If you are a new investor with limited capital, having the misfortune of renting to a bad tenant in a tenant-friendly state can cripple you financially and put you off investing forever.
Having invested in multiple states, including New York, New Jersey, Pennsylvania, Connecticut, and South Carolina, I know the pitfalls of encountering a “professional” tenant who calls Legal Aid more often than their family members and understands how to game the system.
Having said that, I’ve also encountered model tenants in a property I owed in Brooklyn for 20 years—notorious for New York’s tenant-friendly laws—who never missed a month’s rent. So as you’ll see, there are many sides to this discussion.
A Rule of Thumb: Invest Where You Can Evict Quickly
Landlording is a business. You need to correct it when your business stops producing revenue. The longer it takes to evict a tenant, the longer your business will suffer.
That’s why I advise any new investor or someone with limited resources to choose a landlord-friendly state where the eviction process is fast and relatively painless. This article is a great deep dive into the top landlord-friendly states and why they are good places to invest.
Other considerations, such as taxes and rent increase restrictions, also make a state welcoming to landlords.
Why It Is So Hard to Turn a Profit in Tenant-Friendly States
When Local Law 18 was enacted in New York City, and Airbnb was outlawed, many would-be landlords were reluctant to rent to yearly tenants. However, “the working-class homeowner who was maybe renting out a place for $99 a night and needs the money has been the hardest hit,” contractor and filmmaker Tony Lindsay, who has a house in Bushwick, Brooklyn, told the New York Times. “We’re not getting rich off this.”
The Times article went on to say:
Every Airbnb host I spoke with seemed to know a story about a difficult tenant who became impossible to remove. Mr. Lindsay said that his father’s tenants in Bushwick stopped paying rent during the coronavirus pandemic. He eventually served them with eviction notices, but the tenants are still there.
Small-time landlords who depend on rental income to survive suffer the most when tenants don’t pay. Affluent landlords with generational wealth, low mortgages, and multiple higher-end buildings to offset losses might better weather the storm.
As a former Brooklyn property owner, I was fortunate. I owned a brownstone for two decades and never had any issues with nonpaying tenants. I screened thoroughly, rented to tenants with good jobs, and charged slightly below market rent. As the home appreciated, I realized that while I wouldn’t get rich on rent, simply holding on to the property and enjoying depreciation and appreciation was the winning strategy.
How to Protect Yourself
Have a rock-solid lease
If you are using a generic rental lease you found online and not one specific to your state vetted by a lawyer, you could be setting yourself up for problems. A legally binding lease specific to your state is essential when evicting a tenant. It won’t miraculously change the laws in your state to result in a condensed eviction process, especially if your tenant has legal representation, but it could prevent lengthening it.
Run a background check and screen scrupulously
You’ll be amazed when seemingly upstanding citizens with good jobs and impeccable backgrounds intend to defraud you of rent payments and know every legal loophole in the book to keep them in your apartment rent-free. Professional tenants in tenant-friendly states know the system better than many attorneys. The best/worst professional tenants are often the smoothest talking.
Horror stories such as one in the New York Times, in which an unsuspecting landlord was left $100,000 in the hole by a master con man in New York City, are scenarios all would-be landlords should heed. It’s worth spending the money for a thorough background check before letting any tenant into your dwelling.
Don’t invest in bad neighborhoods—in any state
Having owned multiple apartments in Newark, New Jersey, generally a landlord-friendly state, as a newbie investor, I was continually in landlord-tenant court, evicting tenants who were quick to call Legal Aid as soon as they received an eviction notice, fabricating excuses that were hard to disprove without spending money on a lawyer. While my eviction times could have been longer if I was across the Hudson in New York, it was still torturous, stressful, and financially crippling, causing me to divest all of my units and vow never to make the same mistake again.
Regardless of your state’s landlord-tenant laws, there are good, honest, on-time paying tenants in every state. Your job as a landlord is to find them by providing quality accommodation and thoroughly screening them.
Consider squatters rights
After a video surfaced of a Queens, New York, landlord being arrested for trying to change the locks on her squatter-inhabited home, squatters rights have been a hot topic. Until recently, in New York, a squatter could not be removed by the police for trespassing. Their eviction had to go through the legal system. According to ABC News, the average eviction in the city takes about two years to complete.
“People can stay in homes for years, years, without having justice brought to them for essentially staying for free and making homeowners pay the bill,” NY State Assemblyman Jake Blumencranz, a Republican representing District 15, told Channel 7, Eyewitness News. He filed a bill that was recently signed into law by New York Governor Kathy Hochul, which excluded squatters from tenant protection.
With a cost of living crisis sweeping the nation and homelessness a big issue, squatting has become more prevalent. Any landlord should check their state’s squatter rights laws and ensure they take appropriate measures before leaving a home empty.
Short-Term Rentals: A Game Changer
As seen in New York City, short-term rentals were a game changer for landlords, exasperated by the tenant eviction process. For Airbnb-friendly cities, where laws favor tenants, short-term rentals allow landlords to skirt the hassles of adhering to long-term state-mandated rental agreements and laws. Instead, landlords are paid upfront for their space, and guests leave after a few days or weeks.
Sticking points could arise if you have a mid-term lease for a month or longer. You will need to check your local landlord-tenant laws and consult an attorney to ensure that a mid-term tenant doesn’t outstay their welcome or rent.
Final Thoughts
Real estate investing is fraught with potential risks. As a landlord, you must mitigate as many problems as possible. The easiest way to accomplish this is by buying an investment for cash. It might bring you peace of mind, which is priceless, but it would contradict most gurus’ advice about the power of leverage.
So, assuming you have a mortgage with the lowest rate possible, purchased in a decent neighborhood, meticulously screened your tenants, and provided them with a state-specific lease, one of the remaining things that could trip you up is a loss of rental income to cover your expenses. It doesn’t necessarily mean that your tenant turned out to be a Jekyll and Hyde character, intent on not paying rent when they moved in. People lose jobs, go through divorces, and have unforeseen medical expenses.
As a landlord, you want to stop the bleeding as soon as rent is a few days late. Choosing an investor-friendly state will allow you to move through eviction as quickly and painlessly as possible.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
