Tenants for New Investors
The first thing you need to do if you want to be a real estate investor is to find a property. However, one of the primary aspects of making money in real estate is finding good tenants. Good tenants can either break you or make you. They can make your life a joy or they can make your life a nightmare.
Finding tenants is important. Nowadays, we find most of the tenants through online such as Craigslist or Backpage. Years ago, it was always done through printed publications. Now, you typically don’t have to pay anything on online publications. Now, we typically don’t spend any money on online publications or glossy brochures. We mostly pull most of our tenant’s right off Craigslist.
We advertise the property on Craigslist with pictures and information on the property. What I then do is rather than meet each tenant individually; I have everybody come at the same time. When people call or email me on the ad, I say that we are going to show you the property at 6pm on Wednesday. Then I have everybody come on Wednesday and when I show up, in many cases I’ll have 2, 3, 4 or 5 sets of people or individuals interested in the property. I take everybody through at the same time and those who are interested I have fill out an application.
Now, the reason I do that is because it saves you an enormous amount of time but it also creates a bit of a bidding environment as other people are thinking that they should better get an application in and I don’t have a lot of time to think about it, because other people are interested in the property. It will just set you up for a lot more success. Bring everybody at once, those who are interested, have them fill out the application and collect the security deposit there.
If you want to charge a deposit or a fee for processing, you can do that. Just check that with the municipality. Generally, we charge $25 - $50 for an application fee. If they don’t get accepted, we generally give it back. It depends where you live. You may or may not have to do so. If they leave a security deposit and we don’t rent to them we always give it back. Just make sure that their check has cleared before you send them money back. I have had checks bounce after refunding up front deposits. Normally I only cash the check of the person we accept and simply send the other people back their original check.
You need to screen your tenants. If you are going to screen any tenants, you will have to screen every tenants, otherwise, you are looking at huge trouble because the government has rules and regulations on what you can and cannot do in that regard. You can do a full credit check and I suggest you do. You can do a background check on them as well. Remember, if you do it on one you have to do it on all of them, otherwise you are opening yourself up to discrimination complaint, which makes no sense. It’s pretty easy to do. You can set up with your tenants associations and just ask around for people who have rental properties. They will be able to tell you how to do it and where to get it done. You can also call a real estate attorney and they will also let you know.
You also need to make sure that your property is government compliant. You need to have an energy certificate if it’s required. Check with your local municipality as to what kind of permits they require. They will require smoke alarms and carbon monoxide detectors at a minimum. If it has more than one unit and if its common entry, some municipality will require the common entry needs to be locked. There are different kind of rules and regulations in different areas. Once you get familiar with them, you will be okay. You can go to the local tenant association, local real estate attorney, or you can even go down to the local government. They will have a checklist of things you are going to need to do.
Now, the important thing with tenant is you have got to train them properly. If you let tenants get away with things, you will have nothing but trouble. For instance, we tell our tenants that if the rent is paid on or before the first, they will get a discount. What we really do is that if we want $700 in rent, we mark it up to $735 and tell them they will have to pay $700 if we get the check on or before the first. If it’s not on or before the first, then its $735. You have to train them.
If they haven’t paid by the 5th of the month, you will have to send them a 5-day notice to pay or vacate, which starts the process of evicting them. Most people will pay when they get the notice.
What I’m telling you is that you have got to have rules and regulations in place. You can be pleasant about it but you have to be firm about it too. You don’t want to cut people slack because if people get more than two months behind on rent, the odds of you collecting that are slim or none.
Another technique which I recommend for new investors is don’t tell the people you own the property. When I started I was really proud that I owned the property but people think if you own the property, you are rich. In many cases, they don’t feel guilty about non-payment. Just tell them you are the manager. If they complain that it’s not fair and they need more time to pay the rent, you can say, I’ve been talking to the management company and they require me to get the rent in, so what we can do to do that.
You need to make sure that you are following same rules and regulations for everybody and make sure that you are following the regulations for posting notices for non-payment of rent. In some areas like Nevada or Florida, you can get a tenant out in 3 weeks or so for non-payment. In some areas, especially in the Northern states, it can take months. You need to get the process started right away to minimize rental loss. You have got to make sure that you are firm with your tenants if you want to have a successful business in real estate.
You will occasionally get a problem tenant. I don’t care how much screening you do, on occasion you are going to get problem tenants. Drugs are a huge problem. If you have got people doing drugs in your building or other illegal activity, all your good tenants are going to leave. You have to get rid of the bad tenants. You have to do so quickly.
If you have got drugs and you know about it and you are not taking any steps to get rid of them, you could actually be looking at some liability. In the worst case, possible confiscation of your property by the government entities as a public nuisance. What you want to do is if you have got a drug issue, you want to get the local police involved. Violence or drugs cannot be tolerated in your property because good people will leave and you will end with the dregs of society.
Noise is the most common problem. If you have got upstairs and downstairs units, then downstairs will always going to be a little noisier. You typically don’t want to put hardwood floors on the second floor if somebody is down below. You want to carpet those and keep it little quieter. But you need to be on top of noise complaints. Be aware that some people are perpetual complainers and you will never be able to satisfy them. When the new lease comes up, they will hopefully move away.
Remember your biggest issue is Non-payment. As I have mentioned, if they haven’t paid in 5 days, then you have to charge them extra. Not only can you not get them a discount for early payment you have to start tacking on fees and penalties. Be sure to check in your local area as to what you can and can’t charge.
You can’t cut people slack no matter how nice they seem because it is going to become a problem. They are trying to make their problems your problems and you are a business. You have got a mortgage and other bills to pay, which you will have to take out of your pocket if they don’t pay. Unless you want to start taking money out of your pocket and support your fellow man, instead of supporting yourself, then you have to make that decision. If you are soft about this you will not last long in this business.
In order to be successful in real estate or the rental business, you have to be very proactive. You have to be looking at problems before they occur. The biggest reason people will move besides non-payment or noise or drugs, is your non responsiveness to maintenance requests. If there is a maintenance request, that’s an opportunity for you to go ahead and take care of that. It will set you up for being a great landlord or manager in the minds of a tenant. However, some of the things that we have to fix are often caused by the tenants, so if the municipality allows us we tell the tenants that they are responsible for the first $20 etc. of any repair. That discourages them from calling you for little things.
Negligence on the part of the tenant is billable to the tenant in every case. If they ruin or wreck something, or if they break a light fixture, they won’t just have to pay the light fixture but for the labor and your time too.
Tenants can be trained very well and if you do so, if you stay on top of them. Treat them well but hold them accountable. If you do you can find that the residential real estate investment can be a wonderful career. It can be very profitable and rewarding. If you want to learn more, you can contact us. We actually do coach new real estate investors in their first couple of investments to make sure that they don’t make any expensive or financially fatal mistakes.