An actor, behind in his rent and trying to stave off the insistent landlord said, “In a few years, people will point to this apartment and say ‘Jones the famous actor, once lived there.'”
“If I don’t get my rent tonight,” said the landlord, “they’ll be able to say it tomorrow.”
For the investor, having and holding rental property can be a great source of passive income if done correctly, or a huge headache if not. Ideally, according to property management gurus, a rental should generate at least $50 per unit above and beyond all expenses. Expenses include obviously the mortgage (principal and interest), PMI, insurance, property taxes as well as scheduled maintenance (hopefully to avoid unscheduled maintenance).
The “trick” you need to learn is how to establish tenants who will 1) pay their rent on time and 2) not create undue maintenance issues, thereby maximizing your return on investment.
We missed a huge red flag on a tenancy application because it came wrapped in a nice old lady, who put a good face on it. A previous landlord said H was a good man, great father to his daughter, smart, employed and tidy. Her experience was that he was never a problem, if he got behind he always made it good and the place was in great shape when he left.
I verified his employment, ascertained his financial situation, got personal references and we rented him the house. Five years later he found a lady love, married and moved out. It took us a month and a half to fix all the damage and he was so far behind on rent that the total owed was over $16K.
Yes, there are a number of circumstances which brought the amount that high, but rather than enumerate, which of you, gentle readers, picked up on the warning sign we missed? Yes, that would be the one. “If he got behind he always made it good.” For a man who had a reasonably high paying job in the software industry, a rental payment shouldn’t “get behind” unless there was a pattern of financial laxness, which we found out there was. Pay attention.
Here are some common issues and methods for dealing with them. All of them require a little detective work, but like anything worthwhile, the diligence will pay off in good tenants, positive cash flow and value in your properties.
- References can be faked.
- Look up the employer for a general contact number; do not accept the “supervisor’s desk” number.
- Check public records for the owner of the house or building listed as a previous address. Contact that person or business to verify tenancy rather than the Susie Q listed on the application. The exception would be if it is managed by a property management company. In that case, look the PM company up and call the front desk number.
- When contacting the bank(s), ask, “If I were to walk in with a check on this account in the amount of [rental rate], would I be able to cash that check?” If it is the middle of the month and they don’t have that much in their account, you’re going to have problems collecting. Note the bank may require you to bring in or fax a copy of the application for tenancy to verify they can release financial information.
- If the previous property is within reasonable distance of you, do some door knocking of the neighbors. As much as possible, find out what sort of tenants lived there previously. It is in your best interest to know that the neighbors regularly saw flashing lights arrive.
- Utilize a rental screening program to determine if you have someone with a history of run ins with the law.
The screening program is the last step you should take. Why? Because the temptation to take the printout and base your decision on that is huge. It will also only give you part of the picture, and that can be costly.
So what would I have done differently with tenant H to prevent a $16,000 problem? I would have paid attention to the imbedded message from the landlady and not let things go with on assumptions.