If you polled a thousand landlords and asked them what the number one headache in owning rental property was, you would most likely get one of three answers...
1) Getting the rent ON TIME
2) Property damage or unreported maintenance issues
3) Picking the right tenant
In a three part series, let's talk about these items and some relatively easy steps to alleviate most of the headaches of both. Of course there is certainly not a ‘one size fits all' solution but a couple of techniques that I've advised my investor clients about over the last twenty years have proven to work more often than not.
First let's discuss the number one issue, collecting your rent on time. For example, let's assume you have a rental house that you are going to rent for $1,000 per month. That's an annual rent of $12,000 right? What you do is increase your rent to $1,075 per month with the following clause in your lease:
"If all rents are collected prior to the 5th of each month, then your December rent is FREE"
For most tenants, having the chance to skip their largest bill in December; the month that always seems the tightest; is absolutely wonderful. Many of my investors get Christmas cards from their tenants thanking them for being able to provide the presents for their families without hurting the family budget.
Being the WORLD'S GREATEST LANDLORD, you will have a waiting list for their next available house compiled of referrals from past and present tenants. Imagine never again having to run an ad or keep a house vacant more than a few days for cleaning and prepping for the next tenant! That alone is worth the price of admission on my blog today! (Oh yeah, it's free!)
As long as you are a good landlord in other respects (addressing maintenance issues quickly; not fixing items ‘the cheapest way possible') your tenant retention will be significantly higher using my ‘December free' program.
If you keep a tidy rental and everything is in good repair, you shouldn't have much of a problem getting an extra 5-7% over ‘market' with those conditions. The investors I've had using this technique over the last 20 years have absolutely loved it.
Let's take a look at the numbers. $1,075 times 11 payments equals $11,825, just $175 short of what you WOULD have collected at $1,000 per month. Any landlord under the sun would gladly give up $175 to have all their rent payments on time. Whatever your numbers are, make it work for you. Just take your annual expected rent and divide by 11 to get your new rent, make it about 5-7% over what you would have charged and you'll be fine. And remember, if they're late, you pocket an extra months rent at year end.
This technique is certainly not for the part-time investor. Make sure you have enough set aside in December to make all your debt service payments should your tenants live up to their end of the bargain, and believe me, most of them will.
Obviously every situation is different. A few of my investors found that if a tenant went past the deadline, then it seemed to be a recurring issue since the incentive was gone. What they've done was to allow one ‘late' rent up until the 15th and they could still qualify for ‘half rent' in December. That has proven to work pretty well. You also need to figure out what to do for incentive based on when your lease starts. If it starts in July, maybe you offer a half month the first year and a full month every year after that.
Subscribe to my blog so you won't miss future installments of "How to be the WORLD'S GREATEST LANDLORD". We'll be discussing "property damage and unreported maintenance issues" next. And oh yeah, Happy Landlording!
Bill Swanson is an agent with CBSHome Real Estate, with over 20 years of experience helping investors acquire and sell properties in the Omaha metro area. Email Bill at Bill.Swanson@CBSHome.com
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