Risky Business: How to Minimize Tenant Related Risks

[Jared Garfield]

We all know there is risk owning real estate, I wanted to share some thoughts on tenant risks, which seem to scare people the most.  Please reply with what you have done to minimize this type of risk!  Let's build a great discussion.

-----------------------------------

All investments come with risk, and real estate is no exception, especially when it comes to tenants. Investors imagine their expensive turnkey properties sitting inexplicably vacant, or even worse, riddled with unpaying tenants who leave the homes with more damage than rent checks. All of these worries are possible and serious, but there is some good news to all this: those risks can easily be mitigated with just a few tips and tricks.

Below you’ll find the three most common tenant risks—and our industry knowledge, strategies, and tools to help you solve each.

A delinquent tenant and a vacant property both mean no cash flow for the investor.

Vacancy:  When investors think of vacancy, they envision empty lots and homes. But there’s a sneakier version too—delinquent tenants. The bottom line: if you’re not getting a check at the end of the month, your property is vacant, no matter who lives there.

Knowledge: Research is your best friend. Look at census records. Avoid neighborhoods with higher crime and poor schools. Don’t buy properties built in the 1890s if most of the housing stock in your community is 1960 or newer. Learn more about proper vacancy reserves, which will help you float during lean times.

To get rid of unpaying tenants, you need to know the tenant-landlord laws in your state. Every state is different, and it’s vital that you buy investment properties in states that favor the landlord. Otherwise, you’ll struggle to have your rights enforced.

Strategies: One core strategy is screening. Decide if you’d like to include or exclude Section 8 tenants. Verify all tenants’ employment history. Have property managers look at previous landlords—but not the most recent. Instead, look at one or two landlords before that because they’re less likely to have bias or ulterior motives.

If you already have tenants who can’t pay, consider giving them a voluntary exit strategy. In other words, allow them to leave without putting an eviction notice on their records, so long as they vacate the premises immediately. That will get the old tenant out and new one in more quickly, and it’ll save you court costs too.

Tools: Use background checks and credit checks. Set credit limits and inspect their unpaid bills. Don’t lease people who have been evicted.

Many investors use Indexed Universal Life (IUL) policies as well. IULs are more flexible than most life insurance policies and will help you store a cash flow for potential future vacancies.

DamageTenant damage is one of the biggest real estate boogiemen. Every investor frets about their tenants’ trustworthiness because if left unchecked, damage can be a huge problem.

Real Estate is as much about people as it is about properties.

Knowledge: Know the most durable materials and products available for your properties, and use them when you renovate. That way, you won’t have to repair as many items when tenants move out.

Houses from the 1960s often have hardwood floors, which are both appealing to customers and easy to maintain. The same goes for granite countertops. It will last much longer than laminate, attract better tenants, and it won’t cost that much more—especially if you use granite remnants for smaller homes.

Strategies: Get a quarterly inspection. Have someone change out air conditioning filters and make other small updates so you won’t face larger problems down the road.

While you’re at it, have the inspector look around and shoot some pictures of the tenant’s damage. Charge them for those damages the next month, and if they don’t pay, evict them.

Tools: Security deposits are a must. That way, you’re guaranteed to get most of your money back. Renter’s gap insurance is a great option too because the tenant pays for it, not the landlord. If neither of those options work, take legal action and garnish their wages.

Pets

Making a decision about allow pets is not as cut and dry as it might seem.

To allow pets or to not allow pets seems like an easy decision for many investors, but is it really as cut and dry as they think? There are obvious disadvantages but also some less obvious advantages to consider before making a final decision.

Knowledge: Many investors think no-pet policies are the best solution, but there are some definite downsides to this. Many people choose their next homes based on whether or not they can bring their pets with them, so allowing animals may solve future vacancy issues.

Strategies: Increase pet owners’ number of inspections. If you normally inspect properties biannually, change pet households to quarterly and charge the tenants for them.

Tools: Use pet deposits and pet rents. Tenants generally prefer pet deposits over rents because they hope to get the money back. If this doesn’t work, ensure your renter’s insurance covers pet damage.

I hope this helps, please add anything I missed!