Real Estate 101: Keeping Good Tenants

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences.  (To read the series from the beginning, start here.)   The series is designed to give prospective investors the basic tools they need to succeed.

It’s very important that you find good tenants, but once you find them you want to keep them.

The most costly thing to your rental business is turnover.  It will cost you time, effort, and money.  The most frustrating thing about turnover is that after all the effort and expense needed to freshen up the unit and find a new tenant, your business will not be improved.  It will merely be returned to the state that it was in before you had a vacancy.   Perhaps you can rent the unit for a slight increase in rent over your previous tenant but it will not be worth the effort and expense it took to turn it over.

The only thing better than a good tenant is a good long-term tenant.  The ideal tenant would stay for 30 years.  If you have a good tenant who is not looking to become a homeowner, you want to do everything you can to encourage them to stay for as long as possible.

These are a few of the things I recommend to retain good tenants.

Be a Good Landlord

Be fair.  Be friendly.  Be responsive.  This is your house but it’s your tenant’s home.  Make them feel comfortable in it.  Be responsive to their needs and repair things quickly.  Do not enter their home unannounced.  In addition to being illegal in most states, it is a frightening invasion of privacy that will scare away good tenants very quickly.  Be willing to be a little bit flexible on things that are not that important.  Many tenants hold a non-flattering view of landlords.  Be different from what they expect.

I have heard from other investors who own properties near mine and from prospective tenants who have talked with some of my tenants.  They tell me that my tenants generally speak well of me.  I have heard phrases such as “I have a good landlord” and “my landlord is a good guy.”  Just because I am running a business does not mean I need to treat people harshly.  I take pride in treating my tenants with respect, but it is also good for my business.  Make no mistake; I am not a push over.  I say no when it matters, but sometimes it doesn’t matter and saying no then doesn’t help you.  Be firm but be fair.  Your tenants will respect that.

Do Not Use Month-to-Month Leases

Month-to-month leases are nearly ubiquitous in the rental business.  I have met very few people who do not use them.  They seem easy.  You can raise the rent at any time with proper notice.  You can simply refuse to renew at anytime with proper notice.  You don’t have to sign lease renewals each time a lease expires.  It just makes everything easier.

However, if you use month-to-month leases you have no stability in your lease terms and have no control over when turnovers are likely to occur.  This means your turnover may occur at inconvenient times for finding new tenants.  It also means your tenants can decide to leave at any time if they happen to see a different rental opportunity they want to take advantage of.  If they are locked into a fixed term lease they can’t pursue opportunities that occur before their lease ends.  This requires them to plan their departure around the lease end date rather than getting a spur of the moment idea.  The planning part doesn’t usually happen unless they truly have a reason to leave.  This keeps them renewing your lease rather than exploring their options.

Have Long Leases

Some people prefer not to have leases longer than a year.  This makes it easier to get rid of a tenant you don’t want and to raise rent more often if the rental rates are going up.  Long leases do lock you into current rental rates but the amount of extra money you could get by raising rent $25 a month after a year is not worth as much as knowing you have a tenant committed to a lease for 2 or 3 years.  It may be wise to keep the first lease to 12 months but once you have determined this tenant is a good tenant, I would encourage them to sign a longer lease.  The tenant can ensure their rent is not going up which in turn will tend to make them want to stay.  It also tends to encourage them to sign another long lease on their next renewal.  I always offer my tenants the opportunity to sign leases longer than a year to lock in the rental rate.  Many of them take me up on it.  I never consider a long lease with fixed rent to be a detriment.  I consider it a large benefit due to having a contractually binding multi-year revenue stream.

Raise Rent Less than the Maximum

When your lease comes due, this is the time to adjust the rent if the market allows you to do so.  However I try to see what comparable properties are renting for and always keep my rent for renewals at or a little below the typical market rates.  I do not want my tenants to feel like I am merely using the opportunity to gouge them and I do not want them to be able to easily find a comparable place for less.  When I am finding new tenants that is when I try to get top market rent if I can.  But after I have a good tenant I don’t want to risk creating turnover with excessive rent increases.

Do Not Rigidly Impose Fees

My lease has a $50 late fee if rent is not paid in full by the 5th of the month. The purpose of the late fee is very simple.  It is to encourage the tenant to pay rent on time so that I do not need to chase after them to get it.  Take note of what purpose the late fee is not intended to serve.  It is not to act as a secondary revenue source.  The late fee does bring in a little extra money every year but that is not why it is there.  If that is actually part of your business model and you intend to squeeze as much extra money out of fees as possible, that is a mistake.  Tenants know when they are being squeezed.  I have a colleague who was renting a place that had a late fee if rent was paid after 4 o’clock on the third of the month.  He paid them at 4:05 on the third of the month and was charged a late fee.  Management had every right to impose that late fee and he knew it.  That did not stop him from thinking they were greedy leeches.  He didn’t stay very long either. 

Depending on circumstances I have waived the late fee on countless occasions.  I have been contacted by tenants letting me know they could not pay until a day or two late.  I have had tenants send me most of the rent with a second small post-dated check asking me to deposit it 10 days later.  I have had checks show up in the mail a day past the late date.  Notice that in each of these cases, I do not have to chase rent.  Unless there is a pattern developing I will typically waive the late fee in these situations.

Once a tenant is a couple days late and I have not heard from them, I start chasing the rent, and at that point I certainly will impose the late fee.  If a tenant tells me they can’t pay rent until the 10th of the month I will impose the late fee then too.  But rigidly imposing the late fee if they are late by 1 day or by $100 does not earn me any trust with the tenant.  Most tenants do not have any emergency fund.  There are going to be months when circumstances leave them unable to come up with the full rent on the 1st of the month.  Letting them know that I am waiving their $50 late fee because they were pro-active earns me considerable appreciation from my tenants.  That is worth far more towards retaining them as tenants than is a meager late fee once or twice a year. 

By combining all of these techniques I am able to keep my tenants for extremely long periods of time.  I have had 4 short-term 6 month tenants.  They were just in transition and not going to stay anyway.  Other than that I have only replaced 1 long-term tenant in over 4 years with 10 properties.  The vast majority of my tenants are going on 3 or 4 years of tenancy.  I expect many of them will continue on for years to come.  This is worth its weight in gold to both my business and my sanity.

To read the next post in this series, see Managing the Property.

Comments

[AndrewB]

Apex,
You describe almost exactly what I do apart from the longer than 1 year lease. In my location I have not had a tenant stay for more than 2 years due to the changes in job, family conditions or other reasons. I have been a landlord for the past 4 years.
I treat my tenants really well, keeping rents stable and slightly below market rate for lease renewals, with prompt repairs and I am flexible on late fees as long as they let me know in advance it will be a day or two late. I even purchase a $25 gift card for the Christmas holidays to their favorite supermarket for tenants living in my properties more than 1 year. This is a small expense for me, but earns a great deal of goodwill.
Now I have at least one tenant calling me every month asking if I have vacancies for their friends. If I managed/owned 50 properties instead of the 10 I have now, I believe I could rent them all out from referrals!

[retireby40]

Great tips. I have a great tenant at my rental home and we signed a 3 years lease. I know I could raise rent, but they are such great tenants that I don't mind. Once they are gone, I'll probably turn this home over to my property manager.

[John S @ Frugal Rules]

It's always good to read posts from the other side of the rental world. When we rented, a good landlord was priceless. The bad ones were wretched and could not wait to get away from them, we actually had to sue a landlord once. If both sides are good and agreeable parties, then that goes a long way to make the arrangement work out well.

[LotharBot]

Here's a "how not to do it" story:

I was a tenant in the same apartment for over 4 years. There was never any problem with late rent. I was a great tenant and a great neighbor.

So, one day we had a holiday fall on the 5th, the day rent was due. The office was closed all day. Yet somebody still took the time, at midnight that night, to go around posting 3-day pay or vacate notices. They also put a cover over the rent drop slot -- which I spotted when I went by the office at 1 am to try to drop off a check.

I went into the office the next morning, with my sick infant in tow (and having gotten only a tiny bit of sleep, on the floor of the nursery), with a personal check to cover the rent plus late fee. I was upset by the policy that we needed a cashiers check for late rent, and asked if they could make an exception since I'd been there so long and didn't want to drag my sick kid down to the bank. I was fine with the fee, but it was going to be a major burden to take my kid out. The conversation ended with "I could have made an exception for you, but when you came in the door I didn't like your attitude, so I won't."

Up until then, I'd been totally impressed by the management. We'd been planning to move out several months later for family reasons, and I was going to leave a great review online, go out of my way to leave the apartment unusually spotless (I even owned a steam cleaner), and so on. Instead, we left on bad terms because some jerk in the office thought she needed to punish me for not being as cheery as she wanted me to be. And she thought it appropriate to TELL ME that she was trying to make my day worse.

(One of the other office workers who saw the exchange went out of his way to find me and calm me down.)

[FMF]

LotharBot --

Yikes!!!

[Noah]

How long do you wait to file an eviction notice? I forgot to pay rent on time one my at my apartment and on day 4 (day 3 was cutoff), I had an eviction notice taped to my door.

[Apex]

@LotharBot,

This is why landlords need to go out of their way to make a good impression. There are too many stories like yours that set the tone for what tenants expect from landlords.

A tip for landlords who get big enough to hire people. Your employees are you. If you hire an employee who treats your tenants poorly, it reflects not on them but on you. If you do not train your employees to set the tone that you want set you will get this kind of thing and it will reflect very poorly on you.

BTW, if you use a management company they are also you. Knowing how they will treat your tenants is also important.

[Apex]

@Noah,

That is ridiculous. My post next week will address that exact issue. Tune in next week for the answer. :)

[Apex]

BTW,

This month has turned out to be a really bad month for late rent for me. The worst ever actually. On the late date (the fifth), I only had 5 of my 10 rent checks. I was following up with any tenants whose checks didn't come in on the 6th. I have made contact with all of them or had them contact me pro-actively. 2 will not be getting a late fee because of exactly what I talk about in this post. 3 will. As of today I now have 8 of the 10 and 2 more are coming. One will not be coming until the 21st of the month, but I have had this tenant do that before and come through. I am confident they will again.

Nobody is getting an eviction or a move out notice or even a nasty gram berating them about the rent. The rent will all come in, with a little extra chasing this month and a few late fees.

[Jim]

Yet another great article.

We certainly try to be good landlords. We fix things as soon as possible (within reason) and respect our tenants rights.

We use 1 year leases, though I'm not really sure how much lease length matters. Tenants will break leases or a lease makes it harder to get rid of bad tenants. I think the good tenants will stay in general regardless of lease length.

We try to keep our rent increases at a minimal. In fact we generally don't raise rents at all except between tenants. Of course if you have a tenant for too long you eventually do really need to raise the rent some or it gets way below market. I think slow increases is best. We start low on our rents as well. Lower rents do help retain tenants.

Typical lease length may vary from place to place. Local laws may have a big impact on this. Month to month leases aren't the norm here in my experience. Most ads I see call for leases. Also, some places actually do not allow leases over 1 year.

I disagree at least in part about imposing late fees. If you do not impose fees then you invite abuse. I'll waive it occasionally for a good long term tenant but generally not otherwise. I'm also not going to impose a fee if its less than 24 hrs late. Theres a happy medium somewhere between being a jerk and being a chump.

[Luis]

There are some good pros to month to month renting that to me overcomes the cons. My niche is corporate tenants and so I offer it to make my unit attractive to them.

[Jim]

I also agree that you certainly don't want to slap 3 day notices on peoples doors at the first possible time. Thats pretty severe, heartless and certainly won't help retain tenants.

[Apex]

@Luis,

Your niche is not conducive to long term tenants so that makes sense. In any niche that is conducive to long term tenants I think month-to-month leases lead to increased turn over.

[Apex]

@Jim,

Your fee policy appears to be almost identical to mine.

[Amy]

I consider myself a good tenant - pay on time, respect the property, respect the neighbors. Suppose the market has changed, is it out of line to inquire about reducing rent or about small upgrades to the property?

[CW]

Just to add to Amy's question, do you (as landlords) decrease rent for good long term tenants (supposed that rental market has gone down)?

Another great article. Looking forward to the next one.

[Apex]

@Amy,

It is not out of line to ask for that.

As it stands right now the rent market has not gotten softer so it is unlikely that you could garner rent decreases at this time. But there are times when the market does change and comparable rents are going down. Asking about a rent reduction is certainly worth a shot in those environments.

If there are some minor upgrades that would be meaningful to you I would think you could ask for those in most environments. I would be receptive to that. I did have someone inquire about a water softener which ends up being nearly a $1000 "upgrade" so I did not agree to do that, but if there was something that cost a couple hundred and you were a good tenant I would likely do it.

[Apex]

@CW,

If the rental rates were getting lower then yes. If not then you will eventually get to the point where you will force tenants to leave and then will have to get a new tenant and get less rent on top of that.

As I mentioned to Amy, that is not the environment right now but if it were I would lower rents if my rents were above market.

[Noah]

@LotharBot

The apartments didn't have a 3 day grace period without a late fee? I know at ours you have the 1-3rd of the month to pay rent. After that it's considered late and a cashier's check is required. The fact that rent was due on the 5th is simply bizarre. I now pay the rent a week early so as to avoid the $50 late fee, although the awesome manager did waive it since I've been a good tenant.

@Apex

I absolutely understand why they say if the rent is not received in a few days an eviction notice will be filed. I believe the eviction process takes a lot longer here in CA and if you don't start it immediately and the tenant decides to squat without paying they have at least a month or two of free rent. You can't kick them out physically until the sheriff arrives and changes the locks. I imagine this happens a lot more with apartments because if you are going to rent out a house you are going to be extra careful during the screening process.

[Jim]

AMy, CW,

I certainly wouldn't mind if a tenant asks about reducing rent.

If the market has dropped then I would likely agree to a reduction. If market dropped significantly I might cut rents without a tenant asking (after lease expiration).
I've not seen a market drop below my rents though as my rents start out on the low side. I haven't had tenants ask for reduction nor felt a need to cut my rents in general.

If tenants ask for upgrades then it all depends on what they ask for. I might be OK with paying for something small like ~$100 range. Depends on the tenant, how long they've stayed, what they want, etc. One tenant asked about an improvement to the landscaping that would probably cost me $1000-$5000 range and I flatly told her no. She is a good tenant but I'm not spending that kind of money for something optional. Now if the carpet was 15 years old and worn out and she'd been there many years and asked for new carpet for $1500 then I'd probably OK that. Optional upgrades are different than replacing wear and tear items.

[Apex]

@Noah,

You may be right. In MN I can be in eviction court in 2 weeks and have a sheriff at their door in 3 if need be.

Also I suspect LotharBot meant that rent was late after the 5th rather than due.

[Noah]

@Apex

If the rent was due on the 1st and by the 5th it wasn't in, I'm not sure why @LotherBot is upset. If you had 5 days on top of the normal due date and didn't make any attempt to contact the office, you are inviting problems. 5 days is fairly generous. Also, the fact that it was a holiday means nothing. I think the issue about taping up the rent receiving slot was to prevent abuse. They probably were burned a few times and decided to handle it that way. Getting upset about that doesn't seem rational to me, especially if you've had an additional 4 days to get into the office.

I believe apartments handle things a little more rigidly because they have to. They probably have a 30-50 unit to personnel ratio and simply don't have the time to chase down the rent everything month.

Also, from what I've read online, it can take anywhere from 20-90 days to complete an eviction in the state of CA. Yikes, that is painful.

[Jonathan]

Noah is correct, eviction in CA is a nightmare process for landlords and takes forever. My wife works in property management and manages some trailer parks, and especially with that quality of tenant you have to serve a 3-day "pay or quit" notice right away or you'll be taken advantage of all the time.

We had a tenant in one of our houses wish to landscape the backyard. It was going to cost about $1,200. We worked out a deal where they paid $250 plus a rent increase of $25 a month. We covered the rest of the upfront cost. They were happy with the arrangement, and we were happy to make them happy.

[Melissa@LittleHouseintheValley]

I wish more landlords would read this. We were at our apartment for 10 years, and though we didn't want to move, we finally did because they stopped repairing anything. They had us prop up a leaky kitchen pipe with a brick inside a plastic container to catch the drips. Not cool.

[Jim]

My state has a mandatory 4 day grace period before rent is lat and subject to a late fee. So if I say rent is due on the 1st then its officially late on the 5th per the law. That may be what Lotharbot is looking at, the lease could have similar language.

I do have some rents that are due on days other than the 1st. We've had tenants request later due dates. So its possible the actual due date is any day of the month. Of course having the due date be the 1st is most common.

Yes apartments can tend to be more rigid.
I would also say dealing with apartments is different than dealing with single family homes in a variety of ways. Youre much more likely to have longer term tenants in single family homes than in apartments.

The eviction process can take anywhere from 2-3 weeks to 3 months depending on the state system and laws. In my state the fastest possible scenario is about a 2-4 weeks after rent is due. California should be more like 2 weeks to 2 months. But of course if you don't do everything right then it can take much longer no matter the state.

[Jim]

"They had us prop up a leaky kitchen pipe with a brick inside a plastic container to catch the drips."

Thats awful. No duct tape?

[Noah]

@Jim

Duct tape, the handyman secret weapon ;)

[LotharBot]

Noah, it seems you've missed my point.

My story wasn't about the late fee or the cashiers check. It was about me being a good tenant for 4 years, who everyone in management knew, and them knowing they could have made a big difference in my bad day by making a simple concession, which they had the option to make, but choosing not to, and then TELLING ME they had the option but chose against it because I was grumpy. (recall I'd been up most of the night with a sick infant; they also knew this.)

Forget all the other stuff about late fees, holidays, or whether it was "rational" for me to be upset about a minor inconvenience, and focus in on the key point. "I could have easily done something nice for you, but I won't" is something you should NEVER express to anybody unless you want to make them mad. If a good tenant is in a foul mood, don't try to punish them for it. Calm them down, make a token concession, and preserve the relationship.

[Noah]

@LotharBot

You are correct. Any smart and competent manager would have given you a break and as a result of their handling the situation, they lost a good tenant. On a side note I really wish we had a steamer for our carpet. It always seems to be filthy and I can only imagine what it contains.

[Erik]

Apex,

As a landlord the past 7 years, my experience is different from yours. At the end of my one year lease, the tenants go month to month and I don't raise the rent. I let them know upfront that it will just go month to month at the end of a year.

We are in a very low inflation period and I see no reason to raise the rent on an existing tenant. In a more inflationary time I may have a different attitude.

My thought is that making tenants sign a new lease requires them to actually think about moving. I'd rather then not have to give that thought and just let it slide to month to month. My very first tenant has been there 7 years. I have checked and the rents for the neighborhood are within $50 of my current rent so I don't want to give this good tenant any reason to even think about leaving.

My experience has been very good going to month to month and have an average tenure of over 2 years.

[Provenance]

If you are a good landlord, then you are more likely to attract good tenants too. I definitely agree with you about not engaging to into Month-to-month leases. The income will not be stable compare to long term lease (minimum of 6 months or 1 year)

[Amy]

Thanks for your thoughts. In the wake of Sandy on the east coast, I'm "perceiving" that the demand for flood-prone units "may" go down. Now that I've poked around on CL, I can't actually find comparable rentals in the area - maybe it's not the right season or they are all still being fixed! He is a good landlord - responsive in general and completely proactive in the disaster aftermath (it is what it is) - and I don't want to take advantage. Since I'm in the middle of the lease, I might try for a small break by negotiating the date to restart the rent clock and then do more research closer to renewal.

I had to dig out my lease to find the due date and late fee policy: due on the 1st, 3% fee after the 5th, legal procedures after 30 days.