Owning rental property seems like an easy way to generate extra income.  But, it’s actually not all that easy.  Nevertheless, the number of people buying second or third properties as investments has grown tremendously, according to the National Association of Realtors.

Landlords who take shortcuts when screening potential tenants, who skimp on insuring the property or who fail to outline everything in a detailed, written lease can end up with unpleasant and, yes, costly surprises.  But there is one shortcut neophyte landlords can take – they can listen to the pros so they won’t have to learn lessons the hard, expensive way.

Do Your Own Due Diligence – A Case Study

Take for instance, the tenant who looked good on paper with his attractive credit report and handsome deposit check.  Too bad the paper he looked good on was bogus.

Apparently, this seemingly perfect tenant doctored his credit report, giving himself a stellar rate.  Then the guy bounced his hefty $4,000 deposit check.  ThePasadena,Californialandlord blames his real-estate partner for renting to this con man.  Not only were they out money, but the lying tenant damaged the investors’ two luxuryHollywoodtown houses.  (The guy claimed he’d work in one and live in the other).

After three months, the man was finally evicted, but not before he ran up a $20,000 tab for back rent, legal fees and repairs.  The owner says he’s learned to double-check everything and his advice to landlords – “Never accept a credit report that a tenant brings you.”   

Check References

As for screening tenants, thePasadenalandlord always asks for two landlord references.  The past, not the current landlord is the most important reference because the present landlord may fudge the truth to get rid of a terrible tenant.

He also asks for a copy of a bank statement saying, “I want to make sure they have assets – how is that check going to clear?”

Another owner has survived 40 years as an owner, manager and seller of rental property by doing very thorough due diligence and basically by doubting everything prospective tenants tell him.  In fact, he gets a police report on applicants and asks for photo identification as an extra precaution.

Buy Adequate Insurance

Protecting yourself goes beyond combing through a tenant’s background.  Too often, landlords skimp on a very important item – insurance.

“Tenants create all possible situations you can imagine” says one landlord.  He tells of a young woman who rented from a client.  The woman’s boyfriend slipped her two illegal drugs – ecstasy and methamphetamine.  Her family is suing the boyfriend, the lender on the property and the owner of the townhouse. Protect yourself against the impossible.  You need as much coverage as you have on your automobile.  Also, most experts recommend requiring tenants to have renters insurance.  The owner’s coverage repairs and replaces only the actual structure and many times the appliances, but not the tenant’s belongings.

Move-In Checklist

Another form of protection is proof of a property’s condition.  It is suggested that you have a written, signed document with photos of the property when the tenant moves in to establish a baseline.

Say “No” to Form Leases

And what about those leases for sale at office supply stores?  They’re useless because each state has different landlord/tenant laws.  Get a standard lease from a real estate office or association in your state.  [Use AOA’s Rental Agreement and/or Lease for your area.]

Also, set up HOUSE RULES – put them in writing and enforce them uniformly.  If one tenant thinks another tenant gets special treatment, it could be considered discriminatory.

Heed Environmental Matters

With environmental concerns taking center stage nationwide, landlords, too have to take heed.  Watch out for lead paint, asbestos, mold and overall indoor air quality.  If the structure was made before 1979, chances are it will have lead paint in it even if it has been painted over.

Landlords need to give tenants the U.S. Environmental protection Agency booklet called “Protect Your Family From Lead in Your Home”.  It is recommended having the property inspected by a licensed lead-testing company – most people are poisoned not from eating paint chips, but from the dust.

Consider Hiring a Property Manager

One real estate professional inSolana Beach,Californiaactually tells her clients not to deal with all of these details.  Instead, she urges her clientele to farm out that work to a professional property manager.  She says, “If you’re retired, that can be your job.  If you already have a job, do not take on managing your own property”.

A better option, in her opinion, is to have a property manager handle the day-to-day dealings.  To do this dirty work, property mangers typically charge a percentage of the rent, with many charging as low a 4% for very large complexes and up to 10% for single-family homes.  She says that the property owners should learn to manage the equity in the property and buy other property while managing the manager.

The owner’s concerns should be finding out how to increase the rent by improving the property while decreasing expenses.  They should be doing the thinking work and not the physical work.

Other Matters to Consider

The real estate professional goes on to say, “Do not go it alone”. “Get involved in an apartment association”.  That way, property owners have others to turn to for advice, forms and referrals.  She recommends establishing separate bank accounts for each property so that the finances of each investment can be analyzed separately.  It’s also important for keeping tax records straight.

Finally, each expert recommends demanding an adequate security deposit from tenants, a form of protection if all the above fails.  And to avoid the headache that the Pasadena owner experienced, insist on getting the deposit before the tenant moves in and in certified funds – a cashier’s check, certified check, money order or, of course, cash.

Reprinted with permission of the Wisconsin Apartment Association News.

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