So, you finally found a great property that will work for you, and the keys are in your hands. What a wonderful feeling! Now what? This is where the fun starts! In this module, our expert House Hacking Coach, Jeff White, will guide you through the top six things you must consider before acquiring your first tenant.
This module covers:
- Fair housing laws
- Advertising your property
- Getting your first tenant
- Lease signing
- Moving in and property management
- Order the book on Amazon or grab a copy from us
- Listen to episode “#215: UHHG – #12 Just Closed On Your House Hack, Now What?” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom.)
- Read this blog post, which is from the book.
Fair Housing Laws
It’s important for you to understand and abide by applicable federal, state and local fair housing laws in order to run a compliant real estate business. Disclaimer: The advice in this module is NOT legal advice. Always consult with the appropriate professional.
The Basics of Fair Housing Laws
- Federal laws are in place that grant fair housing protections to renters from being discriminated against when applying for housing. The federal law prohibits discrimination against an applicant based on their race, color, religion, gender, national origin, familial status, or physical or mental disability.
- State and Local law – Each may have additional protected classes; for example, veteran or military status, criminal history, gender identity expression, etc. You need to be aware of these classes for each city and county you have a property in.
- “Mrs. Murphy” Exemption – This exemption provides that, if you are living in a property as your primary residence with four or fewer rental units, that property is exempt from the Fair Housing Act. “Mrs. Murphy” is the hypothetical elderly widow who is supplementing her limited income by renting a portion of her home and has a say in who she chooses as her tenant(s). Keep in mind, the exemption does not apply to rental advertising.
- Example: If a 25-year-old female was house hacking and only wanted other female roommates or only roommates who were around her same age, she could deny any male applicants who were 40+ years old, and she would be within her rights. She would not be violating any Fair Housing Laws.
- Remember, the information given does not constitute legal advice. You should talk to a lawyer and make sure that the “Mrs. Murphy” exemption is recognized in the city or county you will be residing in before you exercise it.
- If you are a real estate professional or own multiple properties, there may be some additional stipulations for this exemption as well.
Advertising Your Property
Once you are familiar with the Fair Housing Laws for your specific city and county, you are ready to create an advertisement to fill the vacancy. Properly marketing your rental property is an important part of finding reliable and high-quality tenants. Without good advertising, it’s difficult to generate enough interest in your rental, and the longer a rental property sits empty, the more you lose.
The 3 Key Elements of a Good Property Advertisement:
- Pictures are valuable
- Renters look at pictures first before reading an entire listing. Having five to ten high-quality pictures goes a long way because they can justify a higher rent price, which can help you rent your unit faster.
- Don’t hold back from light staging (artwork, area rugs, accessories, etc.) because empty units can take longer to rent. The more you can convey a sense of an inviting home, the more interest you get and the faster you will rent the property.
- Consider hiring a professional real estate photographer to take pictures for you because it ensures the absolute best quality since their wide-angle lens will be able to capture more of the space and details.
- If permission is granted, use the pictures from the listing. You must get permission from the listing agent and/or seller to use the photos so you don’t violate any copyright issues.
- Effective Property Description
- Keep the property description short and sweet (1-2 short paragraphs) in order to significantly increase the amount of inquiries. The goal is to get prospects to engage!
- Include descriptive information renters immediately want to know about the property. Mention appealing amenities, available date and highlights of what’s nearby like schools, restaurants, shops, parks, etc.
- Check out other listings to see what seasoned landlords and property managers are highlighting—and what they are leaving out. People are looking for a place to call home, so eliminate anything that doesn’t entice the prospect to want to reach out.
- Your number-one goal is to attract the most prospective tenants.
- Advertising Your Property
- The more exposure the better! There are many listing platforms available on the market, so how will you know where to spend your time? Consider trying the options listed below. Remember, the more inquiries you can get, the better your pool for screening and finding a high-quality tenant.
- Facebook Marketplace is my top recommendation because it expands your reach and puts your unit in front of more potential tenants than industry websites alone. In my experience, it has rendered the most interest with the least amount of work.
- Zillow is the highest rated rental listing site, and it also posts to Trulia and HotPads, creating a huge opportunity for visibility and more exposure.
- Room rental platforms such as Roomster, Roomies and Cozy.co are great for finding a roommate.
- Avoid Craigslist! There are too many risks for landlords these days. It used to be decent, but not anymore. It’s overrun by scammers.
Getting Your First Tenant
Ok, so the text messages, phone calls and social media messages are rolling in because you have an amazing advertisement that has attracted lots of interest. Congrats! How do you decide which tenant to rent to? It’s too soon to know, but so far, you’re on the right track.
Four important steps to ensure a smooth rental process:
- Showing Your Property to Potential Tenants
- The best times to schedule a showing are evenings (after work) on weekdays, and 12pm-2pm or 1pm-3pm on weekends. Be flexible for those who may work nights or weekends.
- Don’t post your property and postpone showings until five days later; you will lose highly-motivated applicants.
- Group Showing vs. Individual Showings – Don’t waste your time with individual showings (one time slot per person). Schedule 10-15 people in a two-hour window since you will experience a high “no show” rate—about 50%, even with confirmation.
- If you have more than one prospective tenant at the showing, it creates a sense of urgency to fill out an application because they will see other people are interested too.
- Tenant & Credit Screening to Protect Your Property
- Reduce your liabilities by uncovering criminal history of property damage, violent offenses and other serious crimes that can be a risk to your property and your tenants by carefully screening prospective tenants carefully.
- Avoid any question of discrimination if all your applicants use the same third-party system to apply.
- There are some great websites that will take care of the screening process for you, and you get to set the standards for what you use to accept/not accept.
I use and recommend Cozy.co because it reveals bankruptcies, sex offender lists, evictions, judgements, etc. It also performs soft credit pulls, so it won’t mess up any lending qualifications for future tenants.
- Application Fee – By using Cozy.co, the application fee is paid to a third-party system, so you won’t have to worry about potential tenants wondering if you made money on their application because landlords are removed from the process.
- Cozy.co emails you letting you know that it has completed the application, and you get results within minutes.
- Assessing a tenant’s ability to effectively pay the rent, aka underwriting
- Never overlook or rush this step just to fill a vacancy; it’s a worthwhile step.
- Have a diligent underwriting process, even if it takes a little more time upfront to land a qualified tenant. Check judgements, ensure they have a 3x rent-to-income ratio, verify paystubs, call at least two prior landlords, and ask questions to help you make a better-informed decision.
- Ask every landlord the same questions. References from past landlords are more forthcoming and can indicate how the potential tenant might treat your property, if they will pay their rent on-time and the likelihood of receiving noise complaints from neighbors, etc.
- When it comes to hard financial times (much like the pandemic we are currently in), it’s the landlords who took the time to underwrite their tenants properly who will be sleeping easy because their tenants were able to pay rent.
- Accepting or Rejecting a Prospective Tenant
- As a landlord, you have the freedom to choose the “most qualified applicant.” If you have two very qualified tenants, make your choice on a first-come-first-serve basis to save yourself from any discrimination claims.
- You must tell the prospective tenant why they did or didn’t get approved for the property via email or a written letter (no text or phone calls). As long as the reason for rejection is legitimate and meets Federal Fair Housing Guidelines, you can say “no” to the applicants that you won’t be accepting.
- Remember to always keep correspondence in writing.
- For highly qualified applicants who didn’t quite make the cut, gently decline the applicant with the following example: “Thank you for applying, we’ve accepted someone who is a little better fit for the unit, but if we have another property become available, we will let you know as you were a highly-qualified prospective tenant.”
Hire an attorney to draft a good, strong lease for you. Avoid quick one-pagers or a generic lease you found on the internet that may not factor in local and city laws or critical clauses. You need to protect yourself, and it’s always better to have a lease that covers too much rather than not enough. If things go south with a tenant, the lease is what will help you get the non-compliant tenant out and save you from lawsuits.
Consider these five main concepts to avoid pitfalls
- Lease Structure
- Be extremely specific about the space intended for the tenant and where they can/can’t put their stuff (rooms, common areas, storage spaces, garage, whole unit, etc.). To avoid disputes, it is better to be more detailed than vague. Mention that drawers will be assigned and labeled in the kitchen and bathrooms if you rent by the room.
- Setting House Rules
- Include detailed house rules like quiet hours, lawn care, guests, smoking, etc. Include designations, like who is responsible for lawncare, snow removal, trash, etc. When you have a strong, detailed lease, you won’t be seen as the “bad guy” if you have to evict a tenant for violating the lease or any of its provisions.
- Print the house rules on a separate document making it easy for them to refer to it since most people never read the lease thoroughly. This gives you a chance to emphasize the importance of the house rules.
- Start with a Shorter Lease Length
- Start with a six-month lease and include a security deposit amount. Sometimes, shorter can be better when renting room-by-room as it gives you a “test drive” or a “feel” for the other person before committing to a one- or two-year lease and vice versa for the tenant.
- In Colorado, it’s in your best interest to end a lease between April and September as that is the prime time for people moving, which gives you the best chance to quickly replace a tenant with a new one and avoid any vacancy. When leases end in the middle of winter or around holidays, it takes longer to rent or lower prices to fill vacancies.
- In-Depth Lease Signing Appointment
- Go over the entire lease thoroughly. Read every word and re-emphasize addendums such as drug use and tobacco, which will set expectations upfront and avoid misunderstandings. Be clear about the boundaries and expectations of the guest policy. Also, be upfront about enforcing these boundaries.
- Breaking the lease is a serious matter, so avoid this sticky situation by discussing clauses and how failure to comply can be grounds for eviction.
- Separating Out Utilities
- Using the bill-back method may seem easy enough but avoid it because it can lead to unnecessary disputes about how much a tenant feels they should pay this month vs. the previous month. Here’s an example of how bill-back could backfire: “I wasn’t here half of the month; I shouldn’t pay for a whole month,” or, “I know tenant A uses the internet way more than I do; they should pay more.”
- Include utility charges in the rent by adding up all charges and dividing them by room or square footage.
Moving in and Property Management
Now that you have a qualified tenant, it’s time to move them into the property. There are a few practices that will help you manage roommate situations effectively and avoid common headaches if you put in the work upfront. The goal is to set the expectation from day one that your property is a clean, functional, inviting and modern living space, and you plan to keep it that way.
Why You Should Furnish Your Rental Property
- Easy Tenant Turnover
- Functional furniture gets the most out of common spaces, and tenant turnover becomes effortless because all they need to pack up are their belongings from their room, fridge and bathroom. You can find affordable, functional furniture from Ikea, American Furniture Warehouse, and my personal favorite, Facebook Marketplace. Keep it simple and not too comfortable (no super comfy couch, a big screen TV and Xbox). The last thing you want is several guests in your property partying or lounging around taking over all the common areas.
- Promotes Peaceful Communal Living
- Providing furniture such as a kitchen table, chairs, bar stools, couches, end tables, etc. makes your new tenant feel right at home, and you won’t have to worry about the clutter of extra couches and chairs.
- Avoid the struggles and confusion of separate kitchen utensils, pots and pans, plates, cups, silverware, etc. by providing basic kitchen necessities.
- The refrigerator space doesn’t have to be confusing to navigate, simply divide the space out by assigning individual shelves for tenant’s food. Designate the door as communal space.
Six Property Management Tips to Save Time (and headaches)
Whether you are managing your own property or having someone else manage it for you, there are a lot of things that need to be decided on to set yourself up for long-term success. This is not an easy process but has rewards that can contribute to building long-term wealth.
- Collecting Rent Payments
- Always have documented transactions. Accepting payments in cash is ok, but you need a clear paper trail for every payment received. This is ultimately important when you go to qualify for a new loan. The lender will need to see how, when and the amount of collected rent documented.
- Get the assurance of compliance and security with mobile applications like Venmo, Zelle and PayPal—they will be your new best friends. When you collect rent using Cozy.co, payments will be transferred directly to your bank account, and if you don’t receive payment on the day you specify, they’ll let your tenant know and automatically add a late fee to encourage payments on-time—no need to knock on doors or have to follow-up.
- Establish Office Hours
- Set the expectations up front because there isn’t much you can do about a clogged toilet at midnight. Choose your availability by setting reasonable office hours to eliminate late-night phone calls for non-emergency issues.
- Managing Landlord-Roommate Relationship
- People may have less than ideal experiences with landlords, so if they’re living in your property, should you tell them you’re the owner? It’s up to you, but I suggest for you to be honest and up front. Plenty of landlords make it work either way.
- The advantages of being a live-in-landlord is that you’re seen as an authoritative figure, not their friend. Tenants are more likely to refrain from property damage and noise violations, and you’ll have the ability to settle disputes quickly. Communication is key. Always refer to the lease when resolving issues.
- Property Upgrades
- One important goal is to get top dollar for your property, so upgrading to meet modern standards is encouraged, but keep in mind, there’s a major difference between a House Hack vs. Your Dream Property—a HUGE difference. Don’t renovate your rental as if it were your dream home.
- Renters want a comfortable, functional, clean and safe place to live. Renters don’t care about stainless steel appliances, marble countertops or pricy light fixtures, so don’t waste money on luxurious upgrades.
- What should you improve to add the most value? Low-key landscaping is important to attract tenants and sets the tone for the inside of the property. Dead grass and overgrown weeds are unappealing. Kitchens are often the focal point of and can improve the value of your property. Upgrading a kitchen can cost anywhere from 5-20k. Remember, tenants don’t care about fancy appliances, backsplashes or cabinets. Adding bedrooms/bathrooms increases your rental income because it’ll attract more potential tenants, and it boosts the value of your property, making it a great return on investment long-term.
- Hiring Contractors
- Generally, contractors are not hard to find. When your property needs repairs outside of your scope of expertise or you don’t have time on your hands, I recommend asking for personal recommendations from close friends, other investors and inspectors.
- Licensed Vs. Non-Licensed: The purpose of contractor licensing is to ultimately reduce liability for homeowners and increase legitimacy of the work, even if they are more expensive. Typically, unlicensed contractors charge less because they avoid worker’s compensation and liability insurance requirements.
- If you choose to do the work yourself, you’ll avoid paying for a contractor, but there is an opportunity cost involved since you’re sacrificing your free time.
- Self-Manage Vs. Property Manager
- Self-managing a property is a large undertaking, but if you have the time on your hands, it yields a higher profit margin since you will not have to spend your earnings on management expenses. Just make sure to include a 10% property management (PM) fee in your numbers—you don’t want to self-manage forever.
- If you are a full-time employee or work two jobs, you may not have time for routine maintenance, responding to repair requests, lockouts or managing vacancies. It may be worth leaving management duties to an experienced property manager. The goal for every investor should be to have someone else manage their property.
Like most topics we have covered in this course, the process of finding, screening and managing your own tenants is a personal choice that you will have to make. You will need to weigh the pros and cons to determine the best course of action for your individual situation.
Most importantly, make sure you have the dedication to the underwriting process so that you can form productive habits, set good expectations and set yourself up for success long-term.
Jeff is an avid house hacker and helps other investors and house hackers run their properties. He offers coaching sessions to get started, how to run a house hack efficiently and can answer any operation questions. All of our clients receive a complimentary session with Jeff once we close on a house hack property.
If you have more questions about how to run a quality house hack or want to connect with Jeff, please email him at firstname.lastname@example.org
House hackers who work with Chris and his team to buy an investment property receive a copy of our house hacking lease for free and a complimentary consulting package with Jeff to help with leasing.
YouTube Video: Just Closed On Your House Hack, Now What?