5 Things to be Aware of Before Leasing Out a Property
I’ve seen it more often than I’d like.
Rather than selling a property, an owner decides to lease instead. It is, they figure, easy money. Find a tenant, charge them a monthly fee, and smile all the way to the bank.
This inevitably blows up in their face.
Maybe they’re left with a pile of maintenance bills they can’t possibly afford. Maybe their tenant is suing them for something they did wrong. Or maybe they’ve found themselves in the crosshairs of the Landlord and Tenant Board for mismanagement.
Regardless of why, their career as a landlord is in shambles.
I’m not saying renting out a property is fiscally irresponsible. Rentals are an excellent way to generate wealth. You just need to know what you’re getting into beforehand, and a lot of newer landlords don’t.
Here are five things you need to be aware of before you lease one of your properties.
You Cannot Afford To Skimp On Insurance
Plenty of landlords seem to operate under the mistaken belief that a standard homeowners or property insurance policy will be enough to cover them. It’s not. In most states, there is a specific type of policy you need as a landlord.
While a typical insurance policy may protect you against certain types of damage, it does not insure you against many of the risks that typically go hand-in-hand with being a landlord. These might include injuries for which you can be found legally responsible, unexpected maintenance costs, repairing damage caused by tenants, and coverage for loss of rental fees.
Shop around before you commit to a single insurance company. Check online reviews to see how each one treats their clientele, and make sure to thoroughly read the fine print attached to each policy. You might even want to consider using a third-party service to help you get the best deal possible.
You Need To Do Your Homework
Most businesses will, before they hire, conduct a thorough background check on a prospect. They’ll run a criminal background check. They’ll search the hire’s name online, contact their references, and touch base with previous employers.
They’ll be thorough because they don’t want to deal with the liability of hiring someone harmful to their business or brand. As a landlord, you need to practice that same level of diligence. Like it or not, you’re giving someone unsupervised access to your own property, which means carrying out the following:
Carrying out a criminal background check.
Carrying out a Google/Facebook search.
Examining their history as a renter, including contacting previous landlords.
Checking that they have their own renter’s insurance policy in place.
Carrying out a credit check.
This due diligence doesn’t just extend to renters, either. If you are purchasing a property with the explicit intent of leasing it out, you have to make sure there aren’t any nasty surprises bundled with ownership. These might include but are not limited to:
Lack of proper maintenance within the past decade
Issues with infrastructure (ie. faulty pipes, shoddy electrical work, etc.)
Severe damage from issues such as mold
Shoddy materials used in construction/inaccurate documentation of repairs & renovations
You Can’t Just Rent and Forget
Maintaining a rental property isn’t just a way to get free money. You need to put a lot of work into it, both before you purchase it and while you’re leasing it. There is no such thing as “rent it and forget it” in real estate unless you hire a property manager. And even then, you’ll need to pay some attention to your property.
Make sure to schedule a physical inspection of your property at least once every few months. Your tenants won’t always contact you when something’s wrong. In some cases, they might not even be aware there’s a problem with the property until something actually breaks.
Regular inspections and visits are also an important component of good landlord-tenant relations. By demonstrating to your tenants that you care about providing them with the best renting experience possible, you’ll ensure they’ll treat you and your property better in turn. In the long-run, that means they’re more likely to renew their lease once it expires, while also caring more about your property.
You Need to Document Everything
I’m going to assume you already understand the importance of a well-written rental contract and lease, and why you should speak to both a lawyer and a real estate professional when drafting them. What you might not know is that in addition to these written documents, you should maintain thorough, searchable records of everything connected to your property. That includes all communications with your tenants, and all repairs/maintenance projects.
By maintaining a record of when you spoke, what you said, and what you did, you protect yourself against legal retaliation.
You might not think this is necessary. You might think your tenant is completely above-board and trustworthy. But speaking from experience, relations with even the best tenant can easily sour.
It’s Always Worthwhile to Have a Mentor
Last but certainly not least, even if you think you have a good handle on the ins and outs of being a landlord, I’d consider seeking out someone with a bit more experience in the field. This could be a work colleague who’s been renting a property for a while, a family friend with experience in property law, or even someone found through a community or social media group. Try to find someone who owns a property near the one you want to rent, as they’ll have a better understanding of the unique challenges of that area.
Ask them about the mistakes they wish someone warned them about when they first get started. Talk to them about what they learned over the years, and any insights they might be willing to share. See if they know of any prospective tenants or business partners in the area you might work with.
It’s not easy being a landlord. It isn’t something you can really do as a hobby or a part-time job. Still, if you go in with a thorough understanding of the challenges involved and the work required of you, it can be both profitable and rewarding.
About the Author:
Ryan B. Bormaster is the managing attorney at Bormaster Law. The law firm practices in a number of areas, including real estate law.