She called me on the way back from eviction court. The tenants hadn’t shown up for the hearing, and the judge had ruled in her favor. After it was all said and done, they were almost four months behind. But that was not all. The house was going to need about $15K worth of work to be brought back to normal.
My client was driven by the best of intentions. Her tenants had pled with her, and she wanted to work with them, to give them a chance to get back on their feet and in the process, make her whole. In the end, not only did the rent go unpaid, but the tenants had caused substantial damage to the property as well.
Look, life happens. People lose their jobs or face unexpected expenses and they’re unable to pay. Even the best tenant screening process in the world doesn’t screen for events that might happen to your tenants in the future. Even if you underwrite your tenants’ financial situation as if they were applying for a mortgage, losing the main source of income will cause problems for anyone. Financial distress happens, and it will cause problems to even the best of tenants.
However, the financial distress faced by my friend’s clients was not the main cause of the mess my friend faced—the root of the problem was her mismanagement of the property.
Today, I want to share with you two simple rules that you can apply in the management of your rentals that will save you thousands of dollars in unpaid rent and property damage.
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Rule #1: The rent MUST be paid within the month it’s due.
If your tenants are facing financial difficulties, you can work with them within the month the rent is due. You can waive late fees and charges. You can allow them to pay it in installments as long as the rent for that particular month is paid in full by month’s end. If it is not paid by that time, you must give notice to your tenant to pay rent or quit and begin eviction proceedings.
Listen, I’m sure your tenants have very good reason(s) why their payment is late. In fact, in over 15 years of practicing real estate, helping real estate investors acquire and manage rentals, I’ve never encountered a single situation where the tenants didn’t pay rent because they simply didn’t feel like it. There is ALWAYS a story. Often, it’s very emotional and I’m sure you feel very compelled to help.
Here’s the thing, though: The best way for you to help your tenants is by setting clear boundaries and not by allowing them to overstep them. At the end of the day, when you strip all the drama and emotion away, your tenants are either in an untenable situation or in a temporary crunch. If it’s the former, it’s best for everyone if the tenants change their living situation into one that’s better suited to their new financial reality. On the other hand, if it’s the latter, deadlines are critical to make sure that the temporary crunch doesn’t become a new permanent reality.
Related: How I Underwrite Rental Applications to Mitigate High-Risk Tenants
It’s not the investor’s fault that difficult situations arise with their tenants. It IS their fault when they mismanage the situation and let is get out of control. I’ll borrow a Tony Robbins axiom that perfectly illustrates what I’m trying to convey: You get what you tolerate.
The Exception That Proves the Rule
I know the above rule seems a little harsh and one-size-fits-all.
What if a stellar tenant who has been leasing from you for a few years, always paying on time and taking care of the property, suddenly faces financial distress?
When there’s an established track record with a tenant, they have earned some goodwill and leeway. Perhaps they will be able to get things back on track but they need more time than the current month allows. You want to work with the tenant to come up with a payment plan that would allow them to stay in the property and catch up the payments.
For this unique category of tenants, you can make an exception but on one condition. If you decide to put together an installment plan for a tenant, each milestone deadline along the way must be respected. If you allow for one of those deadlines to come and go without the required payment, you’re setting yourself and your tenant up for failure.
Also, a note of caution: Use installment plans that last longer than the current month very sparingly. The tenants in the example I offered at the beginning of this post had lived in the property for over three years. The length of stay in the property alone doesn’t keep disastrous situations from happening.
Rule #2: Inspect your property at least twice a year.
Substantial property damage doesn’t usually happen overnight in a rental property. Instead, it compounds with time. The most important factor that allows the problem to compound is the owner’s/manager’s inattention and lack of presence. If you are going to act as the manager of your own properties, you must inspect your property twice a year. Some of the inspections may not need to be done by you. I know investors who ask their trusted vendors (i.e. A/C person or handyman) to keep an eye on the property when they go make repairs and report back what they find. But you should make your presence felt at least once a year to let the tenants know that you’re paying attention.
If during an inspection you discover issues, you have to address them with your tenants right away in a fair but firm way. One of their obligations in the lease agreement is to take care of the property and report any required repairs in a prompt manner. If they aren’t abiding by those obligations, you should give them a stern warning and ask them to remediate. If they won’t, you’re better off beginning eviction proceedings before problems compound into tens of thousands of dollars.
Lastly, any time you grant a lease extension or make favorable modifications to the lease, you should first inspect the property. It doesn’t make sense to extend the lease term for a tenant who is not taking care of the property in the current term.
Ultimate Rule: Better Tenants = Fewer Management Problems
The ultimate rule to help you reduce bad tenant situations is to lease to better tenants in the first place. Even the best property manager can only play the hand they’re dealt. When you lease to a problematic tenant, you will get problems.
In contrast, when you secure a great tenant, the need for management and the hassle associated with it goes down dramatically. If you want to get better tenants, you must do two things:
- Buy higher quality properties.
- Have a solid tenant screening process.
The quality of the rental property is the largest predictor of tenant quality. When you buy a property in a C, D, or any-of-the-subsequent-letters-that-follow location, you are also making a decision about the types of tenant you will attract and the level of management required for that tenant.
But just because you purchase a higher quality property doesn’t mean that you automatically get great tenants. Your tenant screening process must be more than a simple formality. It is critical to underwrite the tenant’s ability to pay the rent comfortably and the likelihood that they will be a great tenant based on verifications of prior rental and credit history.
In the paragraphs above, I shared two operating rules that can save you thousands of dollars in unpaid rent and property damage when managing your rental properties. If you do apply them and make them part of your property management systems, you will be able to reduce the probability that bad tenant situations become nightmares.
If you want to preempt tenant problems completely, apply the ultimate rule that says better tenants result in fewer management problems and a better rental property ownership experience.
In your experience, does following these two rules result in fewer headaches and less loss of revenue?