You’re One Bad Tenant Away From Going Broke—How Smart Landlords Bulletproof Their Multi-Family Rentals

Whether you already own multi-family rental property, or you’re thinking about investing in a condo or apartment building, one bad tenant can turn your business into a nightmare. For instance, it’s common for tenants to make things hard for landlords for serving an eviction notice, either by refusing to pay rent, not vacating, or causing serious property damage. One Texas landlord went bankrupt trying to evict a tenant who stopped paying rent, and they aren’t alone.

Although owning multi-family property is a great way to generate a steady stream of income, it takes a strong system to make it work. One of the most important components in your system is your tenant screening process. All it takes is one bad tenant to drain your bank account or destroy your property. You could be generating some serious cash flow and it will all be over when you rent to the wrong person.

Smart landlords don’t gamble. They have systems in place to prevent foreseeable disasters and keep their income flowing. If you’re going to invest in multi-family property, here’s how you can protect it.

1. Screen tenants to strict standards

The easiest way to avoid bad tenants is to never let them into your property in the first place. While there are no guarantees, holding high screening standards will filter out a significant portion of bad and risky tenants. The recommended minimum qualifications are:

• No evictions on their record. Applicants with a recent eviction or multiple evictions on their record are high risk. However, if the eviction was 10 or more years ago, and they can provide a satisfactory explanation, you may want to consider them if they meet all your other requirements.
• Proof of income, typically three times the monthly rent. Proof of stable income is a must. Most landlords require tenants to earn at least three times the rent to ensure they can afford it. Don’t just take an applicant’s word – verify their income by calling their employer.
  
  
• Solid references from previous landlords. It’s important to ask an applicant’s previous landlords if they paid rent on time, were respectful, and if they’d rent to them again. Keep in mind that if a previous landlord was a roommate, negative feedback might reflect a strained personal relationship and not the applicant’s way of being as a tenant.
  
  
• A good credit score. An applicant’s credit score will tell you a lot about how they manage their finances. Someone who carries high balances is high risk, even if they make on-time payments. Likewise, someone with accounts in collections is high risk. Aim for applicants with a credit score of at least 650. If someone doesn’t have credit, that isn’t necessarily a bad sign, but it would be a good idea to charge a higher security deposit in that case.

When considering applications, make sure you apply the same criteria to everyone. This will protect you legally and ensure you aren’t making emotional decisions. However, trust your instincts and don’t second guess yourself if a tenant doesn’t meet your requirements.

Be cautious when considering criminal convictions

While many landlords place a blanket ban on applicants with a criminal history, in some states, Fair Housing laws make it illegal to discriminate against applicants just because they have a conviction on their record. However, there are some exceptions. For example, if an applicant has a conviction that would put other tenants at risk, it’s not considered discrimination to deny that applicant.

Generally speaking, the exception might apply to convictions for violence or property crimes, but you’ll need to be able to substantiate your decision. Regardless, it’s crucial to consult an attorney to make sure you’re compliant.

2. Create a strict lease agreement

Your lease isn’t just technical paperwork – it’s your only source of legal protection if anything goes wrong. Without a signed lease, you’ll have a hard time if you end up in court with a tenant.

It’s crucial to spell out tenant responsibilities clearly so they know what they’re responsible for. For example, make it clear who pays for what utilities, the maintenance your tenants will need to perform, guest policies, smoking and pet policies, and even yard maintenance requirements. Written rules will give you leverage in court if a tenant violates the agreement.

Include clear details about rent payment due dates, late fees, grace periods, and anything else related to the rent. Spelling this out in detail will leave no room for confusion, guesswork, or attempted negotiations.

Add clauses for property damage and eviction. Don’t use generic lease templates. Work with a real estate attorney to add proper language to your lease based on state and federal laws.

3. Collect a decent security deposit (and handle it legally)

Hopefully you never have to deal with property damage, but if you end up with a bad tenant, a security deposit will be your only protection. Charge the maximum allowed by law. In most states, it’s 1-2 months’ rent. However, in Texas, there is no limit to what you can charge, but it does need to be reasonable. Collect the deposit up front and don’t accept payments.

In some states, tenants can sue for multiple months’ worth of rent and/or double the deposit if their landlord doesn’t handle or return their security deposit properly. Don’t let this happen to you. Keep all deposits in a separate account and consult an attorney before using a deposit to repair damage.

4. Hire a property manager

Being a landlord for a multi-family property is hard work. It’s nearly impossible to do it all yourself without making costly mistakes. Hiring a property management company is the best way to protect your property. Since they screen hundreds of tenants every year, they’ll have a strict, proven screening system in place and will know how to spot red flags, including scammers.

A property manager will:

• Market your vacancies
• Screen tenants
• Perform regular property inspections
• Handle repairs and maintenance
• Serve official notices, including evictions
• Collect rent
• Handle tenant issues promptly and legally

Hiring a property manager isn’t an expense. It’s an investment in keeping your multi-family property profitable.

Need a property manager in the Houston area?

If you want to attract the kind of tenants who pay on time, respect your property, and stick around long-term, you need a professional property management team on your side. At Green Residential, we have decades of experience managing multi-family units for Texas investors in the Houston Area. We’ll help you keep your rentals profitable and stress-free. Contact us now for a free property evaluation and see how we can help you find and keep only the best tenants.

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Tiffany Ferdus

Director of Operations at Green Residential

Tiffany is the Director of Operations at Green Residential.She has been in the multifamily property management industry for 7 years, serving most recently as an Area Manager in Nashville, TN. Tiffany specializes in all aspects of the property management process.

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