for credit. Bad credit can be fixed or at least qualified for a loan by doing this. Most of these people will never buy but it doesn't do you any good if you have to evict them either.

Just a thought.

 

seacrow

You have offered the best advice I've heard from anyone anywhere, and believe me I've been getting advice (even from people who don't own any rentals).

You make a very good point about the hassle of BPOs. I had never thought of that. Of course, I have never thought about somethign like the $5,000 down your old lady made, and that makes me see nothing but $$$$$.

Seriously, we are purchasing in the Gainesville area (near University of Florida). My ideal tenant is the student family. There are a lot of older couples with kids who have one member going to UF, usually for a doctrate or perhaps to the prestigous medical school there (Shands). Gainesville is one of the cities where when you settle in you really aren't quite sure if you are going to stay or not, it's such a nice college town. Even I (a single guy when I graduated) thought about staying. It is that wishy-washyness that I want to capitalize on with a tenant. If they think they "might" want to stay, I think the average joe family would see my BPO as the greatest thing in the world. "We aren't getting a home only a rental for this $1000 a month (or whatever), but then again we aren't tied down like we would be if we had purchased a home, and besides a portion of what we pay goes towards this home IF we ever do want to buy."

I figured if we bought 4 houses between the two of us that would be enough (re/ your comment about multi-family housing).

Re/ your question about the types of houses, these are simply small nice little houses, maybe 1000-1200 sq. feet. approx. $150K in value. Neighborhoods are good, no real crime in Gainesville (except for that serial murder a couple years back...hehehe)....

 

Take it from me. Unless you do the kind of volume Seacrow does, you will not get rich from just 4 units.

In my case, property value is very high. We're talking $35 to over $100 per square foot. I know of several vacant lots of around 20,000 sq. ft. selling for $2 million. I live in the "slums" and my 40+ year old cookie cutter tract home is assessed at $300k. The appraised value is actually closer to $400k. Most of the value is in the land.

I went into this with the mindset that it was an investment for sale in the future at a profit. Renting the places are to provide income to maintain the place and provide a bit of positive cashflow until I decide to sell.

There is a slight possibility that you can lose your property because of your tenant's activities. You need to check the laws where your rentals are. There are conditions here where I live that could put a landlord's property in jeopardy. The landlord either has to be the dumbest landlord on earth or knows what's going on and continues to rent to those involved in illicit activities. It's tough to do it, but a small handful of landlords have lost their propety here in the last few years. The last was a lady who kept renting her commercial property to people involved in illegal gaming. Somehow the authorities knew she was renting to particular people who were involved in illegal gaming, so they confiscated her property. She actually lost the property.

 

Well what am I supposed to do, buy 90 units? I am semi-retired from my career and teach part-time now at a college. Most of my assets are in stocks and bonds. I wanted to get started in real estate rentals, so I figured 4 units is a good start. I can't afford to modify my investment structure, which is strictly laddered for cash flow, as well as structured with LEAPS so I'm essentially locked in some positions for 3 years. Besides, even if I could dump all my money into rentals I wouldn't do that due to lack of diversification.

If 4 units work, maybe I'll get 4 more, and then maybe 4 more....Why do you find it necessary to put a negative spin on everything? I am already rich enough for my tastes, and simply feel I should expand my portfolio to enter into the one asset I am not invested in at all - real estate.....

 

cpadpl,

I think your price range for the houses will not work for BPO's. I think the 80-120K price range might be better for those. It will keep the tenants payments more affordable. Remember, families that can swing $1500 payments are not that wishy-washy. However, there is nothing wrong with having any rental property in a nice area. You may not always make a monthly income from them but it would be good for appreciation. Now if you are buying homes for $90-100K that are potentially worth $150K that makes it even better.

Many of my friends went to college at UF and they preferred apartments. Why don't you look around for some duplexes, triplexes, etc. and see what you can come up with along the way.

The houses that I buy and resale for example, one I got for $81K and will sell it for $109K after about $7500 in rehab. and another that I bought last week from some guy in foreclosure for $74K in a much nicer area I will sell for $120K after about $6500 in rehab. I have buyers lined up ready to see them. There is a shortage of houses in these price ranges that will pass FHA inspections, etc. I would assume the same is true in Gainesville. The high FHA puchase limit is $144,000 by the way.

There is nothing wrong with your ideas. I just think that if you are looking for a good cash flow multi-units are the way to go. With the low rates on mortgages now it is easier to buy and resale houses right now. There are also some decent first time buyer programs around that help. Or, you could rent your houses for 4 or 5 years and sell them for a gain and turn that in to multi-units or whatever.

Some more ideas.
Never buy anything but concrete block construction especially here in Florida. Never overdo anything, if you are renting expect to get your unit back trashed. Put as little money down as you can get away with. Get friendly with the German ****roaches, cause you sure can't kill them that easy. Never buy mobile homes or condos as an investment unless you can get them for $1. When you are succeeding in real estate there is someone else around the corner that is failing, look for that and be ready to take theirs. You don't need an attorney to evict. And don't take any crap from tenants but treat them like humans.

Dennis is not negative, he speaks his mind. I can tell he is a landlord too.

OF course, you never know. This BPO may work out fine and be the next frontier. Maybe I will try it on a house or two to see how it works here.

 

I sure hope I didn't discourage anyone from getting into this. I just want people to realize that you aren't going to bet rich from rental income unless you have a gazzillion units like Seacrow has.

Rentals, however, are a good way to go if you are looking for a way to buy and maintain investment property. The only thing worse than having a place trashed by a renter is to leave a place un-occupied for long periods of time. It's not hard to keep a renter from trashing a unit if you schedule regular inspections. In my case, I learned a lesson when a renter abandonned a unit and left me with about 2 weeks of work before it was ready to be rented again.

Since I'm going for the investment side of the business, I tend to buy in better neighborhoods. Consequently, the rents I am able to get pretty much just goes to paying expenses and leaving me with enough (hopefully) positive cashflow to cover any unexpected rehab expenses prior to my selling the place.

As I alluded to earlier, it's a hell of a way to get tax deductions on equipment and other things.

I presonally don't know how Seacrow does it. The kind of volume he does would put me in an early grave. I'm way too old to put myself through that kind of stress. Besides, I didn't retire when I was 38 to bust my butt 10 years later!

One more piece of advice. When you rent out a unit, make every effort to put it in as new condition as you can. It's a lot easier to fill out the rental inventory and condition form when the place looks like it's new. When time comes for the tenant to leave, you'll find all the damage and will be able to either get them to fix it or charge them for fixing it. Normal wear and tear is paid for by the landlord, but dents/holes in walls, holes/burns in carpets, smoke in no-smoking units, pet damage when there aren't supposed to be any, etc. are a lot easier to charge back to the tenant if the inventory sheet shows the place was in pristine condition originally.

Oh, if you paint the interior, do NOT use flat paint anywhere. Use gloss or semi-gloss paint. It's a hell of a lot easier and cheaper to clean the walls than it is to paint over flat paint. I actually use a sponge mop to clean the walls. Learned that from a friend who managed McDonald's a while back.

One final thought. Don't go cheap on your lease. Don't spare any change in getting a lease written up that covers every conceivable possibility.

 

I just want to be perfectly clear here. To make money in the rental business, you need volume. Unless you got the place for free, you won't make much of a living from renting out just one place. If you have a mortgage, that cuts into your income. Do the paperwork and see how much you'll actually make and remember, you need a reserve to cover major rehabs if your tenant decides to screw you.

The best buy in many areas is a whole apartment building. My cousin does this up and down the west coast. He and his partner buy distressed multi-unit properties. They move everybody out and rehab the place. Then, they rent out the place for more money and put the place up for sale. He's much younger than I am, so he has the energy to do it.

I think you'll find the only way to make a go with a low volume rental business is to buy in areas where appreciation will make it worthwhile. All the usual caveats apply. Never buy the worst or best house on the block seems to be the best one to follow.

I thought I was doing you a favor by pointing out the negatives. I suppose I should have kept my mouth closed? I've been doing this since the 80s. I didn't want you to be disillusioned. I pointed out how you can still make money with a low volume business through appreciation, not from rental income.

Seacrow is a special case. He has youth and energy on his side to do a high volume rental business. You need the volume to make a good living at it. Even with a dozen units split between two partners, it's going to be hard to live well off of it.

In your case, you are in a similar situation to me. I don't think you want the stress that Seacrow thrives on. I did that for the 12 years prior to my retirement. If I read what Seacrow is saying correctly, he's telling you the same thing. You aren't going to get rich from just 4 units, unless you're looking at appreciation and you need to buy in areas that are sure to appreciate.

I pointed out how I do it, compared to how Seacrow does it. Take that at face value or read what you want into it. I'm at the point where I don't even have to take out a mortgage to buy my next place. Think about that one for a moment. I own everything outright. Seacrow probably has to rent out 2 dozen units to get the kind or rent I'm getting from my 4 properties. I'm betting he makes a better living with his rental income than I am.

I'm sorry I wasted your and my time. Forget all the advice I gave. You probably think I don't know anything anyway.

Since you're in the market, how much UAL did you buy? I'm sitting on 20,000 shares I bought for under 2.0. I wish I had bought 3 times that, now.

 

What you want to read up on is the civil forfeiture laws of your state. I would structure the lease so that once the Joe Tenant does something goofy, he can be evicted pronto.