A bad tenant is what can cost a landlord the most money. Some 95 percent of tenants are good. They pay the rent on time, take care of their homes, and are good neighbors. But bad tenants have a knack for sniffing out landlords who are less than diligent or less than expert in tenant selection. It’s almost as if they have a built-in radar for tracking down landlords who don’t screen well. Tenant selection is a job that is easy to learn but hard to practice because bad tenants are often people who are expert at weaseling their ways in to rental properties owned by landlords who decide to rent to a tenant while they are listening to him and get snookered by a sob story.
The bureaucrats in government seem to have it in for landlords. They pass laws specially aimed at rental property owners and apparently consider landlords fair game for any and all regulations and enforcement activities. It is all but impossible to know all the laws that affect rental property. They are hidden inside federal, state and local laws and regulations and come out to destroy landlords’ businesses when the landlords least expect them.
In addition, often the property taxes on rental properties are higher than those on owner-occupied properties and, in addition, may be subject to licensing fees and inspections from city workers, all at a cost to the landlord.
Especially dangerous is the Fair Housing Act. Without knowing it, the uneducated landlord can fall prey to a Fair Housing violation. Some of the seemingly most innocent misstatements or comments can result in a complaint that can cost upwards of $5,000 even if the landlord is found to be totally blameless. Imagine the cost if a landlord actually broke the Fair Housing law.
You are lucky if you get a long-term tenant, one who stays for several years. Normally, though, figure about one vacancy per unit per year. If you own a single-family property, that means that once a year you have to find a new tenant and have a 100 percent vacancy rate. Figure the cost of each vacancy is at least one month’s rent. Think about it. You will have to get the property ready to rent, the cost of which can vary from simple cleaning and polishing to painting and re-carpeting to fixing major damage.
That’s not to mention your marketing costs. Of course, ads on Craigslist are free and often are successful, but you still have to write them and answer the phone calls. Then, there’s the time involved driving over to the property to show it and waiting for someone who may or may not show up.
Prepare to be hatedHave you ever noticed how every time a rental owner is portrayed on a television program, he or she is the epitome of either disgust or evil? How that came about is something of a mystery, but rest assured that many people suck right in to that belief and resent the fact that landlords saved their money, invested it in real estate and actually want to turn a profit on that investment. Even some of your “friends” might turn against you. Or not.
The best way to avoid many of those hassles is to hire a property management company to take care of your property. That can be an excellent idea. It also can result in your losing your entire investment.
Not all property managers are diligent and look out for their clients’ interests. Too many are sloppy, lazy, incompetent, underfunded, mismanaged and generally a bad idea. You need to interview property managers just as you would any contractor.
In addition, figure that the property manager is going to take 10 percent right off the top, thus cutting into your expected profits.
Do you know all these pitfalls? Have you thought them through thoroughly and how they can affect your business? Have you decided that you can deal with each of them successfully? If so, you will want to read next week’s installment. In that, I’ll discuss why and how owning rental property can be a good idea and a great investment.
Part 3 Next Week