If You’re Going To Be A Landlord . . . Do It Right From Day 1!
I had an amusing conversation while in New Orleans in September with a fantastic couple from Mississippi. They have been investing in real estate for the past 15 years and have amassed a portfolio of over 40 properties that provide a nice income for their retirement. They had come to me for advice on managing their properties and the conversation that followed, while being serious, had all of us laughing at how backwards we can sometimes get when managing our own properties. I was once a landlord managing my own properties so I laugh from experience!
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Never Close At The Local Burger King
One of the first pieces of advice I gave them was about the tone they set from the beginning. If you want the tenant to respect your property and your authority as the owner and landlord, then you must set the right tone from the time you meet them. A few ways to set the right tone are:
1. Pre-qualify the tenant on the phone BEFORE showing the property. Help them to understand that you are very busy and that you cannot simply drop everything and show a property to everyone. They are either serious about wanting to rent the property or they are not. If they are, set an appointment and show the property. I would never advocate putting lock boxes on rental properties.
2. Never be late… ALWAYS arrive early. It lets your future tenant know that when you set a time or a due date, that you expect it to be met!
3. Close your lease like a professional. Never close the lease at a local coffee shop, or fast food restaurant, or the counter in the kitchen of the home and never close the lease on the hood of the trunk of your car. I have been shocked the number of times I have heard do-it-yourself landlords talk about the problems they have with tenants respecting their process only to hear they started out on the wrong foot by whipping out a contract and signing it on the hood of the car!
When I was talking with the couple from Mississippi, I mentioned that you should never close a lease at the local Burger King. The wife began to laugh and put her head on her husband’s shoulder and he laughed as he told me that their favorite fast food restaurant in town is Burger King and they happen to close all their leases there. We all started laughing and I told them it was purely coincidental that I chose that restaurant, but I wanted to know if they understood the message that sent their tenants. One of their major problems was that tenants took advantage of their kindness and seemingly low-key, relaxed operation. They constantly asked to pay late, asked for additional work to be done to the property and they felt that, at times, they were being pushed into a corner of “do this for us or we are leaving”. That constant threat left them feeling like the tenants were in control of their investment property and not the other way around.
As we continued to talk, I asked them if they had a real estate attorney with a conference room and they said that they did. My advice to them was to use that conference room for all of their lease signings. It would help them to set the proper tone from the beginning and assert their position as providing a professional service to their tenant and not simply a rental property. They had been using a two page lease and when I told them we had a 5 page lease with 9 addendum pages their jaws fell open. They were just as likely to sit and have a burger with the tenant as they were to actually discuss the terms of the lease and what they expected as managers of that property. It was my turn to be shocked when they said they even pay for the burgers!
Presents Are Nice, But Earning A Profit is Always Nicer
The paying for the burgers story brought us to a completely different set of circumstances that was undermining the performance of their investment properties and ultimately costing them more money. They were being too nice! I can honestly say this from experience, because I too have been way too nice to tenants in the past. It completely undermines my ability to hold them accountable.
The couple told me that the wife often gave the tenants flowers at closing to decorate their new house with. She often sent them a card at Thanksgiving and a card at Christmas with a small token gift card. I understood exactly where they were coming from and had often done the same thing. The problem is not with the giving. The problem occurs when you need the something from the tenant…like rent! When tenants are behind on rental payments, they not only owe you rent, but they also should owe a penalty for paying late. It is almost impossible to hold a tenant to a timetable and a late payment penalty if you are constantly providing all the niceties that fit your personality. I can say this because I was way too nice when I managed my own properties!! Receiving rent on time and collecting a penalty when they are late are two essentials for not only earning a profit, but also for keeping the relationship with your tenants balanced. They must know that you are fair both in applying the rules and working with them as a tenant without thinking that they can take advantage of your personality to pay late, pay less or pay late without a penalty. If you allow this even one time…it will become the norm. The couple told me that my story hit the nail on the head and that they now had tenants who expected grace periods for rent, waived late fees and even withheld rent if they had even a minor repair to the property.
My last piece of advice for them on property management is arguably the hardest. It is difficult to always apply the rules in a consistent manner when each tenant, each property and each situation are different. This is one of the big reasons why so many people turn over their properties to management companies. It is not the toilets that cause the real frustration. It is the constant need to apply the rules as a property manager consistently to multiple different scenarios. It is hard to hear of the hardship that legitimately can fall on a family and yet hold them accountable to a consistent application of your rules. I explained to the couple that being brutally honest on day one about the rules and how they are applied will go a long way. Having an addendum to your contract that spells out clearly the rules for everything from rental payments to reporting damage and requesting maintenance gives you a very sturdy hold to balance on when you have to be stern and strong. If you simply make the rules up as you go and allow some tenants leeway and not others then you will have a real problem not only staying profitable, but navigating the mental stress of managing your properties.
When our conversation was over and they were moving on to the next presentation, they turned back to add one more thing. The husband walked over and shook my hand. He told me that one 30 minute conversation on the business may have been the best conversation they had in years. They had simply been resigned to their fate of going up and down on the landlord roller coaster. He let me know that upon returning to their home on the following Monday they were starting with a brand new Day 1! I made him make me one promise before he left. If he and his wife turned things around and truly became great landlords by regaining control of their business…he had to be the one net year passing on what he learned to others.
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