17

ATTRACTING AND TRAINING LONG-TERM, LOW-MAINTENANCE TENANTS

What qualities are you looking for in a good tenant? When I ask investors in my seminar this question, here are the responses I get:

1.   A tenant who pays on time

2.   A tenant who takes care of the property

3.   A tenant who stays forever

4.   A tenant who never calls

Now turn the question around. What is a good tenant (one who will do the preceding) looking for in a house and in a landlord? You probably have rented a house or an apartment. What was important to you as a renter? Here is a partial list of what good tenants tell me they are looking for:

1.   A house in a safe neighborhood

2.   A house big enough to hold all our stuff

3.   A house that is clean and in good repair

4.   A landlord who will maintain the property

5.   Fair rent

6.   Fair rent raises

7.   Privacy

8.   A house that is not for sale

Is there anything on this list that you would find difficult to provide?

THE SECRET OF GETTING THE BEST TENANTS IN YOUR TOWN

The best tenants have their choice of houses to rent, because every landlord with a vacancy would love to meet them. The secret to attracting the best tenants in your town is simple. Most of the features listed here were covered in Chapter 2. This is no accident: Buy a house that will attract a superior tenant.

Buy a well-designed house in a good neighborhood. Good neighbors are what everyone wants, and tenants are no exception. If the neighbors on both sides and across the street take good care of their property and are good neighbors, then you can attract a tenant who values a good neighbor.

Avoid neighborhoods full of tenants. Most landlords do not maintain property well or manage tenants well, so you can spot the tenant-occupied houses. Buy in owner-occupied neighborhoods, and then keep your house looking as good as the neighbors’ houses.

Avoid houses with strange layouts. Some houses have been remodeled poorly, so you have to walk through one bedroom to get to another bedroom. These houses are hard to rent and hard to sell. Use your common sense to avoid houses that do not have a standard layout. You can buy them cheap, but in the long run, you will make less money.

Avoid houses on busy streets and on corner lots, and buy the best location you can afford. The best-located houses will appreciate the most and be easiest to rent.

BUY A HOUSE WITH ROOM FOR LOTS OF STUFF

Buy a house that is big enough for a family of four or five people to live in comfortably. Smaller families still appreciate the extra space, and it gives them room for guests or “new additions.”

Houses with three bedrooms and two bathrooms and a garage or a basement are more rentable than a smaller home. You want to rent to a tenant who owns a bunch of stuff and does not find moving fun.

A yard that is fenced or that can be fenced is a great asset. Most of my tenants have kids or pets or both. One reason they need a house instead of an apartment is the kids and pets. Kids and pets increase the chances that the renters will stay a long time.

UNDERSTANDING THE LAWS THAT APPLY TO LANDLORDING

There are local, state, and federal laws that affect you as a landlord. Your local laws, such as zoning regulations, determine what you can do with a property. A house zoned single-family residential may not be used to house a business. Other local laws may require you to maintain your property. Local code-enforcement departments generally enforce these laws.

Your state has laws that regulate the relationships between landlords and tenants. Get a copy of your state’s landlord-tenant statute that applies to single-family rentals. Your state statutes will be available in your public library, and now they are often available online. It is almost certain that there are separate statute sections that apply to multifamily, mobile home, and commercial rentals.

Read the part of the law that deals with single-family tenancies carefully. Learn what maintenance you are required to provide and what your tenant is required to do. Know how large a security deposit you can charge, where you have to hold it, and how you handle the return of the deposit when a tenant moves out of the house.

Learn what steps you need to take if a tenant refuses to pay their rent. Hopefully, you will not use this information often. In renting to hundreds of tenants, I have had to evict only six tenants.

More of my tenants have had problems, but by quickly addressing those problems, I avoided using the court system to evict. If you have a problem with a tenant, your recourse will be in your local courts, and the process is guided by your state statutes. By understanding and complying with your state statutes, you can avoid going to court, except in cases where the tenants refuse to negotiate.

Federal fair housing (antidiscrimination) laws apply to renting and selling houses. A copy can be found online by searching for the Fair Housing Act or, again, in your public library. Read the Fair Housing Act to learn how it affects you as a residential landlord. It prohibits discrimination in the sale or rental of a house based on race, color, religion, sex, familial status, or national origin and explains your obligations if you rent to someone with a significant handicap.

THE STEPS IN RENTING A HOUSE

Here are the steps that you take to attract, select, and rent to a good tenant.

1. Get the Property Clean and in Good Repair

Always get a house in good condition before you rent it. It’s a mistake to rent a dirty house or one that needs work. When you do, you will probably get a dirty tenant who will leave you with an even dirtier house that needs even more work. Tenants may promise to do work or clean, but they rarely do it.

How much does it cost to have a house professionally cleaned in your town? Typically, it is the equivalent of only a few days’ rent. Who makes the decision to rent a house? If you rent to a couple, the woman typically will be the decision maker, and women prefer a clean house (because they know who will have to clean it).

Spend the money to clean the whole house: windows, screens, closets, and cabinets. Touch up or paint the house as needed. Spruce up the yard, and make sure that the house looks good from the street. A house may be beautiful inside, but if it’s a dog from the street, no one is going to stop to look in the windows.

If a house rents for $1,500 a month, it costs you about $50 a day to let it sit empty. In addition, you probably are spending money on utilities and taking the time to keep the grass cut and talking to perspective tenants.

Anticipate vacancies, and move fast to clean and spruce up your property. If you can rent a house in a week instead of a month because you paid a housecleaner and a painter a little extra to work over the weekend, you are way ahead of the person who takes several weeks to paint and clean the house himself.

2. Introduce Yourself to the Neighbors

Knowing the neighbors keeps out bad tenants. When I buy a house that I intend to rent, I always introduce myself to the neighbors and give them my name and phone number. I tell them that if a tenant causes them any kind of problem, I want to hear from them and that I will do everything I can to take care of it. I want my tenants to be good neighbors, and I want good neighbors that are there to stay.

I then tell my prospective tenants that I know the neighbors and that they keep an eye on the house for me. A prospective tenant who was planning on sneaking several more roommates in or using the house for a business or an illegal purpose will not want to rent a house that is so well monitored. Such a person will leave and rent a different house.

3. Set the Rent and the Deposit

Before you begin to rent a house, write down the rent, the deposit, and the amount of income that a tenant would need to afford your house. Typically, a tenant can afford to pay between 30 and 40 percent of her income as rent. If they have other obligations, car payments, and so on, they may need more income. Some tenants will want to rent a house that they cannot afford. It is up to you to use good judgment and not allow potential tenants to obligate themselves to too much rent.

Setting the rent and deposit is not an exact science, and you can give yourself a range rather than an absolute number for a tenant’s income. Charge a security deposit that is an amount greater than a month’s rent. If it is the same as a month’s rent, tenants will assume that they can use it to pay the last month’s rent. The only money that helps you as a landlord is money you have left after the tenant moves out. The bigger the security deposit you have, the more the tenant will want it back, and the more cooperative that tenant will be.

Research your state tenant and landlord laws to see if there are restrictions on the amount of the security deposit you can charge. Most states allow a deposit of at least a month and a half’s rent, and many allow two months’ rent.

While you are better off with the biggest deposit you can charge, tenants will only pay so much. They will pay a larger deposit to get a better house at a fair rent. A bigger deposit will eliminate many financially marginal tenants. By charging a larger deposit, at least a month and a half’s rent, you can rent to a tenant who is financially stronger and is smart enough to pay a little higher deposit to get a better house.

Images

The figures shown here are just for illustration and you should adjust your criteria based on your market, and for other financial obligations that the tenants may have.

Look at both the quantity and quality of the income. Some tenants make too much money to rent your house. They can afford it easily, but they also can afford to buy, and, typically, they will buy and will only rent the house for a short time.

The quality of a tenant’s income with a new job or working in a new field is lower than a tenant with a longer-term job. Commission income is a lower quality than one paid by the hour or on salary. Ask potential tenants where they work and how long they have worked there. Ask for both their income and their immediate supervisor’s name and phone number. Verify what they tell you.

4. When the Rental Market Is Soft, Lower Your Rent, Not Your Standards

When the rental market is soft (there are many houses for rent and not many qualified tenants to rent them), rather than lowering your standards, reduce your rent to attract a quality tenant who recognizes a bargain. There are always some good tenants looking for a house. To attract them, you need a good house in a good neighborhood that is attractively priced. When you calculate the cost of letting your house sit empty for a month, it is a far better strategy to price your house on the low side of the market to begin with and to attract the best available tenant immediately rather than pricing it higher and waiting longer for a qualified tenant.

If a house rents for $1,400 a month and sits empty for a month before you rent it, it costs you $1,400 plus the cost of advertising and maintaining the house. Renting it the first week at $1,300 a month will make you more money and take less of your time. When you have an empty house, in addition to advertising and maintaining it, you have to answer the phone and interview prospective tenants. This takes a lot of your time. Otherwise, you could use the time to find another good deal.

Try to reduce the rent, not the deposit. Although the two move together, you don’t want to rent to someone who cannot afford your house. The best test of this is whether the potential tenants have money in the bank today.

5. Place a Sign on the Property

You get better-qualified tenants with a sign. You get people who want to rent in that neighborhood and maybe on that street, because they have friends or family in the area. Use a good-looking sign with your phone number in larger numbers. Put an information sheet showing the price and features of the house in a front window. Leave the blinds and drapes open so that prospective tenants can see the interior. Put a message on your voice mail stating the rent and deposit and availability, and if pets are welcome.

6. Advertise on the Internet and, If Necessary, in the Newspaper

The Internet is a constantly evolving way to attract potential tenants. Different sites and technology provide ways to reach the world. The downside is that you may get fifty or more responses, and replying to fifty people with questions takes a lot of time.

I’ve learned to use e-mail to sort the better prospects. By asking them questions via e-mail, I avoid trying to reach them by phone and the time that that would take. Questions like “How long do you want to rent for?” “How many people will live in the house?” and “What pets do you own?” can allow you to communicate with them quicker and you’ll have a written record of their responses.

Whether you advertise online or in the paper, clarify these important points: the rent, the cost to move in, the location, the size, and the condition of the property. Pictures sell. Study professional pictures of houses for sale and then mimic them.

7. Notify the Neighbors

Send the neighbors a short letter or postcard and tell them the rent amount in case they have friends looking for a place to live.

8. Arrange for Lawn Care During Vacancy

Keep the outside looking good. Try to use a neighborhood kid or local service to mow, and the worker(s) also will keep an eye on the house for you.

9. Answer Your E-mail and Phone

Some landlords use a dedicated cell phone for calls on ads. If you cannot answer it, put recorded information about the house and about how prospective tenants can contact you, either during office hours or at an open house that you have scheduled.

10. Showing the Property

Rather than meeting prospective tenants at the house, tell them to drive by the house, look in the windows if it is vacant, and then to give you a call back if they want to see the inside. If they have seen the outside and want the house, ask them to meet you to fill out an application and to leave a deposit. (I currently ask for a $100 deposit that I will refund if I don’t rent to them or that I will apply to the rent if I do rent to them.)

After you have met them and they have filled out an application and you like them, then you can meet them at the house or give them a key to the house to inspect it. If you give them a key, have them sign a receipt that says, “We agree not to occupy the house, to lock the house when we leave, that no one will smoke in the property, and that we will turn off any lights, water, etc., before leaving, that we will return the key within ____ hours, and we are responsible for any damage to the house.” Don’t worry about theft. If someone is going to steal something out of your house, they are not going to fill out an application first; they will just break into the house.

11. Holding Open Houses

An alternative is to hold an open house at the rental house at a certain time and invite all who are interested to meet you there. Pick a time that will work for most tenants. Between 4:30 and 6:00 p.m. is a good time for most. You can do this once a week or more often depending on the number of calls you get and how eager you are to rent the house. Put a note in the window of the house with the time and date. Bring applications and rental agreements with you. Come prepared to rent the house.

12. Have the Prospective Tenant Fill Out an Application

Once prospective tenants have seen a house and want it, have them fill out a rental application. Check with your local investor’s association or apartment owner’s association for locally used forms and rental contracts. Another source may be a local real estate attorney who hands out free forms to drum up business. Many forms are available online. (Professional Publishing LLC has both applications and residential rental contracts at a reasonable cost.)

If your application does not ask how long the prospective tenants intend to stay, you ask them, without giving them clues to the answer that you want. The right answer is “the rest of our lives,” but most tenants say one or two years. Obviously, two years is a better answer; I want people who will unpack and stay a while. The longer they stay the more money they make for me.

Ask prospective tenants for an application fee with their application. I ask for $100, which I refund if I refuse to rent them the house or apply to the security deposit if I rent to them. State laws vary on how much you can charge for application fees and security deposits. Get a copy of your state landlord-tenant statute and become knowledgeable about the sections that deal with residential leases.

13. Check Prospective Tenants’ References

Call the prospective tenants’ employer(s) to confirm employment and income, and call their current and immediate past landlords to ask whether they would rent to these tenants again. To make sure that you are really talking to the right person, confirm the facts that the tenants gave you. For example, the tenants may have stated that they had paid $1,000 a month rent and had lived in the previous property three years. Ask the landlord the amount of rent and how long the tenants have lived there. If it’s just a friend of the tenant instead of the landlord, he may not know the answers.

14. Interview the Tenants

Before you agree to rent prospective tenants a house, you want to spend some time with them and interview them. You want them to see you as a competent landlord who has rules and wants to rent his house to tenants who will take care of the house and be good neighbors.

Part of the interview is just getting to know them. Ask where they are from, where they went to school, how many kids they have, where their family lives, what activities their kids are involved in, why they like this house and this neighborhood, and so on.

Invite the entire family to the interview so that you can see how the parents interact with the kids. Well-adjusted kids squirm and want their parents’ attention. The way in which the parents handle their children shows you how the family interacts.

Always ask the kids, not the parents, what pets they have. Sometimes parents forget to list the pets on the application. The kids will tell you all about their pets.

This “small talk” will allow you to learn much more than what the prospective tenants listed on the application. You want to rent to real people who can answer these normal questions comfortably.

When you are interviewing potential tenants, ask them if they have had any credit problems. Most tenants will tell you if they do, because they assume that you are going to check.

Some new landlords are looking for the perfect tenant. Call other landlords in your town, and you will find some who want a tenant with-out children or pets, a nonsmoking, nondrinker, with a steady job and good credit.

Such tenants may be out there looking for a house, but they are few and far between. Most of my tenants have both kids and pets, and many have some credit problems. I like tenants with all three because they stay longer. They need me more than I need them. With a little training, they can become great tenants.

There are many honest, hardworking tenants looking for houses, but they are by no means perfect. Look for tenants who can look you in the eye and answer your direct questions. Watch for body language and how the spouse and kids react. Normal couples will both have questions. Questions are a good sign. Tenants who have no questions and are anxious to sign are desperate for a house. Keep talking to them until you find out why. If you don’t like the reason, don’t rent to them.

Look for signs of stability, such as staying a long time at a job or several years with a previous landlord. Ask them why they are moving. If their reason is that their current landlord won’t fix anything, you might wonder why so many things needed fixing. Dig in and ask more questions about what needed fixing and why.

A tenant who needs a place tonight is not a good planner. Have them rent a motel for a day or two until you can check them out. If they cannot afford a motel, they cannot afford your house. Perhaps they have to move today because they were evicted. Stable people plan ahead more than one day for a move.

15. Collect a Cash Deposit or a Cashier’s Check Made Out to You

In William Nickerson’s classic book on real estate investing, How I Turned $1,000 into a Million in Real Estate in My Spare Time, he advised to never accept anything but cash for a security deposit. Nickerson was a hands-on landlord, and his book is still a good read for investors.

Always get your houses in good shape before you rent them, and then always require cash or a cashier’s check with a current date drawn on a local bank for the deposit. (You can stop payment on a cashier’s check—beware of ones with old dates.) If you make the mistake of letting tenants move in and you take a bad check for the rent and deposit, you will have to evict to get them out. That will take you a month or more. Because they did this intentionally (and fraudulently), they are unlikely to return your house to you clean and in good condition.

Tenants are creative and want you to accept something other than money for the deposit. Tenants with no money will try to talk you into renting them a house. Their pitch is that “they will take the house in its current deplorable condition [it’s actually in good shape] and do all the work it needs instead of paying a deposit or first month’s rent.” Recognize this technique, and don’t accept a story in the place of money.

16. Give the Keys, a Copy of the Rental Agreement, and an Inspection Sheet to Tenants Only After the Full Deposit and Rent Have Been Paid

Do not let tenants begin to move in until they have paid you all that they owe you.

17. Cancel Ads and Remove the Sign

If you have more than one house for rent, callers from one sign can rent the other house. You may decide to leave the sign up until the tenants move in, to generate more calls.

18. Note the Return—or Lack Thereof—of the Inspection Sheet

Always require new tenants to fill out and return to you an inspection sheet that shows the condition of the house the day they moved in. Give them only a few days to return this to you, and explain that if they fail to return it, they are stating that the house is in good condition. If there is something that needs attention, get it fixed as soon as possible.

19. Note the Deposit Amount and Rent Amount on a Bookkeeping Sheet

Circle the deposit in red so that you do not accidentally include it in your income. The security deposit is not taxable income but can be reported accidentally that way unless you are careful to note it. Learn your state laws that govern how you must handle security deposits. Some states require you to hold them in a separate account.

20. Note the Rental Amount and Due Date on Your Monthly Checklist

Have a paper checklist that lists your properties by tenants, rental amount, and due date. Have your rents all come due on the same day of the month. Most use the first because it is easier for tenants to remember. When you rent a house, prorate the first month’s rent to have it fall due on the first day of the next month. If the tenants are moving in the last half of the month, collect a full month’s rent and then prorate the next month’s rent.

21. Have a System to Remind You When the Agreement Expires

Plan to renew and evaluate the monthly rent prior to the expiration date.

SELECTING THE RIGHT TENANTS

After reading the Fair Housing Act, make your rules for selecting tenants comply with the federal rules. As a landlord, you can still have standards. You just need to apply those standards equally to everyone.

What is really important to you as a landlord? If you agree with my list, the top three qualities are (1) you want someone who will pay the rent on time, (2) will take care of the property, and (3) will stay “forever.” You can select your tenants based on both their history of accomplishing these actions and their potential for future performance on these important issues.

You can refuse to rent to a tenant who cannot afford your house. Before you begin the process of renting a house, set the rent and deposit amount, and tell every person who calls the same information. Not renting to someone who cannot afford your house is not discrimination; it is good business. You simply need to treat all applicants equally.

Likewise, if you require that a tenant has a certain level of income to rent your house, write down how much that will be for this house, and again, treat everyone equally. You can require proof of income, but do it for everyone.

Gross income is not the only consideration. The debt or other obligations potential tenants have, such as car or furniture payments, affect their ability to pay. The number of children and other dependents they have or other extraordinary expenses, such as a hospital debt they are obligated to repay, make them a higher-risk tenant.

Many potential tenants have some credit problems. These problems may be preventing them from buying a house. Some credit problems are a result of a catastrophe, such as a divorce, an automobile accident, or a business failure. If the prospective tenants are recovering and are able to pay their current bills, then they may be good risks as tenants. Most tenants have had some financial problems, or they would not be tenants.

You can refuse to rent to tenants who are abusing their current residence, because they likely will abuse yours. The way tenants maintain their car is also an indication of how they will maintain your house. Look at their car and, if possible, go inspect the house in which they live. You want to rent to responsible tenants who will maintain your house. You can require them to do this with your agreement, but if they are unwilling or incapable of taking care of your house, you don’t want to rent to them.

Third, you are looking for tenants with long-term potential. My average tenant stays five years or more. If they stay at least two years, they have made me a profit. Tenants who move out in a year cost me money. It is expensive to have tenants move out and replace them with another. It may cost you thousands of dollars depending on how long it takes you to find a replacement tenant. Although you never really know how long someone will stay, you can look for signs of potential stability.

Ask these questions on your application: How long have you lived in your current residence? How long did you live in your previous residence? What were the addresses? (If they can’t remember the addresses, they weren’t there very long.)

Ask for the current and previous landlords’ names and phone numbers. Often the previous landlord may be a better source of information than a current landlord, who may be happy for them to move. Call the previous landlord and ask one simple question: “Would you rent to these tenants again?” If the landlord says no, ask why.

Job stability and the type of job a prospective tenant has are additional clues to potential longevity. If they have a history of job-related transfers, they are a higher-risk tenant.

RENTING TO YOUR FIRST TENANT

The first time you rent a house, you are likely to be confused about how to screen and select tenants. When tenants call on your ad, tell them the amount of the rent and the deposit. Some will ask if they can pay over time, and others will tell you that you are charging too much. Neither of these tenants has the money to move into your house.

You are better off with an empty house than with a house occupied by tenants who cannot afford to pay the rent. Set standards and stick with them.

Ask everyone for proof of income. If a tenant is a salesperson or self-employed, require two years’ tax returns. Make sure that they are signed copies of the original. Call references and confirm income if the tenant is employed.

Just before you conduct your interview, go back and review this chapter, and write down your requirements for a tenant for this house.

Most new landlords are concerned about how they can turn down tenants they don’t want to rent to. Turn them down because of a business reason, not a personal reason. Here are some business reasons you can use to turn down a tenant who does not qualify to rent your house:

1.   They will not fill out an application.

2.   They will not give you an application fee.

3.   They do not have enough money for the first month’s rent and the security deposit.

4.   They do not make enough money to afford the rent.

5.   They do not have a verifiable source of income.

6.   They do not have a steady record of employment.

7.   They do not have a good history as a tenant.

8.   They cannot give you a referral that you can contact.

9.   They do not plan to stay as long as you want a tenant to stay.

10.   They have a big dog (or several dogs or cats—or any animals you don’t like—animals are not a protected class).

11.   They have too many vehicles or a large truck or motor home.

This is not an all-inclusive list, but it will give you an idea of the types of reasons you can use to turn down a tenant.

In summary, you want to rent to a tenant who has a verifiable source of income that is large enough to afford your house. A tenant with long-term potential is preferable to a better-looking tenant who likely will move in six months. A tenant who moves in less than two years is costing you money. Set your goal to have your average tenant stay at least three years, and you will be a happy and successful landlord.

REWARDING YOUR GOOD TENANTS WITH FINANCIAL INCENTIVES

In my first years of renting houses, another landlord shared a technique that he used to collect rent on time. Rather than charging a late penalty like most landlords, he gave his tenants a discount for paying on or before the first of the month. The amount of the discount was meaningful enough that his tenants paid him first. If they were short that month, they paid someone else late.

The concept of giving a good tenant a real discount to pay on time works well. Today, I combine the discount for on-time payment with a discount for not calling for maintenance that month. As a tenant, you have to do both—pay on time and not call for maintenance—to earn your discount.

With this approach, tenants may just defer maintenance for months or even years. To use this discount approach safely, you also must collect a substantial security deposit and inspect your homes periodically. Your rental contract should include a clause that says any deferred maintenance that is the responsibility of the tenants will be charged against the security deposit when the tenants move out of the property.

The concept of giving a financial incentive works so well with good tenants that you rarely see them. Some of my tenants have been with me for more than twenty years—really. And during that time they have paid on time every month. These tenants are making me a lot of money and, just as important, not taking any of my time.

Other ways to reward exemplary tenants is for you to agree to pay for improvements or additions to the house that benefit the tenant. Fencing in a yard, screening a porch, adding landscaping, paying for the materials to build a deck or a fence, or simply allowing the tenant to make some modifications to the house, such as wallpaper or a different color paint, bond the tenant to your house.

My tenants have re-carpeted, painted, replaced and refinished cabinets, and installed decks and patios, all at their own expense. My longest-term tenants moved into a new house I had built twenty-six years ago and plan on living there for as long as they can.

Not every tenant will be a great tenant, but when you get one, take good care of him with reasonable rent raises and prompt responses to normal maintenance problems. Long-term tenants are worth tens of thousands of dollars to you, because they keep you from having vacancies and keep your repair bills lower. You will spend most of your money as a landlord when you have tenant turnover. Do what you can to minimize it.

BEING A SUCCESSFUL LANDLORD, WITHOUT WORKING NIGHTS OR WEEKENDS

Many people avoid buying real estate because they fear getting a phone call from a tenant in the middle of the night. I don’t take a tenant’s call at home. In fact, I insist that my tenants e-mail me with maintenance requests. The e-mail gives me a written record, and a chance to contact whoever will make the repair before I respond. When I call or e-mail a tenant and tell her that help is on the way, she is pleased.

Early on I decided to work no more hours than my banker does, and he does not work nights or weekends. You can be a success as a landlord and work no harder or longer than your banker.

In the rare event of an actual emergency, furnish your tenants with a list of numbers for emergency contacts. I have had five actual emergencies in managing hundreds of tenants: two fires (solution: call 911), two break-ins (solution: call the police), and a flood caused by a broken pipe (solution: call the plumber).

Not everything that a tenant would see as an emergency is an emergency to me. For example, several years ago on Thanksgiving morning one of my tenants could not get her oven to work. She thought it was an emergency, called my office number, and left a message. Since it was not a true emergency, I did not respond until the following Monday. If I had called her Thanksgiving morning, she would have been upset with me if I could not fix her oven in time for her to cook her turkey. It would have been nearly impossible—and very expensive—to find a repair person who would make a house call on Thanksgiving morning.

By the time I called her on the Monday morning after Thanksgiving, she had forgotten why she had called. The moment had passed. The “emergency” was over, and we could deal with the minor repair rationally, not emotionally.

Most “emergencies,” like a hot water heater not heating, an air conditioner that is not cooling properly, or a drain line that is plugged, are not real emergencies and can be handled during business hours.

Real emergencies include fires, storm damage like a tree falling on a roof and creating a leak, a plumbing problem flooding the house, an electrical problem that is dangerous, a break-in where the house cannot be secured, and other problems that may result in injury to tenants or others.

You can delegate to tenants the responsibility for clogged drain lines (which they clogged), damaged screens or broken windows (which they damaged or broke), and anything else that they break. You can have them coordinate the repair of almost anything else—after you authorize it.

A couple of years ago I came to work on Monday morning, and a neighbor had left a message that the police had raided one of my houses and kicked in the front door. I tried calling the tenant and got no response, so I drove out to see the house. By the time I arrived, the tenant had purchased and installed a new front door to replace the one the police had damaged. It turns out that he had a problem that warranted the police arresting him, but he made bail, fixed the door, and lived there for many months until the judge sent him to jail.

Although the tenant was in trouble with the authorities, he valued his home and wanted to continue living in it. I had treated him fairly and had provided him a good place to live at a fair price. He knew that he had an obligation to fix things that he damaged, so he fixed the front door and continued to pay the rent until he moved out.

BEING FIRM AND FAIR WITH TENANTS WHO TEST YOU

Tenants will test your system. If you give them a discount for paying by the first of the month, they will bring or mail the discounted amount in to you so that you receive it on the second of the month. If you accept it and still let them take the discount, the next month it will come on the fifth and then the tenth, and so on. If you give someone a financial incentive for good behavior, don’t reward bad behavior. Be nice, but smile like your banker would smile if you tried to talk him out of a late charge on your monthly payment. Tell such tenants that you hope that they pay on time next month so that they can qualify for the discount. Collect the full rent on the appointed day, or you are training them to pay late.

MOVE-IN AND MOVE-OUT INSPECTIONS

Likewise, tenants will test you and ask you to do repairs that are their responsibility. When they do, be fair but firm. When tenants move into a house, I give them a detailed inspection sheet, which I ask them to fill out and return to me within three days of taking occupancy. I want it back quickly so that I have an accurate record of the condition of the house. I already have on file the previous tenants’ sheet, and now I can compare them. The new tenants are doing the exit inspection for the old tenants, and they will be thorough.

After the three-day period, I hold the tenants accountable for any damage to the property. If they clog up the plumbing or break something, it is their responsibility to handle the maintenance call and repair on their own without involving me. If they do involve me, they will lose their discount and still may be responsible for the repair if they are at fault.

CONSISTENCY AND CONTROL—THE KEYS TO EFFECTIVE MANAGEMENT

A good property manager does not have to think a lot. He just needs to have a good set of policies and procedures and then follow them. If you find yourself making up a new answer for every tenant question, then you need to think through your policies, write them down, and be consistent with all your tenants.

Landlords get into trouble when they treat tenants differently. Establish policies and then stick with them.

The secret to being a happy, successful landlord can be summed up in a word—control. Many people who invest in real estate do it because they like to be in control of their investments. Landlords who are miserable have lost control. Their tenants are running the show.

TRAINING YOUR TENANTS

Either you will train your tenants, or they will train you. I use the word train here not as in training a pet simply to respond to a command. Rather, tenants will learn what they can expect from you, when you respond to their requests, or when they test your system of management.

Good tenants are looking for fair and responsive landlords. Being fair and responsive will not necessarily cost you money. In fact, if prospective tenants believe that you are both fair and responsive, they are more likely to rent from you. Many landlords are neither.

To be in control as a landlord, you need a management system that both you and your tenants understand and that you implement. Like teenagers, tenants will search for boundaries and then test them. As the landlord, you need to set those boundaries clearly. When you are tested, restate the boundaries and be fair but firm in sticking with the rules.

Training starts with your first contact with prospective tenants and continues through your entire relationship with them. You set the stage with your rental application and initial interview. After that, your response to requests will train people to either call more often or to handle their own problems.

It is important that you have policies, that your policies comply with the law, and that you enforce those policies. In more than thirty years of managing hundreds of tenants and studying other successful landlords, I have established the following rules as policy for renting houses. Use them and they will save you thousands of dollars and many hours of aggravation.

Single-Family House Management Policies

1.   Always get cash (or a local cashier’s check or money order) for the first month’s rent and the security deposit. (Never accept an old or out-of-town cashier’s check—they may have stopped payment on it.)

2.   Never accept a partial security deposit and allow a tenant to have possession of the house. Prorate the rent, and take a full deposit. (You cannot evict for nonpayment of deposit.)

3.   Always use an all-inclusive rental agreement with which you are comfortable and understand fully. Never negotiate the agreement with tenants. If they win this negotiation, they will negotiate more.

4.   Always take the time to go over the entire agreement with all adults who will be living in the house. Try to interview the entire family.

5.   Never discriminate. Treat every tenant and applicant equally and fairly. Do not bend policies because a tenant belongs to a minority. Treat everyone the same.

6.   Have a late payment policy and stick with it. When you make an exception, the exception will soon become the rule.

7.   Always serve late tenants with notices as soon as they are late.

8.   Feeling sorry for tenants doesn’t help them or you. Pay them to move out; take action! Do not confuse business with charity, or you may not have the money to be charitable.

9.   Keep good records of all income and receipts. Always give receipts for rent collected in cash; keep duplicate copies in a receipt book.

10.   Respond to tenant requests in a reasonable and businesslike manner. Distinguish between ordinary maintenance and real emergencies. Have a system in place to handle true emergencies.

11.   Keep the property in good repair, and inspect the outside of a property several times a year to ensure that tenants are taking care of the property.*

GETTING RID OF PROBLEM TENANTS

The primary reason to move tenants out of a property before the term is up is that they are not paying rent. Take immediate action when tenants do not pay on time. Deliver to them a three-day pay or quit (i.e., move) notice. It is the first step in the eviction process. Read your state’s statutes so that you know in advance what actions you need to take.

When tenants receive this prompt response to their nonpayment, typically they will pay you. If they don’t pay you, the next step is to talk with them, if possible, to see if you can work out a payment schedule that they can afford.

Sometimes, converting tenants to a weekly pay schedule (at a higher rent) will make it possible for them to stay in the house. Take the monthly rent and divide it by four, and have the tenants begin to pay you this new amount every Friday. Since there are fifty-two Fridays in a year (not 4 × 12 = 48), you will receive an extra four weeks’ rent each year for your trouble.

If this solution does not solve the problem, offer to return a portion of the security deposit if they move immediately. You can make the offer this way: “I can hire an attorney to evict you, in which case you will lose your entire deposit, or I can give you part of your deposit back if you will move out by next Friday. Would you rather I pay you or an attorney?”

You must make this offer short-term so that if they do not move as agreed, you still have enough deposit to protect you if you have to continue on with the eviction process. It’s worth repeating myself and saying that I have had only six evictions in managing hundreds of tenants. The secret of having few evictions is a good selection process coupled with an immediate response when a tenant does not pay. An eviction is the most expensive way to move a tenant out.

RAISING YOUR RENTS

You Cannot Raise Your Rent on an Empty House

The first step in raising the rent is having a full house. If you own a dozen full houses, you can constantly test the market by raising one rent each month. If tenants start moving out because they can find a cheaper, comparable house, then stop raising them for a while.

Raising your rents a little bit every year is good for you and your tenants. Your costs will go up most years. Your tenants expect some increase—the secret of keeping your tenants long-term is a series of small increases.

Consider how a good tenant paying you $1,200 a month would react if you did not raise his rent for five years and then one year you jumped it $300 a month. The $300 a month increase may not even catch him up to market rent, but it still will be a shock to him, and he may move. This would cost you a good tenant and the tenant a good home.

It would be better for you and the tenant to raise his rent $75 every year. Over five years you would actually raise rents more, but your good tenants won’t move to avoid a $75 yearly increase in rent. It costs far more than that to move, not to mention the aggravation of moving.

Track your tenants, and raise their rents a fair amount once a year. If there is a season of the year that tenants hate to move, time your rent increases to fall in that season, and fewer will move.

If the rental market is soft and you want to keep your good tenants, put a handwritten note on the rent increase letter to call you if they have any questions. If they call and say that they will have to move if you raise the rent, you may decide to leave the rent alone this year to keep a good tenant.

During recessions, I have lowered my rents to keep my good tenants. I’d rather be 100 percent full at 90 percent of market rent than 10 percent empty trying to get 100 percent of market rent.

When your houses are full of solid tenants, you can spend your time looking for good deals rather than trying to rent houses. A landlord who tries to squeeze the top dollar in rent out of a lot of his houses will spend a lot of time looking for new tenants.

Set your rents slightly below the market, charge a larger-than-average security deposit, keep your houses in good shape, and you can attract the best tenants in your town.

AVOIDING LANDLORD BURNOUT

Some landlords enjoy owning property all their life. In fact, owning and managing property is something you can do as long as you want to. Many of my more senior students are well into their eighties and still enjoy managing their money and their property. In doing the research for a book I coauthored entitled, Optimal Aging (available at www.optimalaging.com), I found that staying active in managing your financial affairs keeps you young and that you will often make better decisions than those to whom you delegate.

Other landlords suffer “burnout” and sell their property before they benefit from long-term appreciation and debt payoff.

There are a couple of keys to avoiding landlord burnout. The first is buying property that attracts long-term tenants who have the same value system that you do. You want to rent to tenants who see themselves as homeowners one day. These tenants will value the house they live in, and they may want a reference from you to either buy a house or to rent another.

There are big differences in how people view themselves and others. If you rent to people who are constantly trying to beat you out of the rent, eventually you will wear out.

Another key is avoiding high-turnover, high-management property. Renting low-income property to tenants who can’t afford anything better is a hard way to make a fortune. People who live on the edge of financial disaster are high-management tenants. They often cannot pay the rent for if they miss even one day’s pay.

The third key is to buy the right number of properties for you. Set your goals in terms of cash flow and net worth, not in terms of numbers of properties. You may decide that you only need a few properties. Fewer properties mean fewer tenants and less work.

* Reprinted from John Schaub’s “Building Wealth One House at a Time—Beyond the Book Seminar,” 2016, by permission of Pro Serve Corporation of Sarasota, Inc.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset