Paying mortgage when tenant is late on rent?

Question

Hello everyone! Newbie here and preparing myself the best I can for my first property. Curious how you pay the mortgage and eviction expenses if you have a problem tenant? If there ever was a need to spend money for eviction, would you use money from the typical expenses budgeted in to rent anyways?

Eric Gerakos · Answer

Valerie, this is why having adequate cash reserves is so important. You need to plan for maintenance costs, vacancy etc so that when those things happen you can get through them comfortably, without undue stress.

Jessie Dillon · Answer

- go into every property with adequate reserves. i personally think 10k/property is good. once you have a ton of properties, maybe less would be ok, but it depends on the conditions of those properties and your personal comfort levels. and your monthly debt on them.- if at all possible, don't try to live off your rental income until your cashflow AFTER reserves covers twice your monthly cost of living. it's a dangerous game up until then.- having lines of credit in addition to all that helps me personally feel more secure.hope this helps!

Richard F. · Answer

Aloha,Don't rent to the first person that waves cash in your face. Proper screening of every adult occupant is the single most important step you need to take, after proper preparation OF the rental unit. Determine your standards, then stick to them. It is critical to hold all applicants to the same standard...do not "give in" because they "seem like nice people". Credit scores alone tell you very little...you need to see what is contributing to that score, and you need to check for Bad Habits in all areas of their life...Court Records, Employment history, prior housing history, online presence, and anything else available. Bad Habits in any of these areas are likely to carry over in how they perform as Tenants.

Eliott Elias · Answer

You want to have a reserve with each rental property you own. You are obligated to pay the mortgage whether your tenant pays you or not. The bank does not care.

Nathan Gesner · Answer

You should have a reserve fund to handle the expenses of a major repair, non-paying tenant, etc.How much you hold in reserve is not an exact science. It depends on your financial strength, the quality of the property, how many properties you own, etc. I like to start with one major expense and three months of vacancy. Imagine if you had one single-family home. The tenant fails to pay their last month's rent and leaves the place needing new flooring and paint. It will take two months to turn it around and get it rented. That's three months of mortgage and utilities, the cost of flooring, and the cost of painting. That's a pretty common scenario and could cost you $10,000 - $15,000 so that would be a good starting point for your reserve. But there's more! What if you're a cardiologist with no debt and making $250,000 a year? You could probably afford $20,000 without much impact on your personal budget. If you're a single mom with student loans, a car payment, and living paycheck-to-paycheck, then $20,000 would be devastating and a reserve is critical. What if you have an apartment complex with 20 units? Do you save three months of vacancy for each unit and $50,000 for the roof replacement? That would be around $90,000 sitting in a savings account! At this point, I would recommend having a line of credit to cover these things so you don't have money sitting in the bank doing nothing when it could be put to work. I have 33 units, no debt except for mortgages, and excellent income. I can pay for all my problems using the cashflow from my current rentals. I also have a $175,000 line of credit at the ready if something catastrophic happened. A reserve is unnecessary, but I still keep around $15,000 - $20,000 in my account. The point is, you should sit down and assess your personal finances to determine what the worst-case scenario may look like, how much you would need to cover it without impacting your life, and whether you will need to build a reserve.

Garrett Spear · Answer

Cash reserves is the answer to your question. When you run your numbers on a potential investment, consider your cost to operate through a worst-case scenario.

Michael Bailey · Answer

@Nathan Miller thank you for the shoutout, we always appreciate it!@Valerie S. if you do decide to use us just know we have a Live Chat feature available on the site that will connect you to a Screener in our office who can answer any questions you may have. You can also message me directly for any questions that you may have. Good luck on the new rental and congrats!

Bud Gaffney · Answer

@Valerie S. Reserves will be your best friend :)

Michael Smythe · Answer

Reserves

Nathan Miller · Answer

There are many many solutions for landlords to order screening from, including inside most property management software apps. But when you do it be sure to do a complete, nationwide check of credit, criminal, and eviction on new tenants. You should be able to order a package of all these reports for less than your application fee.If you are not using property management software with tenant screening available, some solutions I've heard work well for smaller landlords with one or two properties are ApplyConnect or RentPrep. I'm sure there's others, but those come to mind.