When I first began to invest in real estate, I was only interested in wholesaling and rehabbing. But a few rentals presented themselves when I was not looking for them and I ended up using whatever lease I could find to use. After all, these types of deals were not desirable to me at the time. I did not want to deal with the hassles or face the fear of paying a note that the tenant should be paying for me. But someone gave me a great tip that would eventually eliminate that fear.
I learned about “Rent Credits” and this was the very first time that I’ve ever heard of them. Even when I rented from a landlord, none offered such a thing. But they really do work. As an example… I had a 3 bedroom, two bath house that I wanted to rent. I learned that comparable rentals were going for $900 to $1050 a month. So I chose the middle road and decided $950 was fair. Applicants who viewed the property were told the rent was $975 a month with a $25 a month rent credit if the rent was paid by the 5th of the month. The term “late fee” is never mentioned anywhere in the lease. The approved tenants were never late. In all of my leases, I used this clause and it works flawlessly with the tenants. I think that, psychologically speaking, being rewarded is more positive and accepted than being punished. Everyone loves to save money! And that, in return, means being paid on time.
So there are other advantages to using this clause. I have been told that judges will sometimes throw out late fees. So this clause can eliminate that possibility. The rent is $975 a month. If they paid by the 5th, they could deduct $25 and write the check for $950. If they paid after the 5th, the full amount of rent would be due. It’s simple. Also, when it comes time to refinance the property, this clause will help increase your pocketbook. You see most appraisers and loan officers do not read an entire lease. The bottom line is they want to verify the rent amount. So on the first page of my leases, the full amount of rent due each month is listed. Somewhere on page 4 or 5, the rent credit is listed but is usually unnoticed by appraisers and loan officers. Appraisers usually use three methods to determine ‘fair market value’. The first is to locate ‘Comparables’ – buildings that are very similar to one another in shape and condition. The second is determining ‘Cost’ – if the building were to burn down today, what would the cost be to rebuild it? And third, they would be required to determine ‘Income’ – total the rents, subtract the expenses and determine value from the stream of income. The rule is that typically, for every dollar rents are increased, the value of the property is increased by $100. So you can see where, in the case of refinancing, the appraisal should return higher than it would, based on Income.
This is just one tip of many that I will publish in the near future for you. I hope this one will be of great help to you. If you found value in this post, please comment on our facebook page! Feel free to ‘Like’ and ‘Share’!
About the Author – Troy Ross – Mr. Ross has invested in real estate for several years and is one of the founders of the largest real estate investor association in Central Virginia. He is also one of the partners in ownership of the PCFC Group, LLC.