EP229: Watch Out! Tenant Red Flags Lurk in Out-of-State Investing!

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Out-of-state investing… is it a dream come true or an actual nightmare? 

Well, it depends! There may be hidden surprises you don’t see coming, or what we like to call dreaded tenant red flags! 

Sounds scary, we know. And hitting the buy button on your first, out-of-state turnkey rental property is a monumental decision already, so knowing what to expect and how to handle any red flags will help make your out-of-state investing experience MUCH smoother! 

We’ll explore a common sign of potential tenant issues, how it can impact you and the investment, and how to know if you should move forward with a deal or not, if you do come across red flags. 

When we’re through here, you’ll have a solid game plan for spotting and dealing with tenant red flags, as well as plenty of confidence to take on anything that comes your way in your out-of-state investing adventure! 

Let’s get to it! 

To illustrate what we’re talking about today, we’d first like to know if you’ve ever had a splinter. 

Yep, you heard that right… a splinter. 

What does a splinter have to do with tenant red flags? Well, think about it. You’re going about your merry way, enjoying life when suddenly, out of nowhere – WHAM 💥 – you catch a sneaky little splinter. It stings, sure, but you know that pulling it out may take a little time and might even hurt more, so you soldier on and go back to what you were doing. 

Only later, that tiny little sliver in your skin has grown more and more irritated, and it starts taking all of your focus because you can’t think of anything else! 

Now, replace the image of a splinter with your out-of-state tenants. A red flag may start out small, but over time, it can turn into more pain and stress if it’s not handled the right way. Oh, and in this case, instead of a throbbing finger, the stakes are a bit higher. We’re talking about thousands and thousands of dollars being on the line… yikes, right? 

So, let’s set the stage here. We’re discussing a situation your fellow out-of-state, turnkey investor has found herself in, because we can all learn valuable lessons from it. 

She’s in the midst of sealing the deal on a turnkey property, but there’s a snag.

The seller hands over the rent roll, and guess what?

The tenant is a whopping 10 days late on their second month’s rent! There’s 11 months left on the lease, and this is the first time rent has been due so far. There is a 3-day grace period in place, meaning that the tenants are technically 7 days overdue. 

Now, if you’re like this investor, you’re probably wondering if this is a red flag or not, especially if it’s your first out-of-state investment property.

Is it a large enough flag 🚩 to stop you from moving forward, or do you dive in head first and risk facing bigger issues down the road? 

It’s not an easy call, because there are lots of things to consider. But we’re about to walk you through how to handle this sort of tenant red flag, so you can make the best decision for you and your investments. 

▶️ So, first things first. You need to assess what it will be like dealing with some potentially delinquent tenants to get a better idea of what you’re getting into.

There are things you can do to gauge if their late payment is likely a one time thing, or will be a persistent pain in your neck.

We recommend requesting to see their lease application, as well as any other financial statements to assess their risk profile. 

A quick and easy test you can do is compare their net rental income to their monthly rent. If their income is not at least 3 times the rent price, then you know this may be a bad situation to stay in, and these tenants are likely to cause issues every month. 

▶️ Next step for you would be to get savvy with the legal stuff – things like state laws on delinquent tenants for eviction procedures and tenant protections.

You always want to make sure you know your options BEFORE things get bad with tenants. After all, once that splinter has dug its way underneath your skin it’s much harder to pull out, you know? 

Once you know the laws, you can have a plan in place for a timely eviction, if it comes to that. You just won’t want to be dealing with the red tape or legal snags when you’re ready to be rid of problem tenants. Trust us. 

After you’ve assessed your red flags and gone over all the info you need about the tenants and laws, you’re probably wondering if you should move forward with this out-of-state investing deal despite the red flag, or find a way to bail? 

Just remember, the choice you’re making will affect you both financially and personally.

You wouldn’t up and quit your job without knowing what you wanted to do next, right? Having all the info is essential to feeling good about taking the path you choose, and there are a few more things to know before you can confidently make this decision. 

First, you’ll want to crunch some numbers. 

▶️ Do you have a financial safety net? If you don’t have enough cash stashed away to cover your mortgage if your tenants go AWOL, then the risk may be a bit too high to take. 

Additionally, even when you know the laws about evictions and are prepared to carry them out, don’t forget that those can cost money too – whether you’re dealing with lawyer fees or even property damage. 

Now, there is something you can do to help mitigate your risks a bit. 

If you’ve ever been rock-climbing, you know that there’s always a crash pad laid out, in case of a fall. Usually, you won’t need the pad, but it still offers peace of mind knowing you’ll land on a cushion if you slip. 

When it comes to out-of-state investing, consider giving yourself a metaphorical crash pad by negotiating with the seller of the property to get a price concession for dealing with potentially bad tenants, like asking to have the funds in escrow. If the tenant pays on time within the 11 months left on the term, the fund will revert back to the seller. 

We’re sharing all of this because we know what it’s like – thinking you’re stepping into a passive income opportunity, then realizing that it’s actually not-so-passive at all. 

It reminds us of the time a friend of ours was so excited to tell us they were automating their home.

We’re talking about the whole shebang – from automated door locks, to lighting, to thermostats. It was supposed to make every day living so simple and convenient! 

But it wasn’t long before our friend called us to complain about their new gadgets. They faced a crazy complicated setup, tons of compatibility issues, ongoing maintenance fees, and malfunctions galore! 

Instead of improving their life, it made simple tasks much, much harder. And that’s what we’re trying to help you avoid by sharing this out-of-state tenant scenario with you today. 

It’s easy to get drawn into turnkey investment properties with rose-colored glasses on, but then the time, money, and stress adds up quickly when you’re constantly dealing with your out-of-state problem tenants. 

What starts out as a simple way to passively get “mailbox” money can quickly turn into what feels like a full-time job. 

We’re just guessing here, but that probably wasn’t the vibe you were going for, was it? 

That’s why it’s so important to look at the opportunity from all angles BEFORE diving into an out-of-state-investment opportunity. You want to know how you’ll handle any issues that arise, so they don’t take you by surprise. 

We love surprises normally, but these kind? Not so much. 

To give yourself the best preparation for success, we recommend looking into 6 different parts of each investment opportunity and learning everything you can about them before purchasing the property. 

First, you want to know about tenant management, which is what we’ve been discussing today, but don’t stop there! 🛑

You’ll also want to consider the property maintenance, potential communication challenges, legal compliance, unexpected expenses you need to be prepared for, and property turnover. 

By doing your due diligence, you can give yourself the best shot at making informed decisions about whether or not an investment opportunity is right for you. 

Now listen, there’s no harm in changing your mind. Sometimes things sound appealing until we get all the information – like ordering a beautiful cheesecake and realizing it has the equivalent of an entire day’s worth of calories! 

If the cheesecake no longer sounds as enticing, there are other desserts 🧁 out there that can satisfy your sweet tooth without throwing you off your healthy lifestyle. 

If you’re now feeling like out-of-state single-family rental investing isn’t quite what you thought it would be like, it may be time to look into another avenue of passive investing – one with less headaches and potential red flags involved. 

If that sounds like you, and you want to explore a truly passive investment strategy, check out this video next!