Most people consider the decade of 2000 to 2010 as the lost decade of the stock market.  Most persons who invested actively during that time essentially made nothing, and in most cases even lost money.

For this reason, rental property offers a good opportunity for diversification.  For example, my current house on Broadmoor has cost me just under $60K and I will rent it for $800 per month.  If you figure 2 months of your income each year is for insurance and taxes that should leave me with a yearly return of $8K which is just over 13%.  Any stock trader or mutual fund manager would certainly love to have that.

However, the reason so many people avoid rental property is the headaches that come with it.  If the hot water heater goes out on Saturday morning, you are going to get a call. Or if a toilet stops up at midnight, you might get a call.  Plus there is always the possibility of problems collecting the rent or the tenants doing damage to the property.

While there is usually no fool proof method for finding good renters, I highly recommend doing your homework upfront.  First, always ask for an application fee.  This will help make sure that the applicants are serious about your property.  Also, you really should run a background check on applicants.  There are many ways to do that, but the online company I use is called ZIP reports.  For around $25 you can get a list of prior addresses, criminal background checks, and also credit reports.  You cannot get a copy of their credit report if you are an individual, however, you can call and a representative will review it with you.

I personally do not look for perfect credit.  Let’s face it, many people rent because they do not have perfect credit. However, I do verify rental history from their past landlord(s).  In my opinion, if that is okay it means a lot, because my theory is housing is one of your basic needs so it is going to be paid first each month in many cases.

The other thing in renting is that you should get a large deposit, usually near the same amount as the monthly rent, but a slightly different amount so there is no confusion when it is paid.  If I am charging rent of $800 per month, I would probably get a deposit of $775.  Also, I usually charge a pet fee of at least $100 per pet – this is non-refundable.  Pets can be hard on your property.

Once you get a good person in your house, my last advice is do not raise the rent unless you absolutely have to.  In the rental business if you get tenants staying more than 1 year, it is gravy.  If you have a revolving door after every 1 year lease, you usually lose a month trying to find a tenant, plus you have to paint, clean, repair, etc.  If they stay more than 1 year, it is a bonus, and you should always try and lock them into another 1 year lease.  If they insist on going month to month after one year, I would then suggest raising the rent 10% for that convenience.  Good luck out there!