Tenant Not Paying Rent? Here’s What to Do


Tenant not paying rent? Debating whether a year-long, six-month, or month-to-month lease is best? Don’t know how to estimate rent for a new unit? On this week’s Rookie Reply, we’re tackling some of the most troublesome yet common questions that rookie real estate investors have. We’ll be going deep into property management, tenant screening, and what to do when a tenant stops paying. So fret not when investing; there’s always a way to make a win-win!

This time around, we’re joined by Alexandra Burnham, live for Phoenix! Alexandra is like many real estate investors, except for one big difference. Alexandra and her partner share over $750,000 of student debt! Talk about a hole in your pocket! But, instead of letting the naysayers convince her that she can’t invest with her debt, Alexandra has flipped the situation on its head, buying five rental properties and tackling her debt faster thanks to multiple income streams. Stick around for her full story and the phenomenal advice she gives to get your property locked up and leased!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Ashley:
This is Real Estate Rookie, episode 252. Another thing you can do, too, as a landlord is look into different kinds of funding, state funding, county funding, for the tenants. There are a lot of resources, even small non-profit organizations, that will help people who need help to subsidize their rental income. Especially since COVID and during COVID, there was a lot of programs that were put out that helped people get caught up on rent that you could apply to as the tenant, and even the landlord could apply on the tenant’s behalf. My name is Ashley Care, and I am here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. Today I want to shout out someone by the user name of Agboola5252. I’m just going to call you Boola, all right? But Boola left a five-star review on Apple Podcast that says, “I’m a real estate agent in Minnesota looking to invest in real estate, and I think I found the perfect virtual mentor to help get me started. This is the best place to learn if you’re feeling overwhelmed.” Boola, we appreciate you. For all of our rookies that are listening to this podcast, if you have not yet taken the two minutes to write an honest review and help us reach more people, I’m asking you, I’m begging you to do that. The more reviews we get, the more folks we reach. The more folks we reach, the more folks we help. That’s what we’re here to do.

Ashley:
I have to say, some of these user names for your guys’ Apple reviews are quite entertaining. We had, what, Milkman, recently?

Tony:
We had Milkman earlier.

Ashley:
Honestly, I don’t even know what mine is, how to even set that into my [inaudible 00:01:45].

Tony:
I think mine is actually the name of my podcast that I started when I was 22, called Do Really Good. I think that’s still like my Apple podcast review name.

Ashley:
Yeah. I’ll have to look what mine is. But today we have a great show for you. We are live, in person. We love recording in person, and we hope you guys do, too. Please leave us a comment on the YouTube videos, or if you leave us a review on your favorite podcast platform, let us know what city you guys want us to come to next. We have Alex on the show today. She is a dentist and started investing in real estate to help pay down some of her student loan debt, and she does reveal, after continuously saying many times it’s a large amount of debt, she gives us what that amount is.

Tony:
It’s a mind-boggling number. But Alex has a really cool backstory too, right? Because she, like most people that become health professionals, her and her husband both are in the medical field, a lot of them never really even think about investing in real estate as a full-time thing. It’s just something they kind of do on the side. But she’s really taken a more active approach in building her real estate portfolio, and we kind of get to hear the why behind that.
We’ve got Alex coming up. Alex. You guys want to clap it up for Alex?

Ashley:
Woo, Alex.

Tony:
Alex actually hopped on a flight from Fort Lauderdale this morning, so she-

Alexandra:
4:30 a.m.

Tony:
4:30 a.m., and she’s still going. Clap it up one more time for Alex. That’s an early flight.

Ashley:
Alex, tell everyone a little bit about yourself and how you got started in real estate.

Alexandra:
My husband and I are healthcare professionals, and being in school our whole lives, we didn’t know a lot about finances, truthfully. We didn’t really work while we were in school. And so I’ve seen a lot of healthcare professionals who have a high income, but they’re still living paycheck to paycheck or they’re burnt out from work, and we just didn’t want to be like that. And so I researched a lot on how to not do that, and, obviously, real estate was one of the top ones.

Tony:
But outside of real estate, you looked at some other things beforehand.

Alexandra:
Yes.

Tony:
What were some of those other options, and maybe, why didn’t they work out for you?

Alexandra:
I did everything. I dove in, I took the Dave Ramsey Financial Peace University. I tried to study a little bit on stocks and day trading. Please don’t ask me anything about those things. I don’t know anything. It just didn’t interest me. Of course, real estate investing was one of the top things online, and so I just researched real estate investing for beginners. BiggerPockets came up, and I started listening to the OG podcast, and that’s how it started.

Tony:
If you can, tell us just what does your portfolio look like today? How many units? Where are those units located at?

Alexandra:
We have three in Kansas City, and we have one short-term rental here in Phoenix. We have a new build here in Surprise, Arizona, as well.

Ashley:
What was your big motivator for getting into real estate investing?

Alexandra:
Truthfully, I just did it. We see a lot of the people in our profession burnt out, and we just didn’t want to be like that. We do like what we do. We love what we do, and we want to have a choice of going to work and not have to go to work to pay off our student loans, and have to go to work to live up to this lifestyle or anything.

Ashley:
You already told us earlier, but I just want to see everyone’s jaw drop when you tell us what that student loan debt is.

Alexandra:
I don’t know the exact number, but my husband and I combined in student loan debt, just student loans is over $750,000.

Tony:
But-

Alexandra:
Man, I wish we had a camera on this side. Why has no one been recording?

Tony:
But can you tell them what you and your husband do for a living? They went to good use, I would say.

Alexandra:
My husband is an orthopedic surgeon, and I’m a general dentist. It sounds like, yes, high income and all that, but, again, $750,000. If I listened to a lot of the people in our lives who tell us, “You can’t invest, because look at your student loans. You have no money to do that. You need to pay the student loan off,” we would not be in the position we are, and we would not be able to do that.

Tony:
I know you’re taking real estate investing super seriously and there’s a big change coming next year. Can you share that with everyone and what the motivation was behind that?

Alexandra:
Our third deal was a seller-financed deal. For 2023, I’m going to take a year off of dentistry and try to see how many creative financing deals I can get in that year. I am not quitting dentistry, but I’m just going to take one year off.

Ashley:
I mean, you guys have to clap for that. I mean, that’s amazing, being able to have that option to do that. Tell us what your goal is for the next year.

Alexandra:
My goal is to try and get 12 creative financing deals. I mean, I don’t know if I’m shooting for the moon or not, but we’ll see. That’s a goal that I have.

Tony:
All right. Last thing before we get into the question here. What is some advice you can give to a new investor if they were looking to get started today? Based on your experiences, based on everything you’ve done.

Alexandra:
I would say invest in yourself and take action. Like I said, a lot of people in our lives, my close friends, my family, they literally told us, “You shouldn’t do this.” They kind of tried to steer us away from it. But if we didn’t take action, we wouldn’t be able to have had the five properties that we have now, and, hopefully, scale from here. I would just say try and network as much as you can. By the way, this is my first networking event ever.

Tony:
This is her first meet-up ever.

Alexandra:
Take action, because, again, if you listen to all the other people who say don’t, don’t listen to the people who aren’t doing it.

Ashley:
Okay. For our question, what is a healthy return for a buy and hold in Phoenix? What is attractive about the Phoenix market to you? You have your short-term rental here. I mean, technically, your short-term a buy and hold. You’re holding it. What made you want to come into the Phoenix market and why are you going to continue to invest here?

Alexandra:
I think it’s because I’m from Phoenix. My family still lives here. So I was familiar with the area, and because we are out of state, I was able to use that second home loan, the vacation. But I love the Phoenix area. Everyone still comes here to vacation. There’s a lot of snowbirds. There’s a lot of hospitals. There’s a lot of growth. Even though the market is what it is, there is so much growth in Arizona, and I’m sure everyone here knows that, with all the big companies coming here. You still have to look at the numbers, though. Don’t do something that’s going to make your wallet cringe. You need to make a return, still. With a short-term rental, it’s a little higher than a long-term rental. Ours right now, it’s a little lower than I thought. It’s about 23%, I would say. But it just started, so I’m-

Tony:
23% is still pretty good.

Alexandra:
Yeah. I still think the Phoenix market is a great area to invest in. So look for growth and make sure you do your homework with the numbers. Make sure the numbers work. And network. I would say network. Our places in Kansas City, I’ve never been to them. I managed two rehabs at the same time while being a full-time dentist. Even though I didn’t network in person, all the groups online, BiggerPockets, the forums, were so helpful. That’s how I met so many people, and I trust them. Obviously, that’s how we were able to finish those projects and scale, I guess.

Ashley:
Okay. We’re going to start with our first rookie reply question, and this question comes from Tim Reese. If you own multiple properties, what’s your backup plan if your tenants stop paying rent all at once and can’t be evicted? I think a lot of investors saw this during COVID, whereas there was the moratorium where you could not evict tenants, and there was tenants who really could not afford to make payments at that time. And then there was some, and I’m not going to name names of my tenant that took advantage and didn’t pay the whole time. I think this is definitely a risk as a landlord and something that new investors are very scared of. Alex, what would be your advice to get over that fear of that happening or something they could implement in put in place to mitigate that risk?

Alexandra:
That’s a challenging one. He means if all of them stopped paying?

Ashley:
Yes.

Alexandra:
That is a challenging one. I would first talk to the tenants. I mean, they’re human, you’re human. I would try, maybe, if they really can’t pay, try to come up with a payment plan or something. Like, “Hey, I know you can’t pay the full amount, but can you give me 50% of this month, and then try to ease your way back into it somehow?” That’s tough. I haven’t had that situation, thank God, so far.

Ashley:
Well, I think that part of that reason it’s so tough is because I think the chance of that happening is rare. Unless maybe you have two or three units, then the less units you have, the more probable that’s going to happen. But as you grow and scale your portfolio, there’s kind of that less chance of every single unit being non-paying at the same exact time. But this is where your cash reserves come in, is having those three to six months cash reserves for each unit set in place, so you can at least cover those expenses and get a game plan in place for those three to six months. Especially if you have a smaller portfolio, highly recommend starting out with six months. That covers your mortgage, your property taxes and your insurance for those upcoming months.

Tony:
That’s a great answer. The only thing I would add to him is, like Ashley said, is that I do think that unless there’s a global pandemic that happens again, probably super rare that you’re going to see a point where all of your tenants aren’t paying. If there isn’t a major health scare or something that’s preventing people from paying, and your tenants just decide not to pay, then you might need to do a slightly better job of screening your tenants. That would probably be my advice back to you. If you’re nervous about that, spend a little bit more time up front on the screening process to make sure you get the highest quality tenant.

Ashley:
Another thing you can do, too, as a landlord is look into different kinds of funding, state funding, county funding, for the tenants. There are a lot of resources, even small, nonprofit organizations that will help people who need help to subsidize their rental income. This is completely different than Section 8, because Section 8, you can be on a waiting list for three years to get assistance. But there are smaller organizations, and especially since COVID and during COVID, there was a lot of programs that were put out that helped people get caught up on rent that you could apply to as a tenant, and even the landlord could apply on the tenant’s behalf. That would be something to give your tenant, some of these programs that they may not even know about where they can get that assistance, and that’s going to your local housing authority and organization website.
For example, in Buffalo there’s HOME NY is one of them, and then there’s also Belmont Housing. That would be the best resource to find out about these kind of programs that can help your tenant get caught up on rent.
Another favorite is doing cash for keys. If your tenant is paying, instead of waiting the three months until you can do an eviction or whatever that waiting time period is, maybe just offer them, say, ‘You know what? I’ll give you $500, I’ll give you $1,000 if you move out by next week. I’ll come here, all your stuff is gone, you hand me the keys, and I will hand you a $1,000 check or $1,000 cash, and we’ll part ways.” That may be enough for them to go and get another unit and start over.

Tony:
You took the words out of my mouth. That was the next piece I was going to land on, as well.

Ashley:
I read your mind, and I was like, “You know what? That’s a great idea. I’m going to say it before he does.”

Tony:
That telekinesis.

Ashley:
Okay, let’s check out our next question. This one is from Brian Cavalier. Is it a bad idea to lower the rent if no one is applying for a unit? Plenty of showings and interest, but no one is following through. Alex, what would you think about that?

Alexandra:
This actually happened to us. The first unit we turned into long-term rental, and it actually rented out for $200 more than our goal was. And then that tenant, when they moved out, they moved out in the middle of winter. It’s snowing. No one really moves at that time. We knew that we wouldn’t get a renter for that amount that we were going to get in the summertime. We actually did have to lower it a little bit, but we were still cash flowing a little bit. As long as you’re not negative, I think, cover what you need to cover and still have a little bit of reserves, I think you’re okay. Ashley, what you always harp on, always make sure you have reserves, just in case. But we had to do that, and we’re still okay. I mean, we still have those tenants there. They signed an 18-month lease, so it’s a little lower than the first one, but, hey, we got someone in there for 18 months.

Ashley:
Sometimes that’s better is not having that turnover, is taking a little bit off the monthly rent to have somebody there longer, because turnovers can be expensive.

Tony:
I briefly worked for this massive property management company when I graduated from college.

Ashley:
I feel like today I’m learning all of these new things about you.

Tony:
I was there for six weeks, and I’m actually non-rehireable there, because I didn’t give them a full two-week notice when I left. But, anyway, I learned a few things while I was there for that month and a half.
One of the things they did was they adjusted the pricing based on the term of the lease. Say that someone was signing a lease in June, and they know that December is a difficult time to relist a property. They would give you the option of having a six-month lease, but it would be significantly more expensive than a 12-month lease that would expire in June, and they did that for all of their properties. These are massive apartment complexes, a hundred units, but that’s how they tried to decrease the number of move-outs during the slow season when they would have to charge less and increase the number of move-outs during the peak season when they could charge more.

Alexandra:
We negotiated with them to do the 18-month lease instead of a 12-month, because if we did 12, we would have another turnover, potentially, in the wintertime. We added a couple more months to the lease, so if they did turnover, then it would be in the spring/summer where it’s more demand.

Tony:
Have you ever done that for your listings? For your listings. Sorry, short-term mental brain talking. For your long-term rentals?

Ashley:
Actually, no, I haven’t. And you would think in Buffalo nobody wants to move in the snow, which is completely true. I think that’s a great idea.

Tony:
All right, this next question comes from Shauna Garnett, and Shauna’s question is, what’s everyone’s thoughts on doing a six-month lease and then moving to month-to-month? I hate the idea of being stuck with a bad tenant for a full year. I feel like we just kind of touched on this a little bit, but I mean, I don’t know, what are your thoughts, Alex, on a shorter lease to get around the potential of having a bad tenant?

Alexandra:
They just nervous, then, for the tenant?

Tony:
That’s what it sounds like, right?

Alexandra:
I mean, I would say vet your tenant as best as you can. There’s certain criterias that you can find out from BiggerPockets, forums, and things like that, from property managers. Screen them really heavily, so you can at least trust them. You might get a bad tenant even if you have a six-month lease. They might stop paying after a month, but you really have to just vet them really well. I don’t think I really answered it, sorry.

Tony:
No, that’s a great answer.

Ashley:
I do think that is a fear. Especially if you are in a state where it is more tenant-friendly, where it is harder to evict a tenant, especially if they’re locked into a lease. I’ve actually been more favorable to being month-to-month, because instead of doing an eviction for non-payment, you can do an eviction for non-renewal. When they’re month-to-month, you have to give certain notice. If they’ve lived there less than a year, it’s 30-days notice. If they’ve lived there, I think it’s up to two years, then it’s 60 days. And then over two years, it’s 90-days notice. You give them notice stating that you’re not going to renew their lease, and then you have those three months, and then that’s when you can either increase the rent or offer that non-renewal. It’s an easier way to evict in New York State right now doing the non-renewal process than the actual non-payment process. That would be one benefit, I guess, if you are in a state where it’s more tenant-friendly, the laws, than it is landlord-friendly.

Tony:
Yeah, Shauna, I think, like we said, sometimes turnover is more expensive, so if you have all these month-to-month leases and you’re allowing people to swap out every six to seven months, it could end up costing you more money in the long run. To your point, Alex, I think spending time vetting upfront could be better.

Ashley:
Too, how easy is it for a tenant to actually get out of a lease? Because, in New York State, it is very easy for a tenant to kind of get out of their lease. They can maybe lose their security deposit, but still move out. It’s very hard to, if you do put the stipulation in their lease that, okay, if they move out, they lose their security deposit and they pay rent until a new tenant is put into the property. But you have to actively search for a new property. So they have a very good case, “Oh, well, you didn’t find a tenant for two months. It was your fault. It was too slow.” Things like that. So it’s very hard to actually get that money out of the tenant and to get them to continue to pay for that vacancy until it is filled.

Tony:
I don’t know how you-

Ashley:
Or, even if it is filled right away, you still had that turnover cost that you’re not recouping.

Tony:
Just one other piece on that. The way that that same property management company I was talking about that I worked for, that’s how their lease was set up, that if you broke your lease, you were responsible for the rent until someone else moved in. And if you didn’t pay, they would send you to collections, and they would let collections kind of chase after you. I don’t know if you want to do all that, Shauna, but we’re just talking [inaudible 00:20:36].

Ashley:
Okay. Our last question is from Matt Pauls. How do you determine rental rates in an area? Thanks in advance.

Alexandra:
There’s a lot of websites, platforms that you can use. You can even search Zillow, honestly, and just look at the neighborhood that you’re in or that the property is in, and look at what the comps are in the area and what they’re going for, for rent. But Rentometer is a great website, as well.

Tony:
The BP rent estimator is actually pretty spot-on. I bought my first rental property before the rent estimator rolled out, so just out of pure curiosity, I went back and plugged that address into the rent estimator, and it was spot-on to what I was charging my tenant. Or, I think it was off $25 bucks, something like that, but it was pretty close. So if you’re looking at markets trying to understand what that rent could be, I think the rent estimators a great tool.

Ashley:
The only trouble with some of those tools is that when you get into rural areas where I invest, there’s not enough data for them to actually pull information. That’s where going to Facebook Marketplace, even Craigslist, and seeing what properties are listed at, and then just checking every week. If there was a listing there last week, and it’s gone the next week, then most likely it was rented for what the asking rent was, and you can use that as a comparable. Then, also, calling property management companies in that area, and you can even just pretend you’re looking to rent an apartment, even if they don’t have anything vacant. Just asking, “What size are your one-bedroom apartments, and what do you currently rent them for? What’s included?” Things like that, too.

Tony:
Going back to that same company, that was actually part of my job as the leasing agent was to call other apartment complexes just to get rental estimates on comparable units so we would know how to price, so it is a common practice.

Ashley:
Okay, cool. Well those are our rookie reply questions for you guys today. Alex, thank you so much for joining us.

Alexandra:
Thank you so much for having me. It was so fun.

Ashley:
Can you let everyone know where they could reach out to you and find out some more information about you?

Alexandra:
Yeah, on Instagram, I’m AK_Burnham, and then on Facebook, Alexandra Burnham.

Ashley:
Okay, cool. Thank you so much. I’m Ashley @WealthFromRentals, and he’s Tony @TonyJRobinson on Instagram. Thank you guys so much for listening, and we will be back on Wednesday with a guest.

Speaker 4:
(singing).

 

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