If you fantasize about building a stable of rental properties over time that will provide a steady stream of income during your retirement years, you are not alone. Some savvy landlords do just that very successfully. Others who inherit a home, own a vacation condo, or move out of a start-up residence think that holding a property and renting it out is a smart economic move. Many times it is, but before you put out the “For Rent” sign, there are certain truths that you must accept.
Entering into a landlord-tenant relationship can mark the beginning of a long-term relationship, or it can lead to a stressful, perhaps financially untenable situation. If you plan to act as your own property manager, spend a little time and money up front to ensure that you have all the legal bases covered. Always get all agreements signed, run credit reports and check references, and be certain that you receive a cash deposit (or that the check has cleared) prior to allowing a tenant to move in.
Make the Lease Agreement Work for You
In these days of the digital age, you can easily find sample lease agreements online. The problem is that boilerplate legal documents often do not reflect state and local laws that can have a serious impact on your property rental business. Make no mistake, when you become a landlord, you are conducting a business, and you can suffer damages if you do it incorrectly.
Obtaining a legal opinion to assure your agreement meets all local requirements is well worth the effort. Not only will you be protected in case of a problem, but you will be informed about your legal ability to collect rent and late fees, to charge for damages to the property, to initiate eviction proceedings if necessary, and to enter the property for purposes of periodic review and inspection.
Major points to consider include:
• Lease term and renewal options; i.e., one-year or month to month. At the end of the specified term, is the term automatically renewed and, if so, for what period of time? What about rental price increases?
• Utilities and Repairs: Who pays for what? What happens if bills are not paid, or if repairs are not made?
• Payment dates, grace periods, and penalties should be defined and specified. Possible further action must also be defined, i.e., termination of lease, eviction, payment of total lease obligation, etc.
• The timing and reasons for withholding funds for security deposits, damage assessments, and refunds must be stipulated.
• Insurance coverage requirements for the property itself and for personal belongings should be included, along with procedures in case of emergencies.
Making Sure Renting Is Worth the Effort
As tempting as it may be to become a landlord, analyze your situation thoroughly. With only one -- or a few -- properties, you probably won’t get rich. Put aside a set portion of the rent to cover necessary maintenance and upkeep, and set a budget based on 10 months of yearly occupancy, rather than 12. Having a financial cushion is at least as important as having the legal backing that you need to act as a property manager.
There are two last pieces of advice from those who have had the experience:
First, never lose your sense of humor. And, second, never let your heart get in the way of business. As an example: If your renter has a problem paying the rent on time one month, try to be understanding. If problems occur regularly over the course of several months, get serious and get down to business. Invoke the clauses in the lease agreement that cover such contingencies, and be firm. Remember that the binding agreement between you and your renter is designed for your protection.
Acting as your own property manager can be rewarding, financially and otherwise.