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Dealing With Bad Tenants From Hell
For every landlord, the ultimate stories that are told to friends are the ones where there is a tenant from hell as the lead character. Even if you run your investment property like a well oiled production line, the odds are that you will run into these destroyers if you have been in this business long enough. They are the ones who don’t pay rent, make your apartment smell like a rubbish point that will take weeks to wind off, and damage your perfect wall painting which you spent so much time to find. A bad tenant can potentially costs you thousands of dollars. This is why seasoned property investors stay away from them like contagious disease and refer them to newbie investors to learn their trade.
When you bought your first investment property gleefully, all you thought about was the monthly rentals that you can collect and the fun you will have doing up the place like a video game. Little did you know that in every game, a boss is going to show up and give you a good fight. Your triumph will take you to the next level of property investing.
From an investment standpoint, once you accept a bad tenant, it is almost certain that you are going to take a loss. When tenancy contracts are breached, you have to go through a proper process to legitimately evict them if eviction is indeed your decision. And during this time, you can expect the unhappy tenant to erect their horns and treat your apartment like a battlefield on D-day. Using force is not an option. You have to abide by the laws of the land.
You can typically group bad tenants into 4 categories.
1) Elusive. They are the ones that never pay. You also have a hard time getting a hold on them. Every time you reach them on the phone, they have some lame excuse to hang up immediately. This is assuming you are able to reach them in the first place.
2) Demanding. This category of tenants call you all the time asking for repairs, upgrades, maintenance, etc. They are actually the best of the lot. You just have to meet their legitimate high expectations. Use them as a motivator to be a great property owner.
3) Ignorant. These tenants drive everyone in the neighbourhood crazy with loud music, late parties and loud arguments. It seems that the world revolves around them and their problems are the only problems in the world. So the complaints you receive from neighbours are your problem, not theirs.
4) Destructive. There will always be tenants who break things. They don’t own the apartment and punch holes in your feature walls, snub cigarettes on your bar counter, and let their pet dogs eat up your carpet imported from Turkey. This is a nightmare that can make you jump out of your beauty sleep in cold sweat.
The focus on this article is on the elusive tenants who do not pay.
In theory, once a tenant clearly breaches the tenancy agreement and you have a tribunal rule in your favor, you can pursue damages from the tenant. It’s a good thing that you have collected your 3-month deposit as a buffer. But a lot of times this is not going to cover everything. Chasing tenants for rental owed and damages could just mean a prolonged period of time to settle everything. It will add up your opportunity costs and increase your expenses. At the end of the day, after tallying up your losses, you will be just grateful that you have rid yourself of the Trojan virus in your investment. Evil tenants who have no respect for accountability will realise that you have a pragmatic decision to make and that you will possibly let the matter rest. This is a situation where a lot of landlords choose to step back so that they can move on.
You are not obligated to rent your place to anyone. You own the property and have the right to choose who to rent it to. So unless you have gone to a great extent to stand out as an investor, and positioned your market to only target bad tenants from hell, here are some screening tips to evaluate potential tenants.
- Conduct as many background checks as you can legally do so. Use a professional service. In extreme circumstances, ask for the tenant’s credit report. The critical factor is whether your tenants are able to afford your apartment.
- In overseas markets, landlord associations may have a database of blacklisted tenants. Remember to take a look at that if it is available.
- Do a quick check with the tenant’s employer to see if he is really employed. They would of course not share the tenant’s salary details with you. Asking for a ball park figure is reasonable. Probe on how long he has been working there.
- Get references from the tenant. Needless to say, if the reference is his mother, you can expect her to say how wonderful and beautiful the tenant is as a person. A mom might even compare him to Batman. So get references of friends, then ask the friends for more references. Usually going to the next level of references will help you uncover frank opinions.
- If you can locate the former landlord, call them up and inquire. Property agents will only speak well of their clients as they are expected to. So don’t put a lot of weight on how well an agent speak of the tenant. Landlords are investors like you. They can give you straight answers that you can understand.
- Set clear expectations that the tenant will agree on. A lot of times relationships between landlords and tenants sours like stale tofu because of misinterpretation of terms and different levels of expectations.
Take note that you cannot refuse to rent your property to tenants based on race, religion, nationality, age, gender, sexual orientation, etc. Basically your cannot make decisions not to rent based on discrimination. Our society is not built that way. Accept this fact or you can get into trouble.
However, this does not mean that you are obligated to rent out your property to the first tenant that makes you an offer. There are a lot of factors you can use to judge whether a potential tenant is one to keep for the long haul.
Property managers and management companies
A trend is starting to pick up where investors are hiring people to manage their properties. You just feel like a boss when you can direct someone to do your dirty work for you. But let’s be honest with yourself. If you have 1 or 2 investment properties, hiring a manager to get things done only adds value to your ego, not your bottom line. Anyway, there is no guarantee that managers can handle problematic tenants better than you do. You also cannot expect them to feel for your investment like the way you do. So check their track records and credentials before hiring one of them. A bad manager could actually be the one who aroused a disgruntled tenant.
Also consider signing up a property manager with a notice of termination as short as 14 days. This gives you flexibility when you find that the current manager is not doing a good enough job. It also keeps them on the toes to perform to your expectations. An under performing property manager can really cost you. They could be complacent in collecting rentals and off-the-ball in chasing arrears. De not hesitate to intervene in the operations of your property management companies. They are working for you after all.
What to do if you indeed signed up a tenant from hell
You can only do so much due diligence lawfully. There’s no way you can put up a spy cam in the tenant’s wallet to track their cash flow. So when you finally end up with a tenant that you had tried so hard to avoid in the first place, the only thing you can do is damage control. Assume that you are going to lose money. This mindset alone will help you manage the situation better. Take action swiftly.
How to deal with arrears
- Talk to the tenant immediately. Let them know that you are aware of the arrears. A tenant should always be at least 1 week in advance every month. Don’t feel bad about asking for money. It is your property and you are not running a charity here.
- There are times where you have a to make a judgement call on whether reasons for not paying are legitimate. However, you must be skeptical if you noticed that the tenant has just purchased a new set of iPhone 5, Ipad Mini and Macbook when rental is in arrears. Some people just have these habits of indulging in themselves instead of paying off what they owe.
- Take note of how you found out about the arrears. Did you have to knock down their doors to confront them? Or did they inform you in advance. Tenants with legitimate temporary cash flow problems will usually give you notice and hope for your understanding. Give them a little leeway if they are upfront.
- Request immediate payment citing the terms of the tenancy agreement.
- When arrears exceed a certain period of time as stipulated in the tenancy agreement, you are entitled to start the process of eviction. If you are too soft hearted to do this, hire someone to do it for you.
- When you indeed have someone to do the dirty work for you, remember that your job is to pressure them on enforcement. And their job is to listen to you.
Some people may say that it is bad karma to evict tenants. It is easy to say that when they don’t have a property bleeding a hole in their bank account. But sometimes, good tenants do run into real problems that causes the arrears. This is when you have to use your common sense and make a judgement call.
To make yourself feel better, people will label you a superhero if you are evicting a tenant who:
- is not paying rent
- is always late on payments
- causes damage like a rockstar in a presidential suite
- is a constant nuisance to neighbours
- is using your property for illegal activities
- treats the terms of tenancy like a corrupted document file
When you have decided to start eviction, make sure you abide by the law. Always assume that your tenants are tenants from heaven until they have clearly demonstrated that they are not. After all, you are the one who agreed to sign them up after screening them. Even the best of tenants can go ballistic when treated with accusations. They see themselves as good tenants and will not be happy that you have framed them otherwise. You are going to be labeled as the landlord from hell instead.