How to find the right tenant, the first time around

Is it still a good time to be a landlord?


(This article was extracted from my online course How To Find the Right Tenant, the First Time around, you can find the link to the course HERE )

Does the 1% Rule still apply?

Can you make money with a buy and hold property in this market?

The answer is YES!....

In the last 90 days in the DFW area 1092 properties were leased at an average lease rate of $1,975.00

The average leased properties:

             3BR, 2BA, 2 Car garage with a square footage range of 1500-1900 and built 1978 and after and had no pool.

             Average Days on Market – 20

 

Compare that to properties for sale with the same criteria used for the rental analysis:  440 properties sold, only using properties that maxed out at s $250,000 price point.

 

 

With margins this tight, a prudent landlord will want to make sure they are managing their property with great screening criteria, well written lease agreements and ability to communicate effectively with tenants when lease violations occur.

Here is what is for sale now:

So, yes, it is still a great time to be landlord…

the KEY is to buy the property right.  This is one example of cash flow on a rental:

 

 

but there are other advantages to owning a rental property that you see on the backend when you do your taxes

The following are some of the items you can deduct when you own a rental property*

  1. Interest. Interest is often a landlord's single biggest deductible expense. ...
  2. Property Taxes
  3. Insurance
  4. Depreciation for Rental Real Property. ...
  5. Repairs. ...
  6. Travel. ...
  7. Home Office. ...
  8. Employees and Independent Contractors

****check with you CPA on qualified deductions for your rental properties.

Managing your investment….

Are you prepared….

Have taken the time to buy the right property, get the financing in place and prepped your property for your first tenant.

What steps will you take?  Are you going to self-manage or hire a property manager?

Most first time buy and hold landlords start by managing their property, which I recommend when you are first starting out.  Why?

Because you need to know the ins and outs of having a qualified tenant in your property  that not only will pay the rent on time, but also take care of the property.

So, what does that entail?

The NUMBER ONE priority for any landlord is to take the time to find a qualified applicant,

a.       do a comprehensive background check that includes ensuring the applicant has the ability to pay the monthly rent,

b.      understands your lease agreement AND

c.       can help a landlord care for their property.

Seems like a tall order, but taking the time to thoroughly screen any applicant will pay off for the landlord in terms of

             Lower vacancy rates

             Avoid terminating the lease earlier

             Putting a system in place to handle repair requests by tenant

Being a fair landlord goes along with this, and always the need to follow Fair Housing Guidelines. 

Here is my: TENANT SELECTION CRITERIA

WHY…is it Tenant Screening SO important?

A common misconception  among new landlords, is that the rent they are charging for their property needs to cover the mortgage, taxes, and insurance.

The truth – you will only be able to charge what the market will bear.  For example, if the mortgage, taxes, and insurance are $2100 per month, but the average rent in the area for a property is $1500.00, but the property is advertised for $2100 or higher, the outcome will be:

             Longer Days on market

             Applicants applying that can’t qualify for other similar properties in the area

Landlords that have done their homework BEFORE they purchased their investment, know the market trends and are realistic in the correct pricing of their rental will take the steps to ensure they have a tenant that:

  •   Has the ability to pay rent based on income
  •   Has a strong rental history
  •   Has the security deposit funds – and when borderline, has ability to pay a double deposit

Tenant Screening is THE most important aspect of managing rental properties.  Without a solid and consistent process that can be applied to any applicant is the cornerstone of a successful landlord business.

The second most important step a landlord must take is to set expectations with their tenant by:

  •   Have a well written lease agreement
  •   Conducting a tenant orientation
  •   Document the condition  of the property prior to move in

An additional step that solidifies the landlord/tenant relationship is to incorporate a document that spells out exactly the terms and conditions of the lease agreement – the document I use:

            

Addendum A

 

This additional document is an attachment to the lease agreement.  This document is written in no nonsense terms, and spells out the most important terms of the lease agreement such as:

This was by far the greatest ‘tool” I created during my days as a Property Manager.  Early in my property management career I discovered shortly after move in, I would get calls/emails from tenants and/or the tenant’s agent asking me some of the same questions over and over – seemed like there was a lot of confusion and misunderstanding about:

  •   Where to pay rent
  •   How to request repairs
  •   What constituted a repair vs. tenant responsibility
  •   When/How to go about giving notice
  •   General questions about the common upkeep of the property, such as changing out smoke detectors, lightbulbs, and AC filters

What seemed to be lacking was a clear and concise instrument besides the lease agreement that tenants could easily refer to and addressed their main questions of where to pay rent, how to pay rent and who to make that check out to!  As a landlord, this is probably one of the most fundamental elements that a tenant needs to understand – otherwise how are you going to be profitable if you are not collecting rent from a tenant.

A profitable landlord has two basic principles:  Control over Income and Expenses

My standard answer to these questions and inquiries was to refer the tenant/agent back to the lease agreement, after all the tenants had signed, initialed, and dated the lease agreement to acknowledge the terms and conditions they leased the property under – and their signature was also an acknowledgement they received a copy of the lease agreement, so what could be the issue?

The issue was:  the lease agreement is about 14-16 pages long, and some of the language (as written by an attorney) was a bit confusing or hard to understand.

Since I was the property manager, I thought I was “helping” the tenant by referring them back to the lease agreement and my answers to the same questions were consistent.  But when I realized I was still getting the same questions from multiple tenants; I knew that referring the tenant back to their lease was not really giving them the information the needed.

When tenants lack a clear understanding of where, how and to whom rent is paid OR how/when to request repairs, the landlord’s profitability is going to be on shaky ground.  Addendum A was my answer to those two basic principles.

I sat down one day, put all of the questions I was being asked repeatedly and went through the lease agreement line by line, and created the Addendum A, which now becomes an attachment to the lease agreement, and put the terms/conditions of the lease agreement in very simple and concrete language.

During the tenant orientation, I take the time to review Addendum A with each tenant, and found that by taking the 15 minutes to review this shortened version of the terms of the lease agreement, and put the focus on the top questions/inquiries – what I found was that I freed up more of my time, as this ONE thing actually reduced the number of inquiries/questions about the prior list. 

By my taking the time to create/refine and provide Addendum A – I got back more of my time and the tenants were given a simple and understandable document that was easier to refer to than the longer version of the lease agreement.  Addendum A started out as three pages, and over the years, I have revised and added some additional information especially as it pertains to the return of security deposits. 

Just to be clear, the lease agreement is not replaced by Addendum A, but becomes a part of the overall lease terms.  It has become the one document that I created during my career as a property manager that has been requested and shared with other property managers both locally and nationally.

 

Landlord/Tenant Relationship

If your real estate business model is to incorporate buy and hold properties.  Tenant screening is your first step in having a successful business.  After the landlord secures a tenant, the next focus is on maintaining and building a constructive relationship with tenants.

Landlords who invest time in setting up their screening process correctly, qualifying applicants with consistent criteria and setting the rental agreement expectations is well worth the investment!

Once the applicant is now a tenant, the Landlord is responsible for setting up the following to ensure the terms of the lease agreement are enforced by:

Developing a Relationship with your Tenants

Landlords will develop a relationship with tenants when they practice:

             Professionalism – respond to your tenants’ requests (repairs and otherwise) in a calm and businesslike manner – regardless if they are not paying rent, keep asking for trite repairs or just call you at all times day or night.  You as the landlord are responsible for setting the boundaries with your tenants.  If you remember this is your business, you should conduct yourself as if you were in the office.

             Courtesy – you may own the property, but this is the tenant’s home.  Consider your family needs when the AC is not working, the hot water tank exploded, or the tenant just needs clarification on how to work something in the home. 

             Respect – Unless it is a true emergency, do not drop by on a tenant unannounced.  If you need to get into the property, make arrangements with your tenant.  An example I use on new landlords – a new investor wanted to offer cleaning services to their tenant, just so they could routinely be in the house and checking up on the tenant’s cleanliness – big no, no!  Do your due diligence up front, and you won’t need to “check” up on your tenants in that manner.

             Set Boundaries - Use Addendum A or another written policy/procedure that clearly defines a tenant’s responsibility beyond paying rent.  Set expectations at the time you are signing the lease agreement AND always have it in writing what both parties have agreed to, sign and date this document.  When there is a disagreement (and there eventually will be) it makes enforcement of a breach of lease easier to cure and correct if both parties have mutually agreed in writing.

SO….

Is it still a good time to be a landlord?

Yes – implement a strong and consistent  screening process, due your due diligence when purchasing and have a system in place to set expectations with your tenants.

Is the 1% rule no longer applicable?

Yes – in any market by knowing how to analyze the rental market for any area.

Can you make money with a buy and hold property in this market?

Yes – factor in cashflow, appreciation and allowable tax deductions

Need more proof:

An Average of 35% of the US population rent houses**

The average 3 BR house rents for $2,017**

 

If you are looking to start or scale your real estate investing business….

Now is the time to start earning:

  •   Passive income
  •   Appreciation
  •   Tax Deductions

Get the Tenant Selection Criteria Form here:

**Source:  Rent.com

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How to find the right tenant, the first time around

In the last 90 days in the DFW area 1092 properties were leased at an average lease rate of $1,975.00 The average leased properties: 3BR, 2BA, 2 Car garage with a square footage range of 1500-1900 and built 1978 and after and had no pool.