I have been pretty lucky with most of the tenants in my rental properties. Over the last five years, I have had some bad tenants who cost me money, but for the most part the renters have paid on time and have taken care of the properties. We usually get good tenants because we take our time choosing tenants, check references, perform background checks and make sure our tenants can afford the properties they want to rent. However, you can do everything possible to choose great tenants and still have renters who get behind on rent, damage a house or have to be evicted. I have had three really bad situations with tenants, and we are in the process of evicting a tenant right now for non-payment. It has been frustrating dealing with bad tenants, but it has also taught me a lot about management and how to do things better. Three bad tenants is not terrible, when you consider I bought my first rental in 2010 and have 16 now.
How do I manage my rental properties?
I managed my rental properties with help from my wife, up until I had 7 properties. My wife was usually the one talking to tenants, and she told me if I bought any more rentals we had to get a property manager. It does not take a lot of time to manage one single family rental property, but it adds up when you have five or more.
Around the time I had seven rentals, I hired my good friend Justin to manage my real estate team. He was able to help me take over the business from my dad in late 2013. When I hired Justin, I also gave him the task of managing my rental properties. He had no experience managing properties, but was able to take over management and surpass my abilities rather quickly.
My wife and I were okay managing rentals, but I am too soft on people to be a great property manager. I did not always charge late fees, I listened to sob stories, I gave people breaks and tenants took advantage of that. For the most part we had great tenants who paid on time, but much of that was luck. When Justin took over managing properties I think I started making more money even after paying him 8 percent of the rents. He always charges late fees no matter what, is more thorough choosing tenants, and has had much fewer problems than myself.
What are the three biggest problems we have had with tenants?
We have only had a few major problems with tenants who did not pay rent, and have only had to evict two people in five years. In both those evictions, the tenants left on their own, and we did not have to move everything out of the home. In order to get a judgement or to try to collect more rent, we went through with the eviction.
Here are the most notable problems:
- Single mom vanishes
Last year we rented rental property number 11 to a single mom with three kids. Her references checked out great, and she made plenty of money counting her child support payments. For a few months she paid rent on time and we had no issues. Then she just stopped paying rent. Justin tried to call her, he stopped by the house, posted an eviction notice and she did not call or respond at all. We could tell someone was still living there, but no one would talk to us.
Justin tried to evict her himself and studied up on the court procedure. I showed up in court with him, and the judge told us we pretty much did it all wrong. We followed the instructions on the county website, but I guess they were outdated and incorrect. We decided to hire an eviction attorney, who did everything for us for $750. We attempted to get a judgement against the tenant, but she had vanished and could not be served. Before the eviction date, she moved out and we were able to gain access to the property.
I did not know a tenant had to be physically served, in order to get a judgement against them. I know now! I didn’t feel like spending a ton of money to find her, so we left it alone and re-rented the property. We lost a couple of month’s rent, the attorney’s fees and had to clean up the place a little. She also had a cat which was not allowed. Luckily we were able to rent the house for more than she paid, and we only had to spend a few hundred dollars on cleaning and removing the trash she left.
- Bad tenant choice, plus heart problems
About two years ago, we had another issue with tenants when I was still managing our properties. I rented rental property 6 to the brother of another tenant we had. I did not screen the new tenant very well because the other tenant had been good for many years (not smart). The new tenant had a landscaping company and always paid rent on time in the beginning. Then he started to get behind, he wouldn’t answer calls right away and couldn’t keep his stories straight. He would catch up on rent, but then get behind again. I should have gotten him out sooner, but it was nice seeing a couple thousand in cash come in when he caught back up.
About a year after he started renting from us, we ran into a huge problem, he had a heart attack, or at least developed heart problems. He stopped paying rent for a couple of months and I did not have the heart to evict him. He was able to pay some rent once in a while, but he never caught up. After he recovered partially, he agreed to move out and promised to pay us back the $3,000 or so he owed us. He never paid us another dime and after I was nice enough to let him stay rent free while he was in the hospital, he left a big mess in the house that we had to clean up.
- Problem tenant from the beginning is finally is getting the boot
This month we are evicting another tenant. Justin has been managing this tenant for the last two years, but I was responsible for placing him. We rented rental property number 5 to some marginal tenants because we couldn’t find anyone else. The property had a strange floor plan with no area for a dining table. We rented the property to a tenant who couldn’t pay the entire deposit and rent before they moved in. This should have been a big warning sign, but I ignored it to get the property rented.
From the very beginning, the tenant was late all the time, but he always managed to get caught up. When Justin took over managing the property, nothing changed. The tenant was still always late, but at least now he was paying late fees when he fell behind. A couple of times the tenant fell way behind and Justin posted eviction notices. Every time we posted an eviction notice, the tenant was able to pay all the back owed rent and late fees so we let him stay.
The really frustrating part of the tenant not paying, was he bought a brand new Toyota Sequoia while behind on rent. Another car dealer called us for a reference last year, because they were trying to buy another brand new car. A couple of months ago he fell behind again! This time he took a little longer to catch up, and I have been contemplating selling some rentals in Colorado. I decided to end the headaches and get the tenant out. We told the tenant he had to leave, but we knew the chances of him paying us anything else would be slim, if we let him leave. To make sure he left and to get as much money as we could, we started the eviction process and had our attorneys serve the tenant. The court date was earlier this week and the judge gave us the option of an immediate judgement or a payment plan. The tenant had agreed to pay $200 a month on $4,458 (what he owed plus attorney’s fees) or we could get an immediate judgement of $3,558. If we chose the payment plan and he failed to pay at all, we would get a judgement at that point for what he owed, the attorney’s fees and an $800 fee on top of that. I chose the payment plan.
At this point we are out about $3,000 (the higher amount comes from late fees rent and the attorney’s fees). However, we may get much of that back over time if he sticks to his payment plan.
To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.
How have we limited losing money with bad tenants?
Over the years, I have learned a lot about how to manage my properties to limit damage and unpaid rent. Here are some of the mistakes I made in the beginning.
- I thought I could judge a tenant by talking to them without running credit or background checks.
- I thought if I was nice to tenants and gave them breaks, they would be nice to me and not take advantage of the situation.
- I ignored warning signs like not being able to come up with the first month’s rent and deposit.
- I tried to save money by managing properties myself, even though I had many other things on my plate.
Here are some of the things we do now to make sure we get great tenants and limit damage.
- We do quarterly inspections on properties to make sure they are being maintained and no rules are being broken.
- We run background and credit checks on all tenants.
- We check all references and verify employment.
- We charge late fees on all tenants, no matter what.
- We send invoices every month so there is no confusion on what is owed or when it is owed.
- We set up automatic payments with Quicken.
- If someone gets behind, we call them, visit the house and start eviction sooner rather than later.
For the most part we have great tenants, and having single family rentals helps as well. We avoid having properties that need major repairs, by checking on properties regularly. Most horror stories I hear about tenants who trash houses, are from landlords who never saw the property for years.
Finding great deals on rental properties is only one step to a successful investment. You also must manage them well or have a great property manager. You can’t be soft on tenants, and you can’t be lazy renting homes or you will pay for it later on.
For more information on how to buy the best rentals, which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller