3 Examples of Renter Problems and How to Handle Them
Let’s say you’ve inherited a home or money to purchase one to fix up. What do you do with it?
Turning your second home into a rental property has potential to provide extra cash flow that you can use to pay off your mortgage or other expenses. Plus, when it’s done correctly, it can be a great opportunity to make extra money without having to get another full-time job. Sounds great, doesn’t it?
Conversely, anyone who’s rented their property to tenants knows how risky the business can become. A seemingly wonderful situation can turn into a terrible one that has the potential to ruin your life at any moment. On a less extreme note, being a landlord often comes with more headaches than you might expect.
While many landlord-tenant relationships work out great, you could land on a problem renter who seems bent on taking you for all you’re worth. Whether your tenant refuses to pay, trashes your property, gets injured, or something worse, these are a few renter problems to expect and how to handle them before they get out of control.
1. Late Payments and Property Damage
It’s the classic tale of a nightmare tenant: your rent is three months late and the property you’re renting out is completely trashed – after you spent thousands of dollars fixing it up. Now what?
The best way to handle this situation is to prevent it altogether. Of course, we understand that this is much easier said than done. However, there are a few things you can do to properly screen your potential renters beforehand:
- Establish criteria you’re comfortable with upfront – Decide what kind of renters you’d like to have up front (be careful about discrimination against age, gender, religion, social status, etc.)
- Request information for previous landlords and ask them for references – If they won’t give out contact information or haven’t rented anywhere previously, it’s up to you to decide whether you want to take the risk
- Require that tenants make at least three times the requested rent (or qualified co-signer) – This will ensure you know they can afford the monthly rent at the time of application
- Verify employment and income – Ensure that their employment situation is as stable as possible and that they are actually earning the money they claim they are
- Perform a background check – If your applicant has a tendency to deface property, for example, this might be a red flag
See the infographic at the bottom of the post, courtesy of BiggerPockets.com, for a guide to tenant screening.
Of course, there’s no guaranteed method to avoid nightmare renters. If there were, there wouldn’t be nearly as many horror stories as there are currently (read more about this further on).
If you do find yourself running into a problem, there are steps you can take to evict. It’s worth noting, however, that eviction can be a long, complicated, and expensive process. Therefore, it’s crucial to take as many steps as you can before accepting the applicant to avoid getting in these situations in the first place.
2. Injury or Death to Renter
Let’s say you have a family renting out your home. Everything’s going wonderfully, and they even pay their rent on time. However, one day you wake up to the dreaded notification on your phone: an accident on your property has lead to injury, and you’re being hit with a lawsuit.
In this situation, a seemingly perfect situation can go bad overnight. Suddenly, your entire livelihood is at risk because of a simple accident.
One of the biggest risks of owning a rental property is owning it in your own legal name. This means that you, as a sole individual, own the property and are renting it out to another individual (or few individuals) who pay you for it.
The best way to prevent this situation from happening is to own a legal entity which then owns the rental property. In other words, set up a Limited Liability Company (LLC) and purchase rental properties under this entity. This way, any possible lawsuit would be against the LLC, and not against you personally.
In the worst case scenario, you might lose your equity in that property. However, this is a much better option to ruining your life and losing everything you own personally.
3. Nightmare-ish Renters
In the first two examples, we provided fairly generic renter problems that stem from fairly common circumstances. However, anyone who’s done their research on the potential challenges and risks of rental properties has heard the many horror stories from other landlords.
For example, one landlord experienced problems with a renter which lead to a very long, complicated, and expensive eviction process. Nearly a year later, once the process was completed and new renters inside, a new problem arose: an unfamiliar smell.
After trying everything they could think of – from professionally cleaning the carpets to replacing the HVAC filter and utilizing deodorizing bombs – the smell simply wouldn’t go away. Finally, they discovered something no one expected: maggots inside the walls. The previous tenant had evidently placed packages of raw meat in the walls to rot, resulting in the replacement of drywall and insulation in that and surrounding units.
Although scenarios like this are rare, they do happen. The best way to avoid nightmare-ish tenants is to pre-screen, pre-screen, and pre-screen some more. Follow the tips in the first example to have a better chance of preventing these headaches from happening.
Another way to avoid these renter problems is to get out of the rental business. Renting your home may be a good way to provide cash flow, but comes with risks and headaches. Another option is to cash out now and close in a way that works best for you (even if you currently have tenants – we’ll wait!).