I Published a Book!

Okay, I did it. I published an eBook. Here's the Link:  You Can Be The Next Millionaire Landlord . Hopefully the title is self-explanatory. Current price is $2.99. Such a deal!

Do it for your grandchildren

I have always said that the mucky mucks in the apartment association were the grandchildren of European immigrants who started buying property in the early to mid 20^th century. They had the “advantage” of having a tough life and so being tough themselves. The industry had much less regulation back then and was a much simpler business than it is today. The power of compounding, time, and their guts and hard work allowed them to amass huge real estate portfolios that are literally being managed by their grandchildren now and as a result their families are wealthy and will continue to be for the foreseeable future.

My friend’s step-mother is the daughter of just such a man. He spoke with a heavy European accent and passed away in his late 90’s. His daughter manages the hundreds of units that he amassed, all of them now in nice neighborhoods. As the story was told to me, he was a cutter in the garment district for many years, and he saved his money to invest in a chicken farm, which at the time was considered to be a very safe, secure and savvy investment. Being in vogue they were hard to come by. So with his money ready and him standing by waiting for the right opportunity, he was approached to go in on an apartment building. He was forty years old. They did so well, that after a few years he bought his partner out. He kept buying and never looked back.

Discussing my situation with him and his daughter (my friend’s step mother), I was saying how I had finally gotten a troublesome building under control after almost five years of management. I was complaining about a persistent roof leak, that I finally fixed after three tries on my own, and three tries by a roofer whom I paid almost $500 to do the repair. After the 3^rd attempt by the roofer, he went out of business, and not being able to get anyone else interested in a $500 job I attempted it myself. I was saying I don’t really want to spend my time on the roof, but I was left without a choice. The elderly gentleman beamed as my friend’s step mother explained that there were plenty of days when he came home from work, and then climbed on a roof to fix a leak, coming home tired and dirty.

If this sounds like too much work for you, keep in mind that I prefer to hire out that kind of work when I can. You can not achieve success in any field without some hard work. And that this man, and many others like him have amassed a fortune and have lifted their families from poverty to wealth in a single generation.

What Does Cap Rate Really Mean?

Cap rate is supposed to be a measure of price, which is inverse to the sale price: i.e., the higher the cap rate, the lower the sale price, the lower the cap rate, the higher the sale price. This is because the cap rate measures the rate at which an income stream, in the case of multifamily buildings, it's the Net Operating Income (NOI) after all expense, but before financing, is capitalized. If that's a little complicated, look at the table below for a simpler explanation.

Cap Rate	Price	Manageability	Condition
13%	War Zone	Harder to Manage	Poor
12%	Cheap
11%	Cheaper Than Average
10%	Average	Average	Average
9%	More Expensive Than Average
8%	Expensive
7%	Really Expensive
6%	You Can't Make Money	Easier to Manage	Excellent
5%	Fagetaboutit

On This Day In 2002…

July 5th, 2002, I did a roof job on a building I owned in Newark, NJ. The roof leaked and quite frankly needed a total rip down and re-do. But being a cheap landlord of an inner city property, I tried the cheap way out. There was a local guy, Jalil, that did odd jobs in the neighborhood, and I asked him if he wanted to work on this project with me, and could he bring another guy. He said yes and that he could get his girlfriend’s son to come. I told him to meet me at my house at 9:00AM. He admonished the kid to be on time, and then failed to show himself. The Kid showed on time, and we waited for Jalil for an hour before leaving.

I had an Econoline van at the time, which I loaded the day before with about two dozen green five gallon cans of Karnak fibrous asphalt roof coating, and one red can of Karnak roofing cement. It was 102 degrees in the shade, and must have been 150 on the roof. The good news, if there was any, was that there were internal stairs to the roof, so we didn’t have to haul all those cans up a ladder. I brought two gallons of water, one for each of us, and we drank it all. But we sweat so much, we never had to stop to pee.

The Kid wanted to quit in the middle and finish another day, but I urged him to continue on. After we finished the job, I drove him from North Newark, to his grandmother’s house, where he lived, in South Newark. I paid him and he went in. Standing at the rear of my van, I noticed tar on my leg, so I started to wipe it off with a rag soaked in paint thinner. Being literally the only white guy for miles around, people walked or drove by, staring at me like I was out of my mind. As I drove away in my blue van, hot, sweating and stinking, satisfied that I had saved thousands of dollars and had at least staved off the inevitable roof job, I couldn’t help thinking as I so often have, “I went to college for this?” I didn’t…

Screening Tenants

Speaking of mistakes, another big one is not screening your tenants thoroughly or at all. After ten years of landlording, I think I have tenant screening down to a science. First of all, all adult tenants must fill out an application and pay a non-refundable $35 application fee per application (as opposed to per person). Tenants are not given an application until they pay the fee via cash or money order. Prior to requiring the fee be paid before giving out an application, I had several problems. First, I was making a lot of expensive photocopies of application forms, and giving them to people who never bothered to fill them out and return them. Very few, although some, did actually pay the fee and not return the application, but at least I made money on them as opposed to losing it. Second, since my Super was showing the apartment, I was never quite sure who had paid the fee and who hadn’t. Once I required the fee up front, I knew all applications that I received (99% via fax) had the fees paid.

The application fee also weeded out a fair amount of potential applicants who a) weren’t very motivated and b) had money problems. Anyone who can’t or won’t come up with $35 to apply for an apartment either has bad credit (and doesn’t want to lose their $35) and just looks for an unsophisticated landlord who won’t check their credit and/or won’t charge a fee; or money is such a problem for them, they don’t’ want to part with their $35. I believe this policy has saved me a lot of time, money and grief.

The application form itself also weeded out a lot of unsuitable applicants. I could tell nine times out of ten, just by reading the application, whether or not the tenant would qualify. If the application looked like it had been filled out by a four year-old with a crayon, they usually failed. If they left out large blocks of important information, they either usually failed, or they ended up not being processed at all because I never got the pertinent information. On the other hand, if the application was complete, legible and included the required information (last two pay stubs, photocopy of photo ID), and they made enough money, the usually qualified. Either way I checked them, because sometimes I was surprised, i.e, neat complete application from a person with horrible credit, or person with horrible handwriting has good credit…

How much is enough money? My formula is 2.5 times the monthly rent in gross monthly income, or 30 times the monthly rent in gross annual income (These formulas are the same, but are presented annually and monthly for the convenience of applicants who are often math-challenged). For example, to lease an apartment that rents for $600, the applicant needs $1,500 month in gross income (before deductions) or $18,000 per year. Where did I find this formula? I don’t know, I read it somewhere, implemented it, stuck with it, and it has always worked for me.

I have always used First Advantage Saferent for screening services, and never found a need to switch. I found their information worked for me, and they were cheaper than the others. They also provide options for criminal, civil and sex offender checks, which I also always do. I require a minimum Fico score of 600. You have to adjust this down if you own properties in a rough area, or your apartments will just sit vacant. If you have high occupancy rates, you may have the luxury of adjusting the Fico requirements upwards.

The Fico score is key. I see it as an honesty history as much as a credit history. It is also a predictor of how well a prospective tenant will care for their unit as well as common areas. It is not just a predictor of whether they will pay. Fico score can also predict timeliness of payments. For example, most of the time, tenants with Ficos above 600 pay on time or even early, the higher the score, the more true this is. Once, I had some persistent vacancies, and I decided to rent to two tenants just below 600, who were otherwise qualified. One had a 592, and one had a 594. I had to chase both of them for the rent, pretty much every month. When renting in rougher areas, I rented to those with a 575. I not only had to chase them for the rent, I often had to evict them. Yeah, it’s that accurate.

So to summarize, to rent an apartment from me, prospective tenants must have:
• Income of 2.5 times the monthly rent in gross monthly income, or 30 times the monthly rent in gross annual income.
• A Fico score of at least 600.
• No eviction filings on record.
• No hits on criminal or sex offender records.

What Is The Biggest Mistake You Can Make As A Landlord?

I have always answered this question by saying that paying too much for a property is the biggest mistake you can make. I would say, that most other mistakes you can recover from. But I learned a new way to make this mistake: A guy I spoke with bought what he thought was a seven unit building in the same town I owned in. I thought seven units was a weird number, because back in the day, they built a lot of six unit buildings, many of them side by side on the same street. Seven set off alarm bells. I figured, it has to be the result of some remodeling, which is fine, as long as the zoning was changed to conform to the same number of units. Otherwise, you have an illegal unit. Which means you don’t have a unit.

My two recently sold buildings were in fact originally six units that got converted into 11 units. They would probably never let you do that now, but way back, you could do stuff like that. The zoning was properly changed, and when I purchased them, it was confirmed through due diligence, and spelled out in the contract that the seller was representing that the buildings were zoned for use as 11 unit buildings.

Well this guy, didn’t do his due diligence, and his attorney didn’t protect him. I thought he overpaid for the buildings anyway, but they became that much more expensive because a unit is now missing. When you have someone living in an illegal unit, you have another problem, and that is that the normal tenant landlord laws do not apply to that unit. Which means the eviction laws don’t apply to the unit. If you are in this situation, consult with a qualified Tenant-landlord attorney (who represents only landlords) for what to do. My understanding is that your only option is to buy them out, “Cash for keys,” because you can’t evict someone from a unit that doesn’t exist.

What should you do if you are in this situation? Well, I advised this guy to sue everyone, his former attorney, the seller and the broker, all of whom should have known better. This way at least he may have a chance of recovering a portion of what he paid for the property. Better to do your homework before closing.

Commercial Multi-Family Foreclosures

Several articles in this month’s “UNITS,” the NAA’s (National Apartment Association) Magazine, discuss the coming “Wave” of foreclosures in Commercial Multi-Family properties. Remember, the definition of Commercial Multi-Family properties is a residential property of five units or greater. I mentioned this in my post almost two years ago. But the UNITS guys don’t mess around, they’re talking mostly about properties in the 200+ unit range. These are some big foreclosures, and you have to be a REIT or a very large private player to pick one of these up. The good news for small real estate investors, is that the under 100 unit properties will be facing the exact same thing, so keep your powder dry, because your day will come. And it may be sooner than you think.

Lot’s of talking heads are talking about a bottom in real estate prices, but that’s because they don’t know what they are talking about, or they want to feel good or they interviewed some “expert” that said things are going to get better. There are so many properties entering the foreclosure pipeline, and so many brand spanking new houses that no one has ever lived in just sitting, that there has to be continued downward pressure on prices. One real estate office manager with a large national chain that I recently spoke to said her firm is predicting a 1% per month decline in prices. That’s a 12% annual rate, in case you’re slow on the uptake. If you have been thinking about selling your house, do it now and price it right, because a year from now it will be worth less, I promise.

So are single family home prices tied to Commercial Multi-Family property prices? Yes and no. I would say there is not a one-to-one connection, but commercial property ran up when single family residential did, so commercial must also come down with residential. In part it is driven by bank stupidity. The banks made crazy loans on the way up, driving prices higher and higher. They are now backing away from otherwise sane loans, causing deals to die and properties to be listed at lower and lower prices. A residential mortgage guy I know is bemoaning several files not closing because the bank backed away from solid deals. In a sense, the banks are digging their own graves with this behavior, and several have already jumped into these graves (Washington Mutual & Country Wide to name two).

Think about it, you hold all these real estate loans, some good, some bad, but all are based on the value of the underlying real estate. If that value goes down, the loans get riskier. If the value goes down enough, the owner’s most logical step may be to walk away. For example, if it is cheaper to rent a comparable property to the home you own and live in, and if you have no equity, it makes sense to walk away if you can’t get out. Sure your credit is going to get screwed, but only for seven years. And is it worth say an extra $1,500 a month just to save your credit? Maybe yes, maybe no.

And how about Commercial Multi-Family Properties? If an own is facing increasing vacancies, downward trending rents, and increasing expenses, as I did in the last 2+ years, he may not be able to hold on. If his equity is gone, what is his incentive to keep putting money into the building. If the loans are non-recourse, he doesn’t even risk his personal credit rating and assets. Buh-bye. I hate to admit, but I thought about it few times while my own deal was on life support. Fortunately I was able to close and those bad ideas became just a bad dream.

Meanwhile, as the banks keep pushing down prices by backing away from or refusing to make loans in the first place, they cause more loans to go bad, as owners have less equity and therefore less incentive to hold on. Hold on!

On Life Support

When a real estate deal is in trouble, or dying, the commercial brokers I use to buy & sell my buildings refer to it as, “On Life Support.” That was the status of my deal (see previous blog post) for probably two months before closing. Why? The buyer wanted to buy, the seller wanted to sell. They had agreed on price and terms, albeit grudgingly. Well it’s a long story, but the short answer is, the bank went bankrupt.

The buyer was selling another building, and making money on it. So he would have to pay capital gains. In order to avoid that, he structured the sale and subsequent purchase of my buildings as an IRC 1031 exchange. Properly executed, the proceeds of the sale are rolled into the purchase of the new property, and the IRS gets cheated out of their tax money. I believe this technique is widely know in real estate investment circles.

Because I had prepayment penalties on the loans underlying my buildings, and because I wasn’t getting a great price, part of the terms were that the buyer would assume my loans. The loans were assumable, and the interest was pretty good. The problem was that the buildings were selling for less than they had been appraised at when I refinanced. The bank insisted on cramming down the loans so that the LTV, Loan-To-Value ratio didn’t exceed 75%. The buyer was okay with that. It meant he had to come up with more cash, but cash wasn’t a problem for him due to his sale. The bank still insisted on a prepayment penalty on the crammed down portion of the loan. I’m not sure if the mortgage contract allows that or not, but they won. The pre-payment penalty was split three ways between the buyer, the seller (me) and the broker, making it palatable for all.

Somewhere in there the bank, Washington Mutual, went under and got bought out by JPMorganChase, which has swallowed so many banks in the last few years, it’s hard to fathom. It’ll be business as usual they insisted, but it wasn’t. Processing ground to a halt, I had verbal approval for the deal, one key signature and was waiting for the second key signature. I waited two months. The deal was supposed to close before Christmas 2008. Sometime in the beginning of February, the team working on the deal got laid off. The clock was ticking, and I had granted several extensions to the buyer, what else was I going to do? He wanted to close, and was ready, willing and able. In fact, he was willing to come to the table with all cash just to make things happen. A good buyer and honorable too! But I needed for the loans to be assumed, or half my profits would disappear in prepayment penalties.

My lawyer wrote a “Nasty-gram” to JPMorganChase threatening to sue them if they caused the deal to fail. They then resumed processing the loan assumption, and we closed on the very last day we could close and the buyer could still get his tax break. It was a great effort by the broker, and the lawyers for both the buyer and the seller.

I got lucky I guess. The buildings are most likely worth less now than what I got for them. They were in need of some upgrading and renovation, and I was getting a little tired after eight years. I also knew things were going to get worse for rental housing before they got better. The previous two years were tough, and mentally I wasn’t prepared to hang on. Also I had been (and still am) contemplating relocating to the Pacific Northwest, and would need to sell in order to do so. The buildings are no longer a barrier to my relocating. Also, after a little rest, I intend to start over, either as property manager working for a company, or independent again, but in nicer neighborhoods.

I’m not sure what the moral of the story is, or if there even is one. Life sucks, maybe? Or perseverance? Nothing ventured nothing gained? Never give up? It’s frustrating to me when things are out of my control and I’m trying to make something happen. Use good professionals, and hope for the best.

I Am An Ex-Landlord!

Well it’s been official for just about three months now. I managed to close the sale of my buildings as of the end of February, 2009. Is this a good thing? Yes and no. I feel a certain sense of lost identity, having been a landlord for 10 years. People used to call me “Carlton Sheets,” “Donald Trump” and “Slumlord.” It was a badge of honor. They used to screech with laughter, when after calling me a slumlord, I would correct them, informing them that I was “A professional property manager, focusing on the affordable housing sector.” There were times for sure that I felt like I was a slumlord. There were times that I hated my buildings, and when I visited, I just wanted to get away from them. It was amazing that so much of my net worth and identity was tied up in these properties.

There was a time when I was highly leveraged, and it freaked me out. I was making money hand over fist for about a six month period when I owned a total of four buildings with 48 units. But then the leverage got to me. So did the rough buildings. They have a saying on Wall Street, “If you can’t sleep, sell down to the sleeping point.” So I sold my buildings in Newark. I slept much better afterwards.

I feel like I got out just in time. I wish of course that I had sold when the market was higher. I knew when that was. I recently read on-line a comment from a laid off economist, “Just because you know a freight train is coming, doesn’t mean you can get out of it’s way.” I feel like that. Even though I had the sense that the market was near a top, I didn’t know what I would do if I sold. I thought I was a “Long Term Investor.” I thought the buildings would not only pay for my kids’ college education, I thought it would be the only way to do so. I still do.

My home is probably under water by $100,000. Not that I’m upside down on my mortgage, just that it’s worth that much less than I paid for it. I knew this was happening. So why didn’t I sell? I need a place for my family to live. Of course I could have sold and rented, but rental units are scarce and expensive in my town. I did talk about just renting when we bought this house, but ultimately I didn’t want to simultaneously be a landlord and a tenant. Financially it was the right move, but lifestyle-wise it was not. Also, even though I called a top in the real estate market, I didn’t call a freight train. As always, a crystal ball would have been helpful.

Tenant Rant 2

Tenant Rant 3

Late Rent

Applicant Approval Reversal

I found this in the files, it is one year old...

Approval Reversal

I called the applicant above to let her know her application was approved. During the conversation, she asked me if I would install new closet doors in the apartment. I informed her the apartment is “As-is” and if she didn’t want it, she didn’t have to take it.

She told me she would have to “deduct money from the rent to fix the doors,” and that “she knows her rights as a tenant.” She argued with me for about 10 minutes.

In a conversation yesterday, she called to see if her application was received, and when she would know the result. I asked if she included all necessary documents, including picture ID. She hadn’t, and argued with me for about 10 minutes about how she had never had to do that before, etc. Based on these two arguments, I rescinded my offer to rent her an apartment.

New Jersey's High-Rise Sprinkler Retrofit Proposal

Michael L. Ticktin, Esq.

Chief, Legislative Analysis

Department of Community Affairs

PO Box 802

Trenton, NJ 08625

RE: PRN 2007-297 – High Rise Suppression – Proposed Changes to N.J.A.C. 5:70-4.3, 4.7, 4.17

December 9, 2007

Dear Mr. Ticktin,

I am writing to express my opposition to the above captioned proposal. The negative effect that this proposed amendment will have on housing affordability in New Jersey – on the order of $200-$400 per unit – has been amply communicated to the DCA.

In exchange for a negative affordability effect, only negligible safety increases would be achieved. This proposal clearly runs counter to Governor Corzine’s stated goal of increasing affordable housing in the state.

I am deeply troubled by the fact that this proposal is being driven by the fire sprinkler installer’s union; clearly a self serving conflict of interest. The union members will profit off the backs of New Jersey’s honest landlords and hard-working, working class tenants.

In a testament to this proposal’s ill-considered nature, the strangest of bedfellows, the New Jersey Apartment Association and the New Jersey Tenants Organization, have joined forces to oppose this amendment.

New Jersey is already one of the most unaffordable states in America to live in, let’s not make it any worse. I respectfully request that the Department of Community Affairs not adopt the proposed amendments establishing the retrofit requirement.

Very truly yours,

Rosey

New Jersey's Unaffordable Housing

Gubna Corzine promised upon taking office to create or rehab 100,000 new units of affordable housing in the garden state, as New Jersey is known.

I received today an article from the Newark Star Ledger with the headline:

Corzine: Cost could hinder affordable housing effort

Advocates say they're frustrated with governor over lack of plan

Guess how many units have been created by the Gubna, go ahead guess. If you guessed zero, nada, zippo, zilch, bubkes, the big donut, you’re correct. In fact, the Gubna has increased the cost of housing, just like his predecessor James “I’m a Gay American” McGreevey, by passing idiotic laws that make it more expensive to do business in NJ. The most obvious of which is the 1% hike in the sales tax. Besides clobbering the poor, this tax makes everything landlords have to buy more expensive, so they have to raise the rent (if they can) to cover increased expenses.

His predecessor passed several revisions to the laws governing the handling of security deposits, and window guards. Window guards are designed to prevent toddlers from falling out of windows when their crack-head mothers aren’t paying attention. The law is so complicated that even PhD English professors cannot understand it, much less implement it properly. Perhaps that’s a positive, since state employees generally are way below the PhD level, so they can’t understand the laws they’re supposed to enforce anyway.

The security deposit law is designed to keep landlords from taking tenant’s security deposits when they are not entitled to. A well meaning law of course, but only dishonest landlords do this anyway. The pros know and obey the law. We actually like giving back security deposits, because it means the tenant has done everything they are supposed to, paid all outstanding charges and left the place neat and clean. I’d much rather have that than a trashed apartment and $950.00 that I have to spend putting the apartment in order.

Because the law places onerous administrative guidelines on the handling of security deposits, it has become much less profitable for banks to handle these accounts. The result is that savings banks, the ones who normally pay the most interest, just got out of the business, leaving only the large commercial banks. Since this business is less profitable, the banks pay very little interest. My accounts, currently at Commerce Bank, only pay 0.75%. Compare that to money market funds that pay around 5%. The law mandates that the money must be in one of these accounts, so tenants literally can’t earn any interest on their money. Thanks McGreevey. It also raises the administrative costs, because large landlords need more manpower to deal with the related clerical tasks.

I have come up with several suggestions to help make rental housing more affordable in New Jersey:

1) Lower property taxes for multifamily buildings of 5 units and up.

2) Drop the fire-sprinkler nightmare law pushed by none other than the fire-sprinkler installation union lobby.

3) Eliminate (redundant/burdensome/all) inspection fees, such as DCA 5-year inspection fee, non-lead free unit fee, municipal inspection fees, Certificate of Occupancy and fire alarm inspection fees.

4) Give additional tax incentives (besides depreciation) for landlords who renovate their properties.

5) Simplify security deposit and window guard laws made more complicated by the McGreevey administration.

6) Fast track approvals for new multi-family developments (or rehabs) that meet certain criteria.

7) Provide grants and/or tax incentives for landlords who install energy or water saving improvements such as furnaces, insulation, windows, toilets, showerheads, sub-meters, etc.

8) Provide an energy/utility assistance program for landlords who provide, heat and/or hot water and/or cold water and/or cooking gas to their tenants as part of the rent.

9) Give property tax rebates to the landlords, who actually pay the taxes, as opposed to the tenants.

10) Speed up the eviction process. Eliminate eviction blackouts.

11) Roll back the state sales tax increase.

12) End government corruption.

13) Make sure the Gubna doesn’t survive his next car crash.

14) Elect a Republican to the Governor’s office next time.

Evicting Tenants

This is an article I wrote for the September 2007 Issue of Broker Agent Magazine, North Central New Jersey Edition.
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A few months a ago you sold a multi-family property to a client. The client calls you up in a panic: one tenant hasn’t paid rent and the client doesn’t know what to do. How do you advise them?

New landlords are often squeamish about evicting tenants, they “Feel bad” throwing someone out of their home. First piece of advice is “Get over it.” You are a landlord now and evicting tenants is part of the business. Just as boxers can expect to get punched in the nose as a matter of course, landlords must expect to evict tenants periodically.

When you don’t pay the phone bill, the phone company turns off your phone. When your tenant doesn’t pay their rent, you must turn off their apartment.

The eviction process is how you turn off a tenant’s apartment. This is a legal procedure, which must be done according to the law. Each county has a tenant landlord court, and your case must be handled through this court. Never harass a tenant to leave or attempt to evict them by yourself. This is known as a “Self Help” eviction, and you can get in big, big trouble for doing it, so don’t.

Since this is a legal procedure, you will need an attorney; don’t try to handle this on your own. You must find an attorney in your area that is experienced in tenant landlord court, and represents landlords exclusively. Do not hire an attorney that “Dabbles in real estate” or handles only residential closings. You want an attorney that goes to tenant landlord court several times a month, specifically to represent landlords in eviction proceedings. You can find one by calling the Property Owners Association at 732-780-1966 or the New Jersey Apartment Association at 732-992-0600 and asking for a referral. Or you can go to your County’s tenant landlord court at 8:30 AM on any business day and snoop around for one.

When do you file for eviction? I file for eviction on the 10^th of the month. Rent is due on the first of the month. Tenants get a five calendar day grace period after which a late fee is added. If rent is not paid by the 10^th, you know there is a problem. I fax a list of tenants in arrears along with the amounts outstanding and their address to my attorney, who files on my behalf.

I then send tenants a notice telling them that my attorney has filed court papers, and I enclose an invoice which will at this point include base rent, late fees, county filing fees, and attorney’s filing fees. Hopefully you have a lease in place that spells out these charges and specifically calls them “Additional Rent.” Occasionally this will be enough to get the tenant to pay, but normally not. It usually takes four to six weeks to get a court date. The tenant will get a postcard from the court notifying them of the court date. This may motivate them to bring their account current.

If not, be prepared to show up in court with the books and records pertaining to all tenants you will be opposing. Be sure to ask your attorney what else you may need, such as building registration forms. If you do not have all required documents, you may be forced to default and re-file. Upon arrival, both the tenant and the landlord or his representative must check in with the court, or face default: dismissal of the case.

Before or after check in, the judge will give a speech advising both parties of their rights or a court administrator may play a video for the same purpose.

Next, you will have an opportunity to negotiate with your tenant. Let your attorney handle this. I recommend you give the tenant no more than two weeks to bring their account current. At this point they will be two months in arrears, longer if you did not file aggressively on the 10^th. If you give them longer than that, they most likely won’t catch up, and you will be forced to evict them anyway. Any extra time you give them anywhere in the process will become free rent. If you come to agreement on a payment plan, this must be documented in a legal document called a stipulation. If the tenant fails to uphold their obligations outlined in the stipulation, a judgment for possession is automatically awarded to the landlord.

If you can not agree on a payment plan, and the tenant will not agree to move out, you must go in front of a judge in an attempt to be awarded a judgment for possession. Once a judgment for possession is awarded to the landlord, an application for a warrant of removal should immediately be filed by your attorney. Within two weeks a warrant should be issued and posted by a court officer. You are then eligible to lock out the tenant three business days later. You should schedule the lockout as soon as you are eligible.

A lockout cannot occur on weekends or holidays. Snow days can cancel lockouts. Some counties have a two week moratorium on lockouts straddling Thanksgiving and Christmas. So it is very important to be aggressive throughout the eviction process, especially once the leaves start turning colors!

You tenant will probably be gone by the time the court officer comes to lock them out, but sometimes they are still there! You will need to change the lock (sometimes the court officer can do this for you for a fee), and secure the windows. You must leave the apartment as is for ten days. Within that period, the tenant can pay all outstanding charges and reinstate the lease, although that is unlikely. You must allow tenants to reclaim any possessions left behind within the 10 days.

Pricing Commercial Buildings I

This is an article I wrote for the July 2007 Issue of Broker Agent Magazine, North Central New Jersey Edition.
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A client calls you and says they have a 12 unit apartment building they would like to sell. You have never been involved with a commercial transaction before; you panic. What do you do? First tell them that you would love to help them and that you need to do some homework. Ask for a description of the building and say that you will call back. The most important part of making the transaction close, just like a residential deal, is pricing the property right from the get go, so potential buyers won’t be turned off.

So how do you price an apartment building? Well there are several methods. For two to four unit buildings, they are financed as residential properties, and they price the same way, by comps. Five units and above are considered “Commercial” for the purpose of financing, but buildings up to six units trade a bit like houses, so comps are still important in pricing. Over six units, buildings start pricing for their investment value, and a different approach is required.

The most important method is to price using CAPITALIZATION RATES, or “Cap Rates.” Cap Rate is defined as the rate of return used to derive the capital value of an income stream. The formula is Value = Annual Income / Cap Rate. (1) Value equals the theoretical market value of the property, and the price around which it should sell. The annual income in this case is NET OPERATING INCOME (NOI), or income minus expenses, prior to financing. The Cap Rate is expressed as a percent, usually in the range of 6% to 12%; of course deals can be priced outside this range under special or extreme circumstances.

The first step is to determine what is the correct Cap Rate to use. The best way to do that is to ask someone knowledgeable, either another agent who deals in commercial property, or better yet, a mortgage broker who deals heavily in commercial mortgages. It is important to make contact with a commercial mortgage broker, since they can help you to determine the maximum amount the bank will lend on the property, and therefore the maximum amount the property can sell for. And one will be needed during the transaction anyway.

Once you have determined a cap rate, you need to calculate the income and expenses; using Microsoft Excel is the best way. You will have to work with the owner to figure these out. First you need a rent roll. The rent roll should contain the apartment number, the size in total rooms, the current tenant name, and the current rent. For any vacant units, use the last rent, or the maximum allowable rent if the unit is rent controlled. Add all the rents up to get a total monthly figure, then multiply by 12 to get an annualized figure. Add to this any other income such as from laundry or vending. This is the TOTAL GROSS INCOME (TGI).

You will need a number for vacancy and credit loss. The bank will use 8% in their calculations, the recent nationwide average is 10%. Many brokers will use 5% or less, to make the building attractive, but a savvy buyer won’t believe it. Don’t use less than 5%. To calculate the vacancy figure, multiply TGI by the vacancy percent. Subtract the vacancy from TGI, and you get GROSS OPERATING INCOME (GOI).

Next, ask the seller for the following annual expenses: Taxes, Insurance, Utilities and Superintendent’s Compensation. You will also need a number for maintenance; since many owners may either under spend or under report this number, it is best to use an estimate such as $500 per unit per year. It is also customary to have a reserve for repairs and replacement of capital items such as the roof or boiler. $500 per unit per year is also a good number for a reserve. Now add up all the numbers to get the TOTAL OPERATING EXPENSES (TOE).

Subtract TOTAL OPERATING EXPENSES (TOE) from GROSS OPERATING INCOME (GOI) and you get NET OPERATING INCOME (NOI). Divide NOI by the Cap Rate and you get the building value.

Here’s an example. Let’s say the average rent is $750, multiply by 12 units, and the monthly rent roll is $9,000. Multiply by 12 to annualize, and you get TGI of $108,000 (this assumes no other income). For vacancy Multiply TGI by 5% and you get $5,400. $108,000 - $5,400 = $102,600. So your GOI is $102,600.

Assume the following expenses: Taxes $12,000, Insurance $6,500, Utilities $10,000, Super’s Comp. $3,600 (2), Maintenance, $6,000, Reserves $6000; TOE equals $44,100. Subtract TOE of $44,100 from GOI of $102,600 and you get NOI of $58,500.

Assuming our commercial mortgage broker recommends a 9.00% Cap Rate for the building, based on condition, area and the prevailing market, calculate the building value as NOI $58,500 / 9.00% = $650,000. You may want to add as much as 10% onto this value for “negotiation,” to get a suggested listing price range of between $699,000 and $715,000.


(1) Barron’s Dictionary of Real Estate Terms, 1993 Barron’s Educational Series, Inc.
(2) Assumes a part-time super getting a $300 a month discount off rent.

The Crap Starts Hitting the Fan

I witnessed what I feel is maybe the first piece of truly visible, close-to-home crap hitting the giant real estate fan. I went to both my buildings today, and saw that a 6 unit building two doors down is now boarded up. This was a pro board-up with a steel door and steel boards, a product I have never seen before. There was a shut-off notice from the water company for $790, about a single 2 month bill in my estimation.

So what happened? Well I assume that this building is in foreclosure, and the only thing that surprises me is the speed with which it happened. I saw this building turnover twice I think in the not quite fours years I have owned on the block. Each time it came up for sale, I looked into buying that building as well as the one right next door, but each time the price was too high so I didn't bother bidding or looking. It seems to me whoever bought it, obviously paid too much, bought at the top, and ran out of money. Ha ha!

I say “Ha ha” because people have been buying at ridiculous prices for years, so it was inevitable that this would happen. If it was a cold winter, we'd probably see more foreclosures. Meanwhile, on this short block, in a neighborhood that is both up and coming and has seen a dozen or so murders in 2006, there are three buildings going condo. The most expensive is asking $365,000+ per unit, I believe they have parking, but I haven't seen the units. Four doors down is asking $219,000 for what I believe is a four room railroad, no parking. Five doors down is asking around the same for similar units. At a recent open house, they were asking $159,000 for the same unit partially gutted, but unfinished. Seems like they are running out of money and panicking. I'm hoping to own most of the block sooner or later. I hope the market cooperates. I can hardly contain my glee...Bwahahahahahahahahaha!

Black Slime Away

Well, as luck would have it, my super was on her way over to show a few apartments, so she stopped by the complaning tenants apartment to check things out. The tenant wasn't home so she let herself in and checked out the bathtub, and reported back to me. She said she ran the water for a while and that there was no problem. The water was draining, there was no "Slime," and everything was fine.

On her way out, the super ran into the tenant and told her she didn't find anything. The tenant said that it was it was, "No big deal."

So what was that all about?

Black Slime

I just listened to a voicemail from one of my tenants, claiming that “Black Slime” has rained down in her bathroom, and that the water comes out of the spigot “brownish”…She was “Out of the country for ten days,” important that she let me know that she was traveling abroad so I’ll think that she is worldly and cultured. Also good to know where they are spending their money, although she has already paid her January rent in full and on time.

 

I returned her call, only to get voicemail. The super is heading up that way to show some vacant units, so I asked her to check it out. I’ll be down there tomorrow, so I need to know if need to buy anything from Home Depot before I head out, such as Draino for her to drink, or rat poison to sprinkle on her cereal. 

 

I shouldn’t say that, because I try to hold myself out as an example of a professional property manager, albeit one who focuses on the affordable housing sector, not the slumlord that people like to call me…

 

But you have to understand, at anyone time there are at least 10 to 20% of your tenants driving you crazy, while 80 to 90% just shut up and pay.  Guess which group this particular tenant is in.  Anyway, this is the same tenant who was away all last Summer (she’s a teacher), who was visiting her husband (!), who lives in the second city.  When she came back, guess what? Black slime!  At that time she refused to pay her rent and threatened me and informed me that it was a health hazard and that she was educated and didn’t have to live like that etc…Also, I found out, she had been letting her sister use her apartment, and her sister trashed it, clogged up the drains, and failed to report that the bathroom ceiling had collapsed from an earlier leak upstairs that was repaired.

 

Well I fixed everything as soon as she let me in to the apartment to do repairs,  which was after the Legal Aid attorney told her she couldn’t withhold rent and that by law she was required to give me a chance to make repairs.  Of course she didn’t, she called the office of code enforcement first, so they could write up violations.  When she finally let me in, the plumber pulled various hair braids out of the drain (clearly my fault), at my expense, which cleared up the black slime right away.  As for the ceiling, if someone had been home, or informed us that the apartment would be vacant for the Summer, or if her freeloading sister had reported the ceiling collapse, I could have taken care of that right away too. But no, it’s better to blame the landlord and call the city.

 

This is a tough business sometimes.  I’ve earned every freakin’ penny I’ve made and I deserve to be rich!