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Excalibur Home Management Blog

Investing in Rental Houses: Balancing Risk & Return

Mike Nelson - Sunday, October 25, 2015


There is a relationship between return on investment and risk.  In the stock market some investors are willing to purchase “"Penny Stocks".  There is a chance these investors can generate very high returns on their investment.  But there is also a high probability that these investors will lose every penny invested.  Conversely some investors purchase Treasury Bills knowing that the return on investment is very low but then so is the risk. 

As you analyze your potential return on investment make sure that you analyze how much risk is involved and how much risk you can afford.  In my opinion, investing in rental houses is a great way to “get rich slow”.  With a reasonable down payment, 20% - 40%, an investor can take advantage of leveraging the investment while still generating a positive cash flow that significantly reduces the possibility of having to feed the investment from ordinary income or savings. 

My technique: is to open an interest bearing checking account for the rental properties.  I start with a reasonable reserve for each house purchased.  I make the mortgage payments for the rental houses from this account and deposit the net rental proceeds into this account.  I use professional management so all of the operating expenses are handled by the property manager and I get the net direct deposited to this account.    The properties are generating a positive monthly cash flow most of the time, so these positive amounts accumulate and earn interest.  When the time comes that I need to spend more than the monthly rent will cover, these reserves are available.  I don’t need to come out of pocket to put money into the house.  For example, when I need to “turn” the property between tenants and it requires new paint, and/or new carpet, then that house will not have a positive cash flow for that month.  But, having accumulated several months of positive cash flows during the normal operation of the property, I have the funds in the rental house bank account to pay these bills without having to dip into my savings account and without impacting my monthly household budget.  As the cash balance continues to grow in that rental property account, I will have another down payment available to purchase another rental property. 

So what is a “reasonable return” and a “reasonable” amount of risk? 

Each investor needs to decide that for themselves.  Today I can earn interest at my bank at a rate of .75% (not much).  With a 30% down payment on a rental house I can generate an IRR (Internal Rate of Return) of 15% to 20%.  That 30% down payment, with mortgage interest rates in the range of 4% - 5% for investor purchases, will give me enough of a positive cash flow that I should not need to use any of my savings or monthly paycheck to support the investment.   

Invest with confidence with Excalibur Homes - The Experts in Leasing, Management, & Sales. Buy your next rental home with one of our trusted Realtors and your first Leasing Fee is on us! (Just mention this blog article)

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Great Time to Buy a Rental House - Atlanta Property Management

Mike Nelson - Thursday, September 10, 2015

Admittedly it was better buying rental houses in 2012, but I don’t have a time machine and prices have gone up since then.  However, with recent swings in stock prices, it’s good to remember the wisdom in diversifying our investment portfolios.


Some of the reasons we got such great deals 3 years ago are still applicable today: 

  1. The rate of homeownership is still very low compared to historic norms.
  2. House price increases and more stringent mortgage underwriting guidelines are making homeownership unattainable again for many tenants.
  3. As more people move to the Metro Atlanta area, and as household formations are catching up from lower than normal rates over the last several years, rents are going up for residential landlords.  Simple supply and demand demonstration.  The rental housing supply in Atlanta is struggling to keep up with demand.  Rents are increasing rapidly as a result.

RealtyTrac, a real estate information company, recently named Atlanta to be one of the best U.S. rental markets because of the estimated 26% potential return (Clayton County values) it estimates property owners can get there. http://www.realtytrac.com/news/real-estate-investing/first-quarter-2015-residential-rental-market-report/

Bearing in mind that high returns are associated with high risks, we are helping some more conservative investors buy houses that will generate unlevered IRRs in the 7 – 10% range with levered IRRs in the 15 – 25% range.  I prefer to limit debt to 70 – 80% of the purchase price.  We get rich more slowly while keeping our investment dollars safer.

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Atlanta Rental Market 2015 - Historic Lows

Mike Nelson - Sunday, June 7, 2015
As you can see from the above chart, the number of active rental listings in Georgia has decreased dramatically in 2015.

 

From January 2014 through May 2014, there were 18,078. In 2015, that number has dropped to 8,973 -- that's a decrease of more than 50%! In May 2015, there were only 1,364 active listings -- the lowest number since December 2008.


The above chart measures Average Days to Sell/Lease. So, although there are less than half as many active rental listings this year, the Average Days to Lease is much better. From January 2014 to May 2014, the AVG Days to Lease was 52.4. In 2015, that number has decreased to 38.4 --- a decrease of almost 27% in the time it takes to procure a tenant.

What does this mean for landlords in atlanta?

  

The number of active rental listings are at historic lows, and (good news!) so is the time it takes to find a new tenant. If you're looking to rent your house, now is the perfect time. 

Find out why landlords choose Excalibur Homes for all of their leasing management, and sales needs.   

Household Formation Is On The Rise - Atlanta Property Management

Mike Nelson - Sunday, April 19, 2015


Good news for landlords:

More households forming in 2014 which increases demand for housing.

According to Zelman & Assoc. 1.195 million households were formed in 2014, with 1.0% average growth accelerating from 0.8% in 2013, 0.5% in 2012 and 0.3% in 2011. The annual increase was the strongest since 2007, paralleling solid improvement in young adult employment.  The normal rate of household formation is about 1 million per year.  Since 2007 the rate of household formation has been much lower than that as households consolidated.  Children moved back in with parents, or never moved out, adults took in roommates, and other techniques to reduce living expenses as a result of economic setbacks.  Lately the rate of household formations has been increasing which increases demand for housing.

Approximately 65% of household formation is driven by 20-34 year olds. Not coincidentally, household formation has been improving alongside an increase in the employment rate of 20-34 year olds. In 2014, the average employment rate of 20-34 year olds of 92.0% was up almost 120 basis points year over year to the highest level since 2008. The improvement in the employment rate among this cohort was the fourth strongest over the last 40 years.

Zelman’s earlier research also established that most households will live in a single family, or multi-family, property based on their life style.  Singles are more likely to live in a multi-family property (apartments, condos, and townhomes) where couples with children are far more likely to occupy a single family detached house.  Whether the household rents or owns is a financial consideration but the type of property they are likely to occupy is clear.

As the name indicates, “baby boomers” created a significant bulge in our country’s population.  However recent research indicates that the Millennial generation is now passing the “boomer” generation in numbers.  As these Millennials marry and have children over the next 15 years I anticipate landlords will see an increase in demand for rental housing.  While many families will choose to buy, that is not the obvious choice for many young families any more.  The real estate down turn of 2008 has shown these Millennials that appreciation is not automatic any more.

Conclusion: owning rental property is still a good long term investment. 

Click here to learn more about Excalibur Homes' Leasing & Management Services.     




How to winterize your home - Atlanta Property Management

Mike Nelson - Sunday, February 1, 2015

Despite being a southern state, Georgia is prone to extreme winter weather. Last year’s winter snap caused headaches for many; houses that were not properly winterized contributed to the frustrated pool of Georgia citizens.

If you are a landlord there are some tips that are important to know in regard to winter proofing your home. Heeding these steps will ensure your property can remain safe while unoccupied and save money from costly repairs.

  • Turn off the water to the home. Be sure to locate the main water valve―or breaker to the pump system for a well supply―to do this.

  • Turn off and drain water heater once water has been shut-off. Make sure temperature controls are set to the “off” position, gas valve must be closed. Electric water heaters require shut-off at the breaker. Remember to open the faucet/spigot for air flow to happen as water drains.

  • Water must be drained from supply lines, if water is present there it risks freezing. Leave fixture shut-off valves open.

  • Make sure all devices hooked to the water system (appliances, toilets, etc.) have been properly drained and/or disconnected.  Electrical breakers should be shut-off during this winterization period as well.

  • Check heating systems (i.e.-high-efficiency furnaces) that may utilize/produce water.

  • Set heating system to minimum setting and post “winterization” signs in home.

  • If the home possesses a very elaborate water/electrical/heating system, please seek professional plumbing/HVAC assistance in winterizing your home.

Find out why landlords choose Excalibur Home Management for all of their leasing and management needs throughout the state of Georgia.

What is a tenancy at will? Landlord-Tenant Law in Georgia

Mike Nelson - Sunday, January 11, 2015


Disclaimer – We are not attorneys and we are not trying to provide you with legal advice.  We are trying to provide you with a ready reference to Georgia law regarding the landlord tenant relationship and share some techniques our company uses to comply with those laws. You must not rely on the information on this website as an alternative to legal advice from your attorney or other professional legal services providerIf you have any specific questions about any legal matter you should consult your attorney or other professional legal services provider.  You should never delay seeking legal advice, disregard legal advice, or commence or discontinue any legal action because of information on this website.  We encourage you to read the code for yourself and consult your own attorney before making any final decisions regarding your actions.

Many people mistakenly think of any month to month lease as a “tenancy at will” but this is not the case.  What 44-7-6 says is that “Where no time is specified for the termination of a tenancy, the law construes it to be a tenancy at will.”  If your tenant signed a lease at move in, and that lease has language that, after the initial term the lease will be continued on a month to month basis, then you do not have a tenancy at will.  If you have a well drafted lease form then all of the other clauses in your lease would still be applicable.  One of those clauses may require that either party, not just the tenant, has to provide a 60 day notice before terminating the agreement.  If you do end up with a tenancy at will, then the landlord would have to provide the tenant with a 60 day notice to vacate but the tenant would only be required to provide a 30 day notice to the landlord in order to vacate.

Find out why landlords choose Excalibur Home Management for their leasing and management needs.

Atlanta Property Management: Housing Indicators Point to Continued Recovery in September

Mike Nelson - Thursday, October 23, 2014

Housing Indicators Point to Continued
Recovery  in September   

According to the Georgia Association of Realtors®, inventory is on the rise, with a six-year high for new construction, according to the U.S. Commerce Department. Housing indicators for Georgia for the month of September are as follows: 

  • Median Prices rose 14% to $165,000       
  • Average Prices rose 12% to $204,314       
  • New Listings increased 10%
  • Pending Sales increased 25%
  • Closed Sales increased 12%  
  • Inventory Levels increased 3.2% to 45,112   
  • Months Supply of Homes for Sale decreased 3.3%       
  • Days on Market increased 2.8% to 74 days
  • Percent of Original Price Received decreased .07% to 94.2%  


Atlanta Property Management: Who should you name as the "landlord" in a residentia...

Mike Nelson - Tuesday, June 17, 2014



Atlanta Property Management: What happens your tenant reports mold in the property AND it's making t...

Mike Nelson - Thursday, May 15, 2014

Disclaimer – We are not attorneys and we are not trying to provide you with legal advice.  We are trying to provide you with a ready reference to Georgia law regarding the landlord tenant relationship and share some techniques our company uses to comply with those laws. You must not rely on the information on this website as an alternative to legal advice from your attorney or other professional legal services provider.  If you have any specific questions about any legal matter you should consult your attorney or other professional legal services provider.  You should never delay seeking legal advice, disregard legal advice, or commence or discontinue any legal action because of information on this website.  We encourage you to read the code for yourself and consult your own attorney before making any final decisions regarding your actions.

As a landlord, do you know what to do when your tenant reports mold in the property and it is making them sick?


Remember, we are not attorneys and we are not trying to provide legal advice.  We are describing property management techniques that have been successful for us.  If someone is threatening you with litigation, you should consult your attorney regarding the specific circumstances.  Also, mold is a natural part of our environment.  There are likely to be some mold spores in the air you are breathing right now.  However, there are many people that are allergic to mold and a mold problem that is not addressed could damage their health.  

Most of the mold lawsuits we have reviewed, where the court or the jury found for the plaintiff, the landlord had a tenant that claimed mold in the property was making them sick and the landlord refused to release them from the lease.  And in refusing to allow the tenant to leave, the tenant was harmed.  Sometimes your tenant calls in a normal maintenance request stating there is mold in the house and they want it removed.  Other tenants will tell you that, not only is there mold in the house, but that the mold is making them sick.  Some of these tenants are truthfully telling you about their allergy.  Other tenants see mold and think “pay day”.  They want some of your money.  

The steps below assume that the tenant not only informed you that there is a mold problem but also claimed the mold is making them sick.  At this point you need to consider the possibility of litigation.  The steps below are intended to reduce the landlord’s liability as much as possible.  We want to fix the problem with the house but we also want to avoid the chance of a lawsuit, frivolous or otherwise.

Best Practice – 
1. If your tenant reports mold in the property, send a mold remediation company out to confirm the presence of mold and prepare an estimate to remove the mold.
2. Do not send an Environmental Hygienist out, even if requested by the tenant.  An Environmental Hygienist is the “expert” that can determine specifically what kind of mold is present.  You have no obligation to know what kind it is.  Your obligation is to get rid of it.  If your tenant wants to know what kind (for their lawsuit) let them hire their own expert.
3. Get the mold removed.  Normally that would include removing any drywall that has gotten wet.  It’s a good idea to replace any drywall that gets wet as part of your normal repair procedures to prevent mold from showing up later.
4. If the tenant is claiming the mold is making them sick, then terminate the lease and let them move.  Re-renting a house can be expensive but it is a lot cheaper than fighting a lawsuit.  In the Georgia Assn. of Realtor’s lease form, the Destruction of Premises clause allows for the tenancy to be terminated immediately if the property is no longer habitable.  Most leases have a clause like this related to fire but you might want to check your lease form to ensure it covers other reasons a place may not be habitable, such as mold.  If the tenant claims that the mold is making them sick, then we inform them that, per the Destruction of Premise clause, we are terminating the lease and they should move out immediately.  As soon as the tenant moves out the rent obligation will stop.  This reduces or eliminates the landlord’s liability regarding the tenant being made ill due to the mold because, as soon as the tenant informed the landlord of the problem, the landlord released the tenant from the lease.  So every day that the tenant stays in the property is because the tenant chose to stay.
5. Often when our tenant tells us that the mold is making them sick, and we terminate the lease, they change their tune.  That’s how you can tell the tenant that truly has a health problem from one that was just trying to get some extra money from you.  Before we will permit the tenant withdraw their notice, and stay in the property, we require them to sign a Hold Harmless Agreement to eliminate the chance that they will sue the landlord in the future regarding this issue. 

Excalibur Home Management is an Atlanta property management company.


Atlanta Property Management: What happens when your tenant dies in the property and they don't have ...

Mike Nelson - Wednesday, May 14, 2014

Disclaimer – We are not attorneys and we are not trying to provide you with legal advice.  We are trying to provide you with a ready reference to Georgia law regarding the landlord tenant relationship and share some techniques our company uses to comply with those laws. You must not rely on the information on this website as an alternative to legal advice from your attorney or other professional legal services provider.  If you have any specific questions about any legal matter you should consult your attorney or other professional legal services provider.  You should never delay seeking legal advice, disregard legal advice, or commence or discontinue any legal action because of information on this website.  We encourage you to read the code for yourself and consult your own attorney before making any final decisions regarding your actions.

As a Landlord, do you know what to do when your tenant dies at the property and they don't have a will?

This can be tricky and frustrating.  

Most leases have some language similar to “Unless otherwise specifically noted, the term “Landlord” as used in this Lease shall include its representatives, heirs, agents, assigns, and successors in title to Property and the term “Tenant” shall include Tenant’s heirs and representatives.”  

In short, the lease is still applicable against the tenant’s heirs.  

Common mistake – the landlord learns that the tenant has died and someone claiming to be a relative offers to remove all of the tenant’s things.  Great!  Problem solved!  Then, weeks later, the landlord is contacted by the Executor of the estate asking about getting access to collect the tenant’s things.  Uh Oh!  The landlord explains what happened to which the Executor replies “What do you mean someone else already got them??!!”  

If your tenant dies, then an estate is created.  The estate is represented by the Executor or the Executrix.  That is the party that can legally speak for, and sign for, the decedent.  The Executor is assigned by the Probate Court.  They will have paperwork to confirm their appointment and you can confirm that with the Probate Court if you need to.  

If the rent is not being paid, the landlord can evict for non-payment but make sure your attorney and the court know that the tenant died and you are evicting their estate.  That way the Probate Court can be informed, as necessary, in the event the estate wants to continue the tenancy.  Consider – perhaps the tenant had children and the family wants to keep the children in the house until the school year is completed, or some other milestone is reached.  Perhaps the estate is just days away from getting life insurance proceeds and can get the rent caught up.

Best Practice:  Don’t take short cuts and don’t assume.  Make sure you are dealing with the Executor or Executrix and make sure you consult your attorney before taking possession of the property or evicting the tenant.

Excalibur Home Management is an Atlanta property management company.

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