Help! My Tenants Won't Pay Their Rent!

Jul 22, 2006

The Bottom Line Non- payment of rent usually results in eviction. But there are other solutions to the problem that are sometimes better from a financial standpoint.

Renting property is a risky undertaking. If the mortgage balance on the property is low and tenants make their monthly payments in a timely manner, then renting can be a lucrative investment that offers the advantage of regular monthly cash flow. But if things don’t work out and tenants do not pay, the owner is going to be stuck paying the full mortgage bill and other expenses. There could also be damages to repair and back rent that, most likely, will never be recovered. Let’s take a look at this specific aspect of the rental process: The frustration that can occur when tenants do not pay their rent and some of the different ways to deal with this situation:

Provisions of Rental Contract:

Every rental contract needs to have a provision that explicitly states exactly what is expected from renters in terms of payments. Not only should the payment be spelled out along with the penalties for late payments, the contract also needs to state in clear terms what the different causes are for eviction with precise explanations regarding when eviction will take place and how it will be administered.

Failure to pay the rent is the most common reason for eviction. This needs to be covered in the contract and tenants need to be fully aware of the importance of prompt payments. Usually, evictions take place when the rent has reached the point where it is more than thirty days past due. Assuming the rent is due on the first of each month (the typical arrangement), this gives tenants until the first of the next month to pay.

Some contracts include other reasons to evict. One common reason to evict is for destruction of property. Another is for allowing unlawful activities to take place on the property. I have even seen some contracts that threatened eviction after a specified number of consecutive months of late payments.

Protecting Against Non- Payment of Rent:

Every landlord needs to protect himself/herself from the loss of income resulting from non- payment of rent. The most common form of protection is the rental deposit. Usually equal to one month of rent, the deposit provides the landlord a safety net against financial loss.

Even though one month of rent is the norm, there is no law that says a deposit must be limited to an amount equal to one month of rent. Depending on where a rental property is located and how easily it will be to sign up more tenants, it might me necessary to require a larger deposit; perhaps up to two months worth of rent. Not only will this protect against one month of lost income if a tenant doesn’t pay, it will also provide some money to repair damages, if any exist.

Working Out an Agreement:

Now, let’s say that your tenants have failed to pay the rent and they have now violated the terms of your rental agreement. What is a landlord to do? Depending on the circumstances, some options include:

Eviction- The most obvious option is to evict the tenants immediately. As long as the provisions for eviction have been clearly defined in the rental contract, the tenants have signed it, and a violation has taken place, then it is perfectly legal to send the tenants an eviction notice.

Use Deposit to Cover the Expense- This option involves taking part of the security deposit money and using it to cover one month of rental expense. The good thing about using this option is that it means there will be no disruption in cash flow and the mortgage will get paid as usual. The bad thing is that the tenants will now be without a security deposit. And that means there will be no way to obtain the necessary cash to cover repairs (if any exist) or other tenant responsibilities when the tenants finally leave.

Bartering/Working for Payment- This is an option that most landlords never think about. If the tenants own some assets of value, it might be possible to strike a deal by exchanging the asset for all or part of the rental payment. It also might be possible to find work for the tenant, right on the property, that can be performed in exchange for the rent. (Note: Landlords need to check the local laws to make sure these and other options do not violate any ordinances).

Setting up a Payment Plan- This option involves making a deal with the tenants whereby they will be permitted to remain living at the property as long as they make periodic payments to reduce the rent liability.

Final Thoughts:

Renting property is a relatively new experience for me and I have learned a great deal since I signed up my first tenant late in 2003. I rent a single family home so my problems and concerns are very different from a landlord who owns, say, a group of apartments or some other multi- unit dwelling. With only one family renting my property, the failure of one person to pay the rent has a much greater impact than it would on a multi- unit apartment.

When tenants pay their rent in a timely manner, there is usually little problem keeping the basic expenses of the property covered and (hopefully) realizing a small amount of profit. If there is a mortgage, it needs to be covered each month. Property taxes and insurance also must be paid and there will be routine maintenance on the home or apartment building. All of these things should be covered by the rent payments. If the cash flow from rent comes to a sudden end due to lack of payment, it will now be the responsibility of the landlord to cover the payments or else let the loan and/or taxes default and possibly lose the property.

I have had to deal with non- payment of rent more than once and it did present a serious problem. The first time wasn’t a big deal. I just went ahead and used the deposit to cover the balance owed (like I described above) and went about my day. But the second time presented a greater problem because there was no deposit money remaining to cover the rent. This meant that I would have to cover the mortgage and other expenses myself or risk possible default on the loan. Because my credit rating is solid, I opted for the former. It took a big bite out of my monthly budget and left me almost no money at all for the month. But I felt this was better than allowing the mortgage to default and having my property seized by the bank.

Many people reacted to my situation with a tough attitude. “Why not just kick the bastards out?”, they would ask. “They haven’t kept their end of the deal so why should they be allowed to continue living in a house for free?”. This is true, but the dilemma faced by the renter of a single family home is a difficult one that cannot be solved so easily. If an eviction is made, it might take a long time to find replacement tenants. And as each month passes by and the house sits vacant, the owner will have to continue to make the full mortgage, property taxes, and insurance payments. By letting the tenants stay at the property and working out a payment plan, there is at least a chance of receiving some money each month. It may not be enough to cover the full amount of the expenses but something is better than nothing.

In the case of a multi- unit apartment, the situation is entirely different. Let’s say a landlord owns an apartment building with six units. Having one tenant not pay the rent isn’t that critical to the monthly cash flow because there will still be five tenants paying the rent on time. In this instance, the usual recourse is to evict. Finding another tenant to rent the vacant apartment shouldn’t be too difficult and there will still be five people paying rent in the meantime. But with a single home, a landlord doesn’t have this luxury. No rent payment from the one and only tenant means no cash flow at all. And that means the landlord will have to cover all of the expenses until the rental income resumes.

Probably the main questions to ask yourself when your tenants cannot pay are: How quickly can I find tenants to replace of the evicted ones?....and…..Can/should I forget renting and place the property up for sale? If you intend to continue renting your property and you are confident that your house is easily rentable, then evicting might be the best choice. On the other hand, if housing needs in the area are low then eviction could cause even greater losses then allowing tenants to remain in your property and working out a payment agreement. The reason I decided to let my tenants stay is because I felt I would not be able to find another tenant or sell it quickly. And I knew I could not continue to pay the mortgage out of my pocket. For me, the only practical decision was the one I ultimately made: To let the tenants stay as long as they accepted a payment plan to catch up the rent.

Renting property has been an up and down experience and I am not sure I will do it again in the future. When payments are made on time and there are no other problems, the monthly cash flow is great and it provides an added source of income. But when the rent isn’t paid, the expenses can mount quickly. It could easily reach the point where the mortgage, taxes, and insurance on the property can no longer be paid, forcing the property into foreclosure.

Dealing with deadbeat renters can present some challenges, both financial and otherwise, and the situation can often be a delicate one that requires patience, negotiation, and the making of tough decisions. No one likes the thought of evicting someone from their home but, in some instances, it may be the only choice. I was able to work out a deal with my tenants but only time will tell if they are able to catch up on the rent that is presently in arrears and get their personal finances back in order. It was an important decision, but it is just one of many considerations that must be made when you decide to take on the role of landlord.

To read a related essay, be sure to click the link below:

How to Rent Property

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Member: Bryan Carey
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