When you book a hotel reservation online the representative will ask for single, double, or multiple occupancy and charge accordingly. It’s the same idea when you rent out your property to prospective tenants. Those who plan to rent your property are written in the lease predominantly for liability purposes. Those who plan to stay in your property who are not on the lease are considered guests.

Sometimes your tenants will abuse the lease by having multiple guests stay for long durations of time. Of course having the girlfriend stay over for a couple nights a week or the parents visit for a couple weeks at a time is fine. However, where does one draw the line? Although restricting guests and their duration of stay is almost impossible to enforce, there has to be some language and understanding in the lease to prevent a rental from turning into a boarding house.

During my latest tenant search, I almost accepted two guys who would have fully taken advantage of the lease by having two to four guests all throughout the year. Here’s how things played out.

PREVENTING GUESTS FROM OVERSTAYING THEIR WELCOME

My main rental is a two bedroom, two bathroom condo with parking in a nice part of town. I decided to raise the asking price by 12% to take advantage of current tightness in the market. The realistic range I could charge was between $3,500 to $3,800 based on my market research and I decided to shoot for the top.

Demand was strong at $3,800 but several prospects who showed tremendous interest flaked out in the end. Then a software engineer who just relocated to Google’s San Francisco campus from Mountain View paid me a visit. He was a nice guy who made a low six figure income. His roommate would be arriving later next month from Bangalore, India for an internal job transfer at Google on an L1 visa.

Before I Skyped with the prospective tenant from Bangalore, his roommate was so eager to secure my place that he offered to come by my house that evening and leave the $6,000 rental deposit with me. I agreed and told him I would not cash his deposit until the interview was complete and we all signed the lease. During the tail end of his visit, he mentioned that his father would be paying him a visit next month for a couple weeks. Not a problem.

Then I politely asked what about his mother, afraid that he might say they were divorced or worse, was deceased. He responded, “My mother is coming too, and will stay with me for one month. Is that OK?”

I was surprised by the duration of her stay and asked him, “Where would she stay?” given he would have a roommate.

He politely responded, “In my room, with me.”

I realize it’s common for 20-something year olds to co-habitate with their parents until they build up their financial reserves, but I have never heard of living in the same room with your mother for a month if you are making a six figure income. Why not just put your parents up in an inexpensive motel for a month if you’re making $10,000 a month in gross income? Besides, my apartment isn’t big enough for four adults.

My prospective tenant is either a big time mama’s boy, which may be good because when mama is home, there won’t be raging parties that will disturb the neighbors. Or, my prospective tenant might be uncertain about his financial situation or is super frugal. He asked me if I could put in a clause that said I would not raise the rent for two years for example. If you’re constantly going to have your parents stay over, at least get your own place or a place with one extra bedroom. Don’t parents deserve better?

As a grown adult, I’m not sure if I could voluntarily live in the same room with either parent for one week, let alone a month. Could you? I chalked the situation up to cultural differences. My tenant then mentioned that he’d probably have his five brothers and sisters visit as well from India. One big happy family.

The Roommate

My Skype with the roommate transferring from Bangalore went OK. He was much more aggressive and abrasive as a 25 year old. When landlords think of two fellas in their mid-20s as tenants, we can’t help but think of party animals who disturb the peace. Fortunately, these prospective tenants did not seem the party type as both went to IIT Delhi, the best university in India with less than a 2% acceptance rate.

At the end of the Skype session, the prospective tenant also mentioned that his parents and siblings would be visiting from India as they’ve never seen America. His L1 Visa expires after three years and he wants to maximize his stay as he should. Understandable, but where would they stay and for how long I asked?

“With me, in my room of course!” he retorted in a very annoyed tone as if he owned my place.

If there’s one thing I really dislike, it’s cocky recent college graduates who thinks the world owes them something without paying their dues. I’m very big into respect for your elders, and this kid showed none.

Now I’m doing the math. Rent to two guys who have an immediate family totaling around 15 people who all want to come visit for who knows how long. My fellow owners are going to go nuts.

ADD A GUEST CLAUSE IN THE LEASE

I have never had a tenant in the past 10 years who invited family to stay with them for more than two weeks at a time let alone a month for multiple times a year. Furthermore, I’ve never had a tenant who were not “one unit” – either a couple or a single individual. As a result, I never had any sort of guest clause because I naively assumed everybody wanted to live by themselves.

The prospective tenants were nice enough to at least tell me their parents planned to visit for a while each this year. Some tenants simply roll in extra beds for guests who are not on the lease and squat for months or even years. Once you have a tenant that you want out for whatever lease violation, it is very difficult to evict. The process takes at least six months to move to court proceedings after a notice of eviction is served. In those six months, the tenant can very easily stop paying the rent.

Given I didn’t want potentially six people living in my unit at a time throughout the entire lease, I added an important guest clause which stated that tenants are allowed guests for up to 30 days a year. The days can be used consecutively or distributed throughout the year. I decided on 30 days because that was the duration the first tenant said his mother would stay. Hence, I was trying to be accommodative to his wishes.

The rule is not strictly enforceable by me, nor by San Francisco ordinance, but at least I have some line in the sand I can point to and we can agree upon.

It turns out that both tenants balked at any sort of guest clause. They could not understand why their parents, brothers, and sisters coming to visit for months at a time would not be ideal for me. Even after giving them the single/double occupancy hotel room booking example and explaining liability risk as my biggest concern, they still didn’t get it. I wrote:

Hi Guys, I’m sure all your family members are great, but please understand I have landlord insurance I pay every month for liability reasons. Here are some examples of things that may occur which are out of our hands.

* Mom stays for two months and hurts herself walking down the steps. Mom decides to sue me or the association because of some crack on the steps we are not aware of.

* Dad accidentally leaves the stove on and burns down the kitchen while you guys are away at work. Your rental insurance policy should pay, but who knows? I’m sure I will have to get my insurance involved and the process will be one long nightmare.

* Brother has some altercation with other owners due to excessive noise. They file a complaint and penalize me for him not being on the lease. What an embarrassment and hassle for me during the next HOA meeting.

* Your mom leaves the condo door or garage door open and there is a robbery of someone else’s unit. Although you say you are responsible, the HOA will go after me, and I will then have to make sure you cover the damages.

Hopefully these examples highlight my reservations for multiple long term guests.

Thankfully, the tenants rejected the lease as they refused to have any guest restriction clauses in the lease. One tenant later admitted to me that he wanted his mother to stay for 6 months at a time, and not just one month. Every single landlord I spoke to has a guest restriction clause with durations ranging from two nights a week to five weeks a year total. Although I’ve now got to look for more tenants, I feel better knowing that my apartment won’t be turning into a boarding house for a couple dozen people throughout the year.

THE INTERVIEW IS KEY

Every city has different rental rules to be aware of. San Francisco is known for being very pro tenant given the limited supply and relatively high rents. I’ve heard of many nightmare scenarios where tenants demand X amount of money to move, or who simply squatted without paying rent for months because of some conflict.

Ideally, you want a tenant who takes care of your place, pays on time every month, treats their neighbors with respect, and leaves you alone. In order to find the ideal tenant you’ve got to carefully look over their financials, ask about their work, understand their current living situation, and figure out what makes them tick.

The interview is vital to getting to know them better. Sometimes, there are simply cultural differences which cannot be overcome. Other times, there might be stability issues between the couple or job risks if a prospective tenant works at a company you know is going under.

It is always better to be safe than sorry. Understand your cities’ rental laws, include points in the lease which concern you, and carefully screen tenants who you think will be the best tenants for your place. You’ll be able to lower turnover and increase your happiness in the process.

TO REVIEW: HOW TO MINIMIZE TENANT LEASE ABUSE

1) Stick with the 40X monthly rent as annual income or greater rule to reduce the chance of having tenants wanting to sublet, AirBnB, or secretively find additional tenants not on the least to share rent expenses. We’ve probably all secretly piled into hotel rooms before to save on costs. As a landlord, you have liability risk that could cause big time damage to your finances.

2) Get landlord insurance as well as an umbrella policy to protect your assets. Here’s how an umbrella policy works. This article discusses how much property insurance you should get. Paying the full rent on time becomes a secondary matter if you have assets to protect. The number one thing you should be concerned with is liability because uncontrollable bad things happen all the time.

3) Spend time interviewing your tenant over e-mail, telephone, Skype, and face-to-face. Observe their promptness of response and their courteousness. By asking basic questions about their employment, their desired length of stay, and interests, you should be able to get a good idea of whether they will respect your lease or abuse it like a broken soda machine.

4) Add a guest clause if you have concerns. Make sure you go over every single point of the lease together so there is no ambiguity. It’s all about setting expectations early on. Only when my prospective tenant was giving me the deposit check did he ask about his mother staying for a month. And only after I put in the 30 day guest clause to allow for his mother to stay for a month did he admit that his mother was planning on staying for 6 months. At the end of the day, it is your apartment and you and the HOA decide the rules. If a non-negotiable rule such as quiet time after 10pm ruffles their feathers, then move on. Any tenant who shows annoyance or questions basic rules will probably want to bend them.

5) Get the rental deposit of 1.5 months worth of rent or more and explain its use. With a hefty deposit, a tenant should be more likely to comply with the rules, cause less trouble and damage, and clean up the place upon exit.

Readers, any landlords out there experience tenants who have abused the lease? Specifically, any situations where you’ve found unlawful long term guests camping out in your place? How did you deal?

Photo: What might happen if you have bad tenants, FS.

Regards,

Sam

Source: Financial Samurai

After two years, my beloved tenant is leaving me for another man. My tenant is a single woman in her 50s who sold her house on the east coast to start a new life in San Francisco. She’s always wondered what all the west coast fuss was all about so she decided to see for herself. After a year of work, she met someone and is now moving in with him.

I’m so sad to see my tenant go as she’s been wonderful. Yet, I’m so happy she’s found new love! I don’t know what it is about my rental property but every single tenant ends up marrying or finding someone special. Good feng shui perhaps!

As I wrote in my real estate vs. stocks post, real estate takes more effort to manage. I’ve got to now host multiple open houses and carefully vette my future tenants like the CIA to ensure the least amount of headache down the road. Thank goodness everything is so easy to do on Craigslist nowadays. I’ve got all the application forms and after almost 10 years of being a landlord, I know exactly what to look for.

If you are an aspiring landlord or a new renter in a hot market, this post should help provide some prospective to getting what you want. This post should also help renters get their ducks in order.

CRITERIA AND DOCUMENTS NEEDED WHEN APPLYING TO RENT

* Income and Paystubs: The general rule of thumb for a landlord is for renters to make at least 40X the monthly rent as annual income. In other words, if the rent is $2,000 a month, the minimum the tenant should make is $80,000 a year. Prospective tenants should bring in their latest two paystubs and prior year’s W2 if you feel comfortable. If you operate a business, then please highlight your income statement.

* Duration of Employment: The longer you are at one firm the better. If there’s a history of moving around every year, the landlord will put you in the bottom pile because the last thing a landlord wants is to have to go through the entire tenant screening process again so soon. Seeing a letter from your Human Resources department verifying your employment and duration puts your landlord at ease. Landlords want a tenant who will ideally stay for two years or longer.

* Assets: It is preferred to have six months of rent in liquid savings or semi-liquid investments or more. A landlord’s fear is that a tenant loses his or her job, runs out of money in several months, stops paying rent, turns into the psychopath from the movie Pacific Heights, and destroys all your property! Bring a copy of a bank statement and brokerage accounts that show liquid assets. You don’t have to show everything, just enough where the assets cover at least 6 months worth of rent. If you have tons of assets, feel free to show up to 36 months worth of rent but not much more. Having too much money makes your landlord think you’re only here for a pitstop until you find something better.

* Letters of Reference: Almost every single landlord will experience some type of problem tenant if they landlord long enough. Letters of reference are important to verify a tenant is worthy. Please also provide the telephone number(s) of previous landlords so we can speak to them about their experiences with you. Many times, letters/emails don’t mean anything because the landlord is just being nice so that you can hurry up and get out of their place! As a result, please also provide work references or outside activity references as well.

* Credit Report and Credit Score: The first thing landlords check is the credit score. The credit score is always used for screening purposes if there are many applicants. Even ff there are only a couple applicants, a credit score is still used to gauge the tenant’s ability to pay the rent on time. It doesn’t matter how much you make or how much is in the bank if you aren’t a responsible payer. You need an actual score along with your credit report, otherwise, your landlord will suspect something is wrong. You can check your free credit score at TransUnion here.

* General Feel: One can do all the screening they want. At the end of the day, choosing the right tenant is a leap of faith. It’s the same for hiring someone for a job or admitting them to a school. You never know how the person will turn out until after they settle in. Tenants should consider bringing a friend as a good sounding board for the property they are considering. Landlords should also bring a friend to meet with prospective tenants as well. We are often blinded by our unconscious biases about people that it is always good to have a different perspective. For example, men go stupid over beautiful women. If you are one of those men, then bring a female friend who will think straighter during evaluation time.

ARE YOU THE IDEAL TENANT?

The ideal tenant is someone who knows what he wants, has his financial ducks in order, and has a track record for stability and responsibility. Tenants should also try and get a feel for the landlord’s character. Is he super anal to the point where he is always checking up on you over e-mail or ringing your doorbell? Does he have a list of handymen for you to contact in case something goes wrong? Can you tell your landlord really cares about the property based on the upgrades?

If both parties can be as upfront as possible about their requirements, I’m optimistic in a harmonious relationship between the landlord and the tenant.

How’s the rental market in your neck of the woods?

Regards,

Sam

Source: Financial Samurai