There are many benefits for you to consider being a landlord. There is the lure of the steadily escalating rents, or you may just be interested in renting out your old place. Whatever the reason that is driving you, becoming a landlord can be profitable. However, learning the game requires effort. It is easy to take a misstep that may jeopardize your position. But when you play it right, you will have nothing to regret. Here are several mistakes that some landlords make and how to avoid them.
1. Don’t underestimate costs
It is easy to account for your taxes, insurance and mortgage (if you have one). But you may miss on expenses such as garbage, gardening, water and regular upkeep and repair tasks. Even riskier is failing to set aside money for big-ticket items and unexpected expenditures. Thus, for a realistic estimate, arrange for your annual costs (excluding your mortgage) to run at least between 35 and 45 percent of your annual rental income. A good rule of thumb when calculating your future income is to include only 10 or 11 months of the annual payments. This is because when a tenant moves out, you will still have expenses.
2. Never break the law
Landlord and tenant laws vary depending on the state or city you are in. For instance, you can require a month-to-month tenant to vacate the building within 15 days in one area while, in others, you must give a 60-days notice. One way to avoid such a problem is to avoid buying generic lease or other tenant forms that don’t reflect the local laws. To get an idea of what is permitted in your area, talk to a local or state apartment owners or landlord association. Such groups are not expensive to join, and may cost about $50.
You must also know that according to the federal law, you are prohibited from denying rental to someone based on gender, religion or race.
3. Don’t skimp on tenant screening and vetting prospective tenants
When looking for a good tenant, don’t just trust your instincts, or even depend on a friend’s referral. Landlords often get into trouble when they rush to find tenants or when they pity someone. Never rent your property to someone without carrying out a tenant screening. You need to do a background check on the prospective tenant’s credit, confirm their source and amount of income, and also check with their current and previous landlords. A good rule is to ensure their income runs at least two and a half times their annual rent. You can get their background and credit information from sites such as MySmartMove.com and E-Renter.com for about $25.
4. Don’t ignore the renter’s insurance policy
As a landlord, your policy covers the structure of the home, liability in case of property damage or injuries, and your appliances. It does not include the tenant’s stuff. You may imagine this is not your problem, but renting to tenants who lack an insurance policy may cause big trouble for you in case something goes wrong. Tenants sometimes lash out when it dawns on them they are not being compensated.
It is therefore recommended that in areas where it is legal, for instance, California, ensure that your tenants purchase a policy. This may reduce the number of your potential tenants, but it increases the chances of ending up with a responsible person. If it is not possible, explain to your tenants that you are not covering their stuff and suggest to them to buy their insurance.
The real estate business is of a profitable kind. But you need to understand some fundamental principles for you to be a successful player in this field. Don’t skimp on tenant screening, follow the law, and ensure that your tenants have an insurance policy. When all this is in place, you will have less to worry about.