October 2015 Newsletter

Truth #7: The IRS gets it wrong when they call rental property “passive income.”

You will be sadly disappointed if the only action you take as a landlord is to click the refresh button on your online bank account until your tenants’ deposits appear. Bad tenants rarely operate like Swiss watches with mechanical precision – if you aren’t staying on your high-maintenance tenants throughout the month, that online deposit probably won’t arrive.

Make sure that your bad tenants are continually aware that you are involved, that you are interested in what is happening at the property, and that you intend to be in their face if the rent is not paid. It shouldn’t be the 10^th of the month before you address the fact that they didn’t pay on the 1^st or at least the 5^th day. You don’t have to be a pest, but you have to be on top of things. These actions don’t have to be performed by you personally, but it must be someone with boots on the ground, upfront and personal – not just nasty e-mails and text messages.

Effective landlording includes a lot of expectation-setting with trouble tenants, for example, “Hey, it’s the 25^th, so I’ll see you with the rent in a few days,” or “Don’t forget that there is a 10% late fee if the rent doesn’t arrive by 5 p.m. today.” That doesn’t mean that the tenant will necessarily do what you’re asking, but the quicker that you get onto them, they quicker you will see the appropriateness of their response, which will let you know how to respond in kind. Notwithstanding what the Tax Code believes, you will have earned this money by the time you receive it.

Truth #6: It is the landlord’s fault when the tenant owes more than six months of rent

This rule might seem harsh, but at your core you know it to be true. In the beginning, you gave the tenant a second chance, and then after that, a third. A tiny voice in the back of your head told you that it wasn’t going to work out, but you kept shushing that voice because you didn’t want it to be true.

Every month that you leave a non-paying tenant in your property, you increase the likelihood that 1) the tenant will cause damage to your unit, 2) the damage will exceed the security deposit, 3) even if you obtain a judgment against the tenant, you will not be able to collect it, and 4) the tenant may file for bankruptcy and you’re stuck with them for a long, long time.

Landlording is not a business for people who don’t like to be proactive; either stay on top of the business or hire someone who can.

Truth #5: The exception made for one will become the rule for all

This is especially true if you have a rental property with multiple tenants. If you allow one tenant to pay late, you might say something like, “Hey, keep this under your hat, but I’ll give you a one-week extension to pay,” and actually expect the tenant to do so. Unfortunately, instead of quietly enjoying this special benefit, a bad tenant often blabs to everyone else, “You’re a fool for paying your rent on time – I don’t!” Before you finally evict this individual, he or she will have spoiled the entire tenant base.

Even worse, by making exceptions for one tenant and not for others, you are opening yourself up to a tenant making a claim against you for housing discrimination.[1]

[1] In a nutshell, it is illegal for to treat tenants differently because of: race, color, or nationality; sex; religion; pregnancy; or disability. If you have questions about housing discrimination, feel free to contact me.

Truth #4: The tenant you rush in will be the tenant you rush out

Nearly every eviction I handle begins with a story from the landlord about how he or she bent over backwards to get this tenant in: they let the tenant move in early, they let the tenant pay the security deposit in installments (or not at all), they let the tenant bring a pet, etc. I once had a landlord who loaned his only suit to a tenant so that the tenant might have a successful job interview, only to learn later that the tenant had in fact never even had a job interview. (The landlord never got his suit back either.)

When your mind starts to play tricks on you such as “If this thing goes well for the tenant, then they might pay the rent, and then I might be able to pay the mortgage again,” you are chasing fool’s gold.

Rather than appreciate the lengths that the landlord has gone to, bad tenants often receive the message that if they push, you will fold. You are setting up the wrong dynamic when you give the tenant the impression that you are needy and won’t evict them. If you show that you will break all of the rules to get a tenant into the property, that person will naturally expect you to keep breaking the rules when it’s time to collect the rent. If you focus on a short-term solution, you’ll end up with a long-term problem.

Truth #3: Nothing you do will be enough if the relationship isn’t right

This is something a lot of us learned in high school when we couldn’t get the captain of the football team or head cheerleader to go to prom with us – there is a very real possibility that your tenant is just not that into you.

You cannot make a person be a great tenant by trying to be an even greater landlord. Tenants will often try to make you feel like they would have paid or done what you asked, except that since you didn’t fix that tiny drip, install the carpet they wanted, or paint the front door, they had no choice but to stiff you again. Instead of paying up, they will dangle an unwritten check in your face like a dog who must spin around before earning a treat.

Clearly, meeting your obligations to repair necessary changes will help maintain a good landlord/tenant relationship; but some tenants have a reason each and every month for why they don’t have to pay the rent. These tenants are just waiting until you finally make it a priority to boot them out. Fix the reasonable requests they make and give them one last chance to catch up. If they still make excuses, it’s time to break up and seek a new dance partner.

Truth #2: Never lease to a person that you could not evict if they fail to pay the rent

Landlords often say, “I could never evict this tenant because she has three kids.” Another common reason a landlord might use to delay handling the unpleasant business is that he or she cannot evict a defaulting tenant because the tenant is a friend or family member. Do not kid yourself – this tenant is banking on the fact that the landlord will not evict due to that relationship. The landlord feels bad because the tenant wants the landlord to feel bad about enforcing the lease.

This is why you must keep your business and personal affairs completely separate. You should never rent to that friend or family member in the first place. If you would feel horrible evicting a tenant because she reminds you of your granddaughter, then do not rent to that person!

As long as you are not breaking the law regarding discrimination[1], you have a wide discretion regarding who you rent to. Don’t fall into the trap of thinking that you have to take the first person who calls about the property and seems like a decent person. You may have to evict a few existing tenants in this situation, but if you follow this advice from now, then you will never have to go through it again.

[1] In a nutshell, it is illegal for to treat tenants differently because of: race, color, or nationality; sex; religion; pregnancy; or disability. If you have questions about housing discrimination, feel free to contact me.

Truth #1: Landlording is a business and not a charity

Landlording is not for sissies. You will have to make tough decisions when things don’t work out and you have to forcibly remove a person from a house. Unfortunately, it is a financial reality that some people cannot afford to pay the rent that they agreed to pay. The tenant probably had good intentions, but life sometimes interrupts. Because rent is not a one-time payment, a person who hits hard times can rarely catch back up when things go south.

Do not go into this business thinking that you will not have to evict people because they will always pay on time. You are in the business of providing housing for persons until they can no longer afford it and/or live by the rules of the lease – no less, and no more. Sometimes people forget what landlording is or they do not want to accept the business that they are in.

It is your right as the property owner to decide not to manage your investment income like a business – perhaps you no longer wish to run a for-profit business, and have now decided to run a non-profit or a no-profit. There are some landlords who have been blessed enough to where they do not suffer financial strain when tenants do not meet their financial obligations, and these individuals enjoy being able to help others in need. If you see your role as a landlord more as a religious calling or mission, and you decide that you want to forgive unpaid rent, overlook rule-breakers, or give people second chances when they meet hard times, that is a wonderful thing.

Or is it that you don’t feel that way, but you just don’t want to deal with it? Be intellectually honest with yourself about whether your business is even a business. Don’t pretend that the tenant who pays on the 22^nd of the month will have the next month’s rent on the 1^st. There is no reason to whine and harass a tenant that you know will never catch up, as if you think this will cause them to pull the money out of a stuffed pillow. Also, you don’t need to complain to friends about your “deadbeat tenants,” acting like you’ve done everything imaginable to shake out the money, and then later give your tenants another year of chances to catch up.

Give your defaulting tenants as much leniency as you want, and then when you start to feel taken advantage of, admit to yourself that it isn’t working out as a business and evict them; either forgive them or force them out.

The Seven Great Truths of Landlording

1. Landlording is a business and not a charity
2. Never lease to a person that you could not evict if they fail to pay the rent
3. Nothing you do will be enough if the relationship isn’t right
4. The tenant you rush in will be the tenant you rush out
5. The exception made for one will become the rule for all
6. It is the landlord’s fault if the tenant owes more than six months of rent
7. The IRS gets it wrong when they call rental property “passive income.”