When buying a duplex are current "cash tenants" a situation to avoid?
I'm looking at duplexes for sale with the intention of buying one (both sides) to rent out. From an income-property buyer or landlord perspective, are properties for sale with cash tenants in place generally a fine buy or generally a situation to avoid? What are the pros and cons of cash tenants?
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I would stay away from tenants who pay cash. Firstly it is harder to verify that the rent is being paid on time, secondly many landlords who prefer cash are usually trying to claim less income than they actually get (this could be a pro to having a cash tenant if you are prone that way, I prefer to be above board and avoid being audited by the Tax Man). Even if the tenant has receipts for all their rent payments, really anyone can buy a receipt book and write out a stack of them, would you want to go through a stack of receipts? Then there is the situation of having to go by the property every week, fortnight or month to collect the rent.
When looking for new tenants I usually prefer tenants who pay direct debit straight into the landlords account or ones who go through a Real Estate Agent and can provide a Rental Ledger from their Real Estate Agent. These sources provide an easier and more accurate method of reviewing a tenant's rental history.
In saying that, when you are looking to buy a property the existing tenant should not be a major factor in your analysis when deciding whether to buy or not. This is because you can simply ask for the property to be vacant possession at time of settlement. It is then the responsibility of the vendor to get the existing tenant out before settlement occurs. When buying a property, unless the existing tenant was found to be exceptional, I would always ask for vacant possession.
If you believe an element of any investment isn't above board, simply don't invest.
While I personally wouldn't find any issue with a cash tenant in my rental (that there is a payday loan industry at all is an indictment of the US financial system period, not their "unbanked" customers), I can't prove a negative, and its easy for a stranger on the internet to say this: I don't have to live with the decision to buy this property. You do.
It's tough to correlate any tenant trait with their viability as a tenant. Married/Dating tenants divorce or split, and the single one can't afford the rent. Singles hook up and move out. Those without kids have a child and need more room. Those with kids have another and need more room, or send the teens off to college, and need fewer.
The cash is a sign of being unbanked. This reflects ignorance (possibly) or distrust of the banking system. People who work in a store of any kind will often sign their paycheck and the manager will cash it at a register. after all, it won't bounce, right? If the logistics of taking cash is the issue, you can simply tell the tenants they must pay with a money order. at the post office and problem solved. If the very fact that they started as cash is a red flag, take Victor's advice and buy it empty. But, when you get paid in money orders instead of a check, keep in mind, the tenant may very well have been a cash tenant, and you gained nothing.
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