Owning rental property is considered by many to be the most reliable investment to simultaneously generate wealth (net worth) and generate passive income (“cash now”). That is probably why there are more than 17 million single family home rentals in the US and 89% of them are owned by mom and pop landlords who own 10 or less such rental homes.
At the same time, it is no secret that landlords complain about managing tenants to the point that many landlords burnout and get to the point that they are willing to give up the income that is no longer “passive” and stop building net worth as the tenants pay down the mortgage loans plus appreciation usually enjoyed over decades in real estate markets.
Are tenants inherently problematic or are landlords making a big mistake?
The answer is that 90% of tenant problems can be prevented by better tenant screening and selection. Yup, it’s your fault! It’s true that the problem tenants are the ones who aren’t behaving properly, but YOU, the landlord, are the person who gave them the keys to your property!
How can you minimize problem tenants in your rental properties?
There are many best practices for selecting the best tenants and many psychological methods for programming tenants for compliance. These practices and methods are described in detail in the training videos “Establish Acceptable Standards of Behavior to Screen, Manage and Choose the Best Tenants” and “How to Choose Houses for Rentals.”
In this article, I will mention three of the most important practices, methods and strategies. There are many more and you need to watch all of our training videos to maximize performance and minimize problems and burnout.
1. Choose the Right Income Segment
When you choose the right tenant income, you minimize the probability that an emergency, such as a blown car transmission, will force the tenant to choose between paying your rent or fixing their car they need to get the work to get the money to pay your rent.
I know that when you looked at the numbers, you found that the theoretically highest cash-on-cash returns are in the lowest income housing. Just remember that lowest income means the smallest cushion to survive financial hiccups, not just disasters.
I have found that working class incomes and middle class incomes strike a reasonably practical balance between cash-on-cash return and tenant cushion to handle the inevitable financial speed bumps.
2. Carefully Determine Your Written Screening Criteria
You should have written tenant screening criteria for several reasons, one of which is compliance with Fair Housing Law. Let’s talk about one criterion in particular.
When you set reasonable standards for tenant reliability in paying their bills, i.e., creditworthiness, you minimize the probability of choosing people who simply can’t handle money responsibly. For example, when you allow tenants to rent your property with FICO scores under 600, you are PURPOSELY choosing the bottom 20% of the population when it comes to paying their bills on time. Under 550? Those are the bottom 11%!
Is it a good decision to proactively maximize your risk when you hand over a $100,000-$200,000 property for safekeeping to the worst money managers in the population? Of course not! Is this what you’re doing right now?
Is this what you’re doing right now and complaining about your problems in getting paid on time?!!! Does this make any sense? Whose fault is it? You or your tenants whom you chose?
3. Be Disciplined in Following Your Written Screening Criteria
Some of you have learned the hard way that you create problems of non-payment of rent when your screening criteria are household income of less than three times the monthly rent and credit scores under 600.
But many burnt out landlords continue to suffer from lack of discipline in sticking to those criteria. Remember, YOU are choosing the tenants, YOU are choosing the screening criteria, YOU are choosing extreme compassion over business viability.
Landlords burn out when they have problematic tenants and suffer from the following problems:
Non-payment of rent
Late payment of rent
Wasting time on evictions or other legal proceedings
Dealing with lease violations by the tenant, complaints neighbors and code officials
Aggravation, lost sleep and sometimes anger
Add your own favorite burnout activity here
If you are a burnt out landlord or are on your way to burnout, chances are, you have made the three mistakes above and other mistakes that we detail in our training videos.
How do I know about these mistakes? Because I made them too!!!
My “economic vacancy” rate in my first 7 years of landlording was 5.7%. Economic vacancy is defined as the number of rental-months for which rent was not paid in all the rental units of a landlord (regardless of physical vacancy) divided by the total number of rental-months in all rental units of that landlord.
In my next 4 years, my economic vacancy rate dropped to 2.9%.
Because I chose the right tenant income level, I chose the right screening criteria and became A LOT MORE disciplined in abiding by my written criteria.
I also changed the way I “collect” rent, the timing of rent collection, the way I manage tenants from the first microsecond of interaction through lease signing and renewal and many other things you will learn in this video.
Tenant turnover typically costs $4,000-$8,000 each time! That is a huge amount of money. My 22-hour Smarter Investing home study course, including the Smarter Rentals & Landlording module, costs $997. Do the math. How much money will you save if you eliminate just one tenant turnover in the next 5 years. Now click here to buy the Smarter Investing home study course or continue to lose money doing what you have always done.