Avoiding Professional Tenants in Income Properties - Having a Quiet Retirement
by Don Drake, Connelly Law Offices, Ltd. 8.7.24
"Investing in real estate is a major decision that can significantly impact your financial future, potentially providing a reliable income stream for retirement," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "Finding responsible and reliable tenants is paramount for successful residential real estate investments. Failing to do so could lead to unforeseen expenses and legal battles, making your investment a nightmare. And with that in mind, let's discuss what is commonly referred to in housing circles as professional tenants."
A professional tenant is not someone skilled at renting properties; it refers to individuals who exploit legal loopholes, local laws, and the legal system to stay in a rental property without paying rent. These tenants can be a nightmare for landlords as they know the ins and outs of landlord-tenant law. They often dodge rent, withhold payments, or avoid paying altogether by citing minor or nonexistent repair issues. These tenants frequently use cash payments to avoid leaving a paper trail, offer partial rent, or accept partial payments only to continue the cycle of unpaid rent.
Seniors who purchase rental properties as an additional income source for retirement must know what to look for and how avoiding professional tenants is a must. But before we discuss this further, let's look at an older couple who had the misfortune of going through just such an experience.
A Nightmare for a Well-Meaning Couple
Mary and Carlos, a couple hailing from the Island of Madeira in Portugal, decided to invest in real estate as part of their retirement plan. They aimed to generate income to supplement their savings as they transitioned into their golden years. Their eyes were set on a triple-decker property in a historic city on Massachusetts's south coast.
Their vision for the property extended beyond financial gain. They aspired to create a haven for young couples, providing them a place to start their lives together. Their inspiration stemmed from their journey of starting anew in the United States during the mid-1970s. Their early days in the country were marked by the profound kindness of a landlord who helped them when they had very little. This selfless act impacted them and fueled their desire to pay it forward by supporting other young families in need.
Upon acquiring the property, they were pleased to know that two of the three units were already occupied by long-term tenants, leaving one available. However, they could not have predicted the unforeseen challenges that would arise from their selection of tenants for the vacant unit.
Their vision of "giving back" led them to rent the unit to a young family recommended to them by a local social service agency. Carlos and Mary felt reassured by the family's involvement in a program, believing it indicated their commitment to achieving a better life. Eager to extend a helping hand, they welcomed the new tenants with open arms -- and unfortunately, no lease.
After three weeks of moving into the unit, the tenants began to express concerns about very minor issues, pointing out things such as a small crack in the corner of a windowpane, a minor stain on the bathroom ceiling, and floorboards that produced a squeaking noise when stepped on at a specific spot. Carlos and Mary reassured them that the floors, despite their age, were structurally sound and that the crack in the windowpane was barely noticeable. However, the tenants persisted, stating that the floor might give way and that the crack would allow chilly air in, leading to increased heating bills.
After the tenants made these complaints known, they brought the matter to the attention of the local health board, seeking to have the landlord cited for violating building codes. It became increasingly clear that they were contending with professional tenants well-versed in legal matters and adept at navigating the housing system.
Things proceeded to get worse. After just two months of moving in, the tenants decided to withhold their rent, claiming that the property's poor condition and lack of repair was the reason. Carlos found it frustrating because he believed the tenants contributed to their complaints by leaving bags of unsealed garbage outside, which attracted insects and mice.
Things escalated when the tenants accused the couple of violating the "last month's rent and security deposit law" and demanded the return of their deposit, hinting at a potential triple damage claim against them. Mary was taken aback, stating, "We had no idea about this. All we wanted to do was help people. We weren't lawyers. We didn't think we needed a lease. We didn't know these laws."
In response, the couple hired a company to address the minor violations and clean up the accumulated trash outside the tenants' apartment. However, their efforts were short-lived as the tenants resumed piling up bags of garbage and started hosting loud parties, leading to complaints from other tenants about the dirty entryway, the stench of rotting garbage, and the pervasive odor of marijuana.
Things had gotten so bad that the other two tenants decided to leave for housing elsewhere, taking away a stable source of monthly income. Meanwhile, the first-floor tenant continued to withhold rent even after the minor code violations had been rectified. "We had no choice but to begin eviction proceedings against them," said Carlos. "When we had the paperwork delivered, we faced a barrage of counterclaims followed by the tenant inundating us with numerous requests for documents and interrogatories, which extended the eviction process."
"During this entire time, the tenants continued accumulating more garbage, prompting us to hire another company to take care of it again," Mary stated. "We had two vacant apartments that were not generating any income. The tenant on the first floor withheld rent and caused us additional expenses to clean up after them. We also had property taxes coming due, insurance payments, and utility bills for the vacant units that needed to be paid. Overall, it was an absolute nightmare."
After nearly a year of enduring the problem and incurring significant legal expenses and cleanup outlays, Mary and Carlos finally had a chance to present their case in court. However, on the scheduled day of the hearing, the tenants failed to appear, resulting in the couple being awarded a judgment for the unpaid rent amounting to thousands of dollars that they would never collect, and a property left in a state of disrepair.
Ways to Deter Professional Tenants
A thorough screening and selection process is crucial in deterring undesirable professional tenants from renting your property. This comprehensive procedure involves meticulous evaluation of potential tenants through background checks, credit reports, and references. Each step assesses prospective tenants' character, dependability, and rental history. It is imperative to scrutinize tenant criteria from multiple perspectives, thereby necessitating the inclusion of the following fundamental steps in your screening process.
To begin with, it's essential to establish specific criteria to ensure you're selecting reliable individuals. This may include setting minimum credit score requirements and minimum income levels and conducting background checks to assess an applicant's rental history and criminal background. It's crucial to provide a thorough rental application form that collects comprehensive information such as personal details, employment history, rental history, and references. Obtaining permission to run a credit check is important to assess an applicant's financial responsibility and history of debt repayment.
Additionally, requesting proof of income, such as pay stubs, employment verification letters, or tax returns, is a standard practice to ensure the applicant can afford the rent. This often requires tenants to have a monthly income at least three times the rent. When tenants do not meet this threshold, allowing them to add a co-signer to the lease can be considered a means of meeting the financial obligations.
Verifying a tenant's rental history by contacting previous landlords can provide critical information about their payment punctuality and any past issues, gauging their trustworthiness and ability to care for a property. Conducting a criminal background check is crucial to identifying potential risks to other tenants or the property.
Contacting personal and professional references provided by the applicant can offer valuable insights into their character, reliability, and behavior beyond a tenancy. Furthermore, scheduling an in-person or virtual interview allows one to discuss the rental application, address any concerns, and evaluate the applicant's suitability as a tenant.
A well-designed screening process is vital for identifying potential red flags and allowing landlords to make informed decisions. While it's impossible to know every detail about a potential tenant, understanding the main red flags to watch out for can increase the likelihood of finding a reliable and trustworthy tenant.
The Red Flags
When reviewing rental applicants, it's important to be mindful of the following key concerns:
Poor credit history: Applicants with a history of unpaid debts, bankruptcies, or foreclosures may pose a higher risk.
Income Concerns: Potential tenants should have a steady income to afford the rent and other expenses comfortably. A history of frequently changing jobs may indicate a lack of stability and could affect the ability to pay rent consistently.
Past Rental Problems: Past evictions, property damage, or complaints from previous landlords may signal potential tenant behavior issues.
Criminal History: Prior convictions for violent or property-related crimes may pose a risk to the safety and security of the property and other tenants.
False Information: Discrepancies in the information provided on the rental application could raise concerns about the applicant's honesty. Also, an unwillingness to divulge necessary information or documentation may indicate a lack of transparency.
Cooperation Issues: Difficulty reaching the applicant or receiving vague or evasive responses during the application process may signal communication challenges in the future.
Being Overly Aggressive: Pushy or overly insistent behavior during the application process may raise concerns about potential tenant conduct issues.
Doesn't Want a Lease: Reluctance to commit to a formal lease agreement may indicate a lack of long-term commitment or potential issues with following rental policies.
It's important to consider these factors carefully during the tenant screening process to help ensure a positive rental experience for both the landlord and the tenant.
The Right Tenants
Creating a solid rental agreement is essential after successfully vetting a potential tenant through a thorough screening. This document is your primary protection against any potential tenant exploitation of the rental system.
When drafting the rental agreement, ensure it is clear, detailed, and legally binding. The agreement should cover essential areas such as rent payment terms, property maintenance responsibilities, and dispute resolution procedures. Additionally, it's important to consider adding clauses discouraging unprofessional behavior, such as prohibiting subletting, unauthorized occupants, or engaging in illegal activities. Seeking legal advice to ensure that the rental agreement complies with local laws and effectively protects your property and interests is highly advisable.
Once the new tenant has moved in and their tenancy has commenced, maintaining open communication and conducting regular property inspections becomes crucial. By staying proactive in these aspects, potential issues can be identified and addressed before they escalate.
Regular property inspections provide an opportunity to assess the condition of the interior, exterior, and amenities and identify any potential problems early on. Additionally, these inspections allow you to engage with your tenants, address their concerns, and reinforce lease obligations. Through this regular interaction, you can build a positive relationship with your tenant and encourage compliance by demonstrating that you are attentive to the property's condition.
Consistent rent collection is vital to ensure a stable rental income and discourage misuse of the rental system. By implementing clear and strict rent collection policies, you communicate to your tenants that rent evasion will not be tolerated. Proactive measures, such as offering an online portal and electronic, automated payment methods, go further in setting tenants up for success and discouraging non-payment.
Hire a Property Manager
Suppose you're struggling to find the time or don't have the expertise to manage your rental property and deal with professional tenants. In that case, you might consider hiring a professional property management company. These companies have the knowledge, resources, and experience to carefully screen tenants, enforce lease agreements, and efficiently handle any disputes that may arise. They can also provide valuable guidance on legal and regulatory compliance to reduce the risk of legal issues or liabilities.
Additionally, their services often include protection if a professional tenant slips through the screening process, such as support to remove the problematic tenant and find a replacement quickly. While property management services come with additional costs, the peace of mind and convenience they offer can be well worth the investment, especially considering the potential costs of dealing with professional tenants.
A Final Word
"Purchasing rental property as an investment for retirement is a good choice but comes with responsibilities that older couples may or may not want to undertake. This includes a real but preventable risk in the form of professional tenants," stated Attorney Connelly. "By employing proactive strategies and understanding the key factors to consider, it is possible to significantly reduce the likelihood of attracting and renting to problematic tenants. Through meticulous screening, unambiguous lease agreements, regular inspections, and stringent rent collection policies, landlords can effectively keep professional tenants away from their rental properties and reap the rewards of being responsible and successful property owners."
Please note that the information provided in this blog is not intended to and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise you to consult your attorney, professional fiduciary advisor, or medical provider.
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