Listen to This BEFORE Buying a Rental with Tenants (Rookie Reply)

Ashley Kehr:
Today we’re diving into three real world scenarios submitted by rookie investors just like you, from tenant appliance swaps to analyzing a deal and launching your first property. We’re covering it all. So whether you’ve closed five deals or you’re prepping for your first one, you’re going to want to take notes.That’s right. We’re breaking down what to look out for legally, financially, and operationally in situations that can just sneak up on new investors. Plus we’ll share how we would handle them based on our own experience investing in real estate across different markets.Let’s jump into our first question. It comes from Todd in the BiggerPockets forums. So this question is, should I let my tenants swap in their own appliances? I have a prospective tenant who is interested in moving into a vacant unit. They ask if they could swap out the stove and fridge for their own appliances. I have a shed on site so I could store the existing appliances for free. I would also make it clear that they’re responsible for repairs to their appliances. Is there anything I’m not considering that would make it a bad idea to let them swap in their own appliances? Appliances? Hot topic for me because I dread having to have appliances repaired, replaced. We have a great company we use, but it’s usually very expensive repair to get these appliances to have somebody come in and take care of them. So I think personally it is a great idea to have tenants bring their own appliances because you don’t have to worry about maintaining them, repairing them.
One, a big thing is okay, the fridge doesn’t work, all of their, the food they have to throw away, landlord, we want you to pay for all our food. Here’s our $600 grocery bill of all the food we shoved into that fridge. It’s their own responsibility to figure out what to do with their food if the fridge breaks down. So that’s why love it when tenants bring their own appliances because it does cut down on the maintenance request and issues that can happen to kind of butt heads in a situation like that where they want you to. We had a circumstance before where the fridge stopped working and we brought over a cooler with ice for them to put it in, but it’s like that is not convenient for me to do. So that’s why I’d rather not have the appliances at all.I couldn’t agree more. Ashley, I think appliance repair is one of those silent things that they can just leak profit from your properties and you’re fortunate, Todd, that you’re in a situation where the guests or the tenant wants to bring their own appliances. Like in the short-term rental space, I can’t tell someone, Hey, bring your own fridge when you book my Airbnb and we spend an obscene amount of money with all these different refrigerators and stoves and microwaves and all these different things that break just from normal wear and tear. So I agree wholeheartedly with Ashley. I think if they want to bring their own appliances absolutely positively, I would let them do that. I think the only, I guess two things I would just call out is I would want to specify in the lease that the unit does not come with whatever appliances they’re bringing in and that they’re responsible for keeping their own appliances and condition. And I guess I don’t know how much of a risk this is, but maybe it’s worth putting in there as well. But just like, I dunno, what if someone’s say they brought in their own stove and say there were stove malfunctions and causes some sort of damage, maybe a fire to the entire unit and just making sure you have some sort of language in there that would also hold them accountable if their appliances and their neglect led to some larger issue with the property. But overall, I like the idea.That’s interesting you bring that up because we have a resident that just moved in and we weren’t supplying the appliances and she asked if my maintenance guy can actually hook up her stove and we talked about it and we decided no, we thought it was more of a liability if he hooked it up incorrectly or there was something faulty with her stove that would come back on him because he’s the one that connected the gas. So we ultimately decided no that we weren’t going to connect their stove to the property, that they would have to handle that. And then we did have another issue that’s currently still ongoing where we did supply the stove and they put in a maintenance class that the stove was smoking when they would try to cook. So we sent out our appliance vendor and he went out and he said that everything is working correctly, that at the time it had been around Thanksgiving or whatever, and he said there was grease and he thinks when they cook their Turkey, whatever grease spilled all into the stove and it’s just in nooks and crannies, but he said it’s grease from whatever.
And he said it just needs a really good deep cleaning. And so they keep submitting maintenance requests that their stove is smoking. So we have the appliance guy going out there for the second time. So after this time, which I’m assuming he’s going to say the same thing, it needs to be cleaned. I need to figure out what my course of action is going to be. Am I going to tell them, sorry, you need to clean it as we told you before, or am I just going to replace the stove so I don’t have the headache of this constant maintenance request for the stove, but then what’s going to stop it from happening again where they’re not cleaning it and whatever. So that’s something I will have to decide. Does the cost outweigh the headache of this continuously happening? And they are great tenants. I mean they take care of the property, they pay their rent on time. So it’s just one of those things where it might be worth it to just buy the new stove and kind of hopefully be done with it.But I think you also bring up a good point, Ashley, of conditioning your tenants to behave in a certain way and I think swapping the stove for them maybe could reinforce the wrong behavior because it’s the stove this time, but what if it’s the microwave next time? What if it’s then they keep pulling out all their hair in the shower and they keep clogging the drain? It’s like, okay, well now the shower is the issue. So yeah, maybe there is something to be said about what kind of behavior do we want to reinforce with the tenants as well.Yeah, that’s actually a really great point too.When the tenants move out because they’re mad about the stove, you can come back and blame me.I guess to kind of wrap up this question is make sure whatever you decide to do you have it written specifically in the lease agreement. If the lease agreement is already signed, just add an addendum stating that as of the state they’re supplying their own appliances and things like that. Also, wherever, if you’re storing your appliances in the shed, just make sure that no, you can tell you live in the country by this comment. No mice are getting in and building nests inside the stove or the oven too by the shed. Okay, we’re going to take our first ad break and we’ll be back with more questions right after this. Okay, welcome back.Alright guys. So our second question for today comes from Oria and Oria asks, I’m considering investing in the Los Angeles market and looking at a four unit multifamily property that’s already tenant occupied. I know LA is incredibly diverse with some great neighborhoods and some that are more challenging. I’ve already pulled data on the zip code demographics, crime, rent trends, et cetera, but I don’t want to base my entire decision on just that for those of you experienced with LA or multifamily investments in general. A few questions. Number one, what other strategies do you use to make sure you’re not walking into a money pit or dealing with bad tenants from the start? Number two, do you request leases or payment histories before closing? Number three, how do you evaluate tenant quality when it’s an occupied property? And finally, number four, any red flags you look for when it comes to older buildings in la? Again, a lot to unpack here and let’s maybe just take a question by question. And Ash, you’re the resident multifamily expert on the show here. I love how I would just crown you with all these expertAnd I just can’t wait to disappoint you and lose that title.But let’s go to the first question here. It says, what other strategies do you use to make sure you’re not walking into a money pit or dealing with bat tenants from the start? I’ve never purchased a property with inherited tenants, so I’ll always lean on you when it comes to this Ashley, but let’s maybe handle that part first, right? How do you make sure you’re not dealing with bat tenants if you buy something that’s already tenant occupied?Yeah, so first you’re looking, you’re going to hopefully walk the property and you’ll see how well the tenants are taking care of the property. You’ll also get a lot of information from the tenant being home when you do the showing. There have been so many times I have had tenants say to me like This needs to be fixed, this over here. Make sure you look down over there in that corner. There’s something going on there and you get tons of information as to if there are real concerns or not, but at least you’re getting stuff pointed out to you, which I always think is great.
So just doing the showings while the tenants are there, even though it is very uncomfortable walking through someone’s home and looking at stuff and them being there in the house, but you’ll get a lot of information from most tenants will tell you a lot of stuff. The second thing is to get copies of the lease agreements and then to also send the tenants. And this usually you have to wait until you’re under contract to do, but send estoppel agreements. We have one of these at biggerpockets.com/resource and you can get a copy of the estoppel agreement and it’s basically you send them to the tenants with the owner’s permission and it’s just asking them to verify all of the information that is in the lease agreement. Or if there’s not a lease agreement and you’re just going by the rent rider that’s attached to the purchase contract, you can verify that what the seller is telling you is the same as what the tenant is saying and you’d rather have a discrepancy before you close on the property and get to the bottom of it before, after you closed on it and now you have to try to figure out how to handle this discrepancy.
So those are the big things that you can do as far as getting to know if it’s a quality tenant. I did just create a tenant screening guide with Rent Ready and you can find that in the resource hub by going to biggerpockets.com/tenant screening. And this full guide gives you how to screen a tenant, but this is also a great resource to read through before you even do any screening, even if you’re inheriting tenants and maybe you can talk to the seller, maybe talk to the agent on what the actual screening process was for the seller of the property too. So do they have a copy still of the rental application that was filled out? Do they have a copy of any of the screening reports that were filled out that they could give to you? And if they decide not to give those to you or whatever, maybe that’s a red flag and they probably would have to get the tenant’s permission to give, especially if it had their social security number on it or whatever. Maybe they can black it out. But I think asking for all of that information is a great way to see did they actually do their due diligence in the proper screening to get quality tenants in place? Ash,So many good points. And I guess one follow-up question, and maybe you can educate me here, but if there’s a, say she buys a fourplex, all four units are tenanted occupied, there’s leases that take us through the next six months, can the new owner run a new screening process, background check, credit report, all of those things even though the tenant’s already there? Or do they typically have to wait for that lease renewal period?I mean you could do it at any time, but you’re going to need to get the tenant’s permission, so you’re going to need their social security number. Most cases to do any of this screening, the estoppel agreement will have a lot of information that would be on a rental application, but you can screen the tenants at any time. It’s just you’ll need their permission. And a lot of property management software, it’s third party in a sense that you actually not doing the screening yourself, a third party is doing it for you. The tenant actually requests the reports and asks for the reports to be sent to you as the landlord. Because if you actually were doing the screening yourself and getting somebody’s social security number, running these checks on them, I actually did this before and I was a property manager. We would do all the screening in house and we actually had to have these verification inspections done to make sure there was a lock on our office door to make sure there was a lock on our filing cabinet and they would want to see where the applications were stored and make sure that we had security on our computers and things like that.
So in most cases, no matter what software you’re using to screen the tenants, you are most likely going to have to have them actually start the process of ordering the information. And also you should never order any kind of screening report without at tenant’s permission or an applicant’s permission at any time anyways. So you could send a letter and say, I am just letting you know I am running screening reports, things like that. But I would have them sign something that they’re getting permission or if you just send them the link from the property management software like Rent Ready has a great screening process where the tenant just goes in, they get an email with the link and they go and fill in their information and then you get the report. So you could just send that to them whether they will fill it out or not. But I don’t think that you can force them to actually do it because you can’t even force an applicant to do it because if they don’t do it, they’re just not getting to rent the property.But I guess what’s the repercussion for folks that are already there? Hey, if you don’t fill this out, then it’s just like an immediate non-renewal at the end of your lease.Well, that really depends on state laws as to if you can do a non-renewal and how long until you can do a non-renewal, how many days notice non-renewal. But yes, you could say if you don’t, because a lot of states you can non-renew for no reason. You can just decide you’re not going to renew the lease. In some cities, counties, it is almost impossible in some areas to do a non-renewal. But yeah, you could definitely do that as a reason if your state allowed it for non-renewal and say, this is your notice. You can either accept, do the screening report or a non-renewal. But also I would make it clear that if their screening report doesn’t come back as to what you want, you’re making it clear that you may not be renewing it that just because your screening doesn’t guarantee. But yeah, you could definitely do that when the leases come up and it is time for that renewal to decide if you’re going to keep the tenants in place.
But I think I honestly would not do that because I think that you’re already going to know a little bit about the tenants from the history of the previous landlord, and if you’re having to wait until a renewal period, you are seeing how they are. Maybe if they just moved into the property right before you bought it, you won’t have any kind of background information on their payment history or what they’re like, but you would still have to have them for another full year till their lease leases up. So yeah, personally I would say that I wouldn’t, I think you already have those tenants in place and it’s like, well, let’s see how it goes.But you bring up another good point, Ashley, about the local laws and regulations. And that was kind of the last part of this question was are there any red flags you look for when it comes to older buildings in Los Angeles and this is just new or old building, but really making sure that you understand, hey, what are the local landlord tenant laws both in California and specifically within Los Angeles County? I’m in the neighboring county, so even for me, I don’t even know what all the laws are for Los Angeles County, but just really making sure you understand what your responsibilities are as a landlord in Los Angeles County, that you understand what your limitations are as a landlord in Los Angeles County, that you’re abiding by those laws because it can get a little bit tricky, but I think in general, just like general red flags, always make sure you do an inspection on your property during your due diligence.
You’re buying a multifamily property in Los Angeles is not going to be cheap. So making sure you get a really, really thorough inspection done, you bid out whatever comes back to see what is it actually going to cost for you to fix these things and if it’s cost prohibitive or if it doesn’t make sense and not being afraid to walk away from the deal. I think the mistake we see with a lot of new rookies is multifamily, single family or otherwise, is that sometimes they invest so much energy and they’re so excited once they go under contract, they start to force the deal to still make sense. But sometimes you get into that due diligence period and you identify things that make the deal not make sense, and you’ve got to be able to recognize that and not get so caught up in the emotional aspect of it all. But yeah, those are I guess some of the red flags I would look out for. Anything else on your side, ash? From a red flag perspective?No, I think just how you mentioned to get an inspection on the property, but also ask the inspector like, Hey, could you make me a list of what’s going to need to be fixed in the first year? What’s going to need to be fixed in the next three years, the next five years, and then the next 10 years? And that’ll kind of give you an idea of what your capital improvements would be down the road. So you can look at the how old the hot water tank is and say on average the lifespan of this type of hot water tank is 10 years, so it’s eight years old. You probably got two years till you need to replace it. And that can be really beneficial, is kind of getting that guideline of what’s going to be coming up soon. Okay. Well, we’re going to take our last break here and we will be back with a short-term rental question. We’ll be right back after this.
Okay. Welcome back. And we’re onto our third question today. And this one is a short-term rental question. So we have our expert, a short-term rental rookie co-host here, Tony Robinson to answer this question. So this is from David and he asks, Hey y’all, I’m looking to acquire my first short-term rental and I’m trying to find people that specialize in that area, like a creative financier photographer, short-term rental specialist, et cetera to get started. I’m hoping to close on something in the next one to three months. Anyone open to helping Ricky out? Hey Tony, how do we build the dream team in a market?So when you think about building a team for your short-term, and so for your Airbnb, there’s I guess your acquisition team and there’s your operation, your operational team. On the acquisition side, it’s not much different than what you would want for many other type of investment. You want a lender, you want an investor friendly agent, you want someone who understands the insurance associated with short-term rental and potentially like a good contractor or someone who can help you kind of piece all those things together. But on the acquisition side, those are the kind of things that you’re looking for. Now mentioned, David mentioned the question, creative financeers. So I’m not sure if he’s leveraging or David mentioned creative finances. So I’m not sure if he’s referencing true creative finance like subi seller financing or just a lender who understands short-term rentals. But what I’ll strongly encourage is that you do find a lender who’s already lent on multiple short-term rentals in the past.
And ideally we’re short-term rentals make up a large portion the volume that they do because I can’t tell you how many times I’ve spoken to people who’ve been fed incorrect information by lenders who can do long-term rentals all day, but they don’t understand the short-term rental asset class. I actually just talked to someone, I think it was at the conference we were at a couple of weeks ago actually, but someone came up to me and said, Hey Tony, how do you get around the whole six month thing that comes along with second home loans? And I said, what are you talking about? What’s the six month thing are you talking about? And he’s like, oh yeah, my lender told me that you can only rent the property out for six months if you have a second home loan. And I was like, I’ve never heard that in my life. I’ve literally don’t know where that came from,Especially such a specific amount of time. Usually it’s such a gray area,It is a gray area, and that’s what everyone tells me, but I’ve never heard six months. But that case in point, right? If you don’t work with a lender who truly understands that either because of misinformation or who knows why, you just might get the wrong details, get the wrong loan. So I do think that one’s really, really important. Second is an agent who really understands short-term rentals, I think can be incredibly valuable for a first time, first time short-term rental investor. Much like every type of asset class, short-term rentals are very market dependent. And even within those markets there are certain properties that tend to do well, certain locations that tend to do well and certain properties that don’t do well and certain areas that tend to not do well. And having an agent who understands that nuance can help you avoid buying a property that on the service level looks like a really good deal.
But digging a little bit deeper, you can see that maybe there’s some issues there. And I’ll give you guys an actual example. There’s a property that we were looking at buying and my agent, everything looked great, but my agent was like, do not buy that deal because I know that all of the homeowners are about to sue the HOA because there’s been, or I think it was the builder because there’s been consistent plumbing issues in that HOA and you wouldn’t know that just perusing through Zillow or Redfin, but because she’s there, she knew that. So having a good agent can help you in that way. So that’s everyone that’s on the acquisition side. Operationally, the people that you need a great cleaner first, foremost because they’re the lifeblood of your property. You need a good handyman, someone who can go in there and fix all those things that happen.
And maybe I could have bucketed this in your acquisition side too, but you also need an interior designer, someone who can help bring your space to life cleaning, go to Facebook, go to your local meetups, go talk to agents, go talk to folks in that market. But you need someone who’s a very strong and well experienced short-term rental cleaner because your cleaners are your first and your last line of defense in many situations. They’re oftentimes the only people who will see your property in between one guest checking out and the next guest checking in. And if your cleaners are not on their A game, everything else becomes exponentially harder. So finding a really good cleaner, same thing for your handyman. Things are going to break with our portfolio. We literally are talking to our handyman every single day about something. There’s something at some property that needs to be fixed at some point virtually every single day. So just making sure that we have something that we can rely on. It’s quick, it’s cost efficient. I would truly find the handyman first. I wouldn’t, wouldn’t call a plumber for every single plumbing issue. I want to call an electrician for every single electrical issue because that can get expensive. So just having a good plumber, I think, I’m sorry, having a good handyman who can do all the different trades to a certain extent is always super important as well. So that’s really all you need. Acquisition that those folks, operationally, those folks, put ’em all together. You’ve got the dream team you’re looking for.Now, once you’ve created your list of who you need to make into your team, what’s the best way to go about finding them?Yeah, again, I love local Facebook groups. I think you can find a wealth of information inside of local Facebook groups. If not there talking to the agent or the lender that’s in that market that knows it well, they tend to know their folks who are in there as well. And like a kind of ninja trick, say you don’t know anyone. Say there are no Facebook groups you can find, or you didn’t have a ton of luck. Maybe your agent is from a different market, but they’re just helping you out, whatever it may be. Say you can’t find someone through those other means. I think one of the best ways is to just go stay in that market. Like go book an Airbnb there and just drive around between the hours of like 10:00 AM and 4:00 PM and you’ll see the Airbnb cleaners, you’ll see ’em pulling up, you’ll see ’em jumping out their cars with other cleaning equipment and just go talk to ’em. Just go shake hands and say, Hey, my name’s Tony. I’m looking to buy in this market. Are you taking on new clients? That’s an easy way to go find someone new. So digitally in person, both of those options work. And then once you find the cleaner, they can typically connect you to the other folks that you’ll need in that market. They typically know good handyman. Handyman, typically no good service folks. So just pick one to go after first and then you can find the rest from there.Okay, advice, but I have a little twist that would make that better. Instead of wasting gas driving around you, just stay at the Airbnb, sit in your car after checkout, wait for the cleaners to show up, introduce yourself, and get their contact information.That is a great strategy as well. You pick the highest rated Airbnb in that city and just wait for the cleaners to show up. I love that approach. Alright guys, so look, whether you’re trying to decide if tenants can bring in their own appliances, vetting a multifamily deal across the country or assembling your dream Airbnb team from scratch, these are the kind of challenges that every rookie will face at some point in their investing journey.And the good news is you don’t have to figure it out alone. These questions show just how much you can learn from others who’ve done it before. So keep asking them, please keep posting and we’ll keep answering them right here on Ricky reply.Now, don’t forget to subscribe. Drop a question in the forums and share this episode with another Ricky who might be struggling with the same issues.I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode of Ricky Reply. Thanks for joining us.