The Rental Rule of Three

I have many landlords ask me about how we keep our rental properties full and running smoothly.  No doubt, keeping a rental operating trouble-free can be a challenge at times.  However, my experience has taught me that most of the problems can be avoided at one critical junction in the property management process.

Most landlords think that vacancy is their biggest challenge.  While vacancy certainly takes the 'income' out of income property, this focus on vacancy often leads to rash decision making when it come to tenant screening.  These hasty decisions often lead to property damage, unpaid rents, and expensive evictions.

To avoid these pitfalls, I follow a hard and fast rule on my rental properties.  To qualify to rent, all of my tenants must have a verifiable monthly household income (i.e. social security payments, salary, commission, child support, etc.) that is at least three times the monthly rent amount.  So, if I want rents of $900 per month, my tenants would need to earn at last $2,700 per month to qualify.  The math is pretty simple.

While this rule is not a guarantee of perfect performance, following this guideline avoids many of the problems created by ignoring natural economic laws.  In today's economy, people can afford to pay about 1/3rd of their income to housing.  However, I have seen situations where tenants pay half of their income towards rent.  When I interview landlords about how things are going with these tenants, inevitably they admit they receive rents late, that the tenants have vacated early and unannounced, or there is some other ongoing and time consuming crises.  

While the tenant may technically owe the landlord what is due in the lease agreement, collecting on debts from broken leases is a tedious exercise at best.  After all, you can't bleed a turnip.  I have found it is better policy to help tenants avoid placing themselves in such undesirable situations...especially when the outcome is very predictable.  Everyone benefits when this is the case.

So what does a landlord do if everyone who applies to rent cannot meet the Rule of Three criteria?  In these cases, I have found that it means the rents are too high.  I have often lowered rents to accommodate this rule and make sure my tenants have enough wiggle room to pay rents even if they get sick or have a financial setback.  The last thing I want is a flu to put them permanently behind on rents and ultimately usher in their early departure.

So, if you are a landlord looking for some guidance on how to run your income property business, the Rule of Three is an important and wise place to start.

Otherwise, if you are looking for superior property management services to maintain and protect your income property, CONTACT ME, and lets talk about what we can do for you.