10 Mistakes Made by First Time Landlords
1. Setting Arbitrary Rent Rates
The price a tenant will pay has little or no bearing on your monthly costs. They will compare what’s available and, if your price is reasonable, they will rent your unit. If your price is too high, they won’t even look at it. If it’s too low, they will wonder what’s wrong with it or take you to be a sucker.
The list price for your rental has to be comparable to similar apartments nearby. If you’re looking to purchase a rental building, that list price at the worst point of the market needs to be enough to cover your costs and still leave a little left over for you to say the investment is worthwhile. If you’re looking to rent out your current home for a short while until the market recovers, you need to consider both your own bottom line and the current market rates for nearby rentals before making the transition.
2. Insufficient Screening of Tenants
Unlike a sale situation, where you will have little to no contact with the buyers after the sale is finished, your renters will be in constant contact with you (or your property manager) throughout the lease. There are companies that offer automatic screening of the statistical info about renters, including credit reports and criminal data. However, there are still many steps you can (and should) take on your own that go above and beyond the standard background checks. Here’s some things that would not be considered out of line:
- Contacting the prior landlord in person.
- Visiting the renter applicants at home to get an idea of their housekeeping skills.
- Checking their criminal records in the past few states where they’ve lived. (Many automated checks only verify the most recent address.)
- Entering their name into a search engine and seeing what you can find.
3. Under-Insuring the Rental
A rental should have at least two, and possibly three insurance policies in place, and none of them are your standard homeowner’s policy. One of the biggest errors made by temporary landlords is to try and squeak by without changing their existing insurance. Here are the policies you should have in place:
- Landlord policy, ideally with rent interruption coverage
- Umbrella policy for extreme cases that exceed the maximum reimbursement for your landlord policy (optional)
- Your renters should also carry renter’s insurance with you named as an additional insured party. Make this mandatory and require them to provide proof of insurance before you give them the keys.
4. Neglecting the Occupied Property
Tenants do have the “right to quiet enjoyment.” Contrary to popular belief, this is not related to noisy neighbors. It means you can’t just barge into their unit unannounced – you have to give them adequate notice and have a very good reason before entering. By signing the lease, you’re forfeiting your own occupancy rights in favor of theirs. However, this does not mean you should completely neglect the property while the tenants are living there.
I have encountered many landlords who’ve let their tenants do their thing for months or years without checking in, and then have been greeted with major deferred maintenance problems or extreme housekeeping disasters when it came time for them to get involved again. Here are some things you should be doing to keep an eye on your investment while it’s occupied:
- Include several scheduled site visits in your lease. Two or three over the course of the year should be sufficient. While you’re there, check the furnace filters, smoke detector batteries, and general upkeep of the property.
- Drive by the property at different times of day throughout the year to check for signs of unannounced tenants, obvious exterior problems like graffiti and trash, and noisy or disruptive behavior noticeable from outside.
- If any maintenance calls come in from your tenants, ask your contractors to report back to you on the condition of the property.
- If offering your renters a lease renewal or extension, bring it to them in person and require a site inspection as a condition of renewing the lease. If the place is a disaster, don’t renew them.
5. Buying at the Peak of the Market
A sensible investor is not going to sell their best properties unless something dire has befallen them. The majority of the investment properties you see on the market are loss leaders that the current owners could not operate successfully. If you are buying an investment property, you are making a bet that you can increase the cash flow and overall value through a combination of your own improvements to the building and general appreciation over time.
If an investor has been unable to make a building succeed in a good market, there’s little chance that it will do any better when the market starts to weaken. A lot of new landlords have been tempted by the recent high rent rates to buy up properties now, expecting that we will continue to see rents rocket upwards at the same pace as we’ve seen over the past two years. Unless you’re doing so with the intention of flipping them back to owner-occupied buildings in the near future, it’s better to wait until the rental market softens up a bit.
6. Lenient Collection Efforts
So I heard from a landlord last week who asked me, “My renters haven’t paid me in six months, but I thought that the courts wouldn’t evict anyone in the winter. When can I file to evict them?”
Answer #1: Evictions happen year round. The sheriff puts a hold on evictions for a couple of weeks during Christmas, and in cases of extreme cold weather, but eviction hearings happen every day that the court is in session.
Answer #2: You should do a soft notification as soon as they miss one payment, and start the eviction process as soon as they miss their second payment. If they get two months behind there is almost no chance that they will ever catch up. If you let your tenants think you will be lenient on them when it comes to rent, they are not likely to change their behavior and suddenly start paying you on time.
Answer 3: If your tenants are six months behind, it’s time to talk to an attorney with landlord-tenant experience and get the eviction process started. Now. Right now.
7. Using the Wrong Lease
For apartments covered by the CRLTO, you have to be very careful which lease you use. A lease cannot require a tenant to give up their rights under the CRLTO. If it comes down to a court case, a judge will probably consider any conflicting clauses in your lease to be invalid. Missing clauses can cost you, too. I’ve seen many landlords reach for whatever free lease they can get their hands on online, but you have to be quite cautious.
Disclosures are also required. Depending on the style and age of apartment, you may have to include a lead paint disclosure, heating cost disclosure, radon disclosure, and/or a high rise life safety ordinance compliance disclosure. For rented condos, you also need to provide a copy of the condo association bylaws in order to remain in compliance with the Illinois Condo Property Act.
CRLTO-compliant leases can be obtained from the Chicago Association of Realtors and, for high rise condos, from the Apartment Building Owners and Managers Association of Illinois.
8. Choosing Good Buyers as Tenants
Turnover costs eat into your cash flow like crazy. They’re the single biggest deterrent to a consistent income from an investment property. Many landlords seek financially immaculate renters, but they forget that those renters are also prime candidates to buy their own homes. Perfect credit and solid income is a fantastic low risk situation for a year or so, but those perfect tenants are also very likely to cut out on you after a short time.
If you want to minimize your turnover, look instead for a slightly blemished but worthy tenant. These folks probably have some work to do to bring their credit scores up to the point where they’d be considered for a mortgage, but provided you are responsive and responsible in your dealings with them they are more likely to stay with you for a while.
9. No Contingency Planning
Providing housing for people is not like selling them something in a retail shop. It’s one of the basic life needs, and you will have to plan for pretty much every possible contingency from the minor to the very major. Here are some events that happen all the time that landlords will often forget:
- Lost keys.
- Lost job.
- Adding or removing a roommate.
- Broken leases.
- Tenant rescues a stray animal.
- Pest infestations.
- Severe illness or death.
- Tenant needs to make your rental ADA-compliant.
- Section 8 vouchers.
- Tenant jailed.
- Loud parties.
Here’s a recommendation: read through the past month or two of your Facebook wall or the Twitter feed of a typical renter. Give some thought to everything that happens, and how you would react if those things happened in your rental. Plan accordingly.
A study by HUD in 2000 found that 17 percent of African-Americans and 20 percent of Hispanics in the US encountered some sort of race-based discrimination in their search for housing. A 2007 Michigan study found that 30 percent of same sex couples faced housing discrimination. It is so easy to trip up and cross the line when you’re advertising housing for rent. I’d like to think that StrawStickStone readers are too intelligent to have Fair Housing issues, but it is very easy to accidentally cross the line. Here are some points to consider:
- What if your applicant works in the adult film industry? Would you accept them? You cannot discriminate based on source of income in Chicago.
- How about the words you use to describe your neighborhood? “Chinatown,” “Greektown,” “Boys Town,” “Little Italy” – using these terms could be construed as steering.
- Is there a great restaurant in your building? Great, mention that there’s a great restaurant. Is there an awesome Lebanese cafe in your building? Great, mention that there’s a great restaurant. Leave the ethnicity out of it.
- Say it’s November. Suppose you’ve got sign supporting a local political candidate on the lawn of your building. Surprise! You’ve got a fair housing problem.
- What if one applicant brings their own recent credit report and another does not? Do you make them both pay for fresh background checks?
- How about your maintenance workers? Will they give the same level of attention and service to tenants of all sorts? If not, you may be in trouble.
Above all, unless you can honestly say that you will accept cash from anyone with a verifiable income, a clean criminal record and strong credit, you need to get out of the landlord business.
Can you think of other pitfalls for first time landlords? Share them in the comments! I’ll be back Friday with some thoughts about comparative neighborhood safety.