The real estate market continues to ebb and flow, and we hope you have weathered the storm. Perhaps you have even found yourself looking for investment properties amongst the foreclosures left in the wake. Many of our clients have seized the opportunity to purchase one or two-family houses, fix them up, and put them on the market to make a few bucks. Other clients decide to use it as an income producing property by getting a tenant. What could possibly go wrong? Before you try your hand at being a landlord, you should consider some of the following points I go over with every client:
- Consider an LLC: Insulation from liability is a critical concern for any land owner, especially a land lord. Protect your other assets from possible collection in the event of a lawsuit. If your tenant (or even one of their guests) is injured on your property, it can be a harrowing experience and potentially very costly. A successful litigant can reach beyond the property asset to your other assets if you are not properly protected. You can limit your personal liability if you own the property under a limited liability company. Note, that if you are borrowing money from a lender to purchase, make sure you tell the lender of your intention to acquire the property under an LLC or you may find yourself starting the loan process all over. If you’re not sure, have the contract list the buyer as yourself, or your assign.
- Important Documents When You Buy: When you purchase the property, get a copy of any existing lease as well as an estoppel letter. This letter, sometimes signed by the tenants and/or current landlord, can protect a buyer from future claims by a tenant that says they gave a greater security deposit or prepaid rent, for example. Think of it as a benchmark for the tenants and you as the new landlord; a way for the parties to establish where they stood with the old landlord and a tool to “estop” a tenant from changing the story when they vacate.
- Use a Lease: Although oral leases are valid and enforceable, there is no substitute for a well drafted written lease. A lease establishes important terms such as the rental amount, whether there is a security deposit, and who mows the lawn. By law, residential leases must be drafted in plain language, and it makes perfect sense to clearly delineate which party has certain obligations. Often, disputes arise when a lease is unclear about who is responsible to clear the sidewalks of snow and ice, or who is authorized to make repairs at the premises. Ambiguity breeds litigation.I don’t view a lease as an opportunity to take advantage of the tenant, however, when I draft leases, I make everything a tenant does wrong an explicit breach. If you want to evict a tenant because he/she leaves the yard a disaster, or doesn’t put the trash out to the curb, has a water bed, does drugs, etc. you want to be able to evict them and you may not be able to unless they are actually in violation of the lease terms.
- Do a credit check: Perhaps the single most important way to avoid a bad tenant is to avoid renting to them in the first place. Your realtor or attorney can provide you with guidance in running a prospective tenant’s credit. When taking an application, be sure to ask for the appropriate information you’ll need and consider in advance who will be paying for the credit application charge.
- Be Prepared for Anything: Calls in the middle of the night to fix a broken furnace, sob stories about why the rent is late, why they can’t get rid of the dog they never told you they had, etc. As a landlord, you must be prepared for anything. Expect the best but be prepared for the worst. One example is to take pictures of the premises at the beginning of the tenancy and have the tenants sign an acknowledgement of the condition of the property. This makes it much harder for the tenants to contest damages they may have otherwise argued were present when they moved in.
- Know the Law and Be Prepared to Litigate: Even the most apparently qualified tenants can turn sour and you may end up in Housing Court. Be prepared to litigate by taking measures to ensure that you won’t be in the hot seat if you have to take a tenant to court. In addition to providing essential services, like heat and water, a landlord should do things like keep the security deposit in a separate interest bearing account, collect only the legally permissible amount of security deposit, and not charge a tenant for utilities in common areas, etc.
The clients I find that are the most successful at being landlords are realistic and the most prepared. If being a landlord is something you’ve considered, or if you find yourself in the midst of a landlord tenant issue, give us a call. Let the experience of TMB help you achieve success.