Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected]
Q1. Kam from Ocean City NJ asks: Hi Brian, after three years of procrastinating I’m finally closing a deal for a rental house in about two weeks. I’ll be spending a couple of weeks sprucing the place up with fresh paint and carpets but my big concern is putting the right tenants in place. I know the fair housing laws but the rental market is so strong that I’ll have plenty of applicants to choose from. I’m hoping to make this as passive of income as I can. Who do you think I should be looking for in tenants?
A1. Hi Kam. Yours is a great question that landlords everywhere should be asking themselves. A good way to find the right answer for you is by further defining the traits in a tenant that best meet your needs. Knowing that you want this to be passive income is a good start. You imply that you’re cleaning the house up to make it nice to live in but it doesn’t sound like you’re making big changes that could lead to flipping it in a short time. It sounds like a long term tenant who will take care of the place will best fit your needs. Your next step is determining the traits and lifestyle these people tend to have.
In a broad sense, there are three types of tenants. You weren’t specific about the type of house that you are buying. Hopefully it is something middle of the road that appeals to stable mid-income people. These tend to be 3 bedroom, 2 bath homes or maybe 2 bedroom 1 bath with a yard in an established neighborhood. These are much preferred over cheap houses in gang war neighborhoods that will cause you all kinds of grief. People in these neighborhoods tend to not have stable incomes to pay the rent and when the house goes vacant after an eviction, vandalism becomes a real and expensive problem. High-end, “Class A” properties have their own problems. These do generate a lot of income but have a lot of expensive amenities and gadgets requiring maintenance and that break down frequently. People renting these expensive properties expect you to drop everything to come clean the pool when the pool guy misses his scheduled appointment. These tenants also tend to have plenty of money to buy their own home. Often, they rent for a few months to test drive the neighborhood before buying a home or while building their home. Within a year, you’ll again be making it immaculate for the next short term and demanding tenant. Neither the low end nor high end fit your desire for a mostly passive income.
So who makes a good stable, mid-income tenant? Someone who is budget conscious and shops at Costco or other discount stores. Someone with enough reliable income to pay the rent but probably isn’t looking to buy a home in the next five years. This could be someone that has been a store department manager for several years (produce department of a grocery store, toy department at Target, or maybe drives for UPS etc.). They also want to live in one place for several years, which often means having school age children. A good indication of how they will treat your property is how they treat their own. You can learn a little about this by how clean your potential tenant is. I don’t mean spotless but rather that they do keep things picked up and reasonably tidy. You might learn about this from a previous landlord. One trick I’ve used is meeting them at their car when they come to view the rental or walk them back to their car after the viewing. It gives you the opportunity to see if the car is reasonably clean or knee deep in fast food wrappers.
Kam, I hope that gives you an idea of how to screen for tenants who will pay the rent, will stay long term, and will maintain your property. Those are the basics but you probably have your own ideas about the traits of your ideal tenants. When you do find these tenants, you have a responsibility to take care of them so that they want to stay. Also as you mentioned, be sure to stay on the right side of the fair housing laws. Still, you have a lot of leeway in selecting a long term tenant who will take care of your property so that you have a mostly passive income.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].
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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 12 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.