How to Rent Out a Duplex / Apartment – House Hacking in Milwaukee, Part 5

(Transcription Below)

Welcome back to chapter number five of our series about house hacking in Milwaukee.

Today, we’re covering everything that you need to know in order to become a successful landlord. In the previous chapters, we spoke about what is house hacking, what are the different strategies, what are the different types of properties, and how to finance them.

Today, we’re going over everything that you need to know from how to get your property ready, how to show it, how to advertise it, how to do background checks on your tenants, everything you need to know about the paperwork and leases, and all the way to ongoing property management and how to collect rent.

Step number one after closing is making contact with your new tenants. So we’re going to assume that there is at least one tenant in one of the units, but it is certainly possible that both units are vacant or both units are tenant occupied. But in either case, the tenants are certainly going to be aware that the property was for sale. They may not know the exact timing, they may not know on what day you’re closing, but they know there is a transition in ownership, and they’re going to have a lot of questions about it, and they’re going to be nervous about if they can stay in their place or if they’re going to get kicked out, and if they have to find a new home.

Now, this is very important to know. The lease is going to survive the sale of the property. So no matter what the terms of the lease are, you as the new owner have to honor the terms of the lease, and there are basically two possibilities. It can be a year-long lease that still has time left before it’s going to expire, let’s say in six months, or it can be a month-to-month lease. If it’s a year-long lease, you still have to honor it all the way to the renewal date of course. If it’s a month-to-month lease, you have a lot more flexibility, and both parties, the tenant and the landlord, can terminate that lease within a month.

So how should you best approach this? I recommend that you prepare a welcome letter that you’re going to bring with you when you’re meeting with the tenants for the first time. The purpose of the welcome letter is that they have all the details. So they don’t need to take notes when you’re talking with them. It will have your name and your contact information. You can choose if you want to give them your phone number. If you do that, I would recommend to also spell out the times in which it is okay to give you a call. For example, from 8:00 AM to 8:00 PM. Or you can also say only text messages, or you can say, “Here’s my email address. This is how I wish to communicate.”

Now, the next thing that you have in there is where and how to pay rent. So far, they had arrangements with the previous owner on where and how they would deliver the rent. There’s all kinds of nonstandard ways of how people are collecting rent. So be certain that you spell out how, and where, and until when the tenant is supposed to pay rent to you. At this point, you can also state your intentions with the property if you’re ready to do that. In some cases, it’s better to actually meet the tenants and get to know them before you make your final decision about what you’re going to do. But you can certainly reference that you are going to honor the existing lease no matter if it’s a month-to-month or if it’s going to be an annual lease.

You can address also some of the more practical matters. For example, the parking situation or the garbage bins. I believe that meeting in person is really the best way to get started because it allows you to get to know your tenant and your tenant gets to know you, and you can go over some of the practical things, for example, minor repairs that are going to be necessary or if you have remodeling plans for the property that involved the tenants somehow. If a meeting in person is not possible because the tenant is not at home. At the very least, you can leave the welcome letter at the door so they know how to reach you and how to make contact with you.

Here’s a quick side note, whether you keep an existing tenant or you find a new one, it’s really a case by case judgment call. There are certain advantages to keeping an existing tenant because they’re already there. You don’t have to go through the hassle of advertising, finding a new tenant, signing them up for a lease, and going through all that, you already have an existing stream of cashflow. But there’s also certain advantages to finding a new tenant. For example, sometimes tenants can develop a little bit of an attitude towards the new owner because they feel they have seniority. Also, if the rent is really low of the existing tenant, this might be a good opportunity to update the unit and then put it back on the market and charge a higher rent.

Now, if you have a vacant unit, now is the time for updates. Whether you’re painting,  cleaning, installing new carpet, or doing some major upgrades that you have been planning for, now is the time to do it, because if you have a nicer unit, you are going to fill the vacancy faster. You’re going to attract better tenants and you might be able to actually even charge higher rent.

After you’re done with your upgrades, it’s time for a really good thorough top to bottom cleaning. Make sure everything looks and smells nice. The windows are clean, everything is bright, nice, open, and ready for your photo shoot.

I absolutely recommend spending money on a professional photo shoot. It costs less than you might think, and it will give you the best results. Quite frankly, nobody cares about the ad copy that you’re going to write for three hours late at night. People barely read it, but everybody will look at the pictures.

When you were looking through MLS, you’ve certainly noticed the difference between really nice professional pictures and the ones that were taken just with a cell phone.

At this point, we should also talk about fair housing law. This is very serious, and it is very important for you to understand. Fair housing law protects people from being discriminated against.

On top of federal fair housing law, you also have to be aware and observe state and local fair housing laws. Wisconsin, for example, has another set of fair housing regulations, and then when you go local, you have another layer. So Madison, for example, prohibits you against discriminating against people for the ultimate experience. Milwaukee does not have a regulation like that, but Milwaukee prohibits you from discriminating against people because of the source of income. For example, section eight, housing assistance.

A really good website to read up on this is fairhousingwisconsin.com. Very important that you educate yourself and you stay on top and in line with fair housing laws.

The next big question you’re going to have is how much rent can I actually charge? Most people are going to turn to online resources like Rentometer to get a first idea on how much rent is possible for a certain size of unit in a certain area. You have to know that this is just a computer algorithm generated average value that does not consider the condition of your property. It does not know if you have an updated kitchen and an updated bathroom, if you have air conditioning or not, if there is yard space included or parking, or if there is additional storage space in the basement. Those are all things that go into a good rent price analysis.

You can do a lot of research online, but a big rookie mistake that I’m seeing all the time is that people are paying attention to units that are offered for rent for a really long time. They’re available for 100 plus days and nobody rents them. Either the condition is not good enough or the price is too high. So those are not a good benchmark. You want to pay attention to those offerings that go on the market, and they are gone within a week or within two weeks because they are right on the market. It is also very important that you understand the condition of the units. You can do a lot of research online, but the best way really is to go out and see a few properties in person. This is really eye-opening, and you will be very certain after you’ve seen a few properties what a good fair market rent is for your personal property. And when you set fair market rent with confidence, you don’t need to renegotiate it when you’re talking to a prospective tenant.

Now with that, you have all the pieces that are necessary to start advertising. Your unit is spanking clean and ready for showings, you have fantastic looking pictures, you know exactly how much rent to charge, and you understand fair housing laws.

So the next question becomes, where should you advertise? I would start with Zillow. You’re certainly familiar with Zillow from looking at properties, but they also have a really good rental engine. When you advertise on Zillow, they have recently started charging you about $10 per week. I think it’s well worth the fee because they’re also populating to HotPads and Trulia. You get really great reach and great functionality with Zillow.

Another platform to consider is Facebook Marketplace. They’re also charging for the services, but we have seen really good results with Facebook Marketplace. Craigslist is another platform that you can use, but the results that we’ve seen in the last years are kind of so-so. Apartments.com can also provide a good resource for you. You don’t have to advertise on all of them, understand who your audience is, and then pick one or two and really focus on those. Once your advertising is out there, your pictures look great, and your pricing is spot on, you should see several leads per day coming in. I would say it takes us about two weeks to fill a vacancy. We may sometimes manage to do it within one week, and sometimes it may take us three weeks, but if it takes three to four weeks, you know that something is off. Either your condition is not good enough or your pricing is too high. It’s usually one of those two.

Now, with the leads coming in, the first step for you is to make contact with your phone. And the purpose for that phone call is really twofold. Number one is you want to answer any questions that they have and then pre-qualify them a little bit, and number two is to schedule an appointment at the property. These phone calls are very important and they will give you a much better outcome compared to, for example, going back and forth just via email. When you make these phone calls, I highly recommend that you have a piece of paper in front of you with the rough outline of the conversation and some questions. This will give you a much better result and it will make the process a lot easier.

When you first talk to an applicant, they are usually a little bit tense on the phone. So I always start with an icebreaker and I will just ask them, “Hey, how was your day?” The next question that I’m going to ask is, “What questions do you have for me about the property?” Questions that you typically get may for example be, “What is included with the property?” They want to know which appliances are included or who is paying for sewer and water. So be prepared to answer those questions. Next, you go through a few of your questions. For example, you can say, “Hey, what do you do for a living? Tell me about yourself and your family. Why are you moving? What are you looking for? When do you want to move?” You can ask those open-ended questions and you will get a lot of good information from the tenant before you actually suggest an appointment.

When you do suggest an appointment, the way I handle is I always like to have two appointment slots. I have one during the week, usually after work hours. So maybe at six o’clock and one on the weekend, more towards midday, maybe Saturday at noon. The reason I do this is because different people have different work schedules, but if they can offer a Wednesday six o’clock and the Saturday one o’clock appointment, chances are they can make either one or the other. I will then book these appointments in 15 minute intervals. And I’m usually not shy if I get a lot of people that I double-book them because people are usually not exactly on time. And if they feel a little bit competition, that’s not necessarily bad for the landlord.

During those physical showings, you have some additional opportunity to ask them more questions and to get to know them a little bit better. Keep in mind that as much as you are interviewing them, they’re also interviewing you. Not only do they want to make sure that they’re renting a nice property, but they also want to make sure that you’re a responsible landlord and you will take care of issues as they arise. If they express additional interest in the property, I will usually hand them a clipboard with the basic rental applications. And on here, we’re collecting personal information, rental history, employment history, and income, and some credit information.

Once you have a completed paper application and you were able to verify that your applicant is going to meet your predetermined minimum requirements in terms of monthly income or credit score, you are ready to move on to the next and very important step of the background check. Now, background checks are super important. You want to make sure there are no red flags before you’re committing and signing with somebody on a one-year lease. A complete background check can be a lot of work, and a of people are still doing this the old fashioned way. A complete background check includes a credit score check, a criminal background check, a sexual harassment background check, a check of references with employment, with previous landlords, and also a check for previous evictions. So you really have to do a lot of detective work and know how to navigate all these different platforms. But there is a better way of doing this today. And I really like using one of these online platforms. For example, cozy.com has a really good online background check system, or also mysmartmove.com, which is a platform by TransUnion.

There’s a lot to learn about background checks. And if you want to read more, go to mysmartmove.com and check out their blog page. They have a lot of very well written articles on there and to teach you how to do everything completely by the book which is very important. They also have some sample reports here. So when you run a background check with them, you get an eviction background check, you get a criminal background check, and then you get a credit report. So this is just a credit section here. What they’re not showing you here is that you get a line by line payment history, and you can tell if somebody is paying like clockwork or if they tend to be sometimes a little bit late on their payments. That’s also good information that they’re not showing you here.

If you want to use that service, you just go here and sign up for a free account. And then you need your applicants email address, and you send them an invite from here, and then they go online, and they have to pay a service fee. It’s about $40 at the moment, and a couple hours later, you have a full background check in your email address. I’m not being endorsed by SmartMove, but it’s just a platform that I have really good experience with and so I can recommend it. It really works well. What I like about the online background checks is that it’s super convenient and it takes you all but two minutes, and it outsources the entire background check to a completely independent and neutral third party service.

So in terms of fair housing law, you’re really on the safe side here because you have a complete paper trail about all the decision-making, and you have an independent third party that is basically giving you a recommendation if you should go forward with an application or if not.

So maybe you’ve been wondering why not everybody is house hacking if it is such a no-brainer. I think by now, it’s pretty obvious that setting up a rental property is actually quite a bit of work. But bear with me, we only have one step left and that is filling out the actual rental agreement and some other forms that are necessary as well.

I like using standard forms. They are complete, well evolved, and they cover everything that you could possibly need to be regulated in a lease. They’re also easy to fill out, and then they come with the carbon copy. So you just tear them apart and you keep the white page and the tenant is going to keep the yellow carbon copy for their reference.

So this completes my overview about house hacking strategy. You know all the most important steps to get you from A to Z, but of course there is a lot more to learn.

I promised you a few book recommendations. So I will go with the House Hacking Strategy by Craig Curelop. That is really an A to Z overview that covers the entire process, and gives you a good recap of everything that we have discussed here.

The next book that I’m going to go with is also from the BiggerPocket series and it’s from Brandon and Heather Turner. This is the second book that they have written. I believe this one is more by Heather, and she is the property manager of the two, and it’s called The Book on Managing Rental Properties. This is really a nuts and bolts how-to guide, very cut and dry it, and step-by-step on how to manage rental properties. Lots of good information in here. My third one is one by a guy who used to be a police officer, and I think it really reflects in that book. So there is a lot of street smarts in here. It’s called Landlording on Autopilot, and it is by Mike Butler.

There is one last question that I would like to try and address here. So what is beyond house hacking? What is the future like? What do you do after your first house hack? First of all, let me say this. Even if you never do anything again and you only have one house hack, I think it can really dramatically change the outlook on your financial future. It has that much of an impact especially over time. So if you say, “All right. I’ve tried it. It was just not for me.” Know this, it is always easy to sell a duplex. So it’s an easy way to get in, to try yourself, to experience yourself. And if it just wasn’t for you, there is always an easy option out. You can just put the duplex on the market and sell it.

Now, if you want to go beyond that, you can say, “All right. I’ll keep the property, I’ll rent it out completely, and I should have some passive income that will support me in the future, and I’ll just move on and buy a single family home as the next property.” You just keep that one duplex that you originally purchased as a house hack. But if you like this, and if you want to take it to the next level, nothing is stopping you from buying another one, and another one, and another one. You usually have to wait one year in order to buy it with owner occupied financing, but I have several clients that are on the third or on the fourth duplex. So you can really take it as far as you want it to.

Thanks for reading!

-Marcus