5 Traps for First-time Landlords
Owning rental property can be a lucrative venture, or a stress-ridden nightmare. Most likely it will fall somewhere in the middle with good days and bad. To help you avoid the nightmare, here are some potential traps for the unwary.
1. Not Knowing State and Local Laws
One of your first tasks is to brush up on the law. Search the Internet for “Landlord tenant law” applicable to your state and city. There is undoubtedly a wealth of information you can glean. The most reliable sources of information tend to be on government agency websites.
In a recent case in Massachusetts, an amateur landlord made seemingly innocuous mistakes. In trying to save a few bucks, he did not hire an attorney and proceeded with what he thought was the logical way to handle a security deposit. His mistake was easy to avoid. By the time it was caught, it was too late and he spent tens of thousands of dollars to fix it. Most laws are heavily pro-tenant. Know where the hazards are.
2. Taking on Too Much
Owning rental properties can be time-consuming. To keep from getting overwhelmed, follow these steps: (1) outline your strengths and weaknesses; (2) assess your desired time commitment; and (3) delegate, delegate, and delegate some more. Unless you are a contractor, you should hire someone to do your repair maintenance. Are you an accountant? No? Hire one.
If you intend to keep a full time job, consider hiring a property management company. Their services can include selection and vetting of tenants, collection of rent, evictions, handling tenant complaints, and coordinating repairs and routine maintenance. Another good resource to have on call is a local real estate broker. They can provide you with a wealth of information specific to your market.
3. Spending Money Poorly on Repairs/Upgrades
Some landlords find every possible way to pinch pennies and keep their repair and upgrade costs down. Others fancy themselves as interior designers and spend lavish amounts with top-of-the-line finishes. Your job is to find the right spot. If your two bedroom apartment cannot draw $6,000/month, do not renovate it like it can.
Keep your property clean and tidy. Respond quickly to problems as they arise, and fix them correctly the first time.
4. Picking Bad Tenants
Beware of the freeloader. They are tenants who seem great, but find a way to fall behind on their rent. They have a great excuse, and hold off their landlord with sympathy. When the landlord finally sees the whole picture, the landlord must proceed to an eviction that could take months. The tenant leaves, and just received six months or more of free rent. Good luck getting that money back. Spending $20 to $30 for a background check could help weed out potential problems. Use your intuition, and treat the relationship as a business transaction. Becoming too friendly with tenants is a potential recipe for disaster.
5. Risk Exposure
Make sure your insurance policy is up to date and allows for tenants. Same thing with your mortgage. Failing to do so could be a costly mistake if there is an injury on the property and the insurance company denies coverage, or if the bank decides to foreclose because you failed to understand the mortgage. Speak with your attorney about where your potential risk lies, and make sure you are prepared. Again, treating your rental property like a business transaction can go a long way to keeping you on track.