REI INK

Buy & Hold

Managing Risk in a Buy-and-Hold Strategy

Do Things Right to Make Your Long-Term Strategy a Successful One By Laura Niecikowski Congratulations — you have decided to hold onto your last renovation project and become a landlord. It’s a big step for any real estate investor but especially so for someone accustomed to turning fix and flips. There is a different set of risks and liabilities associated with properties you hold, so how you manage this new type of investment and the insurance coverage you decideon should adjust to fit a long-term strategy. Finding the Right Tenant First, run a background check. Leasing to the wrong tenant can result in late rent or non-payment of rent, damage to your unit, and expensive and time-consuming eviction costs. It is important to run a background check every time for every tenant to minimize costs and help give you peace of mind. A tenant background check will generally show criminal history, rental history, and credit history and payment ability. If you are looking at a potential renter’s credit report, don’t just look at the credit score, as that may not tell the full story. Instead, look at the number of addresses on file over the last 5-10 years and the payment history for rent and credit cards to determine if they would be a stable, long-term tenant. You will also want to verify income for all signers on the lease — using either paystubs for the last month or other official documentation. A phone call, in this instance, might not work. For example, your prospective tenant told you she works at a retail store and gives you the cell phone number for her boss…. who isn’t really her boss at all but a girlfriend ready to say whatever is needed so the prospective tenant gets the apartment. State and federal law limit what can be reported on a background check, but most do provide information on criminal convictions, any pending criminal cases, and any history of incarceration as an adult. In the end, background checks provide you with a more level playing field when deciding who to choose as a tenant. Before Move In You found the perfect tenant. Before they move in, we recommend a walk through that includes photos that are dated. Pictures should verify current condition of the unit, both interior and exterior, if appropriate. It is often a good idea to include language in the lease that outlines to the lessor that condition of the unit was agreed upon and verified with photos and a physical inspection. Next, you should require a certificate of renters insurance with you named as additional insured — for every tenant, every time. By requiring a certificate of insurance, particularly for multi-family buildings, you provide your tenants with the assurance that you want responsible people in the buildings you rent. Renter’s insurance is important to protect the personal property of the renter in addition to being an extra layer of protection for you. If one of your tenant’s guests falls in the tenant’s bathroom and sustains injuries, whose insurance coverage kicks in? Their renter’s liability, then possibly yours, which means in this instance, there might not be a claim against your policy — which can save you time and money. New tenant have a pet? Almost 70% of US households do, so it might keep your units filled if you allow them. But if you do, you should also understand the risks and require renters to add on pet liability coverage just in case. Be aware also that some breeds of dogs carry more risk of bites than others and may not be covered. We also strongly encourage you to have signed leases for all tenants — even if they are a friend or relative. Signed leases are legal documents and outline the responsibilities of both parties in clear language, so if something occurs, there is no he-said-she-said battle, and everything falls back to what is in the written, signed document. Types of Coverage for Landlords So, you found the perfect tenant, they signed a lease and scheduled a move-in date. Now you need to make sure you have the right types and amounts of insurance coverage because the wrong decisions on insurance could mean the success or failure of your real estate investment business. Do not skimp on liability coverage thinking you can get by without it for a while. Accidents happen and people sue — and you need to be ready and covered. General liability covers accidents that happen on your property and covers things like bodily injury, property loss or damage, and advertising injury, so it is a must. Many new landlords skip over obtaining sewer and water line backup coverage and flood. Skipping flood insurance might be possible if you are not in a flood zone. But sewer and water line backup is an add-on that makes sense in most cases, because this coverage generally includes backup fromthe main sewer line into anywhere in the house — like the bathtub. While you may have redone the pipes in the house, it is unlikely you redid the line running to the house and that could be clogged with tree roots and cause problems down the road. Rent default is additional coverage if your tenant can no longer pay the rent but loss of rental income is related to a property that is no longer habitable – both risks but very different. Running background checks helps mitigate the first risk but there isn’t much you can do to stop a tornado from ripping a roof off. If that happens, you will need Loss of Rental Income coverage to ensure cash flow while the repairs are done. And, add on an Umbrella Policy. This coverage does exactly what it says — provides an overall layer of protection in case your other coverage is just not enough. Property Maintenance Because you have decided to hold for the long-term, maintenance comes into play. As a landlord, you have a responsibility to

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Make Your Flooring Go the Distance

Flooring Advice for Real Estate Investors By Fred Harris Statistics show that 95% of flooring issues experienced at an investment property can be traced back to improper installation and have nothing to do with the flooring materials. Manufacturing defects can occur, but most hard surface flooring materials available today should be expected to last 10 to 20 years and still look great. Carpet has an expected lifespan of approximately five years, even when installed and maintained properly. Hard surface flooring is the obvious choice, but how do you ensure it lasts for a decade or two in your investment property? Here are three pieces of the best flooring advice for all real estate investors: Do the moisture testing, do the subfloor preparation, and use trained installers. Do The Moisture Testing Today, waterproof flooring is the norm. However, people often accept the term without really understanding it. What does the term waterproof mean? In a lab, waterproof means that the material does not retain water and is not transformed by water. This makes the flooring incredibly resilient for the normal drips, splashes, and spills of a household or business. Waterproof does not mean that the flooring is immune to every type of liquid or chemical and a concrete subfloor is where this matters most. Concrete always has some level of moisture, and the levels change over time under various conditions. High levels of moisture in concrete make it likely that flooring will be exposed to moisture from below during the lifetime of the floor. When that happens, it is never pure water. Moisture coming up from the subfloor contains a harsh chemical balance that damages flooring materials or the adhesives used for installation. For this reason, there are international industry standards that require the same testing for humidity and pH before installing all types of flooring. In practice, moisture testing is rarely done. What may appear to be a good shortcut can easily turn into an expensive education of moisture related flooring failures. You should consider moisture testing and mitigation an essential part of your due diligence for any investment property. Do The Subfloor Preparation Doing a job well often requires a significant amount of preparation in advance. Professional painters will tell you not to be surprised when the prepping takes more time than the actual painting. Flooring installation is no different. The quality of a completed floor project is primarily determined by the condition of the subfloor beneath it. Preparation requirements vary depending on the type of subfloor and the type of flooring being installed, but there are four common elements across the board. Level And Flatten the Subfloor It always surprises rookie renovators that walls are not straight, rooms are not square, and floors are not flat. Even buildings constructed with great care by professional craftsmen will end up with some variation in every dimension. Each type of flooring available has well-established industry standards providing clear tolerances for how flat and level a subfloor must be and exceeding those tolerances will cause flooring problems in the future. Correcting an issue in the subfloor will require some time and effort, but it will always be less time and effort than the future flooring repairs that will arise. Thoroughly Clean the Workspace Things get dirty during a renovation project. Drywall dust is everywhere and there seems to be an endless supply of wood pieces, cardboard, and rocks and dirt. The electrical wire droppings of the fast-moving electrician are well known and documented. Cleaning up is a dirty job, but even small pieces of debris left on the subfloor can easily become big expenses down the road. Over time, those pieces of debris will compromise the materials and begin to telegraph through to the finished floor. The unsightliness and visible bumps or cracks that develop are just one part of the problem. The debris left behind puts additional stress on the flooring joints, which can cause physical damage and become a liability to you as the owner. Bottom line: a good broom and shop vacuum can provide an excellent value for ensuring a good flooring installation that lives up to its promises of longevity. Protect Against Moisture with A Moisture Barrier The downfall of even the best moisture testing is that it cannot foretell the future. Unpredictable weather, changing seasons, and other environmental factors cause moisture levels to ebb and flow throughout the lifetime of a building. The smart move is to install a moisture barrier regardless of the current test results. Adding an extra few cents per square foot in advance can protect against huge losses down the line. Use Trained Installers When you want a flooring project done right, do it yourself, if you are a professional flooring installer with the appropriate level of training and tools required for the job. Unfortunately, general contractors and even professional installers are not always properly trained to install flooring. Ask questions to verify credentials and experience with the specific products being installed. One clip system is not the same as all the others. Different adhesives have varying cure times and application techniques. Some primers and adhesives should never be used together. And techniques used to speed up installation can end up compromising the integrity of the entire floor. For example, using fans to dry primer or adhesive is a common technique, yet it is such a bad idea. Every manufacturer provides the guidelines you need to know for their products. Great suppliers will provide training and consultation for free or at a minimal cost. Get the details right and avoid expensive repairs, claims, and legal costs. Hard Surface Flooring Is the Smart Choice You want your long-term investments to provide great returns and increase in value. Sometimes that requires a little extra investment upfront to reduce expenses and protect your assets in the long run. Do not put yourself in the situation where you must redo the flooring in 4 years because of a problem that could have been avoided from the

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“Boots on the Ground”

The Benefits of Leveraging a Property Services Provider By Andrew Nolan While consumer home sales show signs of slowing, the single-family rental (SFR) market remains strong. According to John Burns Real Estate Consulting, the SFR industry typically benefits from rising mortgage rates as the for-sale market cools with some potential buyers moving to the sidelines and current SFR tenants staying in place longer. For buy-and-hold investors in the SFR space, this bodes well for their strategy. Not only does it point to an ample pool of renters, but also provides a growing inventory of additional housing stock — especially for all-cash or low-leverage investors — for those seeking to expand their SFR holdings over the next 18 to 24 months. As fast as the SFR industry has grown in just the past few years, it has been a challenge for owners and operators to have all the knowledge, skills, manpower, and bandwidth to handle the many facets required to successfully grow and operate a profitable portfolio. Investors have varying degrees of experience in each aspect of the industry while others have experience at the corporate level but not the local level. This has led to property services providers like MCS entering the SFR market to become an extension of SFR owners and operator’s teams, providing a variety of “boots-on-the-ground” services that might otherwise be challenging for investors to handle on their own without a large — and potentially expensive — team in place covering multiple markets around the country. In some cases, property services providers leverage a network of vendors and subcontractors to perform the work, while others self-perform the core functions with their own team of employees. MCS employs a hybrid model to provide maximum coverage across the largest SFR markets. Regardless of the approach, technology, processes, and procedures must be in place to manage work orders, coordinate project management, ensure quality control, and track budgets, among others, adding additional layers of complexity and cost to owning and managing a growing SFR portfolio. There are four main areas that buy and hold investors can leverage most when partnering with a property services provider. Inspections From pre-acquisition through post-moveout, inspections are an integral function for any buy-and-hold investor. It’s imperative to understand the condition of a SFR property, potential rehab time and costs, and extent of any damages when making a purchase decision, as well as decreasing any down time — and lost revenue — of a rental property when preparing for a tenant turn. Additionally, owners and operators may need home health occupancy inspections, loss draft inspections, and quality control compliance inspections, among others, to ensure properties are maintained and repaired as intended. Detailed and customized inspection reports can be invaluable throughout the lifecycle of a SFR investment. Ongoing Maintenance Tenants expect timely and professional service, along with quality work, when repairs are needed. Landlords need to ensure routine maintenance occurs to help protect their long-term investment while providing tenants full value of the homes they are renting. From landscaping to plumbing and electrical to general handyman work, ongoing maintenance becomes a core component of keeping renters satisfied and in place which means uninterrupted and recurring revenue. Rehab & Repair Seeing the potential of a property is key to achieving the financial objectives of an investment. That often means undertaking significant rehab and repair work to get a property up to appropriate standards before the leasing process begins. These types of projects can range from installing new flooring, painting and minor repairs, all the way to full renovations or remodels depending on the rental rate. Additionally, older homes often need new HVAC, roof repair or plumbing overhauls to reduce ongoing maintenance expenses and increase satisfaction after a tenant moves in. Tenant Turns As time passes, it’s inevitable that tenants move out. Investors then need their SFR investment prepared for the next renter as quickly and efficiently as possible. These turnover services range from basic repairs to deep cleaning to transferring utilities, as well as painting, re-keying and other basic items to make sure the property is ready to welcome its next occupants. At times, eviction management or security services may also be needed to protect your investment. Leveraging a property services provider for these and other services can provide several benefits for SFR buy-and-hold investors: Faster Occupancy Property services providers have established processes and procedures, existing technology platforms, and accessibility to the necessary trades to complete work on time or ahead of schedule. This can lead to shorter timelines to complete property rehabs or perform tenant turns, allowing tenants to move into a home quicker, resulting in less downtime and more rental income. Field Presence & Support Property services providers act as an extension of your team, ensuring projects are completed to established specifications at the agreed upon budget. With property services providers performing the work themselves or leveraging their vendor partners, investors don’t have to source and manage a network of subcontractors, handymen or maintenance staff and can focus on the profitability of their investments. Qualified property services providers are responsible for quality control throughout the process and should be able to provide visibility and transparency into each assignment through a client-focused technology platform. Quality Work Property services providers ensure employees and vendors are trained to complete assigned work with the highest quality that aligns with local code requirements by leveraging proven policies and procedures. Additionally, qualified property service partners handle the required licensing, insurance, and regulatory requirements, reducing your potential exposure. Purchasing Power Larger providers leverage the purchasing power of national partnerships to secure materials at lower costs to help maximize your investment. When evaluating property services providers, investors should make sure that potential partners are able to provide these services and benefits at a minimum, as well as understand who is performing the work — the partner’s team or third parties. Buy and hold investors in the commercial property and multifamily arenas can also find it beneficial to partner with the same types of service

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