We’ve known a lot of real estate investors who have abandoned investing after a bad experience with a tenant. Selecting an inappropriate tenant can cost you any return you hope to make on your investment. But almost as bad, selecting the wrong person can harm the investing experience to the point where many investors just abandon the opportunity. If you select the right tenant? Real Estate investing with the right people in place is rewarding financially, and it’s fun too. You have a positive impact on your community, and you get to meet a lot of great folks.
You just need to know what to watch for, and how to watch for it. And the purpose of this article is to provide that information to you.
You’re going to read some nasty stuff. I’ve outlined three worst case real life scenarios. Don’t let it scare you away from real estate. Almost all of these problems can be avoided with a little diligence, and it’s the diligence that we want you to take away from these stories.
The Professional Tenant
These people are scary.
They know landlord/tenant law better than you do.
They become your tenants, but don’t pay rent. When you start taking action, they use every legal means they can to extend their stay at your hotel at no cost to them. They appeal decisions at every point they can, until they lose their last appeal, and finally move on to torment the next landlord. In the meantime, you’ve lost months of rent, which you’re not going to recoup. There are ways they can accuse and appeal to extend their free vacation at your expense. It can cost a pile of money in legal fees.
You can avoid this one by good vetting. Just like interviewing a good employee, you need to do all of the checks that we’ve described in our article on vetting clients. There will be cracks in the woodwork if the tenant is high risk. You’ll just need to be a good detective. It might seem like a lot of effort, but if the tenant is good, you’ll only have to do it once, and if the tenant is bad, you’ll be really glad that you did.
What do you watch for? Periods of time where he or she is not divulging where he or she lived. Was the tenant couch surfing? In jail? Was this one of the times that the tenant was living somewhere that he or she wasn’t inclined to pay?
Does the tenant move around a lot?
If you have any suspicion at all, this is also a place to do some verifications to make sure that the reference they are providing isn’t their best buddy pretending to be a former landlord.
Typically, these people’s credit isn’t great, so that will be another clue.
The Grow Op
Another bad one.
In Prince George (BC is infamous for just how far it bends in favour of the tenant) in June of 2014, a judge decided that in spite of police actually dismantling the grow op, in spite of agreement by both the tenant and the landlord that there was a grow op on that site, insufficient evidence existed to determine that the tenant had acted in such a matter that the tenancy should end early. (The tenant insisted that the drugs belonged to the owner.)
There are clues that might help you to determine if the potential tenant is likely to be in the business. A questionable employment history is one. And, if the vehicle they are driving is a bit beyond the means of their reported salary, alarm bells should be going off. Frankly, if I owned a Beemer, I’d be renting to someone, not renting from someone.
If you’re diligent about vetting, you should be able to spot these people.
Do they insist on paying cash? That is a bad sign.
How is their credit score?
Be meticulous with references. Read our page on reference checking to learn a few tricks of the trade.
During the application process, make it clear to your tenant that you’ll be doing regular inspections. You have to give 24 hours notice, but typically a tenant can’t remove all of the evidence of a grow op that quickly.
It is a whole lot better to not let the grow op in than it is to find it and try to get it out.