Location is often described as the most important thing in real estate. It's said to be the second and third most important things, too. But in the rental housing market, finding a high-quality tenant trumps location every time.
"The essence of an investment in real estate is a good tenant," says James McClelland of the Mack Cos., one of the largest owner-managers 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 as if it were his own. And that's when landlords get burned.
Nearly 60 percent of the landlords and property managers polled recently 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 in a good tenant is getting out a bad tenant. 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 about 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 says, "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 Mack Cos. goes 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 too loud -- as a seemingly clean-cut guy who arrives in a Prius. But if he or she doesn'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.
Don't discriminate because of race, color, religion, sex or national origin. Still, if you get a bad vibe about the person, or if something doesn't seem right, go on to the next one.
You also have to ask the right questions. Most novice landlords ask about such things as hometowns and high schools, McClelland says. "They just want to see if they like the person, without any understanding of their financial capabilities."
It's better to purchase a standard rental application form at the local stationery or office supply store and have your prospect fill it out completely. Most important, you'll want to know how long they have lived at their current address, how much rent they pay, where they work and how much they earn. Also ask why the person is leaving. It could be that he is being evicted, but it also could be that he has no choice. Maybe the owner is selling the place or wants to rent to a relative.
Now verify everything. Start by interviewing the current landlord on the phone. How much is the rent? How long has the potential tenant lived there? Did she take care of the place? Any problems?
Yes, you want to make sure everything matches up. But during the course of your conversation, you also 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 her employment. Mack Cos. looks for people with three years' tenure at their current workplace. "You want to make sure they are stable, not job-jumping," McClelland says.
Next, pull a credit report on the prospect and run criminal background and "skip-trace" checks. 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 the rent payment the same way. "A landlord needs his rent on time because he has to make his mortgage payment on time," McClelland says.
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 explains.
If the would-be tenant does not 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 report.
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. A great way to make sure your rental house is being taken care of is to go to the place in person 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 says. "Making costly repairs to the property because you haven't checked on the tenant in months, then finding out the property was poorly maintained."