Why is it that the quantity and frequency of “No U-Turn” signs is always the highest right around highway on-ramps? You know, where one wrong turn can send you in the wrong direction for miles and a legal U-Turn would be the most helpful?

In the future, will education and intellect be judged based on how much information one can recall, or how good one is at formulating Google search queries?

Why does it take 5 days for my local Baby Bell to install internet services when no technician visit is required and I already have my equipment?

One of my loan broker friends has been working 14-16 hour days six hours a week making deals happen over the last two months. His income is on track to return to the level it was back in the middle of the housing boom.

Another friend of mine who works the property side (i.e., he’s a real estate broker) who was just asking me if I had any tech work for him three months ago just hesitated when I called him and asked if he could spare a few days of time this month. Apparently his active buyer count is almost “back to the level [he's] used to”.

This colloquial “word on the street” experience tells me that we may have hit bottom. If REO supplies are dwindling, that has a stabilizing effect on market prices, making traditional sales more attractive. The general sentiment that there are good deals to be had, that it’s a buyer’s market, and that those with cash on the sidelines should be investing now (go ask your shoe shiner or hair stylist if it’s a good time to buy) means that demand is returning, which means that (in economics jargon) price has reached it’s equilibrium point. In common parlance, that means that we done hit bottom, yo.

Now, I’m not at all suggesting that it’s a good or bad time to buy. I’m an investor. That means, in my mind, it’s pretty much always a good time to buy. But most people don’t have that mindset, and for you, I’m suggesting that the end is in sight, so if you’re bargain hunting, it’s time to get off your arse.

Mind you, my sampling wasn’t exactly huge, but when CNN reports that the U.S. housing market bottomed out sometime around March 2008 next Christmas, just remember that you read it here first.
As for economy as a whole, your guess is as good as mine. A one-point jump in unemployment could easily derail this “recovery” just as its starting.

But for California housing, at least, barring external shocks, I think things are looking up.

So I get a call the other day from a tenant. I’m in Britain on a job, mind you, so his late-afternoon call is actually quite a bit more of an imposition than he realizes. It’s after midnight and just got used to the dang time zone. But, hey, it’s only four bucks a minute… still cheaper than the two grand a month I’d have to pay a property manager, right?

Tenant: Hey, uh, I have a problem here with the apartment. The electricity in the family room is out.

Tired Landlord: Have you checked the circuit breakers?

No. Where are they? I turned the whole place off and then back on.

Realllly. Is anything else out, or is it just the one room?

It’s just the one room. Actually, it’s only half the room.

Half the room? What do you mean? Are the lights out?

No.

Then how do you know the power is out? One of the outlets isn’t working?

Yeah. The TV won’t turn on.

Ok. Have you tried plugging anything else into that outlet? Something that you know is working properly?

Oh, like the lamp?

Sure.

(After long pause) No, the lamp doesn’t work in that outlet either.

Ok. Can we check the other outlets in the room? If the lights are working, then maybe it’s just the one outlet that’s broken, in which case we can get you by on an extension cord for today. Ok?

Ok.

(Another long pause.)

Well, the other outlet on the same wall doesn’t work.

Ok. What about the adjacent wall, by the door?

Oh! That one works!

Weird. Would you just do me a big favor and check the last outlet or two in the room?

(Another $12 or so in roaming fees accrue on my mobile phone bill.)

All the other outlets work. This isn’t as bad as I thought.

Agreed. How about this… is there a light switch in the room that you never use? Maybe behind the door or something?

No.

Ok. We probably just have to replace the two receptacles in question. Is there anything weird about those? I’ve seen one receptacle go bad at a time in the past, but two is really odd. Maybe something indicative of a short, like a little telltale burn right around where the plug is inserted into the outlet on one of them?

Hmm. (Pause) Well, there’s a couple of weird buttons on one of them.

Weird buttons? (I pause for a moment in disbelief.) Um. Are they red and black?

Yeah. How’d you know?

(Without missing a beat) Just a lucky guess. Do me a favor and press the black button, ok?

(The Jerry Springer Show is suddenly heard in the backround.)

Hey! My TV just came back on! Awesome!

(Amused grunt) That’s great. I think you’ll find that the second outlet that wasn’t working is now working, also.

Yeah. Thanks, Johnny!

If it’s not immediately clear what happened, perhaps this Amazon listing will help:

No, this isn’t an homage to Ms. Mary J. Blige, it’s an alternative to the phone company’s directory service. I started paying my own mobile phone bill last summer (off the corporate-sponsored plan, and yes, do I ever miss it), and have been struck by how many hidden charges there are. I’ve tried calling AT&T three times since my last billing cycle about some random $20 charge I don’t recognize, and have yet to get through. I imagine that’s one of their strategies, though, seeing as how at some point, it isn’t worth my time.

The answer? Why, Google, of course. Printing all that money with adwords let’s them do an awful lot of really cool things. Put 1-800-GOOG-411 into your phone and use it next time instead of the $1.50 a pop your we-can’t-even-have-an-offshore-employee-answer-your-call-and-we-own-the-damn-lines phone company charges you.

Inflation is Up

The CPI (Consumer Price Index) for the 12 month window ending 11/2007 rose 4.3%. Check out the numbers for yourself at the government’s CPI site.

If you are leveraged to the hilt, this is good for you, because you can pay off your debts with inflated dollars (why do you think the powers that be don’t stress too much when the dollar weakens? Hmmm).

If you’re not, well, there’s a reason you’re feeling pinched. Wages haven’t kept up. (Actually, you’re probably feeling pinched anyway — the energy index was 21.4% for the same time frame — a number that effects an individual much more drastically as they slide down the socioeconomic scale because it represents a larger chunk of their income. In other words, this effects the working and middle classes the most.)

Still, there is some benefit to this…
Mortgage Rates Are Down

Folks with good credit are locking in 30-year rates below 6% again this month. Considering a 4.3% inflation rate and the ~2% you’ll get back in income tax incentives (assuming, of course, that you <ahem> work for a living :-) ), you get to borrow that money for free.

Read that last sentence again. Go on, I’ll wait. For Free. Think about it. Then tell me again why real estate is a bad investment. Because I can’t seem to remember how borrowing a half million bucks interest-free and reinvesting it at any positive rate of return is a bad idea. Anyone? Bueller?

So, in broad terms, there are only 5 legitimate ways of making money. This is irrespective of methods that are illegal, of course. You’re also free to seek out and marry a wealthy older mate, but that’s outside my scope of expertise. :-)

1. Employment. Go work for “the man”. It doesn’t matter if you’re flipping burgers or performing open-heart surgery — if you trade time for dollars, you’re still here.
2. Business. Employ others, create value, and re-sell at a profit. Be “the man”.
3. Creativity. Write the great American novel or compose the next Thriller.
4. Investment. Take your earnings from the other methods and buy appreciating assets, like stocks, bonds, and real estate.
5. Leverage or “other people’s money” (OPM). Borrow lots and lots of money and reinvest it at a higher rate of return than the amount you’re paying in interest. This is, in essence, the business model of traditional banking (the term “savings and loan” is a direct description of this practice).

Now, ideally, you’ll employ all five on your way to riches. I highly recommend putting effort into all of these (save for employment, perhaps, because most of us have that one covered).

Want more info? Leave a comment!

(Anyone know from where I’m quoting?)

This article is written with real estate investing in mind, but it’s relevant for any investment vehicle.

Rule 1: Always Keep Your Eyes Open.

Remember when you were in the market for your first car? Remember how, for the entire year before you hit that magic dollar amount or that milestone birthday, you noticed every car on the road?

By the time you actually drove away in that vintage masterpiece of slightly-used mobile bliss, you could quote the going price for every vehicle in your price range, couldn’t you? And quite a few outside of your price range, too.

Well, if you’re in the market for an appreciating asset, like a stock, a house, or a business, then you should have keep your eyes peeled with the same amount of passion you dedicated to studying slightly rusty Camaros. (And for the record, I’m afraid, dear, that designer handbags are not an appreciating asset, even if you can get your money back selling it on ebay.)

With that in mind, if you’re looking to invest in real estate, you need to be paying attention to what’s going on in your area. “For Sale” signs should make your head turn and pique your interest. The “Homes For Sale” freebie at the supermarket should be on your coffee table (or, perhaps, the bathroom, if that’s your preferred learning spot). And you should already know what you can afford, both in terms of what the banks think you can afford and what you can actually cover if you quit your daily Starbucks habit and cook at home more.

Rule #2: You Are Not Allowed to Fall in Love

Philosophers, Paul of Tarsus, and the work of Michael Bolton are all probably coming to mind now. I’ll wait while you find “When a Man Loves a Woman” on your iPod. Go ahead, it’s ok. Your headphones are on. No one will know.

Ready? Well, before I lose you to the tear-inducing bridge, please re-read Rule #2. You Are Not Allowed to Fall in Love.

It doesn’t matter what the counter tops look like. It only matters that you can rent it profitably.

It doesn’t matter what the interest rate is. It only matters that you can make money on the deal.

It doesn’t matter how many places you’ve looked at before, after, or dreamt about. It only matters that a beneficial deal can be forged.

It doesn’t matter who you’re buying from, what the floors look like, how much the place costs, what your mother-in-law thinks, whether the air conditioner works, why the gutter leaks, or how much you love the oak tree in the front yard.

It doesn’t matter that you’re proud of the home. It doesn’t matter that the backyard is perfect for Fido. It doesn’t matter that the address matches the last four digits of your phone number. It doesn’t even matter that you can or can’t afford it.

If there’s money to be made at low risk, buy it. If there’s money to be made at high risk, but you can stomach it, buy it. If there’s money to be made at a return you can’t earn from somewhere else, definitely buy it. Now.

If you want to buy it for any other reason, don’t. This is an investment. It is weighed by one factor, and one factor alone: profitability. If you aren’t making money on the deal, then you’re being an idiot.

Now I’m going to give you one exception to this rule. You can buy whatever house you want to if you’re living in it yourself. But, remember: your primary residence is not an investment. You’ll make money on it, yes. It will be the single biggest purchase you make for consumption, yes. It’s a great tax write-off, yes. But, like your vintage Camaro, you’re buying it because you love it. You’re buying it based on emotion. It produces no income and is not purchased with value in mind. Any value judgment you place on the home’s future value is irrelevant. That is nothing more than your rationalization for spending the resources.

Buying the biggest home you can afford is not a wise investment. It’s showing off. (Doing so is perfectly acceptable… just don’t lie to yourself about it.)
Allow emotion to influence your investments, and you’ll lose your shirt.

Rule #3: Ask For More

Would you rather have an income property worth $1 million dollars (US), free and clear, rented, and producing income?

Or would you rather have $1 million dollars in cash?

If you want the house, I’m glad you’re interested in real estate investing. Keep reading.

If you want the cash, congratulations, because cash is king.

If you said “it depends”, you’re right. Maybe there’s some strange circumstance that makes the income property incredibly attractive. Perhaps it’s throwing off an abnormal amount of cash, for instance, and the appraised value is grossly understated as a result. By the way, how’s that economics degree working out for you in the job market?

But the simple answer is cash. All other variables being equal (in this case, the appraised price being accurate), it is always cash. With $1 million in cash, you could buy a house free and clear that appraises for $1.1 million. You might even find a motivated seller of a home worth $1.2 million that will sell for $1 million in cash. Or you could buy 5 homes that appraise for $1.1 million for $1 million dollars each (negotiating for the discount) with 20% down.

Buy 5 at a 10% discount as I’ve suggested, and you’ve immediately turned that million bucks into 1.5 million. That’s a 50% return in only a few months, boys and girls.

Keep those comments and questions coming…

I have a motivated seller on a mixed-use duplex in an urban area in California. The two units are actually connected on the interior (picture one of those shared hotel room situations) but the place is legally zoned as a two units. The place is on a busy street with the front unit easily used as commercial space. The rear unit is away from the street and accessible through a side entrance with porch (it’s tasteful). There is also a two car detached garage. The place has been remodeled and has new cabinets, flooring, dual-pane windows, etc.

Basically, it’s a pretty fair rental property. The schools are mediocre in that area and the place is literally on the proverbial tracks. The “busy street” the property is on is more or less the dividing line between the city’s bourgeois and not-so-blessed. It’s in a dynamic area overall, however, and all of the economic indicators of the area are favorable. It’s in the San Francisco Bay Area, after all. I’d have no problem renting the residential space in less than a week. The commercial space might not be quite so easy, but I’m by no means uncomfortable with the idea of marketing and selling that space.

I have an appraisal in hand that shows a value of $750K. Yes, I know. Property values in California are obscene. But it’s not real money — yet. This is just paper money for now. And it’s in US dollars, so it’s depreciating by the minute. :-)

There’s a first mortgage of a little less than $500K and an investment by the owner (well, not quite, there’s a partnership currently, but for the purposes of this discussion) of about $150K in cash. The place is in danger of foreclosure; I actually got the call from the lien holder on the second, who is trying to find a buyer who can put together a package of at least $650K — for obvious reasons. If the bank forecloses, he plays second fiddle to the bank that hold the first mortgage. That lien is in pole position, and a sales price of $500K would wipe out the entire investment for him. I happen to know the gentlemen personally, and that literally represents a decade of thrifty living.

Ok. So in a sane market, this should be simple. If the place appraises for $750K, then the place should be able to fetch $700K — enough to save everyone’s shirt and feed a couple of real estate agents for a week or six.

But this isn’t a sane market. It’s hard to get loans, buyers with cash have it because they’re uber-conservative and have been for years (really, folks, how long do you have to sit on the sidelines before you’re ready to buy? I’ve met plenty of 45 year olds who have lived in the same area since college and still aren’t “ready”!), and the nature of the market makes the tenuous even more hesitant. Investors like me are in a holding pattern. And people are panicking, struggling with the plight of becoming an accidental landlord, selling at a loss, or simply remaining stopped in their tracks like a deer in the headlights as their bills mount.

Basically, it sucks to be in real estate right now. But you knew that. Your shoe-shiner told you, right? (know the allusion?)

Which begs the million dollar question (almost literally): can this deal be salvaged?

Let’s crunch the numbers.

$650K at 6.5% interest on a 30 year amortization schedule is $4108 per month. I think I can rent the place for $3600 per month. That’s a bad deal at first glance, because we haven’t even figured in taxes and insurance yet.

Property taxes at 1% with a 750K purchase price would be $7500 per year. There are some additional county fees hiding in the fine print, so let’s call that a nicely divisible (by 12) $7800.

I can probably get insurance down to $1500 or so if I opt for high deductibles, but let’s call it $1800 for our purposes here.

So the monthly cost for taxes and insurance is $800. That’s an awful lot of negative cash flow, especially for the thankless job of being a landlord. (Don’t try to screw your landlord, dammit. He’s a nice guy. And he probably works harder than you.)

No deal.

But wait, we have a motivated seller!

Ok, so what would make it worth it?

6 Ways to Improve Value on a Real Estate Investment

1. A higher monthly cash flow. More rent? Not likely.
2. Cash up front to cover the monthly shortfall until the market recovers and the property can sell at a profit. Be careful with this. It’s dangerously close to depending on a bigger fool. This depends directly on factors outside of your control like availability of credit, public sentiment towards real estate as an investing vehicle, etc.
3. Cash up front to cover the monthly shortfall until the rental market price increases enough to yield zero cash flow, i.e., monthly break-even. This is ultimately a key factor (some would say “the” factor) in determining value, so if these numbers work, you’re in a good spot.
4. A lower purchase price. ’nuff said.
5. A lower monthly payment. Lower interest than 6.5% on a commercial note with the words “credit crunch” still on everyone’s lips?
6. A significant down payment. If I had six figures lying around, I wouldn’t be working so hard. Anyone need some software development services? Oh, and how are those ads looking?

So Are We Making a Deal or Not?

Well, let’s look at our options. #1 is out. The place has already been upgraded, and the normal method for improving cash flow in my arsenal, a lease-option agreement, is probably not going to happen because it’s a mixed-use duplex.

#6 is out. By the way, you don’t have an iPod or Playstation you can sell, do you? ;-)

I’d like to be a hero, so let’s try to work with a purchase price of $650K with no agent commission fees. So for the purposes of this discussion, #4 is out.

#2 and #3 are worthy of consideration because we have $100K in equity (on paper, at least) to work with. We’ll get to that in a minute.

#5 seems insurmountable, but remember that we have a motivated seller who already has $150K floating out there, and right now it’s keeping him awake at night. If we can turn a sour deal good and restore his confidence, we might have some room to work there.

The Nasty Math First

Let’s look at our monthly cash flow issue. We’re looking at roughly $5K per month in expenses (remember to include a little padding room — one month of vacancy in three years will eat that up in one shot), so that’s $1500 a month short. That’s $18K per year, or $54K over three years. Add in the first month’s payment, and we’re looking at ~$60K.

But that’s the future value of money. We’re getting cash up front. Done any calculus lately? (Seriously. Newton showed that compound interest calculations required iteration, which is taught in first-year calculus as Newton’s Method. Check out the first problem in the review questions — it’s exactly what we’re talking about.)

This is actually a lot more complicated than that, because the amount of cash we need is actually less than $60K. We need an amount, X, that, when we stick it in a savings account (say, an effective 1.2% APR, or .10% per month), and withdraw $1500 per month, drops to exactly zero after 36 months.

You catch all that? Well, if your calculus is rusty, you can use a financial calculator to do it. The answer is $53,013.53. So we need $53K at closing to stay afloat for 36 months, assuming no changes in the rental rate during that time frame.

Now For that Investing Part

First off, are we making money on the purchase? Is this property going to appraise — and, more importantly, sell — for $750K in three years?

Well, let’s give that appraisal the benefit of the doubt. Let’s average it with our [effective] purchase price of $650K, giving us a cost basis of $700K.

Let’s assume that both our rental rate and our appreciation rate (yes, I said it!) both roughly keep pace with inflation. Given our base price of $700K, in 36 months, with an appreciation rate of only 2.5%, the property value will be $753,823. The rental rate of $3600 will have grown to 3877.

It looks like holding this property long term is not a viable option, because servicing $650K in debt will still cost more than the monthly income in three years.

So, we’ll sell it in three years for $754K. After sales commissions, we’ll net around $710K.

Yawn. You Should’ve Broken This Up Into a Series of Blog Posts.

Yes, you’re right, but I have a nasty habit of never finishing those multi-part articles unless people ask for them. And you know how you people are with the comment stinginess.

Right, so we’ll make $60K on our investment in three years. That’s good.

We now just need to structure the deal so that (a) we can get a bank to finance it, and (b) we get our $53K at closing.

With an appraisal in hand at 750K, I should be able, with lots of documentation, and perhaps some sexual favors, to get a 90% LTV loan. That’s a note of $675000, which is not much more than the $650K I used to calculate the monthly payment above. So far so good.

Now is where the creativity comes in. I don’t have the $75K or so needed to deposit into escrow. But the seller does. So, he’ll need to gift the $75K to me, agree to pay all closing costs in the purchase agreement, and I’ll deposit the $75K into escrow.

This is a taxable event, because the IRS has a tax-free gift limit. I believe it’s $11K per annum, but I’m not an accountant. If we draw up a loan contract, however, then it is not a gift. This is a bit of an ethical quandary, because we have to tell the lender that this is a gift, yet tell the IRS that it’s a loan.

In reality, our purchase price is $650K, though, so I’m owed $25K even after (if) the loan funds. I also need another $28K to meet my 36 months of cash flow requirement, so there’s more work to be done.

The Proposal, At Last

On paper, the purchase price is $750k.

I get a new 90% LTV loan at $675K. The seller agrees to carry back the 10% on the loan docs with a zero percent interest rate and a balloon payment in 2273. I’ll owe him that money back when the Enterprise leaves Spacedock. If that is not acceptable to the lender, then I’ll create a new lien on another one of my properties for $75K and the seller will loan me that $75K in cash with the same loan terms. Perfectly legal and completely above-board. He can gift me $11K per year for the next 7 years and it all goes away.

The seller now has $250K in cash. He has $225K invested at this point ($150K noted above + $75K he just “loaned” to me), so $25K of that money is mine outright. I’ve come up with no dollars out of pocket at this point and I have a note of $675K on a house I paid $650 for.

Now, I still need that cash flow money, so we need to find ~30K (actually 28K) from somewhere. We’ll, I just saved the seller’s shirt, right? So have him loan me the shortfall. I like nice round numbers, so let’s have him loan me $50K at the rate of inflation with a single balloon payment in 36 months. If everything works out as I’ve outlined, then I get an extra $22K right now in profit plus $7K when I sell in three years ($60K in profit less the $50K I need to payback to the seller less interest.

We just moved around almost a million bucks to make thirty grand, but hey, I started with zero dollars and a good credit score.

Ok, so where do we stand?

Give me the summary

• I have $100K in notes with the seller at zero percent interest. The terms of the note effectively mean I never have to pay it back. This is good, because the effective purchase price is $650K, not $750K, and even though we moved around a lot of greenbacks, that never actually represented a change in ownership or value except to help qualify for the new loan. That $100K in debt goes away over the next ten years as he forgives a portion of the loan every year in accordance with IRS limitations.
• I have $50K I owe the seller that I actually have to pay back in three years. The balloon payment at 2% interest works out to $53060. Love that Newtonian math.
• I have a property worth $700,000 that I actually paid $650K for today.
• If we see any appreciation [above inflation] in the next three years at all, I’ll make out like a bandit. Remember that my only investment is time in the form of packaging this deal and managing the property. Now, I make a good wage per hour, but based wholly on the amount of dollars I put in out of pocket, the return on investment is infinite. The rate of return is based on the dollars made divided by the dollars invested. Since the denominator (the number we are dividing by) is really really small (because you can’t divide by zero in arithmetic), the rate of return is really really big. This is child’s play for you if you know what an asymptote is. ;-)

And we’re done.

So, is this a good deal? Would you do it?

Surprise: Toxic Mortgages are the Best

The most pertinent point in the article, in my opinion, is this. Note the bit about “good [financial] self-control”:

The option to pay less than the minimum monthly interest owed on the loan is valuable for people with good self-control whose income fluctuates a lot. They can pay just a little in lean months and catch up in fat months. It’s good for lenders, too, because they don’t have to foreclose on people who fall behind, which is an expensive process. People with steady incomes don’t need this feature, but having it doesn’t hurt them.

There’s another point, too, which I use to rationalize my own usage of Option ARM (with potential negative amortization) loans. If your appreciation rate is equal to or greaer than the the negative amortization amount, you’re still in the clear. In fact, you’ve now used a good method for obtaining leverage (using other people’s money to make money), and made it an obscenely amazing one. The risk goes up dramatically, of course, but if you’ve got that “financial self-control” magic down, you can handle the juggling act.

(And, don’t forget the the tax benefits of holding real property.)

The answer is, yes, I’m worried. Times have been pretty tough for about a year, and the higher interest payments are making the frugal side of me cringe. It’s a pretty scary thought to realize that I’m losing more every month on paper than I’ve ever made working a day job. And then some.

Yes, that’s right. I’ve done the math, and it isn’t pretty.

But here’s a little reminder.

You didn’t get into this game because you were hoping to flip your place in three months and make a quick profit. Did you? Then well, you might be one of those “accidental landlords”. In which case, start asking questions. You’ll need the help. And by the way, that strategy, at best, is akin to looking for a new job with a higher salary. At worst, just go to Vegas. You’ll lose less.

No, you got into this game because you believe in the long term value of leverage. You looked at your mom’s house that was purchased back in 1977 for half of what you make in a year and is now bigger than her pension plan, and thought, “hey, if she just bought two, I could’ve gone to an Ivy League!”

Well, I’m here to tell you something that a fellow real estate investor said to me a couple of years back: the hardest part is holding on to it. I’m pretty sure he was talking about times like this. When two tenants call at the same time, when two more are late on their rent, when you just gave up your day job, and when you’ve already tapped some of your reserve credit lines. When you can’t open a newspaper without the term “housing meltdown” jump out at you and a bulletin about some bank you owe a million bucks to that might be going down the tubes. And you’re reading People Magazine, not the Wall Street Journal!

Don’t fret. This too shall pass. Keep at it, work your business, and don’t sweat the hundreds of thousands of dollars you just “lost”. You never had it in the first place anyway. It’s not real money until it changes your lifestyle.

This is a long term game. Stay the course, and five years from now, you’ll be quietly laughing at the guys who swore off real estate forever and are bragging about the $35K tucked away in a 401K.

I know it’s scary. But the fundamentals haven’t changed. If it was a good investment at $600K, it’s a great one at $500K. Make your payments, restructure where you can, and remember that, even worst case, inflation will save you. It only hurts in the short term.

“Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming out in the fourth quarter of 2006,” says Lawrence Yun, a senior economist with NAR. “Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends in many local markets.”

Don’t forget, however, that the National Association of Realtors, who sponsored the data analysis, has a vested interest in generating and maintaining consumer confidence in real estate.

Of course, if you’re reading this, chances are I’m preaching to the choir, in which case any real estate related news that doesn’t have “meltdown” in the title is, I’m certain, quite welcome. :-)

Now, as a landlord, there are really two things I care about. These are summed up nicely in the following excerpt that I regularly use in my rental advertisements:

I care about two things. Every landlord does, despite the fact that some of them can be old, cranky, and get hung up on details.

Will you pay your rent on time?
and
Will you take care of the place?

Demonstrate these two things and we’re in good shape. Usually that means a paycheck stub and a glowing reference from your last landlord. A high credit score never hurts, either, but a lower one is not necessarily a deal breaker.

In terms of weight, I usually place the highest value on the previous landlord’s recommendation, merely glance at the paycheck stub (”is it enough” is a pretty quick arithmetic computation), and spend 5-10 minutes scanning the credit report.

With regard to credit, it can simplify things in your head if you simply pick a number, e.g., 630, and stick to it as your mid-score baseline, but remember that people are human. I’ve had phenomenal tenants that never called, always paid their rent, and left the place in good condition after years of tenancy with a sub-600 FICO. It’s important to take a look at why the score is low. Ask them. A bankruptcy two years ago because of a failed business is probably fine if they’ve spent the last 18 months cleaning up their act. Late payments over the last year might be ok if they are forthcoming about a need to downsize and renting from you will represent a substantial cost savings in their monthly budget.  And I shudder to think about the FICO score repercussions for anyone who endures a life-altering injury (think bad car accident) without good medical insurance. Use your schmoozing techniques to get the low-down and follow your gut. People are more than their credit scores.

That being said, credit scores, generally speaking, are a good barometer of responsibility. Higher scores do usually indicate someone who minds the details, and that usually includes not only the validity of their personal checks, but the cleanliness of their home and the orderliness of their closet, too. Now if I could work a credit check into the evaluation process when I ask a pretty girl out on a date… ;-)

That being said, a slightly lower credit score is not necessarily a bad thing. Aside from the examples I’ve noted above — all of which represent actual tenants I’ve worked with for years, incidentally — there’s another, slightly evil reason for considering your sub-excellent applicants.

It’s no secret that good credit is an incredibly valuable tool for building wealth, is it? Borrow at 5%, lend at 10%, repeat a million times, get rich. That’s called leverage, and it’s the principle that makes real estate investing a strategic vehicle for moving up the socioeconomic ladder.

So what can one do to sabotage their own wealth-building abilities? Not pay their bills on time. Blow off creditors. Live beyond their means. Basically, cultivate poor financial habits that tend to manifest themselves in poor credit scores.

But guess what? Folks who sabotage their wealth building abilities actually make pretty good tenants. Sure, the frugal fellow with a 730 credit score that makes $100K a year is a great tenant, but he’ll leave you when he buys his own place. The family of four who is barely making it and submits a 600 will stick with you for years, until something substantial (and usually non-financial) occurs that changes their situation, like a pet that dies, a child that goes off to college, or a divorce.

It is, perhaps, a bit unfortunate, but these folks do have to live somewhere, and it may as well be in your house, which is a nice place to live and has a very responsive, friendly, and helpful landlord. (Right?) You’re providing a needed service. It’s just business. More than that, it’s good business.

One last point about credit scores. I always tell applicants to bring in their own copy. “If someone wants to spend the time forging 25 pages of credit history, I’m sure their diligent enough to pay their rent on time.” For what it’s worth, I’m pretty sure I’ve never seen a forgery in any of the 400-500 credit reports I’ve seen.

While we’re talking about applicant evaluation, there is one red flag I insist on: they must have a checking account. If your tenant has no checking account, forget it. This is a huge sign of irresponsibility, and if you move forward, you will spend the entire lease duration visiting your property twice a month. You will get payments in cash, it’s true, but they will always be late, never be complete, and, in general, be an enormous pain in the arse. Even if you don’t lose money in the from of cash flow, you will spend so much time retrieving it that you’ll consider getting out of the landlord game altogether. The only exception I’ve ever seen to this rule is if you happen to live on property grounds (e.g., duplex or in-law unit). But this isn’t really an exception — it’s just that the legwork required is much cheaper in terms of time and energy.

With housemates, there’s an additional, culture-based factor to consider. Ideally, I would suggest having a drink together before deciding to live together, because pet-peeve compatibility is a must. If you can’t stand dishes in the sink, but your housemate-to-be likes to do dishes in the morning, that needs to be considered. You have much more discretion here than in a landlord-tenant situation, although the rules do vary by state-to-state. I haven’t discussed this with an attorney in the last several years (it’s been a long time since I’ve had a housemate that wasn’t a friend I knew previously), but I’m pretty sure that, even in California, the tenancy laws pretty much get thrown out the window. I’m not an attorney, however, so please check with your legal counsel.

So, for my aforementioned friend, have your roommate-to-be bring in her own credit report, call her last landlord or roommate (both is even better), and take her out for a drink (go dutch). Do not flirt with her, aside from the necessary schmoozing. Or, if you do, tell her in the same breath that she’s going to dinner with you and is not going to be your housemate. :-)

Ask questions about house guests and current boyfriends, because a 5-night-a-week guest is a whole different ball game. Ask about if she’s a home body or always out on the town. Ask about alarm clocks and when they go off. Find out about eating habits and if she stresses over sharing condiments or milk. Check out her shoes and her car, because both are usually a reflection of her attention to detail.

Then compare against your own habits and make the call.

To anyone going through this process, remember that it is better to make a good decision at the beginning of the tenancy, because you’ll live with that decision for some time to come. Good luck!

The strangest and most difficult part is simply remaking and rethinking old habits. There’s an extraordinary amount of peripheral tasks I take care of with face-to-face meetings, but the truth of the matter is that stacking all of these in person contacts into a week once a quarter isn’t that bad of a plan, whether you’re talking about landlord duties, network management, or custom web development. This is especially true when your relationships are strong, as [I believe] most of mine are, because I’ve been providing good value over an extended duration for them. It also definitely helps to have some trusted friends on the ground in a pinch… I’ve done this for several months at a time in the past while fulfilling IT contracts overseas, but we’ll see how well this works over the long haul.

In thinking about your own life, work, and business, if you were to take yourself out of your office everyday from 8-5 (or whatever), how much of that work could actually be done elsewhere? Sure, there are conveniences around being present, but how many of these are actually more effcient with an in-person interaction? If you work in Information Technology, like me, you need some lab boxes somewhere to do work on, for instance, and the setup required to have these machines be virtual instead of physical requires some planning.

A couple of summers back, I had a case where I actually showed a house to a prospective tenant over the phone. I had a liaison physically come and open the door for security reasons, then I proceeded to do a walkthrough over the phone. We handled all of the negotiations right there, on the spot, and took care of the contract specifics and payment via email, fax, and good ol’ snail-mail. Now, that isn’t something I’d really care to repeat, because I can sell better in person than any agent I’ve ever worked with, but just because you do something well doesn’t mean that delegation isn’t possible.

I did make a personal visit to my new tenants the week they moved in when I had time several weeks later, however. Schmoozing isn’t dead. I’m just challenging myself — and you — to consider your options for untethering yourself from an office, city, or even a country.

There’s another angle to this, too, of course. If you can handle it remotely, you can also probably outsource it. I’m a long way from a 4-Hour Work Week, but it’s definitely a pleasant ambition.

I know, I know, all this talk about good business practices, and the supposed “really smart guy” doesn’t even take care of the simplest of civic duties.

Ahem. I prefer to look at it as a matter of priorities — I have so much to handle every day that often the administrative overhead just falls by the wayside. So I collect receipts, stuff them in a cabinet, and then sort them all out at the end of the year. Er. The end of next year. Or something like that. But anyway. That’s not the point of this post.

The point is that the US tax system rewards investment in business activities. In some ways, this makes sense — I fed around 5 people from my operations that year. (It was a lot more than that in terms of the quantity of vendors/contractors, but I wasn’t the sole provider for any one of them. In other words, I worked with, say, 25 vendors for one-fifth of the year.) I also pumped more money into the economy than I could have ever accomplished by simply working my day job and paying a third of it to Uncle Sam as income tax.

So, while this post is quite short as a primer on how to pay zero taxes (It was admittedly linkbait, however if you want to see that, leave a comment and ask me for it!), I thought I’d post the pleasing portion of my TurboTax summary page.

Bet you’ve never seen a summary that looks like this:

It’s mostly from real estate depreciation, which is a non-cash write off.  That means there are “passive losses” from my real estate management business that aren’t actually paid out of pocket. It’s actually tax deferral, not tax avoidance, because if I ever actually want all this work I’m doing to improve my lifestyle someday, I’ll be subject to capital gains taxes.

Oh, and don’t worry, I’m not really freeloading the system. I paid more in local, county, and state taxes in 2005 than Barry Bonds spent on steroids. (Believe me, I was personally astonished at all the numbers when I went through my calculations. I spent how much on what?!)

Still, there’s probably an argument that this is unfair here somewhere… but that’s a topic for another day and another blog. Probably one focused on politics. 

• Summers are always a better time to market a home. This is true for selling or leasing. So, as a buyer or renter, it’s probably a better idea to look for a place in the late autumn or winter. It makes sense, psychologically — no one wants to move around Thanksgiving or Christmas (or the equivalent winter celebration for your faith/country of origin)!
• The Sacramento market is flush with individuals and families down on their luck that need a home. I received over two dozen calls on a place I had on the market for a total of 36 hours. Of those two dozen, more than 50% of the callers were former owners. One or two were natural, i.e., divorce or other life-changing events, but most of them were the direct results of the housing crash. I didn’t ask a lot of questions about why — whether they chose to let the bank foreclose on negative equity loans (where the owner owes substantially more than the market value of the property) or it was simply a case where adjustable rate mortgages suffered substantial increases in interest rates and payments. (I’m not immune to this, either — it’s been a tough couple of years on that front.) In either case, the fact that there are so many displaced families is directly indicative of the opportunity for short sales, makes prospective tenants particularly keen on lease-option deals (where the owner gives the tenant an option to purchase in exchange for a hefty up-front fee, extra monthly cash flow, or some combination thereof), and may mean that the hemoraging the housing market has been doing has progressed beyond the deepest of the valleys on is on it’s way back up, however slow and uninteresting the creep (inflation + 1% is fine for us long term investors because of leverage).
• Fair, honest, and amicable landlords are really hard to come by. Folks who have just endured financial wounds are even more grateful to work with well-meaning and up front property managers.
• Speaking of good landlording, if a potential tenant has 10 years of perfect credit history followed by a six month black hole and a bankruptcy, doesn’t that mean they’re back on their feet now? Long histories of late payments are worrisome. Short-term financial tumult that has passed deserves a closer look. Just remember that “no checking account” definitely means “no deal”. What responsible person doesn’t have a checking account? (It is interesting that cash-only finances are now indicative of lower socioeconomics, isn’t it? As a landlord, it’s simply a question of cost. I have to charge more if I’m constantly chasing down a cash payment, because it costs quite a bit more in terms of time, effort, and accounting.)
• The rebound in the rental market means that we’re going to see inflationary pressures coming from housing. Not only are we going to see price pressure on energy and food, but it’s going to show up more directly in housing in the next few quarters. 25 calls in two days means I didn’t charge enough (despite the fact that it’s a minor increase over the last contract on that particular property), and that means I can raise rents across the board. And believe me, seeing as how my rising mortgage payments have been forcing me to work a lot harder at the day jobs for the last two years, it’s something that the business requires. Landlords across the board are anxious to raise rents because we need to do it just to stay afloat, and the increase in displaced owners means the market will bear it.
• The fact that I’m noticing a hotter rental market and the accompanying inflationary period probably means that the broader U.S. market as a whole is experiencing the same thing. That means that more people will be asking for raises, upward pressure on interest rates will continue, and there’s little reprieve in sight for your revolving credit card debt. Sorry. :-\

Banks are in business to loan money. Period. Their business model is built upon borrowing money at a low interest rate and loaning it out at a higher rate. So they want to loan money to you. Don’t forget that.

Now, before I talk about presenting yourself favorably, I need to make something very clear: make sure you can afford it. Flying by the seat of your pants is ok (I do it all the time, and have fallen back on credit cards temporarily on many occasions to make ends meet), but at the end of the day, if you cannot repay the money borrowed, then don’t borrow it. Teaser rates be darned, this is business. You owe it to yourself, your karma, and the entity your actually borrowing from (even if a faceless corporation) to do this right.

Have a plan for repayment. Faith can be involved, but make sure you can handle a negative turn of events before moving forward. Expect the best, but plan for breaks in the road.

Now that I’ve warned let’s talk about dealing with banks. Tell yourself you won’t accept “no” for an answer and remember these key points when dealing with financial insitutions:

1. Everyone is a Vice President. Just because you’re talking to a veep doesn’t mean he or she has any ability to alter the outcome of your transaction.
2. Everyone at the bottom says no. They’re trained to do that. If you’re not sure where the person you’re talking to sits on the totem pole, refer to #1. Then ask if they have the authority to say yes. No? Then how about you talk to someone who does.
3. Most people at banks don’t think like entrepreneurs. They are run by people who think a 6.5% return on their money is good (that’s what the 30 year fixed mortgage rate is these days, right?). I have an anecdote for this one, too. Once, during the application process on a new real estate purchase with World Savings, the loan agent for World Savings insisted that she couldn’t do the loan because I already owed World Savings over a million dollars on other investment property. I asked if any of the payments had ever been late, knowing the answer was no. When she confirmed this, I replied, “well, then, you should be delighted to loan me more money, because you’re assured that I’ll make prompt payments!” The loan was approved the next day.
4. Stick to gross numbers. I don’t make any money from real estate; I never have. All of my “wealth” is on paper. In fact, I would have lived better over the last decade if I just bought nice cars and partied a lot instead of playing the landlord game. But no matter how cash poor you are, put your best foot forward. When I bought my first new car five years ago, I put down only my W-2 income, asking the finance person I was dealing with if I should include “other income”. He incorrectly told me no, then ran my credit and discovered that my monthly liabilities were 6 times what I earned on my paycheck. “How do you live?” he asked, noting that I apparently had been paying my bills on time for many years. I then asked for a new form and included all of my gross figures without documenting any of my expenses. They couldn’t wait to give me the keys. Again, I knew I could make the payments — it was just a matter of presenting the data properly. Lenders do their due diligence on your liabilities anyway, so there’s no need to volunteer the information. Most likely, you’ll just end up getting those obligations counted twice.
5. If you really are credit-worthy (meaning you kept reading after I talked about karma, above), then someone, somewhere, will loan you money. The only question is if it’s still profitable for you to borrow. Keep pushing those VPs you’re talking to and get to the next level. Someone will say yes. Try hanging up and calling back (or going to a different branch if you’re an in-person kinda guy/gal) if all else fails — you’ll get someone new, and with a little luck they’ll be that much more helpful. And don’t forget that there are literally thousands of smaller financial institutions eager for new customers. Citibank and BankAmerica aren’t the only games in town (and, indeed, in my experience, they are the most conservative lenders).

I was just contemplating subjects to write about and thought about applauding the World Sunlight Map for simply being a marvel of engineering. (That’s where this nifty Mercator map to the left came from.) Could I do it? Yes. Would I ever bother? Heck no. So the folks over at die.net deserve a huge pat on the back for making the web a cooler place.

Then I thought about discussing the recent news that Google is slapping the AdSense arbitrage folks around and squashing the Made-for-Adsense bonanza. But lots of other people have already mentioned the topic and it’s old news at this point. I’ve never made any significant revenue using this business strategy, personally, so I’m not too passionate on the subject anyway. Boooooring.

So I guess I’m left with talking about some core business stuff. I was pondering my recent experimentation with FuelMyBlog and noticing that google analytics reported that I received only a half dozen or so click throughs from FMB in the last couple of days (it was actually 7, but I’m not sure if one or two of those CTRs were me clicking my own smiling face :-)) . I didn’t get too excited about those numbers, despite the fact that most of them were new readers and the not-too-shabby coincidence that my RSS Feed count went up by about the same amount in the last 24 hours.

The business lesson here, aside from “always be grateful, even for small steps” — or whatever form of that cliche you prefer — is that growth snowballs. (Oh, and FuelMyBlog is worth it, in by book, btw.)

Getting started in business — any business — is hard. It takes lots of working for free to get the ball rolling even a tiny amount. Once you push with all your might for days and days with seemingly no reward, you only, then, start to get some payback. And it’s still minimal. It won’t feel worth it. You have to have an extraordinary amount of passion and/or vision. Usually an entrepreneur has both, because one tends to reinforce the other synergistically.

One of the business books I read as a teenager (yes, I was a geek even before it was chic!) stated a rule that I still remember (albeit paraphrased after 15 years): When you start out in business, ten units of effort earn one unit of results. Later, however, one unit of effort will earn ten units of results. If you care, it was Wealth Without Risk by Charles Givens. I don’t wholeheartedly recommend the book, but it’s definitely better than Rich Dad, Poor Dad! (Post a comment and ask me for a real review of both if you’d like to see it.)

That one statement is definitely true, as my FuelMyBlog experience helps illustrate. At one point in the history of this blog, I cared so little about my number of readers that I didn’t even check. When I did start checking, I found I had only ten or so regular readers — and all of them, pretty much, were friends, both new and old. Getting 4-5 new readers in a single day back then would have been like striking gold. But adding a handful of new readers on to 100+ subscribers isn’t quite so earth shattering, now is it? Heck, I lose that many when I don’t post for three days. (Not that I don’t love y’all, please DO keep reading! And don’t hesitate to contact me and let me know what I should be babbling about if this banter isn’t suiting your taste.)

For bloggers and folks making their money (or trying to) on the web in particular, remember that the web is a network — and the ability to grow improves with every new node added. In some respects, getting your first ten customers (or regular readers) takes as much effort as the next 90.

I have a real estate investing anecdote as well. I bought my first house back in 1999. I got told no several times. I knew I could afford it — I was the thriftiest guy you’d ever seen. I drove a 12 year old car and was used to surviving on less than $1000 a month. The banks and mortgage people, however, just saw a 22 year old kid with eyes too big for his stomach. Getting that first mortgage and handling the subsequent landlord duties was definitely a whole lot of work without any reward. Changing locks at 6am before heading to my tech job at a startup was pretty brutal, not to mention the pain of getting acquainted with custom plumbing supply vendors on my lunch break. And boy, were those property tax bills scary!

The second time I applied for a mortgage, however, banks were lining up to give me money. I closed 4 new lines of credit in 60 days the second time around (that’s a good story, too, but you’ll just have to subscribe for that one ;-)). Some of it is learning the ropes — like giving the banks what they want in the format they desire, nothing more, nothing less. Some of it is simply that getting the ball rolling is the hard part — like having a track record of paying my mortgage on time, not to mention actually owning a screwdriver so I could change those locks. And some of it is due to the economies of scale — my on-paper net worth was higher, in this case, so banks looked at me as less of a risk.

The moral of my stories? Get started. Define your customer. Craft your product. Tell said customer about product.

Rinse. Lather. Repeat. Don’t worry about the rewards, because if you’ve laid your foundation well, the rewards will follow without question. You’ll look up one day, finally notice your profits (or your peers will) after solidifying your processes, and wonder how you got there.

Now, I’m a bit of a lazy guy when it comes to this sort of thing. I’d rather write TPS Reports every day than do construction work, for instance, but in the landlord game, I’ve painted more than my share of ceilings, installed dozens of venetian-style blinds and new doorknobs, and bought a lot more lightbulbs than the average, well, anybody.

The past couple of nights, for instance, I found myself changing some electric receptacles. There were also several hours whre I was on my hands and knees painting baseboards. It’s actually not bad work — painting doesn’t really count as construction, and it was, um, thrilling to swap out two outlets. I say “thrilling” because I didn’t bother to kill the circuit before swapping. Hey, you want to work at night, you got fly by the seat of your pants sometimes!

Now, I did save $700 or so by sacrificing sleep for the first half of this week, but I did this mostly because I was lazy and scatterbrained last week (I’m not sure that one or the other was causal) and the scheduling with my usual labor crew didn’t work out.

Actually, I was so scatterbrained I just forgot to make the calls. Don’t tell anyone, ok?

Part of me just wanted to do the work and save the money, I think. I didn’t really have the time, but I knew I could make the time if I had to. The funny thing is, the place in question is the house I’ve owned the longest, and so I was intimately familiar with the place — I think I painted it the last time it needed it, along with swapping the kitchen and laundry appliances, spackling every wall in the place three times over, installing new faucets, etc. There was a little bit of pride as I painted those baseboards, because my painting skills have gotten better, my patience has gotten less exhaustible, and, most of all, that house is one of my babies. There’s a lot of me in that place. It was lightly spiritual experience, like cooking or gardening can be.

There are some lessons here, as always.

1. Take pride in your product, its quality, and the value your efforts add. It shows throughout — your customers will believe often simply because you do, especially if you can passionately and articulately backup your product’s value.
2. Sometimes, through your own oversight, unforeseen circumstances, bad luck, or even your own hidden desire to get “back to basics” on occasion, you will end up doing the work that should be outsourced. As I alluded to above, you’ll end up taking out the trash sometimes.
3. Do get “back to basics” on occasion. The experience of choosing to work can be spiritual. It’s also a different type of gratification and is a catalyst for appreciation. Employees notice it, too, and respect you for it. 
4. (For landlords and do-it-yourself types) Don’t by that Home Depot Behr paint! How many professionals do you see in the paint section at Home Depot at 7:30 in the morning? Go on, check it out — Home Depot is a slammin’ busy place at that time of day, and there isn’t a single housewife in the whole crowd. Everyone’s got a tool belt and a sense of urgency. And the paint department is DEAD DEAD DEAD. Behr paint is thin, often requires a second coat, and doesn’t stick to your brush. Bleah! Don’t be penny-wise and pound foolish on your materials — get the good stuff and save yourself some work. Not to mention all of the paint spots on your carpet.
5. Don’t go overboard. As my post yesterday on the 5 ways to make money touched upon, you must get out of the time-for-money trade in order to actually build wealth. I basically billed myself out at $50 an hour over the last three days — not a shabby rate, but I was still an employee, even if it was for my own business. As a general rule, despite the four previous points, it would have been better to outsource that work and spent my time making rain (i.e., growing my business).

I hired a contractor that was obviously lacking in professionalism because of the price. He and his wife did gardening and painting, and I needed both of those services.

They quoted me about $500 for the job of painting two rooms, removing some ivy, a tree stump, some other miscellaneous pseudo-landscaping, etc. I was to provide the materials for the painting, which was no big deal in principle, but turned out to be horrible in practice.

At the end of the day, I believe that they were not skilled painters. It’s not just that I would have done a better job (that’s often true, but the reason we hire/outsource is because we can’t do it all ourselves), it’s that every vendor I’ve ever worked with would have done a better job. They used improper tools for the job, trying to get my high quality paint to work through an incredibly cheap (in every sense of the word) paint sprayer that required highly viscous paint. That means low-quality. So they used paint thinner to cheapen my paint and then had to do two coats. They didn’t tape off where the job ended and the paint should have been truncated, so the edges had to be re-done (which I personally took care of after the fact). Because they had to do the job twice (the second coat), they felt that they been cheated and thus cut corners everywhere else – bagging up the yard refuse, but then not removing it, for instance. Furthermore, they needed twice as much of my expensive paint as they should have (I buy the pricey stuff because it means only one coat – something I’ve learned first hand from experience), and the job ended up costing me as much as if I’d just picked out someone cold from the yellow pages. This is especially true if I count the time I had to spend in cleaning up after them. In fact, I think they might have stolen some of my paint to use on another job. They used that much, even considering the second coat.

At the time, I remember whining about the whole ordeal to a girl I was dating. She was very liberal and we were discussing the differing viewpoints between owners and workers, and while the discussion was far from heated, I actually proposed that some of her liberal ideas were maligned. For instance, I work harder than any tenant I’ve ever known. I’ve put in more hours, managed more tasks, and made more difficult decisions to get where I’m at than any of them. And while I am very liberal, both socially and even fiscally, I’m obviously pretty skeptical of tenant’s rights. I naturally treat my tenants as partners and equals, because I really believe that anyone can become a landlord if they really want to, and we’re just at different points in our lives and/or have made different decisions. Ditto with vendors.

At any rate, I recall using this particular vendor as an example of why it’s often (unfortunately) better to not give the underdog a chance. This couple was poor, just starting out, and it showed in their professionalism. As I complained about the work they did and how the experience would make me think twice about ever giving someone new in business an opportunity like that again, she asked, “then why did you pay them!?”

The answer was, “I have a business to run. I don’t have time to deal with managing and training my vendors. It’s simpler and easier to just do it myself or hire someone I know is competent.”

She repeated the question, intimating that I shouldn’t pay for a job that wasn’t finished correctly. I told her that the $250 I paid the vendor (half up front, half upon completion) at the close of the deal was cheaper than replacing the family room window. I told her that that $250 bought me peace of mind and ensured that my vendor nightmare would disappear into the past without repercussions. I told her that I didn’t have time to worry about being called (and called, and called, and called) by an angry contractor who might just decide to vandalize my rental property or harass my future tenants.

From my perspective, I went out of my way to give opportunity to someone who seemed likely to have the attitude that “the man is keeping me down” (and, as it turned out, did). Instead of going the extra mile in appreciation, let alone the thousands of dollars in follow-on work I’d have given them, they’re perception that I had money to burn (I didn’t, and was, in fact, so short of cash at the time that I had to take a cash advance on a credit card just to pay them) led them to screw me.

This is a horror story, but it’s a minor one. There are plenty of similar stories where tenants skip out on a portion of their rent, vendors don’t follow through, and clients don’t pay their bills. The important lesson is that these occurrences will happen, and the frequency will only grow as your business grows. No amount of screening will allow you to completely avoid these situations, so prepare for this type of thing. Establish a credit line or a substantial savings you can tap if things don’t go according to plan. Then do what you can to mitigate disasters when they occur. For me, this usually means additional work, sometimes hands-on, even when I’ve already paid someone else to handle it.

Finally, and perhaps most importantly, handling these unforeseen occurrences often means calling a favor, so always do your best to take the high road and protect your reputation. This means everything from your credit score (which is really just a quantitative measure of your ability to follow through on promises) to how you treat strangers. If you generally treat everyone with respect and patience, they’ll have it for you when the time comes.

Ultimately, business is about relationships, even if they’re just transactional relationships. Do everything you can to protect and foster them. This lesson is evident from both sides of this story — instead of earning a bread and butter customer, my vendor is, I’m sure, still floundering in obscurity at best. I, too, needed to leverage my reputation to make it through this tough time — borrowing to pay a vendor is a tough position for anyone to be in, but it’s significantly easier if you’ve earned the trust of the entity your borrowing from. Whether that trust is based on your Fico Score or 5 years of handshakes is irrelevant; it’s still trust.

Practice this in everyday life, and you might just be welcomed on the basketball court or get invited to concerts, even after you flake (see my last post if this allusion is confusing). Once in awhile is okay – relationships are based on the complete history of interactions, not just the last one.