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Ghosts Applicants and What To Look For When Screening Prospective Tenants

Sunday, April 01

I don't believe in ghosts.

I especially don't believe in ghosts who apply to live in one of my two-bedroom apartments (I hear they are more attracted to creepy mansions). This is why when poor Miss Abileen's name came forth on the background check I ran this week, despite her death in 1987, I didn't immediately call the Ghostbusters. While there are a number of "protected classes" that are illegal to discriminate against, I'm fairly sure being dead is not one of them. Clearly something was wrong with the social security number provided. It was fake, probably purchased by the applicant who was lacking a social security number.

This event has made me revisit just how important screening a prospective tenant truly is. As a young investor, it is easy to want to just let a tenant move in based solely on impressions. After all, throughout high school and college we are accustomed to gauging the integrity of a person based entirely on conversations. However, properly screening tenants is the most important step in decreasing the headaches you will get while investing in Real Estate. I would even be as bold as to say 90% of all management headaches could be avoided by adequately screening. The following is a list of the top six things to research before allowing a tenant to move into your property.

1.) Valid Social Security Number: I'll start with this, as it relates to the story above. There a number of reasons a tenant might have a fake social security number, such as immigration issues or trying to hide their shady history. While you might be tempted to allow a fake or non-existent social security number to slide - this is a terrible idea. Instead, just take all the money from your bank account and just mail it to me. Why? You are almost guaranteeing future financial problems. If they refuse to pay, trash the place, and skip town - you can't garnish wages. If they hurt someone on your property, you can't find them. Finally, without a social security number, you have no way of knowing who they really are and what they have done in the past. Do they have several evictions? Do they have seventeen felonies in the past year? Simply put, the risk taken when renting to tenants without valid social security numbers far outweighs the reward.

2.) Job Verification
: Tenants may tell you they have an excellent job, but without verifying it from their employer, you have no way of ensuring that they are telling the truth. Even if they bring current pay stubs to you, it is still a good idea to call their place of employment because the job could be just a temporary position ending soon. Renting to tenants without a proper job is just asking for future evictions.

3.) Income Verification:
I recommend setting a minimum income level for your property at 30% of the tenant's gross income - and make this number visible from the start to avoid wasting time. I cannot tell you the number of times I have driven to a property to show a unit, only to find out that the tenant only makes $500 per month in social security and is looking to rent a $495 apartment. It is ludicrous, but it happens all too often. Tenants do not know how much they can afford, which is why you must. I now tell prospective tenants over the phone exactly our qualifications to minimize unnecessary trips to show units.

4.) Previous Landlord References: You do not want another landlord's trash. Calling a previous landlord is vital to knowing the kind of tenant you might be soon renting your property to. However, do not simply just call the most recent landlord, because more likely than not, this landlord will give a positive review even if the tenant was terrible - simply because they want them gone! Instead, go back to other previous landlords and find out the quality through them. Additionally, a proper background check will include previous addresses for the prospective tenant. Make sure these addresses line up with the addresses they give you. Often times tenants will conveniently "forget" to include landlord information for the property they were evicted from.

5.) Credit - While understanding a prospective tenant's credit is important, this is the only item on this list that is only necessary depending on the type of tenant you are looking for. Credit checks often just tell you one thing - they have bad credit. However, if you are renting higher income properties - by all means check credit. The way a person has paid their debts in the past is a huge indication of how they will pay you.

6.) Living Style: This includes a number of specific items of note about your perspective tenants that are pertinent to know before renting to the tenant. This includes items such as number of pets, other people who will be living with them, smoking status, and "how much cash do you have". These questions will help you better determine the type of renter this prospect will be and how they will affect the condition of your home.
Screening tenants does not have to be a scary task, and can easily be subcontracted out to either a screening company or simply a trustworthy college student looking to make a little bit of money. I also strongly believe in charging a tenant for the cost of the background check.

If you are interested in learning more about getting started investing in real estate, check out my website, RealEstateInYourTwenties.com. And yes, will still be allowed in even if you aren't in your twenties!

Happy Investing!


Myths Exposed - Why Young Investors Shouldn't Wait

Sunday, March 25

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     Most investors wait until their forties, fifties, or sixties to begin investing in real estate. While there is nothing wrong with investing at those ages, there is an underlying belief among many young people that it is not possible to invest until a person is well grounded and experienced later in life. In the words of Dwight Schrute: False.

     Investing in your twenties (and thirties) is not only possible, but beneficial. This post will look at six myths that hold young people back from investing and why waiting to invest is both unnecessary and detrimental to your investment plan.

I Don't Have The Time -

     Let me tell you a secret that the older generation all know - as you age you don't get any more free time.  In fact, the older you get, the more obligations seem to compile.   Kids, career, home maintenance, civic activities, etc all seem to multiply as you mature in life. Unless you plan on waiting until you are retired to start investing, you are never going to have "more time".  Don't use "I'm too busy" as an excuse not to invest. You can't afford to wait.

I Don't Have Enough Money

     Money is important in investing in Real Estate. While "gurus" have made millions of dollars selling the idea that anyone can invest in real estate with no cash, credit, or problems - the fact is it does take money to invest. However, that money doesn't have to come from you.  You can purchase your first property with nothing more than 3.5% down, which depending on the program and current lending standards, can be a gift from a relative
     You can also use your own sweat and muscle in the place of money. For example, purchasing a property through a hard money lender (non-bank individuals and companies who can finance the acquisition and materials for repair based on the value of the property, not the value of your wallet), improving the property, and subsequently refinance the property with no money out of pocket.

I Don't Have The Credit

     If you have made mistakes in your early years regarding credit, or you simply have never used credit and therefore don't have any, investing is not impossible. It simply takes another set of tools to make it happen. 

     First, you need to immediately begin fixing your credit. There are dozens of books online and at your local public library that deal with the issue of credit repair. Study these, follow these, and soon your credit problems will be a thing of the past.
     In the meantime, you can try flipping properties or wholesaling properties.  Additionally, hard money lenders do not generally care that much about your credit. If you find an amazing deal, the funding will be there. Also, it doesn't take good credit to write up offers, to find motivated sellers, or contact other investors to sell deals to. Wholesaling property is an excellent way to learn the business, meet other investors, and earn good money - all without any credit involved.

I Don't Know Enough

     Knowledge is foundational to any real estate investor, but your age makes no difference in your ability to learn. The first step I tell any would-be investor is to invest first in their education. The internet is full of great posts (such as the Bigger Pockets blogs, forums, and articles) and your public library is an unending source of knowledge. (see more about gaining a free real estate education on my website).
    One major advantage young investors have over the older generations is your ability to learn. As you age, your desire to pick up a book and learn or take a class on a subject decreases exponentially.  You are not that far out of high school or college, so use those skills to learn how to invest.  (Now, I do know many older investors who continually sharpen their mind through books, classes and other learning tools. However, I am speaking of adults in general). 

I Don't Want To Lose It All

     Investing, by nature, involves risk.  However, a smart investor knows how to invest with careful criteria and sound judgment, minimizing risk and maximizing financial gain.  This, again, is true at any age. 
     No one wants to lose when it comes to investing. Who, though, is at the greater disadvantage when it comes to risk? Someone who is looking to retire in five years or forty years? Clearly, the younger you start, the more time you have to make mistakes and still recover.
     I am not suggesting that you make risky choices- jut the opposite, in fact. However, don't let fear of losing stop you from winning big.  When you have forty years ahead of you before retirement, you are allowed to build that nest egg into a war chest.   Investing $10,000 and adding no additional funds for forty years at a 15% interest rate (the minimum you should shoot for with any real estate investment) will result in almost three million dollars at the end. Now imaging what adding an additional $10,000 per year would do ($23 million, in case you were wondering).  No wonder Einstein called compound interest the most powerful force in the universe.

I'm Not Stable Enough -

     This is one of the largest complaints I hear from people when I encourage them to invest in real estate at a young age.  Young people, by nature, are much more unstable in our lives. We change occupations, get married, have kids, move across town or across the country.  However, this is used more often as an excuse not to invest than a reason.
     If you were planning on moving to another state in six months, perhaps it doesn't make a lot of sense to purchase a home. However, you can still learn the ropes by wholesaling a deal or two during this time to another investor, picking up on skills that will follow you anywhere you move in the world. The houses may change style, laws differ, and your income fluctuate - but the fundamentals of real estate are the same where ever you live.