No matter how well rental properties are managed, bad tenants will trash them. There are many things a landlord can do to decrease the risk of damage, but the longer you own a rental, and the more rentals you own, the better chance there is for a bad experience. I have had a couple of bad experiences just this year. We do quite a bit to screen tenants, and we check up on the properties and keep them maintained. However, tenants sometimes have major problems that make them stop taking care of the property. They could also be mad at the world or the landlord and take out their problems on the house. Earlier this year, I had to evict some tenants, and they had bed bugs. In the last week, another tenant just up and left after absolutely trashing the house. I was in a bit of shock when I saw the damage, and I include a video of it later in this article. My team manages my rentals for me, and we had some serious discussions about why this happened and how to prevent it in the future. After some good talks, I think we figured out a way to help prevent these situations.
How well has this rental property performed in the past?
The property that was trashed was rental property number eight. I bought it in November of 2013 for $97,500. I spent about $15,000 on repairs before renting it out, and it has been occupied since I bought and has earned me $1,300 to $1,400 per month. I have not spent any money since the initial maintenance and repairs, but that will change! This tenant was the second in this house. She had rented another house of ours for 2.5 years before this one. She took care of that house and always paid her rent on time, that is until November of 2016. My property manager (an agent on my team) worked out a payment plan for the renters where they would pay twice per month to catch up while they looked for a cheaper rental. The property manager visited the house in February, and though it was cluttered, he did not notice any damage (which may have been because of all the clutter). The tenants kept making payments, but the payments weren’t enough to keep up with rent, so they were falling further behind. However, they promised they could catch up after they received their tax refund. We did get a $4,000 payment in February after they filed their taxes, and this caught them up. At that time, the wife told me her husband got a new job with a promotion, and they would have no further problems paying rent.
The next month, we only received a partial payment! They brought in another big check in April to catch up, but it bounced and we decided to start the eviction process. Up until the eviction, she communicated very well and it seemed she genuinely wanted to make things right. But after they started falling into the hole the second time, we didn’t think they would catch up again. As soon as I told her the eviction process had started, she stopped talking to me. She never talked to any attorneys or went to court (every other tenant has tried to work things out). They left around June 15th and left the house looking like this:
Here is what the property looked like after I bought and repaired it:
How much money did I lose because of this?
There are many things you can do to protect your rentals from bad tenants. The first thing I do with all my properties is assume I will have maintenance and repairs, and I account for those repairs. Depending on the condition, age, and location of the property, I will assume that 5 to 15 percent of my rental income should be held aside for maintenance and repairs. This property was occupied for over three years at $1,300 or $1,400 per month. In those three years, I did not perform any repairs or maintenance. So, assuming 10 percent of the rent would go to repairs and maintenance, I would have planned for about $5,000 up to this point. In reality, it will cost me $15,000 to $20,000 to repair this house, although this does includes some upgrades such as new windows.
Obviously my usual prediction for repair and maintenance costs did not add up to how much it will actually cost. But this was also the most damage any tenant has ever done. I have bought 17 rentals since 2010, and most of them have needed very little if any work. If I take into consideration all of my rentals, how much work I have had to do to them, and how much I have assumed they would need in work, I am still ahead of the game. My properties bring in about $250,000 per year in gross income (before mortgage payments, taxes, insurance, etc), which means I allocate about $25,000 per year for maintenance (10 percent of $250,000). In the grand scheme of things, this is not a huge deal for me, because I planned for repairs and my properties were bought very well with plenty of cash flow.
What did my property management team learn from this?
I have had a couple of issues with rental properties this year. In both cases the tenants were long term tenants who had lived in the properties for more than two years. The tenants had been good to start with and paid rent on time in the beginning. But over time, they slowly became very bad tenants. We check on the houses quarterly, but both houses were trashed in a matter of a few months. Here is what we will do differently from now on:
- As soon as we’ve received 2 late payments, we will go straight to the eviction process. Tenants can be very good about prolonging things. If rent is falling behind, everything else probably is too, and in most cases, it’s just too hard to catch up. Plus, any decent landlord won’t select them, which means it will be very hard for them to find another place to rent.
- We need to make sure to check on the tenants and examine every single room. Tenants are also good about saying “oh the baby is sleeping in there” and stuff like that, but in the future, we’ll make it clear that we will inspect every room.
- A large amount of clutter is a warning sign. People could be covering problems up or who knows what else.
- Stakes are super high during evictions. Housing is a basic need, so people get desperate. Next eviction, I will call the police and request they patrol during the process. The stress of an eviction can lead to poor decisions and angry tenants who trash houses.
- If tenants paid on time and took good care of the property, we always renewed their lease. However, we are now going to treat each renewal as a brand new tenant. We will check references, credit, and verify income in every case. That way we can see if there are problems coming up like a lost job, missed car payments, etc.
Should this scare others away from rentals?
The great thing about buying properties below market value is it puts you in a great position when things go well and protects you when things go wrong. This property is worth around $230,000 now, which is more than double what I paid for it. Appreciation has helped the value go up, but I also got a great deal on it. I estimate it was worth at least $160,000 after I originally fixed it up in early 2014. While it sucks that the property was treated horribly by these tenants, it was still a good investment.
I am also in a good position because I have so many properties. The more properties you have, the more diversification you have, and the better position you will be in with a bad tenant or two. If you only had one property and this happened, it could really hurt. However, because I have so many properties, there is also a much greater chance of this happening, and I have owned rentals for over 6 years. If I assume I owned 10 properties those entire six years (a random average since I have not owned all 15 properties all six years), and I have only had two really bad tenants that caused over $10,000 in damage, that equates to just a 3 percent chance of this happening each year. There are also many things we can do better in the future to prevent this type of damage. I would not get scared away by this one experience but use it as a learning tool instead.
This property was left in horrible condition, and I will have to spend quite a bit of money on the repairs. However, it has still been a good investment, even with what happened. If I look at the big picture with all my properties, they have been an awesome investment. They have increased my net worth by well over one million dollars, provided me with thousands of dollars per month in income, and have provided amazing tax advantages.
For more information on my rentals, how to buy rentals, how to finance them, and much more check out: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.