Landlord must figure out a way to keep a tenant full invested in the property.  The perfect tenant treats the landlord’s investment property like it’s their own personal home.  Even if tenants pays the rent on time every month, how they treat the property can still make them very bad tenants.

The standard way to mitigate tenant damage to the property is to collect a security deposit upfront, typically one month additional rent.  This deposit serves as insurance against property damage when the tenant leaves.  Unfortunately, with this method, how much rent landlords collect directly correlates with how much insurance they can secure.  Furthermore, the less a tenant pays in rent, the less invested a tenant will feel.

Landlords can turn regular paying tenants into perfect tenants with some create leasing agreements and good maintenance habits.  As a caveat, always consult a lawyer before adding non-standard provisions into lease agreements.  Assuming a state or city allows the landlord to put in minimum maintenance provisions, these can be extremely helpful. 

Some landlords have even charged a below market rental rate, but required tenants to do all maintenance on the property.  This strategy works well with established, responsible tenants.  Be careful using these provisions with first time tenants because this gives tenants much greater incentive to simply defer maintenance.  Landlords are often surprised by the conditions tenants can live in when they have to maintain the property themselves. 

In the absence of any maintenance provisions, it helps to show an interest in the property.  Being responsive to maintenance calls and checking in on a monthly basis to perform standard preventative maintenance shows tenants that a landlord is very invested in the property.  Most tenants will value this and help maintain the property.  Landlords should be eager to provide tenants paint and other light working equipment, if a tenant expresses interest in doing some upgrades to the property.

Some landlords offer bonuses to tenants that add additional value to their property.  If a tenant consistently keeps the property in great condition or upgrades appliances, carpets or fixtures, that tenant has added significant value to the property at no cost to the investor.  Encouraging this behavior with a gift card to Home Depot or Lowe’s makes the tenant feel great and further enhances the value of the property.

Regardless of the method, moving a consistently paying tenant to a true property asset pays significant dividends.  With a very small monetary investment and a lot of thoughtfulness, landlords can improve their investment tremendously.

Investors that focus on long-term hold periods must become experts in tenant selections.  Great tenants add tremendous value to a property, while poor tenants not only detract from the property valuation, but will also take years off of your life.  Every investor that has been in the real estate business for a while can share a tenant nightmare story.  Tenant selection is a mixture of art and science, so here are a few quick ways to stack the odds in your favor.

1.         Standardize the Process: Start with a basic tenant questionnaire.  Focus on questions like employment history and rental history.  Before conducting any tenant interviews, familiarize yourself with the tenanting laws of your state.  A variety of questions are illegal to ask and could potentially open you up to litigation from rejected tenants.  Additionally, familiarizing yourself with landlord tenant laws of your state will make you a better landlord.  Regardless of the area, always assume tenants know their rights.  Many lawyers specialize in finding tenants with the sole purpose of suing landlords.

2.         Credit Checks: Always run credit checks on your tenants.  If you have a mortgage broker, they can traditional run credit checks for you for a nominal fee ($15-$30), which should be passed on to the applying tenant.  Credit checks should not be solely used to approve or deny a perspective tenant, but they should add to the overall tenant story.

3.         Rental History: Be careful when verifying rental history.  Bad tenants will often get excellent reviews from their current landlords.  Think about it.  If you have a nightmare tenant that is looking to move to another location, would you do anything to prevent them from getting out of your property?  Get around this by asking for their past three landlords or more. 

4.         Employment History: Look for patterns in employment or any major gaps.  Great tenants keep jobs for long periods of time, have no employment gaps, and work for strong industries.  Be wary of tenants in bad industries (e.g., autos) or in commission-based jobs.  These types of jobs layoff often and traditionally these people have fewer savings.

5.         Financial Statements: Secure monthly income and expenses.  The most important items to note are the credit card bills.  Watch out for tenants with significant revolving debt, even if they pay it off regularly.  Factor in what rents you will be charging and the expenses that will be passed through to the tenant.

Tenants should not be approved or denied on any one factor.  Perfect tenants are tenants that value your property as they would their own.  The best tenants not only have strong scores in the factors above, but also have strong character.

Low income areas often prove attractive to first time investors because of their low cost of entry.  Investment properties in low-income areas can be purchased for well under $100,000 and typically provide a nice stream of investment cash flows.  Investors can use this strategy to build up a strong base of investment capital and improve the community in which they invest.

With few exceptions, low-income areas tend to experience little to no appreciation for several reasons.  First, investors in these areas expect low future rent growth.  Typically, tenants in these areas have limited disposable income making high rent increases on a regular basis unfeasible.  Second, investors expect limited neighborhood improvement.  Again, with very little disposable income retail demand tends to be lower.  Furthermore, major offices tend to locate in more affluent areas, so new developments generally do not occur in these neighborhoods.

So where is the value?  Tenants and property selection create value in these neighborhoods.  Investors should first understand that not all vacant buildings are created equal.  Finding a structurally sound building in need of cosmetic repairs yields the most value for an investor.  With a ceiling on rents and low appreciation expectation, heavy financial investments in property upgrades will not make sense.  However, cosmetic touches like new doors, paint, landscaping, carpeting, etc. can go a long way in increasing the value to the perspective tenant.

Tenant selection also creates value.  Quality tenants, who pay their rent every month and take care of the property, generate significant value in this type of an investment.  Remember, current rent and expected future rental growth drive value in real estate.  Selecting the right tenant not only locks in current rent, but increases the expected future rental growth. 

Tenant selection is as much about the tenant as it is about the landlord.  Tenants will care as much about a property as a landlord cares about them.  If landlords are slow to respond to their needs or generally treat them poorly, tenants will be slower to pay rent and slower to appreciate the value of their home.  Investors should understand the cost in time and dollars of managing a rental property.  Saving a few dollars in the short run by deferring maintenance items that are important to the tenant will cost an investor a quality tenant in the long run. 

Finally, investors should always be thinking about their exit strategy.  It is important to understand that value is created upfront.  Once an investor completes the cosmetic repairs and places the tenant, he/she should expect very little additional value creation because of the factors mentioned above.  Young investors looking to move up to bigger properties should look to quickly sell these types of properties to investors looking for stable, easy to manage cash flows.  By establishing a niche in this investment type, an investor could quickly obtain a stable of willing buyers and create a very profitable business model.

 Real estate is personal. Each individual will be attracted to a variety of styles, trends, furnishings, etc. One of the most important rules every investor must remember is to invest for the tenant. While you may like a subzero refrigerator, stainless steel appliances and cherry wood floors, your tenants might be quite happy with bargain brand new appliances and linoleum floors. 

Most novice investors make the mistake of going too expensive or too cheap with furnishings and amenities. Whether you are a minimalist or a person of high fashion, the only focus an investor should have when purchasing, renovating or furnishing an investment property is the buyer or potential tenant. Rarely is it as simple as buying a cheap house and furnishing it cheaply or buying an expensive house and furnishing it lavishly. 

Investors should first understand the expectations of the tenant. The simplest way to do this is to tour the competition. Understand the offerings in the neighborhood. Do houses or apartments typically come furnished and with washer/dryers/stoves/refrigerators/etc? Ask the detailed questions because you never know where you can save money. In one of my earliest investments, I interview several tenants the day before I was going to buy appliances for the property. It turns out every tenant had their own washer/dryer/refrigerator/stove, so I save about $1,500 in upfront costs. Additionally, I would not have worry about any future repair or maintenance of those items. Remember, every dollar saved goes right to the bottom line.

After understanding the expectations of the tenants, an investor should strive to slightly exceed them in the most cost effective way. Consider the value of each investment decision. If there are basic item that need to be replaced to get tenants in the door, those should be done immediately. Items like painting, laminate flooring and new doors and fixtures and exterior maintenance go a long way to adding value at low costs. 

Lastly, make a budget and stick to it.  The key to making a good budget is to tie every item to the rental income stream. For example, if you can get a tenant into the property at a rent of $100 today by doing nothing, but after installing appliances, they will pay $150 then you know your budget for appliance should be around $500-$1,000. A good rule of thumb is to expect a 5-10% yield on renovations. In the example about $500 in appliances lead to a $50 increase in rent or a 10% yield ($50/$500). Had the investor spent $1,000 on appliances and gotten the same $50 increase, they would be getting a 5% yield. Making a budget with yield figures helps an investor understand what is value add and what is not. Forecasting this is more art then science and investor become more accurate over time and through talking with tenants and touring competing properties.