In this week’s episode, Podcast Host, Property Manager & Business Owner, Andrew Schultz, chats about tenants that signed a lease agreement, but then inform the landlord they won’t be moving in because they’ve found another property. What do you do?
Emergency funds are a thing to have when owning a rental property. Find out just how much to put off to the side.
Last, but not least, what happens when your state introduces new HUD Laws? Determine whether or not you need to switch up your rental property descriptions from here on out.
Andrew Schultz: (00:00)
Hey everybody. Welcome back to another episode of the Rent Prep for Landlords podcast. This is episode number 395 and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about what to do when a tenant decides not to move in. How much should you have in an emergency fund for your rental properties and source of income laws and rental property listing descriptions? We’ll get to all that right after this.
Voice Over: (00:27)
Welcome to the Rent Prep for Landlord’s podcast. Now your host, Andrew Schultz.
Andrew Schultz: (00:32)
Have you joined the free Rent Prep for Landlord’s Facebook group. We’ve just reached 13,000 members and of course that now means that we’re on the hunt for 14,000. So if you have a question or a situation that you’ve never encountered before or you just need to bounce an idea off a large group of housing providers, this is the place. If you haven’t checked it out yet, do it today over at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions so we know how you found us
Voice Over: (00:59)
Water cooler wisdom. Expert advice from real estate pros.
Andrew Schultz: (01:08)
We’re gonna start things off this week with a water cooler wisdom segment. Let’s go ahead and jump right in. This one comes to us via the Rent Prep for Landlords Facebook group. We are new landlords. Aside from renting to known persons, I would like to know if we have any recourse in a situation where a tenant agreed to all lease conditions via email and confirmed that they would be making the security deposit in first month’s rent would be paid today, hard copies of the lease would be signed tomorrow, and then move in the following day. Today instead of making the deposit payments, they said that they were take on another property. Instead, we took a property off the market and decline other renters based on their email confirmation. Is this a case of bad luck where we should not believe anything until the money is in the bank and just move on?
Andrew Schultz: (01:50)
Or could we seek payment until we find another tenant? And this happened in the state of Maine, so it doesn’t seem to me as though you have a whole lot of recourse in a situation like this. An email agreeing to lease conditions isn’t going to hold up in court, so essentially you really have nothing binding at this point. Basically, the tenant never paid their security deposit, never signed the lease, and now you’re left holding the bag with a vacant apartment. I’m going to explain what our process is here in our office so that hopefully this doesn’t happen to you or anyone else that’s listening in the future. Keep in mind that different states will have different laws, so double check to make sure that whatever you want to do is legal in the area that you operate. For instance, I’m operating here in the state of New York, so the process that I’m describing works here in New York.
Andrew Schultz: (02:34)
Some states will allow you to do first last in security. Some states will allow you to do, you know, a double security deposit, things of that nature. We don’t have that in here in New York, so that’s why this process is based off what we’re legally allowed to do here. First, we don’t take an apartment off the market until the day a tenant moves into the unit. That might sound a little bit crazy, but we’ve literally had tenants not show up for move-in and just fall off the face of the planet. I’m not saying this happens frequently, but we’ve had it happen a handful of times over the years and we’ve lost valuable marketing time as a result of that. So we made a decision internally that our policy going forward is to not pull a property offline until the tenant moves in. So that means that we’re gonna continue to show the apartment to qualified people right up until the day of move-in.
Andrew Schultz: (03:18)
In a lot of instances, this is going to be a bit of a waste of time because in most instances the tenant does wind up taking possession of a unit, but our goal is to get the units filled as quickly as possible so we don’t want to lose that marketing time in the event that we do have someone that doesn’t follow through. Once somebody comes out and takes a look at one of our apartments, we send them over to our rental application that they can fill out online. We require them to upload their most recent pay stubs or whatever proof of income they have a copy of their ID and fill out the application completely as well as pay the $20 credit and background check fee for anyone over the age of 18 who’s going to be living in the property. Everyone over 18 has to fill out a rental application, even if they aren’t going to be living their full-time such as a college student.
Andrew Schultz: (03:59)
And even if they’re not a responsible party on the lease, such as an elderly parent, that family is taking care of, anyone over 18 has to fill out the application and pay the credit and background check fee, and then from there we run through their application and assuming they meet our criteria, then we would go ahead and offer them the apartment. The way we go about offering the apartment is by sending an email to the applicant confirming that their application’s been approved and advising them of the next steps, which are pay the deposit and sign the lease The tenants have up to five days to sign their lease and pay their deposit. And then as far as the deposit goes, it needs to be received in certified funds, so either cashier, check money order, or a wire transfer. We don’t accept personal checks until the second month of tenancy because if a tenant bounces a personal check and you’ve already turned that unit over to them, at least here in the state of New York, you have to go through the full eviction process to get them back out.
Andrew Schultz: (04:52)
As far as the lease goes, tenants are sent the lease via email, so they have as much time as they want to review it prior to signing. This also gives them the ability to forward it to anyone that they may want to have take a look at it before they sign it. We don’t offer tenants any sort of legal advice when it comes to the lease other than to tell them that they should contact an attorney to have it reviewed if there’s something that they have questions on. If a tenant fails to make their deposit or sign their lease by the end of the five-day period, we rescind that offer and send them an adverse action letter at least that way we have a clear point at the endpoint that we’re no longer chasing after that tenant and we can continue to look for the right tenant for the unit.
Andrew Schultz: (05:28)
As I mentioned, we continue to show the unit until such time that a tenant actually takes possession of it. What we don’t do is run a bunch of applications while we’re waiting. People are more than welcome to apply and we still require them to pay the $20 credit and background check fee, but we won’t actually run those applications until such time that we know that the selected tenant is not taking the unit. We tell anyone that we are showing the unit to that there is an application and process. So they’re going into the situation knowing that the unit may mind up being unavailable and then if the selected tenant doesn’t take the unit, hopefully, we already have an application in queue and we could start working on that application immediately. If they do take the unit, we attempt to find the other applicants another apartment in our inventory that would fit their needs or if we don’t have anything that would work for them, we just refund their credit and background check fees for anybody who paid during that interim.
Andrew Schultz: (06:16)
It goes right back to their creditor debit card in like three business days or something like that, and it’s basically a one-click refund for us. So it’s not a complicated process. It really seems to work well for us. This is the process that we’ve been using for a couple of years now. I think probably for at least all the way through covid as near as I can remember. Uh, and honestly it wasn’t too much of a modification from what we were doing prior, so this has been our process for a lot of years now. Give this a shot. Hopefully you’re able to secure a new tenant soon and good luck on your search. Our second water cooler wisdom segment also comes to us via the Rent for Landlord’s Facebook group. Let’s go ahead and take a look at this one. We have three rentals and they are paid off.
Andrew Schultz: (06:54)
Good for you. That’s a nice spot to be in. How much money do you keep in your reserve slash emergency fund and what interest-bearing account are you keeping your rental income in? Uh, I’m gonna skip over the interest-bearing account portion of it because I feel like everybody’s bank has different offerings, uh, and I think that most people are probably well serviced by their local banks, but I do wanna spend some time talking about emergency funds and maintenance reserves and things like that. I think that a lot of people either underestimate or overestimate the amount of money that they should have on hand for reserves or emergency funds. There really is no hard and fast rule when it comes to how much you should have on hand for reserves. Different investors and different portfolio types and sizes are all gonna look at this a little bit differently.
Andrew Schultz: (07:36)
Some investors, for instance, tend to play things a little bit more on the conservative side and would rather have more funds on hand in the event that something goes wrong. Other investors look at having money sitting around in maintenance reserves as sometimes wasteful because that’s money that could be used as a down payment on another property. Looking at both of those investor types, you can obviously see that there’s gonna be pros and cons to both more properties, typically better, but if it comes at the expense of having funds on hand to maintain your current properties, is it worth it? Sitting around with a bunch of cash in your bank account and watching good opportunities go by could be super frustrating until you need to replace a furnace or a roof unexpectedly. I would say that different portfolio sizes will also play a factor in how much you want to keep on hand for maintenance.
Andrew Schultz: (08:19)
The amount that you would wanna keep on hand for one single-family home or one duplex is gonna be vastly different than if you have say, a 25-door or a 250-door apartment complex. The more doors you have, the more potential there is for something to go wrong. So your reserve amount needs to go up based on that. However, not every unit is going to require maintenance every single month, so there needs to be a bit of a balance there. Generally speaking, you need more cash on hand with more doors, but less on hand per unit. One of the main factors that I think should play into how much you keep on hand is the properties themselves. Here in Buffalo, we work largely with housing stock that was built in the late 18 hundreds to early 19 hundreds in the city. And then as you start to get out into the suburbs, the dates push out into the fifties, sixties, seventies, things of that nature.
Andrew Schultz: (09:03)
But there’s also a fair amount of housing stock even out in the suburbs that’s older in the late 18 hundreds, early 19 hundreds. But a house that’s 130 years old is gonna acquire a lot more in terms of maintenance than a house that’s say 10 years or even 40 years old. Uh, another factor to keep in mind is that the older the home is, the more hands have been inside of it, working on it and making changes to it. You’re liable to open up a wall in 130-year-old home and find things that were completely unexpected that you now have to remedy. One of the most common things that we come across is buried junction boxes. We’ll open up a wall and find that there was a junction box that was buried that needs to be straightened out. That’s very, very common in older homes.
Andrew Schultz: (09:43)
Uh, and that’s just the beginning that’s scratching the surface. There’s all sorts of things that you can encounter when you open up walls, so having extra funds on hand for older properties is always a good idea. In keeping with the age of the properties. You also need to understand the physical condition of the property. Like we were just saying, if you open up a wall in 130-year-old house that hasn’t been updated in a while, you’re liable to find things that you just weren’t expecting. If that 130-year-old house just had a full rehab done two or three years ago, depending on what updates were done to the actual mechanical systems, you may be in a much better situation than expected. The flip side of that is if somebody just puts lipstick on a pig and does a cosmetic update without doing any of the underlying electrical or plumbing work, you may be in for some big-ticket expenses that are hidden behind those walls.
Andrew Schultz: (10:28)
Essentially what I’m saying here is that you need to understand what your property actually is. In order to determine how much you need to have on hand in maintenance reserves, I recommend dividing your maintenance funds into two separate buckets, if you will. The first bucket should be normal operating maintenance, and this would be for things like swapping out a broken doorknob or faucet scraping and painting an area that’s been worn down over time, things of that nature. I typically recommend keeping five to 10% of your gross rents in a operational maintenance fund, and this way you always have funds available to take care of little things as they pop up, and you never find yourself in a situation where you don’t have the funds available to do the work. Now, your second bucket should be for capital expenditures. These would be things like replacing a roof, replacing a hot water tank, replacing a furnace, things of that nature, the big mechanical type stuff, the things that basically keep your building up and running.
Andrew Schultz: (11:20)
Other things that would fall into CapEx would be things like updating a unit as you turn it over, so things like flooring or fixtures or appliances could fall into this CapEx category if you’re doing it as part of a larger turnover. And again, I recommend having between five and 10% of your gross rents in this fund as well. I would say that this fund should have no less than $5,000 in it at any given time for a single-family or for a duplex. And the reason that I use that number of 5,000 is because that should give you more than enough cash to complete a hot water tank or a furnace replacement in the event that one of those pops up, up unexpectedly. This number should increase based on the number of units, and I would recommend having that five to 10% of gross rents with a minimum of $5,000 in this account.
Andrew Schultz: (12:03)
Overall, I would recommend having no less than 10 to 15% of your gross rents on hand between the two buckets. If you wanted to max out both at 10%, you’d have a total of 20% on hand, which personally I think is great. I tend to look at things from a little bit more conservative standpoint when it comes to property investing, so 20% would make me feel really, really good. I wouldn’t wanna go less than 5% in each bucket, and I wouldn’t go any less than $5,000 total at any given time. Now, keep in mind that when you’re allocating these funds, generally speaking, no one is gonna be watching over your shoulder. So if you know that you have CapEx coming up, start pushing more funds towards your CapEx account so that when the time comes to put that new roof on or replace that furnace that you know is on its last legs, that the money is in the account and ready for you to make that move.
Andrew Schultz: (12:47)
If you just bought a new build home and are planning on using it as rental, you may not need to have quite as much on hand because in theory, your maintenance cost should be very, very low for the first few years of ownership. Now, saying that no one is looking over your shoulder is kind of eh, not necessarily fully accurate because it really depends on where you’re at in your business cycle. Depending on the type of financing that you’re going after for properties and the type of properties that you’re buying, your bank may require you to have a certain amount of cash on hand in order to show that you’re able to operate during times of low cash flow and things of that nature. Some banks will require up to six months of operating funds on hand, which I personally think is crazy. Other banks will only require three months. Some banks don’t have any sort of requirement at all, and some banks are gonna have different requirements based on different types or sizes of property. If you’re in a position where you’re thinking about adding to your portfolio, talk to whoever you’re planning on financing with to see what their requirements are, you may need to make some changes to your reserves based on their requirements.
Voice Over: (13:53)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.
Andrew Schultz: (14:02)
Our final segment this week is Forum Quorum, and this one also comes to us via the Rent prep for Landlord’s Facebook group. Let’s go ahead and jump in here. I’m in Road Island and recently in 2020 the state added income discrimination to the state’s HUD laws. I will be looking for a new renter shortly. What does this mean for how I list my post, which always includes three times income as the requirement? I’m gonna assume they mean three times the rent as income for the requirement. Um, if anyone has experience with this in their state, can you please advise how I need to update my rental poster requirement so I’m not liable for a potential lawsuit. Any information is appreciated. So I actually have a pretty decent basis for this because we’ve already been through this here in the state of New York back in 2019, New York State passed the H S T P A, the Housing Stability and Tenant Protection Act, and that legislation was some of the most sweeping updates to the landlord-tenant law here in the state of New York in quite some time, and along with it came protections for lawful source of income.
Andrew Schultz: (15:01)
We actually already had source of income protections at a county level in Erie County for I wanna say like six months to a year prior to that. So it didn’t really take us by surprise when the state pushed that language through in the law update, and ultimately nothing really changed with our screening methods or how we posted ads. We continue to tell people what our income requirement is as part of the ad, and they still need to meet that same income requirement order to qualify for the home in terms of source of income. Essentially what they’re saying is that they don’t want you to discriminate against lawful sources of income, such as housing vouchers, section eight, assistance from public assistance agencies, and things of that nature. All of that stuff still counts as income. When your tenants are applying for the apartment, they just need to be able to show you that they’re receiving those benefits.
Andrew Schultz: (15:45)
So for instance, for section eight, we’re looking for their voucher award letter and their R F RFT A packet, the Request for tenancy approval for Department of Social Services. We’re looking for a copy of their budget sheet, which shows all of the assistances that they’re receiving and in what amounts. It’s pretty straightforward. What you don’t have to accept is forms of income that you can’t verify or income that’s earned off the books such as cash jobs and things of that nature. This can become especially problematic when you’re dealing with servers, for instance, who may not claim all of their cash tips because they don’t wanna pay taxes on it, and unfortunately, those cash tips don’t count as income. For us, when we’re looking at them and trying to qualify them for an apartment, we have no way to quantify what they’re actually bringing in in cash tips other than what they tell us, and obviously, that’s not something that we can verify against, so we don’t use it.
Andrew Schultz: (16:34)
This also comes in handy when you have someone that has access to capital, but they can’t prove that they have some sort of lawful employment that’s providing the income. You’ll wanna speak to an attorney that has a better handle of the landlord-tenant law on Rhode Island before you make any decisions, but essentially what it boils down to is the state doesn’t want you discriminating against someone simply because they’re receiving public assistance or a housing voucher or something along those lines. Some states are particular as to how you verify someone’s income, so you’re going to wanna spend some time making sure that your criteria are still fair housing compliant, but ultimately, I think that you’ll find that there won’t be much of a change between your old and your new criteria. One thing I would recommend is to make sure that you do have a good set of written criteria that you present to every applicant every time, and we actually have them sign off on the criteria stating that they read through and understand it prior to applying.
Andrew Schultz: (17:25)
Use the same set of criteria for every applicant and make sure that your criteria are fair housing compliant, and once you tackle getting a good set of criteria built out, you can apply that same set of criteria each and every time you screen an applicant without having to worry about whether or not you’re in violation of any of the fair housing laws. One thing I will specifically mention when it comes to your descriptions is if you have something in your description like no section eight or no public assistance or d s s not accepted, something along those lines, that is an immediate red flag for anybody that’s out looking to bust people that are in violation of these lawful source of income laws. So just be mindful of what you’re putting out there on the internet. Don’t be discriminatory when it comes to the people that you’re renting to or the sources of income that you’re accepting, and ultimately, this problem will take care of itself. Landlord-tenant law can be a very complex web. Find out how to cover all aspects of the landlord-tenant relationship and tenancy expectations by reading Rent Prep’s. Latest blog post visit rentprep.com/blog today for more.
Andrew Schultz: (18:30)
That pretty much wraps it up for this episode of the Rent Prep for Landlord’s podcast. Thank you all so much for listening. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate, and you can help us to reach our goal. If you heard anything in this week’s episode or any other episode that will help someone that you know, please do us a favor and share it with them. Don’t forget that we’re publishing brand new video content all the time over at youtube.com/rent prep as well. If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com. From there, you’ll find links to everything going on with me over at Own Buffalo, as well as other projects that we’re working on. Grab a free copy of our deal analysis tool today over at whatsdrewupto.com.
Andrew Schultz: (19:11)
There’s no obligation and it comes with a companion video showing you how to use it. If you’re looking for top-tier tenant screening services, head on over to rentprep.com. There are multiple products to choose from, including a tenant-paid option. If you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user of Rent Prep for years now, and it’s definitely changed the way that we screen our tenants. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t wanna miss. Until then, I’m Andrew Schultz with ownbuffalo.com for rent prep.com, and we’ll talk to you soon.
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