How do I identify and prevent my rental property from becoming a Breaking Bad nightmare?
Breaking Bad, the hit television series based Albuquerque, New Mexico, is in its final season.?While many of us are sad to see this show end, I for one am grateful that my everyday life is not a Breaking Bad world of meth labs and drug dealers.
However, I am trying to not be naive. Meth labs are often set up in rental homes, so landlords and property managers are at risk of having their rental properties turned into methamphetamine production facilities. This is a big deal because the chemicals that are used to make meth are highly flammable and explosive. And meth residue is extremely toxic and considered hazardous waste. Once it is discovered, the property owner is responsible for cleanup, which can cost tens of thousands of dollars, and most insurance policies will not cover it. In addition, meth residue can permeate an entire building, which means remediating all affected units, losing rental income, and relocating residents.
Given the physical dangers and financial consequences of renters setting up meth labs in your rental home, I thought some meth guidance might be in order:
What are signs my rental property is becoming a meth lab?
Certain ingredients are necessary to make meth. If you watch Breaking Bad, you might recognize some of them. When you see the list, you understand why it is ?so toxic and why it is good to spot these toxic residues:
- Large amounts of cold, diet, or allergy pill boxes (over-the-counter ephedrine or pseudoephedrine)
- Sheets or filters that are stained red or have a white, powdery residue.
- Empty containers of anti-freeze, white gas, ether, or starting fluids.
- Drain openers, freon, lye, paint thinner, acetone, or alcohol.
- Ammonia or propane tanks, anhydrous ammonia (in coolers).
- Camp stove fuel containers or other compressed gas cylinder.
- Jars or bottles with rubber tubing attached.
To make one pound of methamphetamine, six pounds of hazardous, toxic waste is produced. Besides ending up in the walls, floors, HVAC system, carpet and other places, some of the waste is often dumped on the ground, so also look outside for dead grass or plants, and stained soil.
How can I prevent my rental from becoming a meth lab?
Screening your tenants is and critical. People who cook meth tend to end up in rentals that are self-managed and do not have a standardized tenant screening procedure. So make sure to:
- Have a solid tenant screening system in place, or hire a property management company?that does.
- Call previous landlords to confirm that your applicant was a good tenant in the past (make sure the phone number you have is to the actual landlord, and not someone pretending).
- Check employment references, and verify income. Follow up if your tenant pays for rent in cash.
- Include in your lease agreement that there will be regular inspections (with the proper 24- or 48-hour notice, as required by state law. Regular inspections may deter someone who is engaged in illegal activities.
- Let the neighbors know you are the property owner, and that if they notice anything suspicious you’d appreciate a phone call to either yourself or your property manager.
Should I let new tenants know that the unit was previously contaminated?
The answer depends on which state you live in. Scripps Howard news service examined state meth disclosure laws in 2012 and found that seventeen states require property owners to tell renters about prior meth contamination, although several of those states waive that requirement if the meth residue has been officially cleaned up.
One more warning for rental property owners: if you are planning on expanding your rental property inventory, make sure you are confident that any properties you purchase were not used as meth labs in the past, because as soon as you own it, you become liable for the cleanup. During due diligence, if you have any suspicions, consider checking with the local police department, and have the property tested during the inspection. If you find suspicious residue, you can even test it yourself with a ten-pack meth residue test kit from Amazon.com for about $30. If you get a positive result, that $30 would be money well spent.
Have you had any Breaking Bad experiences with your rental property?
Are you looking for a local property manager expert?
As always, the information provided here is just that–it is for informational purposes only and is not legal advice. If you have any particular questions or issues, please consult an attorney.
By Tracey March
 For those who don’t follow it, Breaking Bad is about a high school science teacher (played by Brian Cranston) turned methamphetamine cooker and dealer to provide additional income for his growing family when his cancer treatments start eating up his savings.
Ten thousand years of recorded history can’t be wrong: Since the dawn of civilization, ownership of rental property has been the most reliable long-term source of wealth for kings and commoners alike. Whether you own land via the inheritance of divine right as a descendant of a line of kings, some watery tart threw a sword at you, you scrimped and saved your wages to buy your first piece of real property, or anywhere in between, you’re probably aware of the potential of the unique combination of price appreciation, rental income, tax-deferred growth and leverage that rental real estate investment offers.
But where are the best places to own? The answer to that question is likely different for everyone. But here are a few principles and considerations to keep in mind.
1) Low Vacancy Rates
Ask an accounting professor, and he’ll tell you a rental property is an asset. And he’ll tell you an un-rented rental property, sitting idle is still an asset. But if you’re paying mortgage, insurance and taxes on a rental property that’s sitting empty, it sure begins to feel like a liability real quick. And if it gets out of hand, it can be a disaster to the small landlord. A high vacancy rate hurts landlords in three different ways:
- A vacant property isn’t generating rental income
- Decreases the landlords’ ability to raise rents
- This may impact price appreciation as well
According to All Property Management’s own proprietary metric, the Rental Property Investment Score, the markets with the highest rental vacancy rates at the end of 2013 were as follows:
- Orlando, FL 14.60%
- Las Vegas, NV 14.10%
- Tuscon, AZ 13.70%
- Memphis, TN 13.40%
- Salt Lake City, UT 13.20%
Yes Orlando, Las Vegas and Tuscon are very seasonal which can skew vacancy rates. It is best to look at specific cities and make an assessment about whether a chronically high city vacancy rate is going to affect your property, specifically.
2) High Cap Rates
The term “cap rate,” or “capitalization rate,” refers to the projected annual rental income of the property, divided by the current fair market value of the property. For example, a property with a ‘cap rate’ of 10 percent indicates that you will recover 10 percent of the purchase price back each year.
In theory, your cap rate should always exceed that of less risky alternative investments. Now, don’t look at cap rates in isolation. Detroit has a very solid average capitalization rate of 12.76 percent – the highest in the country. But that just barely keeps the city even with its 12.10 percent vacancy rate! Sellers have had to discount property prices substantially to unload them. 25 percent of the population of the city has left in the last 10 years and the city has declared bankruptcy. This means the city will have a hard time providing basic police, fire, education and recreation services to its residents until it emerges from bankruptcy – which will hurt rental values in the future.
3) Favorable Landlord-Tenant Laws
Many new investors neglect this criterion but it’s an important one. No landlord wants to evict honest, struggling tenants, but if you own a rental property in this market, sooner or later, it’s going to become an issue.
If the tenant fights you, how long will it take you to complete an eviction? Markets like San Francisco are notoriously pro-tenant/anti-landlord. Can you keep up your mortgage, insurance and tax payments on a property if it takes you upwards of four months to get a problem tenant out?
That’s not to say you can’t do very well in pro-tenant jurisdictions. But you should probably build the risk into your calculations, and keep enough cash reserves against the possibility of a lengthy eviction process.
4) Local Intelligence
The wisest businessman I ever knew growing up used to say, “Buy at the edge of town. Town will be there soon enough.” This means rental real estate investors would do well to study the basics of economic cycles and urban planning. Eyes and ears on the ground locally can get you information about planned investments, developments, crime patterns and community problems well before they become news. You can be the eyes and ears in your community or you can have a property manager doing it for you – but there’s no substitute for allies in the community looking out for your interests and keeping you up to date.
All Property Management is currently researching several major U.S. cities to help our real estate investors and property owners determine ideal locations in 2014. Check out our the latest Rental Property Investment Score (RPI) report posting cities with the Highest RPI score that offer the best combination of current rental yield, price appreciation potential and market economic stability. These factors tend to have the greatest impact on overall return on investment in rental housing.
Other helpful tools and tips:
- Rent Versus Sell Calculator
- Property Investment Calculator
- 5 Landlord Liabilities That Might Surprise You
Well, it looks like the Phoenix real estate market is cooling down after over two years of increasing home prices, according to the S&P/Case-Shiller price index. Unlike other areas of the country that are reporting tight housing inventories, such as Austin, Houston, and Denver, there were 29 percent more houses on the Phoenix market in January than a year earlier. Housing supply is at about 5.9 months. This past January saw 17 percent fewer homes sold compared to last January.
Experts are expressing concern that the situation in Phoenix could be foreshadowing similar coolings in other similar markets, like parts of California, Nevada, and Florida. Yet interestingly, the market for luxury homes in Phoenix is doing quite well.
But what about the Phoenix rental market?
The rental market has a different story. Phoenix Rental Property Investment Score (RPI Score) of 75 catapulted the city from 23rd?to 12th in the nation in terms of income potential for residential rental property investment. Phoenix’s comeback was due largely to gains in capitalization rates 8.74% and job growth 2.30%. These factors outweighed a higher vacancy rate 9.70% and stagnant property appreciation rate 3.60%.
Indications are that there will be more of a demand for rentals than homes for sale.
And if you want to read more on the rental market and the influx of institutional investors:
- For an interesting read on how we’re becoming a nation of renters, check out this blog post from Dr. Housing Bubble. Whether you agree with the tone or not (down on big bank investor buyers), the numbers are interesting. For example, “for the first time in history, we had a six year stretch where we added more renter households than that of actual homeowners.”
- Housing Wire just reported on whether investor home sales are “masking a sick market.“Experts are concerned that:
- The influx of institutional investors in to the rental market artificially and temporarily suppressed inventory;
- Optimism in the housing recovery and home values are unsupported by market fundamentals; and
- US housing is more unaffordable now than ever: compared with 1999, real median household income is 9% lower and average home prices are 68.4% higher.
I’m curious to hear from Phoenix property managers about the rental market. Do you see the same treading comeback in Phoenix as the rental property investment score reported?
You were the number two city for big bank rental investors – how has this impacted real-people rental property owners?