Those new to the exciting world of leasing out properties for profit have an incredible opportunity to earn passive income. However, all opportunities involve a certain degree of risk.
Knowing the pitfalls to avoid when they’re new to the rental property scene can help landlords protect their investments while at the same time maximizing their profits.
New landlords do well to take some tips from long-term property managers to avoid common headaches encountered in the industry.
Those who fail to educate themselves may find themselves facing nightmare tenants, unpaid rent, property damage
Consider the following five bits of advice before handing over the keys to your first tenant.
1. Prioritize Making a Profit
Like any business, landlords must turn a profit in order to keep their proverbial doors open.
Life happens, and unexpected financial setbacks occasionally plague everyone. If you have a quality, communicative tenant suffering a temporary economic setback, use your judgment when it comes to lending them a hand by giving them a break on the rent until things improve.
When tenants refuse to pay rent and also ignore attempts to contact them, however, begin eviction action immediately.
Landlords who still carry a mortgage on their rental property should run comps of similar rentals in the area to determine if the average rental rate sufficiently meets the monthly mortgage payment with a bit left over.
If the average rental prices fail to cover the landlord’s mortgage payment, they may consider investigating other ways to profit from the property, such as making it a vacation rental.
2. Screen Tenants Carefully
Every landlord wants tenants who care for their property and who pay rent timely each month. Be sure to carefully screen potential tenants for their past credit and criminal history.
Bear in mind that while some tenants do rent because their career makes them relocate often, most people rent either because they lack an adequate down payment, have an insufficient credit score or debt-to-income ratio or a combination of all three.
Avoid screening out potentially high-quality tenants simply due to a low credit score, as those looking to improve their credit know they must pay rent on time.
The red flags that should make landlords screen out a potential tenant include a history of prior evictions or criminal activity.
Exercise judgment when screening tenants with only one prior eviction have a solid explanation, such as a serious accident or illness that kept them out of work or a mass layoff at a previous employer. However, you should almost always turn down tenants with a history of several evictions.
Likewise, avoid leasing to individuals who have a history of theft crimes to prevent them from stripping the property of everything — including the kitchen sink.
You should also avoid potential tenants with a history of certain drug crimes.
3. Know the Law
New landlords must understand the legal ramifications of renting a property.
For example, landlords must keep the property habitable and may face liability from accidents stemming from safety hazards.
Landlords may not discriminate against potential tenants based on disability. Even landlords of pet-free properties must allow tenants with service or therapy animals to keep their pets unless the animal poses a risk to others.
4. Get It in Writing
Once a landlord finds the perfect tenant, they should always provide a written lease signed by both parties. The lease should include all conditions of property use.
Landlords should specify behaviors that violate the lease agreement, such as smoking in a non-smoking unit, so they possess documentation in case they need to evict tenants for breaking their lease.
5. Plan for Emergencies
Landlords have an affirmative duty to respond to requests for emergency repairs and services promptly.
Should a pipe break causing water damage, for instance, the landlord must hire a qualified plumber to fix the issue before dangerous mold can grow.
In cold climates, failure to fix a faulty heater violates the landlord’s responsibility to keep the property habitable, as does failing to fix broken air conditioning units in hot climates.
Becoming a landlord puts many on the road to true financial independence as they create a reliable passive income stream to supplement or even replace their income from their job.
By avoiding the traps many first-time landlords fall into, property owners can maximize the return on their investment and enjoy a positive relationship with their tenants.