Friday, October 19, 2007

"I'll Just Rent It Out"--Don't Be Too Sure

As someone who has managed rental housing part-time for 23 years, when I hear the owner of an "investment" house or apartment cavalierly say, "I'll just rent it out," my blood runs cold.

Why? It isn't that easy, folks. There seems to be a common misconception about renting out a housing or apartment as a landlord: the renter shows up, you sign the lease, and they send you money every month.

Prospective landlords, please note: a rental property "investment" is not a mutual fund. A mutual fund does not call you at 10 p.m. to notify you that the toilet is stopped up, or to tell you they've locked themselves out of the house, or to complain about their noisy neighbor. Mutual funds don't have roof leaks, nor do they sue you when they fall off a ladder.

The rental housing business is a people business, and you will be dealing with all the foibles, neuroses, grumpiness, self-interest and demands of actual real live human beings. Flipping properties is easy, having tenants is not.

Here is the bible of landlording which I highly recommend: Landlording: A Handymanual for Scrupulous Landlords and Landladies Who Do It Themselves It is a thick book filled with everything you need to know to become a successful landlord/ landlady.

Let me tell you how to do it if you want to regret becoming a landlord, not just today, but every day, and for the rest of your life:

1. Don't bother getting a credit report. Hey, he/she looks trustworthy--go with your gut on this one.

2. Make a decision based on ethnicity, gender, age, or whether they have children. And don't bother with a rental application, either.

3. Just use a one-page lease form you bought in the stationary store. Hey, keep it simple, right?

4. Write the lease so the tenant has to take care of the yard. It's their residence; they should mow the lawn.

5. Take a small security deposit because they're a little short of cash right now. Gee, they seem so nice; I think they're honest but just in a tough spot.

6. Don't take photos of the house/apartment before they move in or go through the hassle of a walk-through and document the inspection. Who has time for all these formalities. They signed the lease, that's all we need.

7. If you own a triplex, hire one of the tenants to be the informal manager. Who needs all the expense and paperwork of getting workers compensation insurance? It's just moving the trash cans and collecting rent checks, for goodness sakes.

OK, so here's the reality.

1. People may have legitimate stories of fiscal woe but if they have lousy credit (past due payments, etc.) then you're taking a huge risk that the next unpaid bill will be the rent.

2. It is illegal to select a tenant based on ethnicity, religion, gender, age or if they have children. Even if you're sure you're not biased, bias might be perceived if you don't keep scrupulous records and establish quantifiable metrics for selecting your tenants which you can provide as defense should you be hauled into court.

3. The lease is all you have to provide guidelines/conditions and verify the tenant agrees to all conditions, including how disputes will be handled. A simple lease offers no guidelines and as a result, every detail and conflict has to be negotiated as it arises, a situation which raises the likelihood of contentious disagreements and impasses.

4. The prospective tenant gushed that they loved to garden and would keep the yard beautifully maintained (and plant more flowers, too)--but alas, their back hurts now, or you didn't provide the right tools, etc. "But it's in the lease." Fine, but how are you going to enforce it? It's much easier to have all the service work performed by vendors and pay it out of the rent.

5. The security deposit is all you have to cover damage and the lost rent when tenants leave before the lease period is up. It's nice of you to let them move in with a small security deposit, but it's also bad business because you have no leverage. Remember, the lease is essentially worthless as leverage to get money out of a tenant unless you go to court--and you know how much that costs. Plus, if the tenant is now unemployed, "you can't get blood out of a turnip."

6. If the tenant trashes your house/apartment, what proof do you have that it wasn't in that condition when he/she moved in?

7. True story. "Informal manager's" mother climbs a ladder to change a light bulb and falls. "Manager's" attorney notes that there is no workers compensation policy in place to cover the manager. It takes $10,000 to make the problem go away.

This is just a small sampling of the realities of becoming a landlord/landlady. It doesn't really matter if you're renting one property or 10 properties, the care, documentation, customer service and maintenance requirements remain the same.

Keep these two points in mind: rental housing is a people business, and it's a "brick-and-mortar" business in which the bricks and mortar are continually in need of costly upkeep and maintenance.

Thank you, David C., ($100.00) for your very generous and most unexpected donation to this humble site. I am greatly honored by your support and readership. All contributors are listed below in acknowledgement of my gratitude.

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