The Landlord Trap, Do not get caught in it

mouse-164751_1280-PDThis is a rental situation that is run across many more times than you think, the landlord trap.  If you think it is your tenant scenario, it may be, but it happens so often it isn’t funny. 

Perfect Tenant to Start

So you have found a tenant.  They are solid people, from a criminal standpoint.  Not even a parking ticket.  They have spotty rental history, an eviction a few years ago for unpaid rent.  In your face-to-face interview, they are genuinely good people that have fallen on hard luck.  It may have been a divorce, a job loss, medical problem, a domestic violence situation.  The prospective tenants have a source of income, but it is a bit light.

Your minimum requirement is twice the rent in income, and they cross that hurdle, but barely.   Their credit score is weak; they have more bad accounts than good accounts.  Some defaults on accounts that have led to a judgment.  They even have some of the deposit, but have promised to make a payment on the deposit next month to get your full deposit.  And they want to move in right away.

You have to analyze a few things.  Money today, is better than money tomorrow.  Passing on this tenant could mean another month of vacancy.  You know the Federal Government recommends families pay no more than 30% of their income in housing; these people will be paying over 40%.  These people need a home; you have a vacancy, so you take a chance.

Rents Start to go bad Quickly

They start out OK.  The first month’s rent is paid before they move in.  Maybe even by a Government source.  The next month’s rent is on time, but is paid on the first Friday of the month, not the first of the month.  The third month’s rent, they ask for a delay.  They can pay on the 10th, the second Friday of the month.  They were never able to come up with the rest of the deposit, but they are still good people; no issues, no complaints.  By the four month, they have had car trouble.  They need until the 15th to pay.  They have paid according to their word a bit late for the past two times, so you are OK with it.  You wait until the 15th.  No payment arrives and you call them.  They need another week.  It is now the end of the month, and you have not received any money, not even $100.

Eventually the end of the month comes, and they may or may not have paid any additional money.  It is time to evict, or negotiate a move out, if you are an astute landlord.  If you were really astute, you would have avoided the situation in the first place, and not rented to them.  Or you would have lowered the rent so they could afford it.  Or you would have started the move-out process sooner, around the 10th.

The Move Out

In any case, you now have some expenses on your hands.  In MN, it is $320 for Eviction Court fees, plus $75 to serve the eviction papers.  You file it yourself, to avoid another $100 in attorney fees.  You have not received the past two months rent, but your tenant has only been living free for a bit over 30 days.  It adds up fast.  So you are out $2,000 in lost rents.  You win the eviction case, and have to get a writ.  It costs another $55 for the Writ, and another $75 to serve it.  They finally move out on the 15th, six weeks after your last rent payment.

You do a damage assessment, and you find the place needs cleaning.  The range and refrigerator is not cleaned enough for your next tenant.  The carpet was not vacuumed, and it needs to be cleaned.  The bathroom and tub is not clean.  There are a few small fix it items.  You estimate the cost to be $500 to fix back to where it was, plus about 25 hours of your time.  Luckily, you collected a $500 damage deposit.  Paying for the labor would have been another $500.

After you clean the apartment and get it ready to go.  All with your own volunteer labor.  You start to advertise and show it.  You have another tenant that wants it right away, and is ready to move in, in six weeks.  You have now recovered.  Or have you?

All in all, this very typical situation costs a bit over $4000, with lost rents, court costs, damages, plus another 40+ hours of your time and aggravation.  It was probably the entire profit for that unit that you were expecting for the entire year.  It also costs a lot of aggravation.  That is assuming that you started evicting right away.  Some landlords wait another month, and add another $1000 to the bill.  They then go to small claims court, and spend more money trying to get money from someone who does not have any.

So in the end, you lost money.  You do it again and again, and soon you do not have money for a new paint job, new appliances, and new carpet.  You are now only attracting bad tenants; good tenants would not live in your unit if you paid them.  You collect a few bucks here and there, but at the end of the year, the only way you ‘made’ any money, is due to deferred maintenance.  Fixing the broken stuff, and maintaining your unit, would have eaten up all of the rent and more.  Your rents are lower and your building is worth less.

So, you look back, and reflect.  You start to think being a landlord would be easy if not for these type of people that do not pay.  But in reality, it is your own fault.  You jumped too fast on the first tenant with money for rent.  They did not qualify in anyone’s guidelines but yours.  The subpar tenant put the golden handcuffs on you.  You could have lowered your rent by as much as $200, made more money, strengthened your rental criteria, and got a rock star Tenant that would have to stay year after year.  You would have the golden handcuffs on them, as your value would be that much greater than anywhere else.  You may even be able to increase your rent at the next lease signing.

So what do you do to avoid the Landlord Trap?  Analyze your marketing; are you reaching the right audience?  Analyze your prices; is your rent too high for your target market?  Do not look at other housing prices. Every house is different.  Look at how many solid tenants come and see your property, and do not fill out applications.  If it is more than five showings to qualified tenants without a lease application, adjust your prices.  Analyze your apartment move in date.  Good tenants look at least six weeks out.  If you are not holding your apartment for great tenants, by definition you are stuck with bad tenants.

Do not get caught up in this Landlord Trap.

Are you a landlord? have you ever been caught in this trap? Or know someone who has?

8 Replies to “The Landlord Trap, Do not get caught in it”

  1. My dad has some rental property and he has always tried to sway me against getting involved in rentals. I’ve rented one property myself a few years ago and it was a good experience. However my experience is an isolated one, as my dad frequently reminds me, but I think the difference is in how a person goes against handling the transaction.

    If you want to help people when renting then you are likely going to lose money. That sounds harsh, but it’s true. Handle the situation as a business transaction and although you’re not guaranteed a good outcome the odds are in your favor. I think spending the extra time in screening tenants and holding out for the right one will usually work in your favor.

  2. Interesting post about the cost of being too hasty (getting a bad tennant)..
    Are you able to have a realtor (they’re called real estate agents in Aus) help you out as a leasing agent?

    Sometimes while you end up paying more I’d say it is worth it for the extra $20 it will cost you per week..

    Great post though

  3. You’re right, jumping on the first tenant is the biggest issue.

    I recently had a tenant apply for one of my properties and their wages were only just enough to cover the rent on the property.

    Whilst they had every intention of getting a flatmate to help share the rental costs, that person would not be on the lease, so there was no guarantee that the burden of rental expenses would be alleviated.

    I waited another 2 weeks to find the right tenant. It certainly cost me a few weeks rent, but in the long run it has been the right decision.

    1. Thanks for reading! Please view my ‘Coming Attractions” to see the posts that are coming up. I will be posting a few horror stories too, just to make things lively. I think you dodged a bullet in your tenant by waiting. Great job!

  4. I didn’t so much jump on a bad tenant as inherit one when I bought a duplex with a set of grandparents living upstairs and kids/grandkids downstairs. We moved in upstairs at purchase and continued renting out the downstairs, but we started having problems after a few months and gave too many chances. In the end we had eviction costs plus smoke smells, damage, filthy apartment to clean. Our new renters are friends and they did a lot of work on the place helping us clean and freshen it up. I’ve heard people say that is two more mistakes – mixing business and friendship and letting renters work off rent – but as I don’t have the time or skill to do a lot of the things they did, it’s worked out great. Now there is new carpet, flooring, lighting, fence and paint and though we’re just now breaking even, we’ve got that great value/price thing going on and tenants who want to stay.

    1. Thank you for the comment!

      You can see that a bad tenant can cost quite a bit. I have had tenants as friends too, and it is OK. You just have to make sure that if they do not pay, you move them out and get a new tenant. If you get great tenants in the first place, having them as friends is OK. I would probably not hang out with them on a regular basis, but attending a wedding or birthday party would not be out of line.

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