Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
WASHINGTON (MarketWatch)—Question: It’s often said that location is the most important thing in real estate, hence the aphorism, location, location, location. But I believe that applies to residential real estate. How about investment property? Is it still the most important thing to consider when you are thinking about purchasing an investment property, more specifically a single-family house to rent out? —C.M., Bethesda, Md.
Answer: As the saying goes, location isn’t just the most important thing in residential real estate, it’s also the second and third most important, too. But in the rental housing market, finding a quality tenant trumps location every time.
“The essence of an investment in real estate is a good tenant,” said James McClelland of the Chicago-based Mack Cos., perhaps the largest owner-manager of single-family rental properties in the Midwest. “A good tenant in a bad location is better than a bad tenant in a good location.”
The trouble is, most novice landlords—and even some experienced ones—don’t do the legwork necessary to land a top-notch tenant who will pay his rent on time and take care of the place, hopefully like it is his own. And that’s when they are burned.
Nearly 60% of the landlords and property managers polled recently in a survey by LeaseRunner, an online leasing company, identified “finding the right tenant” as the most challenging aspect of rental real estate.
Perhaps the only thing more difficult than putting a good tenant in is getting a bad tenant out. But if you hold out for a sound one, you won’t have to go through the costly, time-consuming eviction process.
McClelland, whose company manages some 570 single-family rentals, including 200 owned by others, maintains there are “plenty of good tenants” looking to rent a nice house. “You may have to go through a bunch of [prospects] to find one,” he said, “but it’s worth it.”
So, whether you are an “accidental” landlord who has no choice but to rent your house or an investor looking to cash in on what is expected to be a booming single-family rental sector, here’s how the Mack Cos. go about it:
For starters, personally meet your prospects at your property to show them around, answer their questions and ask a few of your own.
There’s no hard rule about appearances. A guy with a bunch of tattoos who shows up on a Harley could just as easily be Mr. Right—as long as the bike isn’t loud—as a seemingly milk-toast, clean-cut guy who arrives in a Prius. But if they don’t seem to give a hoot about personal hygiene, chances are they won’t take any better care of your house than they do of themselves.
Here, you have to allow your intuition to take over. You must not discriminate because of race, color, religion, sex or national origin. Still, if you get a bad vibe about the person, if something doesn’t seem right, go on to the next one.
You also have to ask the right questions. Most novice landlords ask such things as where did you grow up and where did you go to high school, said McClelland. “They just want to see if they like the person without any understanding of their financial capabilities.”
Better to purchase a standard rental application form at your local stationary or office supply store and have your prospect fill it out completely. Most importantly, you’ll want to know how long they have lived at their current address, their rent, where they work and what they earn. Also ask why the person is leaving. It could be because he is being evicted, but it could also be because he has no choice. Maybe the owner is selling the place, or wants to allow a relative to move in.
Now verify everything. Start by interviewing the current landlord on the phone. What is the rent? How long have they lived there? Did they take care of the place? Any problems?
Yes, you want to make sure everything matches up. But during the course of your conversation, you want to listen for something on the order of “I’m sorry so-and-so is leaving” or “He was really a good tenant, I hate to lose him.”
Also call the prospect’s employer to verify that he works there and for how long. The Mack Cos. look for people with three years’ tenure at their current place of employment. “You want to make sure they are stable, not job-jumping,” said McClelland.
Next, pull a credit report on the prospect, and run criminal background and “skip-trace” checks as well. If you don’t have an account with a credit reporting agency or tenant screening service, ask your real-estate agent to perform these services on your behalf.
You can charge the prospect a fee for this. In fact, doing so often weeds out the bad apples who don’t want to pay because they know what the results will be. But you can’t use the credit report as a profit center.
Here, you are looking at how prospects pay their bills. If they are late or don’t pay at all, chances are they are going to treat you the same way. “A landlord needs his rent on time because he has to make his mortgage payment on time,” said McClelland.
McClelland’s staff also visits prospects at their current residences to get an idea of how they maintain their homes. “How they take care of their current property is indicative of how they will take care of yours,” he said.
If the would-be tenant doesn’t meet your standards, you can deny the lease or ask for a co-signer, a larger security deposit or even a higher rent. But if you take any of these “adverse” actions based on a credit report or a report from a tenant-screening service, you are required by law to give the prospect the name, address and phone number of the agency that supplied the reports.
Following these steps will help protect your investment, but the work doesn’t stop there. Now you have to manage the property.
There’s more to it than just collecting rent, of course. But a great way to make sure your rental house is being taken care of is to physically go to the place every month to pick up the check. That way, you can look around to see for yourself that the house is in the same condition it was when the tenant moved in.
McClelland concedes that this takes time. “But you know what takes more time?” he said. “Making costly repairs to the property because you haven’t checked on the tenant in months and then come to find out the property was poorly maintained.”
Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real estate questions to him at firstname.lastname@example.org. Answers will be presented in this column every Friday. However, because of the volume of email he receives, he cannot answer every reader’s query.