Finance 101: How To Avoid Bad Tenants

Until the collapse of the mortgage industry under the weight of fraud, real estate had traditionally been viewed as a safe investment vehicle. Skyrocketing prices at the height of the real estate bubble brought many buyers into real estate that were enticed by the idea that they could make money from their investments. While property prices have fallen nationwide, some savvy investors are holding on to their property and renting to tenants.

Dealing with tenants if you are not a real estate professional can be very difficult as I have documented with my tenant from hell stories. The easiest way to lose your investment in real estate is to be a lax landlord and let bad tenants run roughshod over you.  Hopefully, with this handy guide, you won’t have too much trouble when  you run into a bad tenant.

  1. The first rule of being a landlord is to know the rules regarding tenants’ rights in your city or state.  Most laws weigh heavily in favor of tenants to combat historical injustices (think slumlords) where tenants had very little rights.  It’s is my opinion that the scales of justice are tipped too far in favor of tenants, but if you know the law, you can save yourself some trouble. I have three resources that I use in this area.  My favorite is the U.S. Dept. of Housing and Urban Development (HUD) Tenant’s Rights page.  This site lists every state and links to information regarding rights of each tenant.  I also use RentLaw quite a bit as well.  Invest with Passion also has a page with landlord-tenants statutes by state.  If all else fails, you can always do an internet search for your state’s attorney general’s website which should list rights from both the standpoint of a landlord and a tenant.
  2. The second rule is to know your tenant.  Just because someone seems nice and can afford the rent does not make them the ideal tenant for you.  Extensive screening of potential tenants is a necessary evil in weeding out good tenants from bad ones.  To avoid bad apples, I highly recommend an application and thorough background screening.Your application is your first line of defense in weeding out undesirable tenant.  Things that you should ask include current employer, verifiable income, the number of individuals that will occupy the apartment, and if the tenant will have any pets.  Rent Law has a great sample tenant application form (MS Word) that you can freely use.  Please be sure to consult with an attorney or do a decent web search on specific questions that you may or may not be able to ask in your state and the maximum of any application fees allowed.
  3. The third rule is to set minimum standards that you will accept in a tenant.  A potential tenant should make a minimum of three times the amount that you will charge for rent.  If the potential tenant makes less than that, chances are they they will struggle to pay your rent in addition to the basic necessities of life such as utilities, food, clothing and transportation.  In order to verify that your potential tenant can afford your apartment, you should ask to see the most recent pay stubs covering the past month.You can go one step further and perform a background check.  TransUnion runs a website called My Smart Move, which offers background screening of tenants for around $25.    You can charge that as the application fee (which you can collect) or even better, you can direct the tenant to the website where they can enter their own information and pay the fee and you will be sent the report. It safe, secure and shows the tenant that you mean business.  My Smart Move allows you to create minimum threshold levels and can tell you whether the applicant meets your requirements for tenancy.  You can even find out of the person is a registered sex offender.  I absolutely  love it.
  4. Once your tenant meets your requirements, your last line of defense is documentation.  The most important document that should exist between you and your tenant is the lease agreement.  You should absolutely have a lease even if the tenant is renting your property from month-to-month.  Things that you want to cover in your lease include:
    • rent amount and form of payment
    • damage to premises
    • provisions for late payments or returned checks
    • security deposits
    • use of premises (you don’t want your tenant to turn your property into a club)
    • number of occupants
    • assignment and subletting
    • alterations and improvements
    • surrender of premises, default and abandonment
    • maintenance and repair
    • pets
    • utility payments
    • renter’s insurance
    • tax increases
    • official record of signature and dates

    If you’ve never written a lease before it can seem daunting.  Don’t worry, I have resources for you.  You can purchase and download state specific lease forms that covers all of these topics and more. You can also try to find some free ones online.  Rent Law has a general lease agreement (PDF) that you can try to customize for your state.

  5. Finally, before the tenant moves in, be sure to take “before” photos of every inch of the property and have the tenant sign a move-in checklist.   This way you have proof of the condition of the property before the tenant occupies your dwelling just in case you need any legal help later.
  6. I would be remiss if I did not tell you that you could avoid all of these steps by hiring a rental or management company to take care of all of this for you.  A decent management company will go through this entire process and take care of your property for a percentage of the rent that they collect on your behalf.  Rates vary, but expect to pay somewhere under 10% for general property management, and perhaps one month’s rent for rental services.  This all depends on whether the property is commercial or residential, the size of the property and how much work you want them to do.

Even if you do everything above it is still possible for you to end up with a  rotten apple.  It’s not your fault.  Your tenant’s financial situation can change after you rent the property.  You should always treat your tenant politely, firmly but never as friend.  If your tenant crosses into the friend zone it will then be harder to take the steps that might be necessary to remove an undesirable tenant from your property.

I know that I mentioned Rent Law a lot here, so I have to say that I am in no way affiliated with or compensated by them.  I just find their site highly useful and wish they would call me to work out an endorsement deal.

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28 thoughts on “Finance 101: How To Avoid Bad Tenants

  • Good information! I have been in residential property management for seven years (now working in the commercial sector) and have had some BAD tenants in the past. Oh the stories. Good luck in turning your “bad” tenant into a “good” tenant. I would ask the tenant to leave, and if they don’t agree to move out, the next time they are late on rent serve notice for non-payment of rent. Then don’t accept any money, unless they are paying in full, taking payments means the process starts all over again. Most tenants know the game and they will play it. You just have to outsmart them at their own game which sometimes takes quite a bit of time. Good luck.

    • Oh I’ve served her that notice before. Fun times. The next in this series will be Finance 101: How to Deal with Bad Tenants for when a good tenant turns bad.

      • With all of these responses I think I just might have to start a property management blog.

        Would anyone be interested in getting info from a property manager that has heard and seen just about everything? I have some great stories, LOL.

        • You might want to try guest posting at Investwithpassion.com Freddy has a great team there and he’s building a real estate investment resource. He could use you.

  • Coming from a tenant’s prospective, doing a walk through before signing a lease is really important. Having the landlord initial any minor damages before taking on a lease is essential. My previous slumlord, I mean landlord, never did a walk through of our rental home (he had his quasi-manager do it and he was really lax). He was very lax, never fixed anything, then in the end charged us for damages that were there before we ever moved in. I learned my lesson. Have a landlord initial everything before hand and get it in writing.

    As for bad tenants, checking their credit reports and previous rental history will give a landlord a good idea of what to expect. I knew someone who was a horrible tenant and they had a repeat cycle of eviction – however they were smart and the evictions never ended up on their credit reports. They made sure to find places that were a bit run down, then turn on the landlord the moment they couldn’t pay their rent. They were our neighbors and we shared the same landlord for a few years, that’s how I know this story.

    • Oh yes, tenants should totally protect their rights as well. If everything is good between tenant and landlord it’s a win-win situation for both. I own the home that she rents but I don’t own the home that I live in. 😉 So I’ve had both ends of it. I should write a post from the tenant’s view. Hmm.

  • Good article! As a former landlord, I would add when you take the application and deposit, go out of the way to visit the prospective tenant in their existing rental. You can use the excuse of collecting the rest of the money and turnover the keys. You will learn a lot about them. I know this is not always possible.

  • Did I mention about my friend getting a tenant through her real estate agent? Well, the REA ran a background check info on this tenant and it came out just fine. later they found out that the SS number was stolen. The whole thing was bogus. My friend went through hell trying to get rid of her tenant. Knowing your rights is imperative!

  • This is all so good to know. The neighbor next door to us has been renting his house out for a while, and he’s had some pretty high turnover. I’ve always wondered about landlord rights in accepting a tenant, since I’ve worked in the apartment industry and had to learn all of the rules about fair housing.

    It’s my plan/dream to keep our current house as a rental once we start to grow out of it.

    • It’s always good to be totally prepared before you go into renting. You should also look out for the next post avoid dealing with bad tenants. Chances are that a decent tenant might turn into a bad one at some point and you’ll need to know how to deal with them too. You get to learn from my mistakes a head of time. I’ll also guest post at Invest with Passion about my rental experience.

  • Thanks for this post.
    I’m going through the process right now on our 2nd property and this list is very helpful. The guy works at my company and he should be able to pay the rent with no problem, but I’m still going to run credit and background check as soon as I get his application form.

  • Good post, Sandy. I overheard a conversation on a plane last night about just this topic, and like so many, it didn’t have a happy ending. Just an ounce of prevention, as always….

  • Good post, Sandy. I overheard a conversation on a plane last night about just this topic, and like so many, it didn’t have a happy ending. Just an ounce of prevention, as always….

  • Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a Lease Agreement form, I found a blank templates from this site PDFfiller. This site also has some tutorials on how to fill it out and a few related Real Estate forms that you might find useful. Here is a link to Residential Lease Agreement form that I was able to use http://goo.gl/Z2Vjks.

  • These are all wonderful tips for avoiding problem tenants. There are so many types of issues a property owners can run into when placing a tenant in their investment property. For example, the constant complainer, the late payer, the rule breaker, and even the destroyer can all wreak havoc on your property that you rely on for income. Knowing the laws, following strict tenant screening procedures, and asking lots of questions will surely help prevent a lot of issues from happening in the future.

  • Even if a prospective tenant’s credentials look good on paper, it’s important that landlord meets them in person. Personal communication is a good way to find out whether you and those renting your property are on the same page. The list of questions that should be asked is presented in the article https://rentberry.com/blog/potential-tenant-interview. First thing you need to check whether applicants are interested in the property for themselves or for someone else. And it usually makes most sense to combine the interview of the tenants with a viewing of the property.

  • I find that credit score is a great indicator of how well a tenant will perform. Get a low scoring tenant, and be prepared for trouble. It is a great personal behavior indicator.

    Income will tell you the tenants ability to pay rent, credit score will tell you the tenants desire to pay rent.

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