Creative Leasing for Investment Property

The goal of every individual with investment property is to find and keep good tenants. As a landlord I’m sure you are familiar dealing with late rent, lost keys, etc. Not to mention when the tenant finally moves out you will likely have to completely gut the unit in order to get it livable again.

Having been a renter for years in my youth, I always felt that it was unfair that I got the same rent increase each year as everyone else when, unlike many others, I paid my rent on time, kept the unit in immaculate condition and repaired anything that was broken. When I asked the property manager about this, she reviewed my record and agreed to reduce the yearly rent increase from 22% to 10%. They knew they had a reliable trouble free tenant and that alone was worth the reduction in rent. In turn I appreciated the recognition and stayed in the unit for over 5 years.

With these experiences I would like to share some alterations in rental agreements and practices in such a way that good tenants are more likely to stay and bad tenants will price themselves out of your property.

The first step is to get tenants into the unit. Interviewing prospective tenants can be an exhausting process and unfortunately, beyond checking indicators such as references, rental history and credit scores there are not many ways to tell if they may be a good fit. Don’t disregard your instincts when selecting a tenant. Instincts are simply your mind and body processing a million little signals and providing you the summary in either positive or negative emotions.

Once you have a positive prospective tenant, I suggest you use the following tips to encourage them to rent your unit and keep them once they are in.

No security Deposit

Get rid of the security deposit. All this is doing is telling the tenant that, “I don’t trust you, so I want you to give me money now for the damage I’m sure you’ll cause.” Not a very good start to a business relationship! Besides, the security deposit usually is so minimal that it doesn’t even start to cover the damage a poor tenant will inflict on the property.

No Last Month’s Rent

Just like the security deposit, requesting the last month’s rent up front is a passive aggressive way of saying, “I don’t trust you to pay, so why don’t you do it now?” I understand that in many cases a poor tenant may try to skip on the last month, however this plan mitigates these potential losses, so keep reading!

Once the unit is filled, you will usually discover within the first 3-4 months whether this is a tenant that you would like to keep or one that you want out! By including these next three ideas in your rental agreement you have the power to entice good tenants into staying and poor tenants into leaving.

Points System

Establish a points system that will determine the rent increase at the end of the lease. Each time the tenant has a maintenance request or emergency of their own devising they are charged a set number of points. Some examples are as follows:

• Lost Key – 1 point
• Broken Window – 2 points
• Broken Doors/Walls/Cabinets – 3 points
• Noise Complaints – 2 Points

The determination as to whether the incident qualifies for a point penalty is the sole discretion of the management and all decisions are final. The incident is recorded in the renter’s file and when the time comes to renew the lease all of the points from the previous year are summed up and the rent Increase is based accordingly:

• 0 – 1 Points. . . . . . .0% to 3%
• 2 – 5 Points. . . . . . .4% to 10%
• 6 – 10 Points. . . . . .10% to 15%
• > 10 Points. . . . . . 20%+

As you can see, your best tenants will have a very minor or even no rent increase, thereby encouraging them to stay. Your high maintenance renters will be providing you with extra funding to see to their needs and your destructive tenants will price themselves out or be paying you handsomely for the next year. The above points and percentages are only suggestions and you will need to determine what works best with your financials.

Year-End bonus

The next method I would like to suggest for keeping good tenants is to provide them with a yearly bonus for being a good tenant and keeping the unit in good condition. Before you start throwing things let me explain how this works. It is similar to the “Keep the Change” techniques many banks are now employing.

Let’s say that your total fees on your investment property come to $550 per month. You’ve currently set the rent at $660 for a 20% ROI each month. Now instead of setting the rent at 20% increase it to 30% or $715 per month. Take the additional $55 per month and place it in an interest bearing account. At the end of the year perform the “Bonus Inspection” of the unit. If the unit has been well cared for, then reward the tenant with one month of free rent or a check for $660. In effect you are simply returning their money to them for not damaging the property. Sounds like the security deposit doesn’t it? Only in this case the tenant sees it as a nice little payday at the end of the lease versus a penalty in the beginning.

If the unit is a mess then you keep the money for repairs. Either way you get to keep the interest the money made in the escrow account over the period of 1 year!

Renter Fixes

The last method of creative renting involves letting the tenant improve the unit in return for compensation. In these cases make sure that you and the tenant sign a “Rental Unit Improvement Contract” that specifically outlines the scope of work and the costs involved. If this is done properly you can end up with a beautiful unit for little overall cost and the tenant will become more invested in their temporary home.

I sincerely hope that these ideas will serve you well in finding and keeping your tenants. As with all contracts and legal issues, please make sure to contact your attorney and understand any state and local restrictions prior to incorporating any of these concepts into your lease agreements.