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How to Avoid Bad Tenants with Rental Property
Joe: Hey, it’s Joe. How to avoid bad tenants with your rental property. Bad tenants really suck. It’s really no fun to have people who aren’t paying their way. And it gets frustrating. And bad tenants come in a lot of different forms. Sometimes they pay but they damage your properties. We had a lady just last week, been in the property for 8 months. We go into it after she moved out and we’re going to have to change out all the carpet, all the paint, replace the drywall. It’s such a mess. I have no idea how it got that bad.
Joe: Now, the beauty is I have somebody else managing the property and all I have to do is hear about it. She doesn’t send me the pictures. She keeps me protected from some of that stuff, so I don’t have to really think about it much. But I do have to pay for it. And it doesn’t happen very often. Most of the time we have tenants that take care of the property or if they don’t take care of it maybe they live in it kind of hard. It’s still not that bad when we get it back. And we can clean things up and get it going and get the next person in. But the goal is to have people in for a long time. And one of the ways to get good tenants is to get people who want to buy that property and that’s why I think lease options is one of the best ways to sell a property and one of the best ways to be a landlord.
Joe: If you want to keep those properties long term, well, it’s still not a bad way because less than 30% of all lease option buyers will actually exercise their option so you’ll probably be holding onto it. They’ll probably eventually move out and they’ll probably be able to sell it to somebody else after that. On average, people live in a house you know, own a house – even when they buy it with a mortgage – 2 to 5 years. So the likelihood that they’re going to exercise the option after 3 years is pretty low. It’s possible, and if they do that, that’s great. You get full price for your property. You get the maximum that you get for it. You get all your equity out of it. You don’t have to pay a realtor to sell the property for you.
Joe: There’s a lot of benefits to doing it that way too. You can then do a 1031 exchange and buy another property, probably get another discount on that and make more profit by selling that property. So selling on a lease option makes a lot of sense.
Joe: It also creates a sense of ownership for the people that are there. And you know, the old saying that you never wash a rental car. You don’t take care of the things that you rent nearly as much as you take care of the things that you buy. So if you’re in this process with your mindset is as a buyer rather than as a renter the likelihood is that you’ll take much, much better care of the property that you have. So doing lease options really makes a difference.
Joe: The other thing that I do with all my properties is make sure that they’re in great condition. We get better tenants if we have great properties. So, you know, no matter where the neighborhood is, if we make it one of the best properties in the neighborhood we always get the best tenants. Almost always get the best tenants. There are exceptions. But it’s more likely that you’ll get people that will take care of the property, that’ll have pride of ownership. If you rent out a property that’s in terrible condition, you’re going to get people that they find it acceptable to live that way. And that’s not the kind of tenant that you want. You want tenants that are going to take pride in that property and take care of it.
Joe: The other thing I like about lease options is we put the onus of repairs and maintenance and all those things on the shoulders of the lease option tenant. And in our lease option agreement we make them responsible for all repairs, that they expect nothing from us. And the main goal here is to keep them from calling us every time the toilet stops up or, you know, they’ve put their hand through the screen door or some other minor problem. We’re probably still going to hear from them if the furnace goes out. And when that happens, they’re probably not going to be able to pay to have that furnace done even though they agreed to do that.
Joe: So that’s going to be an issue. And what you can usually do is negotiate with them in order to cover that cost over time. So you may have to end up paying for that furnace and then having them pay for it over a period of months or years, depending on what their capability is. You want them to succeed. You want them to do well and you want to do the best you can doing it. You know that if you had a regular tenant in there and the furnace goes out you’d have to replace that furnace and if you had to go in front of a judge and they say I’m not making my payments because the furnace doesn’t work and you, as the landlord, show that judge, hey I’ve got this document that says they’re going to take care of all the repairs. The judge is going to shake his head and say, no, you’re the landlord, you own that property, you need to provide a house that is habitable. So you need to put a furnace in there. And they’re going to require that you do that. So don’t go in front of a judge and expect them to enforce that particular clause. But having that clause is still valuable to you because most of the time you can get them to take care of that work because they see themselves as the owner of that property.
Joe: The other thing to look at when you’re looking at getting good tenants is looking at the job that they’ve got and make sure they’ve got enough income to be able to afford it. Look at their income to debt ratios. You know, if their house payment, or their rental payment is more than 1/3 of their gross income, and that’s their income before taxes, then it’s going to be very difficult for them to make all their bills. So we try to stay somewhere in that 30%, 35% range. We’ve sometimes gone up to 40%, 45%, but we also know that when they get to that point they’re really going to be pushing it on being able to cover all their expenses. So we do that on maybe some of the higher end properties we’ve got, less so on the lower end properties that we’ve got. We don’t want people that have lower end properties to have that situation because they’re income overall is lower than the people in the higher end properties that have income overall that’s higher, so they’ve got a little bit more discretionary income to start with and it makes it more likely for them to succeed in that situation.
Joe: Also make sure you have a good rental contract, or a good lease option contract that protects you and make sure that you have access to the property and you can do that. So make sure you get good contracts from your attorney or, of course, one of my programs has those rental documents as well.
Joe: All right. I hope that helps. Subscribe to the channel. If you like this information go to ZeroDownInvesting.com and find out about my six month mentor program. PushButtonAutomarketer.com and find out about the automation techniques that we use to systematize your business. And JoeCrumpBlog.com, you can sign up for my free newsletter and get a lot of extra free information and there’s about 700 training videos on there that might be worthwhile for you as well.
Joe: All right. Take care.