Fix This, Fix That

 

The most common objection to being a real-estate investor and/or landlord is “I don’t want to fix toilets!”

 

Well certainly this can be a part of being an landlord, especially if you don’t focus on what’s important and the reason why you got started in investing.  I have done my fair share of getting dirty.  However, new investors must keep asking themselves “How did I get here?” and “Is this taking me towards my goals or further away from them?“.  It depends on the person, but I’m betting that most people get into investing and out of the 9-5 job for more freedom to spend time with family.  Is fixing that toilet getting you closer to that goal?

This is where your team comes in.  In the case of repairs, that means your handyman, plumber, and electrician, among others.  In fact it is a good idea to have a few backup people in the same trades to minimize the need to do it yourself.  In the end you may need to get your hands dirty too in order to get it done, either to prevent further damages or to inconvenience your tenant beyond reasonable limits.

Laziness or lack of knowledge & skill may actually help you in achieving your goals.  If you can’t do the repairs then you will find a way to have someone else do it.  The best use of your time should be in looking for the next investment property or improving the business.

When I have repairs that need to be done, I ask myself the following questions:

 

1) Is this urgent?

At first you may say yes, but step back a minute to think this through.  If you’be received a call from a frantic tenant, calmly ask a few questions to get a better feel for the severity. If it’s not urgent, maybe you can combine the repair visit with another repair at the same time to save a service call charge.

I remember one time I got a voice mail message from a tenant while I was on vacation, and it went something like “This is Irving (frantic), there’s water coming through my ceiling.  Please call me back right away!”.  Of course I did not get the message until several hours later, so I was picturing water gushing out of a burst pipe filling up the basement and destroying my property, with Irving scratching his head wondering what to do, floating down the hall on his couch.  Turns out there was a small amount of water leaking through the gasket from the toilet upstairs.  It was not constant and until a handyman could look at it in a couple of days a bucket would be fine.  Not great but really not a catastrophe, especially considering what I was imagining.

2) Does this actually need a repair?

Again step back a minute and ask the tenant some simple questions.  Keep it SIMPLE. Also consider if you can leave the item in an unrepaired state if you have some upcoming renovations or replacement.  If the toilet flushes slow and you are planning on replacing it next month, why bother?

For example, in another case, I had a tenant call and say “I think my fridge is broken.  Water is leaking out the back and into the motor and shorting it out.”  Sounds bad.  Sounds urgent to make sure all the food does not go bad.  I simply asked a few questions and determined that it was still keeping the food cold, and that he was hearing the freezer going through the defrost cycle where it turns on a heater to keep the frost down.  He made a few uneducated conclusions and could have cost me a hefty bill from my applicance repairman just to come and look at it.  I did make a mistake one time and was charged $100 for replacing a lightbulb.  I did not take the time to ask a few more questions when my tenant said that a light fixture did not have power.  He tried a couple of lightbulbs but it turned out they were both burnt out.  Should have asked if he tried them in another fixture!

3) Who should I call?

This really depends on the circumstances, but I usually have my handyman look at things if there’s a chance it could be something basic.  He charges much less hourly than skilled trades, and often can get there quicker, even if just to look at it initially.  If he can’t do it then I call in the big guys.  If it’s a big job then the skilled trades may be better value since they can handle tough problems as they come up.

If you make a wrong decision with the repair or get involved in doing it yourself in a moment of weakness, don’t be too hard on yourself.  I still get caught doing these things from time to time.  Do your best to learn for next time and use the frustration as fuel to motivate yourself to spend more time furthering your business rather than doing repairs.

Lie To Me

If you’ve decided to manage your property yourself, you have decided to keep more of that cashflow for yourself!  However, there are other things that you have decided to also keep for yourself.  These are manageable issues, but it’s important to consider them before they catch you by surprise.

I have found “People Issues” to be the source of most of my frustration with self-managing my properties.

The first hints of people that will be a problem are often found during the application & screening process.  Most of these are weeded out with inconsistent or fishy stories.  Here’s a few dead giveaways:

• my landlord is terrible
  Complaints of things not getting fixed, unhealthy living conditions, rudeness, keeping the security deposit, being unreasonable, unfair evictions, etc.  While sometimes there can be some truth to it, just think of what they will be saying about you if you let them rent your property.
• no previous landlord reference
  They’re staying with friends/family, new to town, old landlord doesn’t have phone, landlord on vacation, etc.  Could be true?  If they’re staying with family, do you think they asked permission of their landlord to fit a friend’s family of 5 in their 2-bedroom apartment?  Won’t they need a place to crash when they get evicted?  Where do you think they may stay?  Usually these ones come with the additional need to find a place very quickly.
• no work reference
  Unfairly fired for no reason, new job not yet started, supervisor on vacation, phone system not working, temporary layoffs, self-employed, can not work due to medical condition, have lots of money in the bank due to settlement or divorce, etc.  If the story is more elaborate, it most likely is not true or they simply can not afford to move in without a job.  If they are receiving government assistance, often they will sell it as a benefit to you since the cheque will go directly to you.  This is convenient, but that also means you might be less likely to come and see the property monthly and it does not take long for things to get out of hand for a tenant on a fixed income.  It’s ok to rent to people on government assistance but from personal experience there often is some accompanying baggage.  It’s your property so it’s your decision and if your gut says no then don’t do it.
• no interest in kitchen & bath
  People who are just quickly walking through the place with no real interest and then say they would like to rent it are often hiding something, particularly when it’s the lady of the household.  People who are looking for a place to call home want to see themselves in the kitchen and bathroom.  Those who are happy with running water or who don’t plan on living there themselves are not concerned.  Are they overly interested in the power supply, as if they may be wanting to set up a grow-op?  If they express dislike for carpet, is it because they are very messy and have a pet or kids who will wreck it?
• spouse not there
  When people are willing to rent a property without first having their significant other view it, may be hiding something.  If they are planning on staying a while, this is an important decision and all adults involved should want to see it first.
• credit check conflicting info
  Credit reporting agencies can make mistakes.  Ask the applicant prior if you will find any surprises when you do the credit check.  It’s ok to have imperfections and previous mistakes.  It’s not ok if it’s a trend that has recent bad history, or if they try to cover it up.  If they do have something bad on their record, the elaborate excuses often come out.  If it’s stranger than life, it probably is fiction.
• no money today
  Do they not have the full 1st month rent and security deposit available right now?  How can they expect to rent a place without it?  Try to all the money prior to move in day.  Even consider leaving the ads in until you have all money and they have successfully moved in.  It can ruin your day when they are supposed to have the money on move-in today, they are there with their truck full of stuff, and they have some excuse for not having it yet.  How could they expect you to be ok with this, especially without calling you in advance?
• no phone
  My phone is broken.  With many tenants using a cell phone instead of land-line, this is becoming more and more common.  If you can’t call them reliably with more questions, how do you think you’ll be able to reach them when it’s time to collect the rent or inspect the premises?  More likely is that they have not paid their bill or can not afford a few dollars to buy more minutes?  Are they lazy?  Will you get your rent paid on time?  Are they hiding from bill collectors or worse crazed ex boyfriends or unpaid drug dealers?

While honest people can have the situations above, you will most likely get a gut feel for any inconsistencies and make a decision.  If not, run it by a mentor, partner, or colleague.  Another set of eyes may catch something you missed.

Now that you’ve weeded out the bad applicants, you’re free & clear with a perfect tenant, right?

Well, not exactly.

After move in, the inconsistencies can start to show themselves.  If they were good at hiding something, they will likely let their guard down after move in.  That is why it is very important to keep tabs on them over the first couple of months.  This is why I also recommend starting with a short-term lease, maybe 3 or 6 months.  This allows you to get them out if you see trouble brewing or don’t have a strong case to evict.  In Alberta, you can not increase rent on a single tenant more than once a year, even if signing a new lease.  There should be no reason for them to be offended by a short-term lease.  If they behave, you won’t have any reason not to renew.  Tell them that it benefits both of you since if they are not happy they don’t have to renew.  You can wait to renew any time (even up to the last day of the old lease), but this really isn’t fair notice.  Try to give them 4-6 weeks warning if you won’t be renewing.  If everything’s going ok, sign them on the new lease 4-6 weeks before the existing one is up.  If any lease expires and it is agreed by both parties that the tenancy will continue (expressly or implied), then you now have a month-to-month lease in Alberta.  The other terms are carried over from the expired lease.  My advice is to always have a lease in place rather than go month-to-month.  One reason is that these typically favor the tenant as far as giving them notice and reasons to vacate.  You must give at minimum 3 months notice, or 1 year if doing a condo conversion or major renovations.  And there are only a few specific reasons you can legally have for doing this.  If you are going to turn around and rent it to someone else, then they could take you to court for wrongfully vacating them.  See the Alberta Residential Tenancies Act  and 2007 revisions for details.

Always question odd requests and comments.  For example, if the carpet is in good condition, and they suddenly want to help you out by replacing it, it could be that they don’t want to tell you that their son stained it with grape juice and the cat ripped up the edges.  Always a tip off if they’re not the “do-it-yourself” type.

I recently had a tenant move in and within the first week I noticed a dog which was not listed on the lease.  She claimed it was with a visiting guest and would be gone within a day or two.  A week later I just happened to notice her son walking the dog.  After chatting with the neighbors, it was quite clear that the dog was there permanently along with another child and a boyfriend.  Before confronting them, I decided to observe for another week — it seemed that whenever I stopped by the dog was not around but I knew different.  I just offhandedly asked her brother what her dog’s name was.  He said “Oh, that’s Jack”.  Busted.  No excuses since I had seen the dog over a span of time, so it was not just “visiting”.  People who lie will have elaborate excuses, but if you give them enough rope they will eventually hang themselves.

The intent of this blog was not to persuade you that self-managing is a bad idea.  In fact, I think it can be a good fit for the right person, especially if you have a tight margin between your costs and the rent.  Just be aware that it can be a new world that you did not know existed where grown adults (and sometimes grandmothers) will look you in the eye, smile, and lie lie lie.  Remember that this is a business and nothing is personal.  That also goes if you need to evict that grandmother for breech of contract.

Pay Up!

Be sure you get your rent or money owed by tenants, using some tested techniques.

NOTE: The advice below is not meant to be legal advice.  ALWAYS do your due diligence and contact the proper professionals or courts before using these techniques.

 

1. Get Their Details

• Get the prospective tenant to fill out a detailed application with consent for you to do a credit check.  Be sure it is dated and signed.
• You will need either a social insurance number or birth date to get the credit check processed.  By law you can not tell them that they must give you the SIN…it is optional for them due to privacy issues.  Some may argue that a credit check doesn’t mean that they will pay you and that calling references and previous landlords is a better indicator.  This has some truth to it, however my primary reason for the credit check is to confirm that they are who they say they are, and to give an indication if they have had problems paying property management companies or apartment complexes.
• If they have a car, get the license plate #, make, model & year along with money owing & creditor.  This may be an asset you can go after later if needed.
• Be sue to have a current employer (call to confirm and that they will be employed for the foreseeable future).  This is key if you need to garnishee their wages.

2. No Money No Action

• Get some money as a deposit towards 1st month’s rent when taking an application — otherwise don’t give them an application.
• Put right on the receipt that it is to go towards Rent.  That way you can keep it if they back out.  If you put it down as being towards a security deposit, you must by law return it even if they back out the day of move in.  Avoid setting this situation up by processing the application quickly and getting a lease agreement signed quickly if they are approved.
• Since you will have a cost involved in time to check references and doing a credit check, consider having an application fee that will be put towards 1st month’s rent if they are approved.

3. Get It All Upfront

• full 1st month rent and full security deposit on or before move-in day.
  Sometimes it can be an incentive for a potential tenant if you can take the security deposit in a couple of payments.  Just be aware of the risk you are putting yourself in.  At minimum get half upfront with the 2nd half within 1 month.  I regret doing this half of the time, and many investors say not to do this at all.  How much hassle do you want to put up with?

4. Post-Dated Cheques

• Get post-dated cheques in advance when signing the lease. 
• Make a photocopy of one of the cheques to keep on file.  This will help collection agencies later if needed.
• If you have many properties, also consider getting set up for automatic direct payments.

5. Don’t Let Them Bounce

• If you are suspicious that their cheque may bounce, you can go to their branch and pay a small fee to get the cheque certified.  If they say there is not sufficient funds, just ask them if there will be enough if you deposit 100?  200? 300?  The remainder is better than nothing.  And you won’t have to wait a week or two before you find out — they could be long gone by then. 
• If you do business with the same bank as them, you can go into any branch and cash it there – they will not cash it if there is insufficient funds and you save the fee.

6. Late Must Pay

• Charge late fees.  Be clear that there is a fee even if they are one day late.  Put this in the lease agreement.
• Consistently charge this fee, as a deterrant to late payment, and to pay for your lost interest and fees from your bank. 
• Be aware that if your fee is higher than your bank fees, and if you need to go to court this may be ordered to be repaid.  Some people report that ANY late fees are ordered credited or repaid.  Better to have a reasonable fee ($40 or so, around what a bounced cheque costs) and in the off chance you need to repay then do so.  I do not use the practice of escalating fees and I do not think that is ethical. 
• Give them a 14-day notice of eviction when late and you will minimize your losses — if they pay within 14 days then they can stay.

If you have used all of the above suggestions, you may still have them owing you money.  For example, if they move out and leave a mess or wreck the place.  I have seen it and it isn’t pretty.  Unfortunately it can be a part of doing business.  If you have all of the personal info on them, then proceed to get the repairs & cleaning done by a third-party where you can get receipts.  This makes it the easiest when it comes time to call the collection agency to garnishee their wages.

It may be prudent to do some of the cleanup yourself.  First, it gives you a reality check that you will remember when screening tenants next time.  Hopefully you can learn something from it.  Could you have seen this coming?  Can you make a change to your screening for next time to prevent or mitigate the risk?  Second, this can minimize your cash costs, considering that it will likely be several months before you see any garnishment cheques, assuming you are successful and there are no other complications such as them leaving their job.  Just keep track of your time and you can charge a reasonable rate (use a confirmed rate for a handyman or cleaning service).  If it goes to court, your time spent may be at risk of being discounted, so use a professional if you can take the immediate hit to your pocketbook, with no guarantees that you will ever get it back.

When you’ve completed all of your cleanup and repairs, send the tenant a final statement, with details of the security deposit and what they were used for.  In most cases, if they have caused a bunch of damage, they won’t tell you their new address.  This is why it was important to get their place of work.  Call the collection agency.  Send them your final statement, original application, and anything else they may require.  At this point I pretty much just leave it with them.  If there was a previous RTDRS (Residential Tenancy Dispute Resolution Service) order, as in the case of an eviction where you had to get the court involved, they will need to have a copy of this also.

Of course collection agencies & courts cost money.  General guidelines I use:

 

<$300 owed:

don’t pursue it further; not worth the trouble; lesson learned

 

$300+ owed:

If they are unemployed or you don’t know who they work for currently, call the collection agency to let them try to get it, and they will also put it on their credit record.  The agency fee is usually based on a percentage of the amount owing.  If they don’t get anything they may at least put it on the record for free.

 

$800+ owed:

If you know where they work, get the collection agency going on a garnishment.  This will start around around $350 to have them go to court for you and then a couple of hundred more to handle the garnishment.

 

Here’s an alternate technique you may try if you have a new address for them.  The “Notice of Debt Forgiveness” letter is notification to the tenant that you forgive their debt.  You’re probably now thinking “What?!?!  Did I miss something?”.  It goes on to explain that the Canada Revenue Agency code states that a forgiven debt is classified as income and that taxes are due on this amount.  You explain that you will be submitting tax form R1-ADJ-T1 to the CRA in their name on a specified date.  You then mention that when it is received by the CRA, it may trigger a letter to them from the CRA and possibly a complete tax audit.  Kindly inform them that if they are on any form of public assistance, this classification of income will be reported to all such agencies and might cause them to lose eligibility in the program or reduce monthly payments to them.  Remind them that they can get in touch with you before the above date to arrange payment and avoid all of that messy stuff. I have not yet tried this yet but it shows that we can be creative to outsmart these delinquents!