Finding Good Rental Properties and Tenants
If your long-range plans include a career in real estate investing, it's likely that at some point you'll own rental properties and be a landlord. It will be up to you to find and screen tenants, collect rents, clean up when they move out, and maintain your properties. Of course, you could hire a full-time property management company to take care of such duties for you, assuming your finances are able to handle such a luxury. In the beginning that may not be the case, so how well you perform these tasks yourself can go a long way toward determining if you succeed in the real estate business.
There are a number of clues to look for that can help you determine whether or not a home will make a good rental property. For example:
- Look in areas that have a plentiful supply of tenants. Good candidate areas include those where jobs are nearby to support a tenant base. Additionally, the property should be a suitable match for the tenant market. For instance, if you have a low-income property and the local work force consists mainly of highly paid white-collar types, you might have a difficult time finding tenants. Similarly, if blue-collar workers are the area's majority, renting a high-priced property will be a problem.
- Look in areas that have a shortage of rental units. If there are too many rental units for too few prospective tenants, you'll have trouble. Check the "for rent" ads of local newspapers to get a feel for the supply. It also wouldn't hurt to visit a few of the rentals you find to get a first-hand look at your competition. And if all else fails (or even if it doesn't), ask a real estate agent who specializes in rental properties what the market is like.
- Look for modern homes. An older house that needs a lot of repairs will simply be too troublesome. The home you choose should be under ten years old (ideally under three), and it should be in good shape when you buy it—unless, of course, you're specifically in the market for a fixer-upper.
- Don't consider elaborate homes. Don't buy anything too fancy as a rental property. Light, basic colors and beige carpeting—not white, which is very easily soiled and difficult to clean—is the way to go. Avoid swimming pools and other amenities that have high maintenance costs and lots of potential liability. A smaller lot with less landscaping to keep trimmed is also better. You get the idea.
- Look for homes that offer good rental incomes. The property should present a good ratio of rental income-to-cost. You want the monthly income from rents to at least come close to covering your expenses—ideally, of course, to pay them completely. The only way to accomplish this is to avoid overpaying for the property, which means that you should look for relatively inexpensive rentals.
- Purchase properties close to your home. One of the biggest mistakes a new investor can make is to buy distant rental property. It can make keeping up with maintenance and repairs—not to mention collecting rents—extremely difficult (unless, again, you hire a professional management company. If at all possible, keep your investment properties fairly local, within fifty miles or so. It's also easier to stay familiar with the rental markets if they're closer.
Some investors complain that it's harder to find a good tenant than it is to find a good property. But that needn't be the case. A thorough rental application and a little due diligence will generally help you avoid most problems later on. Additionally:
- Obtain a copy of the applicant's credit report. Don't look for or expect all of your applicants to have impeccable credit. Indeed, if their credit histories were spotless, they would likely already by homeowners instead of tenants. Rather, look for a history of making timely payments on their accounts. If you see a lot of late payment entries, chances are reasonable that the rent may be late, as well. You can obtain a copy of the credit report by contacting a local credit bureau. But remember, you must have the applicant's permission to do so—it's the law!
- Check with previous landlords. Be sure to go beyond just the current landlord, who may be willing to tell you anything in order to get rid of a bad tenant. The most important question to ask is, "Would you rent to this person again?" The answer can often be quite revealing. Again, be sure that you have the applicant's permission to do this.
- Match the tenant with the property. If your rental is a large house, expect to rent to families with children. If it's small, you probably don't want to have as many bodies living there. Additionally, keep track of the number of vehicles the tenants have. Too many can become a hindrance to street traffic, not to mention being an eyesore.
- Verify the applicant's income. It's likely a tenant who doesn't have a job probably won't be able to make the rent payments, no matter how good the credit report looks. Contact the current employer and verify the applicant's length of employment, the likelihood of continued employment, and his or her salary. Once more, you'll need the signed permission of the applicant to do this. Employers generally will not divulge to you an employee's salary amount, but they'll usually confirm a number that you give to them (so make sure it's included on the application).
Finally, when you talk with prospective tenants, pay attention to how you feel about them. Do they seem like people who'll likely make the rent payments on time and keep your place in some semblance of order, or do they somehow instill in you a bit less confidence? Though certainly not scientific, gut feelings can nonetheless be a sound method of predicting tenant behavior. So, don't be afraid to trust your instincts—it's why you have them.