Thursday, September 3, 2015

Sometimes a lot of rent can cost you a lot of money

Before the first dollar changes hands, an investor and/or potential landlord should ask themselves "Do I want steady money or do I just want quick money"?

I can only speak for myself, but if I was asked, my answer would be steady money.  I think this is the one area that will  (and does) quickly break a lot of investors and/or landlords.

You can double the market rate on a house and eventually you will rent it to someone.  True. How many months will that house sit vacant before that happens and how long will the tenant stay there once you get it rented and what kind of condition will they leave it in once they move (or get evicted)?

Personally, I would prefer to have a tenant in place for 2 years paying $800 a month ($19,200) than a tenant in place for 6 months paying $1,000 ($6,000).  

Sure, you can slap some lipstick and mascara on that pig and if you're willing to take someone with less than stellar credit, you will be able to get a higher than market value on that property....for a month or two anyway.  People with bad credit expect to have to pay more for everything than those with good credit.  Sadly it's a fact of life these days that those who don't have the means to pay high prices are forced to do so because of their credit histories.  

Let's say you find what you believe is a perfectly lovely person to rent your house at the inflated price.  One of three things are going to happen.  

(1)  Renters are just as price savvy as buyers.  Good renters know about what to expect to pay for rent in any given neighborhood.  A good renter will know right off the bat if the property in question is over priced and will move on down the road.  If they don't - you may have just rented your property to a meth cooker or some other sort of criminal who has nefarious plans for the use of your property.  Plans that down the road could land you in some very hot legal water and might even end up costing you your property.

(2) If someone pays a much higher rent on your property than they could go down the street and get, there's the chance that you've just rented your property to someone who is on the verge of getting evicted from their current property and they just need somewhere to put their stuff for a month or two while they look for a more affordable property to get into.  I know, sounds ridiculous doesn't it that a person would pay the deposit and first month's rent just for a temporary solution.  Trust me when I tell you that this is a much more common occurrence that you might think.  I have personally witnessed it on way more than one occasion.  

But how can they do this if they are about to be evicted?  Won't that show up on their background check or when references are called?

Possibly no.  If the eviction hasn't been filed yet, nothing will show up on a Court search or on their credit history.  As for the reference checks, when you call the landlords number shown on the application how do you really truly know you are talking to a landlord and not the applicant's sister, brother or best friend?  You don't.  

People like this know how to work the system and they associate with others who know as much about the topic as they do.  I can pretend to be anyone's landlord.  All I have to do is tell the caller that I own the home privately and the tenant has been a wonderful tenant that I hate to lose but I've decided to let my son move into the house so the tenant needs to find alternate housing.  See how believable that sounds?


(3) You have just been suckered by a career non-rent payer who is going to give you the deposit and first month's rent, move in and never pay another penny.  They are going to string you along with all manner of sob stories and bad luck and get you to wait until the 15th, then the 1st, then next week.....but next week never comes and one day you awake to discover that you've allowed them to live in your house for months.....for free. 

Now these folks are cagey.  They will throw you a bone from time to time.  $100 here, maybe $200 there but never anywhere near the whole rent.  Just enough to make you think that they are at least making an effort.  But the thing is, those bones are very few and very far in between. 

But never fear.  They will move.  After you've spent time and money paying someone to evict them and after you have waited the required period of time before you are allowed to go into your property to put their things on the curb. 

Putting their things on the we're getting into the part that lets you know where all that "extra" money you got for the deposit and first month's rent is going to go towards.  You thought it was going to go towards that new boat, or maybe that lot by the lake so you could build your dream cabin didn't you?  Sadly, it won't.  It will all be spent (and then some) on paying to get the tenant evicted, loss income while the tenant is living in the property for free and getting the rental ready for the next tenant - which could take a couple of months realistically.

Why a couple of months?  Because when you run across this type of tenant, you might as well cash out your 401K because by the time you clean up the yard, the house, repair the damage they caused and get it ready to rent're looking at some serious time and money.

I managed a house a few years back.  The landlord accepted a tenant against my recommendation.  "She's awesome" I was told.  She had marginal credit but a steady job and loved the house!  Within a month after moving in the house, she had been fired from her job (for stealing), her car had been repoed (goodbye marginal credit) and then came the sob stories and bad luck songs.

The landlord kept thinking it would be cheaper in the long run to take the $100 here and there that this tenant dished out sporadically than to go through the eviction proceedings and miss a month or two on rent altogether.  After all "she was trying".  It turned out to be more like 6 months.

By the time I finally talked the landlord into allowing me to evict the tenant, the damage had been done.  The tenant fought the eviction pushing the process from 1 month to 3 months. When I was finally able to go inside the house, I almost fainted. 

Fleas EVERYWHERE.  Feces in every room.  Newly refinished hardwoods destroyed.  Doors clawed and chewed by the 4 large dogs that she kept in the house.  4 broken windows. 2 busted doors. Massive holes in the walls and even in some of the ceilings. Roaches everywhere.  Grass was literally as tall as the house.  Weeds had choked the life out of the numerous flowers in the flower beds.  Concrete retaining wall looked like someone had repeatedly run a truck into it.  Mountains of garbage in every room and all over the back patio. As if all of that wasn't bad enough, they had their water cut off for nonpayment several weeks before and had decided to go ahead and use the toilets anyway and once the toilet was full - they used the bathtub.  Now add to all of this the fact that needing money to move, she and her boyfriend (who wasn't on the lease) stole the central heating and air unit and sold it.  Only they didn't disconnect the unit.  They ripped it out.  Electrician bill to go along with the cost of replacing the units.

I tell the specifics of this story to illustrate my point that while the landlord did initially make about $600 more on this property than it was worth on the market, the cost of evicting this tenant and getting the house ready for the next tenant was a grand total of $13,000 (and change) and that total doesn't account for the lost rent.

You may be thinking, "I'll sue them for the damages and also have them arrested!".  Good luck with that.  Many states don't allow landlords to actually have a tenant arrested for damage to their property.  They consider it to be a civil matter rather than a criminal matter.  As for suing the tenant for money damages, you can do that in all states.  But what are you going to get in return?  Nothing.  For one thing, in order for this to really impact the tenant's ability to rent (especially from a private landlord) you will need the judgement to show up on their credit report.  Unless you are willing to pay for a membership to all 3 of the reporting agencies (which is not cheap), then it isn't going to show up on any credit report.  Secondly, you may indeed have a judgment against the tenant.  How are you going to collect that money?  These people are what lawyers call "judgment proof".  Meaning they don't have anything for you to take - or at least nothing in their name.  They typically either don't work at all or only work for a short time and only sporadically at that.  Remember the old saying "you can't get blood out of a turnip"??  

Everyone deserves a place to live.  Rich, poor, good credit or bad credit.  Everyone should be able to have a roof over their heads.  However, do you really want to trust your property to someone who is going to do this to you?  

My rule of thumb is to set the rent at a reasonable price and rent it to someone who checks out. Maybe they have bad credit but their rental history is stellar.  At the end of the day if a person pays their rent on time who really cares if they don't pay their VISA card on time?  

The key phrase in the above paragraph is "checks out".  Pictured ID so you know if the person applying is using their info and not their infant child's info.  Get the last 6 paycheck stubs from them and don't accept copies or printed versions.  Those are far too easy to forge.  If necessary, get the employer's address and mail the verification form to them.  If the applicant gives you their landlords info and it appears to be a private individual - go to the tax collector's website.  There you will be able to search by address and that site will tell you exactly who owns that property.  If the name or contact info doesn't match - chances are you've been given bogus information.  

At the end of the day, you won't get rich quick by accepting reasonable rent.  But chances are, you won't wind up in bankruptcy court either.

But that's just me.