Real Estate the Ramsey Way - Our Tenant Is Falling Behind On Their Rent

Episode Date: December 30, 2024

Your home should be a blessing, not a burden—but unfortunately, some people learn that the hard way. Get the answers you need with Real Estate The Ramsey Way, and learn what to avoid and how to do real estate the right way.   Next steps: 🏠Have questions about how real estate can help you reach your financial goals? Check out our ⁠⁠⁠⁠Real Estate Home Base⁠⁠⁠⁠ for free tools and resources to guide your next steps.   🏠And if you’re ready to buy or sell your home, ⁠⁠⁠⁠connect with a RamseyTrusted®real estate agent⁠⁠⁠⁠. They’re experts who’ll help you confidently navigate homeownership the way we teach. Listen to more from Ramsey Network 🎙️ ⁠⁠⁠⁠The Ramsey Show⁠⁠⁠⁠  🧠 ⁠⁠⁠⁠The Dr. John Delony Show⁠⁠⁠⁠ 🍸 ⁠⁠⁠⁠Smart Money Happy Hour⁠⁠⁠⁠ 💡 ⁠⁠⁠⁠The Rachel Cruze Show⁠⁠⁠⁠ 💰 ⁠⁠⁠⁠George Kamel⁠⁠⁠⁠ 🪑 ⁠⁠⁠⁠Front Row Seat with Ken Coleman⁠⁠⁠⁠ 📈 ⁠⁠⁠⁠EntreLeadership⁠⁠⁠⁠ 💸 ⁠⁠⁠⁠The Ramsey Show Highlights⁠⁠⁠⁠   ⁠⁠Learn more about your ad choices.⁠⁠ ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ⁠⁠⁠Ramsey Solutions Privacy Policy⁠

Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate homeownership with confidence. Kate is going to kick us off this hour in Raleigh, North Carolina. Kate, welcome to the show. Hi, thank you guys for taking my call. I'm so grateful to be able to speak with you both. We're happy to help.

What's going on in your world? Okay, so my husband and I own an investment property, and we have a tenant that's gradually falling farther and farther kind of behind. We're also in Baby Step 2. She's almost current right now, and we want to be gracious landlords and give her as much grace as we can. But at the same time, we know that when she moves out, we're going to need probably $10,000 to put into the house to get it ready to rent to the next tenant. So we're trying to navigate how to help her if we can to stay so that we don't have to pay that $10,000 while we're still in baby step two, but also help her not dig herself deeper into a hole that she can't get out of. When's the lease up?

So actually October 31st, and it goes into a month-to-month term after that. So we need to give her 30 days notice at any point that we want to terminate. Okay. How much debt do you guys have? So we have about 60,000. We're like in gazelle intense mode right now. So we should have that paid off by March if everything stays according to plan. And do you own your house? Do you live in a house? Yes, we do. And the 60,000 is not including our mortgage or the mortgage on the rental property. What's the mortgage on your house?

Right now we owe about 200,000. And what's the mortgage on the rental? About 100,000. What's the rental worth? Probably 250. Okay. What's your household income? About 175. Is that with the rental income?

Or I guess right now there isn't a lot of rental income. Correct, yeah. That's including the rental income, yes. How much was this rental bringing in in its heyday when the tenant was paying? So we met about 500 in profit. a month. It rents for $1,500, and the mortgage in HOA is about $1,000. So we get about $500 a month and profit on it. Well, it's less than that because you got maintenance and repairs. You just told you've got $10,000 of work to do on it, too. Right. Yes. So you're losing money on it currently.

That's not every year. We've only owned it for about four years, and so we haven't had any major repairs that we've needed to make to it yet, but we know that we're going to need at least paint carpet and a couple of repairs whenever she moved up. How long has she been in? She's been in one year. Okay, so the whole year she's just struggled. What's the story when you talk to her? What's going on?

So it's been a different story every month since May, which is what really has our antenna up. Yeah, so we want, like I said, we want to be gracious and give her the benefit of the doubt. But every month it's been, I'm having a problem with my bank, or I'm traveling out of town, or something just keeps coming up. And right now, she only owes about $275. What does the lease agreement say? The lease agreement says we can give her 30 days notice at any time for any reason now that the lease is going to be up at the end of October. We could, I mean, file court paperwork. Like I said, right now, she only owes $275.

So I don't really want to, I don't want her to damage the house on the way out. No, but I think. I don't want her to stop paying to. You could just say, hey, you know, it's. 275. This doesn't seem to be working out for either of us. So when the lease is up, you know, it feels like this is too expensive for you. And I think the way you lay that out, because I definitely wouldn't want to renew a lease with someone who's not paying. Yeah, I would find a new tenant ASAP. And you're not kicking her out. The lease is up.

And as long as you give her the, you know, the days. Is there anything in the agreement about her not paying and what happens if she doesn't pay? Well, I mean, we have the right to take her to court and pursue eviction filings and all of that. I wouldn't do all that. Yeah, I don't want to. Yeah, I'd get her current and then say October 31st, you got 30 days. Right. My concern is that she can't afford to move and she can't afford to save up for another

security deposit so she just stays and doesn't pay the rent. Okay. Well, yeah, but you can't worry about something that you don't know is or is not going to happen, right? Like, let's not play that. Let's not assume we know what will happen. If you just remind her, hey, just to remind her, hey, just to remember, minder your leases up the 31st. I want to talk about that. And then you guys talk, talk in person,

not via email or letter or anything like that, anything like that. Talk in person and say, hey, this has been a problem, you know, we love you or we like having you here, but it's clearly too expensive for you. So for that reason, you know, and maybe, I don't know, I'm not a realtor and I'm not a landlord, but maybe you offer an olive branch and say, hey, you owe 275, you're going to need some expenses to move, so we're willing to waive that. Do, do, do what you have to do to make this a clean break? Because I think to your point, if she's the type of person where you are worried about her damaging the house when she leaves, that lets you know, okay, this is not somebody you want to be in bed with much longer, right? Yeah, and I don't think

that she would do anything intentionally. I just, I'm concerned that she's going to stay longer than she needs to. And so we're not only going to not have rent coming in, but we also are going to have that expense. And you might have to, listen, you might go through that. That is part of renting is every once in a while you get a dud. But you need to remember you're not running a charity. Yeah. This is a business. And so I think it's great to be kind.

You're not being a cruel landlord. You don't make the payments. You can't afford this. And you can't let that fall on you because she can't rent somewhere else. She can. And if that might mean she gets a roommate. I had to get a roommate. I never could live alone up until I got married.

And so that's up to her to figure out what's next. You did the due diligence of giving her 30 days, which is what was in the contract she signed. And so I think you need to be firm and you seem like a real sweet person. I don't want her to walk all over you when she sees that she can. Okay. Is your husband a part of this too? He is, yeah.

He's more, give her notice and get her out. Yeah, he's in my boat. Yeah, and I mean, I'm not against that either. I just... You've been very kind so far. Nothing here feels like you've been a greedy landlord who's a big jerk. But I do think you need to move on, find a... another tenant, and you may even want to consider selling this property. I was going to say that was

my next move. Because y'all are broke, your tenants are broke. I think we might get a fresh slate. If we sell this thing, use it to pay off our debt, use it to pay down our mortgage. And then later on in life, we can become landlords again when we're at a much more peaceful place financially. Yeah, because if you sell this, you're out of debt. You've got three to six months of expenses there. And you might have another 10,000 or so left to do something else with. I love that. I don't know that it's worth the, you know, five grand a year you're making off of this. Okay. Because think about this, you had a paid for a property making $1,500 a month.

That's a different number. But for all this hassle to make $6,000 minus expenses, repairs, maintenance, I don't know that I would do it, especially while I'm in debt. Yeah, why grind it out and have a tenant who's not paying when you can just go, you know what, I'm washing my hands of all of this? And that's a great way to get her out. Say, hey, we're actually going to sell the property. You got 30 days. Okay. I like it.

That's an easy out right there, Kate. That's what I would personally do in your shoes, but I'm not. not going to force you to sell your property if you love it. But right now, it's not the blessing that it seemed to be when I saw the TikTok video about becoming a real estate guru. I know. This is the reality of being a landlord. Yeah. It can be a real blessing. You were tough. You were tough. I was trying to give her back to 275. I was trying to be nice. Not today. Which is a rarity. Good cop, bad cop. Linda is in Seattle. Hi, Linda. How are you?

Hi, Dave. Thanks for taking my call. Sure. What's up? I am trying to find out if it's wise to buy, to purchase a home at my age and my financial state, what my options are versus renting with the cost of rent continuously going up and being ridiculous. So I'm just trying to figure out. I'm 66 and a half and I am collecting my full Social Security, but I am. also still working. Okay. How much do you make? I make, I gross 3,435 at my job. A month? And yes. Okay. All right. And then my 1563 a month with my Social Security. Gotcha. Do you have any nest egg saved? I have 100,000 in a money market account. And then I have an additional 10 to 11,000

and set aside that I have a car that I purchased two years ago, and I wanted to pay it off this summer. So I'm pretty close. I'm right there. How much do you all on the car? About 10 to $12,000. Okay. I'd pay it off today if you have to take a little out of the money market.

That's fine. Get rid of that. Okay. I sit around and wait on this summer to come around, knock it out. Okay. And you have no other retirement money? Not unless I retire from my school job. Oh, when you?

you retire from the school job, what will you make? The retirement that I paid into would only be about $15,000. Okay. And my, the school would only be paying a very measly amount, you know, a few hundred a month. So it wouldn't really be profitable to retire. Oh, I got you. All right. Well, here's the, here's the, here's the paradox you face. Okay. You're 66. If you live to 96. That's 30 years. Rent is going to go up every year. Okay. Buying a house. Yeah, if you rent, no, I didn't say rent. I said rent's going to go up every year if you rent. And the most expensive line item in your budget is your housing cost, agreed? Correct. And so your most expensive

item is variable and going up and out of your control as long as you rent. So renting is really a bad option at retirement. It's a bad option long-term, period, but it's really bad at retirement because it will, you know, because it's going to go up a lot faster than your Social Security inflation adjustment. And your income's going to go down when you retire, dramatically. Okay. So that's going to put the pinch on you if you stay in the rental mode. The problem is it's very expensive to buy real estate. And you, You're in freaking, are you in Seattle? Well, I'm about an hour and a half north of Seattle.

Good. Closer to the Canadian border border, but I... Good. Okay, so you're in a much more ruled. You're not in Seattle real estate market. Thank you, Jesus. Good. No.

I'm in a small, Skagit County. Okay, good. So you have a better chance of finding a piece of real estate there than you would, Seattle, with your situation. I've been looking for a couple of years. Yeah. So what I want you to buy is the cheapest possible. thing that you can that you can buy because when you buy it, what happens is even if you've got a

small mortgage on it and you put some of this $100,000 down, you keep some back for your nest egg too. So you put $50 down as an example. And at least your payment, whatever payment you select is not going to go up then, except for taxes and insurance might change. Right. But if you don't do that, every year it's going to go up. Rent is going to go up.

So the good news about buying is you fix, lock in the most expensive line in your budget. And that's going to be a big deal 20 years from today for you, that you're locked in at those old 2024 numbers. Right. But I can't afford a 15-year, the payment on a 15-year. Well, you can afford it if you buy a cheap enough house. And that's what I'm worried about here. The paradox I said is you need to buy a house, but I don't think you can afford one. And I'm trying to figure that out as we're talking through here.

But if you don't buy one, you're really going to be up a creek. So if you buy something too expensive, it's going to drain you out anyway. So that's the paradox. So the only answer to the equation is buy something unbelievably cheap somewhere, somehow. And I don't know what your particular real estate market is or how, you know, quote, unquote, affordable. You can find a one-bedroom, two-bedroom little condo or a little farmhouse out in the middle of no freaking where. I didn't listen. Yeah, or whatever.

I mean, it does not need to be fancy. It needs to be housing. Correct. And the only thing I just don't want you to be somewhere in an unsafe area. But other than that, I want you to go somewhere where you get something super cheap and use what little money you've got to try to lock in this line. But nothing is going to be ideal because there's not a lot of money in this discussion. It's not going to be ideal.

Whatever we do is going to be a strain. We're just going to have to choose our hard. Is there a point when you would tell somebody look to move? Well, she is. She moved to the right area. She's out in the middle of nothing. I mean, she's in a rural area, very rural, inexpensive area. Seattle is what came up on the phone thing.

And I thought, good Lord, she's never going to make it there. But even if you're looking for a couple of years and you still can't afford rural, like. Well, I'm going to, I'm going to, you know, she's not, she got $40,000 a year income, $45,000 of your income. So it's not going to be easy. It would be very tough. because she's operating at a lower income level with not a lot of money to put down. And so we're going to be in lower income housing type, lower house housing prices, which is fine. There's no shame in that.

It's better than being a renter for 35 years, though, or 30 years or 25 years or whatever the number is, because it goes up every year. We've got to lock in that line item. And folks, just to backtrack, for those of you, they're 32 when you're listening to this going, I'll never buy a house. You know, yeah, you will. You got until her age to figure this out, but you'll get it figured out. But you need to get it figured out. And then you need to get the house paid for because if you can come into retirement with a nest egg, let's just make up a number, a half million dollars, and a paid for house, even if it's a modest house,

you've locked in the most expensive line item in your budget and you've got money to live on. And then you're set for retirement. You don't have to be a millionaire, but you've got to, you can, you know, what we're aiming at and, you know, if I can backtrack in Linda's life, I don't know what all happened to her, but if I can backtrack in her life 20 years and take her to a better place today, I would, obviously, but I can't. So we'll work with what she's got. So I'm going to buy the cheapest possible thing as soon as I possibly can. And then if interest rates go down, you can refinance. Folks, you marry the house, you date the rate. The rate is not permanent. You can refinance and

get rid of the rate. So if rates draw, I can't buy it in the these rates. Yeah, you can. You can buy in these rates. And you just, you know, just don't, we're not keeping the mortgage forever. A, we're going to get it paid off and, B, we can refinance and drop it if it goes down. So date the rate, marry the house. That's the plan. So get something inexpensive and get it going. Get your foot in the door. And that's what I want for Melinda. Blesser Heart.