What if I have bad tenants?

Posted by Ed McKnight on 25/03/20
What Happens If I Get Bad Tenants
Introduction

What if I have bad tenants?

Many first-time investors are worried they might not be able to find a good tenant. This is a good question that investors should ask themselves. If you can’t find a good tenant after you buy a property, then you could be left paying 2 mortgages at once!

In this article, we’re going to cover ways to mitigate against being left without a tenant.

Tactic #1

Tactic #1 Drop the Rent

Let’s say you invest in a property that has been receiving $400 a week in rent. Your tenant then gives notice and vacates after the required 4 weeks. However, it’s the middle of winter where the market is less active. That’s making it harder for your property managers to find a tenant.

What can you do in this situation?

If you decreased the rent and marketed the property at $350, you’d probably get more interest and find a tenant more quickly. Then in 6 months you could increase the rent back to the market rate, since the market is stronger.

Why does this work?

The rental market works the same as any other market. If you drop the price, you’ll generally get more interest and let the property more quickly (all other things remaining equal).

While you might not want to decrease the rent and lose the extra $50 a week, let’s look at the numbers to see when it would make financial sense –

Over a 6-month period by charging $50 a week less, that would cost you $1300 compared to where you wanted to be.

That’s the equivalent of 3.25 weeks’ worth of rent at $400 per week.

So, if it’s going to take you more than 3.25 additional weeks to find a tenant at $400, it makes sense to drop the rent to $350 and let the property more quickly.

Will it always make sense to do this? No. But, sometimes it does, and if you struggle to find a tenant in a soft market, this is always an option.

Tactic #2

Tactic #2 Budget for Vacancy

Another method to buffer you from the potential of an untenanted investment property is to put money aside in your rental account for vacancy.

Vacancy is a fact of life, and at times your property will be untenanted.

But if you budget for it and have money in your rental account that has accumulated while you had a tenant, then you can be more selective with your tenants and hold out for a higher price.

How much should you budget for?

We recommend planning for 3 weeks of vacancy each year. That means planning on receiving 49 weeks worth a rent a year, rather than 52. When you plan out your budgets for your rental properties you can either decrease the revenue you receive or add “vacancy” as an expense line.

Every property coach will recommend planning for a different level of vacancy. Three weeks tends to be more conservative, and some other property coaches will recommend only 1 or 2 weeks’ worth of vacancy. With cashflow statements between coaching businesses, it’s important to look at these types of assumptions so you’re making an accurate comparison.

What happens if you don’t budget for vacancy? You may be left scrambling having to cover

unplanned expenses once your tenant leaves.

Tactic #3

Tactic #3 Use a Property Manager

Property managers are an invaluable asset to manage vacancy. Because they are in the business all day, every day, they can often provide a more attentive service to tenants than landlords who have other work commitments.

These professionals also have expertise and processes to find and screen tenants. This means they can bring your property to market more quickly, because as soon as they get notice one tenant is leaving they can immediately start looking for another.

When a property manager selects a tenant for one property, they can also approach the prospective tenants who missed out and offer them other properties they have on their books.

This means property managers have a wider and more immediate pool of potential tenants to contact – and that means filling your property more quickly and limiting vacancy.

Yes, you’ll pay a letting fee of a week’s worth of rent +GST. But if your property manager can avoid 1 weeks’ worth of vacancy then they will have paid for themselves.

Tactic #4

Tactic #4 Invest in Tenant-Rich Areas

Let’s say you invest in a small one-horse town that is reliant on a single industry. If that industry goes through a hard time, then you’ll be more vulnerable to vacancy. If there are fewer jobs then people may move to larger cities to find work, which takes heat out of the rental market – decreasing rents and increasing the time it takes to find a tenant.

This has been demonstrated on the West Coast as the mining industry fluctuates.

The alternative is to invest in areas that have high employment, a buoyant economy, based on diverse industries. That means that if one industry goes through hard times, there are still employment opportunities for your future tenants.

That naturally means selecting a ‘product’ (rental property) that is based in one of the main centres, as these are the areas that satisfy the ‘economic sniff test’.

Tactic #5

Tactic #5 Set up an additional line of credit

Lastly, you can open a revolving credit account with your bank. This works like an overdraft, which is secured against your property at standard mortgage rates, which are much lower than other types of personal loans.

You will only pay the interest on this loan if you actually use it.

This means that you can set up this line of credit before you need it, so if you do go through a patch of vacancy, you can continue meeting your expenses without paying a lot of money out of your personal bank account. You can then recoup this later.

And, of course, if you don’t end up needing it, you pay nothing.

Hopefully this article has reduced some of your fears when it comes to investing.

In summary, remember you are likely to have more control than you think; you can adjust rent as needed (within reason, obviously), place 3 weeks aside each year in preparation for any vacancy issues, employ the expertise of a property manager, and you also have the option of revolving credit. You can use these techniques to help ensure you approach your next investment property with greater confidence.