Lessons from a Non-Paying Tenant

Most people agree that a non-paying tenant is a bad thing.  It is, but I've learned a lot from my current experience with a non-paying tenant and I think you will find these lessons valuable as well.

My family owns a rental property in the Hampton Roads area.  We chose to rent it instead of selling because it is in a big Navy area, it is in a great neighborhood, and the rent is high enough that we can pay the mortgage and all repairs with the money we receive in rent.  It helps that we bought it as newlyweds, so it is small, easy to rent, and the mortgage is small as well.

We've been renting out this house for 13 years, minus the three years that we were back in Norfolk and lived in our house.  We have been extremely fortunate that it has never been empty for more than two weeks, and it hasn't required a lot of repairs because it was new when we bought it.  The current tenant is lovely…she takes good care of our house and has renewed her lease several times because she likes it there.

So what's the problem?  Our tenant is a real estate agent, and business has been pretty bad for the last year or so.  While she had always paid her rent on time, payments have been getting later and later.  Sometimes she'll fall nearly a month behind, just to catch back up for a month or two.  However, she hasn't paid her rent on time since December, and though she has been bringing in small amounts regularly, she is currently more than two months behind on her rent, plus she has a large amount of late fees to pay as well.

My property manager and I have been in constant communication during this time, and I've given him permission to let it get to this point.  As long as she is talking to us and still paying something, I keep hoping that she'll miraculously have several good closings one month and suddenly all will be well.  Last week, however, my property manager and I decided that we didn't see this bad cycle coming to an end and that we were going to have to take action.

I did not want to start eviction proceedings because they cost everyone money and are very unpleasant.  In addition, I do not see this tenant as a deadbeat who is never going to pay what she owes.  Her security deposit would be able to make up a big chunk of her costs.  I feel confident that whatever happens, I will eventually be paid.  She is liable for rent until the end of the lease, or until she is evicted.  Eviction would make her eventual bill even higher, since she is liable for those costs, and leave me with an empty house, and leave her without a place to live.

Instead, I suggested that we talk to our tenant about putting the house on the market in hopes of finding a new tenant to take over the rest of her lease.  This is  a better option as it keeps the house occupied while it is being shown (meaning a nicer looking house) and allows her to continue living there until a new tenant moves in, which only seems fair since she is still liable for that rent.  Our tenant agreed to this plan and my property manager went out this week to inspect the property, put a sign in the yard and list the property in the Multiple Listing Service.  This isn't an ideal solution, but it seems the best plan possible under the circumstances.  I was glad that we were working towards some type of long term resolution.

This morning, my property manager called me and said that he had just talked to the tenant.  It seems that her teenage children didn't know about their mom's situation and were very upset when they saw the sign in the yard and realized what was happening.  They had a family pow-wow and were committed, as a family, to finding a way to stay in the house.  The tenant was wondering how much money she would need to produce before we took the house off of the market.

After some discussion, my property manager and I decided that we would take the house off the market if she could pay one and a half month's rent.  I don't know how this is going to work, but I feel good about our decision.

I have learned so many lessons from this experience.  Some lessons are about myself, and some I have learned from watching my tenant struggle through this real estate downturn and her own financial challenges.

First, I am thankful that my family has structured our budget so that we can still pay the mortgage without receiving our rent.  It has meant dipping into our emergency fund, but we can do it.  If our house were vacant for a long period of time, we would have to make some changes, but we could still get by.  One of the reasons is that our mortgage payment is only a small portion
of our family's budget (less than 10%).  Like I said, it is a little house.  We would have had a lot of
trouble if the mortgage payment were a quarter, a third, or even half
of our monthly budget.  When we made the decision to rent and not sell this house, that was a big factor.

I guess this brings me to the second lesson, having an emergency fund.  Emergency funds are important for everyone, but doubly important for landlords.  Even with good tenant screening, you can't tell when unexpected things are going to happen in your tenant's life.  In a perfect world, I would have six months of mortgage payments in a separate account for just this reason.  In my imperfect world, I have tapped into our general emergency fund.  I don't really care that where the money comes from as long as I can still pay my bills.

The third lesson is the importance of requiring an appropriately sized security deposit.  I have often been tempted to lower my security deposit requirements because I know how hard it can be to come up with a security deposit and the first month's rent at the same time.  However, if our situation ends badly, that security deposit will make a significant difference in how much money I will lose.  I now have a much better understanding of why security deposits are required.

Fourth, one of the reasons my tenant is struggling is because of the nature of her work.  She works for commissions, and when houses aren't selling, she isn't making any money.  I've never been in a position where our family's entire budget is based upon inconsistant pay.  (That is a huge benefit of the military!)  I don't know all her financial details, if she had an emergency fund or how big it might have been, but I can see that having savings is very important if your income isn't guaranteed.  I wouldn't even know how much to save, but I'm thinking something like a year's worth of expenses.  That is a lot of money!  I don't know how I would save that, but I think it would be necessary.

Fifth, try not to put all your eggs in one basket.  By that I mean, figure out a way not to be completely dependent on one source of income without a plan B if that income disappears or decreases.  Admittedly, our family lived solely on my husband's military income for several years while our children were young and I was not working.  It wasn't perfect, but it was more secure than most, and I could always go get a job if needed.  As we get older, I see the value in having a variety of income streams and not raising our standard of living along with the income.  As we receive rent, and I have returned to work, we're trying to keep spending nearly the same amount as before and use the rest to pay off our debts and save more.  We're doing an OK job of it, but I can now more clearly see how important it is.

Sixth (and most importantly, I think), talk to your kids if your life is changing.  I understand why my tenant didn't want to talk to her kids.  I would want to shield my children from financial difficulties, too.  I bet it wasn't any easier once they saw the "for rent" sign in their front yard.  It honestly never occurred to me that her kids didn't know what was happening until I heard about their recent conversation.  It sounds like her teenage children are talking about getting jobs and finding other ways to pitch in during their family's challenging time.  I don't want to second guess, and I don't know their family, but maybe things wouldn't have gotten this bad if they'd been working as a team before now.  (Goodness knows, kids don't like to figure out stuff later.)

I wish this whole situation weren't happening, but it has been a good education for me.  I've learned six valuable lessons, some of which were new lessons and some of which were good reinforcement of stuff I already knew.  Maybe you'll learn a little bit, too.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Wow, I knew the economy was bad and have been worrying about it for over a year now, but honestly hadn’t even thought of this kind of complication.
    What a terrible situation for you, your family, your manager, your tenants and her family. I can see how you don’t blame her for not being able to pay the rent, but it’s also not fair to your family should you need the money for some reason.
    I wish you all the best and hope for all our sakes that things start getting better.

  • deane gilmour

    Of all people to be renting a house, a real estate agent. Unless she was new when she originally leased the house, I would have been a little sceptical at first. Now with the downturn on the market that has been going on for at least a year, i would have been much more sceptical abouit her ability to pay. I put forth that she was living well during the good times and not putting forth the effort to insure her own residence or home while supposedly attempting others to have that buffer of home onwership. Irresponsible handling of her own income in a very lucrative field would have been a huge red flag to me as a property owner and landlord.

  • Your compassion for the tenant and her family is admirable. Often, people only think of the financial aspects of a business arrangement and forget about the people involved. It’s nice that you have been so accommodating, without carrying your tenant’s burden for her.
    These are very tough times for real estate agents. During the good times, few of them thought it would ever end. Three years ago, I told my RE friends that housing would drop by 30% in CA. They all thought I had lost my mind. One friend was driving a brand new H2. Six months later she lost her house.
    I hope it all works out for you and for your tenant.