As stated in How to Buy Your First Rental Property, the 3 most important factors which separate the winners from the losers in the rental business are:
- Buying at the right Price
- Selecting the right Tenants
- Finding the right Contractors
Today we will focus on Tenants.
“It’s all about the tenant” is the unanimous sentiment among successful landlords. Once we buy the property at the right price, ongoing operational success comes down to tenant selection.
Our rental property portfolio is a business!
If you’ve been investigating getting into the rental business, I’m sure you’ve heard a few tenant horror stories. I’ve had my share of rough patches and learning experiences, but without these mini-failures, we don’t learn and grow.
I still remember about a year after buying my first rental, I actually had the thought that although going through an eviction would be a real hassle, I wanted to experience the process before quitting my job so I could learn the full protocol and not have anxiety about this unknown after quitting my job.
Sure enough, a few months later, I had to evict my first tenant. Fortunately, through improved tenant vetting and selection, I have not had an eviction in over 3 years.
If a prospective tenant walks into your open house and seems overly anxious to rent, offers cash on the spot, and begins describing all the things they’re going to do to improve the house, then those are red flags. Take a step back, listen to your spidey-senses, and follow your standard vetting procedures.
Needless to say, we absolutely want to avoid the tenant from hell like Michael Keaton’s character in the movie Pacific Heights! Great psychological thriller!
Overcoming Fear
Being a perfectionist, I used to feel uneasy if I didn’t have a plan ahead of time to deal with a situation. Years ago, a former boss and real estate mentor who knew this about me said, “Mike, you can’t have a contingency for everything that might happen.”
In other words, we cannot plan for the unexpected or unknown as the possibilities are infinite. It is smart to prepare the best we can, but it’s important to be able to handle anything that is thrown at us. This is a skill we develop through time and experience. When faced with the unexpected, we just figure it out and solve the problem.
For example, we might drive a car for 20 years without ever having a flat tire. When it eventually happens, even if we have never been shown or trained how to deal with it, we put our wonderful brain to use and solve the problem. The solution can vary from grabbing our owner’s manual and learning to change the tire ourselves to simply calling our insurance company after realizing we paid for roadside assistance. In either case, problem solved!
My First Rental Property Dilemma
I hired a home inspector for my first rental property, and during the inspection he called me down to the basement to show me some mold on the walls in one area. My initial 20 second internal reaction was, “I need to get out of this deal.” Thankfully, my career-seasoned tolerance for dealing with stressful and unexpected situations snapped me back to the reality that this was simply another problem to be solved.
My second thought was, “There is no such thing as a perfect deal, and therefore, if I back out of this deal, I will never buy a rental property because there is always an imperfect aspect to every purchase.”
This is where our full decision-making skills come into play; we have to be able to decipher the true deal-breakers from issues which can be cost-effectively remedied. Any and all problems can be fixed with enough money, so we need to evaluate whether a given problem can be fixed and still meet our rate of return requirements.
Well, I’m no mold expert, but upon closer inspection it appeared to be old, dead mold as it was concentrated on a wall behind where the washer and dryer used to set, and the owner had subsequently moved the appliances to the main floor.
So what did I do? I later did exactly what the inspector suggested, sprayed and scrubbed the wall with a bleach and water mixture to remove the mold.
Of course not knowing the outcome at the moment, and only having a few days to renegotiate terms with the seller, I used the inspection report as leverage to ask the seller for mold remediation costs. I did some quick-and-dirty online research and asked for $4000; the seller agreed to pay $2000.
I ultimately handled the mold myself without professional remediation, and as an additional precaution, I bought a dehumidifier for $150 and set it in the basement to drain directly into the main sewer line.
I later learned mold cannot grow as long as relative humidity is maintained below 60%. All basements are different and humidity levels vary, so each basement may or may not need a dehumidifier.
Advertising Your Rental Property
The following are the top 3 advertising tools, and they are the only ones I use:
- “For Rent” sign in the yard
- Facebook business page
- Craigslist
When I first started I put ads in the newspaper, but after the first few rentals, it was no longer of value once my Facebook business page gained many followers.
Design a Logo for Your Rental Property Business
I am lucky to have a best friend from college who is a degreed architect and also a skilled artist. He was generous enough to create my rental business logo. However, if you don’t have an artistic friend or funds are limited, there are many websites where you can design your own logo for free.
In fact, I created the logo for Cash Flow Playground using onlinelogomaker.com, and there are many other similar websites. The idea is to start building your brand and reputation. I will reveal how powerful this can be with my next tip.
Start a Facebook Business Page
A Facebook business page is absolutely essential as it will be your #1 marketing tool, and it’s free!
Take several really good photos on a sunny day of both the exterior and interior of the house. Post on your business page with a detailed list of property features, address, rent, open house dates, etc. See my Landlord Bundle for a sample template.
Renters love to share rental property posts with friends and family who are looking for a nice house. Be prepared to enjoy the sound of your phone dinging with comment notifications right after posting. People will either share the post or comment with the person’s name they wish to notify.
To illustrate the reaching power of a Facebook business page: my rentals are located in a city of population 25,000, my business page has 1300+ followers, and one of my posts once reached over 9300 people. That’s more than a third of the entire city! And it’s free, targeted advertising!
Apparently, my business page is ranking high enough on Google search results that I have a few funny stories of out-of-state folks contacting me not realizing where I am located.
Likewise, open an account on Craigslist and post the same photos and property details.
Once you build a large contingent of Facebook followers, 90% of renters looking online will come from Facebook and 10% from Craigslist.
Create a Professional “For Rent” Sign
This is so simple, yet I’m surprised how few landlords do this. Amazon or any home improvement store sells the full size metal frames like real estate agents use.
Find a local sign printing business and send them your logo, business name, business phone number, and QR code for your Facebook business page. You can either format it exactly how you want on Microsoft Word or PowerPoint or just have them do it.
They start with a standard plastic 1/4″ corrugated red and white “For Rent” sign and print all your business information on a large sticker which they affix to the sign. It’s very professional looking and only costs about $30.
Do not use the small, chintzy signs with a hand-written phone number. Remember, build your brand! About a half hour after pounding the sign in the ground, your business phone will start ringing.
Use a MagicJack for an Inexpensive Business Phone Line
Since I manage all properties myself, I give tenants my personal mobile number for emergency and general contact. However, I avoid giving my personal number to prospective tenants.
Therefore, I needed an inexpensive dedicated phone line. The MagicJack device with first year service is around $50. After the first year, you can buy a 5-year plan for only $130. That’s $26 per year for a dedicated business phone line!
Record an outgoing message for your business line as follows:
Hello, you have reached “your rental business name“. If you are calling to inquire about a house for rent, please login to Facebook and search for “your Facebook business page name” for photos and property details, including open house dates and how to submit an application. Thanks for your interest, and we hope to see you at our next open house.
This is a huge time saver! Many folks see the sign in the yard and call with basic questions like “How much is the rent?” and “How many bedrooms?” Before implementing the above outgoing message, I would get home from work, and my answering machine had over 10 messages every day.
It didn’t take me long before I concluded I did not want to spend my evenings returning calls. I needed an efficient method of weeding out those who couldn’t afford the rent or the house didn’t have the number of bedrooms they need.
By directing them to my Facebook business page, they no longer left messages, and these basic questions were answered without my involvement. This reduced my return call workload by 95%!
Showing Your Rental Property
It is naturally recommended to continue working a full-time job while building a portfolio of rental properties. Therefore, due to time constraints, we must become masters of efficiency. In part, this means avoiding private showings of the property.
The most efficient method to show your rental property is by holding open houses on the weekend. I usually schedule open houses every Sunday from 12:00-1:00 pm until the house is rented. If two houses are vacant at the same time, then schedule the second for 1:30-2:30 pm.
Invariably, someone is working during the open house hours and can’t make it, or they just noticed the sign literally right after I left the open house. In these instances, I encourage them to come to next week’s open house, or after talking with them on the phone, if I sense they may be a really good candidate, I may arrange to meet them individually. This is a judgment call, but again, I try to avoid private showings.
Bring copies of your application, property details sheet, and a sign-in sheet to the open house. My Landlord Bundle has a perfectly formatted application that fits nicely on the front and back of one page. The bundle contains all the documents needed to manage your rental properties.
I usually encourage folks to compete the application right at the open house, but they are welcome to complete at home and email it. Of course, you will want to create an email address exclusive for your rental business.
Pay close attention to all those coming to the open house and speak with as many people as you can. This is the first step in assessing prospective tenants. The ones who complete applications on the spot are obviously more eager, so quickly review and conduct a mini-interview when they hand you their completed application.
Application Review and Tenant Selection
Step #1 — Verify Sufficient Income
It doesn’t matter how nice, wholesome, hard-working, and well-intentioned a prospective tenant is if they don’t have the income to reliably pay rent every month.
This analysis is very similar to how a bank evaluates those applying for a mortgage. Use a rent-to-income ratio between 0.33 and 0.30. As an example, let’s assume monthly rent is $800. We want to verify the following minimum monthly income range:
- $800 / 0.33 (or $800 x 3) = $2400
- $800 / 0.30 = $2667
Therefore, the minimum gross monthly income range is $2400-2667. Obviously, the higher the better, and other factors in the assessment process will help in ranking candidates relative to each other. It is wise to consider other liabilities such as car payments and student loan debt.
Make sure to consider all forms of income: child support, spousal support, disability, etc. So if gross monthly income from all sources is less than $2400, then they are not qualified. Unfortunately, many applicants will fall in this category. Move on to the next application as the steps below are unnecessary for unqualified candidates.
Step #2 — Perform Background Checks
This can be done for free yourself in as little as 5-10 minutes. It will vary by location, but in my case 80-90% of applicants are local, meaning they have lived most of their adult life in the same county. The process will take longer if the applicant is not local and/or has lived in multiple out-of-town locations.
In either case, the process is the same. Go to the city or county municipal court website where the applicant resides. Simply Google “city state municipal court” or “county county state municipal court”. Obviously, this will become super quick for your local municipal court as you will have it saved to your favorites bar and already know your way around the site.
Each municipal court website is laid out a little different, but look for “record search”. Once found, enter the applicant’s name, and all their civil and criminal cases will be listed. This is all public information.
For grins and giggles and to see how naughty you’ve been, go ahead and search your own record. It will list everything from speeding tickets to felonies and everything in between.
When you pay a private company to perform a background check, their system is simply compiling results from these public records. So this is the free, manual way of getting the same information.
Credit Checks
I prefer to regard this as a “responsibility and reputation” check. The 3 main things a landlord wants from a tenant are:
- Pay rent on time
- Take care of the property as if it’s their own
- Notification when there is a problem, particularly one that’s causing damage to the property (e.g. water leaks)
There are credit check services for a fee, but they are not foolproof and really only address #1 above. Each candidate’s application is analogous to a resume, so the more complete it is with employment and rent history, the greater their chance of being selected. We are ultimately assessing their ability to be a responsible tenant.
Additionally, with multiple applicants, handling credit check fees is a bit tricky. I don’t want to eat that cost myself, and it doesn’t seem fair to charge applicants a fee when they are competing against others and may not be selected.
Therefore, the better alternative, which is more detailed and both objective and subjective, is to manually perform a character assessment using the two steps below. Once we obtain direct feedback from these sources, the idea of a piece of paper credit check loses its value.
Step #3 — Contact Current and Past Landlords
These last two steps are essentially a manual credit check. I only perform these if the applicant passes the first two steps, and they have become a top choice.
Call the landlord or property management company directly. Some will answer questions over the phone and others require signed consent from the tenant. My application has the necessary verbiage authorizing release of personal information. The following is a sample email and key questions to ask:
One of your former tenants, Clark Kent, has completed an application for a rental property I own. See attached signed application. It would be much appreciated if you could provide the following feedback and any other information that would be helpful:
- Has he been paying rent on time?
- Any 3-day (eviction) notices posted?
- Is he keeping the property clean and well maintained?
- How much of the security deposit was returned? (for past landlords)
- Would you rent to him again?
Step #4 — Contact Current and Past Employers
Likewise, in addition to employment and income verification, we want to know how they perform on their job. Are they hard-working, punctual, and rarely absent. Solid character traits apply in all aspects of a person’s life. The following is a sample email with key questions to ask:
As stated in our phone conversation, Lois Lane completed an application for a rental home I own. See attached signed application. It would be greatly appreciated if you could provide me with the following information:
- Confirm employment
- Confirm stated base wages of $3000/month
- Is she a full-time, year-round employee or seasonal? (circumstantial)
- Overall performance – absenteeism, tardiness, etc.?
- Would she be rehired?
Naturally, we want to hear raving reviews from the above sources so we are confident they will be excellent tenants. Let’s face it, if someone is really good, people will say great things about them. Anything less is suspect.
Target 2-Year Leases Minimum
Successfully obtaining 2-year lease agreements or longer is critical to maximizing our overall rate of return and minimizing our management workload.
Finding great long-term tenants is like finding the Holy Grail! Well… maybe not that impactful, but close. There can be a high cost in both time and money to tenant turnover, so we want to avoid 1-year leases as it cuts significantly into profits.
I almost never do 1-year leases, and in fact, currently have 4 tenants who agreed to 3-year leases!
How do you get tenants to sign 2-year or longer leases? Not everyone has a good poker face, so you can usually tell when someone really wants the house. So in most cases it doesn’t take much persuasion as they will eagerly agree to the longer term.
However, even if you only have one viable candidate, they don’t know that, so use this to your advantage. In all reality, you will likely have one, two, or three acceptable choices with #1 deemed “excellent” and the others deemed “good”.
Knowing I want the #1 ranked candidate, I simply initiate the “term” conversation with something like, “Due to the high cost of turnovers, I’m usually successful getting tenants to agree to a 2-year lease, so if you are willing to at least do 2 years and may consider 3 years, that would put you at the top of the list.” They don’t need to know they are already at the top of the list, or perhaps they are a list of one.
I’m happy with 2 years, but depending on their reaction, you will get a sense for whether they will go for 3 years. Bottom line, it doesn’t hurt to ask. I sneakily start this conversation early on by asking “number of years intending to stay” on my open house Sign-In Sheet.
Now that you’ve successfully bought your first rental property at the right price and selected the best tenant, you get to enjoy the cha-ching sound every month as rent checks are automatically deposited in your ever-expanding bank account.
Go get it!
Comments and questions below are welcome and encouraged.
— Your brother Mike
Illia Kyselov says
Thanks for the detailed article, Mike. I see great advice that has been tried and tested. This is very important when writing someone who has gone through this. I will follow your blog)) I myself invest in real estate through REIT, and in principle, I have a yield of 6-8% of the value of the asset per year. Your topic is also very interesting to me!
Cash Flow Playground says
Illia, I appreciate the compliment and comments! I also invest in REITs and 6-8% is a decent return. However, if we buy at the right price, we should be able to make 15-35% managing our own rental property, depending on how much leverage we’re employing. Thanks for stopping by!
Illia Kyselov says
Thanks for the clarification and helpful link. As for me, 15-35% is just prohibitive profit))) I will read your materials, maybe I can apply it, thanks!