Your tenant is breaking their landlord tenant lease agreement. What now? Do you go after the money or eat the loss? Depending on the amount, it may not even be worth the trouble. Either way, perhaps the more important question to ask is, “How can I prevent this from ever happening again?”
Welcome back to another Rookie Reply! Broken leases are a pain to deal with, but in this episode, Ashley and Tony offer up the “magic words” that could save you the headache. They also talk about partnerships and make the case for getting pre-approved separately. Rookie investors often feel like fish out of water when it comes to networking. Fortunately, our hosts have several helpful tips on how to bring real value to the table. They also go over property management fees and how to vet a property manager before hiring them. Finally, they discuss tax strategy versus tax preparation and why waiting until tax season to hire a CPA is the wrong move!
Listen to the Podcast Here
Read the Transcript Here
This is Real Estate Rookie, Episode 316. What I do put in my lease agreements is that if somebody does break a lease, that the rule is they do have to cover the rent until somebody else moves in or their lease agreement ends. So we also have in the lease agreement, if you do break your lease early you automatically forfeit your security deposit. In my opinion, I would say it’s not worth going after them. I would 100% send them an invoice, if you have their forwarding address you might as well attempt to charge them. My name is Ashley Kehr and I’m here with my co-host Tony Robinson.
Welcome to the Real Estate Rookie Podcast where every week, twice a week we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. We are back with another Rookie Reply episode, we’ve got some great questions for you guys today. We’ve got two questions about partnerships to kick things off, and if you guys haven’t yet Ashley and I co-authored a book. It is called Real Estate Partnerships: Access More Cash, Acquire Bigger Deals, and Achieve Higher Profits with a Real Estate Partner. Published by BiggerPockets, and we go all into the nitty-gritty of building out your own real estate partnerships. So if you guys haven’t picked up this book yet, head over to biggerpockets.com/partnerships and pick up your copy. Then we round out the episode by talking about what should you do when someone breaks a lease and should you be going after that tenant for the lost revenue?
We talk about the importance of having a CPA and why waiting until tax season to hire that person is probably a step too late, and we finish off by talking about the kind of ins and outs and fees that come along with hiring a property manager. What’s fair, what’s reasonable and what you should expect as a rookie investor.
Okay, for this week’s Instagram shout out. I want to give a shout-out to Homegrown Investing Co, this is Gabby and Ciara. They are childhood best friends, mamas and business partners in their real estate investing. So they go through and they are sharing their journey as to why they invest, how to save money on furnishings and just real estate investing tips for beginners. So make sure you go and check them out and give them a follow. If you would like to be featured as the Instagram of the week, please use the #RealEstateRookie and tag Tony and I in your post.
All right, now I also want to give a shout-out to someone that left us a five star review on Apple Podcast. This person goes by the username of Coach Mick and Coach says, “This podcast is exactly what it sounds like, a resource for rookies. It’s so refreshing to have an honest place to learn and grow. It’s a perfect balance between advice, examples, inspiration and fun. After listening for a few months, I finally had the courage to buy my first property. Wouldn’t have taken the leap without listening to relatable rookies on the podcast. So thank you BiggerPockets, Tony and Ashley and all of the guests who are willing to share their story. I’d never thought I could get into real estate being a teacher in Colorado but this podcast showed me that there’s always a way. I appreciate you guys.” Guys, this is probably one of the coolest reviews that I’ve read recently. It’s for exactly reviews like this that motivates us to continue to do this show because we know that there are folks out there that don’t have a community.
There are folks out there that aren’t seeing their close friends and family building real estate businesses. But when you can hear day after day, week after week while you’re driving in the car at the gym, shopping for groceries, whatever it is. You can hear stories of everyday people finding success, it shows you that it really is attainable. So Coach Mick, kudos to you and super excited to hear that story and for all of our rookies that are listening. If you haven’t yet, share your success story with us and the reviews as well. Leave a story about how the show helped you and we’d love to read it on the podcast as well.
Okay. So our first question is from J.P Bailey. “How do you network and partner with more experienced investors when you feel you have nothing to add value? I’m aware that this might just be me being too hard on myself.” Yes, I would agree with you J.P. So how to network with people and find more experienced investors when you feel like you have nothing to add to value and there probably is some value that you have but it is very easy to think that there is no value added. Especially when you’re just starting out you might think I’ve never even done a deal, how can I be of value to another investor? First of all, you can network without having to provide any value. Just going to meetups, messaging people online and asking questions. Yes, you’re going to build more of a connection most likely if you are able to add value. Tony always gives such a great example of how he was able to network before he actually made a deal and that was from making a podcast about getting your first deal done.
Where Tony was able to network with somebody who had at least done one deal and get them onto the podcast and I’m sure Tony learned a ton.
Yeah. I mean a big part of the reason why I started that podcast was to network. My logic was, initially I was putting out three episodes a week. I was like okay, if I interview three people a week for an entire year and there’s over 150 people that I’m going to meet that are active real estate investors my network is going to explode. So that was a big motivating factor for me was just kind of building out the network. But I think just like you said Ash, I think J.P’s being a little bit too hard on himself. Everyone has value that they can provide, even if you don’t necessarily have experience J.P with real estate like you haven’t done a deal yet. There’s still tons of ways that you can provide value to other more experienced investors. So I think my first question is do you have the ability to walk or just be mobile in any way, shape or form? Because if you do, say you live in a neighborhood.
Maybe you could walk around that neighborhood and find distressed properties and instead of driving for dollars, you’re literally just walking around the neighborhood. We have guests in the podcast that they would take their morning stroll with their dog or whatever and they found deals doing that. Same thing if you can drive, hop in your car and just drive around neighborhoods and look for deals and houses that look kind of old and beat up and capture those addresses. That’s a great way to partner and provide value to a potential real estate investor. Just as an example of something that just happened recently in my own business. We had one of our events this past weekend and at that event one of the attendees there she has a ton of… I mean not necessarily investing experience. But a ton of real estate experience where she works for a builder in her hometown and she’s a project manager for this builder and I was like, “Man, that’s an incredible skillset.” But she’s like, “Yeah, but I just don’t feel confident investing in real estate.” I said, “You do it every day in your day job.”
People have that same kind limiting belief all the time where they don’t realize how their skills from the rest of their life translate to the world of real estate investing.
I was just like at a BP Con last year. We asked everyone in the room, “Who doesn’t think they have any value to add?” Somebody up front raised their hand and we said, “Okay, what do you do for a living?” Same answer, “I’m a project manager” So then we said, “How many of you would love a project manager on your team?” Almost every hand went up. So I think really taking your W2 job or even past experiences that you have had and kind of look at those and be like what did I learn from that? What kind of skillset do I have that can be incorporated into real estate? Because real estate is a lot of different kind of aspects tied together, it can be a people person business. So if you are great at talking with people, you’re great with customer service and you can build a connection with someone. Okay, you’re great to go talk to potential sellers and get them to sell the house. You’re a great property manager, you have patience, you can connect with people, you can talk with them, communications.
So there’s so many different kind of skill sets that you can have that you can bring value to the table. So I challenge you to sit down right now and start making a list of some of those attributes that you have and that you’re really good at and don’t focus on and actual job. Think about what you do well for your personality. Maybe take a personality test like the disc profile and use that to gauge, I’d be really good at doing this because of my personality and what my strengths and weaknesses are too.
Yeah. I guess last thing I’d add Ash is for you J.P, when you’re thinking about the different things that you can do there’s really kind of three major buckets. Right? You have your acquisitions activities, you have your operations activities and then you kind of have your finance/admin stuff and I’ll use a few different asset classes as an example. So in the Airbnb space acquisitions could be networking with realtors, networking with brokers, if it’s like a commercial property. Networking with wholesalers, if we’re trying to find something that’s a value add. So you don’t even necessarily need to be the person that’s, “Finding the deals.” But you’re just building relationships with people that have access to those deals and then using that as your way to find those opportunities. Then on the operational component someone’s got to manage the guest communication, someone’s got to manage the cleaners and the maintenance staff. Someone’s got to do all the pricing and the software and all those things, and then on the finance side someone’s got to make sure that the books are clean. Right?
That you have good clean books you can pass off to your CPA at the end of the year. Someone’s got to make sure that the utilities are set up and getting paid, that the taxes are being paid if you’re not doing it through your mortgage provider. So every single type of real estate investing has buckets, another example would be flipping or let’s do wholesaling even because that’s even a little bit more different. Say they try on the acquisition side of a wholesale transaction, you’re the person that’s reaching out to the sellers. It could be text, it could be email, it could be phone calls, it could be door knocking, direct mail, whatever strategy you want to use but you’re there conversing with the sellers to find those deals. The operational side will be, “Okay, now that we’ve got this deal under contract. How do we actually disposition this thing? How do we make our money on this deal?” So you’re networking with buyers, you’re out there going to real estate meetups and meeting flippers and long-term buy and hold people that you can add to your buyer’s list.
Then when the property comes in on the acquisition side, you’re working to dispo that with those buyers that you’ve built up an then same thing, finance and admin would be the bookkeeping and making sure everything looks clean and good there. So there’s so many different activities involved in a real estate transaction and if you can specialize in one of those, that’s how you provide value to a more experienced real estate investor. So Ashley let me ask you, what’s one thing a rookie could do today that would help you in your business?
My social media. I think that is something that I find difficult to outsource because you want to find somebody that is typically the same personality as you. Because if somebody starts commenting and sharing stuff with descriptions and things like that and people are like, “Okay, this is not Ashley because it’s literally different than everything she’s been posting about on the last five years.” So I think that that’s definitely one thing that I would need right now.
Just a funny story about social media, so I have someone on my team that helps with social and if you guys haven’t noticed I have black thumbs. Kind of part of my identity and when I first hired my social media girl she kept using white thumbs and I was like, “I get what you’re trying to do.” I was like, “But I think people might know it’s not me if the thumbs aren’t black.” So I get what you’re saying, there is a bit of a learning curve there. But I think somewhere that I need help in my business and this has always been true, is just finding good deals. If someone brings me a good deal, that’s the easiest and fastest way for us to partner on a deal together. So I actually have a deal on a contract right now that someone sent to me through Instagram. So hey, if you’re listening to this and you want to partner with me send me a good deal @tonyjrobinson. I’d love to take a look at it.
Okay. So our next question is from Isaac Brummer, “When partnering up what are the benefits, drawbacks of getting pre-approved together versus individually? Shouldn’t your debt to income be the same individually as it is together?” Well, this question has come to the right place. Tony and I have wrote the Real Estate Partnerships book, so we should be able to answer your question. But if you guys haven’t checked it out yet, you can find it at biggerpockets.com/bookstore and you can find it on there and it launches August 10th. I’m not sure when this episode comes out, if that’s before or after that but I think it’s around that. So you should be able to get it on the bookstore and then it launches in September on Amazon in Barnes & Noble, you can still pre-order from there. Okay. So drawbacks and benefits of getting pre-approved together versus individually. My advice would be for somebody to get pre-approved on their own first and see if you actually need the other person to get pre-approved with you. So there are lending limitations that one person can only have so many conventional loans under them.
I think it’s at like 10 right now, but also it’s very hard to get to that 10 and stay under the debt to income ratio. Also, say you have $1000 mortgage payment and Tony and I both go on the debt together. That $1000 counts towards both of our debt to income, so both of our debt to income ratio. So if you can eliminate that, because we’re not married. So if Tony goes off and buys another deal and he’s showing that he has that mortgage on a property, that’s going to count towards his debt to income even though I own half of that. When they pull that on his credit report it’s not going to show that I also own a portion of that debt.
Yeah, and I just want to define both of these terms that Isaac brought up for our rookies that may not be familiar with it. So he talked about pre-approvals and he talked about DTI, so DTI stands for debt-to-income ratio and basically what this is. It’s a measurement of I guess comparing your income towards your debt repayments. So lenders, banks or creditors in general really when they’re looking at approving you for a loan. They’ll say, “How much money does Tony make and how much debt payment does Tony have to make on a monthly basis?” So say for example I have income of $1000 a month and I have debt payments of $600 per month, then my DTI is 60% right? 60% of my income is going towards debt repayments, which is pretty high. Or say I made $1000 per month and my debt payments were $200 per month, then my DTI would be 20%. Right? 200 is 20% of 1000, so my DTI would be 20% which is a healthy DTI.
So that’s usually what lenders are looking at, they want to see how much do you make versus how much do you have to spend. Again, the higher your DTI the harder it is for you to get approved for additional mortgages because banks might see that you’re overextending yourself. The second thing that Isaac mentioned was the pre-approval. So most lenders you can go to and they’ll, “Pre-approve you.” Basically it’s kind of a quick look at your credit profile and it gives an understanding of like here’s generally how much we think we can qualify you for to actually purchase a property. Now a pre-approval is not a final approval, which is why it’s called a pre-approval. When you actually get a property under contract most lenders will then open up a pretty thorough kind of underwriting process for you and the property to make sure that everything checks out. But the pre-approval at least gives you a ballpark in terms of what is your purchasing power and what kind of loan amounts can you get approved for.
Okay, our next question is from Keeley Wood. “I have a rental where someone broke the lease and decided to move out early. I have found new tenants but there is a seven-day lapse between the two leases to do repairs and clean. Would you tell the previous tenants they had to owe rent for those seven days since technically they broke the lease and moved out early or just chalk it up to less rent for the month due to turnover?” Tony, did you ever have this happen when you had long-term rentals?
When we had our long-terms I was pretty removed from the process, my property managers did everything so I couldn’t even tell you. But I can just say from my own perspective right now, if I was dealing with this today. I probably wouldn’t chase after them for seven days, I don’t know if it’s even worth the headache. Especially if they’re the kind of tenant that broke the lease without really giving you a bunch of heads up. They probably strike me as the kind of tenant that might be hard to chase down for seven days worth of rent. But you Ashley are the long-term rental queen here, so I’m curious what your take is?
So I just did it like $1000 divided by 30 days would end up being $33 for the day. So 33 times 7, is $233 is what you’d be going after them for. I would say that’s definitely not a substantial amount to actually go after and seek a judgment against them. What I do put in my lease agreements is that if somebody does break a lease, that the rule is they do have to cover the rent until somebody else moves in or their lease agreement ends. But per New York State law, you have to actively market the unit. Right now seven days, that’s filling your unit pretty fast and you’re able to get your turnover. That’s amazing, that’s great. Sometimes when you get that short of notice, it’s a lot harder to line up somebody in seven days. I did have somebody that did the same thing, called my property manager and said, “You know what? What’s going to happen to me, I’m moving out in three days?” And it was the end of the month.
So we also have in the lease agreement if you do break your lease early, you automatically forfeit your security deposit. So that’s what we told this resident is that we would just keep their security deposit, unfortunately they left all of their furniture and all of their belongings also. So I actually just got the quote sent to me and it’s going to be $2,200 just to have our dumpster removal company come in, clear all the contents out and just put it into the dumpster and take it off. So that’s not even part of the turnover process, so their security deposit definitely doesn’t cover that. In my opinion I would say it’s not worth going after them, I would 100% send them an invoice. If you have their forwarding address you might as well attempt to charge them for those seven days. But as far as going after them, seeking a judgment against them. A lot of property management software if you’re using that actually has collections built into it, so you pay a large percentage of that to the collection company.
But to me it’s more of the principle than me actually getting all of the money to where if somebody doesn’t pay it is turned over to collections when they do vacate the property.
Yeah, I’d agree with you. You got to ask yourself if the juice is worth the squeeze, and in some situations it’s not. You just kind of got to chalk it up, it’s all part of doing business.
Okay, our next question is from Victoria Watchers. “How did you go about finding a CPA versed in real estate? This is our first year filing after starting this in Denver and we only have one property but we’re struggling to find any sort of tax breaks via TurboTax®. So naturally we’d like to see if a CPA could be of any assistance. Is it normal to owe taxes your first year? We’re talking a little over $1,400 here.” So Tony, let’s start with the first question. “How did you go about finding a CPA versed in real estate?” So my first CPA was my parents’ CPA, then my second CPA was my husband’s CPA. So that’s currently the same one I use and then next year I’ll be transferring to Amanda Han who I think you use and that’s just a well-known real estate CPA in the real estate investing community. But as far as finding someone local to you or someone else out there, there’s a couple major questions I think you should ask or at least one important one. Because you can go to a CPA and say, “Do you know anything about real estate investing?”
“Can you help me with my taxes? I’m a real estate investor.” They can say, “Yes.” But what you should be asking is you need to learn how to ask the right questions and we always say this with other kind of service providers too. Is to, how many clients are real estate investors or have rental properties or flip houses or whatever your strategy is? Ask them that and then ask what kind of tax advantages are your clients getting right now? Because one huge advantage of hiring a CPA that is well known for real estate investing, is that they are going to be able to tell you what tax advantages and what strategies are available to you. Instead of you spending so much time and having to come and tell your CPA, “Well, I want to be labeled as a real estate professional because of the tax strategies. So this is what I want to do, here’s how you do it.” Or, “I want to do a cost segregation, so here you need to do this for it.” Or whatever and telling your CPA what kind of tax advantages you want.
You want to hire them because you want them to do that work for you. So if you I think asking questions the right way instead of just, “Oh, do you work with real estate investors?” And them saying yes. Make sure you are wording your questions so that you’re getting more than a yes or no answer.
That’s a great point, Ashley. I think the only thing that I’d add to that is… It sounds like the person that asked this question, I mean she said she’s already filing her taxes. The sad truth here is that when you’re at the point of filing your taxes, it’s too late at that point to try and change how much you owe. I mean there might be some slight deductions and things that you can take, but at that point what you owe is what you owe and that brings up an important distinction between tax prep and tax strategy. So tax preparation is you handing all of your documents, your P&Ls to closing disclosures, etc, off to your CPA and them just filing that information that you’ve given them to calculate how much you either owe or how much you’ll be getting back. Tax strategy on the other hand, is you working with your CPA throughout the year to try and actively take steps to minimize the amount of taxes that you’ll owe for that specific year.
So my CPA and I, we meet I’d say like once a quarter to review P&Ls and where the business is heading to strategize to say, “Okay. What do we need to do to make sure that we’re not giving more money to the government than we actually need to?” Obviously that’s one of the benefits of real estate is that there are tons of legal tax loopholes that allow us to pay nothing in taxes. A good CPA will not just file your taxes at the end of the year but will give you that strategy throughout the year to maximize those tax loopholes.
So then kind of the tail end of this question is, “Is it normal to owe taxes your first year? We are talking a little over $1,400 here.” That is very hard for us to answer and I’m so sorry, I hate to give that answer but it depends because your whole tax situation could have so many different variables as to what are your W2 jobs? Do you have high withholdings in your paychecks that there’s already taxes taken out? What the actual profit and loss was on the property? How much was taken for depreciation? Things like that. So we really can’t give you an answer on that because it depends on every income stream that you have coming in right now. Also, do you have kids where you’re able to get some of the tax advantages of having kids like the Child Tax Credit? Things like that. So unfortunately we can’t give you an answer as to if that’s common. One thing I would say is that I would rather owe 1,400 than get $1,400 back at tax season.
That reason is, is because no matter what you’re going to owe X amount of dollars to the IRS. So if you get that refund that means you overpaid them $1,400 and within the last year you gave them an interest free loan of $1,400 for 0% and if you owe them $1,400 then you just got an interest free loan for 0%. So that’s the way I look at it, I mean obviously the ultimate goal is to break even so you don’t owe any taxes. But yeah, I try not to and that’s where it comes into advantage to doing tax planning and getting that strategy. So that you don’t owe a ton of money that you’re not expecting at the end of the year. But also that you’re not getting a huge refund where you could have started investing in real estate earlier because you had that money earlier in the year. Okay, and our last question today is from Anthony Roberts. “For those who use property management companies, what do you pay?” So Anthony is wondering, “What about a setup cost? A new lease? A lease renewal?”
Do they pay for vacancy or not? Monthly costs? Any other maintenance charges such as on Section 8 or adding surcharges for maintenance calls or paying bills? Also wondering, do you get charged if a tenant requests paperwork for rental assistance to be filled out?” These are great questions, things that I wouldn’t even have thought of to ask. But that’s the thing is, so many property management companies are different as to what they charge and also who they charge. So for example that last one, that request to have them fill out rental paperwork assistance. I’ve never thought of that, I think when I hired a property management company I think that was always baked into the fee. But that’s definitely something that could be charged as an admin cost to you as the owner of the property. I think at least in the New York state, I believe it would be illegal to charge the tenant that fee to have their paperwork sent into Section 8 for assistance. So Tony, let’s start with you and when you had your property management company.
Yeah, so mine was pretty straightforward. So again, they were only managing a few properties for us in the long-term rental side. We self-manage all of our short-term rentals, but on that lease agreements they did charge us a fee for lease up. I want to say it was either 50% of the first month’s rent or some percentage of what they collected for the month’s rent. There was a renewal fee as well, so if they renewed a lease there was another fee for that as well. This paid for vacancy or not? I’m not quite sure what that means Anthony. But I mean if the property was vacant, we weren’t paying the property manager at least in my lease. There was no, “Monthly cost.” But their fee was 10% of the rent, but they capped it at $100 per unit which I thought was pretty fair for that market. This wasn’t necessarily with the property management company, but the property management company also had a maintenance sister company. Whenever they would kind of give me options it’s like, “Hey, either go find three quotes or here’s a quote from our maintenance company.”
Obviously I think most owners are going to go with their maintenance folks as well. So I think that’s where we probably solved more of those kind nitpicky charges, was with the maintenance company. Because there’s a fee to send them out and there’s a fee for them to do the work and the material costs. So I think that’s where we kind of got beat up more on the fees was with the maintenance side and not necessarily the actual property management fees.
Yeah. I actually talked to somebody who was a maintenance coordinator at the property management company I was using, and she said that all their money is made on the maintenance side. That there’s not that much in the actual property managements, the maintenance and the turnovers, the remodels, things like that. So the property management company I was working with, they charged their property management fee plus $25 a month per building. So that covered any after hours emergency maintenance calls at nights or on weekends. So you were never up charged for a maintenance tech going out to a property because you already paid that monthly fee every month, that $25 a building. So let’s see, the next thing. A new lease that was one month’s rent and then there was no fee for any renewal. As far as the paid for vacancy, one thing I thought of when I read this too because I was a little confused at first. Is I had went to Texas and interviewed a property management company there before and they actually had kind of programs you could sign up for.
So you paid more but they would guarantee that if there was a vacancy for so many days or whatever, they would actually pay the rent to you. So it was almost like insurance on the property but you had to pay more of a percentage every month to kind of get that benefit of it I guess. You could sign up for the different tiers, and there was three tiers and each had different elements put into it. If you wanted more security that you were going to have rental income coming in every month then you were paying I think 12% compared to 10% and then as far as maintenance charges, the maintenance I think was $55 an hour maybe. I’m not clear on that. But one big difference that I learned to ask when you’re interviewing property management companies is, who’s actually going to the property? The property manager we used the tenant said that she had never been on the property, never even set foot there. Okay? So anytime an appraiser, an inspector, a contractor had to be met at the property or it was the maintenance guy and we were charged the hourly rate.
So if there are things that you think should be the property manager’s job and baked into your percentage. These are things to call out as to what you’re actually going to be charged for, for who’s doing what work? Then there was the leasing agent who would do the showings obviously in the move-ins and the moves-out that were just part of the leasing fee, there was no additional charge there. Then I don’t believe, I never saw any additional charges for doing the payables that was baked into the property management fee. Then also a tenant request for paperwork for assistance, that was also included in the property management fee. One other fee actually that we found out later on that we didn’t ask the right questions was there actually was a project management fee on turnovers. So they would do an estimate for doing a remodel on a unit and it would be their maintenance guys performing that. But then also they would tack on a project management fee and I think it ended up being like 10%, it was for that. Okay. Well, thank you guys so much for listening to this week’s Rookie Reply.
I’m Ashley at Wealth from Rentals and he’s Tony at Tony J Robinson. Make sure you check out our new book Real Estate Partnerships available at biggerpockets.com, Amazon and Barnes & Noble and we’ll see you guys back here on Wednesday.
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In This Episode We Cover:
- What to do if a tenant breaks a lease (and the clause you MUST put in your lease agreement)
- The best way to get pre-approved for a loan when you’re in a partnership
- Two questions you MUST ask before hiring a CPA (certified public accountant)
- Different types of fee structures to consider before hiring a property manager
- Minimizing your taxes as much as possible as an investor
- How to bring value as a rookie investor and build your network
- And So Much More!
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.