My plan is to post a series of experiences with the hope they provide information that may help someone else as they start their real estate investing journey.
Lesson #3 - Strategy for collecting inherited debt
When we were buying our fourplex, we received the rent roll and it wasn’t to difficult to figure out. It was easy because there were four people who were all paying their rent on time. However, when we’re buying the 16 unit, there were a few tenants who had hundreds of money owed, be it from late fees or a missed rent payment. Now since you are buying the properties and the income stream, you are also assuming the debt.
While it may be tempting and easier to just “forgive” the debt and start the tenant off under your management on a clean slate, I would not recommend this. You do not want your first act as their new property manager to be forgiving them for not paying what they owe. Bad idea. Here is what we did...
We gave them the option to either pay it off or to sign a year lease for their current rent plus 1/12 of what they owed. For example, if they owed $360, then we would sign a year lease were their new rent would be their old rent + $30.
For everyone who had over $600 worth of money owed, we gave them the option to payoff the entire sum at once, in chunks, or effectively pay $600 by signing a lease for $50 more than their current rent and we would forgive the rest. This was actually something that all the tenants who had balances liked. One, they didn’t have to move. Two, when they looked at their portal, they weren’t defeated by the size of an unpaid balance.
Most people want to avoid legal matters, so providing them an option and a way to make things right is generally accepted by them. Plus, it shows them that you are willing to work with them and to help them out right from the start.
I’d love to hear how others have others dealt with this!
