Top 10 Self Managing Landlord Hacks - Part 1 of 10

This is an installment of my experience as a self managed buy and hold investor.

My favorite landlord hack is an ETF. No an ETF is not an exchange traded fund but an Early Termination Fee. Here is how it works.

Everyone that owns rental properties has had this happen if they have owned property for any length of time. Tenant calls and says grandma died and I have to go take care of grandpa can you let me out of my lease? Or I got a job transfer and need to break my lease, or My Boyfriend and I are breaking up and neither one of us can afford the place on our own, we'll be gone by the end of the month.

The answer is ETFs and they are beautiful. I've had tenants thank me as they pay me.

We all know about ETFs from our cell phone contracts. Sign up for 2 years and you are locked in. If you leave early you pay a significant "penalty" because the phone company fronted you the cost of your phone, or so the sales pitch goes. I don't know the ins and outs of the phone business but this concept is what I apply to my rental business.

Here is my ETF clause (run it by your attorney as I am not one and even if I was I am not likely from your state).

LEASE TERMINATION: TENANT AGREES IN ADVANCE, THAT IF FOR ANY REASON THEY VACATE THE DEMISED PREMISES PRIOR TO THE END OF ANY 12 MONTH LEASE PERIOD (INITIAL OR RENEWAL), IN ADDITION TO ALL OTHER OBLIGATIONS HEREIN CONTAINED, THEY WILL PAY $1,480 AS A RE-LEASING FEE AND WILL BE RESPONSIBLE FOR ALL RENTS, UTILITIES, ADVERTISING AND OTHER EXPENSES INCURRED BY LANDLORD UNTIL THE DEMISED PREMISES ARE RE-LEASED OR THE LEASE END DATE (ORIGINAL OR RENEWED) WHICHEVER COMES FIRST.

This is in all caps at the end of my lease right above where the tenant signs. The amount I select amounts to something near 2X monthly rent (the above apartment rented for $749). There are a few things to consider.

1) Select the amount that is NOT equal to two months rent. This is a FEE to re-lease the property so it is NOT rent. There should be no confusion with this being money to cover lost rent while you re-lease the property. It is not rent. Once the tenant moves out, you can re-rent the next day and you owe the former tenant nothing. If it was rent then you would owe a refund because you would be collecting double rent. 

2) I use NEAR two month's rent amount to cover the cost of finding a new tenant. Property managers often charge 1 month rent to find a new tenant. I then add the amount to cover one month of rent in case I can't find a new tenant. Bottom line is, it's the going rate in my market.

3) I usually waive all the other costs in the clause for the tenant when they sign my termination agreement and pay the funds. 

An ETF is far superior to many of the other scenarios I have seen landlords use over the years like:

1) I'll just keep their deposit since they broke the lease. You can't "just keep their deposit". You must send an accounting of the Security Deposit (SD) within your state allotted time period. If you were a judicious landlord and re-lease your property in two weeks then you would have to return roughly half the SD depending on other costs such as cleaning. While you are not out any rent your time is completely wasted and at no fault of your own. The tenant should pay for that.

2) Some tenant's will plead poverty and ask, "Can I use by SD to cover part of the fee after all I'll clean the place up better than it was when I moved in." To that I say, "We can't do that."  I remind them that perhaps there is a friend or someone they can borrow the fee from and pay them back when we return the SD. The SD is for damages and cleaning. If you use it for the ETF then the tenant will have zero incentive to be careful when moving and will not clean a thing before they give you the keys.

Arguments Against ETFs

1) People will read this and say "If you re-lease the property before two months are up you are collecting double rent and that's illegal." To be clear renting property to two parties at the same time is illegal. Legally that is covered by having the departing tenant sign the termination agreement. Their lease ends when they move out according to the termination agreement. The new tenant's lease period would start after the date of the first tenant's termination. In addition, this is a FEE it's not rent. Rent is for use of the property. Fees compensate me for costs related to your use of the property but are not required if you use the property.

2) Some will argue that you are really just collecting double rent and while you have covered yourself legally you are morally double dipping. To that I say, "I have no problem doing this because I value my time." I know many landlords that value the property and so as long as no rent is lost they are ok helping tenants out. While this is an admirable position, I don't have the time in my life to help my tenants out aside from the obligations spelled out in our rental agreement. My family is more important to me and if I'm giving up time with them I want to be paid for it.

Parting Thoughts.

ETFs work with collectible tenants with good jobs and a credit rating to protect. If your tenant class is the forever renter class then this is not likely to work as well. 

You should see what the market will bear as far as the amount. For a gauge of that, visit you local big box apartment complex and see what they charge. You might want to start out smaller. 

I must say I was very skeptical of this when I started this but I have been pleasantly surprised by the response. To be sure, I've had a few tenants bolt but most have paid and it's much less painful to be re-leasing those properties.

It has significantly reduced the stress when I get "those calls."

Questions or thoughts, leave your comments below.