Until the collapse of the mortgage industry under the weight of fraud, real estate had traditionally been viewed as a safe investment vehicle. Skyrocketing prices at the height of the real estate bubble brought many buyers into real estate that were enticed by the idea that they could make money from their investments. While property prices have fallen nationwide, some savvy investors are holding on to their property and renting to tenants.
Dealing with tenants if you are not a real estate professional can be very difficult as I have documented with my tenant from hell stories. The easiest way to lose your investment in real estate is to be a lax landlord and let bad tenants run roughshod over you. Hopefully, with this handy guide, you won’t have too much trouble when you run into a bad tenant.
- The first rule of being a landlord is to know the rules regarding tenants’ rights in your city or state. Most laws weigh heavily in favor of tenants to combat historical injustices (think slumlords) where tenants had very little rights. It’s is my opinion that the scales of justice are tipped too far in favor of tenants, but if you know the law, you can save yourself some trouble. I have three resources that I use in this area. My favorite is the U.S. Dept. of Housing and Urban Development (HUD) Tenant’s Rights page. This site lists every state and links to information regarding rights of each tenant. I also use RentLaw quite a bit as well. Invest with Passion also has a page with landlord-tenants statutes by state. If all else fails, you can always do an internet search for your state’s attorney general’s website which should list rights from both the standpoint of a landlord and a tenant.
- The second rule is to know your tenant. Just because someone seems nice and can afford the rent does not make them the ideal tenant for you. Extensive screening of potential tenants is a necessary evil in weeding out good tenants from bad ones. To avoid bad apples, I highly recommend an application and thorough background screening.Your application is your first line of defense in weeding out undesirable tenant. Things that you should ask include current employer, verifiable income, the number of individuals that will occupy the apartment, and if the tenant will have any pets. Rent Law has a great sample tenant application form (MS Word) that you can freely use. Please be sure to consult with an attorney or do a decent web search on specific questions that you may or may not be able to ask in your state and the maximum of any application fees allowed.
- The third rule is to set minimum standards that you will accept in a tenant. A potential tenant should make a minimum of three times the amount that you will charge for rent. If the potential tenant makes less than that, chances are they they will struggle to pay your rent in addition to the basic necessities of life such as utilities, food, clothing and transportation. In order to verify that your potential tenant can afford your apartment, you should ask to see the most recent pay stubs covering the past month.You can go one step further and perform a background check. TransUnion runs a website called My Smart Move, which offers background screening of tenants for around $25. You can charge that as the application fee (which you can collect) or even better, you can direct the tenant to the website where they can enter their own information and pay the fee and you will be sent the report. It safe, secure and shows the tenant that you mean business. My Smart Move allows you to create minimum threshold levels and can tell you whether the applicant meets your requirements for tenancy. You can even find out of the person is a registered sex offender. I absolutely love it.
- Once your tenant meets your requirements, your last line of defense is documentation. The most important document that should exist between you and your tenant is the lease agreement. You should absolutely have a lease even if the tenant is renting your property from month-to-month. Things that you want to cover in your lease include:
- rent amount and form of payment
- damage to premises
- provisions for late payments or returned checks
- security deposits
- use of premises (you don’t want your tenant to turn your property into a club)
- number of occupants
- assignment and subletting
- alterations and improvements
- surrender of premises, default and abandonment
- maintenance and repair
- pets
- utility payments
- renter’s insurance
- tax increases
- official record of signature and dates
If you’ve never written a lease before it can seem daunting. Don’t worry, I have resources for you. You can purchase and download state specific lease forms that covers all of these topics and more. You can also try to find some free ones online. Rent Law has a general lease agreement (PDF) that you can try to customize for your state.
- Finally, before the tenant moves in, be sure to take “before” photos of every inch of the property and have the tenant sign a move-in checklist. This way you have proof of the condition of the property before the tenant occupies your dwelling just in case you need any legal help later.
- I would be remiss if I did not tell you that you could avoid all of these steps by hiring a rental or management company to take care of all of this for you. A decent management company will go through this entire process and take care of your property for a percentage of the rent that they collect on your behalf. Rates vary, but expect to pay somewhere under 10% for general property management, and perhaps one month’s rent for rental services. This all depends on whether the property is commercial or residential, the size of the property and how much work you want them to do.
Even if you do everything above it is still possible for you to end up with a rotten apple. It’s not your fault. Your tenant’s financial situation can change after you rent the property. You should always treat your tenant politely, firmly but never as friend. If your tenant crosses into the friend zone it will then be harder to take the steps that might be necessary to remove an undesirable tenant from your property.
I know that I mentioned Rent Law a lot here, so I have to say that I am in no way affiliated with or compensated by them. I just find their site highly useful and wish they would call me to work out an endorsement deal.