Drive down just about any residential street in any city, and answer this question: Of all the homes you see, how many are owned by the occupants? Eighty percent? Seventy percent?
The answer is that the U.S. homeownership rate has fallen to 65.6%, according to the U.S. Census Bureau. That’s right. Over one-third of homes across America are rentals.
“For many people who have the cash to invest and want become landlords, it might seem to be easy,” says longtime landlord and Santa Maria, Calif., resident, Jim Bull. He added, “This would be a great mistake.”
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Just what does it take to get into the business of being a landlord and avoiding financial and legal pitfalls? From his over 30 years of experience as a rental property owner, the retired Santa Barbara County deputy sheriff lists these keys to failure.
1. Fail to check out prospective tenants. Assume what they put on their application is true. Don’t do credit checks: Just save the money instead.
Consequences: Getting a bad tenant, incurring damage to the property, and going through an eviction process. To avoid trouble:
- If your state law permits, obtain the applicant’s Social Security number and provide this to a local credit reporting agency, which will research employment, payment and credit history, as a well as past residence addresses. Have a background check done that looks into criminal records and past evictions.
- Drive by the place where they are currently living to see how the property is being maintained. Speak with their current landlord and ask if they would rent to them again.
- Verify all personal references. With unmarried couples, obtain credit/background checks on both and have each sign the rental agreement.
- Use Google Earth to see all prior addresses the applicant lists. One applicant put down that he had lived at a certain address in Corcoran Calif. In checking it out, it was the state prison!
2. Refuse to spend money to keep the rental in good condition and when emergency maintenance issues arise tell your tenants to fix them on their own. Soak your tenants and raise the rent way beyond what is reasonable. Acquire a reputation as a slum lord.
Consequences: Nonpayment of rent. Your property will be damaged, holes punched in walls by angry people, the lawn and plants will die due to a lack watering. Tenants will move. You will have higher rates of vacancy, which will attract vandalism and squatters. To avoid this, when things break that are your legal responsibility, fix them right away. Do not own a rental that you would not be willing to live in yourself.
When a tenant moves, replace whatever is needed to make the property attractive and justify a higher rent. Then, tenants will not move out to find a cheaper place. You will have happy renters who will take care of the property and appreciate what you do for them. They will stay there for many years, especially if you keep rent under market and avoid unnecessary rent increases.
3. Don’t become well educated with the requirements of your state’s landlord-tenant laws. Don’t buy the Nolo book for landlords. Fly by the seat of your pants, and when a tenant refuses to pay rent, turn off the water, electricity or harass them to move out.
Consequences: You will be sued, fined for civil code violations, and become the victim of a violent tenant.
4. Illegally enter the tenant’s dwelling. Just drop by anytime you want to “check out the place.” Use your key to go inside without giving proper notice, or for a proper reason.
Consequences: Discover that even though you are the owner of the property, you just committed criminal trespass. Be cited to appear in court.
5. Fail to have a rainy-day fund for unexpected repairs. Just tell your tenants they will have to take cold showers for a month before you can afford to put in a new water heater.
Consequences: Discover that in most states they can install it themselves and deduct the cost from their next month’s rent. Realize you violated the warranty of habitability. This is a code violation that could drag you into court.
Jim Bull concluded our interview with these cautionary remarks for anyone tempted to get into the rental business:
“Real estate ownership is a job, and like any, you must know what is involved ahead of time before you decide to become a landlord. A good tenant will eliminate many frustrating and disappointing situations. In over 30 years, we have never had to evict anyone.”
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
