June 25, 2018
3 Minute Read
By investing in a rental property, you can build wealth and fund a comfortable retirement. But suitable, bargain-priced rental properties that will result in positive cash flow can be hard to come by, and not every investor is willing or able to put in the effort required to rehab a fixer-upper. You could hire a contractor to fix up your investment property, but that’s an additional cost.
Some investors try trading work for rent with their tenants. The way it works is you offer your tenant reduced or free rent in exchange for work on the home at their expense and with their labor. With the right tenants, this can be a win-win approach. Here are the things to keep in mind to make this arrangement successful:
Trading work for rent takes time and planning to function properly. But, this arrangement can be well worth it for both the landlord and tenant. The tenant gets to live rent-free for a while, and the landlord gets a more attractive and valuable property.
Find a property that tenants can move into right away with no safety hazards or appliances that don’t work. This way you don’t have to put in work ahead of time, and your tenant doesn’t have to pay rent to live somewhere else while they work on your property. A property that needs substantial cosmetic work but is basically sound and in livable condition is what you want.
Verify that your new tenants know how to do the work required and that they are physically able to do the work. You need tenants who can tackle the physical tasks without injuring themselves. Be sure to include your needs in your rental listing, and use the screening process to verify applicants are experienced and suited to the tasks at hand.
People interested in this sort of arrangement are attracted by the idea of paying little to no rent. However, the right tenants for this type of project will be those who see it as an opportunity to save on rent — perhaps they’re saving for a down payment on a home — but have the money for materials to do the work you need. When labor is the major cost factor, this type of arrangement can work well for both parties.
Use the same rental screening process you would if you weren’t trading work for rent to be sure that the tenant has the kind of financial stability you’re comfortable with.
Just like you would draw up a clear set of specifications and scope of work for a contractor, you need to do so the same for your tenants. Describe what work you want done, a timeline and the quality of the materials you expect them to use. Put it in writing. You might use contractor estimates for specific jobs and deduct some portion of that from the rent so everyone knows what’s expected. Go over this with your tenant and get their signature on the agreement.
In your agreement, also establish a schedule for performance checks. Make it clear to your tenant that if they fall behind, you will start billing for rent. Be reasonable. Oftentimes during a project like this there are unforeseen issues that can cause delays or even an increase in the scope of the project, so be sure to accommodate for these possibilities and build them into your discussions. Make sure you fully understand what the issues are, and set up clear benchmarks monthly, even if you have to revise them as you go.
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