The Four-Letter Word No One Is Saying S-A-V-E!
By Mercedes Shaffer Published in AOA Magazine November 2020
This year, more than ever, having great tenants who pay rent on time is golden. If you have tenants whose income was affected by COVID-19 and who are not paying rent, or who have chosen to use the current crisis as a cover and decided not to pay rent, 2020 has probably been a frustrating and challenging economic year for you.
At the onset of the epidemic, the government shut down businesses and schools and only services that were deemed “essential” were allowed to remain open. At the top of the government’s list of essential businesses were certain medical services, food suppliers and housing providers. Despite being an essential industry, real estate is seeing unprecedented tenant protections, and has taken away more of the landlord’s control. Tenants have gained additional protection from eviction if they can’t pay rent due to loss of income caused by the pandemic, leaving some landlords carrying the financial burden.
Is It Okay To Spend on Non-Essentials If You Can’t Afford To Pay Rent?
As we approach the holiday season, the message to spend is everywhere. SAVE is an unsexy 4-letter word that no one wants to hear. There are advertisements everywhere as marketing experts try to convince us that there are so many things that we can’t live without, but is anyone mandating that people pay for the “essentials” such as food and shelter, before they spend on the non-essentials? Neither the government nor the private sector is encouraging a measured approach and recommending a sizeable cash reserve to help weather likely future crises. Consumerism is encouraged as a means to drive the economy. It’s like encouraging people to press on the gas, but not pay attention to how much fuel is in the tank. It’s up to individuals to prioritize their spending and manage their finances, so will people prioritize paying for shelter, healthcare, and food before non-essentials such as entertainment and material comforts?
How to Select a Qualified Tenant
If you own investment property, you understand what it means to save and to plan for your future, and if you took a loan out to purchase your rental property, the banks made sure you had the financial reserves to qualify for your loan. The banks used to be more lenient about extending credit, but after the mortgage crisis and stricter regulation, they require higher down payments, a closer look at credit score, a larger amount of savings and a higher income to loan ratio. These measures are designed to decrease the likelihood of defaulting on a loan.
As a landlord, you can do the same thing when selecting a tenant. When screening prospective tenants, it’s important to have a written form that outlines the minimum standards for qualifying and to give this to interested rental applicants ahead of time. A consistent standard helps landlords minimize the risk of claims of discrimination, and helps make evaluating candidates more straight forward. You can create your own form or the AOA provides one free to members.
Just like the banks, if you want to minimize the likelihood of a tenant not being able to fulfill their lease agreement, you can require a high standard to qualify. You need to determine the minimum credit score, savings amount and combined income to rent ratio.
This higher requirement may cost you some prospective tenants who had great personalities, but the end of the day, you’re looking for a tenant who is reliable and responsible, you’re not looking for a friend.
Here’s an example of minimum qualification for tenants:
· Credit Score of 650 or higher
· Savings equivalent to at least 6 months’ worth of rent
· Household income that is at least 2 ½ times the rent
· Proof that your rent is paid up to date at your current residence
· No history of evictions
· Favorable references
To some these standards may seem high, but if you take pride in providing excellent service to your tenants and providing them with clean, safe, housing - in return it is reasonable to expect them to take care of the property and pay rent on time. Can Landlords Help Create A Society That Saves?
In addition to assuring that a tenant qualifies financially, you can require the maximum deposit legally allowable, which is the equivalent of 2 months’ worth of rent if the rental is unfurnished or 3 months’ worth of rent if the unit is furnished. Customarily, landlords ask for about one month’s worth of rent for a deposit, in part because it is difficult to find a renter who is capable of putting down two months of rent in advance. When considering the cost of the home you are providing for your tenant, not to mention taxes, insurance and maintenance fees, the deposit is a very small fraction of the cost of housing. Finding a qualified tenant is not an easy task and it’s costly to leave a unit vacant. However, if the majority of landlords implement more stringent requirements to qualify to rent, just like the banks have done when determining criteria to qualify for a loan, then perhaps landlords can help create a culture that SAVES, so that it’s not the landlord who is left carrying the financial burden when unforeseen circumstances such as losing a job occurs. Tis the season for spending, but we are seeing that life in unpredictable and it’s important to save for a rainy day! There’s no sense in having a new leased car and the latest flatscreen TV if your credit is wrecked and you have nowhere to keep them. Tis the season to SAVE.
Mercedes Shaffer is an agent with Pacific Sotheby's International Realty and specializes in investment real estate and 1031 Exchanges. For help with buying or selling an investment property, Mercedes can be reached by phone at 714.330.9999, by email at InvestingInTheOC@gmail.com or visit her website at www.InvestingInTheOC.com. DRE 02114448