Tuesday, September 22, 2009

Renting to Prospective Tenants

Although I currently rent, I also own a townhouse in Palo Alto that I have been renting out for this past year.  Being a new homeowner and landlord, there were many advice that were given to me -- but most importantly, this is what I learned from it.

Everyone loves to give advice on how to successful manage and rent out your property to a great tenant, but most of the advice aren't worth the price you paid for them.  Some advice, even ones from my own parents, ended up making my first rental experience very difficult.  I had two renters during this past year, one was a nightmare tenant, the other everyone's ideal tenant.  My suggestions and learning may not apply to everyone, but hopefully you will get some useful insights from my experience.

There are many areas to list your rentals.  There are management companies that will take care of everything from applicant screening to maintenance.  Management companies will charge a fee of on average 6% of total monthly rent -- if you currently already have a tenant.  They will charge you an additional fee to find a prospective tenant that equals to about 1-month the new tenant's rent.  There is no risk for them as the owner (you) will be paying all the expenses during the tenant search and application process.  In addition, most of these management companies will advertise your unit on Craigslist.org (which is free for them).

I think there is a much better solution.  If you're able to find a good tenant, then you won't have to have a management company be the go between because they will most likely take care of everything themselves or work with you to resolve any issues. 

First things first, I would suggest taking very good pictures of both the interior and exterior of your rental unit, as well as your neighborhood and posting them on craigslist.org.  Rental ads with good description of the unit as well as pictures will attract the most number of visitors.  Don't leave your unit to be shown on a case-by-case basis, set up open several open house hours on weekends to allow prospective tenants to visit the property on your time.  This will further filter out the looky-loos with the serious tenant.

Set your rental property below market.  I understood that I could have rented out my rental property for $3,300/month -- and did.  But the tenant I found that accepted the higher rent was so difficult to work with that it wasn't really worth the extra couple hundred dollars I received.  They claimed allergies from a property that was brand new (6-month old environmentally friendly building) and made outrageous demands and claims that just didn't make sense, including "exhaust fumes leak from the garage to the living room when they leave the car running in the garage and the door to the living room open".   Now seriously, is that really a design defect or just someone being stupid?  End of the day, I shortened their lease just to get rid of them as quickly as I can.

The second time around, I purposely set my rent at $2,800/month.  This brings in a lot more potential renters.  In addition, because your property is now a bargain, people are more willing to be flexible.

Always operate on a first-come, first-serve basis.  Don't get too greedy waiting to select the perfect tenant.  The first tenants are usually the best since they are serious about the property and usually the most ready to move in.  Tenants that are further down the list are usually the more hassle prone and difficult to work with.  I initially listened to my parents and tried to select the best tenant for my property, but ended up stuck with the worst tenant I could possibly find.  Second time around, operating on the first-come, first-serve basis, my current tenants provided me their application and deposit the afternoon of my first open house.

Tenant's personality really shows through during the application process.  If the tenant is very picky about the contract (I used the standard Realtor rental contract) and/or your background check form (same standard form), chances are they will be very picky and difficult to work with during their lease.  Remember to always ask for a deposit if they are serious about the property.  If they are hesitant, then chances are they probably are not serious renters to begin with.

Review the credit check in detail.  This is common sense, but it can foreshadow your future experience with that potential tenant.  Make sure they have no outstanding loans or debt, and they are not stretched too thinly on their loans.  In addition, make sure their total salary can comfortably pay for the rent.  You do not want a deadbeat tenant especially in California as the laws favor the tenant much more than the landlord.

Try to have your lease begin or end during the spring.  This is the best time for rental properties.  Winter is the worst.  This may be because people usually do not want to worry about moving to a new place during the holidays.  This market applies to auto sales as well. 

Be a good landlord.  I think many landlord (who many at one time were renters themselves) forget that.  Be prompt with responding to your tenant and check in with your tenant periodically to make sure everything is ok.  I find email works best for me as it's easier to think out my thoughts before I reply, but my tenants have my cell phone number as well in case of emergencies. 

Following the above, and avoiding the downfalls from my first rental experience, I found tenants that basically take care of everything themselves.  I never hear from them.  They direct deposit their rent to my checking account at the end of each month.  They even take care of minor maintenance on their own.  I couldn't have found better tenants, and I hope they stay for some time.

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