Tenants that try to use damage deposit as last months rent

[Andrew DeB]

So i've come across this situation for the 3rd time in 3 years of landlording. A tenant has financial issues and starts paying rent a week or two late every month. Then they tell me they are moving because they can't afford my property anymore and choose not to renew the lease when it comes up. They tell me they will pay rent a week or two late like the last couple months. After i bug them again for rent they tell me they need the money for the damage deposit on the new place and tell me to just keep my damage deposit as rent. Now i'm in a situation where i have no choice but to accept because where i live before i can evict someone i have to give a 2 week notice for non payment of rent. Plus i don't get any late fees.

Now if there is any damages or cleaning that they haven't done then i have to chase them down for money. As well my properties have basement suites so the utilities are in my name and they pay me a % of utilities. So for the final month there is always $100-$200 because i get the utility bill 2 weeks after they moved out. Normally i hold a portion of the damage deposit until i get the bill and refund them the remaining amount. Now i have to deal with the hassle of chasing them for at least a couple hundred plus anything for damages. If they choose not to pay it's not a high enough amount for me to bother going to court over so i just bite the bullet. How can i avoid this happening a 4th time?

[Michael Gansberg]

Welcome to being a landlord, @Andrew DeB. It sounds like your tenants fall into what I'd term the "financially stressed" category, a category which an unfortunately high percentage of Americans fall into. Even after 13 years as an owner, I run into this problem pretty often. There is exactly one solution, and I'm going to detail it below- just for you.

Buy Class A residential and only rent to residents with the highest credit and income.

There- now you know. Of course, if you do that, your yield will drop precipitously- in fact, if you tried it in my hometown(New York City,) you'd have a negative cash flow, as the rent rate wouldn't cover the mortgage expenses and taxes.

What you've chosen to do, and please correct me if I'm wrong, is purchase B and C residential, and rent to those who are frequently unable to buy a home of their own. They rent from you, and pay a higher rate for that real estate than they would if they were able to buy it on their own, and you're benefiting from that spread- and making a positive cash flow. When they get into a pinch, they'll sometimes stiff you for a few hundred bucks. So what are your options now?

You can sue them, as some people suggest.  Lemme tell you something about that- if I had a dollar for every thousand dollar judgment I had against someone, I'd be a rich man. In fact, those big judgments would be more valuable as toilet paper. They don't have the money to pay you in the first place, so why bother suing them unless you think they're lying about it and sitting on some big stash of cash? Spoiler alert- they're not. I've given judgments to collections agencies- I estimate about a two percent recovery rate. I've stopped doing that altogether, it's such a waste of time and resources.

If you value your time and money, you won't use either in court, 'cause you're not gonna get 'em back. It is justifiable to start an eviction proceeding occasionally-  specifically when you think a tenant is not going to move out, but is just trying to snag a free month off you. 

Bottom line? Enjoy your cash flow, and stay out of court for such piddling little things- focus on portfolio optimization. Things like property improvements, energy efficiency, tax reductions, various economies of scale, reducing insurance premiums...and if you've done all those things? Focus on sipping margaritas on the beach.