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(YAWN!) The difference between asset growth and cash flow

This isn’t the most exciting blog entry – but to my investor friends and agent followers – READ ON FOR WISDOM!

When potential investors tell me they want to purchase real estate, I ask them – tell me what you envision your end to be. Are you looking for a cash flow monthly or are you looking for asset growth?

These two objectives provide different approaches in the beginning of the buying process. For the investor seeking a cash flow, s/he usually has lots of cash and looking for somewhere to park the money and pull down an income each month. That’s different than the investor looking for the asset to grow who may be wanting to leverage their funds with a mortgage so they can count on two things – OPM (other people’s money) paying off the mortgage, and the market growing their asset, thus growing their equity.

Asset growth is how an investor gains a return on investment (ROI) in the double digit percentages consistently. For instance, let’s say you  purchase an investment property with 20% down – say $40,000 on a $200,000 purchase. If that condo grows in value by 5% per year (i.e., $10,000), the investor’s cash growth is actually at 25% ($10,000/$40,000).

Meanwhile, the tenant’s rent is making the mortgage payment each month, thus paying down the mortgage for the investor so  the equity is growing year after year.

For the cash buyer, however, it’s more about – what can s/he take out of the property each month for cash. If the house is purchased for the same amount – and the rent is $1,500 per month, with a $300 condo fee and $150 property tax, then the net cash flow for the year is $12,480 per year. On the initial purchase of $200,000, the cash return is about 6% per year – in cash. It’s like you own a stock paying dividends – on a monthly basis.

When you’re looking to invest – what is your end game? Until next time…

Anthony Carr is the Director of Training for Keller Williams Realty Falls Church, VA. KWFC is in the Top 10 real estate offices in Northern Virginia according in both agent count and sales volume. His real estate career is diverse and he’s a sought out speaker, author, blogger and problem solver. Mr. Carr is the author of “Real Estate Investing Made Simple: A commonsense approach to building wealth”; and he was a contributing writer to “The Best Real Estate Advice I Ever Received,” published by the Donald Trump organization. He holds associate brokers licenses in Virginia, Maryland and Washington DC.

 

by M. Anthony Carr

What do you do when the dishwasher has spewed soapy water across the kitchen floor and leaked down on your neighbor below? Who’s responsible? The landlord or the tenant? Across the country, tenant law differs as much as the geography. Nevertheless, some principles remain the same regardless of the local nuances of tenant and landlord rights. One of the first places to visit is the landlord/tenant area posted online by Cornell University’s Law School.

Commonly speaking (because the biggest problem I find with legal websites is that they don’t speak in such basic terms) there are certain rights reserved for the landlord and certain rights reserved for the tenant. Tenants, says Cornell, have “a property interest in the land…for a given period of time.” The lease reflects the length of the landlord/tenant agreement and what the tenant is allowed to do with the property. “The lease,” says Cornell, though not historically or strictly a contract, may be subject to concepts embodied in contract law.”

“Basic to all leases is the implied covenant of quiet enjoyment. This covenant ensures the tenant that his possession will not be disturbed by someone with a superior legal title to the land including the landlord,” according to the site. Now, I bring Cornell’s Web site to the forefront as it is an official sounding, and at most of all, reputable place, for all of us to seek out what the law says. However, a site based in Cleveland puts the responsibilities of landlords and tenants into simple language.

NeighborhoodLink is a product of Levin College of Urban Affairs, a part of Cleveland State University. An easily navigable site with plenty of information on rental laws in Cleveland, the site also includes form letters for tenants who must deal with unresponsive landlords. (This is a very cool part of the site — check it out.

Nevertheless, the lists of landlord and tenant duties found here give a simple approach to who’s responsible for what in a lease agreement and are generally relevant across the country.

Here are a few sample landlord duties from the site:

  • Keep the premises fit and habitable.
  • Keep the common areas safe.
  • Comply with building, housing, health, and safety codes.
  • Keep all systems in good working order — plumbing, electrical, heating, etc.
  • Maintain all required appliances and equipment.
  • Provide, in most cases, running water and reasonable amounts of hot water and heat.
  • Provide garbage cans and trash removal.
  • Give adequate notice, at least 24 hours in some jurisdictions, before entering a tenant’s unit — except in emergencies. Enter only at reasonable times.

And what about tenants? The school says that tenants have an obligation to:

  • Keep the premises safe and sanitary.
  • Dispose of rubbish in the proper manner.
  • Keep the plumbing fixtures as clean as their condition permits.
  • Use electrical and plumbing fixtures properly.
  • Comply with housing, health, and safety codes that apply to tenants.
  • Refrain from damaging the premises and keep guests from causing damage.
  • Maintain appliances supplied by the landlord in good working order.
  • Permit landlord to enter the dwelling unit if the request is reasonable and proper notice is given.
  • Comply with state or municipal drug laws in connection with the premises and require house-hold members and guests to do likewise.

Oh — who is responsible for that leaky dishwasher? Most likely, the tenant has an obligation to limit the damage by shutting off the machine and drying the floor. The landlord who supplied the appliance should have it repaired or replaced as soon as possible.

Keep in mind, tenant laws differ by jurisdiction. For details regarding your area, speak with local realty brokers, attorneys, and housing offices.


For more information on real estate investing, resources and news, check out my Commonsense Real Estate Blog at http://commonsenserealestate.blogspot.com/.

Originally Published: May 4, 2001

QUESTION:

I am a real estate investor in the state of Colorado that purchases single family homes for rent. My question concerns my growing frustration over tenants that break their lease. Typically, we only make a lease for one year periods. The issue typically arises when the tenant finds a home and enters into a purchase contract, then sends a notice to me that they intend to break their lease sometimes within 3-4 months of signing the lease! My question actually has more then one part.

  • What can I do to discourage this from happening? (The obvious issues are wear and tear and the expense of finding another tenant).
  • What if I have negotiated terms with the tenant for a reduced rate in lieu of a multi-year lease and the same circumstances arise?
  • Are there legal clauses that can be inserted into the contract lease that we can rely on for compensation? (It seems that collecting money from a tenant who is moving would be difficult to impossible).
  • Are renters able to break a legal contract with impunity?
  • Who would I contact in my state for guidance?

There are probably others, but you get the idea. Any advice would be greatly appreciated.

K. Bryant
Colorado Springs, CO

ANSWER:

You have issues, man! But, fortunately, you’re covered by the law. A good resource for landlords (investors) is http://www.findlaw.com/, (in particular for use: http://realestate.findlaw.com/). Here you’ll be able to get a handle on your rights and responsibilities as a landlord and what tenants are responsible as well.

First of all, tenants (and landlords) need to understand that the lease isn’t just a fly-by-night document. It’s a contract, enforceable by the courts. Yes, you can take their deposit money (but check your state’s Landlord/Tenant Act for particulars.) But as a landlord, you have given up the right of possession of the unit to the renters and they have agreed to pay you for that assignment. FindLaw.com says:

“The lease does not terminate just because the tenant moves out. The lease is a contract in which the tenant promises to pay the landlord for the right to possess the premises whether the tenant actually lives there or not.”

Now, what you want to do with the contract is up to you. If you consider that you’re talking thousands of dollars per year in rental dollars, then it would be worth a visit to the courthouse to force some of your home-buying tenants to pay up on the way out. In the D.C. market, we take that into account when renters want to become buyers and I’ve seen some sellers pay off the lease as part of the sales contract.

Make sure the tenants understand what they’re signing when you put the Deed of Lease under their noses. They may be willing to walk because you cave and say, “Okay…I guess you can go.” Rather than: “Sure, you can get out of it, as soon as you find a sublease or pay up for the remainder of your ‘legally-binding agreement’ called a lease.” There’s no need to get nasty. Simply point it to them when they sign it that it’s legally-binding and that you expect them to fulfill it.

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