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Thursday, October 25, 2012

How I Avoided a Landlording Nightmare

I own two rental properties and for the most part I have good tenants. Of course every now and then something breaks or a rent check is late. Well, over the last two months a lot has broken and one tenant has been way late. Dealing with all at the same time has been challenging but I had a few things on my side. 

 Of the 5 years I have been a landlord it seems that this summer Murphy moved into the rentals and all of a sudden all the problems decided to show up in about an 8 week period.

First off both air conditioners in both houses broke. In one house the repair was just changing a capacitor in the furnace and cleaning the outside unit…$200. On the other house however, it was not so simple…

The fan in the condenser that sits outside the house broke off and since the unit was original to the house we could not find a replacement. So the option was to try and "invent" something or replace the entire unit.

I knew this day was coming back when I bought the house so I bit the bullet and put in a new unit so I will not have to worry about the AC for years to come. Of course this is a tax deductible expense but I still had to shell out $1,200.

Back to the other rental…storm blows by, roof gets damaged, tree limb falls and damages roof and one gutter. I made an insurance claim and lo and behold they approve it and as a result I get a new roof and a new gutter! I had to pay my deductible of $1,000 but when else can you get a brand new roof for a $1,000?

Another long term repair that I can check off my list for this house and now will not have to worry about the roof for at least 20 years…

Now back again to the other rental but this time it's the tenant…

They had a history of paying a day or two late. My lease has very clear rules set on rent due date and I even give a discount if they pay on the first of the month. Well, for some reason beyond my comprehension this tenant chooses to forego the discount and pay an extra $50 every month…I am not complaining.

However in the last two months, his checks bounced two months in a row. Both times (because of the clauses in my lease) he has had to pay with a bank check plus late fees. But besides that this was a sign to me that something was not right.

Sure enough I talked to him and found out that he had broken up with the long term girlfriend that lived with him and he was struggling to keep up with the bills.

To me this means that unless he gets another "live-in girlfriend" eager to share the bills in a hurry, he will continue to struggle with the rent. I have seen his pay stub and know that rent is taking up too much of his take home pay. What to do?…

This to me feels like an eviction waiting to happen, plus getting a rental house back at this time of the year is not a good idea. Soooo...

I took the proactive approach and have decided to lower the rent, at least for a couple of months. That way he stays in the house through the Holidays and I have time to plan and get the house back on the market at the beginning of the year.

Anywho…the lessons from me to you after all this are:

  • Never buy rental real estate with little or negative cash flow. Cash flow is the difference between what you get in rent vs. the mortgage payment, taxes and insurance on the property. I have seen people do this, thinking they can float it but when Murphy moves in like this they get in trouble. You need that cash flow so you can create… 
  • Rental property reserve$ are a must. Take that cash flow and SAVE IT, don't spend it if you don't have to. Because stuff will break (sometimes all at the same time), tenants will leave and you will still have to make the mortgage payment. 
  • Have clear and strong leases. Be very specific when rent is due, what happens if they are late, what fees you will charge, etc. That way when things go wrong all you are doing is enforcing the lease instead of going on your judgment. 
Oh yeah, I forgot, back to the other rental…one of the garage doors broke last week! Again decided to upgrade for good and repaired both doors for $350.

We had built hefty reserves by saving all the cash-flow from both properties. As you can imagine it has been pretty much wiped out. But that is exactly why we had it.
 

All in all I have had a good landlording experience but I tell you... when it rains it pours...

How would you have dealt with a tenant that is paying late, keep them or ask them to leave?





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