The moment you purchase your first investment property, you become a small business owner. You may think of yourself as just a real estate investor, but an individual who is just an investor would be a person who retains a professional property management company to run his or her property. This individual isn’t involved in the day-to-day operation of the property. Each month, this investor receives a statement and hopefully a check reflecting the month’s profits. This is the picture of real estate investing. Anyone actively involved in the day-to-day management of his or her property has gone beyond just being an investor to being in the property management business. This is the situation that describes most owners of investment real estate and it probably describes you.

This chapter will show you that it’s time to start thinking and acting as a small businessperson. The more you do, the more likely you will be successful investing in real estate.

One of the best things you can do is to avoid unnecessary costs. For example, suppose you could save $10,000 a year in expenses. Saving $10,000 in expenses is the same as an equal increase in income. You have $10,000 more in your pocket. You could use it to invest in another rental property. What you do with it is up to you, because it is your money. Consider this simple strategy: one investor took two hours to shop for property insurance. By doing so, he saved $100 a year. He could have accepted the first quote, and been done with his search for insurance. Instead, he persevered, and found the same insurance for $100 less than his first quote. Another way to look at this is to say he earned $50 an hour. That isn’t a bad return on two hours worth of time. Saving a $100 here and there adds up.

When purchasing insurance, consider a higher deductible. Check the difference of premium with a $500 or a $1,000 deductible. If you can afford a $1,000 loss, consider the savings on the yearly premium.

Apply your skills at sniffing out a bargain piece of real estate to every expense you may incur. Shop around. Think out of the box. Go beyond just buying items on sale. Maybe you pick up some deals at a rummage sale. Better yet, can an expense be eliminated entirely? For example, does your investment property have one furnace for the entire building? If it does, you are probably paying to heat the building and heat is included in the rent each of your tenants pay. Such a situation invites waste. You may be able to at reasonable cost install individual meters so the tenants can be billed for the utility, eliminating this expense entirely. You can install flow meters on boilers, and individual gas meters on forced air furnaces.

At a minimum, be sure to install an outside thermostat governing the temperature of any boiler that you have to pay to operate. This thermostat helps regulate the maximum temperature that can be achieved in any of the apartments, thereby reducing the opportunity for waste.

David purchased a building a number of years ago where 11 individual forced-air furnaces were on the same natural gas meter. He had individual meters installed so the tenants would be responsible for natural gas consumption for their own furnace.

One step better than buying something on sale is to avoid buying it at all. Sometimes a complicated repair may require expensive specialty tools. If you are attempting this repair yourself, think about renting the tool instead of buying it, particularly if you do not anticipate needing the tool often. Remember once you own a piece of equipment, you also need to find a place to store it when not in use. If the equipment has a small gasoline engine, then you will also need to perform maintenance on the equipment to keep it in working order. Consider the full cost of owning something and think about renting such equipment when it makes sense.

Preventative maintenance always makes sense and saves money in the long run. An oil change for your automobile is cheap. While it is possible to never change your oil and filter, eventually you are going to pay for this lack of maintenance.

Maintenance of your real estate also makes total sense. New filters in the heating/cooling system are cheap. So are batteries in the smoke detectors. Keep your property in an excellent state of repair.

Some things you can do to maintain your property include …

As part of your real estate investing business, you need to develop a list of qualified, reputable contractors who can do work for you. Obviously, any work you can do yourself will save you money. A thing like replacing batteries in a smoke detector only makes sense for you to do. Although you could employ an electrician to do this service for you, it makes little sense to pay $100 to unplug an old battery and replace it with a new one.

Bigger jobs call for the services of reliable and dependable contractors. For example, repairing a gas-fired furnace usually requires a professional. You have to decide what work you can do and what needs handed off to a professional.

Even if you have good experience with one contractor, seek other estimates. You want all of your contractors to know that they must not pad their estimates in order to get your work. Perhaps this strategy isn’t important for small jobs of less than $100, but for bigger jobs, ask for estimates, and let your contractors know they are bidding against others.

Many times, it makes sense to bundle several small jobs into one larger one. For example, if you are seeking a plumber to replace a hot water heater, and next year you plan to replace the bathroom vanity, it might make economic sense to have both projects done at the same time. Remember, this is only business, and there is nothing wrong with asking for the best deal a contractor can give you.

Always remain on the lookout for good contractors and tradesmen. Just as you learned earlier, if you can get the same quality work done for $500 less, there is no reason not to do so. Make sure that your contractors are licensed (if required to be so), and that they are properly insured. Proper insurance includes business liability and workmens’ compensation insurance. Contractors who have this insurance are used to providing it to their customers.

Often, knowing a handyman who can handle a wide range of repairs is money-saving knowledge. A handyman may be every bit as capable for many minor repairs as a licensed plumber or electrician, and much cheaper. The handyman will probably be able to perform a much wider range of work at one time than the specialty contractors. Your plumber isn’t going to hang a light fixture for you while he or she is fixing the plumbing leak, but a handyman would.

If the repairs you need done require a permit, then your handyman will not be able to help. Further, the handyman probably will not have the proper insurance. Anyone who ever works at your property should be covered by Workmens’ Compensation Insurance. If your handyman doesn’t have such insurance, you should carry it. This chapter covers such insurance needs in a later section.

All real estate investors with tenants will experience emergency repairs eventually. The types of emergencies that call for immediate action include no heat, burst pipes, or lockouts. You should have a plan of action in advance to handle such problems.

Today, with the popularity of cellular telephones, it is much easier to be reached in the event of an emergency. Make sure that your tenants can contact you without difficulty. You can’t rely on a telephone answering system that you turn on Friday afternoon and only check on Monday mornings. A tenant without heat all weekend can become a major issue for you.

A lockout—where the tenant locks himself or herself out of the property—is easily handled. Water gushing from broken pipes requires the water to be shut off and an emergency repair made. Loss of electricity also calls for immediate action.

You need to develop contingency plans. Consider installing dead-bolt locks with passive doorknobs on all entry doors. This requires a key to lock the door and makes it impossible for tenants to lock their keys in their unit. Of course, they could still lock their door, leave, and lose their keys later.

Be sure to take care of your tenants in these types of situations. One landlord, in the middle of a sweltering heat wave, put the tenants in a hotel for three days when the air conditioning broke. It took all weekend until the compressor could be replaced. The landlord also gave a few dinner gift certificates, just because of the inconvenience. This type of outstanding customer service paid off: the tenants renewed their lease for two years. Knowing they could trust their landlord to take care of them was the only incentive they needed to re-sign their lease.

Locate plumbing shutoffs now. Show them to new tenants so that they can turn off the water themselves in an emergency. You should have 24-hour heating/cooling contractors available, as well as plumbers and electricians. Those firms that you would use in such an emergency should be readily available to you. Store their telephone numbers in your cell phone. Add their numbers to your Rolodex.

The earlier discussion on how to control costs largely dictates how you will provide routine maintenance. Your maintenance plan should include routine inspection, care, and fixes. Who will do this is up to you.

Remember the old saying, “a stitch in time saves nine.” The message is that a little preventative maintenance can eliminate the need for major repairs later. You may also have heard that “an ounce of prevention is worth a pound of cure.” For the real estate investor, both of these sayings make sense. For example, repairing and painting exterior wood trim could prevent wood from rotting and rain from being driven into the house. Plan your routine maintenance.

Make minor repairs yourself when you can. Hire a handyman for repairs beyond your time or ability. Rely on licensed and expensive contractors only as a last resort.

As mentioned earlier, twice a year properties have to be readied for the coming seasons. In most locales, this is done in the spring and the fall. Service heating and air conditioning equipment seasonally. Cover air conditioning units and prune trees and shrubbery. Your property could require other outside work, from simple cleanup to painting.

Each property is unique. You must stay involved, and do whatever routine maintenance is required. Do not overlook these simple property-management requirements.

There are several services that you are likely to need on an ongoing basis. They include pest control, snow removal, lawn maintenance, waste hauling, fuel oil delivery, coin laundry appliance leases, water softener rental, salt delivery, and more. Some of the specifics of these service agreements are covered in the next section.

The first decision to make is which services to contract and which to try to do on your own or to delegate to tenants. Delegating to tenants will risk the work being done improperly or not at all. Additionally, what happens if the tenant is injured while doing the work? The message isn’t that you shouldn’t delegate any work to tenants. Just know the pitfalls. Alternatively, you can do the work yourself or hire a service provider.

Shop around for any service you decide to contract. Because you may be paying monthly for any particular service for years, small cost disparities can add up. However, cost should not be your only guide. Poor service can increase potential liability for you, particularly in the area of snow removal, for example.

Be careful to pay attention to the fine print on these service agreements. Pay close attention to the term of the service contract. Many of these agreements are multiyear contracts that renew automatically. You are unable to cancel the service, but the vendor can still pass along price increases, even while providing mediocre service. Don’t be intimidated by the standard language in these agreements. Cross out these provisions and change the contract term to month-to-month with no more than 30-days written notice required to cancel.

As a real estate investor, among the gamut of services that you may need, the services in this section are the most common. These services include snow removal, lawn care, waste hauling, and coin laundry leases.

If your property is located in an area that receives winter snowfalls, you may need to arrange for the removal of snow and ice accumulation. Some areas have local ordinances that require snow removal from sidewalks. Local officials are often quick to issue citations and levy fines against property owners who do not remove snow accumulation.

It is also important to remove snow from your property for the safety of your tenants and visitors. Failing to do so could expose you to injury claims.

If your rental property is a single-family home, you may be able to delegate this responsibility to the tenant. Your lease should clearly spell out who is going to be responsible.

In most areas of the country where snow accumulates, local businesses have sprung up to provide this service. The time to contract for snow removal is before winter. Shop for the best rates and ask for references.

Often, snow removal contractors are only interested in clearing the snow from the parking lot and other areas that can be cleared using a snow plow truck. They do not want to have to exit their vehicle or carry additional equipment like a snow blower to remove snow from a sidewalk. You may find that you need to make separate arrangements for sidewalk snow removal. Usually, a tenant can be compensated for removing snow from these areas.

Another service required to maintain the property is lawn maintenance. From cutting the grass to fertilizing, from pruning to adding mulch, lawn maintenance can become costly. Yet it is one thing that you must provide. The range of solutions includes delegating the work to the tenant of a single-family home or an on-site manager, to doing the work yourself or hiring a service provider.

Properties with Homeowner Associations include this service. For one monthly fee, these services are provided.

In some areas, waste removal is provided by the local municipality. In other areas, you hire your own waste-hauling contractor to remove garbage and recyclable materials from your property.

If the municipality is providing the waste hauling, all you can do is pay the bill for the service. If you can hire your own hauler, you can shop around for the best price and service. This is one area where the contractors like to use multiyear automatically renewing agreements. Remain on guard.

Make sure you are complying with all recycling requirements and regulations. Provide recycling bins, and provide your tenants with information required by your local authorities.

Garbage trucks are extremely heavy. The weight of these vehicles can destroy the paving. Therefore, locate waste collection areas so that the trucks drive on the least amount of pavement on your property as possible. Maintain sufficient waste capacity that these vehicles do not have to service your site any more than once per week if possible.

If your investment property has four units or more, it probably makes sense to provide coin-operated laundry appliances. You can buy, install, and maintain the machines yourself, or you can retain a service provider. If you decide to retain a contractor, take extra care to work with a reputable firm, as there are so many opportunities for you to be shorted on the revenue.

Most coin laundry leases allow for a 50/50 split of revenue between you and the contractor. You are responsible for providing the room and the utilities for the machines and the contractor provides the equipment and any needed service, including collecting the coins.

To get a contract to install new equipment in your building, you will probably need to make at least a three-year commitment, allowing the vendor exclusive rights to operate the coin concession. However, these service agreements are notorious for having automatic renewal clauses that are difficult to avoid or cancel. Insist after the initial period (of hopefully no more than three years), the agreement becomes month-to-month with cancellation possible at any time.

Unscrupulous contractors plague the coin appliance industry. David acquired a building with a coin laundry lease already in effect. The lease ran with the land, so David was still

bound by the terms of the lease. The initial lease period was for ten years. After the first ten years, the lease was renewable for ten more years at the vendor’s option. In effect, the lease was really a twenty-year lease. The lease also contained an automatic renewal clause allowing only a 90-day window, twenty-years in the future, where the lease could be canceled before it renewed automatically for another ten years. And the coin laundry split was 85 percent for the vendor, 15 percent for the landlord! Need David tell you that their service was lousy besides?

When you purchase new appliances, you are often presented with the option of buying an extended warranty or a service agreement. These agreements and warranties are usually a bad idea.

These agreements are driven by actuarial science. In other words, the vendor must calculate expected failure rates and the resulting costs of repairs or replacements, and then factor in overhead and profit. In at least some industries, these extended warranty programs are a high margin business because the products being covered are actually highly reliable. Electric stoves are one example of appliances that rarely fail. You can recapture the profit and overhead portion of this service by taking your chances and paying for service only when and if it is needed.

Extended warranties and service agreements are essentially an unregulated form of pseudoinsurance. You should only insure that which you can’t afford to lose. Hopefully, you can afford the impact of a failed appliance like a refrigerator. Find a handyman who knows something about small gasoline engines and appliance repair and take your chances.

If you do decide to get the extended warranty or service agreement, remember that a brochure isn’t a contract. Always read the contract to determine what additional warranty or service you might receive for your money. Be sure you understand how to file a claim, and how you are reimbursed.

Check for things like the length of the warranty period, the items covered, and other contract details. For example, is service provided locally or do you have to ship to a repair center? If shipping is involved, who pays for it?

Ask questions. If a tenant’s child were to jump up and down on an oven door, would the extended warranty cover the cost of a replacement door, and the service call to have it replaced? Often these service agreements apply to home personal use only. Commercial applications such as a rental setting sometimes void these agreements.

Consider the reputation of the company offering the extended warranty agreement. If the firm has been in business for years, you are probably okay. But a vendor who has gone out of business is worthless to you, no matter how much your contract says things are covered.

Without insurance, you could not invest in real estate. If you wanted to buy a property for $250,000, could you afford a total loss and start over? A lender would not loan money if they could not insure their collateral.

In the simplest terms, insurance is the transfer of risk. By the payment of a premium, the insurer establishes a pool of money to pay probable claims. If your $250,000 property becomes a total loss, the insurer pays $250,000 to you and your lender. You have transferred the risk of such a total loss—and the financial burden caused by that loss—to the insurer. Always think of insurance as way of transferring risk from you to the insurance company.

Insurance is more complicated than stated here, but here are the basics of insurance offered for protection of your property. As a real estate investor, you are concerned about four types of insurance:

One big fallacy of most insurance buyers is thinking that they are covered for all losses. Nothing could be further from the truth. All insurance policies include exclusions of coverage. One common exclusion is that no coverage is provided for damage caused by “an act of war.” Any damage your property suffers would not be covered.

Other common exclusions include no coverage from flood damage, mold, or intentional damage. There are many others, which vary from things like nuclear accidents to damage caused by freezing pipes in unoccupied buildings. Coverage and exclusions vary from state to state.

You will also be amazed at what is covered with insurance. If a careening car becomes airborne and lands in your living room, expect your claim to be promptly paid. If a wayward skunk wonders into the property, becomes agitated and sprays the walls and carpet, your policy will pay for the damage.

Many people wrongly call property insurance, “fire insurance.” The last thing you want is only fire insurance. You want your property covered (and you protected) against as many hazards as possible.

For investment properties, you can’t purchase regular homeowner’s insurance. Rather, you need an insurance policy that protects the property against damage caused by tenants. Commonly called Owners, Landlord, and Tenant coverage (OLT), this type of policy provides protection against claims made against you during the operation of the property as an investment.

Liability coverage protects you against legal action. The types of claims that are covered include slip and fall accidents on your property. For example, if someone falls on the sidewalk and claims the accident was your fault because you negligently failed to remove snow and ice on a timely basis, your liability insurance would provide protection. The insurer would pay a settlement to the claimant, up to the limits of your policy.

Most important, liability coverage includes the payment of your legal fees. This means that the insurer would hire and pay for an attorney on your behalf. In today’s litigious society, this is an absolute necessity for any real estate investor. With lawyers advertising for injured clients, you must have this coverage. You do not get to pick your defense lawyer, but rather your insurer does. They routinely hire experienced defense law firms with expertise defending insurance company policyholders.

When it comes to insurance, you should always shop around. Not all insurers are created equal. Many provide extra coverage, and often offer coverage at differing rates.

Some things to consider when considering purchasing insurance include …

As discussed earlier, title insurance, bought at the time you purchase the property, provides protection from title defects. Should the legal description be faulty, or someone else claim to have an interest in the property, your title insurance would provide protection against such claims.

One type of insurance that many new investors overlook is workmens’ compensation insurance. This insurance pays for any claim related to any employee workplace injury. You may not think that you have any employees, but the government sees it differently.

If you have an on-site manager that cuts the grass for you, that person may be regarded as your employee for workmens’ compensation purposes. What happens to this individual if there is an accident? You could be held responsible for any medical care and disability payments, in addition to probable fines, if you do not have workmens’ compensation insurance. The impact could be ruinous.

Rest assured that anyone doing work for you at any investment property you own must be covered by workmens’ compensation insurance. Either the contractor must carry it or you must carry it. When bidding work, make submitting proof of insurance part of the bid requirements.

Your insurance agent will be able to help you with the details of your workmens’ compensation insurance needs.

The Least You Need to Know