Renting to Tenants can be a daunting task; this list is five of the common things landlords skip over or do not consider when initially renting to tenants.
1. When should I start a Rental Contract with a Tenant?
Expert landlords know the start date of a rental contract does not matter; but the payment date going forward should always be the first of the month. This means if they start their rental agreement on the 10th of the month have them pay a full month and then on the first of the second month will be for twenty day (prorated depending on number of days in a month). Always have a tenant pay a full month when they start.
There are several reasons you would want to prorate the second month and not the first. The main reason is to have the tenant be invested in the rental. The second is to train them in what the rental payment date is.
Note from editor
When I first started, and a lot of other investors did this too, I would run around and pick up checks throughout the month. If someone started on, say March 10th, I would set their payment date as the tenth of every month.
It usually seemed to work for them, but not for me! I would show up and they wouldn’t be there – so I spent half my time just running around trying to collect money.
If pounding on doors and looking for missing people is your idea of fun – or you just want job security – well this is it.
Invariably, if you let one person pay on a day other than the first, the others will hear about it and want theirs changed as well.
It’s funny how they can congregate together and tell stories
If you want to do it the right easy way. Have everyone pay on the first. And just a side note – if you want to pick up checks fine. But I prefer to have a drop off location. If there is a bank near by, have them drop the checks there.
Don’t change the date even if they are paid on a different date. I used to let it slide. I would have someone move in on the 1st but low and behold, their payday was the 10th. Okay – no sweat I thought, it’s just a few days late this way.
Well here’s the problem with that logic. If they pay on the tenth they are already 10 days late, if on the 10th they don’t pay, they are already almost 2 weeks into the non-pay status! By the time you get them out – how much money will you have lost?
So what do you do when someone starts on the 10th? Make them pay a full month worth (always!), and then prorate the second month. So on the second month they would owe for 20 (or whatever) days.
2. How Much Should I request For a Deposit on a Rental?
A deposit for a rental is entirely driven by the market and location. The best way to analyze your market is to call other rental properties in the area. If others are asking for a 25% deposit plus first and last month’s rent then it would be appropriate for you to request the same.
If you market is giving away incentives to rent in their properties; the cold hard fact is you might have to as well; bottom line – know your market so you can fill your properties quickly by having the right rates and deposits.
3. Is It Okay to Set the Deposit the Same as the Monthly Rental Amount?
Experts highly recommend against setting the deposit the same as the monthly rental amount. The main reason is because the tenant will see the deposit as the last months rent and not a deposit against leaving the rental in good shape.
Notes from the Editor:
When you are new, this might not seem too obvious as to why you shouldn’t set the deposit the same as the rent.
It has nothing to do with marketing – it has to do with the psychological effect of what it stands for to the tenant.
If the tenant see they are paying $1200 a month and their deposit is $1200 what are they going to be thinking about? That they are putting a deposit for the last months rent. Which means – if they approach you and ask if you will just take their last months rent out of their deposit, you give them no incentive to clean the place up in tiptop shape.
Why should they care, they have whittled away their deposit in the form of rent and you now have nothing to cover any possible damages.
Always say no to applying the deposit to the last months rent.
Before I even knew tenants would do this I did it myself. I had a gift shop that I was selling and on the last month I asked the owner’s of the building to just apply the deposit to the last months rent. (Which they did, but lucky for them, I cleaned the place up!).
4. Can I Set a Tenant’s Deposit In Installments?
It is not common for a Landlord to breakup the deposit in installments. Most expert Landlords would highly recommend against it for the reason that you are now dependant upon a tenant to pay you and if they should leave you have no leverage for payment or cleanliness.
Note from Editor
Now, I ask you to think this one through a bit – if you have a tenant who can’t pay you his/her rent plus a deposit up front – what are they going to do if something “major” happens in their life?
If they don’t have disposable enough income to pay rent plus deposit – what’s going to happen when they have to fix their car – or something else breaks.
Demanding it all up front is a good way to measure their money management skills which is what you want in a tenant.
5. As a Landlord Where Can I get a good Rental Agreement?
Rental agreements are NOT all the same. Rules and regulations, as well as current landlording issues make it unlikely that a general boilerplate rental agreements would be current and cover all issues for your area.
The best place to get a rental agreement is through a reputable real estate lawyer. The second place would be through recommendations from other landlords (through real estate clubs) and then take these recommendations to your lawyer for review. Regardless of where the rental agreement is initiated, a good real estate attorney should review the documents specifically for your needs.
Stay tuned for our article “what to discuss with your lawyer” we will cover in depth the items we wished we had mentioned to our attorney before signing up tenants.