These Two Simple Rules Will Save You Thousands in Unpaid Rent & Property Damage

by | BiggerPockets.com

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.

tenant-questions

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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.  

best-tenants

Related: 12 Tenant Nightmare Stories I Swear Are Actually True

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:

  1. Buy higher quality properties.
  2. 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 Conclusion

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?

Comment below!

About Author

Erion Shehaj

Erion Shehaj is the founder of Investing Architect. I help successful professionals design and execute a custom Blueprint Real Estate Investing™ strategy so they can achieve financial independence, retire early and gain the freedom to live the life they always wanted. Side effects might include: Early retirement, wealth and piece of mind. Follow on Twitter if that's your thing.

16 Comments

  1. Cindy Larsen

    Erion Shehaj,

    Great article, and I completely agree with your two rules. In fact, I go a little farther. I set the tenants expectations up front, and in the lease that any rent later than 3 days will result in late fees, and any rent (plus late fees) not caught up by day nine of the month will result in a 20 day notice, so they will be moving out the first of the next month, since they will have violated the lease, and the law in washington state requires only 20 day notice with a broken lease. I also inspect every unit at least 3 times per year, spring, fall, and whenever there is an issue.

    I read every page of the lease with prospective tenants, translating legalese into everyday english and not pulling any punches: this clause means that in this situation, that will happen. it’s part of the screening process. The good tenants have no problem with the clauses designed to protect the landlord, once they understand that there are tenants out there who will do the things we write leases to protect against. They wouldn’t domthose things, of course, but, I explain, I have to use the same lease with all tenants under the fair housing laws…

    The good tenants also love that I have high standards of who I will rent to: because it also means their neighbors have good credit scores (or good cosignors) and are not criminals. I treat my tenants and my properties well, doing all needed maintenance, maintaining clear communication with them via email, and responding to real problems (like something broken or leaking) immediately, while scheduling less critical issues with the tenant.

    Your better tenants = fewer problems point is a good one. B class properties attract those tenants. I have been buying C class properities in B class locations and fixing them up to be B class properties and attract the B class tenants. Mostly cosmetic fixing: the pictures and location (nice neighbothood, near shopping and restraunts, good commute location, good schools) are what initially attracts people to respond to my zillow add. I put my tenant screening requirements right in the add. this means that when I get calls or emails to schedule an appointment, from people who do not meet my requirements, I can point to those requirements, and ask them if everyone who will live with them meets the requirements. This saves me a lot of time, since I only show units to people who believe they will meet the requirements. I also do complete credit and criminal background checks, and call,previous landlords and employers.

    If they pass all that, and are willing to pay rent electronically (most good tenants see this as a plus) then I make them give me first, last, and deposit as a cashiers check before we sign the lease and they get the keys. So, If anyone was to have a negative life event and be unable to pay rent, they would be moving after only one month’s lost rent, which equals their security deposit. When we go over the lease, I explain to them that I have to pay PITI, plus maintenance, repairs and capex on the unit, and cannot afford lost rent, since the income from that unit is my retirement income. I make it clear that I will ask them to leave if they cannot pay. I set the expctations up front when they want to be approved to rent the unit. So everyone is on the same page: no surprises.

    So far, no problems, and no evictions needed. Only one tenant did not pay on time, and I lost no rent, whenall was said and done: but he was out at the end of the month because I did not want to contract with section8 to pay his rent. Giving that 20 day notice on day 10 of the month, even though I was trying to help him to stay, protected me. I got the rent on day 23, and he was out on day 30. Good decision: cleaning that unit was expensive, and I ended up painting everything, and retiling some areas. Many inherited tenants that are in the property when you buy it are a source of significant headaches and $ costs.

    Good tenant screening, a good lease, and good property management result in less time and money spent, more rental income, and less expenses.

    • PM Ahern

      Great comments Cindy. I really like the idea of setting CLEAR expectations up front, to avoid surprises. And going through the lease with them in plain English is also a great idea. I’m going to use those, thanks!

    • Jennifer Nanda

      Thank you for the detailed post! Very helpful for me as a NY salesperson and as a landlord. Many times we may feel like it may come across as condescending to “go over the lease in plain English” but in reality, it’s very helpful to set clear expectations on your side and also empower the tenants to be comfortable feeling entitled for the explanations. Some people are very intimidated by legal and medical talk. As a professional, I know I don’t have anything to hide, so taking the extra time with them to go through the lease the way you described is something I want to implement and learn from. Thank you.

  2. Holly D. Metzger

    I’ve been involved in rental property management since Mom used to take me with her to do unit make-readies when I was a kid. I’ve been involved in the day-to day management of other people’s rentals as well as my own. I’ve literally done hundreds of evictions, and I can’t agree more with your philosophy demonstrated in rule #1. The first time a tenant is late with the rent, start the procedure by posting whatever notices you need to to start the proper eviction process. Then start the dialog about how they’re going to get caught up. Keep the conversation focused on that. They’ll give you all the sob-stories in the book about why they’re in this predicament, but keep the conversation focused on what they’re going to do to get caught up. Then, make whatever payment plan you want to, but make sure it allows you to get the judgement for possession of the property the instant they don’t live up to the agreement. Then, if they break the payment agreement, you know that their struggle was probably worse than they expected, and that if you allow them to continue, they will only be digging themselves (and you) into a larger hole. That’s when evicting them becomes the kindest thing you can do. You force them to put down the shovel, and you give them the opportunity to start fresh somewhere else.
    Rule #2 is also a wise move. It’s better to see the damage when it’s a minor fix, than to wait until it’s what makes the property lose serious value later when you want to sell. If it’s normal wear and tear, the tenant will likely be glad that you noticed it and be happy to have it fixed. If it’s damage that the tenant has done, you can explain it to him and ask him how he wants to pay for it. i.E. ” I’ll have my repair guy call you to set up a time for him to get in next week to do this fix, so how do you want to handle this? Can you pay the guy next week? or should I pay for it and deduct it from your deposit?” Then, if he offers to fix it himself, ask if he’s qualified or even licensed to do the work. If he is, wonderful, you’ll be back in 7 days to inspect. If he’s not, but has a buddy who is and who will do the work, wonderful, you’ll be back in 7 days to inspect. If he’s not, and doesn’t have a buddy who is, but he would rather hire the repairman himself, wonderful, you’ll be back in 7 days to inspect, So you let the tenant know that you’re not going to let this slide, and if he can’t make good on a promise to fix it his way, it’ll get fixed your way, and you will be back to inspect. EVERY SINGLE TIME I’VE TRIED THIS, THE TENANT HAS DECIDED TO LET MY GUY DO THE WORK. I also like to give my tenants a week’s notice of when I’m going to be making the inspection. I tell them specifically what I’ll be inspecting, plumbing, electric, furnace/boiler,etc., and what I expect to see when I get there. For example, if I’m inspecting the plumbing, all the cabinets under the sinks must be clear of all trash, the access to these areas must be clear and unencumbered by furniture, etc. This gives them enough time to clean house if they haven’t done so for awhile, Beyond that, when a tenant really really balks at the thought of an inspection, that’s a red flag for anything from an “illegal” pet to a hoarding situation. So be firm, take someone with you, but be firm. (The person you take with you will be able to witness the condition of the unit, any conversation you may have with your tenant, or attest to the fact that you didn’t steal anything while the tenant was absent).
    And a BIG AMEN to the Ultimate Rule. I do call employers to verify employment with a salary range, I don’t care how much an applicant makes, but I do care if the next unexpected automobile repair will trash his ability to pay the rent, so the rent should be no more than 33% of the take-home pay. I do criminal background checks. I don’t care if someone’s been arrested once 10 years ago, but I do care if he or she has been arrested several times in the past 10 years. While an arrest record doesn’t mean the applicant is guilty of a crime, it does mean that this person is putting him or herself in a position where crimes are being committed, and he or she probably hangs out with people who are committing crimes. And the odd trip to jail probably has affected the employment history, and may well affect the ability to pay the rent in the future. Finally, I also check the judgement history of all my applicants. The very last thing I need is for a tenant’s wages to be suddenly garnisheed as that’s a SERIOUS blow to his or her ability to pay the rent.

    • PM Ahern

      Great comments, Holly. What a wealth of information Bigger Pockets is. Your comment is practically an awesome article on its own! “You force them to put down the shovel,” I love it. And polite firmness is key, especially with periodic inspections and repairs.

  3. Dave Rav

    Love rule #1 – i do! It contains the potential wildfire that can occur with unpaid rents and other developments. The anti-thesis of this was what my prop manager did to me 4 years ago: let my deadbeat tenant stay for 3 months until filing for eviction. I dont think they even contacted her when she missed the rent payment until 20-30 days past-due. Way to encourage and enable.

    I want to build on this post. Lets add-in: Loss mitigation.

    Loss mitigation when it comes to tenant evictions. Sometimes, not always, when tenants are evicted not only do you encounter loss of rents, but property damage too. Just as you mentioned. I propose approaching these soon-to-be evicted tenants with payment. Thats right. Payment to prevent property damage. You offer to pay them a few hundred dollars if they leave quietly and timely. They are still being evicted, but (hopefully ) they leave a little less angry/disappointed/frustrated – you get the point. Consider the damage that can be done by: breaking windows, stealing appliances, ripping down ceiling fans, kicking holes in doors/drywall. Giving up $300-400 is worth it. Loss mitigation. I’ve actually done this – it worked every time. (lucky!)

  4. John Lenhart

    Completely agree with Rule #1 and that is how we operate too. However, I do think you neglected to mention one thing. Whenever your tenant is late, it is best practice to serve them with the 3 day notice (or however long your state requires) letter that is required before an eviction is filed. It should be an automatic part of the process. If your tenant maintains their end of the bargain and pays when they are supposed to, the letter is disregarded. If not, you can file the eviction and get them out a little sooner because you have already satisfied this portion of the eviction process. If the lease calls for a 5 day grace period, you still give a notice to leave on the 6th day even if you know they will not pay you until say the 15th. Then, if they do not pay on the date agreed upon, you can file the eviction the very next day because you have already cleared the notice requirement of the eviction process. Depending on the jurisdiction, this can speed up the turnover process by a week or more by addressing the notice part early.

  5. Eric V.

    1 month?……Way to forgiving!

    Especially in Landlord Unfriendly states like NJ. If the rent is 10 days or more late, as per state regs., you can AND ABSOLUTELY Should file for eviction on DAY 11. You still can work with your tenants but if u do have to evict the clock does not start till the 1st eviction forms are filed. Best case the sheriff will take 3 months to evict in NJ.

    You always have to power to stop your eviction at any time. Back YOURSELF UP 1st. File the paperwork. THEN try to work with them. Make it very clear the process has started and they can stop it if they so chose.

    You will quickly find out who will make good on their payments and who has made up their mind to milk you for what ever they can get.

  6. Holly D. Metzger

    Even in Landlord Friendly states like Colorado, START THE PROCESS FIRST, then negotiate. If the negotiations work out, well and good. If they go south, continue the process. You have shown all the “good-faith” you need to, and you haven’t wasted any time. if you wind up having to hand the tenant over to a collection agent, to collect the money owed once you’ve regained possession of the premises, you don’t need to negotiate further.

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