Landlord and Property Manager’s most Frequently Asked Questions

LANDLORDING:  MISCELLANEOUS  Q & A  FOR NEW LANDLORDS

Landlord and Property Manager’s Most Frequently Asked Questions

 

by Don Conrad

Q: I’m torn: is it worthwhile to accept pets in my rental?

A: Good question. The decision to accept pets (mostly cats and dogs) is an issue most landlords struggle with at some point, and there is no right or wrong answer. So the best we can hope to do is look at the risks and rewards and go from there.

      The risks fall into three categories: safety, noise and damage.

  1. Safety—When dealing with pets, you must be concerned about safety, particularly with dogs. Some dogs are docile but others aren’t. If a tenant’s dog bites someone in your building or even your neighborhood, you might find yourself on the wrong end of a lawsuit. Also keep in mind that the bite of a poodle is a lot less vicious than that of a pit bull. Pet safety is covered in detail in my book, “How to Find that Quality Tenant.”
  2. Noise – Is the pet going to make constant noise, irritating other tenants in the building or nearby neighbors?
  3. Damage – What kind of damage can a pet do to your rental? If a dog or cats has one bad day, they can do a lot of damage to a doorway, trim work or cabinets, not to mention if they are habitual clawers or chewers. Keep in mind too, that pets can do major damage to carpeting by staining or leaving odors in them.

Some of the rewards are simple:

  1. A lot of places do not take pets. Therefore, when tenants does find someone willing to accept their pet, they often will pay a little more rent. In addition to extra rent, these  tenants are usually more stable tenants because they know how hard it is to find a place where their pet is accepted.
  2. Because many people have pets, if you do accept them, you have increased the number of potential tenants for your rental. Now that we’ve discussed some of the risks and rewards, let’s cover one more topic that needs to be addressed: the financial aspect of renting to pet owners.

By renting to pet owners you can charge a higher security deposit and higher rent. For more information about this see my article “Should You Charge Extra Security Deposit and Extra For Pets?”

It seems that a lot of landlords miss the mark when it comes to financially figuring out if renting to pet owners is worth it. Most landlords think along these lines: “I just spent $800 re-carpeting the place and I don’t want a pet peeing all over the new rug.” I understand.

Let’s discuss the issue a little deeper. For starters, let’s assume your monthly rent is $600. Let’s also assume that within 30 days, you can rent the place to a pet owner who is willing to pay an extra $200 deposit and $25 a month rent.

 

 

 

Now let’s assume it takes two months to rent to a non pet owner. How do the finances really add up in lost income should you have to re-carpet the place after renting to the pet owner for 1 year?

Pet Owner

 

Non Pet Owner

 

$625 x 12 mos. =

$7500

$600 x 12 mos. =

$7200

extra pet sec. dep+

+ 200

extra pet sec. dep+

N/A

Total Income

$7700

Total Income

$7200

1 mo. Vacancy

- 600

2 mo. Vacancy

-1200

New carpet

- 800 

New carpet

N/A

Actual Income

$6300

Actual Income

$6000

By renting to the pet owner and still having to replace all the carpet in the rental in just 1 year (highly unlikely, by the way) you are ahead $300. If it took three months to rent to a non-pet owner you’d be out another $600 for a difference of $900. (You could have bought carpet again with the difference.)

This same thought can be applied to other damage as well. Most chewing and clawing damage (which I’ve seldom encountered) is generally confined to one or two spots, usually trim around a door. I’ve never found damage to kitchen cabinets.

In a nutshell, the decision to rent to pet owners (cats and dogs) should be based on your tolerance for the problems that could arise. Are you going to toss and turn at night, worrying about a dog biting someone, ruining your new carpet or wondering when you are going to get a new tenant? Use common sense and pick the solution which will give you more money in your pocket and cause you the least amount of stress. This applies to all pets: not just cats and dogs.

 Q. How much security deposit do I need to collect?

A. There are a couple of answers to that question. The first that comes to mind is “as much as possible” or “whatever the market can bear.. This means that if landlords in your market area get $800 a month rent and $1200 security (security deposit = 1 ½ x rent) you should be able to get the same or a little less if you want to edge out your competition.

However, if landlords in your market get $800 rent and waive the security deposit altogether, you will have a hard time even collecting $800 security deposit. So the first answer is, know your market. Make a few calls to advertised rental units in and around your area. Ask what their security deposit is. See how yours compares.

The next answer is, “As much as possible without breaking the law.” Some locales have maximum caps that a landlord can ask for. Call a local real estate attorney and ask if there is such a cap for you to be concerned about. You can also ask a local real estate investment club if they happen to know. There is a list of such groups elsewhere on this site. Generally, it seems most landlords try for a security deposit equal to one month’s rent. However, I recommend having the security deposit a different dollar figure than the rent to help discourage tenants from trying to use that deposit for the last month’s rent.

 Q. Should I collect last month’s rent?

A. Well, the plus of collecting last month’s rent is obviously that the tenant will be a lot less likely to use security deposit for rent, which leaves the security deposit for what it is: security for damage incurred in the rental unit. Do not expect to be able to apply last month’s rent to damages, even if the opportunity presents itself! Rent labeled as last month’s rent can only be used as such. There are two drawbacks to collecting last months’ rent in the beginning of a person’s tenancy. First, let’s say a tenant rents your dwelling for $800 per month and they happen to stay through 3-4 rent raises. During each rent raise, you have to collect an additional payment equal to the raise to add to their last payment.

Sometimes this is hard to do. So if you initially collected $800 but the ending rent is $1,000, you could lose $200 if you don’t keep collecting extra funds (which really isn’t so bad if they stay for many years. Think of it as a gift to your tenant for not causing a vacancy each year, which would surely cost you more than that rent raise.) 

Second, tenant moving costs are expensive. In addition to rent and security deposit to you, they often are saddled with turn on fees for water, heat, phone, cable and electric plus moving costs and costs to get settled in such as drapes, appliances, etc. Often by adding another month’s rent to the mix, you eliminate a large percentage of potentially good tenants.

In answer to your question, see what the market can bear. If every landlord in your area is getting last month’s rent, you may wish to as well.

 Q. Do I need to run a credit check?

A. I personally would never rent to someone without checking their credit. Even though a credit report probably won’t reveal everything about an applicant’s credit history, the report and the credit score (if one is provided) are an excellent overview of how they handle their finances. These reports will usually list monthly payments on credit cards, car payments and other such loans. Late pays, judgments, bankruptcy, foreclosure and sometimes child support information is also listed. By examining a credit report, you can figure out what the applicant is paying late on and can cross reference information on the report with the information they have verbally given you. The proper use of a credit report will weigh heavily on your decision to rent to an applicant. 

  Q. What is a credit score?

A. A credit risk score can best be described as a statistical summary of the information on your credit report at the time it is pulled and reviewed. The use of the credit risk score is considered faster, more accurate and more objective than many other decision making tools, explaining why it is widely used in the lending industry.

Because of the value of these scores, you need an understanding of how they are evaluated. A credit risk score is calculated by setting up a “model”, which can be described as different numerical “weights” placed on different characteristics in a report. Generally, these characteristics fall into one of the following six categories, listed her in alphabetical order, not order of importance.

  1. Application for Credit  --  how recently and how often there’s been an application for credit.
  2. Credit Experience  --  length of time accounts are opened and used.
  3. Credit Mixture  --  the different types of credit used.
  4. History of Payment  --  how well the accounts are maintained.
  5. Total Balances  --  the total amount  of money currently owed.
  6. Utilization of Credit  --  the amount of credit used in relation to the total amount available.

Different credit bureaus will place different emphasis on these characteristics, depending on what that company is developing the model for. This leads us to one of the main problems with credit risk scoring: a credit score designed for a specialty credit bureau such as the medical or insurance field would not be the same scoring as the lenders use. So an acceptable score at one lending institution could theoretically fail at another. Also, a score pulled for one purpose could be less valuable than if it was pulled for another purpose. In spite of the main flaw of credit risk scores, they have one big advantage, which is that they eliminate individual biases from the credit granting decision in an objective and precise manner, with generally accurate results.

Although it is important to keep in mind that risk scores do not tell with absolute accuracy how someone will or will not react in a certain situation (in your case, paying rent), but it will reflect how thousands of others with similar credit histories performed in the past, therefore giving you a reasonable idea of what to expect from your renter.

Your main concern as a landlord is to be aware of where that risk score came from. Or in the words of the credit industry, what model was used to develop the scoring. Let’s say you have a friend who can pull scores for you and you decide to use their service. You want to know if the risk score they are giving you profiles tenant rent payments in any way because if your friend is pulling scores based on medical information, insurance information, credit cards, car loans or even some home mortgage lending institutions, you could be receiving scores that will lead to an ill informed decision. This could result in a tenant you don’t want or losing one you do want.

My advice when you pick your credit reporting agency is to discuss your concerns about the risk score they provide. Ask if their score will do what you need it to do. If you aren’t comfortable with their answer, look at other agencies. Understand that the more emphasis you personally place on this scoring, the more precise your scoring source needs to be.

The credit score you really want is called a FICO credit score. This is the score most appropriate for your use. Try to find a credit reporting agency that uses this score. Out of the big 3 credit reporting agencies (Experion, Trans Union and Equifax), Equifax has a lock on providing the true FICO score to consumers. The other two agencies also offer a score, but they are different than Equifax. If you order your credit reports through Trans Union or Experion, you can get your FICO credit score at www.myFICO.com.

 Q. Should I charge for a credit score?

A. Wherever you order a credit report from is going to charge you for the service. At bare minimum, I would pass this fee onto the applicant (to be paid when they fill out the application). You can also add on a few dollars for your time. This would be considered extra income and should be reported as such. A fee of $20-35 per credit report is currently an accurate price to pay.

 Q. Should I take a deposit for the rental?

A. It depends: if your rental is in a low demand area, it might be a good idea to take a deposit while you process the application. This deposit would be non-refundable should you accept the applicant but they fail to take possession of the dwelling within a predetermined period of time. The applicant needs to understand that leaving a deposit does not guarantee they have been accepted until all things check out okay on their application. If they fail the application, the deposit should be returned in full immediately, along with a very brief explanation as to why they failed to get the rental, such as “I’m sorry to say you have filed to meet one of my criteria required for rent, so I am denying your application at this time.

 Q. Where can I get a good lease?

A. If you are going to be a landlord, I strongly advise having a well prepared lease. A good lease will solidify the verbal agreement and important criteria between the landlord and tenant. This lease will also be your strongest ally should a dispute arise between you and your tenant. A properly entered lease will go further in solving landlord/tenant disputes than any other document you have.

There are basically three ways to go about finding a lease. I’ll list each of them along with the advantages and disadvantages associated with each choice.
1. Draft your own.

   -Advantage – it’s cheap!

  -Disadvantage – you could make some costly legal mistakes by not having enough information or the wrong information in your lease.

If you choose to draft a lease yourself, there are books you can purchase that will walk you through the process, although I cannot say how well they work because I have personally never tried to draft my own lease.

2. Pick one up at an office supply store.

       -Advantage – it’s easy to do.

       -Disadvantage – could be too general to offer adequate protection.

When you need a lease right now, these store bought leases can do the trick since they are so easy to find.

They are cheap and simple but will offer the least amount of protection out of the 3 lease options.

3. Have a real estate lawyer draft a lease for you.

-Advantage – tailor fit, offering you the best overall protection.
-Disadvantage – more costly, although not nearly as costly as a poorly drafted lease followed by a tenant dispute.

Because you want a good lease and not just any lease, I am going to recommend option number 3. Here’s why. When you are a landlord, you have at least some financial net worth; definitely more than your tenants will have. This automatically makes you prone to frivolous lawsuits and unwarranted demands by those tenants. A properly drafted lease will offer maximum custom protection against many of the possible lawsuits and demands landlords are exposed to. Therefore, I would advise you to have a lawyer draft your lease and to do it from the time you put that first tenant in your first rental.

Finding a lease that fits your every need will be tough to do. In addition to my recommended lease options, check into one of the real estate investment groups that dot the country. These groups have many benefits for the new investor, including ties to area appropriate leases. Please see our website, www.findthatqualitytenant.com for a listing of such groups.

Q. How do I screen my potential tenants?

A. True screening of a new tenant begins the moment you first make contact with them. Whether in person or by phone, it is here you begin to find out if they meet your desired qualifications or if they have “red flag” issues which would stop you from renting to them.    

Once they have filled out, signed and dated the application, you send away for the credit check. While the credit check is being processed, make phone calls to everybody listed on the application. This includes past and present landlords, references, past and present jobs, emergency contacts and any other names and phone numbers they have provided you with. When you contact the individuals, you will be asking questions about the tenant applicant that pertains to them qualifying as your tenants (For an in depth list of questions, please order a copy of our book, listed below. 

As you receive answers to your questions, you will cross reference them with other answers and information you have obtained, either from other calls, off the application or from the tenant themselves. You are building a character profile of the tenant. Just remember not to discriminate against anything protected by the Fair Housing Laws. (If you would like further information on this topic, please purchase my book "How to Find That Quality Tenant". Ask your locale bookstore or see my website at:www.findthatqualitytenant.com  Editor’s Note:  I tried to visit the website a few times but was unable to. Regarding the author’s book: it is available through Amazon .com (published in 2007) either in new or used condition.  Reprinted as a courtesy in appreciation of the author, Don Conrad, for the above article.