Real Estate Investing (Part 3) – The 9 Tenets Of Good Tenants
I. Understand Your Local Market
With Nashville being the 10th fastest growing single-family housing city in the nation, there’s much to know about getting into the rental property business. There are currently 100+ people moving to Nashville a day, which makes owning rental property an extremely appealing income venue. While Nashville rent “officially” peaked 3 years ago, the demand for housing isn’t slowing down anytime soon. What does that mean for buying rental property? It means there may not be a better time than right now. We’re seeing the middle Tennessee housing market bringing relief to buyers/renters, compared to sellers’ boom that has been “calling the shots” since early 2012. This gives anyone interested in purchasing rental property more leverage now that the market is pushing to correct the seller advantage.
II. Attract More Eyes With How Your Advertise
Using websites like Craigslist, Realtor.com, and your own website are all great ways to advertise available properties. Social media is also a great way to reach a larger audience of possible tenants. But think about this: What audience are you attempting to reach? Consider the neighborhood and community around the available property, and who might be your ideal tenant. Once you’ve pinpointed your audience, market to them! List amenities and benefits in the community that attract that specific tenant. Consider things like school districts, nearby local businesses, parks, libraries, etc. The more clear, concise, and numerous photos and perks that are available, the better. This will attract legitimate prospective tenants, ultimately giving you the best fit for your rental property.
III. All Need Not Apply
The first step to finding the right tenant for your property is having a thorough application and screening process. Things like financial history, rental history, previous landlord contacts, income information, background checks (evictions, public record, criminal history, etc.) are all very important to finding the best candidate for signing a lease. Other things to consider would be lifestyle questions (pets, smoking, work schedule etc.) that affect your property and your neighbors. Finally, verifying employment and having a face-to-face interview with the applicant are always a great way to find optimal candidates.
IV. Collect A Security Deposit… Always
Charging a security deposit is never a bad idea as a landlord. First, it’s important to understand the true purpose of a security deposit. The most common misconception is that security deposits protect you from paying out of pocket for damages incurred by your tenants. This is false, because damage repairs caused by a destructive tenant will usually exceed the security deposit. In the event that you do have to utilize the deposit to make repairs to your property, keep excellent records of the money spent. Be prepared to prove expenses in court, should you be required to do so. Also a good idea? Be sure to keep security deposits in a separate, interest bearing account, as this is legally required of the landlord in most states. Another primary reason to charge a security deposit is simply to weed out anyone who grumbles about paying a security deposit. Tenants who aren’t prepared to pay a security deposit usually fall into one of two categories: financially irresponsible (a good tenant expects and has the means to pay a security deposit set aside), or they’re not being honest about having the ability to pay the deposit. Either way, this is the kind of tenant you want to avoid. Be sure to define, in extreme detail, the meaning of “normal wear and tear” in your leasing agreement. This minimizes any confusion at the end of the lease. Which brings up the next important part of owning rental property: having a clear, sound lease.
V. Importance Of A Good Lease
A lease defines your relationship and expectations of your tenant, and vice versa. It is also the first document a court will ask to see if there is ever a legal dispute between a tenant and the landlord. Detail is the key to a successful, sound lease. Reusing a “master” lease agreement isn’t typically a great idea. Consider your lease as a living, legal document and be diligent about being as specific as possible in your written agreement with your tenant. Be sure to define the terms of the lease (including payment times and amounts), the expectations during, and at the end of the lease, and that all pages of the legal document are initialed by the parties, and properly signed— including witnesses, and date and time of signing.
VI. To Hire A Property Manager Or Not?
This is one of the biggest debates in owning rental property. It boils down to what’s more important to you, your time or your money? A (good) property manager can help alleviate the stress of finding, managing, and communicating with tenants, and delegating tasks such as maintenance and advertising your rental property. You can save money by managing those calls and tasks yourself, or save yourself the time and stress of those extra duties by having a property manager.
There’s three types of landlords: too involved, diligent, and MIA. Two of these will be unfavorable with your tenants. Be sure to clearly communicate in your lease and with your tenant, the expectations or schedule of checking on the property. We suggest a routine on-site walkthrough every 3-6 months during a lease (personal preference), which your tenant should ALWAYS be present for. Periodic drive-by property checks are a good idea, too. There is no required notice for a drive-by check, since you aren’t entering the property. Be sure to clearly communicate and notate the expectation of both of these prior to signing a lease. Without question, a move-in walk through with your new tenant, and a move-out walk through with your soon-to-be-previous tenant are staples of a good landlord/tenant relationship.
VIII. Make Your Repairs
As a landlord, it’s your responsibility to make sure your property is “habitable” for your tenants. Heating and cooling problems should be addressed within 24 hours of your tenant reporting an issue, while other repairs should (ideally) be handled within 48 hours. Consequences of not having a habitable property for tenants range from their right to withhold all or partial rent, paying fines if it violates health or building codes, and even the resident’s right to end the leasing agreement. Be sure to give your tenant at least 24-48 hours notice before entering the property to make repairs. It’s best practice to keep an open line of communication with any tenant about repairs. It keeps the person residing there more likely to take care of your property, and keep you in the loop of any issues. And it goes without saying that fixing small issues upfront may save you time and money on huge repairs down the road.
IX. The Nasty Business Of Eviction
Whether it’s lack of payment or care for your property, the topic of eviction is extremely uncomfortable and something
NO landlord ever wants to have to face. Tennessee state law requires landlords to give a 14 day notice to pay rent before filing an eviction lawsuit. If at any time during those 14 days the tenant pays rent, the landlord must not proceed with the eviction lawsuit. Other situations where eviction may be a solution would be damage (more than wear and tear) to the rental property, or committing a violent act or threatening of neighbors, landlord, or other residents of the rental property. There are many other situations, circumstances, and processes depending on the type of lease and landlord/tenant relationship when it comes to eviction in Tennessee. We would suggest a landlord seek legal advice in ANY situation where eviction may be a possibility, for the protection of the landlord, the rental property, and the tenant.
There are many great resources out there at your disposal; each one can help you hone your strategy for success in the rental investment game.
Personally, one of my favorites is the Rental Property Calculator offered by BiggerPockets.com. This is extremely useful in making sure all of your math checks out for the cash flow, and sustaining of your property.
MyRental is pretty awesome, too; this service is great for screening tenants, getting rental histories on prospective leasees, searching for adverse letter actions, etc. Just a good all around tool to have in your pocket as a landlord.
I wish all of you the best!
Please post your comments below; we’d love to hear your experiences and recommendations on managing rental property!