Do It Yourself Pitfalls
It doesn’t take much to turn an homeowner into a landlord. Maybe you have to move but want to keep your home and rent it out. Or you have a change of fortune — you get married, receive an inheritance or buy a new house before you unload the old one.
While many people would love to have an extra house to worry about, owning even one rental property can be a headache. Ideally, it’s in good repair, in a safe part of town and the mortgage is cheap or paid off. The more your place departs from this ideal, the more closely you should look at other options. That’s because, whatever your reason for holding and renting out a spare house — and there are many — it won’t work if you don’t treat it like a business.
Can you do it? Should you?
The biggest criterion for whether you should even attempt to perform property management duties yourself may be whether your temperament is suited to being a landlord. You first have to ask yourself if you have the time and the skill set to do this properly.
In addition to your obligation to yourself to keep the business afloat, your landlord responsibilities include:
- Providing a safe, smoothly functioning home for your tenants. That means, for example, making sure plumbing, wiring and appliances function, outdoor areas and stairways are safe. It means quickly responding to a tenant’s report of the inevitable malfunction or problem.
- Advertising the rental, selecting tenants and evicting them if you must — all of which are governed by law.
If you can’t see yourself performing these roles, it doesn’t mean you can’t pursue your rental plans; you just might be one of the people for whom it’s worth paying a professional property-management service. In fact, if you are out of town, consider the decision made; you simply must be on site to manage a rental. But first, you need to do some basic math:
- Calculate your costs. That’s the total cost of keeping the place going, including mortgage payments, utilities, maintenance, yardwork, repairs and any professional services you’ll need, which could include property management, tax help and a legal consultant.
- Estimate your rent price. A competitive rent price reflects prevailing rates, so simply adding up your cost of ownership won’t do. Check the price range for similar units in your area. You might want to visit a few just to see how your property compares.
- Compare the rent you think you can get with your costs. Create two profit-and-loss statements: a best-case list and a more conservative one that includes all the things that could go wrong. Even if the plan doesn’t pencil out, there may be good reasons for hanging onto a rental that doesn’t turn an immediate profit. Among them: tax-sheltered depreciation; the chance of a profit if property values appreciate; the need to hold a home for a family member to use later; the prospect of a worse loss incurred by selling immediately; or the simple desire to add to the value of your estate.
Three tricky areas: Screening, the law and maintenance
If you’re considering managing your property yourself, take into account how you’ll handle these three demanding jobs:
Screening: Tenant screening is perhaps a landlord’s most crucial task. You may think your gut is your best ally for this job, but there are two important reasons this isn’t a good idea:
- It doesn’t work.
- It’s not legal.
If you think you are a good judge of character, stay out of this business. When people come through my door, they can look and sound fantastic. And then I do the credit check and am surprised at the credit issues, at the criminal record. To find the perfect person is very rare and everyone has credit issues these days.
The Internet is full of companies promising to perform credit checks or criminal-records searches. But this is an unregulated area, and the accuracy of the information is not good. Lawsuits have been filed by tenants claiming to have been denied housing because of inaccurate assessments. Landlords who use these screeners also are legally liable under fair-housing laws.
Your rental application should elicit an applicant’s full identity, rental history and credit picture. If you are going to perform a credit check, you must disclose that on the application and ask the applicants to sign a release agreeing to this.
The law: Landlord-tenant laws vary from state to state. Some states tilt toward landlords, others toward tenants rights. Some municipalities have requirements, too, and federal law governs things like fair treatment for tenants and Americans with Disabilities Act requirements. You’ll still need to find a local attorney who specializes in landlord-tenant issues representing landlords (not tenants) to be your consultant.
Maintenance: As for property maintenance, if you are handy, go for it. Just remember that there will come a time when you’ll hit a problem you can’t solve. You’ll also likely want to take a vacation at some point and will need emergency resources your tenants can contact.
Outsourcing: Paying for peace of mind
When you add up the responsibilities, there’s much to be said for hiring a professional. Going this route will cost you about 10% of the monthly rent collected
No matter who manages your property, you’ll need to keep rental-business records separate from your personal accounts. You want to see at a glance where the business stands financially and substantiate tax deductions in case of an audit.
You can deduct mortgage interest, property taxes and expenses related to the operation and rental of your unit, such as professional services (cleaning, painting, accounting, property management, yard care), supplies (paint, equipment, lumber, appliances) and travel in the service of caring for the property.
When the thrill is gone
The prospect of evicting a tenant is the nightmare hovering in the background of every new-tenant screening. Do the screening correctly and you should be safe. Still, things occasionally go wrong. If you must evict, don’t do it yourself — use an attorney who specializes in the area.
Consult the attorney if a tenant gets even one month late on rent and follow the guidance you’re given, since laws are quite specific about your obligations at this point and professionalism is crucial.
If landlord duties are keeping you awake at night, if a bad tenant is taking the fun away, if you must dig deeper and deeper into your savings to support it that when you need professional management. Rental property is a business, and if it’s not a business you like, let it go and stick to work you enjoy.