The True Cost of a Bad Tenant: Why You CAN’T Afford Not to Screen

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Are you capitalized enough to be a landlord? Can you really afford the true cost of a bad renter?

I see it all the time: A prospective landlord looks at the numbers and says, “Rent will be $1,000 a month. My payments will only be $800; I can pocket the rest.”

If you are any type of investor, at least one who reads here, you know that this is a losing proposition. There is $200 worth of cash flow — before expenses. After expenses of 50%, there is a negative cash flow of $300.  And they are even managing the property for free.

But to the naïve investor, on the surface it looks OK: $200 a month in your pocket. And that is if you get a renter, if you get a renter who pays, if you get a renter who doesn’t damage the place, and if you do not have any vacancy.

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The Start of Trouble

So the investor does the deal anyway. They are thinking that even if the cash flow is even, they can make up for it on appreciation. They somehow lose the point that a house has to appreciate about 10% just to break even on a real estate commission. And they forget the number one cardinal rule of real estate investing: Never have a negative cash flow.

After the offer is accepted, they get “lucky.” They burn up most of the cash they had on the sidelines, but the closing goes successfully. Then the investor gets even get luckier: A tenant sees the advertisement and wants to move in “right away” (red flag). The investor does not want to make a mortgage payment without rent to supplement it, so they accept the tenant despite not really knowing what they are doing. They do not know a good tenant from a bad one.

Related: 6 Insane Landlording Stories That Prove the Importance of Tenant Screening

Slipping Down the Slippery Slope

The investor knows about background checks, and the reasons to do them, but they have not yet figured out how to do them (red flag). They do not want to lose this renter waiting on an on-site office inspection. Besides, they know how to “judge” people. They have a great skill of being able to tell a person’s character just by meeting them (red flag). The renter seems to “click” with them. And, as will most con artists, the professional renter reels the investor in hook, line and sinker.

And if you think it’s just investors who get fooled, think again. A property manager will know the renter might be suspect, but will also have their own personal bills to pay and will need a commission. Besides, if things go wrong, they can just get the investor a new tenant, “free” of charge.

Are All Tenants Bad Tenants?

If you got the one applicant out of ten that was a great tenant, you can consider yourself blessed. If you were like many landlords, you “settled.” You did not consider that bad tenants move at least twice as often and apply to at least four times as many places as a good tenant. And here is what you were rewarded as your investment returns.

In a medium bad tenant, after a year, the renter moves out. They paid on time, most of the time, but despite several showings, the place is still empty, and it looks like at least another month of vacancy while you wait for a tenant. It was just too cluttered while the tenant was in — and too messy — that no one wanted to rent that place for your price. There is some damage and some painting and cleaning to do. Maybe even new carpet.

If you were unlucky, you would have had late payments and maybe even missed payments. In Minnesota, you might have had to file an eviction. If you were thinking that the renters’ late rent story was actually going to pan out, you would have waited until at least the 20th to evict, and some new landlords even wait months. In other tenant-friendly states, even if you start evicting right away, it may take months.

The True Cost to Evict

The cost to evict is huge in all states. Vacancy is your largest expense. Even worse is not getting rent and having a tenant in place. It’s like a vacancy, except it irritates you even more. In Minnesota it’s $320 just to ante up at the Court house. You also have to serve the papers. An attorney might charge $100 for that, and if you knew the number one defense for an eviction is improper service, you will gladly pay it. You do not want to waste another month for lack of proper service.

Once you win the case, in MN, it’s another $55 to issue the writ and ~$150 for the Sheriff to serve that. So, allocate ~$625, unless the tenant denies everything and needs a court hearing about two weeks later. Your attorney will be the only one who is happy.

Forcing the Tenant to Comply (It’s Your Right!)

Maybe you thought you would be “smart” and force an inspection on a tenant who tells you to stop harassing them for the rent. Or they might not even tell you to stay away. You are a newbie, and you know the law demands that you can enter your property with a 24 hour notice. You want to see how much damage they are doing, being too naïve to know the damage doesn’t stop, or even matter, until they are physically out.

You post a 24 hour notice, and before you can get into the rental, the Sheriff serves you with a notice to stay away from your own property with a court issued restraining order. It’s just a civil case now, but if you ignore the restraining order, you will get arrested. It’s your property, you complied with the law, and they have this right?

That’s right, the very tenant that you thought was so good on day one has turned into a formidable legal challenge. And if they are low-income, they even have a free lawyer. They may have even lied to get the order. You will have a chance at a hearing coming up in two weeks to refute the order.

And if they call or text you, and you respond or call them back, you are also in violation of the order. They just set you up to be a criminal.

You hire an attorney to represent you in the hearing ($$), as you know someone who represents themselves in Court has a fool for an attorney. And if somehow you lose at the hearing, you will lose even more than the attorney will cost. They have an attorney; you better have one. Any “tie” will go to the renter.

Finally, You “Win”

In the end, you get the property back — after two months of non-payment while you were waiting for the court to issue the vacate order and the tenant to actually vacate. If you had to fight a harassment order, it is even longer and you have no idea what condition the property is in.

When the tenant moved in, the place was immaculate. It was a turnkey rental you purchased off the MLS.  Everything was painted fresh, the appliances were new, and the carpet still smelled of fresh formaldehyde only a few months ago.

Related: The Landlord’s Guide to Effective (& Legal) Tenant Screening

Conclusion

You get the place back, and it looks like some of these pictures. All of the pictures came from various rentals over the years. All have the same thing in common: low income tenants with low credit scores. None of the tenants would be considered a criminal upon moving in.

BP5

Do you think a good tenant wants a stove like this? It will have to be replaced. Maybe you can charge the damage deposit, if you got a decent sized one. If you went with a lower deposit, it’s an expense you will have to eat yourself as the deposit was long used up before this.

BP4

This is another example of an improper job of cleaning. Imagine a kitchen with all the cabinets like this. It takes time, or money, to get cabinets like these back in shape. And they may need repairs. These cabinets were discarded and new cabinets and counter tops installed.

BP3

All these belongings need to be stored for a tenant to retrieve. Store it in the apartment, and you have extra vacancy expense. No one will rent a place that looks like this; you have to move it out. Then dispose of it. And do not think for an instant that charities want a tenant’s junk. All the charities want nice, nearly new, stuff.

BP1

Maybe the tenant left some extra “pets?” In this case, it is goldfish. In other cases, it may be a dog or a cat or some other furry or feathered animal. You may have to hold a tenant’s belonging for a longer time than you want. Are you going to turn pets over to the city’s animal control? Maybe a dog or cat, but they do not want fish. Donate it to a pet shop? Do that, and a Judge may have you replacing some expensive “koi” that you no longer have.

Can you afford the vacancy and repair expense of a bad tenant? If you have ever had a bad tenant, did you ever look back and see how you could have avoided them?

Leave a comment, and let’s discuss.

About Author

Eric D.

Eric is a 55 year old, soon to be former, computer professional. He started several years ago to replace his “work income”, with other alternate streams. He is well on his way to retirement at age 56, and is currently making more money at extracurricular activities, than he is working at his full time job. Whether that is Financially Independent, or just old fashioned entrepreneurial spirit, is in the eyes of the beholder.

40 Comments

  1. Kent Harris

    Had this happen to me this month. Real Estate Agent went by what Tenant told them and didn’t do a background. Realtor said tenant had been unemployed for 2 months and had a job lined up.
    Found out later it was more like 2 years! Tenant told me about a tragedy and would not be able to make the rent this month. Two days later I showed her a letter of intent, that she would be served an Eviction notice after the due date. I’m a heartless landlord! she said. Paid the rent today and is moving out at the end of the month.

    • Eric D.

      Thank you for the comment!

      I find that most Realtors do not have the slightest clue how to screen a tenant. And they have never had any sort of tenant of their own, let alone a bad tenant. Look at my previous posts about property managers….

      • Kent Harris

        Eric: They either don’t have a clue or they don’t care. They much rather get a Tenant and get paid then find the right tenant later on. I am having the Realtor fix the problem she caused by, collecting the rent and having to deal with the Tenant. That way it won’t happen again. She has to find the right tenant for free this time.

        • David duCille

          Wait, the person screwed you the first time and you are going to use them again because they are doing it for free?? I place every bit as much blame on you as the realtor! Most realtor have the best of intentions but lack the skill and training in deali,g with investment stuff. That is why you need a good. “Investment friendly” agent to help you or you need to screen yourself. In the internet age it’s easy.

        • Eric D.

          Good points David.

          As long as the investor uses the Agent to increase their marketing, it may work out OK. The investor should have criteria for the agent to follow, and accept no tenant than doesn’t meet the criteria.

          As long as that is followed, using a ‘free’ service should be OK. If they rely on the agents advice again, that is a big issue.

  2. Joey Middlemiss

    Have I just been extremely lucky and just count my blessings?? I have been a landlord for 15 years – in SoCal, Colorado and even a vacation home at a ski resort, and I’ve never had an issue with a renter and I’ve never done a background check. I’ve also never had a vacancy in my monthly rentals. I’ve had a strategy to put in extra nice finishes and comforts that are very coveted in the area, so I’ve always had tenants willing to pay a premium for a nice space. When I had my ski home I started with a property manager she told me to take out anything fancy and brought in her cleaning lady to supply cheap linens, I had some minor issues, vacancies and the place was often left a mess. The following year I put in a 60″ HDTV, playstation, high end furniture, plush linens, the works and took over the management. I was able to go from $450 a night to $600 and very few vacancies. Sometimes I would arrive before the cleaners and it looked like the cleaners had already come and gone, that’s how nice people would leave the place! So I follow the same strategy with my rentals. I make them EXTRA nice, put in coveted amenities and get renters that will pay as much as a 30% rent premium to live in a nice place. I collect a big deposit to CMA and have only had to collect $280 on one deposit.

    Yes I’ve been lucky, I will be screening better from now on, but after reading this article, investing a bit more in the properties has paid off in big ways.

    • Eric D.

      Thank you for the comment! You have been very lucky! As you get higher on the rent scale, you weed out a lot of bad renters. If you do not make enough to rent, it weeds out lower income tenants which are typically a larger chance for issues.

      What most people do to get themselves into a problem is have a modest rental, and have rent that is too high. All you get is subpar renters when you do that.

    • Ken p.

      You have been very lucky. We were the second tenants once in a luxury apartment. The landlord told us his tale of woe with the first tenant. The only money he ever saw was the deposit. The tenant was a professional who knew every legal trick in the book, and it took over half a year before he was out. The landlord did a background check AFTER the fact and found out the smooth talking tenant had been fleecing owners of high end properties for years. We always do checks on our own rentals and that alone probably scares off the worst offenders.

    • David duCille

      Part luck, part skill! I employ the same strategies in my rentals. They all rent for the top end of market rate because I dress them up nicer. Many a lesser qualified person comes to see them and immediately says “it’s priced too high “. Smart consumers understand “cost is what you pay, value is what you get” the tenants I end up getti,g realize they have an attentive hands on landlord that takes care of his properties and handles issues in a timely fashion; they gladly pay extra for that. With that said, background check and credit score costs $40. No reason not to do them

      • Eric D.

        That $40 is the cheapest insurance you can buy. As long as you know how to read the reports, and have a criteria set in place up front. And can wait for a tenant that matches it.

        Far too many landlords jump at the first tenant that offers money and has a good story.

  3. Nice picture of the goldfish!

    Interesting to hear your experience and perspective. I’ve definitely had my share of issues with tenants both with and without property management involved! Though at the time I felt at my lowest points, overcoming the hurdles and learning from these experiences is priceless.

    Having bad experiences should not only be seen as a negative if someone can truly learn from it. After all, nobody’s perfect! 🙂

    • Eric D.

      Thank you for the comment!

      After every tenant, a landlord should make the assessment and see what went right and what went wrong. If you learn, it might have been a great lesson. A stove is a $350 lesson, an eviction is a multi-thousand dollar lesson.

  4. Mary Clark

    We screen our tenants using rentprep.com. They charge you by the application. It is ok, but I am sure that there must be a better site to use that is still reasonably priced. Any Suggestions?

    Also is there a way to leave information on renters credit reports? I have some really good tenants and I would like to give them “paid on time” reports, and of course I would like to post the bad apples to try and help protect other landlords from having problems.

    • Eric D.

      Thank you for the comment!

      It’s even more to do about the results of the screening. All of my bad renters have had a sub-600 credit score. All barely made enough to pay rent. Most did not even have a single bad thing on their criminal report.

      I use mccgrp, and make sure to do a county level criminal check. And I use Credit Score as a litmus test too.

  5. Kevin Yeats

    Eric, I’m curious about the tenant’s restraining order AGAINST the landlord.

    First, it seems crazy that a debtor (tenant) can place a restraining order against an active creditor (landlord or property manager), but would such a restraining order apply if the tenant had complained of a needed repair? (especially a gas leak, lack of heat or water) In such instances, the landlord would NEED access to the property (even if the tenant was not present) to make the repair.

    What about maintenance issues during the restraining order? Can a landlord visit the property for normal maintenance such as mowing the grass or snow removal? Such items are NEEDED (assuming such care is the landlord’s responsibility under the lease).

    I agree with Amy. You are my favorite and I have sent several other people to your blog.

    • Eric D.

      Thank you for the comment Kevin!

      A tenant only needs to go to a Judge to get a harassment restraining order (HRO). This is a different animal than an intimate couple would get, which is a domestic Order for Protection (OFP). Same process, different Orders. Both Civil are procedures.

      In either case, the petitioner says they are being bothered, and think they may be in danger. Lies or not, it’s their perception.

      The Judge will issue the Order as to not issue it could be a problem. Then you have to go to Court to fight it. Likely the tenant will not even show up. In the meantime, the two weeks between the order and hearing, DO NOT GO AROUND. Even if the place is burning down, let the people burn.

      I have known landlords that have gotten an Order, just stay away until the order is resolved. Even if it is a multifamily building. Have the cops escort you there if you need to go.

      If you go back to the property, and the cops find out, you will be charged with violating the order. Even if the tenant called for maintenance. Even if the tenant says it is OK. The cops do not need the tenant to prosecute the violation, all they need is proof of the violation. It is now a criminal violation.

      If you ever have known a couple in a domestic situation, it is similar. Although not as serious.

  6. Joey Middlemiss

    Sad but true with the restraining orders. Unfortunately its the people who have frequent run ins with the law that know how the system works and how to use it against you. If you’ve always paid your bills, followed the law and lived responsibly you have no idea how the system works and how easily it can be used against you. I’ve had one bad experience with someone who used the system against me and I found myself so far out of my element. After all the criminal proceedings I found out he had several RO’s, DUI’s and previous arrests. Luckily the judge could see exactly what was going on and quickly ruled in my favor. Big eye opening experience and some serious schooling on the system. This was not tenant related, but again, I can see now how easily a landlord can become a target. My best guard is steering clear of low-class rentals / renters, doesn’t matter how enticing the numbers may look on paper.

    • Eric D.

      Thank you for the comment and confirmation!

      The best way to avoid tenant like that is to use credit score as a primary indicator. A tenant can have a clean criminal record by not getting caught. To get a decent credit score, they have to do something positive.

      If they lie and cheat their creditors, why wouldn’t they lie and cheat a landlord?

      You definitely want to avoid someone that gets free legal help too.

  7. Andrey Y.

    Hi Eric,
    Do you have any recommendations for an easy to use (maybe prospective tenant can use it), once stop shop service/website for screening tenants? I’ve had a similar story as Joey up there but you have me scared!

    • Eric D.

      Thank you for the comment!

      I use a company called mccgrp. You have to know what to look for. A credit score is sometimes the only indicator that the tenant is bad. A past landlord is to scared to say anything bad.

    • Eric D.

      Thank you for the comment!

      A tenant is your customer, you need to treat them well. No different than a retail store. But an effective pre-screen to weed out the shoplifters is absolutely necessary.

  8. David duCille

    Thoroughly agree with the article having just. Done my first eviction last month (not my property, helping out a friend that moved out of state) in this case the property doesn’t cash flow as it was her old residenc that she bought sky high in 06 and can’t short sell and doesn’t want to simply let it get foreclosed. Cash flow is so key, I have a rental in a bad neighborhood that I will NEVER get an applicant with a credit score above 600! But it cash flows 2.5x the mortgage payment! The cash flow has to be there in the C and D areas to mitigate the risk. In the A AND B neighborhoods you just have to hold out for a good tenant. They are out there

    • Eric D.

      Thank you for the comment David!

      It may be difficult to get a tenant with a 600+ credit score, but they are out there. Only about 20% of the population has a score that low. And you are 1000% correct. You need higher rents, higher deposits and more profit the lower the area rating.

      My 4-plexes, the ones with mortgages, cash flow about 4x the mortgage payment. All purchased with ~25% down and all since 2008.

  9. Kimberly H.

    Thanks for posting. I also found the comments especially about restraining orders informative, I had no idea a tenant could actually bait you by saying they need maintenance and then call the cops when you get there to trap you. Wow. Glad I know now.

    • It really is important to know how you can get into trouble. Better tenants do not do this, but a drug dealer, prostitute or low income person that is getting behind on rent might do it. Also, a person that might lose their rent subsidy if they get evicted will pull out all the stops to keep that gravy train going.

  10. ken gurta

    Eric, Everything in your article happened to me with an ex tenant that I eventually successfully evicted. This tenant hired a realtor to represent her in negotiating a lease. The realtor assured me that this tenant paid all of their past rents on time and that background checks had been done on the tenants. I believed this without seeing any reports. This was a huge mistake!

    The first red flag came when the tenant wanted to move belongings into the garage before the lease started. Then, I was told to not deposit the first month’s prorated rent check because the tenant had taken on too many moving expenses. I used to get called over to the house for the smallest of problems, things that the tenant should have taken care of their selves. I almost evicted the tenant around 8 months into a 2 year lease, but held off after corresponding with a shady attorney that represented the tenant. I was told that she had a large settlement coming from a workman’s comp suit that would catch her up on back rent. And I believed that. Big mistake on my part.

    When I tried to give her an intent to evict letter a few months later, she refused to take the letter and tried to put a restraining order on me. Thankfully, the judge denied the restraining order and I was able to file for eviction. I hand delivered a subpoena to the tenants attorney so that I could question him in court. He didn’t show, conveniently having to be in another case the same day. He did however send another attorney to represent my tenant. After being on the stand for 30 or more minutes, the judge had heard enough and ruled in my favor for the full amount I was seeking. I won, or so I thought.

    After following the law in my state, I filed a Writ. When the ex tenant, who I now know is a professional scam artist found out about the writ, she filed for bankruptcy even though she had received $30,000-$40,000 in the W.C. settlement. By this time, she was suing her next employer. After fighting her in Bankruptcy court to try to recover the judgement she owes me, I lost. She now is not responsible for her debt to me. I am out a few thousand dollars in lost rent and attorney fees.

    Had I done my own tenant screening, none of this would have happened. I would have found out that she was being evicted by her previous landlord when she found me. No longer will I make compromises. A tenant must pay for a background and credit check. And they must pay the rent and security deposit before getting a key to my house. I tell them this is part of “Qualifying”. Landlords, screen all of your serious applicants so that my story doesn’t happen to you. For the record, I have had perfect tenants with on time rent payments since I started screening.

    • Thank you for the comment!

      WOW, that is quite the story. Investors that have never gone through a bad tenant can never fully appreciate that. It also shows that many PMs are just interested in a commission, not your profit.

      I like to use credit score as a litmus test. Anyone can avoid a criminal record by not getting caught. A credit score is earned.

      • ken gurta

        I agree. I used to think that most tenants would not have a good credit score. That is not always the case. In my latest screenings, I had 2 applicants come back with scores in the mid to upper 700’s. If an applicant balks at paying the application/screening fee, they are probably in bad financial shape or have something to hide. Either way, you don’t want them as tenants.

  11. Michael A Sanders on

    Tenants, Toilets, and Termites!

    Sadly, credit profiles can be falsified, if the prospective tenant knows how to game the system. Also, credit scores aren’t always accurate. Having myself been the victim of identity theft 13 times, my credit was harmed through no fault of my own. I even subscribed to ID theft insurance. But, when it came time to collect on the policy, the provider just cancelled me and refunded my premiums.

    For the record, identity thieves can pass your background check by obtaining an ID and checking account in the name of their last victim who had a high credit score. A checking account can even be opened online. Even birth certificates aren’t difficult for iD thieves to obtain.

    I heard that they look for prospective victims who aren’t “in the system,” so to speak, decreasing the likelihood that their victim will find out about their stolen identity before said thief rips off their next victim, such as a landlord.

    Besides, even a great credit score is no guarantee that a tenant isn’t a lowlife scumbag who will leave you high and dry. For the record: Some of the world’s most notorious criminals have high credit scores (because they pay their bills on time) and no criminal record as they’ve usually managed to avoid capture. By law, background checks can only show convictions, not suspicions of crime.

    I’m getting into the commercial PM biz, myself (office/warehouse/industrial space). I’ve read that many investors are pursuing rent-to-own tenants, as they’re supposedly better than common renters. But, as an investor, I’m more interested in self-storage units and high-end hotels owned by REIT’s. With hotels, if the guest doesn’t pay, you can evict them in 24 hours.

    Also, I’m researching tax lien certifs. in certain counties in Texas, as well as S&P 500-indexed options, both of which I’ve read can earn 42% ROI. At the end of the day, it’s mot what business your in that matters, it’s what your ROI is and whether you enjoy what you do.

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