I’ve often stated that one of the most important factors in your success as a real estate investor is your ability to select, screen, and retain quality tenants. This is something that I think I’m pretty good at, which has helped me as an investor.

I was going to write an article about this not to long ago when, bam, I ran into a problem: tenants who stopped paying.

The tenants were a flaky young couple that I knew I might be taking a chance back when they signed the lease in May. But I decided to rent to them and mitigated my risk by signing a short lease (six months, with renewal contingent on timely payment), charged them first and last month’s rent upfront, plus one month’s rent as deposit. I won’t go through the boring details, but they ended up breaking the lease and abandoning the property while they owed me money. If you find yourself in a situation like this one here are some points to keep in mind.

• Property codes, generally speaking, exist to protect the tenant. However, most tenants who end up in situations like this have not followed the law. On the other hand, you have – assuming you’re a responsible landlord. The party who is on the right side of the law (you) negotiates from a position of considerable strength.
• Ensure that you use a current, legally compliant lease contract that includes specific references to the property codes. For example, all of my leases state that tenants are prohibited from withholding payment for any portion of any month’s rent on grounds that the security deposit is security for unpaid rent, and that bad faith violations may subject the tenant to liability up to three times the rent wrongfully withheld plus Landlord’s reasonable attorney fees.
• We all have our own style, but in tenant/landlord disputes you want to be more like Agent Friday (“just the facts, ma’am”) than, say, John Madden. Communicate clearly, calmly, and factually. Quote relevant state property codes, chapter and verse. Read the relevant clauses from the lease that the tenant signed. Use the facts, the contract, and the law as a blunt instrument.  Don't call or email when you're angry. 
• Back up phone calls with written communication – email or a leter. Tell ‘em on the phone, the follow up in writing to tell ‘em what you told ‘em. Keep copies of everything.
• Once you feel a problem brewing, keep a written log of everything. Capture dates and times of phone calls and what each party said.
• Follow the law with regards to notices. You can’t just put deadbeats out on the street; you need to serve them with a Pay or Quit notice with the proper lead times. Consult your local property codes and know what your obligations are.

The idea of all of this is that you’ll be following a rational, well planned strategy. If you end up in front of a judge, either in an effort to evict the tenant or suing for damages, your ducks will be in a row.

This reminds me of my brother. Greg isn’t always right about everything, but if he offers to bet me about something then there’s a 99.9% chance he is. Greg hates to lose, so when he puts his money where his mouth is and offers to shake on a bet then I tend to back down. If you end up in court you want to be like Greg; you should know you’re going to win. Smart, ethical landlords don’t lose these cases.

And if you follow these guidelines then, in the end, the tenant (if he has a rational bone in his body) will often back down. That’s what happened in my case; they paid and got out, and I didn’t have to drag them to court. They saw the handwriting in on the wall.  Sure I wasted some time hammering out threatening letters and trying to chase them on the phone, but all in all it wasn’t a bad outcome.

Expect to see more of this issue...

As the presidential election looms, the issue of immigration - particularly illegal immigration - will move into the spotlight.   This has implications for all Americans, but it may have a particular relevance for landlords. 

An article in today's New York Times discusses the issue of local statues which impose penalties on landlords who rent to illegal immigrants.  In particular the article chronicles the story of Riverside, New Jersey, which is re-thinking legislation which it passed a year ago which criminalized employing or renting to an illegal immigrant.  The law has had the unintended consequence of driving away residents in large numbers, which has had an unexpectedly large impact on local businesses.  It appears that citizens who once lobbied for the law are now re-thinking their position. 

From the landlord's point of view, this is a sticky issue.  I live in Texas, a border state.  Regardless of your political affiliation it's obvious that illegal immigrants are firmly woven into the economic and social fabric of our society here.  I'm trying to imagine operating under legislation which requires me to ascertain an applicant's legal status.  Is that SSN real or bogus?  How about the ID card that the applicant has provided?  Or the driver's license?

There is an easy solution that many landlords will turn to: just don't rent to anyone who seems "suspicious".  This, obviously, is a law that invites investors to turn to discriminatory practices. 

I'm not a policeman or a Immigration Service agent.  That's not my job.  I'm a real estate investor, and part of being an investor is to offer safe, affordable housing - places where families want to create homes - and to do so profitably.  I'd strongly disapprove of a law that tries to turn me into a government enforcement agent. 

These are bad laws, and landlords should be vocal in their disapproval when they pop up locally. 

I'm interested in your opinion on this issue...

Hey landlord:  here's something that real estate investing courses don't mention...

It’s honey bee season here in Houston. If your'e a real estate investor in a  bee-prone city then you’ll know what I’m talking about.  Or you will soon.

Every colony has a queen, who rules the roost. Every now and again she’ll get a wild hair and decide to relocate. And it seems, for whatever reason, that Houston honeybee queens like to relocate to rental properties that I own. Go figure.

Getting rid of a hive is a three step process. First, you have to kill the bees. Second, you have to extract the hive, and third you have to seal up the house – caulking whatever cracks the bees were using to get into the structure. If you skip a step that’s ok, it just means that you’ll get to repeat the whole process the following year because the bees will come back.

Here’s something that I’ve found out: a lot of landlords ‘round here do this on the cheap, which means that I buy a nice bee-free property only to find that an infestation pops up when summer arrives and a colony returns that had been there the previous year. I got a call just this week about one of my single family homes in Katy, a Houston suburb. I met the bee guy out there and we took care of it this afternoon. (note: you have to get yourself a “bee guy”…when you’re calling around for exterminators you’re just as likely as not to get the response “oh we don’t do bees.”) This was a quick job and relatively cheap.

I wasn’t so lucky last year when a colony took up residence in the siding of a townhouse that I own. Seems these guys were returning to a large honeycomb that had been left a year or two back, and the guy had to do a significant amount of work to get the whole thing out.

sidenote: a second drawback to not extracting the hive is a rotting honeycomb which a) stinks and b) will attract every raccoon, rat, and miscellaneous critter for miles.  Not good.

So when you’re buying ask the sellers if they’ve ever had a bee problem. If so go check it out, and even if there’s not a bee in sight make sure you caulk up the crime scene, otherwise you’re gonna get to deal with it later.

I always love talking to exterminators; maybe I just attract exterminators with good attitudes, but in my experience they tend to be enthusiastic about their jobs and love what they do.  The guy that came out today told me that in the past you would be able to get a beekeeper to come out and instead of killing the bees they'd extract the hive for free.  They'd  they'd collect the comb, the queen, and as many bees as they could gather up and transport the whole lot out to the farm to produce honey.  But nowadays with aggressive Africanized bees popping up they're nervous about harvesting wild colonies and introducing them to thier farms.  So much for that angle... 

Many off-the-shelf standard rental agreements miss the boat by not including language prohibiting smoking.  Try renting out a property after your last tenant has spent the last three years smoking a pack a day in the master bedroom.

Here's a bit of language that I insert into all of my rental agreeements:

• The property covered by this agreement is a no-smoking property. The tenants will not smoke and will not permit others to smoke anywhere within the structure. The tenants will be fully liable for any expenses related to cleaning which is necessary due to violating this restriction.

I don't consider myself an anti-smoking stormtrooper, and this is less of a problem these days since there are fewer smokers out there...but having this language included in your lease agreement will help ensure that your tenants step outside before lighting up.  And...your nose will tell you if they're following the rules when you come around for a visit or a repair. 

When it comes to influencing someone’s behavior it’s a lot easier to set the desired ground rules from the beginning than it is to change a habit once it’s already established. Anyone who has struggled to correct a bad golf swing knows this, as does anyone who has raised a child.

Buy-and-hold real estate investors should bear this principle in mind when it comes to dealing with tenants. At the end of the day you are a service provider and the tenant is your client. Good tenants are a key component in your long-term investment strategy. That said, it’s important to realize that you have a leadership role in maintaining the landlord-tenant relationship.

The desired endgame is a happy tenant who is content with the property, stays long term, and who willingly agrees to fair, periodic increases in rent which are in line with inflation and the local housing market.

I always look at a new tenant as a great opportunity to shape a desired set of behaviors that will make my life easier, and will also make it easier for me as a landlord to provide a quality service to the tenant. In my opinion the following are the “big four”:

• Pay on time
• Take care of the property
• Alert me early about small problems that will turn into big problems (evidence of a roof leak; a problem with the air conditioner)
• Refrain from bothering me about small problems that will stay small and that the tenant can safely tackle himself (a toilet that runs, a burned out fuse, a leaky faucet)

The four desired behaviors in the bullet points above should be objectively laid out in your lease agreement, but in practice I’ve found that there are shades of gray in managing them, as there are in all human interactions.

Let’s look at each one in turn:

• Pay on time: The average person has a lot of financial obligations placed upon them every month. Telephone bill, gas, car payment, entertainment, and a myriad of other priorities compete for the tenant’s paycheck. Your job is to show them that every month paying the rent is in pole position when it comes to prioritizing. Your tenant’s mindset needs to be: it’s annoying to have my cell phone disconnected, but late rent payments will result in my eviction. But if your tenant views the phone company as the real priority she’ll start turning to you for a little slack when she’s having a touch time making ends meet. Once you let this happen one time you risk establishing a habit that will be impossible to break. This is an area where you need to be consistent and tough.

• Take care of the property: You can do some role modeling in this category before the place is even rented out. Be meticulous with cleaning the property before you show it. Take care with the landscaping. Show that you care about how it looks. If you show a property that is dirty and unkept you will be sending a clear message that you don’t care about it. And if you don’t care about it why should they?

• Alert me early about small problems that will turn into big problems: A water stain on the ceiling or a weird sound out of the AC unit should prompt an immediate phone call. And you can encourage this by acting immediately when they call. This is in your best interest. You want to catch a roof leak before it causes major damage (or, heaven forbid, causes a mold problem.) Note that these calls should be rare. If they’re not then it’s likely that you have a deferred maintenance problem.

• Refrain from bothering me about small problems that will stay small: This is a tricky one, because it is, to an extent, the flip side of the point above. You want to get a phone call when the tenant expects that a major problem has arisen, but you don’t want to be getting a call every time a knob on a kitchen cabinet comes lose. One way to deal with this is to ensure that there is a provision in your contract stipulating that the tenant will be responsible for the first $____ of any repair that you make on the property. I generally set this at $100 using standard language from the Texas Association of Realtors lease agreement: The Tenant will pay Landlord or any contractor Landlord directs Tenant to pay, the first $100 of the cost to repair each condition in need of repair, and Landlord will pay the remainder...

Related posts

• Send your tenants to the bank
• Act early on mold problems

Houston has had a few recent back-to-back murder-suicide incidents in the immediate aftermath of the terrible events at Virginia Tech. 

You might have heard about the event at NASA which got some national coverage.  But unless you live in Houston it’s unlikely that you heard about a second killing, in which a tenant who was on the verge of eviction killed the property manager at the apartment where he lived.

The second event was the one that really got my attention.

Stop for a moment and think back on how you thought about landlords before you became one.  From the point of view of the tenant, you, as a landlord, are in a position of enormous power and authority.  It may not feel like it at times - especially as you’re wrestling with taxes, eying interest rates, and dealing with contractors – but you are in control from the vantage point of the families who live in your houses.  You own the walls that surround them, the roof over their heads, and provide the shelter that keeps them safe.   

You invest in real estate in order to secure your financial future.  And if you’re like me then you’re into real estate because you enjoy negotiating, you like crawling around under houses, and you’re into making deals.  But in your rush to build equity and wealth don’t forget about the lives that you touch every day – meaning: don’t be cavalier with the influence that you wield. 

This is a reminder that being consistent, clear and fair with your tenants is a key to building good relationships.  And building good relationships is an important key to being a profitable buy-and-hold investor. 

But sometimes that isn't enough.  The one thing that all of these instances have in common is that the perpetrators were mentally ill.  Dr. Peter Marzuk, associate professor of psychiatry at New York-Presbyterian/Weill Cornell points out some warning signs in a recent ABC news interview, including:

• Past history of violence
• Loneliness and social isolation
• Stalking and other antisocial or criminal behavior
• Paranoid behavior

Pre-screen your tenants well.   And even after you've done your due diligence trust your gut.  If you feel that you’re in danger then listen to your instincts.  As Malcolm Gladwell explains in his excellent book Blink, we sometimes know things even when we don’t know why we know them. 
 
Note:  The strange thing about this post is that I actually sat down with the intention of writing something funny to comply w/ Pat Kitano’s call for funny submissions for the upcoming Carnival of Real Estate.  But for some reason this is what came out.  Oh well; maybe I'll be able to write something funny tomorrow.  But to lighten it up a bit here’s a funny clip.  I’m told that I’ve been living under a rock and everyone in the universe has already seen this, but I just saw it yesterday and thought it was hilarious. 

I write a blog and run this website, so it’s obvious that I’m a fan of technology.  But a part of me (a big part of me, actually) is still pretty conservative.  I think I was one of the last guys still carrying around leather a Filofax with all my handwritten notes and phone numbers – something that I’ve just recently given up.  

Set up a business checking account.  This is a step that the majority of readers will already have taken.  Sign up for online access.

Set up a second account earmarked especially for deposits, and link it to your first account.  Most major banks will allow you to do this; from personal experience I know you can do it with Citibank, Bank of America, and Washington Mutual.  

Print a book of deposit slips for each unit that you own.  Bank of America allows you to customize the slips, which lets you put the property address on each slip.  

When you sign a lease with your tenant give him or her an appropriate number of slips along with their copy of the lease (12 slips for a 1 year lease).  Instruct the tenant to deposit directly to the bank. This can be done either by going to the counter, going through the drive-through, or mailing to your branch attn: DEPOSIT.

On the first of the month go online and check your deposits.  As they arrive transfer them from your deposit account to your main account.  

• Safe. It all works because the tenant never has your primary bank account number.  The tenant only has the deposit account number, and you’ll keep this account at a zero balance by transferring the deposits to your primary account as they come in.  
• Easier recordkeeping. This method creates an effective electronic paper trail.  You can view/print/save the scanned pdf’s of the deposit tickets and checks online from the conveninece of your desk.
• Convenient for the tenant. Bank of America is big here in Houston w/ over 350 branches.  Choose a branch that gives your tenants lots of options.  Plus – they’ll walk away each time with a deposit confirmation, which gives a bit more peace of mind than dropping a stamped envelope in the mail.