Renting out a property you own can be a great way to generate wealth over time. If you can effectively get someone else – a tenant(s) – to pay your mortgage while also achieving capital appreciation on the property, it can be a great combination for wealth creation.
But renting out a property begins and ends with finding the right people to inhabit your home. Get this right and you’re on the right track. Get it wrong, and it cost you big time.
Here are some important tips and advice to ensure you start on the right foot and only attract the right tenants for your property.
How to find and screen the best tenants
- Screen tenants carefully: Make sure to thoroughly vet potential tenants by checking their credit, employment, and rental history. Use whatever tools that are permitted to vet them according to local landlord and tenant laws. Pay a property management pro or qualified lawyer (with experience in rentals) if needed to do the credit check and screening.
- Meet all prospective tenants personally: Meeting prospective tenants personally is a must. You want to see and listen to the people who could potentially be inhabiting your biggest investment. Don’t skip this step. Companies interview in person for the same reason: You want to look someone in the eye and observe their mannerisms and answers to your questions. You lose something when it’s done online or through chat or email only.
- Set clear expectations: Communicate with tenants about your expectations for rent payments, property maintenance, and any other rules or policies you have in place. Drawing their attention to these expectations enables them to understand what you expect. It also enables you to see how they react and if they push back with questions that might indicate that you may have a problem in the future with rule adherence.
- Have a written lease agreement: A written lease agreement can help protect both you and your tenants by clearly outlining the terms of the rental. These days, a written lease is also the law. Chances are your local municipality or state/province has a standard lease form that you can use. You do not have to write one yourself. Plus, you also ensure that you are using a form that has been approved in your local area so that you aren’t putting in clauses that are illegal.
- Be responsive: If a tenant has a complaint or request, respond to it in a timely manner. This can help prevent small issues from turning into bigger problems. Not only that, but there are legalities related to how quickly you are required to respond to certain issues such as heating and cooling issues as well as water leaks and things of that nature.
- Regularly inspect the property: Regularly inspect the property to ensure that it is being well-maintained and to address any issues that may arise. Check local laws to see what is required. You typically have to give written notice in advance – perhaps 24 or 48 hours – before accessing the property. Even though you own it, that doesn’t give you the right to walk in anytime you like.
- Be prepared for repairs and maintenance: Expect that repairs and maintenance will be needed, and have a plan in place for handling them. It’s a good idea to have a list of certain specialists ready to go such as a trusted electrician, plumber and perhaps HVAC pro if applicable.
- Keep detailed records: Keep detailed records of all financial transactions and communications with tenants. This can help you stay organized and can be useful if any disputes arise. It’s also helpful for accounting purposes.
- Take advantage of online tools: There are many online tools that can help you manage your rental property more efficiently, such as online rent payment systems, property management software, and scheduling tools for maintenance and inspections. You might even consider turning over management of the property to a management company if all of this seems too much for you to handle on your own.
Things to watch out for with prospective tenants
Trusting your gut is a good start but it’s the beginning and not the end. Some people are good actors and can impress you in person when applying to rent your property but turn out to be a disaster.
Here are some things to watch out for and consider during the process:
Avoid cash players: Be very wary of prospective tenants who offer to pay cash months in advance for rent. This is often a tactic used by scammers who try to inhabit a home and then sell the property from underneath the owner in a crime called title fraud
. By offering cash, they are eliminating a paper trail so they can’t be found after they disappear and it entices landlords to jump at the offer. Don’t.
Don’t accept the first tenant who applies: In a perfect world you will have several or more prospective renters to choose from. That way you don’t get excited by the first one who may not be ideal and can compare them to others that come afterwards.
Look for clues: Things that may be red flags include prospective tenants who jump from job to job, jump from rental property to rental property, have a poor credit history, use someone else’s credit history, or who have elaborate stories or explanations about their past. If you’re considering renting to first time renters be extra diligent as they have never rented before and may not know what it entails. Renting to a new or unmarried couple means that you must consider what will happen should they split up.
Trust but verify: Meet tenants in person and observe them. Call all their references and ensure they are legit and aren’t friends posing as references or pretending to be former employers. Check the social media accounts for prospective tenants like Linkedin for work history and Facebook for personal info. If they put it online for everyone to see, it’s fair game.
Consider a property manager: Actively managing a property isn’t for everyone. Are you ok with occasional but necessary confrontation should the need arise? Sometimes having a third party gives you an arm’s length distance from tenants so that a professional manager who has experience dealing with problems takes care of it for you, for a fee. Plus, they tend to offer other services such as: quick access to repair services, online billing and rent revenue tracking, options for rent insurance and perhaps even legal access should a dispute occur between you and the tenant. Also, they should be capable of ensuring that your property adheres to all new regulations in your local area pertaining to rentals that you might be unaware of.
Don’t discriminate: Watch out for making negative or positive stereotypes about prospective tenants that are unfounded. Not only can it prevent you from finding a good tenant, it can potentially leave you open for legal problems should you get accused by an applicant of discrimination.
Know the laws: Many local areas make changes to landlord and tenant laws yearly especially during Covid times and also pertaining to rent increases and other laws related to what a property must offer. Ignorance is generally not a good defense so ensure you understand the landlord and tenants laws in your local area. It’s part of the job including when they are updated.
Trust your gut: If the person you’re considering for your rental property seems too good to be true, they probably are.