Many real estate investors purchase a property with the intention of renting it to tenants, and only after they have made the purchase do they look into the legal and financial implications. This is a risky course of action that can result in devastating losses. Imagine buying a home or condo for rent, then discovering the property is not zoned as a rental property!
Smart real estate investors start by conducting due diligence before spending any money on properties. The following are high-level steps cautious investors can take on the path to becoming landlords.
Know All Applicable Laws And Regulations
This includes state, federal, and local laws, ordinances, licenses, permits, and restrictions. There are guidelines around anti-discrimination, health and safety rules, and also American Disability Act requirements that may pertain to your property.
Note that laws can vary based on long-term versus short-term rentals. If you are planning to use the property for short-term rentals such as vacation rentals, Airbnb, or VRBO, make sure such rentals are permitted. Check with local municipalities to ensure there are no ordinances pending approval or votes that may ban short-term rentals.
Understand The Financials
There can be tens of dollars of expenses over and above the purchase price of a rental property. Careful and realistic financial analysis of reserves, repairs, taxes, property management, periods of vacancy, insurance, marketing costs, and more is critical to mitigating your financial risk.
Have A Property Management Plan
Many first-time landlords plan to take on running the rental business and caring for the property themselves. This means that you must be available 24 hours a day to address emergencies. If you live far away from the rental property or have limited availability, consider hiring a professional and licensed property management company. For a portion of the monthly rental income, they will market your property, vet potential renters, manage all contracts, set up a reserve account, manage all maintenance and repairs, and, best of all, they will handle all emergency calls.
Evaluate Your Local Market
There are many different types of rental markets. Some towns have universities, and there is a great demand for student apartments. There are section 8 (subsidized affordable housing) properties, family homes, military housing, luxury rentals, and so much more.
Before purchasing a rental property with a specific target market in mind, make sure the type of renting you want to do is viable in that geographic area. If a specific real estate market has a high demand for 3/2 homes, buying a 2/1 home may limit your pool of tenants and/or the monthly rent amount that you can charge.
Be Realistic About Repairs & Maintenance
Landlord headaches and troubles can pile up quickly when repairs and property maintenance have been underestimated or neglected. In addition to the cost, landlords are wise to consider the loss of income due to vacancy periods while repairs are made. In addition, there is the risk of fines from local municipalities and housing authorities.
Create A Marketing Plan
Great tenants who pay on time and take care of the property are crucial to landlord peace of mind and positive cash flow. To find ideal tenants, it is important to know the rental trends in the property’s local market. How do tenants search for places to rent? Are yard signs or online listings more productive? What does the tenant base look like for your area? College Students? Military? Professionals? Retirees? Luxury? Make sure that you understand local trends and laws related to marketing to tenants.
Screen Tenants Properly
There is significant legal risk in not properly marketing your property and using appropriate methods of tenant screening. The Dos and Dont’s of discrimination in housing are serious and come with significant fines. According to the Federal Trade Commission, “When you use consumer reports to make tenant decisions, you must comply with the Fair Credit Reporting Act (FCRA). The Federal Trade Commission (FTC) enforces the FCRA.”
The United States Department of Housing and Urban Development shares multiple scenarios of housing discrimination. Educating yourself can help you avoid violations and serious repercussions.
Have A Strong & Legal Lease Agreement
If you plan to DIY the process of becoming a landlord, creating your lease agreement is one area in which you want to consult an expert. General leases available online are unlikely to properly address local laws and may leave you financially and legally unprotected with risks of liabilities. Partner with a real estate attorney with expertise in the laws of the city and state where your property is located.
This isn’t just a nicety. This is a legal requirement and a risk mitigation strategy. Check your local requirements for storing tenant-related documents. However, in general, keep copies of leases, lease amendments, and correspondence that refers to lease terms, maintenance, and payments for 5 to 7 years.
Records are relevant in the event of a legal complaint/investigation, civil lawsuit, IRS audit, and more. Keep paper documents stored in a dry, secure location. If you are using software for electronic records or signatures, be sure you maintain access to past records. It may be wise to download records to a secure device, server, or cloud account that you control.
Be A Responsive & Responsible Landlord
Chances are that you have heard the term “slumlord.” This slang term refers to an abusive and/or absentee landlord who profits from rental income while providing substandard living spaces.
Less extreme, yet also at risk for fines and penalties, are landlords who ignore maintenance issues. Allowing properties to degrade into unsafe conditions, including pest infestations, mold, security issues, no cooling or heating, electrical and plumbing issues, etc., can face significant fines and even incarceration. By proactively maintaining properties and quickly resolving tenant requests for maintenance, you can enjoy a positive and profitable experience as a landlord.