KNOW YOUR EXIT STRATEGY

By Jeff Taylor, Mr. Landlord 

The following landlording tip is from a regular MrLandlord contributor. Thanks, S I D (MO), for sharing.

When I first got into real estate, I read several different books. A common theme was always, "know your exit strategy". That applies for houses and for residents. So how does that apply (with rental residents)?

Regardless of whether applicant's a seasonal worker or an oil tycoon, never rent to someone with "under the table income".

But why not?

Because if they ever do damages or stop paying (or both), you will have to crawl under the table to try to get paid. If you've ever been in a restaurant and seen what it looks like under the table, you'll know why this is a terrible idea.

Your exit strategy with a resident must always include, "How do I get paid if the SHTF (stuff hits the fan)?"

In other words, if things don't work out perfectly, how do you collect on what is owed? To that end, I have a policy that I only rent to people with garnishable income. I do not accept those whose income comes only from pensions, retirement accounts, social security income only, self-employment, etc.

Our legislators made such people "judgment proof." Meaning that even if you get a money judgement from them, you cannot collect. That law was designed to "protect the vulnerable." But as is typical with poorly thought-out legislation, it makes them a poor choice for anyone to extend credit or a lease to, because if they can't or won't pay today, you cannot ever collect what is owed.

Sidebar: If legislators truly cared about protecting the vulnerable, they would allow some amount of garnishment on these funds, even if it's just a modest amount like $50/month. The fact that they don't demonstrates the short-sightedness of the judgment-proof approach to sources of income. Many landlords will not rent to them, and you now can see why that is the case.

Why would a wise landlord rent to someone who can disappear tomorrow and there is no money other than a meager security deposit? I wouldn't, and I don't. Consider making this a rule for your business as well. 

Editor's Note: It should be noted that several states have enacted laws that prohibit a landlord from discriminating against an applicant based on their source(s) of income. Know what your state law allows or prohibits when establishing your applicant criteria.