Friday, May 22, 2015

Finding tenants for our rental property

We picked up our first rental property in March.  We finished our renovations by the end of April.  The renovations will help reduce future maintenance, and helped get our unit rented out faster.  Our first tenants moved in May 2nd.  Today I will talk about how we found and approved our tenants.    

Deciding on a rental rate
We searched listing sites such as Zillow,, and Craigslist to help us decide on a fair market rental rate.  There are plenty of other sites where you can search for comparable rentals in your area.  People won’t pay $2,000 a month for an apartment with a nice kitchen if comparable options are available for $1,500.  I also got some input from our agent as well as a local property management company. 

We did not go with any property management because their services can really eat into your profits.  It’s harder to make a big profit if a property management service is taking 6 to 10% of your profits.  Another good tip I recently read on the Bigger Pockets forum is to visit your competition to check out the amenities they offer.  This is more time consuming but may help you with coming up with a fair and competitive price. 

Creating a listing
According to Postlets, listings with 11 to 15 photos get 70% more page views than listings without photos.  This seems pretty obvious to me since I would not want to bother visiting a property without first getting a photo preview of the location.  I used Postlets to create a free ad for our rental property.  Ads created with Postlets get listed on Zillow, Trulia, and Hotpads.  Postlets will create an html template for you to post an ad on Craigslist (photos need to uploaded separately on Craigslist).

People must have liked the advertisement that I put up, because I was getting calls and emails within minutes of listing the rental property.  I took some tips from this Zillow article titled “15 words that could add value to your listing.”  Words such as luxurious, captivating, stainless, remodel, beautiful, gentle and upgraded can help attract tenants to your property. 

Showing the property
My real estate investing friends all recommended that we try to have potential applicants to come to view the property on the same day(s) scheduled closely together.  This helps to save you time.  I’ve also read that some real estate investors online recommend doing an “open house” type rental viewing to get applicants to all show up at the same time.  The thought is that this creates a sense of urgency for potential applicants, especially when they see that the property is highly desirable.  We kept our showings individual because it gave us a better chance to get to know the applicants better. 

My real estate investing friends warned me that we would get a lot of last minute cancellations and no-shows to the property viewings.  This is true.  We had about 25-35% of our scheduled viewings canceled – mostly last minute.    

Screening tenants
Once we had a few good candidates to rent to, it was time to screen them to assess their potential for being good tenants.  I used the Bigger Pockets tenant screening guide as a quick and easy reference for properly screening for tenants.  I made sure I read the Bigger Pockets ultimate comprehensive guide list of tenant red flags and this other Bigger Pockets article on tenant red flags.  This gave us an idea of what to look for and what to watch out for with potential candidates.  The federal Fair Housing Act protects all potential tenants again discrimination based upon race, religion, national origin, sex, handicap, and families with children.  You must not deny a potential tenant based on any of those factors, or you could find yourself in legal trouble.

We used the standard California Association of Realtors application form, which asked basic questions such as:

- Name, address, phone number
- Date of birth, social security number, driver’s license
- Income
- Current and past landlord information
- Current and past employment information
- Whether patient has ever had an eviction filed or broken a lease
- Release of information signature

Other questions that friends suggest we should ask our potential tenants include:

- What is your requested move-in date?
- Do you have any pets?
- Why are you looking for new housing?
- How many people will be living here?
- Is there anything that may interrupt your ability to pay rent?
- How many bankruptcies, convictions or evictions have you had?

There are different companies you can use to run credit and background checks on your potential tenants.  We charged all potential applicants a $25 application fee, which mostly went towards running credit and background checks.  As a courtesy, I provided each applicant a copy of their tenant screening results. 

Per a recommendation from my friend, we went with CTCredit’s basic tenant screening service for $19.95.  This includes credit scores, 7 years of financial history, current and past debts, current and past credit and loan accounts, collections, charge offs, bankruptcies, social security match, past addresses, evictions, and bad tenant data.  CTCredit also offers other options such as terrorist search, fraud detection, national criminal report, full credit report, and more.  They also offer free consultation via email with an advisor to help you evaluate the reports of potential applicants to help you make the right decision on choosing a tenant.  Bigger Pockets, Postlets, and Rentalutions all offer credit and background services.  Rentalutions looks to be a very interesting option, although I have no personal experience with it.
Everything you can screen with
You can deny applicants if they have poor credit, evictions, bankruptcies, or insufficient income.  The tenant screening will help determine the applicant best suited to rent to.  Make sure you request the last 3 pay stubs or 2 months worth of bank statements.  Most landlords prefer tenants have an income that is 2.5 to 3 times the monthly rent.  For example if rent is $1,500 a month, ideally you want your tenants to bring in a monthly income of $3,750 to $4,500.  Anything less and you may find your tenant running into financial troubles or inability to pay their rent.  Your tenant’s credit report will also list any outstanding credit or personal loans you can use to determine whether your tenant can afford the rent you are charging. 

Make sure you call all current and past employers and landlords to get some more insight on your applicants.  Current and past landlords may tell you whether the tenants kept the property clean, paid on time, and whether the tenant gave the landlord any trouble.  Current and past employers will tell you how much the applicant earns, whether this is a part time or full time job, and tell you how professional the applicant’s work ethic is.  You may also want to reach out to any of the applicant’s personal references.  All of my real estate investment friends also mentioned that you should also trust your gut instinct as well.  If anything seems suspicious or fishy, be careful.

Signing the paperwork
After carefully reviewing tenant applications, credit reports, background checks, income verification, and calling references - we were able to easily find a good match for our rental unit.  The California Association of Realtors has standard rental lease agreement paperwork that we used.  I went through each and every step of the lease with my tenants prior to having them sign the paperwork.  We went through the move-in inspection checklist to document the condition of every room and appliance in the condo.  Then I made a digital copy of the paperwork so that each of us could have a copy.  I collected first month’s pro-rated rent as well as the security deposit (one month’s rent) and handed our tenants the keys to their new place!

For the last few years, we’ve been keeping our investments very simple with the Boglehead 3 fund portfolio.  I expect to continue investing most of our money into stock and bond index funds.  Rental property investing is a way for us to diversify our investments and take advantage of the many rental property tax deductions.  One thing I didn’t expect was just how much work real estate investing takes.  It is very hands-on and does require nurturing.   

Sure, we could go with a property management company and have them do all the work including advertising, reviewing applications, and collecting money - but it can really eat into your profits.  The real estate market in our area is still very hot right now, and it is difficult to find properties that provide significant cash flow.  When we are ready to look into another rental property in the future, we will probably consider one that needs fewer renovations.  I’m just glad that our rental property is within a 20-minute driving distance – otherwise we’d be spending a lot of time in traffic driving around. 

For most investors, I still recommend investing in index funds.  It is a lot easier and a lot less hassle than real estate investing.  That being said, the hands-on aspect of rental property investing has been very fun and rewarding – so far.  I will continue to share the ups and downs of our progress.

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