RentPrep Podcast #367

In this week’s episode, Podcast Host, Andrew Schultz, shares how important it is to have a plan of action going into a house hacking scenario.

We learn the story of one landlord that was doubting hiring a property management company because of costs. So, how much should someone pay?

Last, but not least, what does a landlord do if they find evidence of smoking after the tenant moves out? To charge or not to charge, that is the question.

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Show Transcription:

Andrew Schultz: (00:00)
Hey everyone. Welcome back to another episode of the Rent Prep for Landlord’s podcast. This is episode number 367, and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about the fees associated with property managers, house hacking and utility responsibilities, and the cost of remediating smoke damage. We’ll get to all that right after thiS.

Voice Over: (00:22)
Welcome to the Rent Prep for Landlords podcast. Now your host, Andrew Schultz.

Andrew Schultz: (00:27)
Before we jump into today’s episode, don’t forget to check out the Rent Prep for Landlords Facebook group. It’s a great free resource for you to network with housing providers from around the country. And if you have a question or situation you’ve never dealt with with over 12,500 members, chances are someone in the group has been there before and can lend a helping hand. Our goal is to hit 13,000 people by January 1st. So if you haven’t checked it out yet, do that 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: (01:02)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.

Andrew Schultz: (01:11)
This week’s forum quorum is actually a topic that is very near and dear to my heart. We’re talking about tenant screening and we’re talking about property management. So that’s kind of right in my wheelhouse. Let’s go and jump right in here. I recently moved and became a long-distance landlord. Now at the time of lease end, I had to hire a property manager for new tenants and they quoted me a whole month’s rent. Even if I want to do the advertising myself and I already have my own lease terms ready to go. It just seems really high, but I’ve never had a pipe property management company before I have thin margins as it is. So it’s hurting a little financially is a whole month’s rent the industry norm, or should I keep looking elsewhere? This one came to us via the landlord subreddit. So I feel pretty well qualified to discuss this topic since I own a property management company while I can’t discuss what other companies are or are not charging, I tell you our process is and why we charge what we charge for a tenant placement.

Andrew Schultz: (02:08)
I will preface this by saying upfront that we charge one month of rent. When we place a tenant, that’s not really a secret. Anybody can call my office and find that information out. So what’s included in that one-month charge is really what’s important. And when you’re talking about hiring a management company or even hiring just a real estate agent to help you find a tenant, this is the kind of thing that you need to be looking at. So when we do a tenant placement, we aren’t just looking for the first person with a pulse and a temperature to fill an apartment. Any competent property management company has a set of criteria that they’re going to use to screen tenants, to help you secure the best possible for your property. Generally, these criteria are going to include things like income, credit, and background checks, employment, and landlord references.

Andrew Schultz: (02:52)
You know, things of that nature everyone’s criteria maybe a little bit different. So you’re gonna want to talk to your property manager to find out what their criteria are and ask to see their written screening criteria. If they don’t have their screening criteria in writing, move on. That’s not the property management company that you wanna work with. So one of the most critical aspects of doing this tenant screening is ensuring that the criteria that you’re using are fair housing complaint, there’s no screwing around when it comes to fair housing violations. There’s no such thing as a warning in fair housing land, it starts with a fine, and those fines are massive. I think the starting fine is like five or $10,000 for a fair housing violation. I’d have to look it up, but it’s not the kind of thing that you wanna screw around with is what I’m telling you.

Andrew Schultz: (03:36)
We recently had a potential client approach us, and they wanted us to modify our systems so that they could review the applications. And they also wanted final approval on the tenant. And I asked them straight out if they’d taken any fair housing training. And they said, no, I asked if they could tell me how many protected classes there are in fair housing on a national level. And if there are more or less protected classes at a, a local level, obviously they couldn’t answer that by the way. They also wanted us to deny every section eight tenant, which isn’t even legal to do in the state of New York. So really this brand new investor they had just closed on their first duplex. Imagine what they were setting themselves up for. That’s just one aspect of what goes into tenant placement. Making sure that what you’re doing is above board and you know, legal.

Andrew Schultz: (04:22)
That’s just one aspect of it. When we do a tenant placement, our tenant placement also includes a set of edited photos of the property, as well as a basic walkthrough video, we do offer an add-on to clients if they want like a 360 virtual tour or high-end professional photography or video something along those lines. But of the marketing cost is essentially built into that charge that one month that we charge and we make sure that the units are all over the internet, Zillow, Trulia, hot pads, Facebook MLS in some instances, but the only place that we’re not advertising at this point is in the newspaper and on Craigslist, just because it’s such a bastion for scams over there. So we’re following up upon every lead that comes through pre-screening those leads before they come out to take a look at the property we’re present for every showing.

Andrew Schultz: (05:08)
So there’s physical time allotted to being at your property. And that also has to be accounted for then obviously once we have shown the property and we have applications, it’s time to move into that application screening phase, which is kind of what we, we discussed at the onset there. Once we get that application approved, now we’re on the lease signing. We have a very solid lease that we have reviewed by attorneys on an annual basis. Not just one attorney. I send my lease to multiple different attorneys to get different eyes on it every single year. And that’s a charge that we pay for gladly because we wanna make sure that we’re compliant with any new legislation that and past, and in the past two years, there’ve been a lot of new pieces of legislation. So, you know, it behooves you to use the lease that we have simply because our lease is probably the most UpToDate lease.

Andrew Schultz: (05:54)
And a lot of times owners are pulling leases off the internet and barely even reading them before they throw a signature on it. Obviously, those reviews cost us money, but that lease gets included in that fee. So that’s part of the lease placement. Once the lease is signed and we’re onto the move-in, we’re going to meet that tenant the day of the move-in to exchange the keys and to get their security deposit or first-month rent, whatever funds are due. At that point, we’re also taking detailed photos of the home at move-in every room, every single room walls, ceiling floors inside and outside of cabinets inside and outside of appliances, making sure the appliances turn on and function the way they supposed to checking drains to make sure they flow the way that they’re supposed to. All, all of that stuff gets noted, and all of those notes and photos that becomes the move in record for that tenant when the tenant signs off on it.

Andrew Schultz: (06:44)
So now you have a solid set of before photos in the event that there are damages or something like that move-out. So when all that is said and done, there’s also accounting work that has to be done. Obviously, we have to account for any of the funds that are, are received. What was reserved to us in commission, what was turned around and paid back out to the property owner in security deposit and rents, all of that has to be accounted for as well. And then we have to cut the checks back to you as the property owner, along with all the other documents. Obviously, I’m not gonna sit here and say that we don’t make a profit on leasing, but I think a lot of people forget that there’s more to it it than just showing an apartment and putting a warm body in it when it’s done properly.

Andrew Schultz: (07:22)
It’s so much more than that. So the bottom line here is I encourage you to understand the totality of what you’re paying for when you hire a property manager, or when you hire a real estate agent to help you find a tenant, ask the questions, find out what they’re including in their service, and then make your assessment from there. Not everyone does everything that we do. Some people do more, many people do less, but coming back to the original question, you mentioned that your margins are very slim on this property, and doing this is already going to put you in a bind, understand that all tenant screening represents just a snapshot in time. There’s nothing that says that we don’t approve an application and they move into the apartment. And two days later they don’t lose their job. That’s not something that we can stop.

Andrew Schultz: (08:04)
We have no control over that. But if your margins are that slim and you place a bad tenant, imagine the potential repercussions to your property. I’m not saying that every tenant placement that we’ve ever done has been a hundred percent grade a, but as property managers, we screen tons of tenants. We see a lot more than the average investor with just one or two units because we’re screening applicants much more frequently and probably a lot more in-depth than what the average investor is. It can be very, very inexpensive to pay for a tenant placement when you compare it to the cost of what a bad tenant would be. Especially when you start talking about the, a cost of eviction and lost rents and everything else. You may find that you are in a better position to hire a professional, to help you out in the set of circumstances unless you really truly have a good feel for what you’re doing and have good systems in place to handle the situation yourself, water

Voice Over: (08:55)
Cooler wisdom, expert advice from real estate pros.

Andrew Schultz: (09:03)
We have two water cooler wisdoms for you this week. The first one deals with house hacking and the second one deals with smoke damage from smoking in an apartment. Let’s go ahead and take a look at this one on house hacking. First I am house hacking a home in Philmore, California. I’m living downstairs in one bedroom, one bathroom, and the garage with no kitchen, but I have laundry. I do laundry maybe once a month. The upstairs is rented out for $2,700 a month, which is the two-bed one and a half bath. That has the kitchen and everything except no laundry room. I’m paying $55 for the wifi and $55 for the water softener. The tenants have access to the wifi. I thought this would be fair as me covering my use of the utilities at $110. The tenants cover all of their utilities, the water, the trash, the sewer, the electric, and are complaining that the bills seem a little high for as well as water and sewer.

Andrew Schultz: (09:57)
And they want to split those bills. They mentioned the sewer bill is about a hundred dollars a month. I do the maintenance, including the pest control and gardening for the home. During the lease agreement, I told them about what I’m going to be covering and what they need to cover. They agreed and signed. Please help. I’m a new landlord. Thank you in advance. So it sounds to me like you’ve built a nice little mess here. This is one of the disadvantages to house hacking is when it’s not set up and done correctly, it can really turn into a gigantic headache very, very quickly, especially when it comes down to the financial side of it. Who’s paying for what and everything that goes along with it. The first question in a situation like this is always, what does the lease say in terms of who is responsible for what, assuming the tenant’s sign that lease.

Andrew Schultz: (10:41)
Those are the agreed-upon terms. And there really isn’t a reason to make changes to those terms, unless everyone can come to an agreement about the, what the new terms and conditions of the lease are going to be the tenants, sign their lease at move-in, knowing who is responsible for what, and when you’re doing a house hack like this, typically it’s best to keep all of the expenses in your name as the property owner, and then have some sort of an agreed-upon price with the tenants. For instance, if you’re renting by the room, you could build like an all-in price where the tenant pays one rent, and that would basically cover the rent and then all of the utilities and the maintenance and everything that goes along with it. And another option would be, have a base rent for the room and then divide the utilities amongst the number of people living in the home, or, you know, whatever that case may be.

Andrew Schultz: (11:28)
A lot of people do it that way as well. Realistically, the main issue with that is you are not gonna be able to tell who is using how much of what utility because nothing is sub-metered obviously is. So I could see there being arguments there as well. Most people say you know what? We’re probably all using roughly the same amount of utilities and they just add ’em up divide by the number of people. And then everybody splits the utilities that way they pay their base rent, and then they pay their utility portion. That’s a lot more common in commercial than it is in residential, I would say. But when you’re doing a house hack, it’s very, very common. Even just sharing a house with friends, we don’t even need to use the term house hack. I mean, when I was in college, I split a house with friends and that’s what we did.

Andrew Schultz: (12:07)
We all just added the utilities up, divided by the number of people, and everybody chipped in that portion. It doesn’t have to be super, super complicated. I think where you went wrong here is that you told the tenants who are living in the main portion of the building by the sounds of things, to move all the utilities over into their name, so that they’re responsible for the utilities, blah, blah, blah, blah, blah. I think the better route to go would be to have those utilities in your name, as the property owner, that’s gonna give you a lot more control and a lot less headache over situations exactly like this, where someone feels that they’re getting the short under the stick. And it sounds to me like everybody feels a little bit slighted in this situation based on the way everything was written. But realistically, my recommendation here is to who do what you need to do to fix your house hack right now it’s broken move all of the utilities and expenses under your name as the property owner, charge the tenants accordingly.

Andrew Schultz: (13:02)
And then you don’t have to worry about this in the future. I’m not really digging into the legalities of splitting utilities or renting by the room here because it’s pretty much outside the scope of the discussion, but you should check laws in your area on both of those topics to make sure that you’re not putting yourself in a bad situation. That way as well, people house hack successfully all the time, people share houses together successfully all the time. I get the impression that this home is not one that lends itself well to a house hacking scenario. At the very least. I think that the way that the house hack is set up is not good. I think there are some improvements that will make this a lot easier going forward. My only other recommendation would be, make sure you can get everybody back onto the same page as far as who’s responsible for what and things like that.

Andrew Schultz: (13:49)
If you do decide to make changes to the terms and conditions and who’s responsible for what make sure that it all gets put down on paper and everybody signs off so that everybody is aware as to what the new arrangement is compared to what the previous arrangement is. As I said, I think there’s some improvements here that are gonna make this a lot easier for you going forward. Best of luck as you work on sorting this out. Our second water-cooler wisdom this week talks about damages from cigarette smoke in and of apartment and how to combat that. Let’s go ahead and take a look. We are new owners of a two-family home. We are occupying the second floor. We’ll be running out the first floor, which is a two bed, one bath apartment. It’s very important to us. That potential tenants are not smokers.

Andrew Schultz: (14:30)
It’s clearly outlined in our lease. And additionally, in a lease addendum, no smokers, no vaping, no M is it reasonable that we state that an additional charge will be applied to tenants upon moving out who leave behind evidence of smoking. This one comes to us via the landlord subreddit as well. The answer to the question is very simply. Yes, absolutely. The cost of removing smoke order from an apartment can be very, very extensive depending on how bad the damage is at a minimum. You’re talking about cleaning and wiping down all of the walls, the trim, the ceilings, cleaning any of the carpets, or any sort of fabric window coverings. All the windows are gonna need to be washed. You possibly need to have a ductwork service come in and clean all the ductwork to eliminate, build-up and odor in the ducts.

Andrew Schultz: (15:15)
You may need to rent or buy an ozone generator to help with the smoke odor. You may have to repaint summer all of the unit. You may have to do other work as a result of the corresponding damages. And when you talk about painting, it’s not just throw a quick coat of paint on the wall. It’s more extent that you’re gonna have to prime and paint. It’s not just a, a small amount of paint where you can just go in and touch something up. Usually. So as a result of all that, what I’m trying to say here is that smoke damage could be pretty minimal, or it could be very, very extensive. I’m also gonna mention candle burning here. You touched on smoking and vaping, but I candle burning also needs to be mentioned here. And the reason I mentioned that is because we had a tenant that just loved to have a ton of candles burning in their apartment.

Andrew Schultz: (16:00)
And besides the obvious safety concern, there were so many candles burning in this apartment that there was literally so build-up it baked onto the paint above the radiators on all of the walls. So as the the so would kind of move through the air, the convection current would bring it back up to the wall and up above the radiator where it was warmest, the sot would settle on the wall there and it literally baked the sot into the walls. It wasn’t a situation where you could even scrub it off. At that point, that apartment had to be painted with an oil-based primer and paint from end to end every wall, every ceiling, the trim, all E everything needed to be hit with basically an oil-based primer and paint. Obviously just the paintwork, those damages way exceeded the security deposit. And as a result, now we have some new lease language.

Andrew Schultz: (16:52)
So here is the lease clause that we use. I pulled this directly from our lease. Feel free to run it by your attorney and add it to your lease. Please don’t just add it to your lease without talking to legal counsel first, that’s probably the best possible advice I can give you. So here it is. The lease clause that we use for smoking, smoking, and or vaping of any type is not permitted anywhere inside the apartment building, including, but not limited to the apartment itself. ATS, basements, laundry rooms, common areas, and hallways smoking is permitted outside, but cigarette butts should not be discarded on the ground. Extinguished cigarette butts may be deposited into the trash cans or dumpsters only candle burning is not permitted in the apartment, both smoking and candle burning result in foot buildup and an additional cleaning fee of $250 per room minimum may be assessed.

Andrew Schultz: (17:42)
If landlord determines that tenant has been smoking or burning candles in the apartment, and that’s the whole lease clause. That’s our smoking in candles. Closets appears in every residential lease that we have. So is two 50 a room excessive? No, not when you have to restore an apartment from end to end. Think of all the things that we mentioned at the onset of this section. You’re talking about painting, cleaning, possibly cleaning, and replacing flooring. You might have to do duct cleaning. There’s a lot of things that go into restoring an apartment that has smoke damage. Two 50 a room really is not excessive. That’s probably way too low. In all reality, especially given today’s labor and material rates. That’s probably on the low end of what the charge should be. And take note that our lease indicates that that’s the minimum charge. Now here in near state, we do have to prove damages are legitimate.

Andrew Schultz: (18:31)
So if our charges were less than two 50 a room, we would have to bring that charge down to the appropriate amount. Some states have a lot less restrictions on what you can and cannot charge. You’ll wanna check with your attorney to determine what makes the most sense for you as a course of action. But I don’t think that it’s unreasonable to charge an extra fee. If someone causes smoke damage to your building, whether it be from cigarette cigar, marijuana, vape pen, whatever the case may be. If someone is damaging your building, there’s no reason that you should not charge to restore the building back to the position that it was in prior to that tenant taking possession, let’s face it. Security deposits are always a topic of conversation for landlords and in rent. Prep’s latest guide. We’re exploring the idea of opening escrow accounts for rental deposits and whether or not that’s something you should consider.

Andrew Schultz: (19:20)
Check that out today, over at rentprep.com slash blog. That pretty much reps things up for this episode of the Rent Prep for Landlords podcast. Thank you all so much listening. We truly do appreciate it. 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. 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. We just launched a free investment property deal analyzer, which is available over on that website.

Andrew Schultz: (20:02)
Whatsdrewupto.com. It is truly free. There’s no obligation whatsoever. And I also built out a companion video to teach you how I analyze deals and how to use our analyzer tool. 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. And if you’re over 50 doors, ask about the enterprise-level programs and pricing. I’ve been an enterprise user at 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 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.