Hey there,

Not long ago, the sprinkler system at one of our rental houses needed to be repaired.  We had deferred it because fixing those things cost some serious change and the tenant was willing to use a hose.

We got a recommendation to this company by a terrific landscape maintenance company we use.  So, of course, we had high expectations.

They gave us an estimate of “$250-350″.  Now, you know just like I do that the low end just doesn’t happen.  I assumed it would be $350.

Lo and behold, the bill came and it was $350 on the nose.  No problem.

But then, a week later, I got ANOTHER BILL for another $98!

Here’s what would have happened before Corinne and I created a bunch of standard business practices:   I would have called them up to complain, and made a hash of it.  Made an enemy, and then paid up begrudgingly, knowing I couldn’t trust them to do good work and wondering why you can’t find good vendors.

Now that we are really solid in our business, here’s what I did:

I called up and asked what happened with this second invoice.  They still gave the normal “it was only an estimate, and you asked us to repair the system” song and dance.  I talked with both a receptionist and a maintenance supervisor.

I said that I was concerned about being able to do business with them going forward when the final bill came back 30% higher than the original estimate.  They repeated the same excuses, but with more force.

We went around this same discussion a couple more times before I disengaged.  I said, “OK, Thank you.  Goodbye.”

See, now that we’re a whole lot smarter, I knew I needed to get away from the cycle of increasing upset.

I waited a while to clear my head and get some perspective.  I realized that the key point for me was being able to control our expenses by knowing that the estimate is accurate and solid.  I wanted to know how they do business, but talking with the maintenance supervisor wasn’t the place to find that out.

I called back and asked for either the owner or general manager.  They went off for a long time before returning to say, “He’ll be in touch with you.”

That was actually great news:  It meant that the person I asked for was taking this seriously and figuring out how to resolve it in his business before talking with me.

Here’s the pleasant news:  He called about 3 hours later and was both polite and generous.  In short, “I completely understand where you’re coming from, and just tear up that second invoice.”

We had a really nice conversation.  I emphasized the referral we got for them, how we like to have long-term business relationships, and also need to control expenses.

He did bring up an interesting point regarding the estimate:  They couldn’t give a better estimate because they couldn’t turn on the water to find out what all was broken.

That was really surprising because I HAD turned on the water.  I mentioned to him that if I had known that, I would have had them meet me to turn on the water.

SOOOOOO, what’s the point of all this?

An estimate is only relevant to the check you end up writing if you know what the estimate is based on.

If the estimate is based on a bunch of question marks, you will almost certainly write a much bigger check in the end.  If the estimate is based on good understanding of the facts, the vendor should honor that estimate.

How do you handle this on the ground?

Ask a bunch of questions until you either find out you can’t know more and have to live with a poor estimate, or until you can get them more information to give a better estimate.

Remember that controlling your expenses is one of the most critical parts of being a landlord.  This is a way to save thousands of dollars a year.

To your happiness,

Eric

Hey there,

I have to admit, I’m a tinkerer.  I just can’t look at something twice and leave it alone.  There’s always something that can be made better with just about everything.

And recently, we’ve been doing showings to fill a couple of vacancies.  And I’ve been doing a VERY unscientific comparison of what happens at showings to what happens during the tenancy.  Here’s what I’ve found so far:

Four Renters You Meet at Showings:

1. Talkers:  These people never stop selling you on how great they are at taking care of the property.  You talk about things you’d like to do and they say, “Oh sure, I can take care of that.”  But they never quite live up to their promises.
2. Silent Types:  These folks are really quiet, never ask a question (even normal ones), are very polite, but kind of spooky.  (They scare me to death because I want to know what they’re hiding).
3. Storytellers:  It’s easy to confuse these guys with Talkers, but they’re telling you their whole life story - which is always sad, difficult and makes you want to help them.  And you get to keep hearing about it during their whole tenancy!
4. Good Ones:  None of the above.  They’re not trying to convince you to “let them move in”.  They’re asking normal questions about how you work.  They’re not complaining (much?). And they’re not promising the world.

This most recent tenant we got seems to fit this last category.  Here are a few things I noticed about them:

1. They were always early to appointments
2. They were sucking up to me at all
3. They talked about how they were moving ahead in their lives (schooling, training, jobs, etc)
4. They were friendly but not overly polite
5. They wrote a check for the app fee and hold deposit on the spot.

Are they really “Good Ones”?  Of course, only time will tell.  But I can tell you everything on their app checked out (we’re thorough, to say the least) and they’ve done everything they said they would.

I’ll update you later on to see what happens…

‘Til next time,

Eric

P.S.  It took us a long time to figure out how to get “Good Ones” to call off our “For Rent” Ads.  If you’d like to start saving time and money by writing killer ads that really work, check out the Extreme Advertising Makeover package here.

Hey there,

In a couple recent posts, you heard about us filling our two vacancies. They had the money to move in, and yesterday was their first “real” payment.

Don’t know about you, but we’ve noticed this funny thing that happens a lot with our new tenants:

They are late on their first payment!

Yep, even good tenants don’t come up with their first payment on time…

You might ask yourself why that would be so. I could come up with all kinds of interesting ideas to answer you. Here are the ones I came up with this afternoon:

1. They’re really busy moving out, moving in, getting oriented, and so on
2. They’re confused and still trying to figure out our system (admittedly a bit complex the first time around)
3. They’re testing us to see whether or not we mean what we say in our lease about zero grace days.
4. They’re really not good tenants and they’re showing their true colors
5. and so on…

Which one of those is the right answer?

Who cares!!! All I really care about doing what our company policies tell us to do when someone doesn’t pay on time.

The whole process is much too long to go into here, but the short version is: get paid or get them out.

That probably sounds harsh, and the way most landlords treat their tenants, it is harsh. But we don’t call them up to yell at them or anything like that.

It’s no problem for us if they don’t pay on time. We have security deposit, and they know it. And they can stay or they can go. No problem.

Here’s the deal - and you can take this to the bank - if you don’t do something about it your late payers first time, everytime, you’re teaching them to pay late.

Figure out what your policies are and stick with them. You’re in business to make money. They know that, you know that. Start running your rentals like it by demanding payment on time.

Our mortgage companies have never thought, “Oh, well, they’re having a hard time right now and they’ve always been really good about paying so we’ll just give them a couple more days.”

One of my mentors, Dan Kennedy, says, “The biggest difference between those who make a lot of money and those who don’t is the ability to ask for higher prices with a straight face.”

It takes a lot of guts to be in this business sometimes. And unless you want to be hated by your tenants it also takes heart.

But it’s funny. Once our tenants know they’re going to be charged a late fee on day one, it’s amazing how few late fees we get.

I guess they know we mean it: Pay us, or find somewhere else to live.

Since we’re all clear on the rules, we have great relationships with our tenants.

Teach your children well, and you’ll be able to sleep well!

Til next time,

Eric

Hey there,

Corinne and I had some catching up to do with our tenants last weekend. You see, we just spent the past month or so adding a second bathroom to one of our rental houses and filling that house and an empty apartment.

Of course, we had to let some other things slip a little bit (with the other tenant’s approval).

As I was leaving the house to do a little garage door opener work, Corinne wished me good luck.

I said, “All I’m doing is going over to a friend’s house”

That really is what it looks like when you have good tenants in your rentals…

Just drop by and have a nice time with a friend who happens to live in one of your rental homes.

It’s actually pretty nice. You get to hear all the latest news about almost everything…

Catching up on how the new baby is doing, or how the new job is going. What wackiness the neighbors are up to, or the latest gossip on the old lady who lives next door.

I never really thought about it this way before, but it’s fun and interesting.

Of course, I remember all too well when we had the psycho renter who would call at any time to yell at us about whatever was bugging her that day.

Every time we went over to the fourplex, we both got this sick feeling in the pit of our stomachs. Knowing that she was going to gripe and whine about something or someone.

Here’s your Landlord’s mantra:

An empty unit is better than a bad renter.

No matter how bad it is to pay out of pocket for an empty unit that you can’t fill, a bad tenant is far worse. Sure, a bad renter will cost you more money in repairs and maintenance than a good tenant. But you can’t even put a price tag on the energy and time they’ll suck out of you.

An empty unit is better than a bad renter.

Next time you’re tempted to skip your screening processes, ask yourself if you wouldn’t you rather go over to a friend’s house to do a little work?

To your happiness,

Eric

Hey there,

At Subway the other day they asked me a simple question:

“Would you like to make that a meal?”

Every time I go there, they ask that simple question.

What is up with that question?

It’s pure cash in their pocket, and it’s so innocent that I don’t even notice it. And they don’t get mad if I say no.

Do you have any upsells in your landlord business?

If the answer is no, you’re not making as much money as you could.  And you’re not really giving your tenants what they want.

Here’s how to identify upsells you should be offering to your tenants:

1. Figure out what your tenants want or need.  Ask them!
2. Offer it to them for a reasonable monthly amount.
3. Go back to step 1 until you’re ready to retire.

Two upsells we offer our tenants in the summer are air conditioners and ceiling fans.

But my favorite upsell happened just the other day when we were signing paperwork with our new tenant…

She happened use one of my nice pens on her rental agreement.  As I was leaving to do some small repairs, I asked Corinne to get that pen back - and we kind of joked about her taking it.

Later on that evening, Corinne mentioned we should offer it to her if she moved in sooner.

She whipped off an email to our tenant, sort of as a joke.

And what do you know?  She’s moving in a full week earlier than she planned to originally!

That pen costs about $80 - and she’s moving in7 days early for about $140 increase in our income.  That’s a great deal don’t you think?

One other thing you should know is that I get a lot of comments about how nice that type of pen is.  (In fact, I like it so much, I bought 3!)

Guess what pen our new tenants will be using next time we have to sign paperwork?

To your happiness,

Eric

Hey there,

If you’ve hung around me for any length of time at all, you know I’m an absolute fanatic for learning, growing, and reaching.

One mentor I’m fanatically devoted to is Dan Kennedy - the Millionaire Maker. He is truly a marketing genius. I highly recommend anything he does.

Something he said struck me this morning:

“In business, One is the Loneliest Number”.

Back in the bad old days when an open rental was a desperate time, I only used one - maybe two - methods of advertising.

And our rentals stayed empty for weeks on end when we got no responses from our newspaper “For Rent” classified ads. And we got no referrals from anyone either.

In the past 3 weeks we used a bunch of ways to advertise our open 3br/2ba house:

1. Yard Sign both with and without flyers
2. Website
3. Online “For Rent” Ad (also pointing to website)
4. Word-of-Mouth
5. Offering it to our waiting list
6. Asking for referrals from our waiting list
7. Calling friends who are looking to buy

And today, we’re signing a rental agreement with some cool new folks for the 3br/2ba house we just barely finished getting in shape. Actually, it’s not even done - but it looks great.

It probably seems like a lot of work to get all that stuff up and running. And frankly, it’s taken a while to get it going for us.

Then again, we had tons of tenants respond to all of those ads. 6 phone calls the first day, a couple emails, 4 people added themselves to the waiting list, 6 showings, and a bunch of great responses from friends who want to move into our rentals.

Is it worth the work to get all those advertising channels going?

Well, I figure that an empty unit costs between $20 and $50 per day. And that’s a low estimate.

Is getting more than one marketing channel going worth it?

From the first showing to getting money (rent and full security deposit!) and paperwork, we filled the property in 3 days.

Is it worth it to you to have that kind of property downtime?

To your happiness,

Eric

Hey there,

I had this sudden flash about how most people become landlords either by mistake or by default.

Come to think of it, that’s how I became a landlord!

I bought my first investment house in late 2002 with a thought of flipping it and pocketing the cash.

Of course, I made all the mistakes - the worst being overpaying for the house and not being able to sell it for a profit.

So, by default, I became a landlord!

Now, almost 6 years later, I really like the business, boo-boos and all. It’s exciting watching our strategies and tactics turn into real money - every single month.

Now, we’ve all read the horror stories about being a landlord - some of us have lived them. Yes, renting out properties can be a tough business.

But then, ANY business is tough if you do it the way most landlords run rental properties.

So, what does it take to be a good landlord?

A Business Mind-Set.

It’s the opposite of how most of us went into landlording. It isn’t jump into the deep end and hope you learn how to swim before you drown. It’s not very “fun” a lot of the time. It’s not even very exciting. (By the way, I’ve learned this stuff the hard way. I hope you’re listening to spare yourself those painful lessons).

What does a property management business owner do differently than an accidental landlord?

A business owner makes informed decisions:

1. He decides what to invest in based on product and service profitability
2. She decides who and how to Market and Sell her products based on profitability, not on emotion.
3. He manages the finances of the business (including the losses - there will be losses)
4. She manages risk of all kinds including legal, regulatory, market, economic and credit risk.
5. He manages people - clients, vendors, employees, contractors.
6. She uses every experience as a way to improve and grow the business and herself.

If you’re not doing all of the above and then some - you’re going to be a furious, desperate and broke property owner. Probably sooner than later.

How do you become a Landlord/Business Owner?

1. Start by recognizing the realities of the business of being a landlord. Read books, talk with experienced business people, go to local real estate group meetings. Soak up everything you can.
2. Manage every aspect of your business - the most important areas are Clients, Properties, Sales & Marketing , and Finance. Get these handled as soon as possible. You can’t run a business by running around going crazy.
3. Get organized so you can tell what is happening with your business. Know what the rental market is doing. Know what you need to do with your properties - and what you can do. Read the financial statements of your business - start making decisions that you know will improve things.
4. Don’t believe a word you think. If what you thought was so great, you wouldn’t be in the situation you’re in. Prove it to yourself through research - do rent surveys, ask tenants what they think, talk with experienced landlords.

If you can’t or won’t do these things, get out of the business. You may take a financial hit, but it’s better to make a smart business decision to get out than to throw your life away on a business you can’t do the right way.

Life is hard enough without signing up for more pain…

‘To your happiness,

Eric

Hey there,

The other day, while doing a rent survey for the house we have open I saw a ton of ads with a headline that screamed out how cheap it was.

A couple common examples are:

“$99 Moves You In”, or “One FREE Month of Utilities” or “Utilities Included”.

Those landlords must get a ton of response from tenants. And I bet the fill their apartments pretty fast. Although from the number of competing ads, maybe not.

And I’ll tell you this:

That headline is a horrible idea for your business and your lifestyle.

It’ll kill your profit margins, drive you crazy, and almost guarantee you get to go to court.

Why?

When you yell out that you’re the cheapest place in town, what kinds of people respond to those shouts?

Cheap people!

What kinds of folks go to WalMart?

Two kinds:

1. Cheap People
2. People Who CAN’T AFFORD More.

What happens when you move Cheap or Broke Tenants into your rental?

1. They’re too cheap to fix anything so they call you about everything
2. They can’t afford to keep the property up - so you get to nag them about what the rental agreement says.
3. They can’t or won’t afford a rent increase so you’re hostage to cheap or broke tenants
4. They can’t or won’t pay so you get to evict them and lose sleep over how to collect from cheap, broke tenants.

Don’t do it!

‘Til next time,

Eric

Hey there,

Well, the second installment of the audit is set up for Thursday, May 15 bright and early at 8:00 AM. I imagine this one will last another 4 hours.

Here are some insights into the IRS I’ve gotten since my last post.

Lesson #7:  The IRS has no idea what it takes to run a business, and they don’t care.

Robert Kiyosaki of Rich Dad fame would say they are employees, and their language is completely different from us as entrepreneurs.

She emphasized that business is “for profit”!  I’ve begun thinking, “If I could just wave my magic wand and make some business ventures profitable, I promise I would!”

The fact is, when we’re out here in the real world, things don’t always go that way.  But the risk is worth it, knowing that as long as we keep moving forward, we’ll get where we want to get to.  Regardless of the obstacles, including the IRS.

Lesson #8:  The IRS has a dim view of the thousands of dollars I spend on education.

In fact, she literally said, “You don’t need any more training.”

This, coming from a lady who has two Masters degrees!  I guess if I had been willing to argue the point, I would have asked her why she has two.  After all, isn’t one enough?

Fact is, I’ve been learning what it takes to run a fantastically successful business for a long time.  (Or is that “unlearning” what I got out of school?)  And every really successful person I know says the only way to get better is to never stop learning.

I’ll stick with my way and pay the IRS if they don’t like it.  It’s just another part of the tuition, really!

Lesson #9: There’s no better feeling in the world than having a wife/partner/sig.other who believes in you.

Corinne has never given me a hard time about the audit, or hinted that I did something wrong, or anything like that.  She listened intently when I got back and unloaded as much of the first meeting as I could.  Just to let me talk it out.

The faith we have in each other is what allows us to keep moving forward in the face of the challenges that come up.  We know we’re doing the right things because of the results we’re getting.

These speed bumps are just part of the deal.

As my son’s football coach said yesterday, “The only way you can get knocked goofy is by putting your head in.”

As long as we’re putting our head in, we’ll get knocked goofy every once in a while.

Good thing we have each other to hang onto.

That’s enough lessons for now, don’t you think?

‘Til next time,
Eric

P.S.  As long as you’re telling the truth on your taxes, don’t be afraid of the IRS.  They’re just doing their jobs.  And remember, EVERYTHING is a negotiation.

P.P.S.  If you want to read more about the difference between employees and entrepreneurs and business owners, check out Rich Dad’s Cash Flow Quadrant.

Hey there,

Audit update:

After talking with two separate CPA’s and my lawyer, and they all seemed to think the audit would be fine, I felt better. Mainly because I have good records and was realistic about what might happen.

But, I have this detail-guy hidden inside me. The one who secretly gets satisfaction out of making sure that the books balance to a “T’ and every I is dotted and T is crossed.

The one who believes you can never be too prepared for a test. Or an audit!

So, my inner detail-guy developed this strategy:

1. Be pleasant, self-assured, confident.
   Do NOT get upset, angry or self-righteous under ANY circumstances.
2. If they make a statement that I don’t agree with, either let it go, or ask for clarification about the topic.
   Do NOT argue.
3. Prepare reports from Quicken or Quickbooks to be used to focus the conversation and (hopefully) save time.
4. Bring all of the receipts I conveniently have for the specific forms they wanted to examine, but nothing else. If anything else must be provided, offer to send it or bring it in later.
5. Let the auditor talk about themselves as much as possible. (This is a direct example from Dale Carnegie’s fantastic book, How to Win Friends and Influence People)
6. Admit to something damaging right up front so she knows I’m not trying to hide anything. Be upfront about everything on the forms. Acknowledge clear errors, and do not make excuses - own them.
7. Negotiate like hell.
8. Be willing to escalate to the auditor’s boss.

Well, as they say, no battle plan survives the first engagement.
Here’s what happened in a nutshell:

My auditor was a lot like Dr. Jekyll and Mr. Hyde.

On the one hand, she was just as pleasant as could be. Remember the grand time we had on the first phone call? We had at least a 30 minute conversation about her trip to the San Antonio with her grandkids!  She went to the Riverwalk, SeaWorld, the zoo, and everywhere in between. She even showed me the pictures of her grandchildren!

As I listened to her talk with joy and pride, I was wondering if my strategy was working.  And I also wondered if she was trying to play me the same way.  I came down on the side of it worked because she did a lot more talking than asking questions and listening.

But then she looked at my return - and became self-righteous, indignant, accusatory, and angry. She accused me of spending money just to lower my taxes. She lectured me about how business is for profit - even though we all know that depreciation often eliminates profit on a rental property.

It was spooky going back and forth between the personalities, because I never knew what was coming next.

However, I did stay pleasant. In fact, it was fun being able to provide evidence of the expenses, clarify things, and come to agreements on things.

And I’ll tell you what, everything in the strategy worked pretty well.

The real big issue came up with a business that I had that was a financial markets investment company. It seems that I went to too many classes and bought too many books to learn how to not lose money in the stock market! And that the company didn’t have any income! (That was another “for profit” lecture). Long story, but I got her to agree to let me keep about half of those deductions - but to put them on Schedule A instead of Schedule C)

Lesson #1: “Reasonable” is the watchword here. They figured that $4000 was reasonable, since I had receipts for those expenses.

The other really big problem both she and her supervisor had was that we shouldn’t put any of our LLC income and expenses on Schedule C because we’re managing our own properties.  So all of the entries on Schedule C belong on Schedule E!

I questioned this whole line of reasoning a lot, but only because there are significant categories in Sched C that have no place on Sched E!!! For example, common expenses like business use of home, office expenses, cell phone, and so on have no place in Sched E.  I repeatedly asked what to do about those numbers and got no good answer.

I also asked what about not filing a return for those LLCs that have their own TIN, and was told to file an attachment letter!

Lesson #2: The IRS is all about what number belongs in what box, and their ideas don’t necessarily have much to do with the world we live in. The really ridiculous thing is that she signed up to redo my 2005 and 2006 returns just to put those numbers in the right box.

Lesson #3: Big losses on Schedule C will trigger an audit. The IRS manager told me so. Now, I think it’s really wrong that a CPA did my 2005 return and she somehow doesn’t know that she was filing a highly auditable (and incorrect!) return.

For my $2,000, I think the CPA should have told me that, don’t you?

As the auditor said, “All that glitters is not gold.” More on this later…

Lesson #5: The IRS looks at this as a negotiation, and they have the big stick. For them, it seems, an audit is halfway between a game and deadly serious. There were a few times where they made it clear that they were “being nice” For example, I mentioned that Corinne is a real estate professional, and the supervisor said, “Well, that may or may not be true”.

That sent a chill through my spine, because if they decided she isn’t, it would have cost about $10,000. And then there was the time that the auditor mentioned that she could open up my 2004 return - and then glanced through it to find another few thousand dollars she would disallow. I said, “I can shut up!”

All I can say about the whole process at this point is that the strategy seemed to work pretty darn well.   Why do I say that after 4 hours of back and forth?

A couple of things:

1. Her supervisor said to disallow a few things and to allow a “reasonable” amount of the rest of the things.
2. Out of the blue, she said that she’s not going to charge me a penalty.  Not sure why she said that, but I’ll take it.
3. When I called her back the other day, she said, “There’s going to be a balance due.  Not a big one, though.”  I have to believe that she’s “going easy” on me.  (By the way, I said that’s fine, and that I expected it, and I wasn’t trying to get out of paying taxes, just trying to understand the process.  Again, to get her to soften up on me a bit.)
4. She said that when we get together again on May 15, before she submits things, we’ll talk about it and negotiate some more.  (I’m happy about that, and that she doesn’t know how devastatingly lovable Corinne is!)

One last tidbit:

Since I already filed for 2007, I get to file an amended return following the newly revealed rules for rental property owners.

I’m in the middle of redoing that return now.

As you can probably tell, there’s more to this story. I’ll continue it in Part 4.

Lesson #6:  Find a BETTER ACCOUNTANT because yours probably isn’t doing you any favors if you get audited.  And they’ll charge you $200 an hour for the audit time!  I think there’s some serious conflict of interest involved in that set up.  Don’t you?

‘Til next time,

Eric