Knowledge is key and, as such, our guest today is Margo Broughton with the Houston division of Mynd Property Management. Margo is here to give us the top three things that will cost investors in Houston or any other market.
Steve Rozenberg: Hey everyone, this is Steve Rozenberg with Mynd Property Management and I am here in Houston with Margo Broughton. Margo has been a property manager for 37 years in the industry and she is in the Houston division of Mynd. Margo, thanks for being here today.
Margo Broughton: Thank you. Thank you for having me.
Steve Rozenberg: Today what I want to talk about is the top things that cost investors money. And I put a caveat on that to go, do they really cost them money? That's perception, right? Some of it is just part of doing business, I think—my personal opinion. So let's go with, what are the things that do cost investors money and then we can kind of expand on them. Can you give us a rundown on that?
Margo Broughton: Absolutely. And you know what’s interesting, is it's different for different investors, and then when you have a brand new investor, obviously some of these things, they don't know to anticipate. I picked what I thought were the top three things.
Steve Rozenberg: Sure, yeah. That's a good point. And for those watching—you may have different things that you think could be costly and maybe these are just part of your business model. Again, this is just to educate you so that you understand that there are different costs. And again, to me it's all about perception. So, what's the number one?
1. Budget for the Leasing Fee
Margo Broughton: Well, what I chose as number one is the leasing fee because there's always going to be a leasing fee. And most owners, especially if they're new, if they're new investors, they don't know how to anticipate this.
Steve Rozenberg: They don't factor that into the cost.
Margo Broughton: Exactly. And then it hits them and they go, "Oh my God." So in the Houston market, for example, our leasing fee industry-wide, whether you lease the house yourself, whether your management company leases the property, whether you have an outside realtor, whatever it is, you have to pay the realtors. And then in the Houston market it's a full month's rent. So you definitely need to have that budgeted in ahead of time.
Steve Rozenberg: And a lot of times if you're not planning on that now you've had a vacant property, you haven't been getting cash flow. Now you’ve got it rented and you're thinking, "Okay, I'm going to get this money." And the agent or the management company says, "Well wait a second, that first is mine." So now you're not making any money until month two and maybe you didn't plan for that.
Margo Broughton: Right. And what I hear sometimes, especially with newer investors is, "Well, wait a minute, I thought the management company took care of that."
Steve Rozenberg: "I though that was part of my fee."
Margo Broughton: "I hired you..." And of course we have to pay the realtors.
What are Leasing Fees in Texas?
Steve Rozenberg: Somebody has to do the work. What I would say is even if you wanted to do it yourself, you've got to value your time. So you've got to say, "What is my time worth?" And maybe it's not worth as much as the one month's rent and you want to do it yourself and you have the ability to market it and do the credit check and the background and all that. That's fine. But again, there is a value that has to be associated with doing that.Now, in other cities in Texas, and there are other prices that they charge. And that's just what the industry is.
Margo Broughton: Yes. And the lowest I've seen out there is about 50% of a month's rent.
So in the Dallas area, it usually runs about 75% of one month's rent.
Houston, it's 100%.
But you know what? You brought up a really good point, Steve: the vetting of the tenants.
So if you don't have a professional management company doing that for you, you may miss something and that can be very serious and certainly cost you far more money down the road by not doing that really well.
Steve Rozenberg: Absolutely. Without a doubt. Now, the first one is the leasing fee. What's the second one?
2. Make-Ready and Renovation Expense
Margo Broughton: The next one that I picked was the make-ready expense. So in between tenants, let's say one tenant moves out before the next tenant moves in, you're always going to have to do some kind of a make-ready. Probably the most expensive piece of that is painting. So you can't really do touch up paints and make them look good. We do corner to corner.
Steve Rozenberg: Okay. Can you explain what that means to the people?
Margo Broughton: Absolutely. So if your one wall is marred up, you don't want to just paint over the marred area, you're going to want to go from scene to scene where it can make it look a little bit better.
Steve Rozenberg: Makes sense.
Margo Broughton: But if you need to do a full paint, that's a lot of square footage in most cases.
Steve Rozenberg: Paint's not cheap.
Margo Broughton: Paint's not cheap and the labor's not cheap. So it can be expensive. So setting aside money for in-between tenants and keep in mind, now you're going to have to lease it again-
Steve Rozenberg: Yeah, so there's another expense.
Margo Broughton: ... That's another leasing fee. So now you've got the make-ready costs plus the leasing fee. What I tell investors is don't step over dollars to pick up pennies. I've heard you say that many times.
Steve Rozenberg: Absolutely, absolutely.
Cheaper is not cheaper.
You buy cheaper paint, you spend the money, you put the paint up on the wall and now it looks—it doesn't go with the rest of the house. It's a lower quality. Now you can't get the value for the rent because the house does not look good. Now you're upset because you spent money and you may have to spend more money to do it right, or appliances not matching the property is another one I've seen. And so again, yeah, I agree. I think what this leads to—it's funny because number one leads to number two sometimes. Meaning if you don't lease it to the right person and you don't do the background check, now you're going to have an eviction or maybe a make-ready, a vacancy and the vacancy is going to cost you. So if you do number one wrong, you may have to do number two.
Margo Broughton: Yes. To more of an extent than-
Steve Rozenberg: To a larger extent.
Margo Broughton: ... you would have had to.
Steve Rozenberg: Right. And if you didn't budget any money for this, now it really hurts you because now it's unexpected. Nobody likes when an unexpected cost of a vacancy, a make-ready cost, and a leasing fee all hits you when you're not making any revenue for your rental property.
Margo Broughton: So you're talking what? Three months worth of rent or something like that? That hurts. That hurts.
Steve Rozenberg: By trying to save some money, so it's just perspective. Now, what is the final and number three?
3. Potential Eviction Costs
Margo Broughton: Okay. The final that I wrote down that I think is probably the most critical is eviction costs. Now, evictions in Texas, I will tell you, are less expensive than most places, and relatively quick. But as a very wise person once told me, "This is the sandbox we play in." Quoted by Steve Rozenberg.
Steve Rozenberg: That was a wise person. That's right, yes.
Margo Broughton: Quoted by Steve Rozenberg, but this is the sandbox that we play in. What I elaborate on when I'm talking to owners is, no one likes broken glass in their sandbox, but every once in a while you're going to find some broken glass in your sandbox and that is an eviction.
Steve Rozenberg: And no matter how well you vet a tenant, screen them, there's nothing that says that they don't get laid off. They don't get divorced, something downsized.
All these things happen and now, at the end of the day, they can't pay rent. You have to make a decision and part of your lease agreement, part of your contract, you've got to go through this eviction and many people, they don't want to do it because they're going to hope and pray. They're going to do this. They're going to do that.
But at the end of the day, you're running a business. And that business states the contract is what's controlling that business. The contract says if you don't pay the rent, you have to remove them from the property. And again, there's a cost for that, right?
Margo Broughton: Of course.
Steve Rozenberg: There's the forcible detainer. What are some of the other costs?
What is the Timeframe for an Eviction in Texas?
Margo Broughton: In Texas, our evictions are pretty quick. In fact, how we run it is, if you don't pay by the third, on the seventh, you're getting a notice to vacate, which is the first step in that process.
And then we can usually, if you don't pay by the 15th, we're going to file the eviction. Within a week we'll be in court. The judge will give them seven days to be out and that's usually where it ends.
So you're looking at three to four weeks just with that piece.
Now if the tenant files an appeal, which doesn't happen very often, you're talking about another month and you're talking about $1,200 payment to an attorney.
Steve Rozenberg: And now no cash flow coming in from your property. So now you're minus another month of cash flow. Again, it's not to paint a dark picture, but again, these are the three top things that will cost you money. And these are things that I would suggest that you put aside in a contingency that if it should happen, you are prepared financially so you're not putting yourself in a bad position.
Margo Broughton: Right. One thing I would like to add to that, because I think that's really important, is if you have a professional property management company doing this for you, you're going to get the evictions done much faster and much less expensive.
The other thing is I notice that owners that manage their own properties tend to give a little bit more leeway to the tenants. They let them get a little bit more delinquent and then the tenant believes that, "Well, if I did it last month, I might as well do it this month." And so then it kind of perpetuates. So definitely a professional property management company can help you with this. And then I wanted to also mention, because there are a lot of folks out there that might have an elderly tenant. “Well, I don't want to evict an elderly tenant,” but it's business.
I will tell you that we just did one of those the other day, and at the same time that I was filing the writ, I was calling the Adult Protective Services to get this elderly tenant some help. So we did it-
Steve Rozenberg: So it's not always a bad thing where you're putting them on the street. And again, it's a business. We don't want to make people where they don't have a roof over their head. But at the end of the day, we also have responsibility to the owners to make sure that we are doing what we said we're going to do per the agreement. And again, we are held responsible, the owners are held responsible by the banks to have mortgages. So it goes on down the line.Just to recap here, there are costs associated with owning a rental property. There are going to be expenses. Margo, the the top three are?
Margo Broughton: I think, now there's more, there's a lot to choose from, but in my opinion, I thought leasing fees, make-ready costs and evictions.
Steve Rozenberg: There you go. Alright well, if you want to know more, you can go to our website at mynd.co. So it's M-Y-N-D.co. Also, if you want to find us on Facebook, we have the MasterMynd Real Estate Investment Club and you can find us on Facebook as well at Mynd Property Management. Thanks for watching, we'll talk to you later.
Margo Broughton: Thank you.
Bottom Line on Landlord Budgeting in Houston
Every investor has to have a budget to be successful. This means having a full understanding of what factors will determine your budget. For example, leasing fees are an almost universal in property management, as a realtor must be paid to find the tenants. While many investors may believe this is handled by the property management company, it often isn’t and is typically a percentage of one month’s rent.
Likewise, factoring in your make-ready budget is a must. This is the cost to make your property move-in ready for the tenant, and is an up-front cost you will have to endure before you can begin making money on that property.
Lastly, every investor or property manager should factor in eviction costs. While evictions are not the norm, nor are they desired, they are possible. Being ready to endure an eviction is key, both personally and financially; however, remembering that you are running a business and that nothing is personal can make this process far easier, as well.