Introduction

Tenants are your most valuable asset, and choosing good ones is the most important decision landlords make. A bad choice can result in damage and lost rent, but even when tenants leave without much fall-out, tenant turnover is expensive: It costs the average landlord two to three times the monthly rent every time tenants change. These costs include lost rental income, advertising and screening costs, and the value of your time to pull together and run the whole tenant selection show. And for most landlords, tenant turnover is an unfortunate fact of business.

What separates the properties with stable tenants from those that have revolving residents? Simply put, both sides want the landlord-tenant relationship to continue. The tenants want to stay because the property meets their expectations and needs. And their landlords want to keep them because good tenants pay the rent, take reasonable care of the property, and are considerate neighbors. This book gives you the precise legal, financial, and practical information you need to find and rent to good tenants and keep your rental income steady and safe.

Good tenants do more for your bottom line than minimize your turnover rate. Your business will prosper in other ways, too.

• You'll avoid costly discrimination complaints and lawsuits. Discrimination claims are on the rise. You'll need to call your lawyer to reply to even the most-groundless claims—and you know how fast that meter runs.
• You'll save the time, money, and headaches of terminating a tenancy or filing an eviction lawsuit (or fighting a tenant-initiated lawsuit). Nothing can destroy a profitable year more quickly than an eviction lawsuit, even one that you ultimately win. You can narrow the chances of a lawsuit in two ways: by identifying lawsuit-prone and rule-breaking applicants and not renting to them, and by acting within the law yourself, so that you don't invite trouble. Careful tenant selection (and scrupulous adherence to the law) are especially important when you've signed a long-term lease or have rent-controlled property.
• Other tenants are more likely to stay put. If you bring a disruptive resident into a multiunit building, you won't be the only one who suffers. Even if you take prompt action against the troublemaker, it will take you a while to get rid of him if he decides to dig in. In the meantime, your good tenants will leave—and your turnover rate will go up. And suppose you live on the rental property yourself? A poor tenant choice will mean that this person is your neighbor, too
• You'll have a steady cash flow. For many landlords, an uninterrupted cash flow is essential to keep up with the mortgage and other operating costs. If you own one or two properties, you can't afford to go without rental income for months at a time.
• You'll sleep better at night. It's well known that stress can have negative consequences on your physical and mental health. If you can find and keep residents who don't bother you or cause you worries, you may add years to your life.

What's the law got to do with it?

While common sense and business moxie go a long way towards helping you identify and land good tenants, you can't do it successfully without also knowing the law. Most landlords are aware that they must follow fair housing laws, but few understand that the law permeates every aspect of your tenant selection process. You could read every book on tenant selection on the market and not learn the legal details on issues covered in this book. Here are just a few examples of when the law enters the picture:

• Showing the place. The law dictates how you deal with current residents when you want to show their unit (you must follow specific notice requirements) or do a pre-move-out inspection (your entry rights are limited).
• Renting to illegals. If you're concerned about this, you need to know how to safely approach illegal resident issues when screening potential tenants.
• Renting to ex-cons. Surprisingly, there are legal and practical risks in both running (and not running) a criminal background check, and you may face legal restrictions on using Megan's Law databases.
• Discrimination you didn't intend. You may have the purest motives, but if your actions have the effect of discriminating, you're in for trouble (for example, targeted advertising can backfire if you're not careful).
• Using a credit report. You can't order a report to go after "skips" unless the original consent form covers this use.
• Bidding wars for hot rentals. You need to know how to participate in a bidding war among prospective tenants (but not initiate one).
• Rejecting applicants. Depending on the circumstances, you can't just say, "No," or not call back. You must give rejected applicants legally required information—ditto for those you accept with conditions.
• Responding to disabled applicants. Federal law is very specific on how you discuss (not negotiate) requests for changes in your policies or rental terms.

Are you surprised by the legal component of what you might have thought were strictly business decisions and actions? You're not alone—the federal government spends millions of dollars catching (and thereby educating) clueless landlords. But you don't have to be one of them.

Is this book for you?

This book is for all landlords who want to run a profitable business, protect their investment, and avoid legal hassles. The millions of landlords who own only a few rentals, and who choose to do most of the work themselves, will find this book especially useful. You'll find advice on off-loading the tasks that are practically difficult to do as an individual (such as performing a multistate criminal background check), but most of the time, each aspect of tenant selection is explained so that you can implement it yourself. Landlords with large rental complexes and leasing agents, or property managers or management companies, will find also useful information in this book, such as how to say and document their decisions in ways that reflect their commitment to following the law.

This book is useful for landlords in all markets, cold or hot. When you're competing for tenants in a cold market, you need to be as aggressive as possible—but you must not be so eager that you cut legal corners or make poor choices. The advice here will keep you safe, while helping you get your place rented as efficiently as possible. The legal edge will also benefit owners in moderate or hot markets, when lots of tenants are vying for your place: Ironically, when faced with a wide choice of applicants, landlords sometimes relax their legal guard and base their choices on factors that are irrelevant or risky.

Finally, two basic assumptions underlie all of the advice in this book.

• You aren't renting out a dump. You take care of your property and don't let it get run-down, and you don't tolerate problem tenants. If you conclude that you can't afford basic physical and resident upkeep, or if the property and/or the neighborhood won't support the rent you need, sell the property and invest in something else.
• You're willing to work hard. When you invest in stocks, you put the stock certificate in the drawer and monitor the market. That's a lot easier than investing in rental property and holding open houses, checking references, and dealing with even the best of tenants. If you're uncomfortable interacting with people and dealing with problems, hire a management company to perform every task or sell and invest in something else.

Ten ways to keep your rental business profitable

The blueprint for a profitable rental property business is fairly simple and consists of ten basic principles. This section lays out these principles and other chapters in this book show you how to implement these practices.

1. Make a plan

Before you escort a prospect through your rental—and even before writing your ad copy—you need a specific plan for getting your place rented. This book provides step-by-step advice on making and following your plan, which has five basic components

• Establish the basic terms of the deal. Decide on the rent, deposit, date available (build in time for repairs and refurbishing), pet policy, number of occupants, length of the rental term (month to month or a long-term lease).
• Set basic requirements for the resident. Choose a minimum income, number of positive references from employers and current and past landlords, and your criteria for a healthy credit report. Decide whether you'll do criminal back-ground checks on all applicants who make it through earlier, more basic screening. Determine what policies are nonnegotiable and when you're willing to be more flexible.
• Plan your advertising strategy. What you'll say in your ad depends heavily on your decisions on your rental terms and resident requirements. Now, where will you advertise? To craft a successful strategy, you need to figure out who will be your likely tenant (such as singles, a family, students), as well as the temperature of the market for rentals like yours.
• Prepare for phone calls and show-ings by having details of your property at hand (such as the exact size of the bedrooms, neighborhood features) and facts about the competition. Your preparation should also include getting your place in shape before you show it to prospective tenants, and working around current tenants (if any).
• Show the unit. You can do individual tours or hold an open house. This choice will depend heavily on your market and your personal preferences, and will affect how you advertise.

Implementing your plan will put your rental in front of the tenants who are likely to want to live there, and who are the kind of tenants you want. In a word, the plan efficiently moves you from a vacancy to an occupied property. You don't have to spend a ton of money on advertising. You do need to spend some time on planning how and where you'll launch your rental efforts.

2. Deal with current tenants fairly and respectfully

Although your mission is to find new tenants, you can't do so without interacting with the set that's still there. You must respect their privacy and follow state laws on showing their home to applicants. This will help you both avoid legal hassles with departing tenants, and show newcomers that you are an upright landlord who follows the law.

3. Comply with fair housing laws

You'll operate at your peril if you don't know and follow federal, state, and local fair housing laws, which should inform your words and deeds at every step of your selection process. Make choices (on where you advertise, what you say, how you screen, and how you choose tenants) based on sound business reasons, devoid of stereotypes or your personal feelings. Unless you can say, "Any reasonable businessperson in this situation would do the same thing," you may be applying preferences or assumptions (about particular races, religions, ethnic origins, and the like) that could get you into legal trouble.

4. Be consistent

Consistently applying your screening and selection criteria is the hallmark of a lawsuit-proof business. Here's why: Suppose you reject an applicant who has insufficient income, but accept another applicant who has the same income. If the rejected applicant is a member of a protected group, he may claim that the rejection was due to his religion, ethnicity, or membership in another legally-protected group. You'll have an upward fight to dispel this claim. The only way to win is to avoid, in the first place, inconsistent application of your tenant-screening and selection criteria and practices. This includes, for example, showing the unit to all who qualify, accepting applications from every interested applicant, and checking references and credit for all who meet your business-based standards.

5. Maintain some flexibility, especially with disabled tenants

Wouldn't you know it—the law tells you to be consistent in one sentence, yet flexible in the next. Yes, it's true—you must be willing to vary your criteria and standards for disabled tenants and applicants when necessary. That will happen when the variation is required in order for the disabled person to live comfortably and safely at your property, and when the change will not be unduly burdensome for you. Chapter 2 explains these rules in detail.

Flexibility is also in order when dealing with first-time renters. There's a lot of them out there—nearly one-third of all tenants are younger than 30 years old. (U.S. Census Bureau's American Housing Survey for 2003.) Logically, these people would never be able to rent if the lack of a current or prior landlord reference automatically eliminates them. There's nothing wrong with substituting equivalent criteria for first-timers (such as accepting nonlandlord references), as long as you apply the same approach to all first-time renters.

6. Do thorough screening and rank your applicants

Always take the time to do the checking necessary to assure yourself that this person is a good business risk. Nothing will be gained by hastily choosing a tenant. No matter how certain you are that your instincts will not let you down, or that you've learned enough after looking at a credit report (but before talking to references), you cannot afford to take a chance by renting to someone who has a skeleton in a closet that you didn't open. First, it will cost you time, money, and endless aggravation to get that tenant out; and second, if you shortcut your process for this tenant but not for another (who you reject, and who happens to belong to a protected group), that disappointed tenant might file a fair housing claim.

If an applicant is really as solid as you think, you'll lose nothing by completing our five-step screening process, which is depicted in the visual below. (Chapters 7 through 13 provide details on each step of the screening process.) You can reject an applicant at any stage, as long as your rejection is based on solid business reasons, and is consistently applied. Every time you complete a step, you'll rank the acceptable applications in order of attractiveness. Often, you'll need to rerank when you learn more at the next step.

The biggest mistake you can make is to hurriedly rent to the first plausible applicant. No matter how soft the market, how long the unit has been available, how believable the applicant's story of needing a rental unit that afternoon, don't do it. If you hand the keys to someone who turns out to be a nightmare, the costs of eviction (plus lost rent or damage to your property) will far outweigh the month or so the unit remains vacant while you diligently look for appropriate tenants.

Five Steps for Successfully Screening New Tenants chart omitted for online sample chapter.

7. Be careful what you say

Protecting your bottom line involves not only what you do (ordering a credit report for every top candidate who has made it past the application review, for example), but what you say along the way—from the first phone call (when tenants inquire about the rental and you do some prescreening) to the last (accepting or rejecting tenants). Ill-chosen words can precipitate a fair housing lawsuit, commit you to promises that you never intended, or sow confusion leading to problems.

Be sure you know how to get the information you need—but avoid fair housing shoals along the way. For example, it's fine to ask how many people will be living in the rental unit to make sure they meet your reasonable occupancy limit, but asking about the ages and sex of the occupants, and whether they are married, may be an invitation to a lawsuit.

Though it's tempting, don't puff or overhype your rental. It's fine to be enthusiastic and extol the benefits of your property, and it's necessary in competitive markets. But promising things that are only remote possibilities (such as high-speed Internet access or a parking space opening up soon) may only lead to trouble. The bottom line: Deliver what you promise.

Finally, clearly explain to tenants your key terms, policies, and expectations, and do so early in the screening process. You'll avoid wasting time on inappropriate tenants or tenants who want something else (such as a property that allows pets).

Throughout this book, you'll see scripts with typical applicant questions that landlords encounter along the renting way. Matched to the question is a suggested way of answering—one that's accurate and legally safe—and an example of how not to say it, along with an explanation of why. On the CD-ROM, you'll find audio clips of exchanges between landlords and applicants illustrating similar common conversations.

8. Put it in writing and keep good records

There's no way you could get through this list, written by a lawyer, without encountering that supremely lawyer-like admonition, "Get it in writing!" Why is this important? A paper trail accomplishes two desired ends:

• First, by using the worksheets, letters, and checklists in this book, you'll be steered towards the legally safe path. If you follow the directions, it's unlikely that you'll stray. For example, a letter informing an applicant that he's been rejected due to information on a credit report needs to include specific legal information—and should avoid certain topics. By using the adverse action letter included on the book's CD-ROM, and entering only the information relevant to the applicant, you're covered.
• Second, written documents are hard evidence that you followed the law. If you're ever challenged, you won't need to rely on "he said, I said" evidence. Instead, your filing cabinet full of completed letters and notes of conversations will be admissible evidence in your favor. In particular, the Tenant Information Sheet, a master document for each applicant where you record relevant information you find along the screening path, will show your methodical process and business-like conclusions. Even the files for applicants who dropped out will be helpful evidence, for they will establish that you regularly do business in a legally compliant way.

The chapters in this book that involve step-by-step decision making, and communications with applicants and tenants, have corresponding forms that help you accomplish the tasks. At the start of each chapter, you'll see a sidebar "Landlord's Forms Library," which lists them and gives a brief description of each along with record-keeping advice.

9. Screen all occupants and roommates

When you're renting a unit to more than one tenant, whether it's a husband and wife or a group of unrelated roommates, you may be tempted to screen only one (or two) of the applicants. Or, when an existing tenant wants to bring in a replacement roommate or add a roommate, you may skip the screening, counting on the steadiness of your existing tenant. Failing to thoroughly screen everyone who will live in your rental is a mistake for two reasons:

• First, you're potentially depriving yourself of a source of the rent. Any person who lives on the property can be expected to pay the full rent (how the roommates share the rent is up to them, not you). Practically speaking, you won't often insist that each roommate be able to shoulder the entire rent, since people live together precisely in order to share expenses. But if you don't know anything about a tenant's finances, you're limiting yourself to the residents who you have screened. Suppose the screened resident falls on hard times, and his unscreened roommate is unemployed and broke? You have no choice but to terminate the tenancy of both of them. Far better to determine at the outset that the second resident is at least as solvent as the original tenant.
• Second, an unscreened tenant imperils the tenancy in other matters besides the rent. If the unscreened tenant causes problems and leaves, or is asked to leave by you, that will be the end of the tenancy for everyone (unless existing tenants can cover the rent or come up with a suitable replacement). Now you've got another vacancy. No matter how earnestly your existing tenants vouch for the newcomer, nothing will be lost by checking him or her out.

10. Get professional help or advice when you need it

Though there's a lot you can do yourself, it's the wise person who knows when to call for reinforcements. In particular, you may want the advice of a local landlords' association for help on issues that have practical solutions known by experienced landlords (if you've decided to use a tenant-screening firm, an association may know which outfits deliver the most accurate information, for instance). You may want to consult with a local attorney who's well-versed in landlord-tenant law if you're unclear on how to implement a particular state law or local ordinance. And, certainly, if you're sued, you'll want to engage an attorney for all but the most minor small claims court matters.

How to use the Landlord's Forms Library

This book includes over 40 forms—worksheets, letters, and checklists—designed to help you organize your thoughts and actions and record your conclusions (or send communications) in a legally safe manner. Your Rental Kit, for example, includes the forms that you'll give to applicants who want to fill out your rental application. You'll find a handy list at the start of each chapter, with filled-in samples of each form in the text and copies on the CD-ROM included with this book.

Each form appears on the CD in an .rtf format, which you can edit and fill in using the word processor on your computer. You can also save each completed form to your hard drive. The .rtf file format allows you to adapt the forms to your own situation. You can add or delete language, adjust margins, and print on your own letterhead.

A few tips on using the forms on the CD-ROM:

• Always review the sample form and instructions in the text.
• You can edit the forms according to your specific situation, but if you make major substantive changes, particularly to letters sent to applicants and tenants, it's a good idea to have your lawyer review them.
• When modifying the forms, delete bracketed and italicized prompts next to blank lines (such as "[ tenant]" at the beginning of a letter), and just type in the information that's called for.
• If you add a lot of material, you will probably have to work with the margins and layout to make the form fit nicely on your sheet.

Be sure to sign and date every letter, and keep copies of each form for your records. (The icon at the end of each Landlord's Forms Library sidebar tells you how.) If you communicate via email, consider printing a hard copy or, if you're averse to using paper, be sure that your hard drive is backed up regularly.

Finally, your careful documentation of rental decisions and communications needs to be organized and stored. Some documents you'll hope never to need to look at again (like letters to rejected applicants), but others will be useful in the future when it's time to re-rent. For example, having asked prospects to note on their applications how they heard about your vacancy, you'll learn what advertising methods reached the most people. When you look at the pool of qualified applicants, you'll learn further which methods reached the most qualified applicants. This information will guide you the next time this unit becomes vacant—and you'll want to have it at your fingertips. Set up a recordkeeping system for filing your papers like that described in the next section, or devise one that works for you.

Why good record keeping is so important—and how to do it

Organize the paperwork generated by your renting efforts by property. For example, if you own one duplex, you'll have two main sets of files, perhaps separated into filing drawers (one for each rental). Follow this sequence every time you re-rent.

Make a new marketing folder every time you begin re-renting efforts

For example, suppose one half of your duplex at 123A First Street becomes vacant and you begin your renting efforts in January 200X. In your cabinet drawer for that property, you'll start a new hanging file, "January 200X Tenant Search." You'll put the worksheets, ad copy, and all the other forms you use from this book in that file (using folders as needed) as you advertise and show that rental.

Create a file for applications you receive for this property

Continuing the above example, label another hanging file "January 200X Applications." Here, for every applicant, you'll paper clip together the Tenant Information Sheet (a master document where you record contact information for the applicant and make notes of conversations, meetings, and results of each screening step), the rental application, the credit report and your review, and any other papers associated with evaluating this prospect. The final paper will be your acceptance (or conditional acceptance) letter, or a rejection letter (for those to whom you must send written rejections). If you find that this file is getting too big (perhaps you're evaluating several prospects), you can make folders for each, as shown in the illustration below (stagger the file tabs so that when you look at the lineup of files, it's clear that all of them relate to the same renting effort). If you're considering an application from several proposed roommates, clip each roommate's rental application, credit report, and so on together, and put all of these bundles together in one file (labeled "John Anderson et al" or something similar).

Make a file for your chosen tenants

Label this with the names of the tenants and when their tenancy began, such as, "John and Mary Jones, March 200X." You can move the Jones application materials into this file, so that information they supplied on the Tenant Information Sheet (such as an emergency contact) is easily accessible. Following the application documents, you'll add the lease or rental agreement, a checklist documenting the condition of the property prior to their moving in, and so on. This file will eventually include any letters or notices you've sent each other, amendments to the rental document, and requests for repairs and will end with the end-of-tenancy walk-through that you should do in order to fairly assess any damage or excessive wear and tear (hopefully, it will not end with your termination notice!).

How long should you keep these files? The Landlord's Forms Library at the start of each chapter recommends how long to keep different forms. To defend against a fair housing claim, you'll need them for three years at least, and it's wise to keep them longer. However, you'll need to follow special procedures when it comes to keeping credit reports, as explained in Chapter 11.

Rental Documents Filing System chart omitted for online sample chapter.

Icons used in this book