Property Investing: Battle of Conscience
Alright, let me give you a situation:
Imagine that you own a house. The house is being rented out to a family of husband and wife with 4 children. The husband is the only breadwinner of the family and the wife is a homemaker.
You’ve signed a one-year lease with the family (i.e. the family is liable for one year’s rent).
A few months in, the husband suddenly dies of a mysterious illness. Naturally, upon his death, all of his assets will then be frozen (because he doesn’t have a will). Take note that all the bank accounts with substantial amount of money is under his name (including the checking account).
Obviously now you’ll be having non-paying tenants.
The question is, what would you do? Do you ask them to leave or do you let them stay in the house for a while. Also remember that you as an investor needs to service the mortgage repayments every single month.
Assume also that you yourself are running a bit tight on cash and you usually rely on the rental income to settle the monthly repayments.
So, what would you do?
Come on folks, share your opinions in the ‘comments’ section.
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7 Responses to “Property Investing: Battle of Conscience”
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For me this is the perfect argument against becoming a landlord. I would not be able to ask this family to leave. Yet, there is a risk they would default and I would lose some months of rent.
I had a similar situation once. My aunt died and willed her house to me. A man — her boyfriend — was left in the house. His daughter argued that he should be allowed to stay because he had contributed to the upkeep over a period of years. I argued that this was my only inheritance and I would get nothing out of it until he left. Indeed, I knew him to be a drunk who squandered his monthly pension. If I had allowed him to stay, there would soon be his daughter and family there as well, and who knows if could ever have evicted them. Fortunately I was able to get this man out within a month, and get a legitimate tenant in.
For me, I will actually sit down and have a discussion with them first. Ask them on what they plan to do. Are they planning to continue their tenancy or do they intend move out. If they intend to move out, then of course, I will not enforce the lease. Explain to them of my circumstances and give them, give or take, one month to clear the house.
But of course, it is easier said than done. Who knows what’ll actually happen if that situation actually takes place. With all the emotions.
I have a property investing opportunity with different challenges. This house is near a college campus, and currently rented to students. I think there are five inside. In this case I am unlikely to lose the entire rent due to a deadbeat, but I have to collect from five different parties every month. There is also the issue of compatibility among the five. After eight or nine months the school term ends, so I would not have to put up with an undesireable tenant for a long time, no matter what. On the other hand, I would have to find new ones every year (the college has an office that helps with this).
Now a question — Does it make more sense to pay cash or to get a loan to buy this?
With regards to the property rented to students, isn’t there a way to nominate only one party to pay for the rent? Then that student collects the rent from his/her friends. Of course, this only applies if the house is rented out as a whole as oppose to room-by-room basis.
Like in Australia, if you are renting a house with your mates, then only one person needs to pay the rent. The problem of collecting the rent from the others would be his problem. Payment methods are, cash, or direct debit (Deductions from the tenants’ bank account when the rent is due. I’m not sure whether or not this convenience is available to private investors as oppose to organisations.)
Renting out rooms on the other hand would be a little bit tricky, like you said. You need to collect rents from various parties. Though, the advantage of this is that more often than not, the total pooled rent would be much higher than if you had rented out the house as a whole (Do correct me if I’m wrong).
The question of cash or loan, personally, I would go for the loan. This is only on the basis of, well, if I was using cash, then it would limit the number of properties I’m able to purchase.
On the other hand, I could pay cash first (assuming I have the cash), then familiarise myself with all the problems, then perhaps refinance the house to free up some equity and acquire more properties.
DISCLAIMER
If you rent to one party who then sublets to others, you lose control over who the occupants are; and you lose the ability to manage the subletters. From my point of view there is also the issue of transferring management from a mature person (me) to an immature student. Remember that a very valuable asset is hanging in the balance.
No, what I meant was, in the lease, the tenants need to list down all the names of people who shall be staying in your house, but nominate only one person to pay for the whole amount of rent.
Say:
Your house is being rented out to A,B, C, and D. So, in the lease, only these four chaps are allowed to stay there for the duration. The lease also states that, say, Mr. A, is the person responsible of the rent.
Basically, you are renting out the house to Mr. A, and only he and his three other friends are the rightful tenants.
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