Single Family Homes - The No Risk Investment! - Part 13 Try to chat with each family for a few moments to get an idea of what kind
of people they are. This is an art you will get better at as time goes by. Watch
when they leave to see if their car is well maintained. Explain to those who are
interested in renting that they must fill out an application and give you $25 (or
current cost) for a credit check. Explain that you will refund the $25 if you rent to
another applicant before you get to their application. (Some investors keep all
application fees.)
Although your renters don't realize it the system above is the first step in
training them to be the kind of tenants you want them to be. They are learning that
they must do things your way, for your convenience not theirs. It is an important
first step.
Here is an example of the kind of simple ad that we use to rent our homes:
"Speck'n Span 3-bdrm, 2-ba home near schools and shopping.
Big yard, RV gate. Discount rent $850 per month. 345-6789."
If your newspaper will allow more words for the same price add things like
fenced yard or two-car garage.
Let me explain discount rent. We buy homes at a little under market value
so that we can rent them for a little under market rent. Then we offer a discount
rent plan to tenants. In the home advertised above the amount of monthly rent that
will appear on the Rental Agreement is $900 per month.
We offer the tenant a $50 per month rebate if they do all of the following:
1. Have the rent for the month in our hands on the last day of the preceding month.
We have mortgage payments to make and we want to make them on time. If we
don't get the rent until some time during the first days of the month we may be late
with our payment. We reward the tenant for his promptness. Example: To earn
the rebate they must have the July rent to us by 5PM on the last day of June.
2. They must take care of all maintenance problems of $50 or less on their own
without calling us. Anytime they call us with a problem they lose the $50 rebate
that they could apply towards the next month's rent.
We are training the tenants to manage themselves. Small problems aren't a
big deal when you have just one or two houses. When you own more than that you
will find that tenants will be calling you almost every day with little things they
could take care of themselves if you don't use the discount rent plan. We explain
that we have to pay our handyman at least $50 to go to their home and fix
problems. We are willing to give them that amount as discount rent if they will
solve problems without calling us.
If you choose good tenants this system works like a dream. It may be that
they have to lose that $50 rebate one time before they fall into line, but it seldom
takes more than one loss to get them on track. We only see or hear from our
tenants for a moment when they deliver their rent check each month.
We have an office where they can pay their rent. You probably will not
have one and you don't want them coming to your home. Rent a box at a mailbox
store and have tenants mail or deliver the rent there. Explain that you pick up your
mail at 5PM on the last day of the month and if their check is not there that they
will lose the rebate.
If a renter calls to tell us the water heater has failed we promptly replace it,
but they lose the $50 rebate on the next month's rent. Explain all this to the people
who will be renting your home when you go over the rental agreement to them.
We hope to rent to people who will stay in the home for at least one year.
We often get calls from folks who want to rent for just three or four months
while the builders are finishing their new home. Don't rent to those people unless
you get double rent for a minimum of five to six months! It is expensive and time
consuming to find new renters. Strive for as little turnover of tenants as possible.
Our rental agreement is a month-to-month agreement. That means that
either the owner or the renter can terminate the tenancy with 30 days notice to the
other. Why not a lease for the first year? That's a good question and we are
beginning to lean in that direction.
We stress to potential tenants that we expect them to stay in the home for at
least a year and we ask them if they can foresee any reason why they could not do
that. Most will say that's OK, but the question will prompt some people to explain
why that may not be possible. You will probably not want to rent to them.
Even with a one-year lease and then tenancy on a month-to-month basis we
do not force people to stay in our homes if they tell us they must move for some
reason. If a couple is divorcing or if one of them has a job transfer or the like, we
understand. We agree that they may leave, but we insist on a thirty-day notice. If
they must move before that time they still must pay the rent for the entire period
and live up to all of the other requirements of the rental agreement.
That 30 days gives us time to find another tenant and if we act quickly we
often can have the new people move in on the same day the old renters are moving
out. We work hard at losing as few rent producing days as possible.
You've held your open house and your home was visited by one to eight
families who have filled out applications and given you payment for the credit
check. Other people visited, but were not interested.
In your rental application, people have given you permission to check their
credit. Look in the Yellow Pages of your telephone book under "Credit Reports".
Call each local company listed (or the ones nearest you) and explain you are a
property owner screening potential tenants and what is the cost of a credit report?
There may be some variation in price and you can go where it is cheapest and
fastest.
Based on your conversations with the prospects and your study of the rental
application they filled out you will find the one or two families you feel would
make the best tenants. On the following day take the first qualified application
turned in to the credit reporting service and ask for a credit report. Sometimes they
will do it while you wait. Other times it will take a few hours. You must act
quickly because the chances are that the family will keep looking for a home until
they hear they have been accepted.
At the time each prospect gives you an application tell them that you will
make a decision by this time the following day. If they have not heard from you
by then they will know that someone else has rented the house.
Don't offer to call them to tell them you've chosen someone else. Mail the $25
credit check money back to them.
In this age of easy credit you will seldom find a tenant with a perfect credit
report. What you want to see is that any financial mistakes they made were at least
a year in the past and that since then they have kept all payments up to date. At the
time a prospect gives us a rental application we ask them what we will find on their
credit report. Some will be very honest and explain that they have had a business
fail, or a divorce or illness forced them into money problems. That's all OK if the
credit report seems to indicate that they are back on track and paying their bills.
There is no perfect, foolproof method for choosing a tenant. You do all of
the above and choose the family that seems like your best bet. Once in a while
your first ad will not produce a suitable tenant. Don't panic. Just run the ad again
until you find a good one.
Here's a tip: Never tell anyone why he or she was not chosen
as your tenant. Always say that everyone who applied was good,
but you could only rent to the first family that qualified. To say
anything else might be misconstrued as some sort of discrimination
and lead to legal problems.
Your policy, like ours, should be to always rent to the first most qualified
renter who hands you an application without consideration to race, color or creed.
After you have chosen a tenant make a few notes about why you picked that family
and place it in their file.
If you are ever questioned about your selection by a legal authority you will
have something in writing that will support your unbiased choice. Notes could be
things like "best credit"; "plan on living in home for three years" and "tenant
offered to install lawn sprinklers for just the cost of materials".
Never make any notes about why you did not rent to someone. That serves
no purpose. Destroy all applications of prospects not chosen. Do not dispose of
them where others might find them. Never reveal any information contained in
those applications to anyone.
Before a tenant moves in we require the first months rent in advance and an
equal amount as a security deposit.
We insist that those funds be either in cash or a money order. Never let a
tenant move in after giving you a check. If you find they are deadbeats and the
check bounces it will take you at least 30 days to evict them, probably closer to 90
days if they are experienced renter beaters. Your policy must be No Cash - No
Move In!
We stress that the security deposit cannot be used toward payment of rent at
anytime. We explain it will be returned to them after they vacate if they have left
the home in the same condition, as it was when they move in. We emphasis that
we deduct the cost of any repairs or cleaning, over and above ordinary wear and
tear, from the deposit.
What if you rent your house with occupancy to begin in the middle of the
month? Collect a full months rent and security deposit in cash. Prorate their
second month's rent that will be due on the last day of the month they move in.
Example: The home rents for $800 per month. The new tenants pay a full
month's rent and security deposit (in cash or money order) before they move in on
the 16th day of the month. That has them paid through the 15th of the following
month.
Then you have them pay for the remaining 15 days of the following month
on the last day of the current month. $800 divided by 30 equals $26.67. $26.67
per day for the last 15 days of the month equals $400 that will be due on the last
day of the current month. From then on it will be the normal $800 due on the last
day of each month.
After you have accepted a tenant give them a copy of the Inspection Sheet
(found at end of chapter) and explain that they should walk through the home and
mark the sheet with any problems they find. Explain that you will use that sheet to
check the house when they move out. If there are stains on the carpet, holes in the
walls, missing fixtures or any other problems that are not noted on the sheet, they
will be repaired or replaced at the renter's expense after they move out. Keep in
mind that you must allow for normal wear and tear.
If you do find it necessary to use some of the renter's security deposit for
repairs when they move out be sure and mail them an itemized list of the repairs
and the costs within 15 days. This is required by many states, but it is something
you should do because it is just good management practice.
What if a tenant does not make a monthly rental payment? In most states
eviction is called "unlawful detainer". You will have to do some research to learn
the exact steps you must take to get someone out of your house in your state.
In Arizona we have to give the tenant a "Seven Day" notice. If they don't
pay during the notice period we can begin the eviction. In many states someone
has published a guide for landlords that spells out the rules for the area.
We have never had to evict anyone. A few times we have not received the
rent by the fifth of the month. On the morning of the sixth day we tape a Seven-
Day notice onto the door of the house. It is important to take action as quickly as
the law allows.
If tenants are not going to pay rent you want to be able to get them out as
quickly as possible. In Arizona you normally are able to have them out 30 days
after posting the Seven-Day notice. That is why we put the notice up immediately.
With luck we would lose only about 40 days of rent.
In our case the notice has always brought quick rent payment from the
tenant. It is part of the training process. If you let it slide it would be training the
tenant to pay rent a little later each month. Not good.
When they see the notice they usually will call and give some story on why
they did not pay. We are always pleasant and tell them that we must post the
notice to protect our legal rights.
If they will have the full rent payment, plus late charge, to us by 5PM
tomorrow we will discontinue the eviction. So far they have always done that.
Never get mad, never threaten, and never try strong-arm tactics. Just be
pleasant, firm and business like. Always explain that you are doing what you are
doing to protect your investment and your legal rights.
Some property owners "buy-out" troublesome tenants. They have found that
it is quicker and cheaper to offer cash if the tenants will be out in 24-hours. In
practice many of these renters will jump at the chance to grab $500 or so and go
fleece some other landlord.
Take the time to carefully screen your tenants and you should never have
that kind of problem, but file that idea away just in case. This document and accompanying materials are designed to provide authoritative information in regard to the subject matter covered in it. It is for illustration purposes only and presented with the understanding that the author and publisher are not engaged in rendering legal, accounting or other professional opinions. If legal advice or other expert assistance is required, the services of a competent professional should be sought. |
