By Henry Hall, All Property Management
Toya, a human resources executive who lives in a large Midwestern city, figured she was a savvy investor with good instincts about people. The family needed a bigger home, so she started working the numbers. With the right tenant, she figured she and her husband could easily afford a new house by renting their current place at a small monthly profit.
Things went as planned, until month 12 when her tenant stopped paying her $1,500 rent.
Owning cash-flow positive rental real estate is a great investment, particularly at times when other investment options are providing lower returns. But new landlords should consider the many risks they’ll face and how to reduce their impact when plans go awry.
“I figured I could do it because I’ve worked in HR for years. I know how to check references. I know how to interview people. But there were some things I didn’t know,” Toya said about being a landlord.
For one, she didn’t know that laws in her state were geared toward the rights of the tenant, not the owner. And when she was crunching the numbers, she hadn’t considered how she’d manage expenses if she had to go for a month or more without a paying tenant.
When Toya’s tenant went deadbeat, a lawyer friend told her all she had to do was file for an eviction order and then sue for back rent. She did. Then she learned that tenants can string out evictions for weeks or even months. And during the delay, the landlord is left paying the mortgage, taxes and insurance.
After three months, Toya was informed she could take possession of her home. By then, she was out nearly $4,000. Adding insult to injury, she had to pay her former tenant’s overdue utility bills before the county would grant her a new occupancy permit. Fortunately, she and her husband were able to cover the costs out of savings, but it was an expensive education in landlording.
Here are a few tips Toya has for landlord newbies:
1) References: Require and check them. Both personal and professional.
2) Home Visits: Ask where your tenant lives and drop by to see how they keep up their current home.
3) Credit and Income: Check prospective tenant’s credit and income. You want to know a tenant has a history of paying his bills and they have the necessary income.
4) Understand Tenant Law: Either hire a real estate attorney or read up on the local rules in your community.
5) File early for eviction: Regardless of whether a judge agrees with you or not, courts tend to give tenants ample time to relocate. Be ahead of the curve. When a payment is overdue, file so that the court’s clock starts ticking and hope the tenant gets current before you have to follow through with the order.
Bryan Kinsey, an expert in property investor insurance products with AON, a Fortune 500 company, often speaks to real estate investment groups on the differences between home owners’ and landlord insurance.
“Most people who become landlords just call their agent and transfer their home owner policy into a landlord policy,” said Kinsey. “But there are unique programs to help protect you as a landlord and small business person.”
“We recently developed a product that will cover your lost rent for up to six months if you run into an issue with your tenant,” said Kinsey. “We developed this product specifically with the small landlord in mind who might be hurt pretty badly if they have to evict a tenant or, say, their tenant breaks their lease without notice.”
The best defense against a loss is to get a great tenant in the first place. But, sometimes stuff happens. In those cases understand how to navigate small claims court and make sure you have the best insurance possible.