The One "Utility" You Want To Pay Yourself

If your properties are in communities where the government provides garbage pickup (and therefore you pay for it through your property taxes), or you're only dealing with complexes where you already provide dumpsters for the tenants, then you can skip this post. However, if you are like me and have properties like houses and duplexes where people pay for a garbage service, you need to keep reading.

In general, you want to avoid properties where the landlord pays the utilities - energy and water costs are probably going to be rising faster than general inflation for some time to come, and when you're paying the utility cost your tenants are going to never even think about conserving. In the case of garbage pickup, though, you should pay it. We pay it and then have the tenant agree in the lease to add an amount to what they pay each month to reimburse us. Why do this?

You know there is actually garbage pickup. Sure, leases require tenants to have garbage pickup, but you will be surprised at how many tenants won't get it. They will try to pawn their garbage off at work, or in random dumpsters, or worse let it pile up. Most cities in which the government doesn't handle trash have laws requiring residents to have (pay for) garbage pickup. Eventually the cities figure out that tenants won't do this, and will change the laws to require the property owner to make sure there is garbage pickup. They realize that a tenant who doesn't have the wherewithal to pay for garbage pickup is going to be difficult to levy and collect fines against, but you - the property owner - can't hide. They'll put a lien on your property if nothing else. So, are you willing to risk fines and more, trusting that your tenants will pay their garbage bill? That's not a bet I want to take.

In my town, in fact just down the street, there was a small fire in a rental house last week. According to the paper, "I've never walked into anything like that," said one captain with the police department. Just what had he walked into? "Garbage," said the deputy fire chief, "Floor to ceiling, 20 foot wide, 16 feet deep - garbage."

The mayor was called in, and ordered the garbage removed by a hazmat team. The tenant admitted to not paying her garbage bill for over a year.

The kicker, though, is a paragraph further into the story: "The bill for the cleanup, which took about five hours with heavy equipment, will be charged to the owner of the property..." and then they published his name. The tenant was the one who broke the law (and likely the lease) by not paying for garbage pickup, the tenant was the one who piled garbage until it completely filled the house, but the owner is going to be stuck with the bill - which you can figure will be enormous. The city government isn't dumb; they know there is little chance they would be able to collect anything from the tenant, so they go after the owner.

While not experiencing anything this bad, we had seen a pattern with tenants not paying their garbage bills, especially, of course, the ones who end up skipping out on rent. So naturally they left quite a bit of trash for us to deal with, which we couldn't always get to right away because it can take a week or two to get a herbie delivered and pickup service started. Several years ago we decided that paying the garbage and getting the tenants to pay us was the way to go, and haven't regretted it at all. It puts us on very good terms with the garbage company and the city as well.

There's also a lesson here in doing periodic inspections, but that's a topic for another day.

The Free Month Syndrome Part II

So you've researched your market, things are dead, and you feel you have no choice but to offer a rent special, typically the "free month" deal. You are still not completely vulnerable. There are things you can do.

The first thing you must do is be extra vigilant on your screening process. By advertising free rent, you are putting something of a bullseye on you that tells some unscrupulous souls to try and take advantage of you. Free rent also sounds great to people who don't pay their rent like they are supposed to. Dig hard on the background check. Don't forget to require a full month's rent for the deposit (and never, never take checks for the initial rent and deposit - cash, cashier's check or money order only - trust me).

Next, consider whether you have to give away a full month. Try advertising a half month free if you think that might do the trick. There are usually a few days from the time you approve the tenant to when the lease is signed anyway. We allow seven days as a matter of course ("one week free rent" the ad could say, I suppose). Reduce the seven days to one day from approval to sign the lease in this case and then giving away half a month isn't quite as much pain as it sounds.

If that doesn't work and you have to give away a whole month, remember that you are giving something in a business transaction - it's fair for you to ask for something in return. What we ask for is that the tenant guarantee they will fulfill the entire term of the lease. We have a clause written into the lease (as an addendum) which spells this out. If the tenant doesn't stay for the whole lease, they have to pay back the free month they took. It's only fair, really. Initially we tried a prorated formula, where if they stayed, say, for half of the lease then they only had to pay half of the free month back. Eventually I had to ask myself why we even bothered with that, and now it is the simple deal: stay or pay. If it's a 12-month lease and you stay 9 months, then you have to pay the free month back. Period. You will appreciate it when you get some difficult tenant who drives you crazy then and skips out. It also makes life a little harder on the serial tenants who love to skip from free month deal to free month deal every two to four months. So far we have never had an applicant balk at this offer, but we sure have benefited on a few that turned out to be less than desirable (it's a bad feeling when you look back and think "we gave them a free month?" after they've skipped and left the place a mess). Yes, you have to actually find a way to collect the money they owe on the free month when they skip, but that is a subject for other posts.

There is one more thing that can help when you are forced to offer free rent, and have multiple units vacant. The free month's rent doesn't always have to be the first month (in fact it's better if it's not the first month). It can be any month of the lease. So, what we do is list the units included in the offer, and then let people know that the first one to rent gets their first full month free, the second one to rent gets their second month free, and so forth. This tends to get the first unit or two rented pretty quickly as they realize it is "first come, first served". It's also a big help when someone who has the fourth month free skips out after two months - you've not given away the free rent yet. There is one other thing we add to the free rent addendum for these folks as well, which is that the free rent is void if any monthly payments due before it are late. You want to give free rent to good tenants, not late payers. You'll get your rent on time for three months if the fourth month is free in most cases.

Taking these approaches allows us to put our "free month" ad in there to compete with the rest, but it doesn't leave us giving away as much rent to deadbeats, and that's a big deal.

Tenant Application Epilogue

After recently writing the two pieces on the importance of and what to put in the tenant application, the following headline appeared in a local newspaper this past week: "Rentals prompt federal charges: tenants said to be illegal immigrants". If, even after reading my prior posts, you still aren't thoroughly vetting your applicants with a good application process, maybe this will encourage you. The article starts, "A father and son who own two large Lexington apartment complexes have been ordered to appear in U.S. District Court Friday to answer charges that they rented to at least 60 illegal immigrants..."

Going after landlords who rent to illegal immigrants is a shift in policy by Immigration and Customs Enforcement officials that you need to be aware of. A spokesman for ICE said "It's a priority". Doing a little internet searching confirms this; for example, Arizona is considering a bill that will make it illegal for landlords to rent to anyone without papers proving they are in the country legally. Since the government can't control the border, apparently there will be more push to make landlords pick up the slack.

One paragraph in particular in the Lexington article stands out: "The indictment alleges that once the (defendants) began renting to illegal immigrants, they changed their rental policies and quit requiring credit checks, proof of identification and Social Security numbers." So, having a solid application process in place not only protects you from bad tenants, it helps protect you from accusations like this. It's no small matter. The penalties in this case are up to 30 years in prison, $750,000 in fines and the forfeiture of the buildings. Don't let it happen to you.

The Free Month Syndrome

If your town paper isn't filled with rental offers of a free month's rent (or more) to new tenants, consider yourself lucky. This bane of the rental business flourishes like pizza coupons in many communities. The question is whether this is a game you have to play, and if you have to play it, how do you play it smart?

The free month offer is, of course, something to avoid if at all possible. It's throwing away money if you don't have to do it, but there are other downsides. We have found, consistently, that the quality of tenant is lower overall with those who respond to free month offers. In fact, the worst tenants in town will be among the first to respond to your free month deal. These are often the serial tenants - ones who move every few months - who figure that free month looks like it's just the thing for them (since they're a month behind where they're at anyway). These folks will take that free month, maybe pay a month or two, then quit paying while they plan their next move. If you do offer a free month's rent, prepare to look extra hard at the applicants.

Going to a free month seems an easy out to many landlords - they know the tenants often can't come up with both deposit and first month's rent, so this helps lower the hurdle. It can be even more extreme; right now there is an apartment complex near me that advertises "$89 Gets You In", and I have tracked quite a number of my former deadbeats down to this complex later. They'll take anyone, don't do background checks, and they are in court all they time with evictions of these folks they never should have rented to in the first place. Even keeping the $89 deposit (whoopee), the losses in cleanup and damage alone make these tenants typically big money-losers (people who don't take care of their finances well tend not to take care of your property very well either).

The first thing when looking at all the "free month" competition is not to panic. It doesn't mean that you won't be able to rent your properties without giving in. There are many factors that go into a tenant's decision - location, condition, monthly price, etc. Better tenants will tend to focus on these factors a little more than someone who is financially desperate. People will also tend to figure out over time that the complex with the ridiculous special isn't always a nice place to live - you're going to have neighbors that are less than desirable since most serial renters also have constant scrapes with the law. Next, try to gauge how you stand in relation to your market on vacancies and rates. Ask around, call some of the ads (often there is a gimmick or catch to ones that advertise specials), drive around looking at the "for rent" signs. If your vacancy rate is higher than average, it is time to consider action. However, there are still things you can do before giving away free months. Consider investing some money in more aggressive advertising. How much more can you do with that money you would simply give to the tenants? A bigger sign (maybe a large vinyl banner on the side of the building if it faces a well-traveled road), a larger ad in the paper (or maybe put the ad in more than one place), put fliers up on bulletin boards, get a good website going, etc. Sometimes a simple sign in the yard is enough, but when times get tough you can generate more inquiries with better advertising. Also consider a "bird-dog" program, where you reward current tenants with money off ($50, $100) their next month's rent if you lease to someone they recommend you to. When tenants recommend you to friends, you've got a high chance of a) making the sale and b) getting a decent tenant, since your current tenant isn't likely to want to bring in someone they know will be bad neighbor. Finally, before going to free months, take a look at your monthly rent. This amount has a bigger psychological impact on tenants per dollar than the free month does. For example, many will consider renting something at $25 a month less to be a big deal, and yet if you're talking about a $600-a-month rental, it would take two years for that $25 to add up to the amount you'd give away with one free month. Even if you offered a special where you lowered the rent by $50 a month, it takes a year before the tenant is saving more than the free month would have. This is a much better long-term investment for you, especially compared to someone who takes the free month and is gone a few months later.

Next time, we'll look at how to handle the free month program if you just can't avoid doing it.