Investing in rental properties has long been one of the most popular sources of residual income. Particularly when a managing agent is used, owning houses and renting them out to tenants can require a minimal investment of time, while producing ongoing income and capital growth. But property investing is not without its risks.
While many landlords go their entire careers without issue, at least a few investors over the years have been badly burned by renting to bad tenants. From causing thousands of dollars of damage, to disappearing without trace, bad tenants aren’t just an annoyance; they can also cost you a lot of money.
But what can be done to insulate you from these risks, and help the real estate investor to sleep better at night…?
Do Your Due Diligence
It makes sense to do some preliminary checks on a potential tenant before actually signing the agreement. In this way you can gather references from former landlords and employers, and carry out a credit check to ensure the individual has no history of missed payments.
Once this due diligence is complete you can feel reasonably confident about the individual’s behaviour in a previous property, and can satisfy yourself that they are gainfully employed and are likely to pay the rent on time each month.
Request a Reasonable Deposit
Holding a deposit is a financial “hedge” against outstanding monies owed. If a tenant moves out and leaves the property in an undesirable condition then this money can be used to rectify any damage, and bring the property back up to standard. In the same way, a tenant who disappears without paying their rent or providing the necessary notice period can have their deposit used to make up the shortfall.
While many landlords require a deposit of between one and two month’s rent, some landlords opt for higher deposits, especially in special situations. One example might be investors who are willing to rent to pet owners. In many cases, such landlords will demand a higher deposit, under the assumption that more damage may be done to the property.
Word the Tenancy Agreement Carefully
Many landlords, especially those managing the property themselves, are tempted to use a standard “off the peg” tenancy agreement, with little real thought as to its contents. In the case of a bad tenant, however, this may come back to haunt you.
A better option is to utilise the services of a letting agent or solicitor, to draft a thorough and detailed agreement. Consider clauses which carefully prescribe what is and is not acceptable, such as the minimisation of excessive noise, or limitations on playing music after a certain time.
It is better to be overly thorough in laying out the contractual obligations, so that you have all your bases covered should your tenant turn out not to be quite what you expected.
Carry Out Routine Checks
Not every tenant will look after a property as you’d like. Furthermore, routine maintenance may be necessary, and it is a lot easier to carry out work over time, than to aim for a major renovation between tenants.
Many landlords opt for a property check every six months of the tenancy. In this way not only will the tenant be more likely to clean and tidy thoroughly in the time leading up to the inspection, but you can also highlight anything unacceptable during your visit.
This should mean that the condition of the property is far less of a shock at the end of the tenancy, and helps to minimise your expenses in returning the property to rentable condition.
Get to Know a Good Solicitor
While the above points should help to protect you from most bad tenants, it does perhaps make sense to consider what would happen in those few other cases. For example, what if a tenant stops paying rent? While you might opt to use their deposit to cover your mortgage payments, the minimal deposit paid to most landlords means this money will run out soon enough.
To this end it does perhaps pay to have an experienced solicitor on hand. They will be able to offer professional advice on dealing with such tenants in a legal manner, ensuring the best possible outcome for you. They may also be able to assist with evictions, or obtaining any outstanding monies owed.
Buy Specialist Landlord Insurance
What would happen if your tenants accidentally set light to their kitchen, or decided to take all the white goods with them when they left? What about tenants that don’t pay their rent, or situations where a tenant claims that you are negligent and tries to sue?
All of these examples could see you – the investor – considerably out of pocket. Even with a comfortable deposit paid, you’re still probably going to have to pay out a fair amount of cash. This is where landlord insurance comes in.
While many buy-to-let mortgage lenders will insist on some kinds of landlord insurance policy being in place, the coverage offered can vary considerably from one provider to another. As a result, it makes sense to compare landlord insurance policies, in order to find one offering the coverage you need, at the best possible price.
Use Professional Debt Collectors
Despite all of the previous guidance, there are still occasions where a tenant may abscond, owing you considerable sums of money. Trying to trace these individuals is often near-impossible, while recouping your out-of-pocket expenses can be even more challenging.
You might be surprised to hear, however, that there are a number of debt collectors and tracing agents that are willing to work on a risk-free basis. In essence you or your solicitor instructs the agent, and if they fail to reclaim the money you’re owed then you pay nothing.
While some bigger agents may only service large corporate accounts, a number of smaller companies specialize in dealing specifically with private landlords.
This article was provided by Noah Williams from Vilcol Tracing Agents, who help landlords to recover outstanding debts from tenants.