Managing Tenant Issues

Many folks are hesitant to invest in real estate because they are fearful of a tenant defaulting by not paying rent. This is a justified concern, but not one that should stop you from investing in real estate. Here are some steps you can take to mitigate your concerns:

1. Build in vacancy reserves in your deal analysis to account for periods of non-payments/evictions

When you’re analyzing a deal, build in vacancy reserves that are appropriate for the market. For example, build in one month of vacancy and some rental turn costs. If these reserves are never “used,” great! However, if you run into a tenant issue, these reserves will lessen the blow.

1. Find a niche where there are less tenant issues

As an initial matter, consider multifamily investing because if own, say, a 40-unit apartment complex, and two tenants default, the delinquencies will not have as drastic of an impact on the bottom line. Conversely, if you own a duplex, and both tenants default, your gross income is zero. Next, not every real estate strategy involves tenants. Consider flipping, wholesaling, or note investing, to name a few. Finally, consider some commercial strategies that do not involve residential tenants, and thus contain less tenant protections, like self-storage.

1. Find a rock star property manager

A great property manager will prove their worth before a tenant issue arises by placing a great tenant. Even if a tenant issue arises, you can lean on your property manager to help you manage it.

1. Invest in a landlord-friendly state

If tenant issues are something that is stopping you from investing in real estate, find a landlord friendly market. Don’t limit yourself to your local market. Some markets can process evictions in less than a few weeks.

1. Build in maintenance and capital expenditure reserves in your deal analysis

Generally speaking you should set aside at least 5% of monthly rent for maintenance and another 5% for cap ex – or $400/door in multifamily – though your market/tenant base may require more. Having these reserves will help make any repairs caused by an unruly tenant.

• Be a good landlord!

Respect your tenant and be reasonable.

What are some of your tips for being a good landlord and managing tenant issues?