Hi, there! Joe White here from Grow Property Management, your trusted property management company in Philadelphia.
There are times when the tenant causes more damage to a rental property then the security deposit can cover.
We’ve been looking at a few properties in distressed neighborhoods, and one thing we have noticed is that these properties tend to have much lower rents. The catch here is that the lower the rent, the less desirable the applicants often are. This means that we end up having to choose from tenants who might not have the best credit scores or rental histories. When the rent is low, we often don’t have many great options to choose from.
Another significant issue is the lower security deposit that comes with these lower rents. Most municipalities have restrictions on how much you can charge for a security deposit, and in Philadelphia, we're limited to just one month’s rent. There are strategies to work around this, but that’s a topic for another time.
Because of the lower security deposit and the typically lower quality of tenants, the properties in these neighborhoods often suffer more damage when the tenants move out compared to properties in higher-rent areas. With only a month’s rent as a security deposit, it’s common to find that the damage costs exceed what we’ve collected, leaving us out of pocket for the difference.
For example, we recently dealt with a situation where a tenant left behind $580 worth of damage that wasn’t covered by the security deposit. While we pursue recovery through credit bureaus and collections, actually getting that money from the tenant is difficult. The security deposit is straightforward because it’s already in my hands, but with additional damages, the money isn’t physically there, so we have to try to collect it from the tenant.
Even though the $580 loss isn’t catastrophic, it’s frustrating and unexpected, especially when the damage results from tenant neglect rather than any malfunction or wear and tear of the property. It’s an investment, so we need to consider these costs when evaluating potential properties.
When we invest in lower-value neighborhoods, we need to ensure that the rent will cover all expenses, including mortgage payments, property taxes, and capital expenses. Capital expenses are predictable costs like roof replacements or HVAC systems that we know will need to be replaced after a certain period.
Additionally, we factor in a “tenant nonsense” budget to account for potential damages beyond the security deposit. This budget helps me understand how much we might need to cover out-of-pocket for repairs and maintenance when a tenant moves out. If the numbers make sense and the expected rental income can cover all these costs, including potential damages, then the investment is worth considering.
Happy investing!
