Do you want to know something about being a landlord? It really sucks if you don't have quality A-1 tenants. A lot of investors think that there's more cash flow in renting than there really seems to be. When you compare the small cash flow surplus, which not everyone earns, with the strenuous work of fixing a toilet or evicting a tenant it just doesn't seem to fully add up.
All of that is true unless you made the cash without having to physically manage and oversee your properties. That's why I strongly urge you to master creative techniques like lease-options, owner financing, etc. to have self-managing properties. Just remember that the bank makes a small fortune off your property not through the physical management of the property, but rather by simply holding paper.
However, with the right tenants, there's a lot of benefit for the long term buying and holding of a strong cash flow property. This is especially valuable if your properties are in an area that experiences above average appreciation over the long term.
How Can I Get A-1 Tenants?
Marketing–is the one word answer.
If you've read any of my advice, you know that I'm a strong advocator that marketing is 90% of every business including real estate. Put yourself in the mindset of a quality tenant who wants to find the right situation. Which of these two advertisement headlines is more likely to generate the interest of high quality tenants?
- Three Bedroom Home for Rent 123 ABC Road – $600
- Beautiful 3Bed/2Bath Home Across From Park – Only $600
If you don't have an eye catching-headline, don't print your ad. Have you happened to notice that the bulk of articles written on this site have clever titles induced to get you to open them? That isn't a coincidence.
You can simply advertise on a local real estate classified site for people currently in the market. By having an ad that generates more interest, you will be able to select from a great pool of people. That will increase your chances of finding the perfect tenant. It may seem obvious, but look at your local classified site and see if people actually use what I'm suggesting.
Be as detailed as possible in your marketing efforts to restrict to the tenant type you want. You see the more you ask for up front in your ad from your soon to be tenant, the more you'll weed out the people who aren't serious about the long term care and appreciation of your business investment.
For the Love of God, Screen Your Tenants!
I've probably heard more “investors” say they use their gut level feeling to pick the “right tenant”. Don't fall into the emotional trap of selecting a tenant that you like. Real estate investing is a business and so you have to adhere to it using business principles.
Before you jump in bed with your “gut feeling”, check out their past landlords from the last 2-5 years. The timeline will depend on how high end the property itself is. Look into their employment history and do any additional due diligence steps you think may help including a credit check if need be. The most predictable measure of success with a tenant will be from how they've performed for other investors in the past. While it's not a guarantee by any means, it certainly works with a very high degree of accuracy.
Secondly, don't be afraid to include that you will do this in your marketing efforts. You can weed out poor quality tenants from even contacting you for a viewing. If you're a tenant who was a pain for your last landlord and you trashed the place, are you going to call an ad that specifically mentions background checks? Not likely.
Build Artificial Competition
Here's a mistake many investors make. You get a call from an interested tenant who wants to view the property. They say ok and drive over to the property at their first available moment to give a viewing. Don't give one-on-one viewings. Instead, schedule them for a specific time the following day by using something to the effect of “I'm going to be there tomorrow at 7pm, can you meet me then?” Simultaneously, invite as many people at the same time as humanly possible. At the scheduled time, be sure to show up a few minutes late so that all the interested parties will see each other and feel some level of competition. It will be easier to enforce the rules and guidelines you expect with your property if they perceive it to be in demand. They are simply more willing to compromise with what must be done so that they don't lose out on a perceivably great opportunity.
Because you've learned not to select a tenant based on your gut, have all the interested parties fill out a rental application and perform your due diligence. Inform them that you will call them all back the following day or however long it takes you to perform the due diligence. Allow your due diligence to help you remove the emotion from your business and then select the best available tenant.
Have Clear Expectations and a Detailed Set of Rules
A friend of mine is a teacher with excellent classroom management skill. One thing she told me is that during the first week, she is really “strict” with her kids. Ironically, she's probably the most easy-going person I know. The first week being “strict” is simply used to enforce clear expectations and guidelines. She rarely has a need to maintain the same level of strictness after the first week because a strong level of expectation of what is “not okay” has already been set. Run your business as if you were her running the classroom. You don't need to be over the top and harsh, rather just let them clearly know what your expectations are which includes the repercussions for not obeying the terms of the agreement. In fact, a great way to enforce that is to simply state your expectation followed by “is that fair” or “is that acceptable for you”.
- “Mr. Tenant, I charge a $75 late fee for rent received later than the 1st of the month, is that acceptable for you?”
- You can also use the reverse of that if say you want to charge $700/month. “Mr. Tenant, I charge $775 for rent after the first and I give a discount of $75 for on time rent, is that fair to you?”
- “Mrs. Tenant, this is a very nice house to me and I expect the lawn to be maintained every week, is that fair?”
- “Mr. Tenant, I take post dated checks for the entire agreement right now so that I don't have to chase you down every first of the month, is that fair?”
- “Mrs. Tenants, I expect that any and all maintenance issues be sent to me immediately for resolution so that we don't have a disagreement on the first of the month, is that fair for you?”
Your tenants should know exactly what is expected from them before they move in. By properly identifying the expectations for maintenance, rent due dates, etc. and the consequences of not following them from the outset, your situation will be infinitely more manageable afterwards.
Real Estate is a Business and Your Tenants Aren't Your Friends
Don't confuse being “friendly” with being someone's friend. There's a fine line between being professional in your business and being overly friendly. You own your property to generate income for you, not to have a figure like your buddy crashing on your couch. Beware of this trap. It's easier to let a friend slide for money than it is for someone in a business transaction. If you're too friendly with tenants, they just won't pay the bills on time. Send written notices delivered by registered mail rather than by friendly phone call for business exchanges. After that, follow up with them by phone after they are physically received the mail. Firstly, you'll have documented C.Y.A. by sending the agreement by registered mail and secondly, it'll cement home the fact that you manage your properties professionally.
If you're unsure about managing rental tenants then understand that it can be a big hassle without the proper screening. However, if you enforce clear expectations from the beginning, you can enjoy well maintained property that produces positive cash flow and equity appreciation. By also building artificial demand through your creative marketing, you'll have a surplus of quality options available to you.
The moral of the story is this. Do that extra little bit of up front work, that most landlords skip over, and do it consistently and often so that you'll have quality A-1 tenants for years to come.