Mistakes to Avoid if You Own Rental Properties
Rental properties can be an excellent investment, however, you have to be sure you are on top of your game as an owner and landlord. Otherwise, you could be dealing with tenants who disturb others, don't pay rent, or leave you with a damaged rental unit (and a hefty bill) when they leave.
Yep, there are disadvantages to every situation, but don't let that prevent you from getting into the real estate investment game. You just need to know how to protect yourself and your rental property. Here are five major mistakes to avoid when you own and rent a home (or even just a room), so you can focus on making money—not pouring more money into a poorly managed investment.
1 Not following through with background checks.
One of the most important things you can do as a landlord is to run background checks on potential tenants. This can ensure you are finding the best tenant for your rental unit. Background checks can help you search for any red flags and help you verify things such as the applicant's identity, credit history, criminal history, prior eviction history, and more.
However, you have to request permission in writing to run a background check. So be sure to have a separate form from the rental application for this. You also must run background checks on all applicants. Do not pick and choose which ones; this is against Fair Housing Laws.
You can charge a rental application fee to cover the screening costs. (This fee serves double duty by likely weeding out candidates who aren't that serious about renting from you). Be sure to disclose the cost of the fee in your rental listing—and again when showing the unit. Although the screening process can be a bit lengthy, it's definitely worth the time and investment to find qualified renters.
2 Forgetting to check proof of income.
The last thing you want to do is rent to someone who can't afford the monthly payments. Remember: The truth is in the numbers. Think of it as a bank would when reviewing POI—according to Investopedia, most lenders allow a maximum of 28 percent expense-to-income ratio for housing. So, if the applicant earns $2,000 a month, their housing cost should not exceed $560 a month.
There are a variety of ways to verify proof of income. Some applicants may supply pay stubs, tax returns, or bank statements. Make sure their proof of income is current and verify with the employer by phone to ensure they are still employed. Not verifying proof of income can be a costly mistake.
3 Skipping the essential lease details.
You can say anything you want as far as the rules of your rental unit go, but if you don't specify something within the lease, you can't enforce it later. That's why inputting details in the lease, such as "quiet hours," no smoking, no pets, etc., is critical. A lease is a binding legal document, and if either party doesn't uphold the agreement, that lease can be terminated.
Don't forget to specify the renewal terms as well. For instance, does the lease automatically renew for the same terms, and if so, how far in advance do you require notification of the tenant moving? This clause is applied to you as a landlord as well; if you decide not to renew the lease, then the tenant needs an allotted amount of time to move out. The lease should also mention any late fees, eviction clauses, and details about the deposit. Be as specific as possible.
4 Not checking the previous rental references.
Sure, your applicant seems like they would be an excellent fit for your place; however, you don't truly know someone until you have them living with you or in your unit. So be sure to require previous rental references on the application that you can contact. These should only be landlords that the tenant previously rented from, not general character references.
You can ask the reference relevant questions, such as whether the tenant paid their rent on time, left the apartment or house damaged, or gave proper notice to vacate. This knowledge can help you weed out unreliable applicants so you can rent to someone responsible. Of course, sometimes unforeseen things happen, but this will help you determine whether an issue is likely a one-time thing or repetitive behavior.
5 Renting to friends or family without a lease.
Blood may be thicker than water, but it's not thicker than money. When it comes to renting to friends and family, you still need to follow the same protocols as you would with someone you don't know. Unfortunately, if you don't, you could get seriously taken advantage of.
So unless you can afford to house your relatives for free, be sure to write up a lease just like you would with any other applicant. Before renting to a family member or friend, you should first consider whether it's worth risking the relationship—similar to deciding whether to loan a loved one money. What could this do to your relationship if the transaction doesn't work out well?
Also, be sure to know your local laws and regulations for renting; they can vary widely depending on where you live. Rental properties are an excellent investment if you do them right. They can be a great addition to your investment portfolio that brings in passive income. Just make sure you do know those laws—and avoid the aforementioned mistakes—in order to save time, stress, and perhaps most importantly, major money.