From the Excalibur Homes video series “What Landlords Need to Know,” with Mike Nelson
If you’re going to be in the business of owning a rental house, you need to make sure your expectations are set correctly.
When new clients contact us, the primary thing they tell us they’re looking for is simple: “I need you to find me a good tenant.” That’s a fair request, and it’s one we take seriously. But before we talk about what a good tenant looks like, let’s cover a few statistics.
The numbers behind the rental market
About two-thirds of single-family homes in this country are owned by the people living inside them. The other one-third are rented.
The second statistic you need to be aware of is this: depending on which reference you look at, the majority of Americans are living paycheck to paycheck. And when you narrow that down to tenants specifically, the percentage is even higher.
Here’s why that matters. We can run a very thorough background check on an applicant. We can confirm that today their credit is good, their income is sufficient, and everything checks out. The problem you face as a landlord is that most tenants have no fallback position. They don’t have a savings account to speak of, and in many cases they don’t have family they can turn to for financial support if something goes wrong.
Why good tenants stop paying
What we often see is this: we do a great background check, the tenants check out, they move in, and everything goes fine. Then somebody loses a job. Or the relationship breaks up. A husband and wife divorce, romantic partners part ways, or a roommate moves out. As soon as one of those incomes disappears, we frequently lose the tenancy.
It’s not that the tenants didn’t check out. It’s that they can’t stay great forever. When something happens, they have no way to cover the rent until a new job and a new income are flowing again.
Screening is step one, not the whole plan
Thorough screening still matters, and you should do it. You want to make sure you’re not being scammed by someone using a false identity, and that you’re not renting to someone with a history of evictions or squatting. We run a very thorough screening on every applicant, and you should too.
But once that tenant is in the property, the next question is: how are you going to manage defaults?
- What happens if they’re late?
- What happens if they’re so late that you need to start the eviction process?
- How long does eviction take in your market?
- What can you realistically expect to recover?
Georgia’s security deposit limit
In Georgia, the law now caps the security deposit a landlord can collect at two months’ rent. So when you’re renting your property to someone with marginal credit, the most you can hold as a deposit is the equivalent of two months’ rent.
Be careful here. The law is clear that you can’t work around this by charging “last month’s rent” or a “double first month” and calling it something other than a deposit. The law will still view it as money you required before someone could move in, and that total cannot exceed two months’ worth.
What that means in practice: if an applicant is truly marginal, you should probably say no and look for a better candidate. And if you can’t find a better candidate, your property is probably overpriced.
Have a delinquency procedure, and follow it
The second thing you need is a delinquency procedure that’s legal, fair to everyone, and that you actually follow.
We hear landlords say, “I don’t want to evict this tenant because I don’t want to put a family on the street.” Understand what that really means. It means you’ve decided to adopt these people and let them live in your house for free. If you let someone stay for free, they will take you up on it, and it will continue and continue and continue.
At Excalibur Homes, we have an established delinquency process:
- When a certain date is met, late letters go out.
- When the next date is met, demand letters go out. These are the three-day pay-or-quit notices.
- After that, the eviction is filed.
- We get a court date, and we proceed until the tenant has either paid or the property is vacant and can be re-rented.
You need to set up your own system along the same lines. If you don’t, you’re going to lose far more money in cash flow than you ever needed to.
The bottom line
A great tenant can still become a bad tenant if things go bad in their life. Good screening gets the right person in the door, but a clear, consistent delinquency process is what protects your investment when circumstances change.