Today’s real estate market is flooded with prospective renters due to the housing crash in 2008. The countless number of renters appeals to the real estate investor attempting to cash in on the investment. These investors purchase homes at a discount and rent them to tenants for a profit. Many investors are first-time landlords who must be aware of the risks associated with residential rentals in order to protect their investment.
- keep property insured and require tenant to have insurance
- consult with competent legal counsel
- have a written rental agreement signed by the tenant and the landlord
- provide a move-in inspection list for the tenant to complete and sign
- have the tenant complete a rental application with references and credit check
- discriminate against any prospective tenant
- lock a tenant out for non-payment of rent without a court order
- wait to respond to the tenant’s concerns
- combine the security deposit with your own personal bank account
- hide the fact that a foreclosure action has been initiated against the property
It is important for the landlord to remain fully insured with respect to the rental property. The landlord is at risk because the landlord does not control the people who are invited onto the property by the tenant. It may be a wise idea for the landlord to consult with their insurance agent to ensure they have the maximum amount of liability coverage. The landlord may also want to explore the benefits of an umbrella insurance policy in addition to their primary insurance policies.
As a first-time landlord know the laws of the state in which you will rent your property. Most states have a set of laws that govern the landlord/tenant relationship. If you fail to abide by the law you may be subject to significant monetary penalties. Given the risk, it is a wise idea to consult with a competent attorney who can provide you with advice on the landlord/tenant laws within your state. Your attorney can also provide you with the advantages and disadvantages of owning the property in your individual name versus a separate legal entity, like a limited liability company (LLC) or a corporation.
Every rental agreement should be in writing. Among other things, the rental agreement should provide for the term of the lease, the amount of the monthly rent, the amount of the security deposit, and the maintenance and repair of the property. If the rental agreement is set to expire and you and the tenant agree to extend the term of the lease for a specific period of time then the extension should be in writing.
Many states require the landlord to provide the tenant a move-in inspection list. If the landlord fails to do so then they may be in violation of the law and subject to state mandated penalties. The landlord may also want to take pictures of the property before the tenant moves in. These pictures may be used as evidence to demonstrate the pre-move-in condition of the property if the tenant damages the property during their tenancy.
Many tenants will have less than perfect credit but a landlord can still obtain valuable information through a rental application and credit check. Furthermore, if the tenant fails to pay rent and the landlord is forced to file a lawsuit then the credit application may provide valuable information to help the landlord’s attorney collect any past due amounts from the tenant.
The Fair Housing Act prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions. This is based on race, color, national origin, religion, sex, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women, and people securing custody of children under the age of 18), and disability. Most states also have their own laws against discrimination.
Many first-time landlords believe that if tenant does not pay rent then the landlord has the right to lock the tenant out of the home. Most states require the landlord to go to court, albeit a simplified court proceeding, to evict a tenant.
If the tenant calls you because the air conditioning is not working or the roof is leaking then make every effort to respond to the concern as promptly as possible. Put yourself in the tenant’s shoes: how would you feel if it were 100 degrees in your home, and the landlord put off looking at the air conditioning for several weeks?
At the onset of the lease it may be tempting for a landlord to take the security deposit and use it for the landlord’s own financial affairs. There's a risk in doing this. It may violate state law. And it may also create a significant financial burden upon the landlord when the tenant moves out of the home. This is because the landlord is usually required to return the deposit to the tenant within a short period of time after the tenant vacates the property.
In states like Arizona, if a landlord fails to provide this type of notification and the rental agreement is entered into after the foreclosure action is initiated, then the landlord may be subject to monetary damages and injunctive relief (a court order requiring one to do or not do something). The tenant will also be entitled to a return of their security deposit.
The residential rental investment can be a lucrative opportunity. But the first-time landlord must understand the complexity of the investment and should consult with competent professionals for legal, insurance and tax advice. If a landlord refuses to invest time and money in this investment, then it will be an utter disaster. The landlord will likely end up worse off both financially and emotionally.