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Bulletproof Landlord

Updated on February 22, 2014
© expressions photography
© expressions photography | Source

So you’ve decided to dive into the abyss of landlord-ship, you dare to rent out your little green patch with the hopes of not only creating positive cash-flow, but also getting your feet wet into the ultimate wealth building activity that land owners seek to accomplish; earning money with the resources that you have invested. Seems reasonably wise doesn’t it?

I thought so; at least that’s what I had in mind, so here are some tips that I have learned through arduous experience that will hopefully save you some headaches, as well as some money, and hopefully pad your wallet without too much fuss.

First and foremost, you need to have a firm understanding of the landlord / tenant laws in your state. And when I say firm, perhaps I made an understatement, you need to read the entire Department of Consumer Affairs handbook cover to cover, and you should be able to quote relevant information that applies to your rental. In California, where I live, it’s about a hundred pages—not too bad, considering it will give you an edge not only in dealings with tenants, but in the court room as well as a baseline for all the possible rubbish you will hear from people as they try to pass off (potentially costly) lies across your business model. So what? So you missed a few TV shows that you could watch later during a re-run. You need to know as much about your state’s landlord’s laws as an attorney might, you need to know it all, laws, by-laws, amendments, restrictions, regulations on your specific county, as well as your town, where they may be certain exceptions to rules or small modifications to existing rules that you may not be aware of. The average person will want to clean the place up with a minimum effort and rent the place out hoping to cash in on their vacant piece of real estate, only to find later that their negligence has cost them thousands of dollars. Trust me; you’ll thank me for this.

Basically, you need to be the smartest person involved in the deal.

When choosing a place to rent out, you should assess attractive locations near schools, businesses, and freeways; it should be located somewhere busy. If you’re looking to purchase a place for the strict purpose of renting the place out, it may be a better idea to find a fixer-upper. Small cosmetic damages to a piece of property can dramatically decrease the selling price of a home.

If you decide to make repairs or improvements to a piece of property, I suggest that you spend a bare minimum on the type of fixtures and parts for the house, refrain from buying expensive or luxurious amenities for the property, tenants will damage it anyway. I know this might sound underhanded, but let’s get one thing straight, people rent because they can’t buy, and they can’t buy because either they have terrible credit, or they don’t qualify otherwise; put yourself in their shoes, would you baby a place where you live when you only feed the pockets of a stranger? I didn’t think so.

Now the fun part, choosing a tenant, and screening their backgrounds; it helps if you have a tenant with a full time job; I hear a captain obvious sneer coming on, but really, you should do your homework. In California, it’s illegal for you to discriminate on a person’s race, age, handicap, profession, etc., but you can screen tenants and ask them how much money they make, what they do for a living—not as a basis for rental, but as to establish a baseline on their basic profile. It helps if you verify all of the information that they submit. I use a service called TenantVerification.com, they run credit checks, criminal history, as well as other pedigree information for about thirty-three bucks, they are fast, provide great customer service, and most importantly, they don’t sell your information—the real estate industry is a giant cesspool of racketeering, once someone has an inside scoop that you are a property owner, they exploit that fact and attempt to make money off of you in any way possible. Make sure you get a prospective tenant to sign a release before you run their credit and their background. Obtain a copy of their ID, as well as their social security card as to verify their identity. When the checks come back, read carefully, avoid renting to anyone who has had late continuous payments, large judgments, as well as evictions (obviously) on their record. Again, keep in mind the laws of your state, and follow them religiously. By the way, in my state, you can charge up to forty nine dollars and some change to run someone’s credit for the purpose of a rental property, this money is legally only supposed to be used to run someone’s credit, and some prospective renters will ask for a copy, so play by the rules.

I would screen at least a dozen people for a single property, check and recheck everyone’s references, and verify that the references are legitimate.

Now you’ve found a tenant, hopefully they have steady income, and appear to be kosher, but before you rent them the property, take detailed photographs of the place and have them sign a statement that they have reviewed the pictures, and date the statement; just in case they damage the place and claim that it was damaged when they moved in. Remember, be smarter.

The preparation that you have to make as a landlord is fairly simple; clean the place up—I love to bleach everything—and insure it as well with a reputable company. Make sure that you obtain a landlord’s insurance policy, as they are different from a regular homeowner’s—owner—occupied policy. If you live in an area that has a natural hazard, you might want to supplement your policy with other policies, such as earthquake, flood, as well as considering an umbrella policy just in case someone decides to sue you. The last bit could be eliminated by requiring tenants to carry renter’s insurance, and include a clause in your lease that excludes you from any legal action that might ensue while they occupy your rental.

Now that you have a decent tenant in place and you start to recoup some of your hard earned money, you should pay attention to the type of lease that you tenant has signed. I’ve learned that keeping a month to month lease is almost pain free; just in case you have to evict them, a month to month lease is easier to deal with when and if your case goes to court. If a tenant pays late, especially a new tenant, it’s a good idea to establish a baseline of ground rules. An acceptable amount of late fees range from five to ten percent of the total lease amount, most rental companies and landlords impose a flat fee ranging from forty to fifty dollars. In the state of California, you’re allowed to charge up to ten percent.

When I first started to rent properties out, I decided to use a management company, but I have learned that they usually look out for themselves, and not the landlord. If you have the time, I highly recommend that you manage your own rentals. It’ll save you money and in the long run, you’ll learn something new, can’t go wrong with expanding your mind, right?

My lease started off as three pages, and it is now closer to eight. Making revisions and new provisions as I learned things the hard way, I have managed to come up with an agreement that leaves me little liability and the most protection in the off chance that something might occur, and legal protection is something that is good to have and not need, than to need and not have, right?

Make sure that your lease does not violate the laws of your state, and again, keep up with the changes in real estate laws, do your homework, read the news, and keep in mind that landlord / tenant laws might change from year to year. Keep a diligent record of everything, anything that is spent at the expense of a rental property is a tax write-off, in fact, that gas that you spend driving from your home to the rental property to address any issues is also tax deductible. Make sure that your tenants give you a written request for anything, which includes repairs or complaints. Make sure your lease exclusively makes these conditions clear.

Now, a long time tenant might be given favors and even extensions on rent, but make sure that they do not mistake your understanding for weakness. You’re not their friend, you’re their landlord, make sure you clearly define these distinctions.

Books on Landlord Laws

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