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John Nuzzolese
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LANDLORD SPECIAL REPORT: #12

What do I do when...

The Tenant Wants to Use the Security Deposit As Rent?

So your tenant asked to use the security deposit as rent? This happens to landlords everywhere every day. The rent isn't paid, you ask the tenant for the rent and they say, "We don't have the rent this month, couldn't you just take it from our security deposit?"... or ... "We are moving - you'll just have to use our security."

Most landlords are caught off guard and are just dumbfounded when this happens. Beware, this is a common occurance in the landlord business.

How can we be prepared to deal with this situation? First, I believe it is very important to read the lease to the tenant before the tenant signs it. The Security Deposit clause explains how security money may not be allowed to be used as rent. That's when I warn the tenant against trying to use the security deposit as rent. These are the points I try to make clear to the tenant:

• Security is to be kept in a special escrow account for the entire term of the tenancy.
• Security is not to be used by the landlord for any reason other than physical or financial damages as a result of the tenant's failing to comply with the lease contract.
• Failure to pay rent is cause for eviction which will result in the destruction of your credit rating.
• I report delinquencies to the credit bureaus.
• Your lease agreement states that security deposits are not to be used as rent, so if you ask me to do that, you would be breaking your contract and your word.
• If your word and signature are no longer good, then I may not believe anything you say about when you want to leave, so I'll be forced to begin legal action.
• In the event you default on your rent, you are responsible for my late fees, collection costs and attorney fees.

I've been able to counter this particular type of "tenant attack" by being ready with the right comeback:
Tenant: I don't have the rent this month. You're going to have to take it from our security deposit.
Me: That's too bad. I hope you remember the consequences you agreed to in your lease.
Tenant: Oh yeah? What's that?
Me: Security is not to be used as rent... ever. Non-payment of rent is a breach of this lease subjecting you to late charges, delinquency credit reporting, attorney fees, etc. Do you really want to incur all these charges, flush your credit down the drain and have to go to court over your last months rent???
Tenant: No. Thanks for setting me straight.

OK, the tenant doesn't usually say that. He may say a few things I don't want to print on this site, but will usually snap back in line. Sometimes the tenants will bluff to see what you will do, but when they receive an attorney's letter that shows you weren't kidding, they should pay up and follow the rules.

Try to remember these points or have this page ready to refer to in case the tenant pulls the old "Use my deposit" trick.

LANDLORD SPECIAL REPORT: #11

Real Estate 101: Five Big Mistakes Newbies Make

"Real estate investing fever" has hit like a plague.

Zillions of "newbie" investors are jumping on the bandwagon trying to make a profit after losing big in the stock market. I meet them all the time, and many are making big mistakes!

Mistake #1: Stock market mentality

You'd think after losing $7 trillion in the stock market, people would have learned! Nope, they are making the same mistake, which is assuming that what happened yesterday will happen tommorrow. Nine of ten new investors I meet say they are interested in real estate because they saw someone else make money from the rapid appreciation of the market over the last few years.

But, buying real estate solely for short-term appreciation is often a big gamble! If you buy real estate to hold for fifteen years or more, the chances are that you will come out on top. If you buy a property and flip it in within a year, you'll probably do fine, too. And, despite the risk, many people can intelligently time the "boom" of a local market (or subdivision within a market) and make a profit.

But, if you buy a rental property for full-market price with break even or negative cash flow, you'd better have a backup plan if the market doesn't keep going up. Investing is a lot like surfing; if you don't know how to ride the wave, you will drown!

So, should you refrain from investing if you think the market has peaked? Absolutely not! You can find bargain-priced properties in every market, even the hottest. You can find low-interest rate financing that will increase your cash flow, so if values drop, you still are covered.

You can plan short-term (six to twelve months) because markets rise and fall slowly. And, if you keep a cash reserve for your business, you won't sweat when the market tanks. You know that in the long run, real estate markets virtually always come back.

Mistake #2: Investing blind

You'd think after losing $7 trillion in the stock market people would have learned! Nope, they are making the same mistake--blindly buying real estate based on bogus advice or complete lack of education.

Real estate is one of the few investments in which risk is directly proportional to knowledge. True, it has a higher learning curve than investing in the stock market, but there's no proof that having knowledge of the stock market reduces risk (just ask your mutual fund manager).

I read a comment on a real estate discussion group on the Internet. In response to an inquiry as to whether a particular seminar or training program was worth the money, someone answered, "Why waste your money on that stuff? Just use your money as a down payment and learn as you go."

This is probably the worst advice you could ever give a beginner. Money for deals is easy to find if you can find good deals. But, you won't know what a good deal is without having first invested in your education!

The more knowledge of investing techniques, financing, acquisition, negotiating and, of course, your local marketplace, the less risky your investments will be. A bargain real estate purchase will generally always be a safe investment; a bargain stock purchase isn't. After all, who says the company you bought into will be in business next year?

Mistake #3: No cash reserves

Ask anyone in real estate long term (or any other business, for that matter), and they will tell you the two most important words for survival are: cash flow. Heck, even K-Mart failed to learn that valuable lesson!

In order to stay in real estate long term, you need cash reserves. Buying real estate nothing down is easy; handling negative cash flow, repairs, and other expenses in the meantime is the trick. In fact, if you can handle the bad times, you will always come out on top.

Lack of cash reserves puts unnecessary pressure on you to do substandard repairs, accept less than qualified tenants, and give into tenants' demands for fear of vacancy. When you have a sufficient cash reserve, you act rationally.

• You hold out for a higher sales price.
• You hold out for a qualified tenant.
• You leave properties vacant rather than accepting unqualified tenants.
• You call a tenant's bluff when they threaten to leave.
• You take care of necessary repairs and improvements on your properties.

It's a whole different ball game than operating from a lack of cash. Like I said, buying properties with no money down isn't hard; it's handling the cash flow. In other words, you can buy real estate without money, you just can't survive in business without cash reserves. Consider accumulating cash reserves before investing in rental properties.

Mistake #4: Being greedy

Many investors get started flipping properties to other investors, which is a good idea to generate cash reserves. However, you must be realistic about how much profit is in a deal.

If there is a potential for a $20,000 profit in a rehab project, you can't expect to make $10,000 flipping that property to a rehabber. A rehabber has a huge risk embarking in such a project and wants a large enough profit to justify the risk.

For example, if a house needs $10,000 in repairs, and the rehabber investor wants to make at least a $20,000 profit. If you find a deal with $20,000 in profit potential, how could you expect to get $10,000 for flipping the property if the rehab investor is only going to make $10,000?

You should be happy making $2,500 and moving on to the next deal. If you want to make more than $2,500 on such a deal, then you must find and negotiate a better bargain that has more profit potential.

Mistake #5: Treating real estate as anything OTHER than a business.

People are lured to real estate because of the quick buck it promises. Don't hold your breath--you won't get rich quick. An "overnight sensation" usually takes about five years. More than 90% of the people who take a real estate seminar quit after three months.

Why the high fallout rate? Lack of action and unrealistic expectations. Investing should be treated with the seriousness of a career. It takes months, even years for a business to cultivate customers and have a life of its own. You need to treat real estate like any other business.

Give yourself at least six months to see if real estate works for you. It may even take a year before you buy your first property. Maybe in the second year you will buy three or four properties. If you work hard at it and keep your eyes and ears open, you may even find your first deal in 30 days. You will not make money by talking or thinking about it; you must go out and take action.

The Landlord Protection Agency would like to thank Willaim Bronchick for supplying the article above.

About the author...
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors. Bill specializes in all forms of asset protection and is the author of several great home study courses.

Read more articles by William Bronchickat The Legalwiz.com.

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Excuse of the Day for 7/29/04:

"Let's be honest. You are loaded. You really don't need the money do you?"

Excuse of the Day for 7/22/04:

"We didn't have an envelope."

Excuse of the Day for 7/18/04:

"We can't pay anymore. Take the rent from our deposit. Don't worry we'll be out before the end of the summer."

Excuse of the Day for 7/15/04:

"YOU HAVE YOUR SPACE, I JUS WANT MINE."

Excuse of the Day for 7/10/04:

"The pool is all green. You gotta do sumthin. I can't have green water."

Excuse of the Day for 7/04/04:

"You are crazy. Your wife is ugly. I'll pay the rent if and when I'm ready."

"Many of life's failures are people who did not realize how close they were to success when they gave up."
- Thomas A. Edison

"Any fool can criticize, condemn, and complain - and most fools do."
- Dale Carnegie

"Always do right. This will gratify some people and astonish the rest."
- Mark Twain

"If you pick up a starving dog and make him prosperous, he will not bite you. This is the principal difference between a dog and a man." - Mark Twain

"Risk is our BUSINESS!" - James T. Kirk

"How much did your last tenant problem cost you?"
- John Nuzzolese

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