Placing your trust in the kindness of strangers…
At this convivial, holiday time of year, it would be easy to feel very rosy and warm about placing your trust in strangers. Especially if these strangers will be your customers – those that will be renting out units from you.
It would be so nice to take people’s word on faith, that they will pay their monthly rent on time. Or even a little late. Or at all. It would be nice to feel they won’t cause disturbances, be “quiet” tenants, have no altercations with the law, put you in jeopardy, put your building in jeopardy, or put your other tenants in some form of harm’s way.
The landlord’s nightmare
Of course, this just isn’t realistic. Worse, still, every landlord (and I do mean every one) has had at least one nightmare experience with a tenant. As a landlord, the absolute best investment property advice you can learn is how to screen tenants in the right ways.
One of the first rules to learn is never be in a rush to fill a tenant vacancy. The inherent time pressure of feeling you need to fill the vacancy immediately, lest you lose another month’s rent is an extremely dangerous trap for landlords. Make sure you’ve adequately built a proper vacancy reserve amount into your budget, so you can dispel this time pressure. Next, make sure you don’t jump at the first prospective tenant who tours your unit, then exclaims “I’ll take it!” Allow a full week or two (at a minimum) to be able to screen a number of prospects. Then do your homework to whittle down the best possible tenants for your unit.
Ways to protect yourself
There are many ways to do this homework to properly screen your prospective tenants. Credit checks are a good first step. Most tenants are used to providing them, and if you’re using a Realtor, your agent can help obtain a prospect’s credit report for you. If there are no major red flags, you can proceed on to the next step – calling their references.
At a minimum, you should ask to speak to their last couple of landlords. Check with these landlords to find out if your prospects paid on time every month, or if they had any delinquencies, or worse, stopped paying. Was their security deposit always returned to them in full? If not, ascertain why. In addition, you’ll want to ask what type of tenant they were. Did they ever put their landlord’s property in any sort of danger – whether it be to the property, or some socially unacceptable manner? Were there ever any noise complaints from neighbors? Were the police ever called? Fire department? You get the idea…
Likewise, ask former landlords if your prospects made any unreasonable requests for relatively minor repairs. Or if they asked for a constant stream of minor repairs – ones that could be taken care of by the tenants very easily themselves. On the opposite end of the spectrum, did the tenants use good common sense to protect their landlord’s investment? Did they call the landlord quickly when a leak developed, or when a more serious repair was required?
Be sure to also ask past landlords if a prospective tenant had any history of litigation with the landlord. It’s possible that a highly-rated credit history and credit score could mask a potential tenant with a long list of litigious behavior against past landlords…”Slip and falls” are very common types of suits brought by tenants against landlords who may or may not have properly maintained their walkways, steps and driveways, keeping them free of ice in the winter. Be on the lookout for patterns of lawsuits by any one prospective tenant.
Past security deposits as indicators…
More importantly, associated with the return of their security deposit, did the tenants do any kind of physical damage to the property? And if so, what was it, and how extensive was the damage. A bad tenant can do an incredible amount of damage to your investment, single-handedly wiping out a year’s profit for you in very short order. But if they have never had an issue like this before in their past, and always had their full security deposit returned promptly upon moving out, it’s a good bet they will not suddenly make you their first victim.
You’ll also want to ask former landlords about any past history of late pay, no pay or eviction proceedings with your prospects. Obviously, in order to protect yourself, you’ll want to steer very clear of any prospective tenant that has had any of these issues before.
Besides speaking with past landlords, it’s always a good idea to get personal references as well. You should check their work history for accuracy of their statements. If they can offer local clergy as references, even better still. Anything that shows you that a prospect has a strong sense of community will also invariably help protect your investment.
Ultimately, the best investment property advice when screening tenants, is to remember the horror stories of every landlord: the eviction process. In trying to avoid an eviction like the plague, keep in mind that each state has different sets of laws that protect tenants’ rights. These laws can be quite protective in shielding tenants from bad or “slum” landlords. Unfortunately, in the process, good landlords tend to get penalized when any serious rent delinquency arises with a tenant.
You’ll most assuredly need to hire an attorney to represent you in eviction proceedings, a cost equal to several months rent right off the bat. In addition, depending upon the state, you may not be able to actually evict (and therefore take possession of your unit) for many months. This represents a tremendous amount of lost rent during the entire length of court proceedings. In addition, you may also lose your mind in the process, which would be bad as well…
Take your time
Clearly, it is better to take your time finding the best tenants than risk taking on even one bad tenant, in order to quickly fill a vacancy. Always build at least a 10% vacancy rate into your expenses when running your numbers on any new rental building purchase. A 15% rate would provide a much better cushion though, and while a drain on your numbers, would provide an extra measure of comfort. Do your homework when screening. And be very, very patient in your tenant selection process. In these ways you can avoid sitting in a courtroom some day, stewing, as you try to evict a bad tenant. Stewing – and cursing your life as a landlord.
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