Here are some of the biggest mistakes landlords make when they set up their leases and relationships with their tenants:
- If rent is not paid on time, waiting to send out “demand for payment” longer than
the next day. The eviction time is a long process…in Michigan it
can take up to 45 days. If the tenant doesn’t pay, and you go to court, you
could lose rent payments for more than just the one month they are a
- Giving a free month of rent when they move in. You may think
this is an incentive to attract a paying tenant, when in fact it is more of an
incentive to attract a NON-paying tenant. Don’t start out your tenant/landlord
relationship setting a precedent that allows them to think they can have rent
free months. If you want to give away free months go ahead, but make them earn
it. Make sure they pay on time (this means cash in hand, not on the way) for at
least 6 months before you give them a free month. There are ways to handle this
by using online rent collection services. These service collect the tenant’s
rent and deposit in your bank free to the tenant, at a very small monthly charge
to the landlord. This is well worth it to both parties.
- Having a “shoot from the hip” qualification precess and
application fee. Make sure that part of the requirements are based
on debt/income (net) ratios…that are spelled out in writing. If the tenant
has been turned down before and might be concerned about that happening again,
let them see the paperwork with the qualifications before they submit any fees.
If they think they won’t qualify, you both saved time and money. You can
always credit the fee towards the security deposit….speaking of the Security Deposit,
- Giving away part or all of the Security Deposit or
discounting move in costs. If a tenant baulks at this, do you really
want them as your tenant? If they can’t come up with this now, they are a risk
to you if they damage your property and there is no SD to get the repair funds
from. Maybe they know something you don’t? Know what the maximum is that you
can collect in the state your rental is in…and start there. Did you know that
the SD is actually still owned by the tenant…and not the landlord? You must
deposit it in a bank separate account, and let the tenant know where that is.
The landlord can’t touch it unless it is used for repairs, etc…when the
- Not providing disclosures. This is critical
in today’s lawsuit happy world, you’re just opening yourself up as a target.
Houses built before 1978 require landlords to provide a lead based paint
pamphlet and a signed disclosure as part of the lease agreement.
- Not doing a thorough screening of you tenants.
This is particularly important to filter out those with multiple evictions.
Have a written policy on this with NO EXCEPTIONS. Don’t let the applicant
blame the past landlord for the eviction either. If they are using that as an
excuse they are telling you upfront they will do the same to you. Make sure as
part of the screening process you investigate the tenants background, rental
history, eviction reports, credit reports and criminal reports along with proof
of income. Protect yourself before they move in.
- Not using move in and move out checklists for every
tenant…and actually using them in a dispute. It is so easy for a
tenant to blame you for a problem by saying “that was there when we moved
in”…even though everyone knows that wasn’t true. Have it ALL in writing, in
detail, and SIGNED by all, as part of the lease before they take occupancy. You
know they won’t do it after.
- Using your own lease. Make sure the lease you
use has been approved for the state the house is in…and don’t make up your
own. Not every state has the same legal requirements and
- Not providing the tenants, as part of the lease
paperwork, what qualifies as an emergency, and what qualifies as something the
tenant needs to take care of. With this in mind, one of the
important criteria for this involves safety of the tenants and potential damage
to the property. This means you should suggest the tenants get their own rental
insurance and it would be a good idea if you could provide them the name of a
source for that.
- Not knowing the laws and regulations of leases in the
state your rental is in. This should be obvious. Not every state
has the same laws for leasing, but you need to know that they are in place to
protect both the tenant and the landlord. Know them, so you don’t have to find
out what they are in court.
all of this sounds like a lot of work, it can be, but it is more work if you make the mistakes stated above, and you end up losing all your profits…and maybe more…including the house itself. This is one reason why a lot of landlords use Property Management companies to handle this. They deal with this on a daily basis, are usually very reasonable (if you can’t afford it I question why you bought that rental to begin with) for the security they provide to the landlord.
Taking some of your profit out to pay for a service like this will be worth every penny. In all cases, please consult your professional legal advisor before you make a move.
That was easy. Just stay away from the tenants. OK, so it’s not that easy since you can’t stay away from a tenant if you own a rental property…they are the “necessary evil” part of the package. You can make it less painful if you learn how to control them. There are a couple of ways of doing this.
First Method: Control the Rent Payment
The rent payment seems to be the biggest issue of control in any tenant/landlord relationship. Collecting that monthly check is probably a bigger headache than the plugged toilet call…unless your tenant, well, let’s not go there. Maintenance issues are here and there issues, the rent is a regular monthly occurrence, you hope. A great tenant is probably late with their check maybe one a year…and then they leave to either a different/bigger house or location, or buy…and you cry, because you end up having to replace them with the “not so great tenant”. This tenant is late with their rent for those 11 months the good tenant is on time. You end up chasing the rent down, dealing with bad checks or any number of reasons why the check is either late or short…with the promise of “next time…”. So, how do you control the rent payment? Take the controls out of your tenant’s hands.
Have your tenants sign up for (free to them) a system that automatically transfers the rent from their account to yours…every month, on time. Think about this. If someone is automatically taking money out of your account, you are going to make sure it is there…right? Especially if there is a fee attached to it not being there. Why would the tenant sign up for this? For one, it makes it easier for them than to have to write out the check and mail it every month. Also, the company will submit positive reports to the 3 major credit agencies on their behalf. Not a bad thing to have happen in this age of credit problems…and, did I mention it was free for the tenant to enroll and use.
There is a monthly fee (very cheap) for the landlord for each tenant and the monthly fee is only around $2 from the second tenant and beyond…now that’s cheap! The tenant and the landlord is notified about 10 days prior to the transfer and once the transfer takes place both parties are notified again. Just that easy. For me, this automatic rent payment program, is on of the best things I’ve found yet. I said one of, because you can eliminate having to deal with the tenant at all, and have guaranteed payments coming in, with easy cash flow too.
Second Method: NNN SF Rentals
Have someone else handle your tenants and their problems. You just receive the cash flow and pay only the debt service out of it. Your partner/manager takes care of the tenant and the rest of the expenses. You still own the property so you retain ALL of the deductions…and your 9.1 CAP income is guaranteed by the manager. When you buy the property the seller pays all of the closing costs and you get 3 months worth of security deposits too. For those familiar with the NNN commercial properties you can see the similarities. Actually, they work exactly the same way…you’re just talking about SF homes instead of a commercial deal. This also means that you’re not paying millions of dollars for the property. The average home only costs around $60,000. This is a great program for beginners as well as seasoned investors. I discuss this in more detail on a future posting, but if you have any questions let me know.
Take this a step further and see how you can turn this into a guaranteed retirement plan by using a couple of other programs too. Buy a number of these homes, pay off the mortgage in a fraction of the time, refinance, repeat the steps using one house per year, and you have a system of getting tax free income