Question: I remember reading your absolutely informative articles about rental properties some time ago. Now, I am seriously considering getting involved in real estate investment. I don’t have your wonderful columns on file, and I especially remember your info on screening tenants and the rental agreements. Where can I find that information now?
P.T., Sammamish
Answer: Thank you for your compliments about my weekly columns. For detailed information on managing rental properties, I highly recommend an excellent book called “Landlording: A Handy Manual for Scrupulous Landlords and Landladies Who Do It Themselves” by Leigh Robinson. He updates the book every few years to keep up with changes in the rental business. The 10th edition of the book is coming out this month, so make sure you get the latest edition at your bookstore. The book contains sample rental agreements, rental application forms and many other useful documents.
Real estate is not a passive investment, such as investing in the stock market. You are creating a part-time job for yourself, so take it seriously. Study the landlord business so that you can learn from other people’s mistakes, rather than making the same mistakes yourself. The key to success in the landlord business is to take the time to select good tenants.
In the 17 years I have been writing this column, I’ve heard many horror stories from part-time landlords. In most of those cases, the landlord rented to the first person who showed up because they “didn’t want to waste time” showing the house to other prospective tenants. That is a serious mistake!
Now, please don’t misunderstand me. I am not advocating that you illegally discriminate against anyone. When I rent a property, I have only four criteria for selecting a tenant:
* Does the applicant have sufficient income to pay the rent? A good rule of thumb is that the tenant should have a gross monthly income equal to at least three times the monthly rent.
* Will the applicant pay the rent on time? This is determined by analyzing the applicant’s credit report.
* Will the applicant take good care of the property? This is determined by talking to the applicant’s previous landlords.
* How long does the applicant intend to stay in the property? I prefer long-term tenants to short-term renters. Those are the only factors that really matter. The applicant’s race, sex, age, marital status, etc. are irrelevant.
You should use your rental application form to gather pertinent information about the applicants, but beware of discriminatory questions. For example, there is no law against asking for the ages of prospective tenants but it is illegal to discriminate against children. In other words, you better not even give the appearance that you’re using the information to screen out families with kids.
If you use a credit reporting agency or tenant screening service, it is permissible to charge the applicant a fee to cover your out-of-pocket expense, but you cannot make a profit on this fee. For example, if the tenant screening service charges $35 per applicant, you could not charge a $50 rental application fee. Landlords who do the verification work themselves can charge for their time and out-of-pocket expenses such as credit reports and long distance phone calls. However, the charge cannot exceed the customary fee charged by a professional tenant screening service. In this rental market, that’s about $35.
While professional tenant-screening companies provide a valuable service, I prefer to pay for a credit report only and verify the references on the rental application myself.
Why?
Because my rental properties are valuable investments and nobody cares as much about them as I do. I want to know as much as possible about the tenants before I let them move into my property. You may find this hard to believe, but some people actually lie on their rental application.
One common trick is to write down the names of friends as “previous landlords.” To combat this, I never call the reference and say, “Hi, this is Steve Tytler. Jim Jones said he rented a house from you last year. Was he a good tenant?” Such an introduction only tips off the fake landlord, who then proceeds to tell you what a great tenant Jim was. Instead, I try to catch them off guard by saying something like, “Jim Jones gave me your name as a reference.
How do you know him?” A phony landlord might reply, “Oh, Jim’s an old frat brother of mine … ,” while a legitimate landlord would say, “He rented a house from me last year.” I know this sounds sneaky, but it’s better to be safe than sorry.
As for employer references, the purpose is simply to verify that the rental applicant really works where he or she claims to work and that their income is what they claimed on the application. Few people will admit to being unemployed. When calling the place of employment, don’t identify yourself as a landlord, just ask to speak to the owner or manager of the company. It’s not uncommon for applicants to list their co-workers or friends as their supervisor. Don’t use the reference name that they put on the application.
You can’t be too careful. Remember, you do not have to rent to the first person who fills out an application. I’ve taken as many as 15 rental applications for a single property before renting it. You are hoping to establish a long-term relationship with your tenants. Just as you probably wouldn’t marry the first person you ever dated, don’t rush into signing a rental agreement with a total stranger. Get to know them first. You’ll be very glad that you did.
Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206. Fax questions to Tytler at 425-339-3435 or e-mail him at economy@heraldnet.com.
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