Your tenant hasn’t paid the rent in months. Because of that, you haven’t been able to pay the mortgage in months. Now the bank is threatening foreclosure. How can you avoid foreclosure or worse?
Although it may not seem like it, being a landlord is no different from running any other business. A good businessperson has a plan for the bad times, when cashflow may be limited.
As a landlord, you must plan for temporarily losing your rental income,whether it is because your tenant stopped paying, or you’re simply unable to rent the property out. You must alway be able to pay the mortgage, insurance, water, and other essentials for the property, even if you are not receiving rental income. Your finances should never be so tight that you risk losing your property, or worse, because you got caught up with a non-paying tenant.
A good landlord is accepting of a certain amount of lateness in receiving rent, but that doesn’t mean you should go months and months months without rent. After all, you are running a business, not a free housing charity. If the next month’s rent comes due and your tenant still hasn’t paid the last month, you should strongly consider having a Three Day Notice served and starting eviction proceedings.
Evictions are one of the quickest proceedings in the Court system, but they can still take several months to resolve. Add on the time to find new tenants, and you could easily end up without rental income for six months.
Assuming you win in Court and are granted a money judgment for the rent owed, you should not count on ever receiving the money owed. After all, if your now former tenant has the money to pay the judgment, they would have had enough money to pay the rent.
As a property owner, you know how much you pay each month for mortgage, taxes, and any maintenance and utilities essential for the safety of the property. Since even with a prompt eviction it can take six months to re-rent the property and restart your income stream, you should have a cash reserve sufficient to cover the basics for at least six months.
Your non-payment reserve can be held in an income-bearing account such as a Certificate of Deposit, but make sure you can withdraw from it in times of need without too much penalty. You may also want to consider starting a line of credit that you only tap in case of emergency, but you have to make sure you can afford to pay the loan back once your rental income returns.
You should not use retirement or similar savings as your reserve, since most retirement accounts have steep penalties and tax consequences for early withdrawals. Security Deposits from your tenants should not be considered a cushion, since such deposits are meant to cover damage caused by tenants, and in certain situations an evicted tenant may be entitled to the return of their deposit.
A little bit of basic financial planning can make all the difference in being able to deal with a loss of rental income without losing your hard-earned property altogether.
At the Law Office of Andres J. Bermudez Hallstrom, we can help you prepare for the unexpected and protect your property income. Simply call our office at 914-341-1364, and an Attorney will be available to help.