Cut Your Investment Expenses Before You Get a Tenant
Rental property investment is of great interest to more investors than ever. There are television shows about flipping properties and rental investing, as well as articles and websites devoted to how-to topics of real estate investing. There is no shortage of opinion and instruction about how to successfully invest in real estate, but one topic should get more attention.
The spreadsheets, apps, and programs that help real estate investors to research, compile, and calculate rental property income and expenses are all quite helpful. There are three items on just about every expense analysis:
- Vacancy expense
- Credit loss
- Legal expenses
These are three expense items that often must be estimated before buying a rental property, sometimes using local averages for them if available. Doing online research to attempt to estimate these items for an investor is frustrating because the numbers you'll find can vary considerably. There are some good reasons for differences in estimates and experience, but there is one single activity done before placing the first tenant that can make a huge difference in your numbers going forward.
Tenant Screening is the Key to Lower Expenses
If you're still taking the traditional approaches of asking for references, calling them up and interviewing prospective tenants, you're behind the times, and it can cost you a lot of money. References can be faked, and interviews can be a lot like reality TV. Unless you're trained in forensic interviewing, it's too easy for someone to seem great in a 30-minute sit-down and be a horrid tenant once they move into your property.
The internet is delivering tenant screening at a very reasonable cost to every investor and landlord. Even if you own only one property, it's worth the expense. Actually, it's probably worth more to the single property investor, as a failure in this area is a 100% failure rate and can ruin your return on investment for months or longer. What services can you expect from an online tenant screening service?
- Rental Application - A thorough rental application is first. This application must also comply with federal and local anti-discrimination laws, and you don't want to fall afoul of these. Getting as much information as you can legally is critical, especially if you must track down a past tenant for damages or unpaid rent.
- Credit Report - Everyone recognizes the importance of a credit report, as how someone pays their bills can be an indicator of how they'll pay rent as well. You can have your interpretation of their score and credit history in making your decision, but first, you need accurate information.
- Criminal Search - A criminal search can cover more than just the tenant making the application. Will someone with a criminal record be living with the applicant? Bottom line, you don't want someone with a serious criminal record in your rental property.
- Eviction Report - This is a very important bit of information. If they've ever been evicted before, the odds are against you in letting them into your investment property.
- Previous Address History - Because many landlords are small investors not tied to any national group for reporting, someone can abuse them and often avoid showing up in some of these searches. An address history that shows many moves with short periods in each location can be a red flag, even if there aren't any discovered records of legal actions.
- Sex Offender Search - There isn't any need to stress the importance of this one. You want to be careful about moving someone on the sex offender registry into the neighborhood.
- Terrorist Alert - This may seem like overkill, but why not have this check if it's part of the package? This report is based on a search of the acronym agencies' databases: FBI, DEA, Homeland Security, U.S. Marshals, Customs Service, Secret Service.
- Tenant Score - Some of the online services then pull all of this together into a score that helps you to quickly see how your prospective tenant stacks up against average data in the area or nationally.
Remember those three expense items you started out with: vacancy expense, credit loss, and legal expenses. It's easy to see how the items in these checks and tenant research can dramatically impact how much you may lose or spend in the operation of your rental investment property. Spend a little to save a lot.
The enclosed information is deemed reliable but is not guaranteed.