I know that the vast majority of landlords and property managers will have a simple answer to that question: DON'T. However, I'm interested in building my MF rental investing and property management business in New York's Hudson Valley around the idea of making housing available to people who are high risk tenants - folks with bad credit, prior convictions, spotty employment, maybe folks who have a prior eviction. I know there are very concrete business reasons to reduce your risk as a landlord and never rent to these folks, and I don't really need to hear the "no, don't do it" argument. I believe that there is a market opportunity here, and I'm trying to figure out a way to reduce my risk while running a business that offers housing to high risk folks. I'm open to accepting section 8 and collaborating with housing agencies and other social services groups as well as other options I haven't discovered yet. A bit of background: I was at one time, one of those high risk tenants - no bank account, no credit, all cash job, no rental history bc I'd been living with a boyfriend and not on the lease - and I got lucky in moving in with a roommate in a place where the landlord didn't do any screening on me. I also worked in social services in NYC for a number of years and saw how barriers to getting secure housing made people's lives way worse. I'm trying to figure out how to live my values of housing security and economic justice while also growing my business as a real estate investor. I realize that might be a bleeding heart fantasy and recipe for financial ruin, but I'm a big ideas and problem-solving kind of person. So: suggestions for setting up a property management process with this rental population in mind?

How to intentionally rent to high risk tenants?

Engineer · Allentown, PA · Member since 2014 · 105 posts · 64 votes

10y

I'm not really sure its possible to make money on high risk tenants. But then again insurance companies make money on high risk customers all the time so. I do have a few thoughts...

For marketing... to attract these kinds of tenants, I'd imagine all you'd you have to do would be put in the ad something like "No credit or background check, prior evictions are okay".

As for making money on it? I'd assume the only way you'd stand a chance would be to charge a premium. I think there are housing laws regarding the amount of the security deposit you can take, but I don't think there are rules regarding pricing? So potentially you could charge an extra 100-200 a month in rent.

A last thought would be to use shorter leases. I'd think (and I hope someone else with actual knowledge chimes in) that its easier/quicker to remove someone with a 3 month lease than a 1 year lease.

1 Reply

Stephen E.

St Thomas, Ontario · Member since 2013 · 575 posts · 408 votes

10y

There is a reason that conventional wisdom is conventional. If you go ahead with this nonscreening approach you will need to have very deep pockets to sustain very great losses. Unless you really want to get into the slumlord business and work on a lowest cost model hoping that a few of these cases will turn out for a while before you have to evict.

If you want to get into living your values of housing security and economic justice, give to Habitat for Humanity. At least then you know how much you are putting on the table.

1 Reply

Frank Gucciardo

Highland, NY · Member since 2013 · 169 posts · 130 votes

10y

Dacia,

I'm by no means an expert, however, I would think that you will need to put in place a very firm late policy, tenant guidelines, etc.. You will have to train your tenants to prioritize their rent and come down hard when they are abusing the property, paying late, etc..

What you are looking to do is not for the faint of heart and you will need to be strong willed and unforgiving of even minor offenses.

Best of luck.. I'm just down the Thruway from you if you ever want to catch-up.

You also have to remember, people who are in this situation typically put themselves there because of their poor choices. I'd advise against making their poor choices your problem.

0 Reply

Gail K.

Augusta, GA · Member since 2014 · 1k+ posts · 1k+ votes

10y

Dacia ....Don't mistake being a social worker with being a landlord. You're running a business not a social service.

If you insist on doing this go for month to month tenancies (although Section 8 typically will not accept this route) as opposed to year leases.

Might I suggest the book "Evicted" by Matthew Desmond. My oldest son sent it to me and I'm reading it now. Although it is a study of the poor in Milwaukee you might find many of your clients will be the same sort of tenants.

Good luck.

2 Reply

Dumitru Anton

Cumming, GA · Member since 2014 · 218 posts · 71 votes

10y

@Dacia Ray,

-there is a version of Section8 for VA (HUDVASH), where they take the approach to "proactively manage" the recipients of financial help (monthly/weekly visits/checks from social worker to keep them on the right road). i think they usually look for studios/1 bdr apartments... they tout a higher success rate then regular section8

Look for posts from @Bradley Bogdan (very helpful!!!)

-next i would look for the foundations/charities involved locally in re-habilitation of said high-risk group. they will know what they need for success/long term. also the local demand...(a box of donuts in the morning or a weekend of volunteering may open some doors....)

also maybe you can just provide the housing to the charities/foundation and they deal/screen/manage the group. this will also tame any neighboors serial-calling police ....

@Bill G./ Bill Guley has a lot of posts about non-profits

this is usually highly-political/connected so don't step on anybody's toes/territory...

talk with an insurance broker to know your costs/non-no's ! (some insurance groups may not want your business....)

develop the "feel"/6th sense to "smell" the possibly good/no trouble guys

also there may be similar posts here on BP, so please use the "Search BiggerPockets" function

2 Reply

Colleen F.Pro Member

Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes

10y

Another words you are looking for tenants with risk factors that will actually pay you and are maybe stable or on the way up. I've never done this but if this is your mission you could pick a risk factor or factors you are willing to accept with a higher security deposit and month to month lease. You always have to decide where to draw the line though. For example not accepting someone without a job is a no brainer unless you are running a charity. Someone without rental history might be a risk you are willing to take if they have money to pay you. A previous conviction not recent perhaps. Although I know there are boarding houses that specialize in taking those with convictions because they can't live anywhere else. Honestly if your rentals are in some areas you have to be accepting some of these people. Maybe the C/D area people have some suggestions on how to make it successful and what risks are worth it.

2 Reply

Dacia Ray

OP

Phoenicia, NY · Member since 2016 · 42 posts · 29 votes

10y

@Mark B. The shorter leases idea is an interesting one. More turnover means more work to process new tenants - though with higher risk tenants thats true anyway. I'd have to learn more about the laws around this. I'm in New York State so there are definitely a lot of complex housing laws here.

I would still run credit and background checks, I don't want to fly completely blind. And perhaps instead of a free-for-all I could narrow my focus - like accepting folks with certain kinds of criminal records but not others (like no sex offenders). The marketing strategy would be to network with and market directly to social workers at local agencies.

@Frank Gucciardo All of this makes sense, and I would be very proactive about having policies in place and enforcing them. I'm not dreaming about being a landlord who never does evictions. I know that's part of the business.

@Gail K. I know that being a social worker and being a landlord are not the same thing, and I have a lot to lose if I confuse them. I have a copy of "Evicted" on hold at my library.

0 Reply

Douglass Benson

Investor · Mason, MI · Member since 2014 · 151 posts · 152 votes

10y

People are already making a ton of money doing this, I just prefer not to. I would decide early what type of risk you are willing to accommodate. I don't mean to patronize but the high risk you attribute to yourself was only financial and not that great a burden to overcome. There are numerous tenant support groups and charities that can provide you with rent on behalf of someone who is struggling.

That being said, There are other citizens that will bring security and physical and chemical risk to you that you and your business will not be able to deal with.

I wish you luck.

0 Reply

Brian Fouts

Investor · Fall City, WA · Member since 2013 · 200 posts · 63 votes

10y

We did a property where we were actually looking for high risk tenants. We also knew that they would be VERY limited in their options.

So, we didn't fix the place up. No paint, didn't do landscaping, etc.

We upped the rent 25% over market.

We required first, last, security.

They pay every month, sometimes are late, though. We only spent $3k on repairs instead of $10k on repairs and we make an extra $400 per month.

Not something I would do as a general business practice, but it fit with that specific property and is working well.

0 Reply

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

Originally posted by @Mark B.:

A last thought would be to use shorter leases. I'd think (and I hope someone else with actual knowledge chimes in) that its easier/quicker to remove someone with a 3 month lease than a 1 year lease.

Ran my 6-plex for 19yrs on this basis. Hold overs revert to m/m. Gives the opportunity to issue Notice of Non-Renewal instead of evicting.

3 Reply

Frank Gucciardo

Highland, NY · Member since 2013 · 169 posts · 130 votes

10y

Dacia - also check out RUPCO if you haven't already. They do what you are looking to accomplish and can either be a competitor or a partner.

0 Reply

Dacia Ray

OP

Phoenicia, NY · Member since 2016 · 42 posts · 29 votes

10y

@Frank Gucciardo Already on it - I have someone helping me get a meeting at RUPCO.

0 Reply

Mike Lowery

Rental Property Investor · Milwaukee, WI · Member since 2013 · 180 posts · 104 votes

10y

I don't know if you could do it in your state, but I heard a seasoned investor once mention that every poor mark the person had on their background check was another added security deposit needed up front. I.E. Having a prior eviction and poor credit would require them to pay a double security deposit. If rent was say $750/mo with a $750 security deposit then the tenant had to come up with $3000 to move in. First and last months rent plus the security deposit multiplied by two. This may curb the really bad apples from the good people in tough situations. Maybe.....

1 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

10y

IT is very simple to operate renting to bottom of the barrel tenants.

You must have strict pay on time and in full policy, basically no pay no stay. To facilitate this you only offer M2M leases. They will understand that if they do not follow the rules they will be out and you probably will have a waiting list of others looking to move in. Collecting first and last may be a problem as this type of tenant is probably already in the process of being evicted and will have no money. Not sure how to get around that but you must have first and last otherwise you will not be in business very long. I would worry less about the damage deposit as the property will not likely be in very good condition for very long. Do basic repairs and get it back on the market every time you evict.

1 Reply

Joe Butcher

Dallas, TX · Member since 2013 · 311 posts · 94 votes

10y

There was a BP podcast on this very same subject. Podcast #079 "Low Income Landlording and Investing to Make a Difference with Michele and Bruce Fischer"

Check it out: https://www.biggerpockets.com/renewsblog/2014/07/17/low-income-landlording-difference/

1 Reply

Mark B.

Engineer · Allentown, PA · Member since 2014 · 105 posts · 64 votes

10y

@Joe Butcher , that was a good one!

Also, I would be careful about which kind of high risk like others were saying. Evictions/low income/late payments are one thing, but I'd still stay away from professional tenants and people who have sued their landlords in the past

1 Reply

Brandt Smith

Cypress, TX · Member since 2016 · 132 posts · 49 votes

10y

@Dacia RayI would avoid this business model. The evictions / headaches / late payments / trashed units will never be worth it. There is a reason most of these people are forced to live in horrific environments. Landlords get tired of (and can't afford) having to spend thousands of $$$ to renovate the unit only to see it trashed by the next tenant. It basically turns you into a slum lord...or you go out of business.

I appreciate the fact that you want to help, but the best way to do that is to start a charity. Use your real estate business to create your cashflow and wealth. Use your charity to channel your wealth back into the community you are helping.

2 Reply

Dacia Ray

OP

Phoenicia, NY · Member since 2016 · 42 posts · 29 votes

10y

Brandt Smith I appreciate that perspective. I previously founded and ran a nonprofit (with grants and other people's money) and now I'm exploring my options for a future where I would like to build long term security for myself while also still helping other people. I know there are a variety of ways to achieve this and I'm researching all the options to figure out what will work best for me.

0 Reply

Jim Adrian

Architect · Papillion, NE · Member since 2015 · 1k+ posts · 840 votes

10y

I might look at a non-refundable security fee or move in fee vs a refundable security deposit. Or something along these lines. I think I would still screen the tenants as well to get a better understanding person.

0 Reply

Jeff B.

Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes

10y

Originally posted by @Mike Lowery:

I don't know if you could do it in your state, but I heard a seasoned investor once mention that every poor mark the person had on their background check was another added security deposit needed up front. I.E. Having a prior eviction and poor credit would require them to pay a double security deposit. If rent was say $750/mo with a $750 security deposit then the tenant had to come up with $3000 to move in. First and last months rent plus the security deposit multiplied by two. This may curb the really bad apples from the good people in tough situations. Maybe.....

California has restrictions here: We can charge first+last OR first+security and security can not exceed 2x the monthly rent :sigh:

0 Reply

Joshua Martin

Investor · Milwaukee, WI · Member since 2016 · 389 posts · 193 votes

10y

Dacia Ray I would recommend talking to the city (wherever you are) about these issues, as this is not a model most investors are going to work on (myself included). However, I did have a sit down with a guy a few weeks ago who is doing a massive deal for the city of Milwaukee buying some 200 city owned houses with private capital, totally rehabbing them, and then renting them out with rent controls section 8 housing. His deal works because the city gives his company a massive tax credit (almost a million), every year for 10 years. Obviously that's not small time stuff, and way over my head, but this sounds like a city issue as well as an investor issue. I hear you though, and reading evicted had me thinking maybe there is a way to approach this with some kind of secured section 8 low income housing. I don't think most tenants are just trying to scam you, but when 60-70 percent of your monthly income goes to rent any inevitable setback can put you behind on rent and in danger of eviction. Best of luck, JTM

0 Reply

Michele FischerPro Member

Rental Property Investor · Seattle, WA · Member since 2013 · 2k+ posts · 1k+ votes

10y

Listen to my podcast, read my blog posts, this is quite possible, but it will take extra time, savvy, and patience.

Podcast Guest on Show #79

1 Reply

Jennifer L.

Investor · San Jose, CA · Member since 2015 · 246 posts · 183 votes

10y

@Dacia Ray If I were going to rent to high risk people, I'd seek out people who were looking to improve their credit-worthiness. Call it a "Credit-building" opportunity and give tenants the opportunity to build credit by making payments through eRentpayment.

0 Reply

Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

10y

Simple contracts. Plenty of fees and fines to improve earnings with application fees, late fees, processing fees, etc. Price them at affordable rate that build up as you have to take more actions, don't price them so high that they can't cover it, thus defaulting the minute they are late.

Have plenty of terms on the exit to-do list by tenants so you can clean the deposit for small repairs, like HVAC unit serviced on exit.. Your going to need hardened properties; brick, cement, avoid anything that can be damaged easily or at all. Go for that Chipolte look, raw materials made to look nice, cheap, easy to fix.

I would elect a month-to-month lease with a 60 day notice in the terms, that way you have room to manage turnover rates, and you also have the law on your side when evicting for non-payment as you can just show the lease has already expired, so they need to vacate per the law, as you can cancel for non-payment within the pay or quit. So if they fight you in court, or not, you still win a default eviction quickly.

Forget having attornies process your evictions, your going to have to do it yourself or with your staff, expect to spend one day a month in court processing these every month.

Focus would be to reduce repair cost, and just churn units with a little cost as you can. Housing Authority attempts this, but never gets it right in our area, they normally end up over paying for property, slumming it, letting people skip payments, then selling it off for pennies on the dollar once the project loses millions in a few years. I've bought some off of them and cleaned them up to become very good investments.

1 Reply

How to intentionally rent to high risk tenants?

How to intentionally rent to high risk tenants?

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