I come across posts on social media platforms detailing horror stories pertaining to rental relationships gone bad.  And many sound eerily similar.  My landlord doesn’t fix anything.  My tenants haven’t paid rent in months.  Is my landlord allowed to enter my apartment without my permission?  My tenant got two dogs without my consent and they’re chewing everything in the apartment.  Occasionally, I engage in the conversations and realize that neither, tenants or landlords are well-versed in their rights and responsibilities even at the very basic level.

So, where to begin the education?  Too few tenants and landlords thoroughly familiarize themselves with the Truth In Renting pamphlet that is made available by the New Jersey Department of Community Affairs.  Landlords are REQUIRED to distribute Truth In Renting to their tenants.  If you’re a current or prospective landlord or tenant, this is a MUST read.  This publication is written in a manner that is easy to comprehend by an average person and it covers the most important topics (leases, security deposits, rent collection, habitability, eviction, etc.) of engaging in a landlord-tenant relationship.  If you don’t find anything else in this blog useful, at least PLEASE read the Truth In Renting.

Tenant screening and selection is probably the most important part of the process.  In addition to classes protected on a federal level, New Jersey has over 12 protected classes (race, creed, color, national origin, ancestry, nationality, marital/domestic partnership/civil union status, gender identity, disability, military service, sexual orientation, familial status, source of lawful income, etc.) that landlords must be familiar with because discrimination in housing carries significant penalties.  Landlords typically engage third parties to perform credit and criminal background reporting to assess the tenant’s risk of default or past criminal behavior.  I encourage landlords to develop a set of standards used to accept or reject tenants. If the same standards (minimum credit score, eviction history, annual earnings, etc.) are applied to all applicants, the chances for discrimination are greatly reduced.  Even unintentional discrimination may be cause for legal action.  Remember, landlords, ignorance is not a valid defense in the court of law.  Housing assistance vouchers (Section 8) is a lawful source of income yet I still come across landlords who think that they don’t have to accept Section 8. THIS IS DISCRIMINATORY!

Security deposits and rent are probably the next most important subjects to understand.  In New Jersey, a landlord cannot demand more than 1.5 month’s of security deposit.  Within 30 days of accepting a security deposit, the landlord must inform the tenant in writing where the security deposit is being held and the rate of interest that the deposit is earning.  Although hand delivery of this correspondence is permitted, it is best to send it regular and certified return receipt mail for record keeping purposes.  Similarly, the security deposit must be returned to the tenant within 30 days of vacating the premises and an accounting of all deductions for damage/unpaid rent (if any) must be presented.  Landlords who fail to comply with the Security Deposit Law may face penalties up to three times the amount of the security deposit.  Rent must be paid on time.  Tenants are customarily granted a grace period but will likely be assessed late payment fees if the rent isn’t received by the end of the grace period.  It is the tenant’s responsibility that the rent is received in a timely fashion.  Electronic payments have become prevalent and eliminate the chance of a rent check being lost in the mail.  Nonpayment of rent is probably the quickest way for a landlord to begin eviction proceedings.

Although oral leases are valid in New Jersey, written leases are most common.  A typical lease outlines the terms of a rental agreement; the parties involved, the premises, the term of the lease, the rent amount, late fees, landlords’ responsibilities, insurance, renewal, right of entry, pets, etc.  A lease should be written in a language that an average person is able to understand it.  If you don’t understand any part of a lease, it’s probably wise to engage an attorney to interpret it.  It may be a lot more expensive to terminate a lease than to have paid an attorney to review it prior to signing. Make sure that you DO NOT lose this document!

The scariest word in this business may be eviction.  Can a landlord throw me out at will?  Can I remove a tenant without going to court?  In New Jersey, a landlord may recover possession of the premises ONLY through a legal process of eviction.  Entry by the landlord and removal of tenants without a judgement from a court is ILLEGAL.  The landlord may not lock a tenant out or disconnect utilities. There are very specific causes for eviction (failure to pay rent, disorderly conduct, damage/injury, breach of lease, etc.) and landlords must follow a legal procedure to successfully evict a tenant.  I highly recommend to both, tenants and landlords, to use an attorney who is well-versed in landlord-tenant law to handle eviction cases.  A lease may stipulate that the winning party in a legal dispute may be able to recover reasonable attorney and court fees.

I also hear about disputes over the condition of the premises at the end of the lease.  It’s a good practice to document the condition of the premises during the walkthrough before a tenant takes possession of the dwelling.  Any damage and condition of the floors, walls, appliances, windows, mechanicals, etc. should be documented in writing, supported with pictures and acknowledged by both parties in writing.  A move-in/move-out checklist is a good idea.  There is a difference between damage and typical wear and tear.  For example, a missing piece of carpeting chewed by a dog left unattended is not the same as a foot traffic pattern left in carpeting after 4 years of use.

Prior to taking possession of a rental, tenants should have received from the landlord a fully executed copy of the lease, Truth In Renting pamphlet and a Lead Based Paint Disclosure (if the dwelling was built prior to 1978).  Asking for a copy of the Certificate of Occupancy or verifying with the municipality that a CO has been obtained is also a wise idea.  Prior to releasing possession to a tenant, a landlord should have a fully executed lease, countersigned Lead Based Paint Disclosure, security deposit and first month rent.  The condition of the dwelling should be well documented and acknowledged by both parties.

This is by no means an exhaustive list of dos and don’ts but it should give new tenants and landlords the incentive to learn about their respective rights and responsibilities.  Happy renting!

Over the years, I fine-tuned my approach of analyzing properties.  I learned a lot from other investors and from trial-and-error.  I learned how to eliminate emotion from my deals; either the numbers worked or I moved on.  By no means is my system perfect today but it serves my purposes and it fits into my investment profile.  It’s a “living” system; it changes with the market conditions, my appetite for risk and the return that my capital can generate in alternative investments.  Most importantly, I surround myself with a team of highly-skilled professionals.

The first step in considering real estate investments should be the expectation of ROI (Return On Investment).  Is the ROI reasonable and attainable?  Is the ROI from real estate equal or higher than, for example, from equities? Remember, real estate is a long-term investment vehicle.  It’s fairly stable but illiquid.  It can take several months to sell a home vs almost instantly being able to sell stocks, bonds or commodities to make capital available for use.  Consider factors such as professional property management fees (a worthwhile expense if you have no experience in this arena), vacancy rates and market shifts that can impact the ROI.  Always consult an accountant or a wealth manager to determine, whether or not, physical real estate fits into your investment portfolio.

Investors have to be disciplined.  Therefore, the next step should be determining how much capital is available for investment and sticking to this amount.  Real estate, like other investments, carries opportunity cost; the capital used to purchase a home can’t be used elsewhere to generate a return.  It’s crucial to understand the financing part of this business.  Loans for investment real estate differ from those for primary residences (interest rates, down payment, loan type, etc.)Relationships with lenders who have experience with these products are very important.  A loan officer who closes two or three investment deals a year may not be the best choice for your team.

During one of my early interviews for a trading position with a large broker dealer I heard a sentence that stuck with me for the rest of my career: A great trader doesn’t swing for the fences; a great trader manages risk effectively.  There are inherent risks associated with real estate and these risks have to be hedged appropriately.  We live in a litigious society and law suits are common in this industry.  In order to protect your interests, you must add an experienced real estate attorney to your team (starting to see the “team” trend yet?)  An attorney guides you through the process of creating a separate legal entity, creates leases and notices, advises you on tenant-landlord matters and assists you in the purchase and sale of real estate.  How else is risk managed?  Through an appropriate insurance policy.  Again, it’s very important to deal with an insurance broker who is well-versed in products designed for investors.  There are many policies that fit different scenarios: rentals, vacant dwellings, builder’s risk, etc. Additionally, tenants should carry renter’s insurance that names the landlord as additionally insured.

Naturally, a real estate agent is a very important part of your team.  Besides helping you in the search and guiding you through the transactions, a real estate agent is the hub of many resources.  Choosing the “right” real estate agent is a process of interviews, data gathering and personality assessment.  You’re trusting this person to guide you through a maze of procedures that culminate in a transaction typically involving hundreds of thousands of dollars.  Choosing an agent simply because he’s a buddy or a family member may not be the best move.

An agent who engages investors should, at the very minimum, have a firm grasp on the various methods of valuating income-producing real estate and calculating ROI, understand transactions involving REO/foreclosures, be familiar with municipal requirements, respect the investor’s risk profile, regularly close transactions involving different types of investment real estate, understand landlord-tenant laws, have experience with estimating the cost of construction/improvement and be able to recommend resources to quickly transition an asset into a revenue-generating investment vehicle.

Before going any further, an investor should have the above-mentioned concepts MASTERED.  Know the risks and how to mitigate them, understand ROI, know how much capital you have to invest and begin assembling your team (accountant, attorney, real estate agent, insurance broker and lender).

Subsequent articles will drill down into more detail the roles that each member of the team plays and examples of property selection and acquisition.

I began research into which investment vehicle would generate cash flow and provide reasonable tax benefits.  Often, the results of my research would point to real estate.  I began to focus on specific markets where I thought that owning multi-family homes would help me reach my goals of becoming financially independent.  After considering several properties in what was then a highly competitive market, I acquired my first two-family home in Red Bank.

Because I was not an experienced landlord, the learning curve was pretty steep.  I had to familiarize myself with a myriad of New Jersey landlord-tenant laws and regulations as well as local municipal ordinances.  But how much fun would it be if I didn’t bump my head along the way?  It was a challenging time but I learned pretty quickly.  And I knew that this was the right move for me to rid myself of the corporate dependency.  Less than two years later I acquired another property and it was a much smoother transaction.  The following year I left my career as a trader on Wall St to pursue my entrepreneurial aspirations full time.  In 2013 I became licensed so that I could help others with what I had to learn on my own.

Many people (like me back then) don’t consider income diversification until an adverse event occurs.  It’s more difficult to focus on a new venture when one is faced with the pressure of finding a new job.  I usually encourage people who aren’t happy with their career to consider a change when they CAN instead of when they HAVE to.

Investment real estate can be a great way to diversify one’s income.  Yes, like anything else, it comes with its own set of challenges.  However, I found it to be a good fit into my investment portfolio because it’s a tangible asset.  I treat my rental real estate as a business.  I have developed a plan, I have policies, procedures and systems for acquiring real estate, selecting tenants, managing the properties, making improvements and working with vendors.  My experience allows me to advise others in their search for income-producing real estate as well as manage other investors’ properties.

I’m often asked about how I determine where to invest?  My preferences are dictated by market conditions and a set of financial guidelines.  There is no room for emotions in this business.  If the numbers don’t work then there is no need to pursue a transaction.  The rental market in New Jersey is doing well and rents have risen significantly over the last several years.  The core counties closer to NYC have experienced explosive growth and a population shift.  I prefer towns with flexible means of transportation (rail, bus or ferry to NYC) and easily-accessible retail and industrial locations.

Local towns like Red Bank, Middletown and Atlantic Highlands are some of my favorites.  These towns benefit from characteristics that make them desirable to tenants; multiple modes of transportation to NYC and Northern NJ, shopping, night life, close proximity to the beaches, etc.  It is not surprising that the inventory of rentals in these areas remains tight, the market is competitive and the rents have increased noticeably over the last several years.  The current rise of mortgage rates may erode first-time home buyers’ purchasing power and help the rental market remain robust.

When selecting areas for investment consideration, I evaluate the sold vs. active ratio first.  Because I’m more of a “visual” person, I have a two-screen setup in my office.  On one screen I display all filled vacancies (sold) in a particular area during the last 6-12 months while the other screen shows the current inventory (active).  This gives me an immediate impression of the demand vs supply.  If I notice that the sold outnumber the active by a considerable margin, then I take next steps to locate an appropriate property to purchase.  I also pay close attention to the average days on the market.  I avoid areas where vacancies that are priced at fair market value take longer than 30 days to fill.  Losing even one or two months of revenue can have an impact on positive cash flow.  In my opinion, selecting an appropriate area for investment is even more important than selecting a particular property.

In subsequent articles I will provide a more detailed insight into property selection, cash flow analysis, screening and choosing tenants and managing a rental property.  I hope that you have found this blog informative and that you’ll check back regularly as I share what I have learned over the past 15 years and help you choose whether or not real estate fits into your investment profile.