How to Deal with Bad TenantsSep 11 • Categorized as Cash Flow Properties
Good tenants do not live in bad areas
Take away the tenants (rent) and every well intended landlord will go to landlord hell. That is the place where the landlord goes when he can’t make ends meet. If you are in this business, you know what I mean. Without the rent you are doomed, because you can never get it back. Every month the rent doesn’t come in is like a loud bell that clangs louder and louder each month.
As a property manager that manages hundreds of houses at one time I know first-hand how important good tenant selection is and the expectations of the owners I serve
The first step to good tenant selection is the house and the area in which it is located. I’ve declined to manage dozens of houses for investors because they purchased the wrong house in the wrong area. It is a recipe for disaster to expect good tenants to live in bad areas. I have been instrumental in helping absentee landlords select houses and neighborhoods. Some property managers will manage anything. Not me. I’ve had my head literally kicked in by thugs as I was trying to perform a simple home inspection in a bad neighborhood. I can’t emphasize enough how bad neighborhoods attract bad tenants.
Seriously, if you bought in the ghetto, that is going to be the clientele you will be dealing with. Nothing short of AK-47s and Doberman pinchers will get the rent collected on a monthly basis. That is not my idea of predictable cash flow. Nor should it be yours.
Unfortunately, many small investors start out in this area of real estate investment and ultimately give up years later. I know many well intended investors that got chewed up and spit out by tenants, housing court and liberal eviction court judges. Just make up your mind right now. You are not going to buy older junk houses in junk neighborhoods in the wrong areas of the country. Simply forget about welfare tenants and guaranteed section 8 payments. If this is your thought process, start taking your clothes off now because it’s going to be hot in landlord hell.
So how do you deal with bad tenants?
What do you do if you put the wrong tenant into a house? You follow the rules of eviction in that county and you get them out as fast as possible. It’s called cutting your losses.
The real question should be – How do you avoid bad tenants?
Think about this. There are a lot of displaced homeowners that need to rent due to their house being foreclosed on. This doesn’t mean that you should rent to them. You have to carefully select tenants based on:
- Income and Debt Ratios – Can they afford your rent when combined with all their other bills?
- How far is the commute to their job? - This is a critical factor as the price of gasoline rises.
- How long have they been on the job? – This is crucial but what is even more important is the likelihood that they will have a job. These are the questions you should ask the human resource person when verifying employment.
- Landlord References – Most landlords will not give a good recommendation for a bad tenant. But some will, just to get them out. That’s why you should always go back two landlords and ask the question, “Would you rent to them again?” Also, ask if they are related to the applicant and how they got to know them.
- Family Makeup - You must be careful not to discriminate. But the reality is, you should not rent a three bedroom house to a family of ten.
- Personal References – Most times applicants will use someone that they know will say something good about them. A good question would be to ask the personal reference if they will cosign for the applicant and then forward them an application. This will smoke them out in a hurry.
- Vehicles – Would you rent a nice house to someone that had two cars but both were 15 years old? You would if you wanted oil all over your driveway. You have to know the financial makeup of an applicant before you rent to them. Dependable transportation and if they have automobile loans are very important when considering the likelihood of getting paid on time.
- Visit their current residence – This is a critical piece to the puzzle for determining who your prospective tenant is. As a business practice, we visit their current residences to confirm how they take care of the place, landscaping, pets and family. If they don’t take care of the place they live in now, they won’t take care of yours either.
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This may sound crazy but tenants are like children. You must clearly explain the rules and guidelines of the lease. You can’t just hand it to them and expect them to read and understand it. Just like a teacher who gives her students a book and expects them to read and understand it without appropriate directions. If they violate the rules or cross the line, you must act immediately and enforce the consequences. It is critical to do this at the first sign of late payment or inappropriate responses on their part. We will file eviction papers within 3 days of a new tenant deviating from our rules.
Sure, we will let them stay if they pay all their late fees plus eviction cost. But this sets the tone for all future business dealings and they know we mean business.
The key to quality property management is to do your due diligence on applicants before they ever step into your rental house. There is no reason to waste time on people that haven’t paid in the past or those who lie on their applications.
As a member of the National Association of Property Managers (NARPM) and being a licensed broker I have to uphold certain ethical procedures while selecting tenants for owners. We never compromise our owners’ position and we completely understand the importance of predictable cash flow. That is why more and more of the investors we serve call us in advance, before making a real estate acquisition.
By Anthony Salmeri
Call me or email me if you are considering properties in the Atlanta area. I would be glad to earn your business.