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...

There’s a conventional wisdom out there that higher-end properties bring good tenants and lower end properties bring problem tenants. In my experience, this isn’t necessarily true. Ask most buy-and-hold investors about what makes a good tenant and many will respond by recalling a specific tenant that they wish was the model for all their properties.

In my case, my example was in one of my most inexpensive properties; the tenants were a young family with no credit and not a lot of resources, but their references checked out and I rented to them, more or less, based on gut feel. And they were the best tenants I ever had: took great care of the place (flowers in the front yard), made minor repairs on their own and never were late paying the rent. Plus, they were a pleasure to deal with.

Your goal as an investor is to create a portfolio of properties filled with this kind of tenant. Identifying, attracting and retaining them is one of the most important factors to ensuring your success as a real estate investor. Getting the wrong tenant in your property is expensive in two ways: not only does it cost you money in repair, vacancies, and lost revenue – it can also cost you dearly in terms of investor burnout. Get a bad tenant or two and you’ll be ready to throw in the towel in no time, but if you develop a knack for renting to the right people then on the average month managing a property is as easy as cashing the rent check that shows up in your mailbox (on or before the first of the month!)

So what happens when you get a bad apple? Well don’t sit on your hands; take care of the issue. What follows are some fairly broad generalizations, but that’s how I conceptualize problems. Most of the situations I have dealt with fall, roughly, into these three categories:

In all of these cases the key is action. Good relationships don’t happen automatically; you have to work at them. But if you establish a good relationship with your tenant early in the process then it’s easy to maintain, and will help to make your investing profitable and less stressful.

Related Posts:

• Four tips for sniffing out illicit activity in your Investment Property
• Navigating the Eviction Maze
• Avoiding Investor Burnout

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.  

In January I announced a resolution for the New Year to sell a high-end property that had accumulated some equity and reinvest in a multi-family that generates better income. 

Well the first part of that mission has been accomplished; I sold the property, a three-story townhouse loft.  And what does that have to do with the headline on this post?  Well it highlights a couple of things that investors often overlook when screening for tenants.

1 :: Your tenant is a potential buyer.  I ended up making this sale to the tenant who was in the property.  This has some major advantages. 

Easier and cheaper for you :: No vacancy period.  No showings.  And no real estate agent – which means no commission. 

Easier and cheaper for the buyer :: No relocation costs, no inconvenience of moving

When the stars line up like this it tends to make it easier for the two parties to negotiate mutually beneficial terms.  So when you’re screening your tenants give extra points to applicants who might be potential buyers.  Note: (I’m not a rent to own fan – I’ll talk about this an another post soon.)

2 :: If you’re using a real estate agent to find a tenant make sure there’s not a clause in the contract which stipulates that she can come back and demand a commission in the tenant decides to buy the place from you in a year or two.  This is a flat non-starter for me.  If your agent demands that this is included then find someone else.  Going rate for placing a tenant here in Houston is one month’s rent – fair enough – but I don’t expect to pay the agent a big windfall in a year or two if I manage to build a relationship with the tenant and later negotiate a sale. 

Note:  as an investor you want to work with an agent who values your repeat business, not one who is trying to squeeze every cent out of each deal that you do.  Got a good agent (like I do)? Well share and let other investors know. 

Illicit activity is something that every landlord needs to be on the lookout for, and the methamphetamine (“meth”) epidemic that hitting some regions is adding new twists to this concern.  
The Sandusky Register in Ohio recently reported a story on the woes of a landlord there who is facing the economic blow of discovering that a tenant in one of his investment properties was running a meth lab .  

Aside from the obvious social and economic costs to the landlord, a meth lab has a particularly destructive impact on the building where it is housed.  Toxic chemicals can permeate any porous surface: drywall, wood floors, carpet, ceilings – practically all of the materials that go into building a house.  

The best case is that this will turn into a nasty cleaning bill.  Worst case – depending on how long the activity was going on – is that your rental property becomes a teardown candidate.  

A meth lab isn't the only type of illicit mischief that your tenants might be getting into; I'm sure you could come up with a list of shady activities that that would make you life difficult if you were to make the mistake of signing a lease with a bad apple.  But in many ways criminals aren't too creative, so there are some patterns that may tip you off that something bad is going on in there.  Here are four things to look out for:

• 1:: Tenant pre-pays rent: six months or even a year.  This is a tough one.  Investors know that cash is king, and it’s tough to turn down a big pre-payment.  But be aware that there may be a darker motive.  By paying several months in advance the tenant may be sending you a signal that you don’t need to come around for a while.  Not all pre-payments are sinister in nature (I’ve accepted prepayments before) but when an applicants offers it should cause your antenna to go up.
• 2:: Tenant pays exclusively in cash: Again, cash is king – but resist the temptation to look the other way.  Nuff said.
• 3:: Lots of traffic at odd hours:  You’ll notice this if you live nearby, but you might not if you don’t.  That is, unless you make an effort to – which you should.  
• 4:: Tenant never contacts you:  I don’t get a lot of calls from my tenants, so it’s not like my phone is ringing off the hook in the middle of the nights or I’m schlepping around unclogging toilets.  Far from it; well maintained investment properties inhabited by responsible, well screened tenants are very easy to manage and require very little of my time.  But that said – every blue moon I’ll get an inquiry from even the lowest-maintenance tenant I have.  Be suspicious of a tenant who never ever calls you, not even once.  That guy might be sending you a message that he doesn’t want you coming around.  So go check him out.

There are some other things to look for specifically when it comes to sniffing out meth labs.  If that’s a particular concern in your area then check out the KCI Anti-Meth site.  

I find it interesting that one finds so many references in the popular press about the horrors of being a landlord. 

Consider this blurb that appeared recently on Money.com:  

• “…if you can't imagine yourself answering late-night calls about clogged toilets, your choices come down to holding your property vacant or selling.”

Or this gem from the MSN finance page: 

• “…Just when you thought being a property magnate was going to be glamorous, that late night phone call from your tenant saying they have left the bath running and flooded the place is just what you didn't need.”

Note that these comments were written by journalists, not by real estate investors.  Experienced investors will know that if you’re judicious about selecting your tenants and if you maintain your properties responsibly then your landlord duties won’t overwhelm you.  I’ve yet to receive a call in the middle of the night. 

Sure there are challenges to landlording, and yes things will break – but establishing a good relationship with your tenants and finding a handyman that you trust go a long way towards helping you maintain your work life balance. 

Principle 2: Select the right tenantLast month I started a series of posts on Avoiding Burnout in Real Estate Investments.

Before I bought my first investment property my wife ran out and rented Pacific Heights on video and forced me to watch it. Perhaps you remember this movie: Michael Keaton plays a evil con-man who rents half of a San Francisco duplex from a naïve yuppie couple then turns their lives into a living hell.  Bloodshed and drama ensue.
 
Well it’s not a great movie so I won’t recommend that you sit through it, but I will share with you the film’s primary insight: if you’re renting a high-end property do a credit check the applicant before signing the lease.  Housing laws vary from state to state, but one trait that they have in common is that they’re designed to protect the tenant, not the landlord. If you end up renting to a family who destroys your house or refuses to pay the rent then you’ll surely spend a fortune and a lot of time and effort getting them out.
 
If you’re renting a lower-end property then doing a credit check on the applicant is less likely to yield any useful insights since applicants for inexpensive properties may not have established credit histories. You’ll have to rely on other methods of evaluating applicants, such as references from previous landlords and from employers. Call the references. Follow up.
 
And lastly, learn something about the applicants when you meet them (and yes, you should meet them – don’t leave this to your realtor). Do they arrive on time? Do they strike you as someone who will treat your property respectfully?
 
In the end you’ll have to trust your instincts. Having a vacancy is stressful, but it’s not nearly as stressful as having a unit occupied by a tenant who makes your life difficult. It’s not a good idea to indiscriminately accept the first applicant who waves some cash in your face, tempting though it may be.  Remember – housing laws are first and foremost designed to protect the tenant; they’re not designed to protect your rights as a landlord.  Renting your property to the wrong person is an expensive mistake.
 
But it’s not just about finding the right tenant.  It’s also about taking care of your tenant once he or she has signed the lease. Being mindful of the obligation that you have to the family who is living in your property is a moral/ethical issue, but just as importantly it’s a key business issue as well. Doing the right thing goes hand-in-hand with economic success. I’ll talk about that in my next post.