To Lease or Not To Lease…That is the Question

“Could you throw out a single mother with three children on Christmas Day?” How cruel does that question sound? When I started in the real estate investment business many years ago, an experienced investor friend of mine asked if I had the ability and resolve to be a good landlord. I didn’t quite understand what he was getting at. After all, how hard could it be? My naivety kicked in as a thought to myself, “I lived in an apartment once and it went off without a hitch.” My friend pursued further and asked the question above. He told me to think long and hard about my answer. Giving him the benefit of the doubt, I contemplated, “Could I do that?” It seemed so harsh, so mean. At the time and given that situation I didn’t believe I could make that decision. Little did I know that fate would deal me a hand and I would face that nearly exact scenario.

Over the course of my investment history I have heard every story in the book from tenants as to why they can’t make their lease payment. From, “I only get paid every other week and will be a little late this month.” to “I can get you part of the rent next week, just hold out a bit longer.” Those excuses still resound in my head. In the beginning, I believed every one of them to my own financial peril. Over time and after hearing excuse after excuse, I became numb to the tenant’s words. As much as I wanted to be understanding of their plight, I realized that I had a business to run. I couldn’t meet my own financial obligations with excuses. My creditors didn’t care if my tenants weren’t paying the rent. They simply wanted me to make my payments.

After going through the eviction process with a single mother several years ago, I thought to myself that there had to be a better way to handle the situation. Tenants don’t want the humiliation of being evicted or the hassle of having to move, any more than landlords like to toss their tenants to the curb. That single mother didn’t want to transplant her children and I didn’t want to have to put them out on the street. That situation hit me hard and I knew there had to be a better way to help my tenants while I managed my own financial concerns.

When I stared out in this business, I foolishly trusted everyone. I didn’t check the credit worthiness of my tenants; I didn’t call previous landlords; and I didn’t ask about the tenants needs. I simply placed an ad in the paper, waited for a prospective tenant to call, we signed a lease agreement and the tenant moved in. For the most part I had marginal success with that process, but it would catch up with me. It wasn’t until later that I started to understand what the rental business required and what I needed to do to become a smart landlord. It took a tenant named “Lisa”, a single mother with two children, to help me learn how I could win in a winless situation.

Start with the basics, screen your tenants. That seems like such an easy solution, but I can’t tell you how many times I have talked with other landlords that don’t do that simple task. I am not the one to condemn since I didn’t make any attempt to research my tenants. With the advent of the internet, it is so easy to do a quick check of tenants. There are companies that can be hired to verify a tenant’s credit, check their criminal background history and discover if they have written any bad checks. The cost for that can be put back onto the tenant as an application fee. In fact, I tell any prospective tenants that I intend to complete a credit and background check and that they are required to pay the cost. That usually weeds out quite a few “undesirable” tenants. A simple background check can make or break you as a successful landlord. However, that process doesn’t cover you for all situations. Honest and credit worthy people can run into trouble and become bad tenants quickly.

Get to know your tenants from the beginning. Every tenant has a financial and family situation that you should know. I am not suggesting that you should delve into your tenant’s entire family history, nor do I recommend that you become best friends with your tenants. However, having a snap shot of your tenant’s “situation” up front can help turn a potentially bad tenant into a great, long-term tenant.

If I had only asked Lisa about her situation, I could have learned up front that she was recently divorced. She was living off of a part time job and the child support payments provided by her estranged husband. I didn’t learn of her plight until she missed her rent payment three months into the lease. Learning from my earlier mistakes, I was diligent enough to run a credit check on her but I didn’t know about her recent family “problem”. However, if I had asked the questions, I could have worked with her to come up with a different rental solution from the beginning. Lisa honestly thought she could make the lease payments. I discovered too late that the wages from her part time job barely covered the rent, and to add insult to injury, her ex-husband was traditionally late with the child support checks. At the time, all I cared about was getting her out of my property and finding a new tenant. That wouldn’t serve either of us as I would discover.

That brings me to my last bit of advice; work with your tenants to amicably work toward a resolution. Communication can be your final salvation in keeping your investment profitable. Bad things happen to good people. People lose their job; they get divorced; they have a medical situation; life happens. It is unfortunate, but a part of living. Keep in contact with your tenants. Not just to collect rent, but to learn of problems with your property and to stay on good terms with your tenants. If your tenants feel that you genuinely care about their life, they will typically do the right thing in regard to your property and pay the rent.

Concluding the story of my situation with Lisa, she had quickly gotten in over her head and ran into some financial trouble at the beginning of December. Being a businessman, I had started the process of evicting her through the court system. I knew that I would have to clean and prepare the property; advertise the property; and start the process all over again during the holiday season. All of that would add to my expenses since I most likely wouldn’t find a new tenant until late January. It was not going to be pretty any way it went. Instead, I decided to visit my tenant. We talked for about one and a half hours about each of our concerns and needs. In the end we negotiated a mutually beneficial alternative to eviction. She remained in the property for December, rent free. During that time, she cleaned the property and got it ready for a second tenant. I was on the verge of placing an ad in the paper for a new occupant when Lisa called to say that she found a new tenant for me. An acquaintance of Lisa needed a space for a short period of time and was willing to fulfill the remaining term of her original lease. I signed a new lease with Lisa and put her into another property I owned. We had decreased her rent payment by $125 per month and I gave her the first month at half price which was enough to get her back on her feet. Once she learned that I cared about her situation and was willing to help her out, she did all that she could assist me and get herself into a better situation. I can’t tell you how good I felt about resolving that issue. Lisa was a tenant for the next two years and excepting only one additional late payment (which I knew about before hand due to our communications), she was a wonderful tenant. We turned a potentially bad situation into a good one.

I had helped a tenant out of a bad situation and helped myself out of a potential financial loss. I learned so much from that situation. In future dealings I used that experience with other tenants that had trouble paying. Don’t get me wrong, I have had some tenants that I just couldn’t work with, but overall I would consider my landlord experience a good one and best of all, I sleep sound at night. All tenants won’t be like Lisa, but it is an example of what can happen by being a smart landlord.

Leasing property and being a landlord is not for everyone. With correct information and better tenant selection from back ground checks; making smart decisions for you and the tenant at the beginning; and maintaining a little patience in dealing with a potentially bad tenant, you can be a smart landlord and see great financial benefits.

And so the question for you is out there, “Could you throw out a single mother with three children on Christmas Day?” Think long and hard on it. Be honest with yourself. Could you do it? Hopefully you will never be placed in that situation; however, if you are a landlord long enough, you be placed in the position of having to make tough decisions. It is inevitable. It is not pleasant, but a necessary evil in this business. No one likes to be the bad guy, so why not look for solutions to avoid having to make that decision. To this day I have never forgotten that “advice”. It was a good test of whether or not I would make a smart investor and an even better landlord.