Beyond The Deposit: Alternate Strategies To Protect Your Property Investment

Real Estate

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With all the protection incentives being offered to building owners by property management companies today, it’s starting to become difficult to decide what truly adds value and what is just fluff. From rent guarantees to renter’s insurance, from first and last month’s rent to a traditional deposit, from a pet deposit to monthly pet rent, navigating all the options is similar to trying to pick your favorite coffee creamer in a sea of options in the supermarket. It leaves you screaming, “I just want French vanilla!” Options can be good, but one too many can leave you more frustrated and confused and choosing what is most convenient at the moment versus what is the most effective at protecting your investment. I have to wonder, is more always better? In my experience, the answer is not necessarily.

With any investment property, the first questions you must answer are what is my market and my demographic and what am I realistically able to charge? For more expensive properties in higher-end markets, it’s not unusual to change first month’s rent, last month’s rent and a deposit, plus any other pet deposits that may apply. It’s also not unreasonable to require renter’s insurance. This makes sense since the cost to replace damaged granite countertops or the entire master bedroom carpet would eat away at that deposit quite rapidly. However, when dealing with less expensive investments, it is not likely that charging first month’s rent, last month’s rent and a deposit will work. For many people, having that kind of upfront payment on hand is rare.

That’s why strategies for being creative for all parties, while still protecting your property, need to be established. Here are some ideas that may be suitable options.

First month’s rent, deposit and a higher income or credit score: As a great all-around option that ensures both parties are able to perform, eliminating the last month’s rent takes a hefty amount of the financial burden off of the tenant while still giving the owner a reasonable amount of recourse. A higher income-to-rent ratio and higher credit score is a good indicator of a responsible tenant. It can also provide the owner with more confidence if a garnishment needs to be initiated. As the owner, if you are still uncomfortable and feel you need more protection, consider having the applicant get a cosigner.

Thorough background check, credit check and reference check: One of the simplest ways to feel more assured about a new tenant is to require a detailed background check. These should cover previous evictions and felonies. Looking at a potential tenant’s credit score enables a detailed perspective on how their credit is being handled. Debt such as student loans or medical bills, if not outrageously excessive or past due, may be worth considering less of a red flag. However, past due cell phone bills, previous utility bills and same-day, high interest loans are typically warning signs. Reference checks with current and past employers are also solid avenues to collect reliable insight to the person applying. Avoid friends and family for obvious reasons.

Regular inspections: By far the most effective way to ensure that your property is being kept up to par is by inspecting it regularly. Far too many property managers assume that after one year in a property, the deposit will be sufficient to cover any and all damage beyond wear and tear. Even in higher-end properties, unfortunately, this is rarely the case. Nothing is worse than walking into a situation that could have been prevented by a simple walkthrough. Of course, you don’t want to be at the property more then you have to, so establishing a realistic number of inspections throughout the tenant’s lease term is important to maintain the tenant’s privacy and ensure the property is being kept up. Quarterly inspections are reasonable. Keep in mind these are not meant to be overly invasive. Usually, a 10-minute tour both inside and outside can give you all the information you will need.

Consider all your options to make sure you pick the formula that works best for your property. Just because you are offered more doesn’t always mean it fits for the area or demographic. In fact, certain options may actually price you out of your respective market and keep your vacancies higher. It’s crucial to understand your market and make sure you or your property manager is able to adjust. And once you decide on criteria, you must be consistent and unbiased to all parties who apply, as fair housing guidelines will require that.

In a world full of options, most of the time the simple approach of good credit requirements, reference checks and quarterly inspections goes just as far as the plethora of options that may be offered. Tenants are able to rent and not feel strained, and owners are able to have more peace of mind — truly a win-win.

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