How to Beat the Tenant Game
by Scott Britton
"Single Family Houses are hard to beat when it comes to investment vehicles.
There is, however, one small problem called Tenants. While most Tenants are
good, it only takes one bad apple to completely disrupt your life. From plunging
toilets to eviction court, there has to be a better way. And there is... read
on!"
Dear Friend,
I've been playing the tenant game for a long time now. And to be perfectly
honest with you, I've never liked it. In fact, there are days that I'm ready to
get out of the landlord business completely.
Of course... those days pass and I'm always glad I didn't quit. But there are
still those days. If you own any rental property, you know what I mean.
It's those dad-blasted tenants. I know... I know... these are the people who
provide me with a positive cash flow and pay for my houses. If I can just hang
on mentally... they'll make me rich.
Honestly, I've had some excellent tenants. People who have stayed with me for
years and years and never called or complained about anything. These people are
a real pleasure to deal with. They actually enhanced the value of my property.
And then there was Karla...
"Come On Down To The Club Sometime!"
Of course, Karla isn't her real name. But here's the true story. I own this nice
brick 3 bedroom 2 bath home with central heat and air located in a nice
neighborhood here in Jackson, MS. It's probably a $55,000 house and I rent it on
a discounted lease program ($50 discount) for $550 net per month.
Anyway... this house always seemed to attract the strangest tenants. I even had
one who installed hydroponic marijuana gardens under grow lights in the closets
of the master bedroom. I guess he was just searching for his groove?
After evicting the pot farmer, I met Karla. To tell you the truth, I was fed up
and ready to rent to just about anybody who had the necessary funds. That's when
Karla called. I met her and her friend girl over at the property. At first I
thought she was a baker because she had this white flour all over her nose. She
was polite about wiping it off after she realized it's presence.
Come to find out, Karla wasn't a baker after all. She worked in a local topless
bar where her husband was the manager. She assured me she wasn't a dancer (yet)
but made several hundred dollars a night as a waitress. The rent wouldn't be any
problem. In fact, she could pay the first months rent and deposit in cash on the
spot. I rented her and her husband (whom I never met) the house that day.
Plus, she threw in a few FREE passes so I could "come on down to the club
sometime".
What Could I Have Been Thinking?
You would think that someone who makes $300 a night wouldn't have any trouble
paying $550 a month for rent, wouldn't you? And she didn't for a while. But
after about 6 months, I had to start sending out three day notices every month.
She always paid, but it was later and later each month. I was starting to get
that feeling in my stomach.
Then the inevitable happened. No rent. No phone call. No nuthin'. I went over to
the house and couldn't raise anyone. I tried the door. They had changed the
locks. After snooping around the outside I noticed the power meter had been
removed. I wasn't feeling too good.
Finally I found an open window and gained entry into the house. What I found
sent me into a spiraling depression. The inside of the house had been completely
trashed. It wasn't habitable for man or animal. The carpets were completely
ruined. Apparently they had a dog. A big dog. There were flies everywhere. The
had even jammed the doors from the inside before they left.
As it turned out, they had been using the 2nd bathroom for the dog's kennel
while they were away. I've never seen anything quite like it. The vinyl on the
floor had been completely clawed away, as well as, the wood work and sheet rock
about 3 feet up. Plus it was a bathroom, so you can just imagine the rest.
Long story short, it cost me about $3,500 to clean up and fix up the house. I
had made a very poor business decision and it cost me a bunch of money. My
attitude had soured.
"I'm Mad And I'm Not Going To Take It Anymore!"
So, I made the decision to sell the house. It just wasn't working out. But I
wasn't willing to put it on the market and play the waiting game. I'd already
sunk quite a little cash in the house and didn't want to compound the problem
with the potential of making the payments out of my pocket (lifestyle)
for 6 months or so while I waited for a buyer... then waited on the financing...
and so on. There had to be a better way.
Let's Shift Gears For A Minute!
There are three opportunities for profit in just about any business venture.
Real Estate is no different. You have the potential to make an up front
profit... a profit as you go... and a profit on exit. Here's how this relates to
Real Estate.
- Up Front Profit: In Real Estate, this could be a down
payment, pre-paid rent, option consideration, commissions, assignment fees, etc.
As the name implies... you receive this money on the front end of a Real Estate
transaction. It's money in your pocket today. As you are already aware, I
do not consider borrowed money to be profit... so it shouldn't be considered
here. This is real profit today... on the front end of a deal.
- Profit As You Go: In Real Estate, this is known as a
positive cash flow. It's income over expenses. This could also be financing you
have extended on the sale of property such as a Deed of Trust, Mortgage,
Contract For Deed, etc. Rental income in excess of expenses and debt service.
That type of thing. I generally think of this as any type of monthly positive
flow (although it could be annual, semi-annual or any other time frame). This is
profit received over time.
- Profit On Exit: In Real Estate, this is when you cash in
your chips. It's when you sell. It's when you convert your equity to it's cash
equivalent. Generally, this profit is extended out into the future. It's
the pot of gold at the end of the rainbow every Real Estate Investor dreams
about. You might even consider this as future value. Most of the time this
profit comes years down the road after your equity has matured. This is
generally a larger lump sum profit realized upon the sale of your investment
property.
Those are our three choices for making money in Real Estate. Sounds fairly
simple doesn't it?
So... What's The Point?
Good question. Glad you asked.
You see... most Real Estate investment strategies only offer you 1 or 2 out of
the 3 possible profit centers. Let's look at a typical rental property as an
example...
You purchase a property... clean it up and fix it up... then find a qualified
tenant to pay the rent on time. Hopefully, the rent covers your taxes,
insurance, debt service, maintenance and management... plus provides you with a
profit on a monthly basis. If everything goes as planned, your equity in the
property grows with each mortgage payment you make. One day you wake up and
realize you have quite a sizable profit in the property and decide to harvest
your equity by selling... thus capturing a substantial profit upon exit from
your investment.
That's what we all dream about, isn't it? The tenants pay for our house and
provide us with some pocket change along the way. We've tapped into two of the
three profits centers and everything is rosy. So... what's wrong with that?
Well... first and foremost is...
T-E-N-A-N-T-S
It's the rogue Landlord indeed that deep down inside doesn't have a burning
distaste for tenants. I've had some great Tenants and I'm sure you have too...
but all it takes is one bad apple to sour the way you view Tenants. Karla was a
prime example of what I'm talking about.
The truth of the matter is this: If you own rental property you'll have to deal
with a bad Tenant sooner or later. And hey, let's face it... some times the good
Tenants can even be a pain in your butt. After all, they expect you to keep the
roof from leaking... the air conditioning blowing cold... the walls painted...
the carpets clean... the plumbing in good working order... the neighbors
quite... the windows from breaking... the property secure... and on and on.
They can be a bit demanding, can't they. They expect you to take money out of
your pocket (lifestyle)... and pay for improvements to a piece of
property you'll never live in... and be responsible for damages you didn't
cause. Makes me wonder why in the world we don't all become Tenants.Forget this
ownership stuff. But, I'll save that for another time.
New and Improved!
Compare that to a home owner. They do all of those things for themselves. They
are responsible, aren't they? Sure, they have to be. It's in their own best
interest. They can make improvements to their property because they get a direct
benefit... the use and enjoyment... and the pride of ownership. They'll work
around the house and yard for the personal satisfaction. I've just recently
heard that gardening, which includes working in the yard, flower beds and with
potted plants... is the number one leisure activity in the United States
today.
Speaking of the United States, did you know that the "American Dream" has
always... and will always... be centered around home ownership. Home ownership
is good for the individual... the local community... and our country. Home
ownership encourages people to be responsible... to get involved... to take
pride. Home owners have chips in the game. They have a stake.
But guess what? It has become more and more difficult to buy a home. The whole
process has become complicated. Most of this complication revolves around the
financing. While there are a hundred different loan programs available to
potential buyers... they can be confusing. And if that isn't bad enough,
rejection is the order of the day. Everybody has something wrong with them.
Nobody's perfect. The financing process can be rigorous and frustrating.
Sometimes it appears as if the lenders just chew people up and spit them out.
Loan denied... next please!
Rent To Own
Your Own Home
601-977-0277
People want to own their own home. Don't believe me? Try running the simple
three line ad above in your local paper. Run it and they will call.
They'll call so much, in fact, you'll soon get tired of your phone ringing.
Might be a good idea to test with a 3 day ad.
What do you think about this ad? Pretty non-threatening, isn't it? Does it sound
high pressure? No! Does it sound as if you are in a position to help someone own
their own home? Yes! Is it a soft sell? Yes! Does it offer more than a
rental ad? Yes! Do you think this ad would attract someone with a home owner's
mentality or a tenant's mentality? Who would you rather rent to anyway? Who
would you rather sell to? Enough with the questions already!
Here's How I'm Beating The Tenant Game...
I decided I wanted to deal with people who want to become home owners. People
with the home owner mindset. People who would be responsible. People who
would take care of my property. People who had an incentive and desire to pay
the rent on time.
So I developed my own "Rent to Own" program. Here's how it works:
Instead of a rental deposit, I charge a non-refundable Option
Consideration. The size and method of payment of this money is determined by the
market. On low end properties, this may not be any different from the size or
method I would use to collect a rental deposit. On better properties, the amount
can increase substantially. But, it all depends on your market. I'm finding
quite a few people who have between $1,000 and $5,000 saved up for a down
payment. These are the people who have demonstrated that they want to own a
home. They have sacrificed over time to save for a down payment. They just need
a little help.
This non-refundable Option Consideration will be applied towards the
purchase price... so their money is working for them. In addition to the up
front money, they must also pay a monthly rental fee for the property. This is
where I can be extremely flexible. If they want to keep their monthly rental
payments below comparable market rents, I can do that with an offsetting
increase in the non-refundable Option Consideration. If they want to pay
more on a monthly basis, but are a little short on the non-refundable
Option Consideration, I can do that too! Anything over market rents will apply
to their non-refundable Option Consideration... thus helping them save
for a down payment over time. Did I mention the Option Consideration is
non-refundable? Just checking.
In addition... because I generally buy property below the market, I can afford
to give my Tenant/Buyer a healthy rental credit for each month they pay
the rent "on time". This could be as high as 100%. Sometimes it's only
50%... still not bad. And sometimes it doesn't even come into play. My
generosity with rent credits is a function of my profit potential and my option
strike price... coupled with time. Under my "Rent to Own" program, I can
generally set the purchase price on the "high" side of retail and allow a
large portion of the rental payment to reduce this price.
The Tenant/Buyer is responsible for the maintenance and up keep of the property.
I will be responsible for the major components such as the roof, heating and
cooling, plumbing systems, etc. They are still responsible for maintaining these
items... but... I'll bear the larger expenses such as replacement. I tell my
Tenant/Buyer to make a list of those things that do not work within the first 30
days of occupancy and I'll fix them. After that, it's their responsibility.
Currently... I'm setting these up on a 1 year term. I like one year because it
passes rather quickly and meets with the expectations of the Tenant/Buyer. At
the end of the year, one of three things will happen (none of which I dread).
#1) The Tenant buys the house and I receive my profit. #2) The Tenant/Buyer
needs more time and we can renegotiate on some basis for another year. #3) The
Tenant/Buyer... for whatever reason... moves on down the road allowing me to do
it all over again. The absolute worst thing that could happen is I have to evict
the Tenant/Buyer and they trash my house on the way out. Less likely to happen
here than if I did a straight rental, isn't it? Plus, I have more of their money
to fix up the house if that does happen.
Does Everybody Win Under This Arrangement?
Sure they do. The Tenant/Buyer wins because they can have their money working
for them from day one. I'll do whatever I can to help them become home
owners. While I can't guarantee them financing (unless of course I'm in a
position to finance it myself), I can help them navigate the available options,
including credit counseling if necessary.
I win because I've secured an up front profit with the non-refundable
Option Consideration... enjoyed an increased positive cash flow over the term of
the agreement by eliminating the maintenance and management expenses... and if
the sale closes, I will have a rather healthy pay day. Not too shabby!
Just remember this: There is a higher degree of responsibility on the
part of the Tenant/Buyer. In addition to the non-refundable Option
Consideration and the added maintenance they're assuming, they must also do
what's necessary to qualify for a new mortgage loan. That's their
responsibility. I can help them with this process, and so can you, but they're
the ones who must actually do what's necessary. They have to pay their rent on
time... pay their other bills on time... clean up their credit... get their debt
ratios in line... etc. I encourage the Tenant/Buyer to be diligent and begin
this process immediately upon occupancy. I'll help, but I can't do it for them.
They have to do their part.
What About You Retail Freaks?
As you know, I like retailing houses. It's a tremendous source of "lump sum
cash". The biggest problem with retailing is the time frame. You put a house
on the market and it might be 180 days or more before you realize your profit.
All this time, your profit margin is shrinking because the property is not
producing an income to cover your holding expenses. Add the risks accociated
with a vacant house, vandalism and increased insurance costs... and it can be a
bit unsettling at times.
Why not consider adding a "Rent to Own" program to your retailing
efforts? You could cut down on your holding cost... your resale costs... as well
as... make a small profit upfront.
Adios Karla!
She's out of my life now (she completely disappeared). I replaced her
with a young couple who wants to own the house. They have been paying their rent
on time for almost a year now. I received one phone call from them needing help
with the air conditioning system. We got it fixed and they reimbursed me for the
expense. I even recouped a sizable portion of my fix up costs back from them in
the form of their non-refundable Option Consideration.
I don't know for sure if they are going to be able to obtain financing or not,
but my gut feeling right now is that they won't. You want to know something?
Even if they can't qualify for a loan, I'll continue to work with them. They are
the kind of people I want to do business with. They are the kind of people who
deserve to be helped. So, that's what I plan to do.
Best of Real Estate Success!
Scott Britton
PS. Even if I haven't convinced you this market exists... try asking potential
and existing tenants if they would like to "own their own home". You may even
want to add "Ask about Rent to Own" to your yard signs and other
advertising. Once you find people who want to buy, further qualify them by
asking how much money they have saved up for a down payment. I think you'll be
surprised at the results.
Bio:
Scott Britton, author and publisher of the “University of Real Estate Letter” is
an active, full time Investor who has been successfully buying, selling and
investing in Single Family Houses and Mortgages since 1979. Beginners and
seasoned pros alike have profited from his down to earth, common sense
investment advice. Scott is known for his clear thinking and problem solving
abilities. His strategies for generating cash while building wealth, can help
anyone accelerate their investment program while improving their lifestyle.
Scott, along with his wife Cindy and their three children, live and work out of
their high-tech, low-cost home office in historic Jackson, Mississippi, where he
practices what he preaches on a daily basis.