Every real estate investor has received The Call from a tenant who is late paying rent. The Call takes different forms, but the end result is always the same. Here are some examples:

“Hi, this is Frank, your tenant. Sorry I missed the rent payment last week. We had a medical emergency and I missed some work. I’ll mail a check by the 20th.”

“This is Susan, your tenant. I was let go from work so am having trouble paying the rent. But I should be able to catch up next month.”

And of course there is the very common No Call. Rent was due by the 5th, it’s now the 10th or 15th of the month, and you’ve not heard from your tenants at all.

The big question here is–what do you do? The answer to this question turns out to be really, really simple. And the answer is the same regardless of the situation. But before we get to the answer, let’s look at a similar situation.

Let’s assume you, the real estate investor, can’t pay your mortgage because your tenant hasn’t paid rent. As a responsible borrower, you call up your mortgage company and explain the situation. What will the response be? Will the response change based on how heart-breaking your story or your tenant’s story is? Nope. The mortgage company has a process to follow when a mortgage isn’t paid, and they will follow that process regardless of what story you give them.

So now back to your late-paying or no-paying tenants. Your response should almost always be the same–an eviction notice.

When Mike and I first discussed this, I thought an immediate eviction notice seemed a bit harsh. Mike convinced me otherwise. And it’s not that we don’t care about the tenant’s situation. (Well, Mike probably doesn’t care.) But the simple fact is that we can’t financially maintain the properties without tenants paying the rent on time. We don’t debate with the tenants. We don’t try to work out a payment plan. We don’t pretend to be understanding. We don’t try to help them figure out a way to come up with the money.

We’re not mean to the tenants. We don’t threaten them. We don’t yell. In fact, if they leave a voice mail message, we rarely return the call. We simply serve them with an eviction notice if they fail to pay the rent. It’s as simple as that.

The eviction notice usually motivates the tenants to pay the rent. In some cases, after an initial problem, the tenant begins to pay on time. Fortunately, we have never had to actually evict anybody from the properties we own together.

As part of this process, Mike will contact a tenant who has failed to pay the rent before serving an eviction notice. The point of the contact is NOT to find out why they haven’t paid. We don’t care why they haven’t paid. The point is simply to motivate them to pay the rent on time. Our rental agreements provide for a late payment penalty, which we generally enforce. And sometimes, a single phone call or letter is all it takes to put the tenant on the right track. But after that, we move right to an eviction notice.

All of this leads to a very important aspect of the landlord-tenant relationship–distance. Tenants are not our friends, and we are not their friends. The relationship should be mutually respectful and professional, but perhaps unless you knew your tenants before they were your tenants, the relationship is not one of friendship. Being too close to your tenants can really muddy the waters when it comes to money.

You should have a set process when a tenant pays late or doesn’t pay at all. The process should be followed, and involve initiation of an eviction in short order if the tenant doesn’t pay.

This is the third and final article in our series on how to remodel a kitchen for under $4,000. In the first article, we described the factors we consider in deciding whether we undertake a major kitchen overhaul. In the second article we described how we design the remodel and select the materials. In this article, we will describe how we pick a contractor, show you the detail of our costs, show you pictures of the kitchen, and suggest a couple of easy, low-cost ways to set your property apart from the competition. Oh, and we’re going to reveal why this series should have been called “How to Remodel a Kitchen for Under $4,307.” In anticipation of this last point let me assure you that it’s all Mike’s fault.

How to pick a kitchen contractor

The easiest way to pick a kitchen contractor is to know how NOT to pick a kitchen contractor. Don’t hire a company that specializes in kitchens. They may do great work, but they cost an arm and a leg. I know, having just finished a major kitchen remodel in my own home. And don’t pull out the yellow pages. Your contractor isn’t there either. You want to pay for the remodel, not the box ad in the phone book or the 800 number.

We hire individuals (not companies) who have basic carpentry, plumbing, and electrical skills. And we hire them to handle most of the repairs to the home, not just the kitchen. This helps in getting the best price possible.

Personal referrals are always the best place to start. Nearly everyone knows someone who knows a guy that works for the yellow pages company but does handyman work on the side. Granted, a kitchen remodel is no small task, but a structural engineer is probably a little overkill. So, if you find someone with some skills, a personal referral, and maybe a prior job that the someone has done and you’re most of the way there.

With hiring individuals, we don’t rely on them for every task that we might expect from the yellow pages company. We do the layout and design part and pick the materials. This not only saves on labor costs, it also avoids some unpredictable (and frequently less desirable) materials choices.

After a while, you’ll develop relationships with contractors that you feel comfortable relying on. These contractors typically work one job at a time, so you get their nearly undivided attention until the job is done. In the case of No Basement, the cost of the contractor’s labor for the kitchen was $1,000.

Total Costs

Here are the total costs for the project:

In my opinion, the kitchen rehab increased the value of the home by at least $10,000. Not a bad return on investment.

Pictures of the Kitchen

I know this is the moment you’ve all been waiting for. Well, here you go. Pictures of a kitchen that almost cost under $4,000:

Photo Credit: mahmut

Wait a minute. That’s a picture of Mike’s kitchen. Sorry about that. Here’s our $4,000+ kitchen:

Ways To Make Your Investment Stand Out

Kitchens are where you get the bang for the buck, so consider spending a couple more than you have to. Here are three easy, inexpensive ways to do it. First, upgrade the standard builder-grade faucet. A recognized brand high-arc faucet can cost as little as $20 over the one that you see in every new-build starter, yet it makes the kitchen stand out. Second, while granite might break the budget, ditch the pre-formed off the shelf counter. Instead, find a supplier that sells the laminate counter top materials and have your carpenter build it. The laminate finishes come in far more varieties than the off the shelf counters. Also, since virtually no wall of a frame home is ever a straight line, installation of two-piece counter/backsplash is typically easier. Finally, upgrade the lighting. Again, the cost difference is minimal but adds much to the visual picture.

I have to admit that Mike did a great job on this rehab, even if he did blow our $4,000 kitchen budget by an eye-popping $307. We’ve been looking to buy another rental property, so Mike will likely get a second chance at actually bringing a rehab in under budget.

One of the many things that amazed me about the management side of real estate investing was the "No Show."  The No Show is the prospective tenant who calls to say they drove by the house, love it, and would like to sign a lease right away.  You make arrangements to show them the house, confirm the appointment 1 hour before the allotted time, and then they don’t show up or even call.  This happens over and over and over again.  It’s still a mystery to me why that don’t exercise the common courtesy to call us to cancel the appointment.  So we’ve come up with a way to address this issue, at least in part.  I’ll explain what we do in a minute, but first, here are some other types of prospective tenants we’ve encountered over the years.

The Negotiator:  "I see you’ve listed the rent at $1,295 a month.  Would you accept $800?"

The Credit Risk:  "I recently filed for bankruptcy protection.  I’ve also been evicted from my last 7 rental units.  Will that be a problem?"

The Out-of-Towner:  "I am moving to your area and will be in town Saturday to look at homes.  Can you show me the property that afternoon at precisely 2 pm?"

The Anxious:  "I’m very interested in the property and must move by the end of the week.  Can I see the property today?"  These prospective tenants almost without exception become No Shows.

The Planner:  "I see the property is available April 1.  I need a place beginning in July.  Do you think your property will still be available?"  God, I hope not.

The Cash Cow:  "Can I pay $15,000 up front to lower my monthly rent?"  While always exciting, these folks never work out.  And if a tenant is paying you in bricks of cash, you may wish they had become a No Show.

The Scam Artist:  Contact is always made via email:  "I’m from the UK and will be moving to [insert any mid-sized town in Podunk, U.S.A.] at the end of the month.  I’m very interested in the property you’ve advertised.  I can pay with a money order, and would like to write it for 5 times the actual rent.  Please send me the balance in cash as I’ll need it for moving expenses."

The Murderer:  One of our prospective tenants was a convicted murderer.  I let Mike call him to reject his application.

The Story Teller:  "So any way, my husband lost his job two years ago, and we’ve been running an eBay store to get by.  If you’re ever looking for handmade booties for your cat, you’ve come to the right place."

The Dreamer:  "We won’t rent for ever.  Our plan is to build a 10,000 square foot home next year once we get our credit cards paid off."

Well, you get the idea.  So back to the No Show.  What Mike and I did this past week was to hold an open house for our property, The Problem Child.  As prospective tenants called or emailed us about the property, we told them about the open house.  Some wanted to see the property at a different time, but we declined.  Part of that was due to the fact that the property is still occupied.  But regardless, we gave them a 2-hour window on a Saturday afternoon to see the property.  If one or two didn’t show, so be it.

In terms of traffic, the open house was a success.  We had several couples come by to see the property.  And it sure beats driving out to the property for one prospective tenant who fails to show.

Tenants pay their rent late for only two reasons. The first, and I would suggest the primary, reason is this: because landlords have invited them to do so.

Go ahead and take a minute to think about this. Rob, you can take two. Right now, I suspect that everyone is trying to recall when they had the engraved invitations printed up that said “Please join us for a celebration of non-payment on the 6th (or 10th or whenever) of next month. No gifts (or rent) please.”

In Part 1 of this series, I wrote about some typical approaches to the late paying tenant. The common thread of all of them is that there is discussion. Our hypothetical landlord discusses in order to evaluate the reason for the tenant’s late payment; or to explain why his circumstances require timely payment; or to offer clever analogy for justification; or to remind the tenant of the lease terms. And each approach begs the question: What is the purpose of the discussion?

So, let’s consider the purpose. I’m going to go out on a limb here and assume that, all things being equal, landlords would like to collect rent when due. Do any of my hypothetical responses accomplish this purpose? Certainly, the landlord who attempts to evaluate the “good” reason from the “bad” tells tenants that timely rent depends on the circumstances. But, I would argue, so does each of the other responses. The landlord who discusses his mortgage payment with the tenant explains the “need” to pay rent; the landlord with the pithy retort appeals to fairness; and even the landlord who quotes the lease terms offers legal justification.

Although, with each of these responses, the final word may be that rent is expected on time, the landlord has offered reasons, justifications, and argument. In short, he has just engaged in a negotiation. And he has invited the tenant to do the same. That’s the thing about negotiation; the outcome depends, in part, on methods of persuasion. The right argument or explanation offers the possibility of a different outcome. When landlords engage in the negotiation, they implicitly invite tenants to “try again.”

In my last article on this topic, I said that, at least for me, there is only one reasonable response to a tenant who calls to say that that the rent will be late. That response is, as nearly as possible, no response at all. Letters, e-mail, or voicemail messages about late rent go unanswered. Because the negotiation over rent ended with the lease, there is simply nothing more to say. They, like tenants who simply don’t pay, receive a standardized letter about late fees with a deadline to avoid “further action.”

Because I self-manage my rental properties, tenants can, of course, call and reach me and launch into a “why the rent will be late” discussion. It is in this case where the “as nearly as possible” part comes in. One commenter from my last article asked for specific examples, “including dialog.” So, I offer this actual example of a call that happened last year:

Tenant: I was calling to see if it would be OK to pay half the rent on the first and the other half on the twentieth. . . .

Me: No

(Uncomfortable silence)

Tenant: Umm. OK

And it is, at least a little, uncomfortable. Over the years, I have probably used pieces and parts of each of the hypothetical landlord responses. But the truth of the matter is that all tenant reasons for paying their rent late are good reasons, at least by the time they contact me. They are in a bind because of unexpected expenses. And they didn’t intend to be there. But over those same years, I have come to realize that I have no power to fix the circumstances or undo the events (or choices) that got them there. And by engaging in an evaluation of their reasons or a discussion of the rightness or wrongness of those reasons, I place myself in front of circumstances that I cannot control and invite them to bring the next set to my door.

Consider this last point. Let’s change the circumstances a bit. Your tenant pays the rent on the 1st, the check clears, and all is right with the world. But a couple days later, the same tenant calls and asks “Can I borrow $1000? I’ll pay it back in two weeks.” When you respond with a simple “no”, do you offer a reason?

I mentioned at the start of this article that there are two reasons tenants pay their rent late. I’ll write about the second reason in my next post.

With rental properties, tenant screening is a must. But even with screening, if you own rental properties, you’ll eventually get this tenant call:

“Mr. Landlord. I was calling to let you know that I’m going to be late on my rent this month. What happened was [insert personal financial calamity here].”

Over the years, I’ve responded to this call in a number of ways. In talking with other real estate investors, I’ve heard even more approaches to dealing with a late paying tenant. The variety of investor-landlord responses tend to fall into one of the following categories:

The Discerning Approach

Under this approach, our landlord evaluates whether the reason is legitimate. Is the tenant in a situation that couldn’t be avoided? Our landlord asks a few questions in an attempt to gauge the tenant’s honesty. If our landlord is satisfied that the reason is good, and the tenant is honest, then he’ll cut ‘em a break.

The Enlightened Approach

Here, our landlord believes, rightly or wrongly, that tenants are laboring under the misunderstanding that he has all the money in the world. After all, he bears the rather archaic title of “landlord” that conjures images of a land baron standing atop the spires of the castle surveying the fiefdom. (In fairness, Rob actually assumes this posture in moments of reverie, although they typically end when his wife tells him to take out the trash. But I digress.)

Acting upon his belief, our landlord enlightens the tenant by dispelling this image with parables of mortgage payments and property taxes. The response goes something like this. “Mr. Tenant, I have to pay a mortgage on your home every month. If you don’t pay your rent, I can’t pay the mortgage.”

The Pithy Retort Approach

Our landlord is somewhat jaded here—again, rightly or wrongly. He believes that there is never a good reason for a tenant not to pay his rent on time. Indeed, he was once a tenant and could not have conceived of paying late. His response reflects those beliefs.

He responds to the tenant with some measure of incredulity, saying something like “Well, if you want to contact my bank, repeat what you just told me, and my bank will accept my mortgage payment late, then you can pay your rent late.” (Lender contact information is not typically exchanged in the call). Or perhaps this one: “Now, if you were to call me because your air conditioner wasn’t working, and I promised to fix it tomorrow, would it be acceptable to call back to ask for two more weeks?” Zing!

The Chapter and Verse Approach

Our landlord has a fine lease. And he refers to it in the call. “Under section 1, paragraph A, titled ‘Rent,’ the lease says rent is due on the first of the month. If rent is received after the fifth, then a late charge in the amount of $X is charged and eviction proceedings can commence.” Commence indeed.

I have self-managed rental properties for about eight years, although it wasn’t until two years ago that I started buying investment properties with Rob and picking up the pace. After eight years, I am convinced that there is only one way I can reasonably handle this tenant call, and it dictates my response. But I am also convinced that I haven’t learned all there is to learn about managing rental properties, and I suspect that my approach to this situation won’t be for everyone.

In a follow-up article, I’ll write about the way I respond to the slow-pay tenant. In the meantime, let me ask the TWA readers. How would (or do) you respond to the tenant?

Image By: ndrwfgg

There is no question about it. I have been delinquent in reporting results on No Basement, our latest property turnover. Sometime back, Rob wrote about our tenants moving out of this property and offered a promise, or threat as the case may be, to undertake the public humiliation of singing a little ditty for the TWA audience if I managed to find a tenant with no rent loss. I was torn then, as I am now, as to whether the challenge was motivating or hindering. Certainly, as a real estate investor, I want to minimize vacancy, yet as half of TWA, I would like to maintain our regular readers. Rob’s offer presented a clear conflict of interests.

It is with all regret, intermingled with relief, that I report that I did not rise to the task.

The Purchase and the Rehab of No Basement—A Recap

Rob and I bought our second investment property, dubbed No Basement here on TWA, in the Fall of 2005. No Basement is a 3 bedroom, 1 bath home built in 1991 a little shy of 1350 square feet. We bought the property from HUD at a good price, using our knowledge of HUD’s minimum acceptable bid. The rehab was more extensive than our other investment properties, including a full kitchen and half bath remodel. All in, our costs, including purchase, rehab, financing, and holding costs, were around $104,000, with total cash invested of $4000. After completing the reformation of No Basement, we rented the property in about 30 days. The property brought a base rent of $995 for a term of two years beginning January 1.

The Offering of No Basement

Fast forward to this last November–sixty days before the end of the lease. We contacted the first tenants, and they notified us that they were moving. So we were off to the races. We did our homework to determine current rents for comparable homes in the area and advertised the property on a rental website beginning in early November. We determined that market rents were in the range of $1000 to $1100, and offered No Basement at $1045 along with a lease-purchase option (we’ll get back to the lease-purchase part).

We had several early inquiries and our first showing in the first week of advertising the property. One of our first prospects to see the property even set a second appointment to complete a rental application. . . followed by a no-show. While I continued to show the property sporadically through the holiday season, the number and timing of showings were limited by the fact that the property was still occupied by our first tenants and by our prospects’, and my, holiday schedules.

The Taking of No Basement

By the end of December, I had shown No Basement on five occasions to about 10 prospects, and had taken, and rejected, three applications due to show stoppers that ranged from prior evictions to serial bad checks. The first tenants moved out a few days before the end of December, and we repainted, thoroughly cleaned, and did the miscellaneous repairs that always accompany a property turnover. We scheduled the first open house in early January and had ten prospects through the property in one day with one application the same day. After reviewing the applicant’s credit report, checking prior rental references, and verifying income, we approved the application for a lease-purchase with the lease beginning February 1. All in all, we lost a month’s rent.

What We (Mostly Rob) Did Wrong

I’ll start with the “wrong.” It’s simply this—we entered into our first lease for No Basement with an end date of December 31. Renting a property in the Winter isn’t great, but renting a property in the holiday season is worse. Even in an area that has a real Winter (and by real, I mean real bad), responses to rental ads pick up noticeably in January compared to November and December.

While we had no control over the start date of the lease since it was a newly acquired property, we may have been able to change the end date. While I believe it’s important to offer familiar options, which means one and two year leases, we could have approached our first tenants after they were approved, and offered to the option of setting a later end date. For the same reason that we don’t want a lease to end in November or December, neither will most tenants if given the option. People don’t like to move during the holidays. So, we’ll approach an approved tenant and explain that, while they’re approved for a two year lease, we find that most people would prefer to move in the Spring or, if they have children in school, at the end of the school year, so we offer the option of extending the lease with no rent increase for up to five months. By making it the tenant’s choice and by explaining it that way, many tenants will extend the lease to a time that’s easier for them to move and easier for us to find the next renter.

What We (Mostly I) Did Right

We have previously written about the importance of longer term leases to reduce turnover. No Basement was our second rental property, and while still feeling our way around the rental market and the terms that worked best for us, we were at least cognizant of the importance of longer term leases. Vacancy and turnover are the fastest way to drive up the cost of rental properties. There are always additional maintenance costs to make a property rent-ready and, no matter what time of year the property is offered, renting a property with zero vacancy, although we’ve done it, is still a challenge. A loss of one month’s rental at the end of a one-year lease translates into a vacancy rate of over 8%; a loss of one month’s rental at the end of a three year lease results in a vacancy rate of less than 3%.

With No Basement, our first tenants had a two year lease. With our new tenants, we have a three year lease. While, as before, we offered the property for a one and two-year lease term and provided the incentive of lower rent for the two-year term, we also offered the property for lease-purchase. By offering the purchase option, we created an additional incentive to renters who ultimately want to buy. Our new tenants took us up on the offer. As a result, we have a longer term tenant, with built in rent increases for each year of the lease, and potential buyers for the property.

With the re-renting of No Basement, we’ve improved cash flow and returns. But we may have been able to do even better by controlling, at the outset of the first lease, when the property would be re-rented. Not doing so may have cost us a month’s rent.

On the other hand, TWA’s regular readers have not been subjected to Rob’s warbling. While I wonder whether we would have made up for the loss of regular readers with search engine results, it’s simply difficult to predict how many people are searching for “sounds similar to nails across a chalkboard” and “mating calls of sub-Saharan hyenas.”

Splitting the difference, I’m going with Martha Stewart on this one and concluding “it’s a good thing.”

Image By: anyjazz65

Vacancy and turnover can wreck your rental property’s cash flow. Just a one month vacancy can wipe out a year’s worth of positive cash flow, and the cost of repairs and advertising when tenants move out can easily equal one month’s rent or more. Mike recently wrote about some great tips to minimize the cost when tenants move out. Today we are going to describe three marketing strategies that Mike and I have used to encourage tenants to sign two and even three year leases. With long-term leases, property turnover, repairs, advertising and vacancy costs all go down, which means profits go up. To my surprise, many of my friends who invest in real estate do not even try to market long-term leases. All of their tenants sign 1-year leases, and they end up finding new tenants almost every year. Using the strategies described below, we’ve found it incredibly easy to sign up tenants for longer term leases. In fact, with our four properties today, 2 tenants are signed up for 3-year leases, one for a 2-year lease, and one for an 18-month lease.

Offer a lower initial rent

When Mike and I first started out, we offered a lower rent for a longer term lease. A typical strategy for the homes we buy would be to offer a 1-year lease at $1,045 per month and a 2-year lease at $995. Over the course of two years, we’d lose $1,200 as compared to the $1,045 1-year offer, but we avoided what surely would be greater costs if a tenant under a one year lease moved out after the first year. While some 1-year tenants would choose to stay in the home under a new lease, a long-term lease locks them in and avoids the hassle of renegotiating leases every year.

We did make a mistake with this approach when we first starting investing in real estate. We should have included in the lease an automatic rent escalation each year. We do that now as I’ll explain in just a moment.

Reduce the required deposit

This one still amazes me. To encourage prospective tenants to sign longer term leases, we have reduced the required deposit. Usually we reduce the deposit from one month to one-half month’s rent. In the case of a lease-purchase described below, we have sometimes eliminated the deposit altogether. We’ve found that tenants want to reduce the upfront costs of renting as much as possible. Even saving a few hundred dollars at the start has motivated prospects to sign long-term leases. While this certainly involves calculated risk, it’s worked out well for us so far.

Promote the long-term lease-purchase agreement

A lease-purchase is nothing more than a standard lease which also gives the tenant the option to buy the property. The details of a lease-purchase are beyond this article. But the basic idea is to agree up front to the purchase price, and then rent the property to the tenant long enough so that they can save up the necessary down payment. This time also allows them to repair their credit if necessary. Our standard lease-purchase term is three years. In future articles we’ll be describing in more detail our lease-purchase program.

Automatic Rent Escalation Clause

The one potential downside to a long term lease is foregoing yearly rent increases. We’ve solved this problem by including an automatic rent escalation clause in the agreement. These increases are typically modest, somewhere on the order of $20 per month for a $1,000 per month property. For us, however, the rent increases are significant. Assuming a property is enjoying a positive monthly cash flow of $100, a measly $20 per month jump in the rent increases our bottom line by 20%. And the increase is so modest that tenants generally do not mind agreeing to it up front.

Question: Do you push for longer term leases, and if so, what are some of your marketing strategies?

The stream will cease to flow;
The wind will cease to blow;
The clouds will cease to fleet;
The heart will cease to beat;
For all things must die.
All things must die.

Lord Alfred Tennyson, Real Estate Investor
On Air Conditioners

The story goes that Tennyson penned his poem “All Things Will Die” moments after receiving a call from his HVAC contractor that began, “I have some bad
news. . .”

Indeed nothing lasts. From roofs to furnaces and air conditioners to carpet, home components have to be replaced from time to time. For real estate investor-philosophers purchasing a new property or simply budgeting for capital replacement costs, it’s helpful to have a grasp of the timing of the inevitable. When I purchase an investment property, in addition to noting items in obvious disrepair, I will attempt to identify the age of items, such as the furnace, air conditioner, and roof, that although may be in working order at the time of purchase may have to be replaced in the near term.

Recently, I ran across a study published by the National Association of Home Builders and Bank of America that helps with the task. The study provides the life expectancy of a multitude of exterior and interior home components assuming a single (and first) owner, ordinary maintenance throughout the component’s useful life, noting that the quality of materials and installation may vary the useful life calculation.

For rental properties, some components, particularly interior items, will have a lower useful life due to higher wear and tear and, in all likelihood, less routine maintenance. In the chart below, I’ve listed some of the most common components from the study that investors are likely to encounter in purchases or over time with rental properties. I’ve also included an altogether unscientific TWA revision to useful life based on my experience.

For information on life expectancy of additional home components, you can find the full NAHB/Bank of America study here. For rental properties and potential purchases that show signs of neglect (oftentimes the case with foreclosed property), a good rule of thumb is to adjust downward about 25-30% for most interior components.

When a tenant moves out of a rental property, there are always maintenance items to address. Currently, we are in the process of putting No Basement back in rent-ready condition. The steps we’re taking are pretty typical, so I thought I would provide a list of the steps that we take, along with some suggestions along to the way about how to save some time and money in tackling the task.

Typical Rental Property Repairs and Maintenance

While our properties have never suffered extensive damage by a tenant, there are always typical costs that we incur when a tenant moves out. Whether “typical” constitutes “ordinary wear and tear” under our lease, and therefore chargeable to the tenant, is for another day, but the following are items that we almost always encounter.

Painting. In most instances, when a tenant leaves, we’ll repaint. It doesn’t matter how long the tenant’s been there. Moving in, and especially moving out, mars walls. When we market a house, we want to present the best product. Painting gives the appearance of new and clean. Which leads to the next task. . . .

Cleaning. In nearly every case, a departing tenant’s idea of clean differs from an entering tenant’s. While it shouldn’t be a big (or expensive) project, cleaning should include cabinet interiors, appliances, interior window glass, door tracks, as well as the typical items. When hiring help, it’s a good idea to specify what’s expected.

Replaceable Items:

• Light Bulbs. There seems to be something with tenants having one foot out the door that causes them to decide that it just isn’t worth taking down that light fixture cover once more. When No Basement became vacant, there were about five working light bulbs in the entire house. Make sure these are on the list.
• Batteries. Smoke detectors, garage door openers. Check ‘em; replace ‘em.
• Filters. While this is a tenant’s responsibility under our lease, it’s often neglected and is probably the most significant thing you can do to extend the life of the HVAC system. Replace the furnace filter with a least a 3-month filter.

The Miscellaneous Repairs. The repairs differ; the typical part is that there will always be some–a half dozen little things that need to be fixed. I’m the one inspecting the property when a tenant moves to determine the condition and any charges against the prior tenant’s deposit. I’ll prepare a list at that time for the miscellaneous repairs.

A Few Time and Cost-Saving Suggestions

If “location” is the first rule of real estate investing, “standardization” is the first rule of property management. Standardizing a few tasks and lists are a great way to avoid reinventing the wheel.

Have standard ads. Prepare them once. Keep the electronic file. And they’re ready to launch.

Keep a list of the utility companies with phone numbers on hand to transfer the accounts when the tenant leaves. Most utility companies will also provide an option to set up a master account (sometimes called an “owner-agent” account) that will automatically continue service under the owner’s account when the tenant leaves. I still do a quick verification call to make sure there is no loss of service.

Use standard interior paint colors. I use one or two neutral colors for all rentals and keep the color formula on hand so I can just phone in the order or provide specific instructions to a contractor. Using a standard paint color may also help lower costs by reducing the amount of paint needed for coverage and allows an easy match for the occasions when the property requires only a partial re-paint.

Prepare standard instructions for contractors. There’s no question about it. I’m not a hands-on fixer-upper type. And Rob has a tough time figuring out which is the pound-end of the hammer. So, we hire the work out. Preparing standard lists of instructions for contractors helps to make sure the contractor completes the work that you expect the first time and bids the job accordingly. For painting, I prepare a complete list of items that I expect–e.g. ceilings, closet interiors, baseboards, garage walls–and then cross out any items not applicable for a given job. For cleaning, the list includes cabinet interiors, kitchen appliances, light fixtures, ceiling fans, interior windows and light bulb replacement. Finally, for the fix-it guy, I provide a list of inspection items, in addition to the list of repairs that I’ve seen. I may not catch everything in the inspection, and it’s much easier to take care of any repairs when the property is vacant rather than scheduling around a new tenant.

To standardize materials purchases, it helps to use a big box retailer. They’re more likely to be accessible to more of our properties so I can more easily order the same paint and other standard materials for all properties. Also, I can maintain a single commercial account to better track the costs. And some (Lowe’s<--free ad) will provide a contractor’s discount on materials. If you go to the contractor’s desk and tell ‘em Mike sent you (and even if you don’t), you should be able to get around 10% off.

Of course, if you tell ‘em Rob sent you, it’ll be 5% over retail.

Image Credit: angelltsang

In a recent article about evaluating prospective tenants, I mentioned that the Fair Credit Reporting Act (FCRA) imposes notice obligations on landlords when denying a tenant application. In this article, I’ll provide an overview of those requirements and a (free) form for your reference.

When the FCRA Applies

The FCRA applies when a landlord bases an adverse action (more on that later) in whole or in part on a “consumer report.” A consumer report is any screening or credit information supplied by a third party, such as any tenant screening service or credit report provider. This certainly includes any credit bureau or other service providing a credit report, but also includes agencies providing screening information such as criminal background checks, reports of prior evictions, and the like.

The FCRA also applies when a denial of an application is based on information provided by a third party, other than a consumer report. This may include wage information provided by the applicant’s employer, for example. In the case of information other than a consumer report, the language of the FCRA refers to a denial of credit, rather than the broader “adverse action” terminology. To be sure, we treat the two as one in the same and comply with the FCRA notice requirements for an adverse action regardless of whether the decision is based on a consumer report or other third party information.

In the event that a landlord takes an adverse action based solely on information provided by the tenant, such as stated income in an application, then the FCRA imposes no obligations on the landlord. However, where the consumer report or third-party information plays any part in the decision, then it does. Again, to insure compliance, whenever we obtain a credit report or conduct any form of further investigation of an application, we’ll provide the required notice.

However, if you don’t use any form of tenant screening, credit service, or conduct any form of investigation, then the good news is that the FCRA doesn’t apply. The bad news is that it will after you evict your current tenant and start using a tenant screening service.

Adverse Action under the FCRA

For landlords, the requirements of the FCRA are triggered by an “adverse action.” Translating the legalese, an adverse action is any unfavorable action by a landlord in response to a tenant application. In other words, it’s far broader than a denial. While a denial constitutes an adverse action, so does a conditional approval, such as requiring a greater deposit, a co-signer, or an additional month’s rent. The Federal Trade Commission provides some guidelines for determining whether the FCRA applies here. After reading them, you’ll likely conclude that, when in doubt, it does.

Once a landlord takes an adverse action, the FCRA requires the landlord to send a notice to the applicant informing him of the action taken and advising the tenant of his rights under the FCRA, including the right to obtain his consumer report from the screening service or credit bureau, to dispute inaccurate information, or to request further information from you when the adverse action is based on information other than the consumer report.

Tips, Resources, Free Stuff, and Fun with Disclaimers

In summary, here are some good rules to follow:

1. Always conduct tenant screening. The risks of not doing so, outweigh the costs of the legal compliance part. Here is a list of some tenant screening services.
2. If you deny a tenant application or make approval conditional in any way, provide an Adverse Action Notice.
3. Consider hiring an attorney to ensure that the Adverse Action Notice that you use is in a form that complies with the FCRA and applicable state law.
4. Read the information provided by the FTC on the subject here.
5. Go ahead and download this form: Adverse Action Letter, which is what we use as an Adverse Action Notice, and this FTC publication: FCRA Summary of Rights that we include with that notice. But. . .

Use this form for reference only. We don’t warrant that it will comply with legal requirements. That’s why we said that stuff about hiring an attorney.