Many moons ago, when I was 23 years old, I purchased my first duplex. The back unit was vacant and I was in a rush to get it rented. Being young and foolish, I just assumed that people were responsible and paid their bills. To make a long story short, one year and lots of stress later, I ended up evicting these tenants. Over the last 27 years, I have learned a few things regarding tenants. Some of these tips are boilerplate obvious, other more subtle relating to the psychology of being a landlord.
This week some wonderful buyers of ours closed escrow on a great duplex in the Virginia Country Club area. They are first time landlords, yet very conscientious. This list is for them, but also for any buyer deciding to embark into this new business venture:
Psychology:
Be a Jerk:
When you are a new landlord you may feel the need to be accommodative. You want to be helpful. You want people to like your rental. This is the wrong mindset. Now since I am sales my natural in inclination is to say “Yes”. I like to please. Don’t be that way. You will need to change your way of being and be a little more like a “Jerk”, and say “No”. Why will you need to be this way? Because the exact people that you DON’T want as tenants, will be the “Pushiest”, and try to get you to rent to them. The poorly qualified tenant will be the one that tries to give you a big sales pitch. The well qualified tenant is the one who one give you a sales pitch, as their credentials will stand on their own. So I don’t mean that you have to be a jerk, but you have to know how to stand firm and say no. To protect your interests you are going to have to turn away what you deem to be deadbeats, and this unfortunately this does mean you will have to be the bad guy. You aren’t literally being a jerk, but you are likely to feel like one. There is just no way around it.
Be Patient:
If your vacant unit rents for $2,100 per month that is $70 per day of lost rent. You might say.. “Holy mackerel, I need to get this placed rented right away, because I am loosing money”. DON’T think this way. Selecting a tenant is like hiring an employee. It is very easy to hire and very hard to fire. Plan on 2, 4 or even 6 weeks of vacancy. It is the cost of doing business. Hopefully it is less, but sometimes it might just be a slow couple of weeks. As I write this article it is August – summer vacation time. I wouldn’t even consider panicking until I reach the first week of September.
How do you feel about the people:
While there is no substitute for running credit, let you intuition be your guide. Does something not seem right. When you ask basic questions does the story not pass “The Logic Test”. Finding tenants that have the right attitude can go a long way. Sometimes in up front conversation you may get a tip off that these tenants might be difficult, litigious or otherwise likely to cause problems.
Don’t be greedy:
If you try to maximize the rent, you may find that pickings are slim, or you get a tenant that doesn’t want to stay for the long haul. If a tenant moves there might be 30 days or more of vacancy and or $1,000 – $2,000 of clean up, paint and/or carpet. How long might it take to make back this lost income ($2,000 – $4,000) at the rate of $100 or $150 per month (about 3 years). Plus offering your apartment for a competitive price will give you a better selection of quality tenants to choose from. When you get a lot of applications, you will then be in the unfortunate (for the prospective tenant) position of having to say no to these less that ideal candidates. But you will find you ideal hassle free tenant.
The Details:
Advertising
While you certainly can advertise in the local papers, the Press-Telegram, or the Grunion Gazette, these papers are quite expensive and CraigsList is free. Craigslist is also becoming the de facto standard. You will need to register to post your listing and then renew the ad every 7 days. Just be aware of the fraud that can / does occur on Craigslist.
Rental Application:
When a prospective tenant expresses interest in the rental, provide them with a rental application. You will NOT want to run credit on every person that fills out an application. You will only run credit when the initial information looks good. Do they have a job, how many people want to live in the apartment? Do they have pets and what will be your policy. Are they going to stay there for a least a year. Maybe you will start with a year lease that then goes to a month to month.
Running Credit:
If you have decided you like the prospective tenants. It is reasonable to ask them to pay for a credit check fee (maybe $25). This is when the prospect may “fess up” and volunteer information about their shady past. This isn’t a bad thing. People have bad credit for a reason. The question you need to ask yourself is whether the pattern of bad credit will spill over to their ability to make rental payments. Here is a situation which I would consider to be good – “bad credit”. The client just had a foreclosure or short pay on their record. They bought a home for $550,000 in Corona at the peak of the market and have been commuting for 5 years to their job in Long Beach. Their homes value dropped to $350,000 and they just couldn’t take the commute anymore. Other than the home, their credit is fine. This might be the perfect bad credit scenario. Remember they are going to be renting for a reason. And right now homes cost about the same as rents. So don’t expect to hold a tenant to the same standard as a home buyer.
Income:
When you purchase a home, a lender wants to see that your total debt does not exceed 40% of your GROSS income. This means your car payments, credit cards and the proposed housing expense doesn’t exceed 40% of your GROSS income. House payment however are tax deductible, rent is not. So I might be even more conservative when evaluating a tenant. The credit report will confirm payments on car loans and credit cards. If somebody made $6,000 per month then $2,000 towards rent may be OK (33% debt ratio). But not if they have two $500 per month car payments (50% debt ratio). If this were the case I might look elsewhere.
You will also get a sense of whether people are liar’s or not. On the rental application did they not list any of their debt, and the credit report shows traits of a shopaholic? You can put that in the “How do you feel about them category”.
Join an apartment owners association:
Long Beach has an apartment owners association. This is a great source of advice. They will help keep you on the right side of the law. They can also offer services like running credit reports. By the way, you do need a prospects approval to run credit, make sure you get it. They can also check for any “unlawful detainers” that were filed in the county. An unlawful detainer is the initial part of an eviction. When a tenant doesn’t pay rent, they are given a 3 day notice to pay rent or quit. If they don’t pay rent the next legal action will be to file an “unlawful detainer”. Basically this means that somebody is unlawfully detaining your property. This would certainly be good to know. You don’t want to be taking over another landlords problem child.
Disclosure:
Please keep in mind that I am NOT an attorney and this is not to be considered legal advice. That is the purpose of joining the apartment owners association or having an attorney to consult with. The law changes regularly, and working with a specialist, like an apartment owners association, will keep you abreast of legal updates.
Don’t accept any money:
Acceptance of money can be considered to make a contract binding. Let’s say you have somebody that you like. They have given you an application that is stellar, and they even gave you a personal check for first months rent, and a security deposit. The only problem is that every thing on the application is B.S. (NOT Bachelor of Science), and their check bounces. The only problem is that they have moved into your property under the assumption that since you took the money you have approved them. Not to say that this will happen, but I guess it could. So don’t take any money unless you are sure you are going to rent to the people. You may even consider asking for the initial funds to be a cashier’s check, but that is up to you depending upon your sense of the situation.
Security Deposit:
Based upon my understanding (see disclosure above, as this advise could be wrong). You are not allowed to ask for a “Last Months” rent. You are only allowed to ask for a first months rent. But a security deposit can be an amount up to 2 months of rent. When I have had questionable tenants. Young kids, dogs, etc. I may have required them to increase the security deposit to this maximum. If they couldn’t do it all right away, maybe they raised it from one month to 2 months over the initial first several months. You may also consider having the security deposit be a slightly different number than the monthly rent. If the rent is $2,000, then maybe the security deposit is $2,500. This keeps the tenant from thinking that when they are moving out it is OK just to not pay the last months rent because the security deposit is the last months rent.
Enforce last fees:
Should I say anything else.
Evictions:
Use an attorney that specializes in this process. They usually are not that expensive and it pays to have all your t’s crossed and i’s dotted. You don’t want to get down the road in the eviction process and have to start all over again. You may consider providing the first bit of action yourself (The Three day notice to Pay or Quit). This form is pretty basic and you will not want to delay several weeks in providing this form, just make sure it is done correctly. Again an apartment owners association will be able to guild you.
Cleaning Fee:
You are allowed to ask for a cleaning fee. But again I would check with an apartment owners association on this prior to having it in a contract.
Return of Tenants funds:
Based upon my understanding of this (And again I could be wrong – if I am please correct me i the comment section below – Thanks!), you need to return the tenants deposit within 2 weeks of the property being vacated, along with a list of any funds that were taken out, and what those funds were spent on. The general rule is that you ARE allowed to charge the tenant for items beyond “normal wear and tear”. Was the carpet new when the tenant moved in? Was it thrashed when they moved out and needed to be replaced? If they had only been there for 1 year, then certainly you could charge them. You might want to prorate the usage to be completely legal. If carpet is considered to have a life of 5 years, maybe you charge them 80% of the cost. However if the tenant were in the property for 20 years, then it would be just normal wear and tear.
I hope this helps. If you have any of your own insights, comments or corrections, please post them below. I look forward to any and all landlord stories.