| Turning Three-Star Tenants Into Five-Star Residents |
|
|
|
|
So first off, be sure the tenant can afford the increased rent. Some can, but others can’t. If the tenant agrees to pay more, but they don’t have the extra cash, then you are hurting yourself and the tenant. If you have a Three-Star tenant with marginal credit and a poor job history, wait for a better prospect. Sit on the property until you have someon e you won’t have to evict. Landlords who habitually rent to low -end clients are setting themselves up for problems. If you have a property that’s worth $500 per month, you should rent it for at least that amount. Sometimes landlords will reduce rent to “fit” the tenant. Some think … $400 a month is better than nothing. At least then, I’ll break even. I’ll lower the rent and let this guy move in.) This thought process is wrong and will bite you in the butt. You may break even for a while, but when your tenant stops paying rent, then proceeds to damage your house because the landlord/tenant relationship has severely deteriorated, it will cost both money and time to get them out. If you had just waited a couple of weeks, placed another newspaper advert isement, you could have a worthwhile tenant. Don’t lower your rent to fill a property. Instead, build value so the tenant who can afford your property will gladly pay you what it’s worth. For example, for a 3 Bedroom / 2 Bath ranch style house where are a rent comps are $600 to $650 per month, I would charge $700-725 per month. Why? Not because the house is nicer than others; not because it has a large yard; not because I allow pets; but because tenants are willing to pay more to rent from a landlord th ey like and trust. My tenants are willing to pay a little more to live in a house owned by me rather than someone else. It may take me 30 -60 days to fill a vacancy (most of the time it is less), but the tenant and the landlord/tenant relationship will ma ke the wait worthwhile. The most important consideration to keep in mind here is on going mortgage payments. I may be incurring $450 to $900 a month while waiting on the right tenant. On the other hand, I could lower the rent, fill the vacancy quickly, a nd not have to spend my own money on the monthly mortgage. Two months into the lease the tenant is late but, being the nice landlord that I am, I let it slide. Four months later they get a month behind, but I’m willing to work with them because I don’t w ant to have a vacant house and they’re taking care of the place. On the 15 th of the seventh month when they move out without notice, they still owe rent. They were a month behind ($450 mortgage payment) and now I owe for this month. This rental scenario has cost me the same amount of money as the first example, only now the property that may or may not still be in good shape. Now their security deposit goes to having carpets cleaned and rooms painted. Not only is my rental property worth what I charge for it, it has added value because I am a conscientious landlord. If I go to buy carpet, I don’t get a discount just because I can’t afford what they’re selling. My wife doesn’t get a lower price on groceries just because we can’t afford what she’s buyin g. If we really can’t afford it, we do with less. But we do select where we shop for groceries, carpet, and everything we purchase based not only on price, but on quality and service as well. Why should real estate be any different? It shouldn’t! Let’s return to the first rental property described above. The house is nice, it does have a large yard and I do allow pets. However, tenants can get that from other landlords. What can they get from me? What entices them to want to rent from me? Why would a tenant be willing to pay more for comparable property? Added value! “Quality and service”; consciousness and trust; and: Enticements that are your best advertising. This makes my houses worth more. These are valid reasons that add real value to rental real estate. Beyond the “priceless” landlord/tenant relationship, some enticements that I offer tenants may include:
1. Month-to-Month Rent This may seem like a lot and it is. Moreover, I tell prospective tenants right off that I’m different from other landlords; a nd while I save the gifts as surprises, I brag about the various discounts available to them. This accomplishes two things. Hopefully tenants who can afford my property will seriously consider the potentially higher price worth it, and even if they rent another property instead, I’ve given them ideas to help protect them from “poor quality” landlords, in which case they may rent from me “the next time”. We’re not going to discuss how to find your tenants. My article on marketing covers this in detail. Newspapers, signs, banners, direct mail, word of mouth and your reputation should keep your properties filled and supply you with a waiting list of people who want to live is your houses. In this article we will start with selecting residents. As previou sly stated, you never want to setup a tenant for financial failure. That will not only hurt them, but also affect your finances and perhaps, mortgage payments. If you help a tenant fail, you fail yourself. So, how do we determine if our prospective tena nt is the right one for the property? Screening applicants Individual landlords and large corporations use this process. For some, it consists of an informal interview that takes only a few minutes. (In fact, some have no screening process. If the tenant can pay, they can move in.) Others go to the other extreme and require applications, interviews, background and criminal records search, and much more. The screening process can be as easy or difficult as you make it. My personal philosophy is tenants should be screened, but not interrogated. It is imperative to require an application from a perspective tenant. This puts all needed information in one place. A simple yet satisfactory application can consist of a single sided sheet of paper. It should include Full Name, Current Address, Previous Address, Employer and Contact Info, References, Social Security Number and permission to check Credit and Employer, Landlord and Personal References. This permission is important. If you start investigating someone, especially if you pull their credit, you can get into serious trouble unless you have proof of their permission in writing. This application gives you that permission as well as the information you need to conduct such checks. When screening, I don’t go back more than a year. If the tenant has paid his bills for the past year, he will probably continue to do so. Moreover, if the people he or she has known for the past year give him good references, others are likely to do the same. This is not to say that people don’t change, only that change is slow. As a general rule, people financially responsible people don’t suddenly become irresponsible unless something drastic happens in their lives. For this reason, checking the past year usually indicates how responsible a prospective tenant will be based on his more recent circumstances.
Always check the following items as your basic indicators: Why are they moving? First you need to know where thy live now and why do they want to move. Does the tenant live with mom and want to move out? Are they getting divorced and need a new home? Is their current landlord evicti ng them? Obviously, if it’s the later, you’ll want to think twice before putting them in one of your properties. However, regardless of whatever reason is given, you should be cautious. It’s not going too far to assume that every applicant is a liar unt il you verify otherwise. I know that sounds harsh and it is, but it is also the only way to protect oneself in today’s society where “professional tenants” lurk: Persons who are skilled in finding a place to live for six months – without paying. Don’t fall victim to this. Protect yourself. In your due diligence don’t rely on the first thing you hear from the first person you speak with. Follow through with every contact on their application. Professional tenants are good at arranging for you to spea k to a cohort, so be sure the people you are talking to are indeed who they say they are. Ask specific questions of landlords (and employers) that require exact dates, amounts, and other verifiable facts. Do they have good references? Most folks have trouble thinking of references and landlords and employers don’t count because you’re going to check with them anyway. Cousins, in-laws, and other relatives don’t count as references either. Your goal is to talk to people who will tend to be objective, reali stic and the best way to do this is to offer suggestions for them to list: People they attend church with, co -workers (past or present), nearby neighbors from their current residence, friend from a club, organization, gym, etc. If a prospective tenant only gives you one name, get more. I require three references. The advantage to reference checks such as the types named above is that they are not under restraints from disclosure laws that prohibit what they can and can’t say. Take advantage of this with straightforward questions. One very important question you can ask is, “Would you rent a bedroom to this person?” If the answer is no, find out why. If you don’t find out before you rent to them, you will find out after you rent. What is their employment history? Privacy laws protect employees. For this reason, prior to contacting an employer, you need to fax a copy of the tenant’s application to their employer that shows the applicant gave you written permission to check references. Even then, most employers are limited regarding what they can or will disclose. Still, with documented, written permission, verifying employment history should not be problem. If the applicant has been with his current employed a year or less, you should check with his previous employer as well. I don’t suggest going back any further than 18 months, except in cases of someone having had many jobs within a short period of time. Does the person qualify? And what criteria must they meet in order to qualify? If you don’t rent to a tenant, can you give a reason? If you deny occupancy to someone, you had better have a reason and you had better document your reason(s) so that your decision can never come back to “haunt” you. Property owners must not only be alert to civil rights issues, in today’s world they must deal with a small percent of people who “look” for reasons to sue someone. Credit and References are valid criteria as tenant qualifications, but even these can present risks. Consider this. Have you ever rent ed to a tenant with “Bad Credit”? Would you rent to a tenant who had a good job and good references but, because of a divorce, had some bad credit? If you say “yes” to tenant “A” with bad credit, then you better not use “Bad Credit” as a reason to deny t enant “B”. Whether or not justified, that can be called discrimination, and discrimination can lead to lawsuits! Besides protecting you from possible discrimination claims, a rating system enables you to evaluate future tenants based on constructive crit eria. Each applicant is scored based on items listed. You set a minimum score required to rent from you, then you stick to it.
For example: You don’t have to stop here. In fact, you can add as many items as you like. I suggest you have a possible range of 100-120 and require a minimum of 70%, but this is up to you. That’s what great about a rating system. You control it, therefore you control who you do and do not rent to. Just be careful about things you add or subtract for. For obvious reasons, you may not add or subtract for such things as race, religion, sex, marital status, age, et c. Use common sense and list characteristics you are looking for in your tenants. Property owners can opt to address issues such as children or pets, and certain rental communities can be designed for singles, retirees, and so forth. Next, whatever your criteria, you must FOLLOW YOUR GUIDELINES. This is to say, if an applicant meets your minimum score, you must rent to them. You could say this method not only helps you to be objective, it takes individual judgments “out of your hands” so that when an applicant says, “When can I move in?” you can even say it’s not your decision and be telling the truth. It bears repeating, this procedure is a huge protection to you. If someone accuses you of discriminating against them, you have documentation to the app licant didn’t meet your minimum criteria. Once you’ve screened someone and determined they are suitable to occupy one of your properties, your next goal should be to maximize the rent you can fairly require from your new client. Notice I said fairly. I did not say we should get all we can get from our tenants. Rather, my goal is fairness which I define as the creation of a situation that is good for both my tenant and myself. Maximize Rent and Cash Flow
I’ll discuss one of my apartments as an exampl e: A washer and dryer in each apartment unit is a source of additional income, If you would like to keep these in your apartment, it only adds $15 / m onth to your rent”. Above retail office space where I provide access to the Internet for my commercial tenants, this can be still more income for those residential tenants upstairs who have computers. “Would you like access to our broadband connection? It’s only $25 / month and therefore less than the local ISP.” Note: I do not use a standard ISP. I have a T3 connection. You have to make sure you are not violating any laws related to this access. Some providers allow you to “include” the service, but not charge extra for it. Be sure you comply with all laws in this area. Similarly, you might be able to provide access to cable TV, but again you must be sure you are not violating any laws. Of course, the above descriptions of providing internet and/or cable access is appropriate only in multi -unit apartment settings and not feasible for single family housing. You can even offer the use of computers and this works for single -family properties as well as apartments. I offer tenants a new computer s ystem for an extra $25 / month. (I can buy a brand new computer, monitor, keyboard, mouse and speakers for $199 or less. If that tenant stays two years, they have paid $600 and get to keep the computer. I’ve made renting from me and staying with me for two years more attractive AND made an additional $400 after expenses.. That is a 100% ROR per year. The same is true with a television or DVD recorder. I can pick these items up for under $200 and charge $25 per month for each one. The tenant gets a ne w computer, TV and DVD recorder. You get an extra $75 each month for the next two years. If they leave before the two years is completed, you give the next tenant the same option. YES! I know what you’re thinking. The tenant might just decide to take these items with them anyway when they move out. That’s true, but if I’ve screened well and maintained a good landlord/tenant relationship, the chances of that are greatly reduced. The way I look at is this. If I’ve got a tenant I don’t trust with a $2 00 computer, I probably should not trust that person to live in a house I own that’s worth $100,000 or more. Hopefully you can see how to generate extra income through additional services to your clients. Electronic equipment and household appliances can all be leased or “loaned” to tenants for an additional charge on a temporary basis. Not all tenants will take advantage of such items and almost no one will utilize everything; however, if an average tenant keeps the washer and dryer and decides to have the use of a new computer and DVD recorder, then my $550 per month rent is now $615. Plus I can charge a security deposit for certain items that would help offset cost in the event a tenant did keep something he had not paid for in full. I have increased my yearly income by $780 per year and the tenant has deposited and additional $200-300 with me. I make more money and feel more secure. The tenant also feels that they have a good deal. I’m sure you can think of other items or services you can provide. What about lawn care for single family housing tenants? That’s amounts to someone paying you to take care of your own property, a good deal for landlords who have time to devote to this. Sounds like a winner to me! Rent Discounts and Fees. WITH the discount the tenant receives for EARLY payment, the monthly rent is $550. Note they do not get a discount for “On Time”, but only for “Early” payment that is defined as “any time on or before 5PM on the last business day of the preceding month”. Rent is due on the 1st of each month; however, if paid on the 1 st, the tenant pays the full amount of $600. The discount applies only if paid before its due date on the 1st of the month; AND, if a tenant is late more than three times during the lease, the discoun t will cease. Believe it or not, I don’t want the extra $50 each month. I just want to make sure that I get my rent in time to pay the monthly mortgage. The last thing I want to do is spend money out of my pocket or from my bank to pay for that someon e else is living in. If they are living there, their money should makes the payment every month, not mine! Now let’s look at the opposite scenario. Instead of early payment and a $50 discount, a tenant pays late. Then charge a $50 late fee. For my pro perties, late is NOT the 5 th. Late is any time after 5:01PM on the 1 st. If I needed it on the 5th, I would make if due on the 5th. Note: It is imperative to check local and state laws that might impact what constitutes “late” on rental property or migh t restrict the amount a landlord can charge of as a late payment fee. Another matter I am emphatic about is method of payment. Though I will accept cash payments from tenants, I will not rent to anyone who does not have a checking account. Some landlords go a step further and require that payments be made by auto -draft. For now, my preference is to use this as another enticement by giving a discount to those tenants who pay by auto draft. If it’s required, I can’t offer discount for this and I prefe r my “discount approach” as part of the landlord/tenant relationship. Remember the $15 per month that we charged for use of the washer and dryer? If the tenant does not want to take advantage of this simply because they don’t want to spend the extra money, then I ask if they would like them for “free?” Of course they would. Then I explain how. “Normally I charge $15 a month for the washer and dryer, but I also provide discounts for early payment and auto-draft payments. If you make your rent payment with autodraft that discount is $15 per month. This means you can get the washer and dryer for ‘free’. Would that be all right?” First of all, I don’t want the bother of moving the washer and dryer that are already in the apartment or house. I’d much rather let the client use them for “free”. By offering the auto-draft discount, I’m more assured of getting my rent on time every month and my tenant is getting something from me without have to pay me extra money. Again, that builds relationship. A discount that some landlords are familiar with and sometimes use is for “Property Maintenance”. Seldom beneficial for multi -unit rental property, it generally works well for single family housing tenants. Let’s face facts: Many of the people ho rent sin gle family housing are not “white collar” employees with IBM or Intel. Most of our clients are laborers. However, this can be an advantage for a couple of reasons. Often they are willing to take on “extra” work if it can save them money; and, some may be skilled in an area where you have a particular need. But “skill” is the operative word here. If the house they are renting needs paint, offer the tenant a discount for painting the wood siding or trim, but only if the job is “up to your quality of standards.” In reality, it may be better to suggest such a discount ONLY when you suspect the tenant capable of the task. Either way, y ou must make it clear that you expect TOP quality work. If you get it, you both come out ahead. An average house may cost $1000-1500 to have painted. If you offer to buy the material ($200), then offer to discount the rent a total of $500 to $ -7500 spread out over the next 3-5 months, you and your tenant can both save money. Also, some tenants take greater pride in a house they have labored on, taking better care of it. Property Maintenance can apply to a variety items for your long -term tenants: Interior painting, roofing, siding, landscaping and more. Just check yourself to be certain the proposed work is really necessary. Don’t get roped in by bogus “broken faucets”, “foof leaks” or the like. This is also a great approach to take with your Lease Option Tenants. They can build “Sweat Equity” and you save you money at the same time. Rent Increases How many tenants want their rent to increase? If that was a million -dollar question, we’d all be rich. No one wants to pay more. So, how do you get tenant to pay more without upsetting them and the good relationship you have established? That is the real milliondollar question. Most landlords follow this approach: “ Well Mr. Tenant, you’ve been here a year and it’s time to raise your rent. You’ll have to start paying $50 a month more or else move. Which is it going to be?” This approach will produce a very unhappy tenant. The tenant will feel very out-of-control and may opt to move out, rather than pay the additional expense. Then the landlord has a vacant property that they have to fill. On the other hand, this approach may yield a different result: “ Larry, you’ve been with me almost a year now. I know a lot of landlords just raise the rent and tell the resident how much to start paying, but as I hope you know, I’m not like most landlords. With the cost of everything going up, gas, oil, wood, etc …it’s costin g me more to keep my property in good condition. I know you like living here and I don’t want to loose you, but I need to raise the rent. What do you think is fair? I know a lot of landlords go up 5 - 10% per year. What do you think is reasonable?”
Twenty-five dollars? “Well, I’ll be honest with you. I was hoping you’d be willing to pay more. With the cost increases I really should charge more. Do you really think that is the best yo u can do?” Suppose they say, “Ten Dollars.” Then follow up with, “Well, I guess I can swing $15.” You just made an extra $180 per year. And, the best part is … the resident is the one who told you how much to charge. They aren’t upset. You wanted to c harge more. But, instead, you asked them. You wanted them to be involved in the decision. And, you have been fair to the resident. Last, let’s discuss a discount that many landlords should consider. Landlord’s Failure to Perform Discount How many times has a tenant called a landlord to inform them of some broken or malfunctioning item, only to be forced to call back a second and third time for the same repair? Many land / “slumlords” only fix something when the tenant calls multiple times or gets upset and stops paying rent because of a needed repair. If you fall into this category, stop reading this article, stop investing in real estate, and get a job. You should not be in this business because you give the rest of us a bad name. Can repairs take longer than expected? Of course. Repairs on my personal residence have taken longer than expected. My air conditioning has gone out and a repair that I expected to take 24 hours took almost a week. These things can happen and tenants will understand, if we communicate with them. This is a Great Sales Tool when trying to close a good tenant who thinks your price is too high. Tell them if you don’t address their repair needs within 48 hours they get your Landlord’s Failure To Perform discount. Notice I didn’t say repair, I said, “address”. If the toilet is broken, you should be able to have it fixed within 24 hours. On the other hand if the HVAC goes out, and parts have to be ordered, it could be a week or more to getting repaired. “If a tenant’s rent is late, most landlords are going to charge a late fee. I do. But, how many landlords will offer tenants a discount if their unreasonably late addressing repair issues? I will.” I can’t promise to have something repaired in 24 or 48 hours, but I can and do promise to have someone look at the problem and give my client tenant a repair date. If a tenant calls about a leaking roof, I contact a local roofer to look at it and give me repair cost and time line. The contractor may say a couple days or h e may say two weeks. It is my promise to let my resident know when that repair will be made. I have promised to inform the tenant how long it will take to make any repair. The discount only applies only if I miss that repair date. I agree to discount t he rent a set amount per day, for every day the repair goes past the deadline. NOTE: You can protect yourself by placing clauses regarding weather, parts availability or other uncontrollable delays. You don’t want to obligate yourself for $120-150 discount if a leaking roof can’t be fixed because it rains for two weeks; or have a $5 HVAC part to cost you $200 because it’s back ordered. My agreement makes the resident feel more comfortable because they know repairs will be a priority for me. This benefi ts me by keeping the client content and a happy tenant complains less and stays longer. Multiple Repair Complaints Though I addressed this in my article “ Rent High and Keep Tenants”, we’ll discuss it here again briefly. The last thing you want is a tena nt that calls all the time and complains. The toilet clogs and they call. The stove light doesn’t burn and they call. The sink drains slowly, the floor squeaks, the deadbolt sticks, the oak tree blocks their view, the storm door doesn’t close tight. So they call and call and call. Much of their concerns could be handled by them, and in fact, should not be your responsibility. If the storm door doesn’t close tight, how did it get that way? If it’s been like that since they moved in, why didn’t they li st it on the repair list when the moved in? If the sink drains slowly it’s probably because they’re pouring grease down it. If the stove light burned out, they can replace it. If the floor squeaks, they can live with it. If the deadbolt sticks, they can spray WD-40 in the lock. If the oak tree blocks their view, they can stand somewhere else or look at something new. Don’t get me wrong; some of these may be legitimate repair needs. The tenant who has put Drain-O in the sink twice and it hasn’t help ed or the tenant that can’t get her key out of the deadbolt; they have reasons to call. But, you don’t want to encourage them to call you for every problem and the best way not to do that is to have the tenant carry some responsibility for the repair. In my apartments and houses, the resident is responsible for the first $50 of any and all repairs and in some cases, may be required to pay the full amount. When someone calls to say the toilet is clogged, I tell the resident a plumber will be there by 5PM and they need to have a check ready. If the plumber finds a Hot Wheels Car in the crapper, they pay the whole bill. If the clog is under the floor, then I pay anything above the first $50. When he checks the sink and finds 6 months worth of grease in th e pipes, the tenant writes the whole check. If he reams the line and the clog is in the wall, that part of the bill belongs to me. If the locksmith pulls the key out, and it is bent, the tenant picks up the tab. If the lock was just stuck, I pay anythin g over $50. When the resident realizes they are going to have to pay for part of any repair, they begin to do two things: They take better care of your property, and they call you less. All of a sudden, that tree isn’t so bad and the squeaking floor doe sn’t bother them. They learn how to replace the light in the stove or they live without it. After paying a plumber once, they learn how to use a plunger. They don’t bug you for every little thing. You have created a tenant you or any landlord can be hap py with. You have educated the person, and if they ever own a home, they’ll know something about taking care of it. And most importantly, you have saved yourself time, money, and headaches. This is a WIN – WIN – WIN – WIN situation for everyone. As always it’s been a pleasure writing this article. Each new article makes me think about my own investing career: Where it has come from and where it is headed. Although I have now written many of these articles and had a terrific response to them, I still consider myself a novice investor and try to educate myself whenever possible – as we all should. I hope that you are able to find at least one item that’s helpful to your investing. The encouragement I receive from readers motivates me to continue writi ng and it has lead me to setting a goal of compiling these articles into a future book. Although I have had several, somewhat lengthy, articles published in different media, including magazines, I have never taken on a project as consuming as a book. I hope that readers would find any such writing educational and worthwhile. It is also my goal to be able to provide personal, on site, Mentor Coaching to investors all over the country, as I feel that I could learn as much as I could teach. Yours truly, Greg Gardner
S&J Properties and Investments
I’m sure this Post Script will be no different. |
How do you get more rent than other landlords?
