A Landlord’s Most Important Decision Is? (by Steve Norton)

 

Discover what every landlord should know about finding tenants and why picking the best person is not always as easy as it sounds. The most important decision any landlord makes is deciding who can live in their property. Who will you, as the owner, allow to live in your investment? This decision is so vital to the profitability of any property investment business and affects the business on so many levels that it’s amazing that some landlord don’t have a formalized procedure to protect themselves from making bad decision.

Let’s think about what we’re actually doing when we rent a property. Instead of thinking of the property as a monthly income generator think of it as a pile of cash. Cash you have tied up in the deposit and purchasing costs. Cash you hope to gain a regular income from through renting and more cash that you’ll receive if you sell the property and realize your capital gains. (Assuming house prices have risen since you purchased). If you include in this the value you place on your time spend finding the property, buying and arranging the rental then we have a very serious investment on our hands indeed.

Now, imagine all that money in real, tangible terms, stacked up in a room in the house and then consider we hand over the keys to someone and say, “See you next year”. Now we can begin to see how important it is to select the right tenant. Of course, I’m being dramatic and we do have legal safe guards but I hope that by considering your investment in terms of hard cash (like a professional investor) then you’ll treat the question of occupancy very seriously.

There’s more to it than just financials. Not only do we trust the tenant to look after our investment but we’re also investing our free time with them. What do I mean? If we are managing the property ourselves and not using a letting agent then we have made a serious commitment in time to look after that tenant. If you have a tenant who does not appreciate your property or does not treat it with care and respect then you run the risk of losing your evening and weekends in maintenance and management tasks. What about rent collection? An unreliable tenant who does not pay on time creates stress and worry. Legal protection lets us all sleep better at night but the practicalities of recouping money and legal costs are a headache we do not need and one that’s very avoidable.

Once we know how seriously we need to take the task of finding the correct tenant we can start looking for the very best people. In this case ‘best’ has two simple criteria. 1) They pay on time and in full 2) They look after the property as if it were their own.

I’m going to discuss three tools we can use to help. The first is a long and very comprehensive application form. I ask for as much detail as possible from the tenant. I need all their contact details, ID, proof of current address such as telephone or electric bills, previous addresses and, perhaps most importantly, references from their employer, previous landlord (if they’re moving out of home I’ll ask for their parents’ contact details) and a character reference from a recognized member of the community such as a Doctor or Teacher. Importantly, I always act on these references. I will check with whomever they have given to make sure the details are correct and they can vouch for the applicant.

Secondly, I ask for a larger deposit than the usual 4 weeks rent. Typically I ask for 6 weeks rent (UK law give the tenant an automatic option to sublet if the deposit is too excessive, say more than 8 weeks rent). Paying more upfront is usually a good sign that they are serious.

Finally, I have to feel comfortable about the people. If I can get along with them when the property is viewed and when we talk on the telephone and if I don’t have any intuitive alarm bells going off then I trust my own judgement.At this point a credit check and criminal background can reveal a lot about you’re applicant and keep you from losing a pile of your cash and the applicant should be expected to pay for this thru an application fee.

Decent credit and no criminal history usually means this is someone who takes care of business.  Someone who has lots of bad debts and no extenuating circumstances says this is someone who gets overextended and stops paying their bills so are you going to be next? Extenuating circumstances is someone who had many years of good credit then had something happen to them for example: lost a job or had a business failure, had a major health setback or a real estate market downturn wiped them out.

 

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