I got an email from another member of my team today that was asking for some suggestions on how his customer should handle a tenant issue.  Here is his opening email:

I have a client that is very green in the rental business. He signed a lease with a tenant for 6 months.  The tenant moved in but hasn’t paid him a dime.  No month in advance, deposit, rent etc.  What can be done to get this person out?

Ouch!  Now, I suspect that 90% of new landlords have made the mistake of not getting a security deposit prior to move in, at least once in their career.  In my experience (and I have made this mistake before), you will get that deposit only about 10% of the time.  Once they move in, you have zero leverage to get that deposit.  That tenant has no fear of you actually doing anything to them.  In fact, you can’t!  No eviction in the world is going to work to get that deposit paid.

When the tenant signs the lease, you should get the damage deposit.  And before they move in, you should get the first month’s rent.  Worst case, if the time is short, get all of it prior to move in.  If the time is long between lease signing and move in, always get a deposit as the tenant can simply walk away from the lease.  While you could try to sue them for lost rent, good luck.  Actually, you could get into a wierd situation where legally you need to evict them to break the lease even if they never lived there.  Worst case, hold the keys until they give you the security deposit and first month’s rent.  This is the last leverage you have.

Another mistake that I am sure happens, but I made only once in my earlier landlord years was to accept a personal check for the deposit and/or first month’s rent.  I am sure you can guess what happens next; the check bounces.  Now you have a tenant living in your investment property that has not paid anything to be there.  Much like the guy above.  If you have several weeks prior to move-in, you have time for a personal check to clear.  Also, if the check is drawn on a local bank, drive it over there and have it cashed immediately so you get the funds directly instead of depositing in your bank, they send it to the tenant’s bank and then it gets returned 14 days later NSF.

A slight twist on this mistake is when you are dealing with a tenant that get’s a rental subsidy like Section 8.  The tenant talks the talk like they know exactly how it all works, saying they have talked to this person or that agency and you are going to get your money.  Never take the tenant’s word for it.  Call the agency or have the tenant provide written proof of the subsidy.  Just because they say they are getting emergency assistance to pay the security deposit, doesn’t mean they qualify for it.

Taking some precautions and holding the keys ransom for the money is the best option.  By they way, I told this agent to file the eviction immediately (since they also owed the first month’s rent).

Despite being a landlord for over 6 years, I swear I learn something new in this business every month.  Have you ever leased your property to a tenant (Section 8 or not) for less than you were really trying to get?  Most of us have.  Maybe it is a slow rental time of the year, maybe you just haven’t had many calls on the apartment, maybe it is 2 weeks before the first of the month and you just want to get the place filled.  I bet every landlord has done this at one point.

So then, how do you get the rent back up to where you want it to be without upsetting anyone?  With non-Section 8 tenants, I tread lightly.  I would rather sacrifice $50 per month than have them decide to start looking and move out.  Each turnover costs me $1000-$2000 in painting and property repairs, even when they leave the place perfect.  Plus, that is assuming that I will NOT have any vacancy time.  In my book, that $600 that I am losing per year is cheaper than a turnover.

A friend of mine that does property management for about 250 units (60% of them get some rental subsidy like Section 8), told me something I never knew.  You can raise the rent on a Section 8 tenant dramatically in one year or every year and Section 8 will approve it.  This is even if it goes over the maximum rent amount for that unit. Me and another landlord just sat there with out mouths open, about to cry over all the money we had left on the table over the years!

Here is an example of how it works:

• You have a duplex with two 3 bedroom units.  Both units are identical.
• You typically rent each unit for $1200 per month.
• The previous tenant moves out in December and you are having a tough time finding a tenant.
• A prospective tenant calls you about the apartment and says they have a Section 8 voucher that will only pay $1095.
• In a pinch and desperate you decide to take them, despite getting $105 less per month that you normally get (after running the typical tenant screening process).
• You sign a lease at $1095.
• At month 10 (60 days before the expiration of the lease), you contact the tenant to see if they want to stay.
• If so, you draw up a new lease for $1200 and have them sign it.
• You submit the new leaseand documentation of the rent for at least three other comparable 3 bedroom units in duplexes with the same amenities, in the same neighborhood, to justify your rent increase.
  • The other comps must be NON-Section 8 tenants.  You are trying to show what the market rent is for that property.
  • One small wrinkle is getting comps.  You can definitely use the other unit in this duplex in this example, but then you may need to figure out a way to provide proof of other units in the immediate area renting for the same amount.  Hopefully you either have other buildings nearby or maybe you can ask a neighbor landlord to give you a copy of his/her leases for this.
• There is no guarantee that Section 8 will approve this, but if you have a decent case with good comps, my friend said he has raised the rent $200 one year to get the property to the correct amount.

One question that got asked was, why would the tenant agree to a large increase.  The answer is that they may not feel the increase as Section 8 may simply pay the difference.  While you can’t guarantee this, it is worth mentioning.  Alternatively, I do know that Section 8 will mostly ignore smaller yearly increases of $25-50.  These just fly under the radar.

So…..Watch for your lease renewals on your Section 8 properties and bring your rent up to market standards.

As a landlord, if you have not worked with Section 8 before, it can seem a little overwhelming.  There really isn’t anyone that can walk you through the process and no good information exists on-line (except maybe the Section 8 posts here).  And to top it off, the Section 8 tenants don’t know much more about the program than you do.

A common question is “How do I screen Section 8 Tenants”.  That is pretty simple.  You screen Section 8 tenants just like screen tenants that do not have subsidized rent, with a couple changes:

• Most Minnesota Section 8 tenants have to pay a small percentage of their rent (10-25%).  Very few have their entire rent paid by the government.  Consequently, the tenant needs to have some other source of income.  Where are they going to get the $100-250 per month that they have to pay out of their pocket?  Plus, how are they going to pay for utilities, if they are not included in the rent?  Weigh your decision heavily on the fact that a large portion of the rent is guaranteed from the government, but be concerned about the remainder.
• Call their Section 8 coordinator to confirm they are able to rent your apartment for the proposed rent.  Confirm they are able to move from their current residence.  You don’t want to make the same tenant screening mistake I made.
• If their credit is bad or non-existent, confirm that they have income to pay their portion of the rent and then consider waiving that requirement of your rental criteria.
• Confirm they are able to pay the damage deposit upon move-in.  They may need to go to emergency assistance to get the deposit, so have them get a letter to confirm the subsidy.

Screening Section 8 tenants is just like screening anyone else with a few additional steps.  There is no need to over think the process!