John Jung, Coldwell Banker King Thompson, Dublin, Ohio
   Direct Line: (614)526-5692  Home Office: (614)793-2967  Fax:(614)889-1901
Email: FreeReport@JohnJungJr.com

Handling Real Estate Rental Property Management

Good real estate management is critical to being successful at investing in single family homes. In fact, even if you do everything else properly, you’ve got big problems if you don’t know how to manage the houses and the tenants. Finding and buying the house is only part of the job. 

Repairs and vacancies are the two biggest problems that you will face when investing in real estate, and too much of either will turn a good investment into a bad one. Both of them are the result of  bad management. Record keeping is critical. Make sure you have everything for tax time and in case of an audit. Fortunately, once you learn the rules and “tricks of the trade” you can easily put together a system that will allow you to avoid most of the management nightmares.

Selecting tenants is without a doubt the most critical management decision you will make when investing in real estate. The profitability of your investment depends on it.  So how do you find good tenants? You can either turn the whole job over to a professional management company, or do it yourself.

The first option is certainly easier, but a professional will usually charge you up to 10% of the gross rent every month. This may be alright down the road when you have plenty of equity and a large cash flow to afford it, but  investors starting out can be well served to learn the ropes themselves.

The two most frequently used methods to actually find the tenants are a classified ad in the newspaper and a FOR RENT sign in the yard. In most cases these methods will be adequate. The important thing is how you screen and qualify the tenants.

You may be tempted to just take any renter that comes along without any background check because they “seem nice enough.” NEVER, EVER, EVER, MAKE THIS MISTAKE! People are not always what they seem. It is better to have a vacancy than a bad tenant.

The first step is to tell all prospective tenants that call you: “Thanks for calling. That home is an excellent one, and it is still available.  I’d be happy to show it to you.  First though, I should tell you that we require a $35 non-refundable application fee and that all references and past landlords are checked, in addition to a credit report.  Prior to move in we require the first month’s rent, an indemnification deposit of _______, and a refundable cleaning deposit of $275.   Do you still want to see it??”

You will eliminate most all of the bad tenants right then and there.  If they know that you are going to check them out, and they have a lousy record, they won’t even waste their time (or yours). You may be thinking that by following these rules you might not get any tenants. NOT TRUE. Nice, sharp looking homes and real estate in good areas are always in demand.

Before you agree to meet a prospective tenant at the house, make sure to get their name and phone number. Not only can you then call them if you get delayed, but they are much more likely to show up (or call you if they can’t make it) if they know you have their phone number.

When you do meet a prospective tenant at the house, always be polite and respectful (this goes for on the phone, too). Take a look at their car. If it is filthy and full of trash and half eaten hamburgers, that is probably how your house would end up looking if you rented to them.

Let them in and allow them to take a look for themselves, without you breathing down their neck. Don’t say stupid things like “this is the kitchen”. You should casually mention any features or benefits that are not obvious.

You need to let them know that you are a serious investor, and that you will make any necessary repairs promptly. Strike up a conversation by asking questions such as: “How long have you been in town?” and “Where do you live now?” and “Why are you moving?” and “How long of a lease are you looking for?” and  “Where do you work?” and  “How many of you would be occupying the home?” 

Listen to how they answer these questions. If they say something like “We are moving because our last landlord was impossible to deal with,” you may have some concerns. If they are sincerely interested, you’ll know it. Don’t try to oversell the place, you will seem desperate.

Ask if they want to fill out your real estate rental application.  If  so, encourage them to fill it out on the spot, and collect their $35 application fee. Tell them it usually takes less than 24 hours to process, and you’ll call them promptly either way. If they prefer, give them an application to take with them and bring back to you later.

If you are managing a lot of real estate, you may want to get an account with a credit bureau to run credit checks yourself. Otherwise, it makes sense to use an outside service. Many of these services will run the credit check, call and verify past landlords, employment, and bank accounts for you for around $18-30 (that’s what you use the application fee for).

It’s a good idea not to put too much weight on what their current landlord says about them. If they are a problem tenant, many landlords will lie and tell you they are great so that you will take them, and they won’t have to deal with them anymore. It’s best to go back to the landlord prior to the current one, if possible. Remember that people are creatures of habit. If they are slobs or slow payers… they will continue to be.

If the prospective tenant checks out O.K. and you don’t have any bad feelings or other concerns, call them and let them know the good news- they’ve got a house! Arrange a meeting for them to sign the lease agreement and pay the required up front money.

Be careful not to call the indemnification deposit the last month’s rent, and do not make it equal to a months rent. If the monthly rent is $1,000, make the indemnification deposit $1,250 or so. The reason is that at the end when they are going into their last month, you don’t want them to think that they can just use the money they paid at the beginning. Make them pay the rent for their last month at the beginning of that month as usual.

After they move out, if everything is alright, then refund the indemnification deposit. They will be a lot more careful and leave the house in better condition if they know that their deposit is on the line.

If they are paying by check, never allow the tenant to move in prior to making sure that it clears. If the check is drawn on a local bank, go there and cash it. If the move-in date is within a day or so, require them to give you cash, money order, or a cashier’s check.

This meeting is also the time to let the tenant know what you expect of them, and what they can expect from you. You will avoid a lot of potential problems if you spell everything out in the real estate lease agreement.

Since the goal is to find long-term tenants, you don’t want to accept anything shorter than a one year lease- longer if you can get it. Every time a tenant moves out you have wear and tear on the house, a vacancy, cleaning and repairs, and the hassle of finding another tenant.

The best tenants are the ones who stay for years without ever causing you any problems. Because we live in a cold weather state, it may be difficult to find a tenant in December, January, or February, don’t make the lease expire in these months. Run the lease for 14 or 16 months if necessary, and explain why to the tenant.

Let the tenant know that you are serious about your investments, and that you follow your policies strictly. As long as they follow the rules, the two of you will have a good relationship. If they don’t, you will swiftly take action to protect your investment. (Please note: Before implementing any rules, make sure that you are not violating any local or state laws).

Be very clear that rent is due on the 1st of the month, and if it’s not in your hands by the 3rd, they can not take the discount you offer. If you have not received payment by the 5th, you will immediately start eviction proceedings. No matter how tempting, do not ever accept partial rent payments, as you may have to start the entire eviction process over, and it sets a bad precedent. There is a $20 per day late fee after the 5th. There is a $30 charge for a returned check, and once they bounce a check they must pay with money orders or a cashier’s check from then on.

Do not allow them to sub-let the house. Put a limit on how many people can occupy the house (i.e. 2 adults and 2 children). They pay for any legal fees incurred in your having to go to court to enforce the agreement. It is best not to allow pets, and put this in writing. If you do allow them, state how many, what type, and get a pet security deposit in addition to the indemnification deposit.

Smoking should not be allowed in the house – PERIOD! It’s just not worth it. It stinks up the house, turns the walls brown, soaks into everything, causes burn holes on the carpet and burn marks on the counters and sinks… not to mention the risk of burning the whole darn place down!

The tenant should be responsible for any repairs under $25 to $50 or so. You don’t want the tenant to call you for every silly little repair. On the other hand, don’t set this amount too high or the tenant will simply ignore the necessary repairs and let the house slowly go downhill.

The tenant should be responsible for replacing the heating/cooling system filters, maintaining the lawn and landscaping, snow removal, etc. The tenant must notify you immediately of any major problems that need repair.

Tell the tenant that any extra appliances like refrigerators and washers and dryers are there only as a convenience, they are strictly “AS-IS”, and you take no responsibility to repair or replace them.

The key to avoiding vacancy and related problems is to have good, long term tenants. Try to get them attached to the house. Encourage them to work on it.  Offer to supply the materials if they want to do some worthwhile improvements to the place.

If you are paying for part of an improvement, never  allow them to deduct it from the rent. Get copies of the receipts, and then write them a separate check. This is much better from a tax standpoint.

You can also tell them that when you are ready to sell it, you will give them the first right to buy it. This would be good for you because you would have no vacancies, real estate commissions, etc.

The goal is to create a psychological attachment between the house and the tenant. The tenant will take much better care of the house if they think it might be theirs someday. You should drive by the house frequently, and go inside to check at least every 3-4 months.

Try to make fairness your guide in dealing with the tenants. Enforce your rules strictly, but treat them with respect. Once they know your position, they will be unlikely to break the rules, because they know the consequences if they do.

You may want to reward good tenants by not raising their rent, or giving them $50 or $100 off of their rent in December. Often the little things can mean a lot.

How to Sell for Profit

Investing in Central Ohio? Let Me Help You Today!
John Jung, Coldwell Banker King Thompson, Dublin, Ohio
   Direct Line: (614) 526-5692  Home Office: (614) 793-2967  Fax:(614) 889-1901
Email: investinfo@JohnJungJr.com