Buy & Hold Investors: Knowing Your Renters

Buy & Hold Investors: Knowing Your Renters

The strength of a buy-and-hold investment is directly correlated with the tenants that reside within it. Essentially; the better your tenants are, the better off your investment is. A good asset with quality tenants that pay on time and respect the property is quite the winning combination. On the other hand, tenants that reach out consistently and require assistance on a regular basis will only complicate matters. It is entirely something else if the rent is hard to collect. After all, there is one thing that can ruin a buy-and-hold asset: a lack of incoming rent. Of course; there is no way to ever guarantee that you chose the best tenant possible. However, there are steps you can take to make sure you know who you are renting to. The better idea you have of your tenant, the better off your property will be.

There are too many investors who quickly glaze over the tenant search process. If you have ever had to deal with an eviction or a burdensome tenant, you realize just how important a quality tenant really is. A good rental starts with one thing: a tenant review process. In other words, any tenant who doesn’t meet your demands is automatically red flagged. Regardless of what story you are fed or how qualified they say they may be, your tenant needs to complete an application. Without this you really have no idea who will be living in your property for the next nine months or more. It is critical that you learn as much about a potential tenant as possible. The more you know, the more you can deflect poor prospects.

The application should consist of all employment, income, past rental history and maybe even a few references. You can even go so far as to run a quick credit check to get an idea of their payment history. With the application, you should take the time and review it with your prospective tenant. You don’t want a long story for each negative item, but it is important to hear exactly what went wrong and why. Many times, some of the best tenants you will have are from suspect applications. All it takes is a little time to find out why.

There are certain things you cannot ask on an application. Therefore, it is important to check with local housing rules and guidelines. Many renters will put false references in the hope that you never contact them. If your tenant is strong, they should not have trouble finding three people that can vouch for their character or rental history. All of this may seem like a time consuming practice that is really unnecessary. In reality, the total time you spend on each prospective tenant should be less than 20 minutes. However, if you find a good tenant, the next year or so of your life will be so much easier. Again, it is important to consider the alternative. A tenant that misses a payment or ruins your property will have a lasting impact on your entire business. You will need to cover the housing payment until the eviction process is completed. This can take at least a couple of months, and will impact your ability to buy other properties. If you spend more time in finding good tenants, it will let you focus on more productive areas of your business.

If you rent a property, you will need to have the first month’s rent and some security available. Some states will allow you to take an additional month or extra security, but you have the right to hold some funds upfront. Your tenants should know this and be prepared to have these funds available. If your tenant seems great, but lacks the deposit, you need to look elsewhere for a tenant. As nice as a tenant may seem, your protection is of the utmost importance. Without security, what guarantee do you have that your tenant will not just back up and leave overnight? There is nothing wrong with trying to work with your tenant, but some things must be non-negotiable.

The less time you have to spend finding tenants, the more free time you will have . Instead of looking for one lease tenants, ask them what their long term plans are. If you know what your tenants are really looking for, there may be an opportunity for them to stay in the property a couple years or to buy a property you may be selling down the road. You don’t necessarily have to be friends with your tenants, but you should have an idea of what they want out of the rental. By knowing your tenants, you can have a relationship that is mutually beneficial for many years down the road.

Your tenants are the backbone of your rental property portfolio. It is critical that you take the time and find out as much information as possible about them. It cannot be understated just how important tenant screening is. If you do not know who you are renting to, you really can’t complain a few months into the lease when things aren’t going smoothly. A strong rental portfolio can be a great source of long term wealth, but it starts with knowing your tenants. Take the time and find out exactly who you are renting to.

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