Owning rental real estate can be very rewarding, but it can also be very frustrating, especially if you decide to manage your own properties. Rental real estate is really the perfect investment…that is, until you put tenants into the equation. Tenants – you may love them or you may hate them, but you can’t do without them. There is simply no way around it – you must learn how to effectively deal with tenants and become a super landlord.

Before you have to deal with tenants, you must first purchase rental property. The first, and most important thing you need to do when getting involved in rental real estate is to buy right. If you don’t buy right, then you may be doomed to failure no matter how good a landlord you might be.

What does it mean to buy right? Buying right requires you to be extremely selective about the properties you buy that you are going to keep as long-term rental properties. In his book, 7 Habits of Highly Effective People, Stephen Covey argues that successful people “always begin with the end in mind.” This is critical in the real estate investing business. You need to know what you are going to do with a property before you buy it. This is really quite simple if you keep this one thought in mind: If you are buying a property to keep as a rental, buy a property that will be easy to rent and easy to manage. Do your homework before you buy:

• Check the crime statistics in the area; avoid high-crime areas
• Find out the ratio of rental properties to owner-occupied properties
• Find out what the current vacancy rate is for rental properties similar to the one you are considering; a high vacancy rate means you will have a harder time finding a tenant and may have to cut the rent to attract new tenants
• Find out what the current unemployment rate is in the city
• Determine the proximity to schools, public transit systems, and shopping
• Know what you can charge for rent based on what similar properties are renting for, not what you are told by the seller or their agent

Once you have identified a property that will be easy to rent, you need to negotiate a purchase price that will provide you with positive cash flow. This is very important and easy to do. You simply take the monthly rent you can reasonably get from the property and subtract all of the monthly expenses (property taxes, insurance, utilities, and maintenance). Be sure to include a proper vacancy factor, a management fee (even if you plan to manage the property yourself), a maintenance fund fee (for future repairs), and the positive cash flow you desire to get from the property. The net rent you have left (after deducting all expenses and your desired positive cash flow) is the amount that you will have available to pay the principal and interest on a mortgage payment.

You then need to calculate in current interest rates and terms. Use a mortgage calculator to determine the dollar amount you can borrow that results in the payment amount available to service the loan. This is the amount you can afford to pay for the property in order to get the desired positive cash flow.

Remember, if the property needs repairs before it can be rented, the amount of those repairs needs to be subtracted from the purchase price that was determined by the cash-flow analysis formula described above.

If you buy the property right and have positive cash flow, you can more easily tolerate the problems you might face due to the occasional bad tenant. That positive cash flow every month will bolster your attitude when dealing with problems. However, if you saddle yourself with a negative cash-flow property, your problems will seem 10 times worse than they really are. Buy right or don’t buy at all.

Assuming you have purchased a good rental property, one that will produce a decent positive cash flow, the next step is to find tenants. If you purchased wisely, then you also set some funds aside to cover mortgage payments and expenses during the time it takes to find a new tenant. Don’t feel pressured to rent to the first person that comes along just to get a tenant in the property. You need to choose your tenants wisely. If that takes a little time, it will be well worth the extra effort. Trust me on this one: it is far better to have no tenant than to have a bad tenant!

Admittedly, it is hard to completely relax until you get the property rented, so getting it rented as soon as possible is something to strive for. Keep in mind, though, that a high percentage of tenant problems can be eliminated in the screening process. So from now on your goal should be not to just get the property rented, but to get it rented to a properly qualified tenant. And once you get that qualified tenant, you need to do everything you can to keep them as a tenant and take steps to make them even better tenants!

Screening and Qualifying Tenants
As a landlord, you must screen your tenants. If you don’t, you are just asking for trouble. Some landlords like to trust their gut feeling. You may luck out, but you might also get taken to the cleaners. Why take the chance when it is relatively easy to screen your prospective tenants properly? Here are eight steps you can take to help you with the tenant-screening process:

• Step 1 – In 1968, the Fair Housing Act was enacted. This law prohibits landlords from discriminating against applicants on the basis of race, color, national origin, religion, sex, family status, and disability. Get to know the details of this law. Fair housing – it’s not an option, it’s the law! Also become familiar with the laws in your specific state that deal with the relationships between tenants and landlords. Know the laws pertaining to tenant deposits, leases, month-to-month rentals, and evictions. The more you know, the easier it will be for you to stay out of trouble. A lot of professional tenants know the laws inside and out and, if you don’t, you can find yourself at a great disadvantage. Also, get a good attorney on your team who is a specialist in tenant-landlord law. If you ever have a question on any matter of law, consult your attorney immediately. This is not a time to guess at what is right or to use common sense; many times the law does not follow common sense, but it is still the law.

Hints for staying out of trouble:

1. Give all applicants the same information about your property, such as move-in costs or when the property will be available for occupancy.
2. Know the HUD guidelines for the number of occupants allowed in a certain-sized unit. Don’t tell applicants that the number of people in their family exceeds the limit for your rental if their family size is within the guidelines.
3. Process all applications. If you have found that seniors make good renters, for example, and only process applications from seniors, you could be in violation of the Fair Housing Act.
4. If you don’t want to rent to a particular person, don’t ever tell them that the property has been rented, if in fact it has not been.
5. Do not ask anyone about their race, age, country they are from, religious preference, sex, marital status, or disabilities.
6. Apply the same eligibility requirement and income guidelines to all applicants equally.
7. Do not say, “I don’t think you would be happy here,” just because you don’t want to rent to them.
8. You can screen people based on things such as income. Know the laws in your state so you can stay out of trouble.

• Step 2 – The first contact with a prospective tenant is usually on the phone. Start the qualifying process during your first conversation. Advise prospective tenants of the rent, deposit, and other facts about the property. Let them know if you allow pets and, if so, how much the pet deposit will be. Inform them what type of pets you allow (i.e., dogs, fish tanks, reptiles, birds, or cats) and the occupancy limit for your rental (make sure you are using the HUD guidelines). Tell them your fee for running the credit and background check. If you take just a few minutes telling people your guidelines, you will eliminate a lot of potential applicants, thus saving you a lot of time further screening a tenant who doesn’t meet your basic requirements.

• Step 3 – For those applicants that seem to qualify, fill out a prospect card with basic information: name, phone, reason for moving, number of people, number of children and ages, desired occupancy date, any pets, smoking, and present and past landlord references. If you experience any difficulties finding out this basic information, then they will probably not qualify for your rental.

• Step 4 – If the prospective tenant(s) qualifies based on your first contact, set up a time to meet them at the property and continue the qualification process. Note their appearance, which is an indication of how they will treat the property. Are they neat and clean? Take a look at their car. It doesn’t have to be a new car, but its condition and interior cleanliness is another indication of how they will treat your rental property. Their attitude and manners will indicate if they might be difficult to deal with in the future. Are they too critical of the property? Pointing out legitimate concerns is okay, but nitpicking too many things is an indication they may be problem tenants. Take time to tell them what your expectations are for your tenants and all of the critical items that will be in the lease, items such as yard-care responsibility, rent due dates, late fees, pet policy, and a guest-occupancy policy. If they have any concerns, it’s better to get them resolved now, before wasting time on someone to whom you won’t want to rent.

Step 5 – If you have gotten this far with a potential tenant, now is the time to start the application process. Start with a good rental application, one that collects all the information you will need to run a credit check and background search. The application should contain the legal verbiage that gives you permission to run a credit and background check and a place for the applicant(s) to sign. Have each individual adult fill out and sign an application. In the case of married couples, the application should have spots for both spouses’ data. Have them both sign the application. Let the applicant(s) know that they must fill out the application completely and that their application will be considered along with others, and that you will notify them once a decision is made. The application should spell out the screening fee you will charge for running the credit and background check. Check with your state to determine if there are any restrictions on screening fees. Collect the screening fee and run the credit and background checks. There are many companies that will run the checks for you. You can get easy-to-read credit reports, as well as criminal, eviction, sex-offender, and suspected-terrorist reports performed instantly and they are accessible 24 hours per day, seven days per week. An Internet search will give you plenty of companies who provide this service. Here are a few from a quick Internet search:

www.tenantscreeningblog.com
www.mrlandlord.com
www.landlord411.com
www.creditchecklandlord.com
www.landlord2landlord.com
www.accuratecredit.com
(Please note, we have not used these companies and are not recommending them. This list only provides a starting point for your research.)

Also, be sure to check with your local landlord association. They may give you the best price on running credit reports and background checks.

• Step 6 – Once you have chosen a qualified tenant, call them, congratulate them, and let them know that their application has been approved. Set a time and place for the lease signing. Let them know how much money they will need to bring, preferably in money-order or cash form, for the rent and security deposit (and any other deposits, such as pet deposits and mother-in-law deposits). If you accept a check, let them know that possession will be given after the check clears the bank. Many landlords require a credit card to pay rent, with an authorization for a monthly rent charge. This eliminates a lot of potential rent chasing each month and a lot of tenants like the fact that they never have to worry about late fees. Setting up a merchant account so you can accept credit card payments is fairly easy to do in today’s business world.

• Step 7 – The lease signing is still part of the qualification process. If the prospective tenant doesn’t agree to all the terms of the lease, you shouldn’t rent to them. Start with a good-quality lease that has all of the provisions you want to protect you and your property. You should have mentioned the most important items in the lease when you were showing the property, so there should be no surprises. It is critical to read the entire lease to the prospective tenant(s) and highlight on their copy the critical items. Have them initial every page, indicating that they have read and understand the lease and agree to all the provisions. Have them sign and date the lease, your copy and theirs, and sign the spot indicating that they have received a copy with all signatures, yours and theirs. If they argue with any of the provisions (other than minor items) and won’t sign, then politely thank them for their time and call your next applicant who qualified. Assuming all goes well, collect the money and give them the keys (unless they use a check that you want to clear before giving them possession). Remember, once they have moved in, if the funds don’t clear, you have to use legal processes to get them out.

• Step 8 – After a couple of days, send them a welcome letter telling them how excited you are to have them in your property. Thank them for their willingness to take care of the property and take pride in keeping it a great place to live. Have high expectations of your tenants and most will live up to those expectations.

There is no absolute right way to screen a tenant, but a good screening process will help you become a super landlord. So develop a screening system that works for you and use it on every new tenant. Never skip this step! You do not want to deal with any tenants from hell!