Careful control of the quality of tenant is the single biggest factor in minimising risk to rental income from letting residential property. Once a tenant has been chosen, they will generally be in the property for some time whether or not they choose to pay the rent!

Even if the capital value of your property is increasing, dealing with a difficult tenant can cause enough stress and hassle to take the shine off your investment. Moreover, many property purchase decisions are based on optimistic assumptions of rental income. I have included some war stories which may help those considering investing in property understand the challenges, and the possible rewards if you can stick with it!

My first example is a close friend and successful investor in apartments in the Scottish provincial town of Perth. She has invested in 2-bedroom tenement flats and showed great insight into the her target market of tenants, and the likelihood of lower rental returns than in metropolitan areas. Although both flats needed some work to prepare them for tenants (for example, they required kitchen and bathroom renovation), she carried this work out cost effectively using the help of family and friends, recycled appliances, etc. The flats were decorated and fettled with an eye to economy and ease of maintenance rather than with the interior design cues of a lifestyle magazine, and as a result the renovation costs were low, reducing the capital investment. She has now enjoyed 3 years of largely problem free rental in which time central Perth apartments have seen an uplift of around 40% in valuation.

But latterly the capital gain fairy tale has been tarnished by difficult tenants. The first issue was a consistently late paying tenant causing considerable overhead in phone calls, letters, checking of internet bank accounts etc.  This became a consistently annoying overhead of time and effort, although the tenant would always pay when chased. The second issue has become a huge problem, with the 40-something divorcee tenant placing his landlady last on the list of debtors despite claiming housing benefit. He declined to answer phone calls and letters, and at the time of writing is trying to avoid eviction using legal assistance. Although there should eventually be a satisfactory conclusion to the situation, the landlady will have to withstand a significant period of no rent and constant worry of damage or theft of contents.

Both tenants seemed like upright citizens who could supply references and were able to pay a deposit, proving it's very difficult to choose a good tenant!

Another friend in Estonia started renting out her apartment near the Bussijaam in Tallinn when she moved into a new house with her partner. The flat was rented successfully for several years, until she found a new tenant who gave every impression of being a successful Estonian businessman. However, after a few months rent he stopped paying abruptly and was nowhere to be found. Frustrated by the lack of payment or explanation, after some months the out of pocket landlady took matters into her own hands and let herself into the flat to see what was going on. She found it full of expensive AV equipment and designer suits which she confiscated.

To cut a long story short, her businessman tenant was less than respectable, and had been languishing in a Finnish prison for several months. Once he was released and returned to Estonia, my friend showed remarkable courage by refusing to hand back the contraband until he had paid his rent.

All of which goes to show that you need nerves of steel in this game!