Leasing, Tenant Tips for the Reluctant Landlord : Real estate: A self-help book explains the laws, rules and responsibilities of managing rental properties.
They were status symbols of the ‘80s: A pied-a-terre in the city, a house in the country, a bungalow near the beach.
Now many of those prized properties are symbols of financial frustration for families who can no longer comfortably maintain a second home due to changes in the economy or within their own households.
One way out, short of selling, is to lease the property.
But while leasing will help offset mortgage or maintenance expenses, it also presents a new set of problems to those unfamiliar with the legal and tax consequences of becoming a landlord.
“Landlords are small business owners,” said Ralph Warner, co-author of the first volume of “The Landlord’s Law Book,” a self-help book published by Nolo Press.
“Like any other business these days, you’ve got to take it seriously and understand the rules. If you don’t, you’re going to get creamed.”
Understanding the rules means knowing landlord responsibilities, like taking care of repairs in a timely manner and adhering to landlord-tenant laws against discrimination, as well as knowing the marketplace.
The first decision, though, that property owners have to make is whether to take care of the rental business themselves or hire professionals to do all or part of the work.
“It really boils down to the individual,” said Jonathan Pond, a Boston-based financial planner who has advised clients on the subject. “A lot of people don’t have the stomach to be a landlord, in which case, they need to find a local firm that handles rental properties.”
Property management companies, which act as independent contractors, can get the ball rolling by handling the initial leasing arrangements. They’ll find and screen prospective tenants, negotiate the amount of rent, collect the deposit and get the lease signed.
They can stay on afterward to collect rent and help maintain the property.
Most long-distance owners often need this kind of help to locate good plumbers, electricians or carpenters for repairs.
There are other obvious advantages. Good property managers know the marketplace, and therefore, know the going rate for rentals. (And it’s to their advantage get the maximum rent since their fees are often a percentage of what’s collected.)
Most important, though, is their ability to screen tenants and deal with them in a detached way.
Michael McCreary, owner of the McCreary Realty Management in Marietta, Ga., says he checks all applicants’ credit and employment histories and contacts prior landlords. Property owners can do the same, though most will be unable to personally gain access to credit reports, which are also useful for cross-checking information on past jobs and residences, he said.
“The past actions are the only indication of their future actions,” said McCreary, who is also a member of the Institute of Real Estate Management, a Chicago-based trade group that can provide names of certified property managers.
“The only thing you can gauge a person on for renting properties is their ability to pay and take care of the property. That’s the only thing you can discriminate against.”
Applicants who lie or make important omissions are automatically rejected, McCreary said.
“You can’t fall prey to a tenant’s sob story,” he said. “You have to say ‘no’ to a prospect if they don’t qualify. (And) you’ve got to be able to tell these people to get the hell out if they’re tearing the place up.”
The big drawback to hiring a professional manager is the expense. To take care of the leasing arrangements alone, property managers charge as much as a full month’s rent. To handle monthly maintenance and collect rent, the going rate usually is between 5% and 15% of the rent each month.
Therefore, the owner of a one-bedroom condo that rents for $500 a month could give up as much as $900 in income the first year: $500 for the leasing service and $75 each month. Repair work expenses also would come from the owner’s portion of the rent proceeds.
Fees for vacation rentals are significantly higher--more often between 20% and 30% of the take--because of the huge turnover of renters during a season.
“If you’re lucky, you can carry your property taxes and maintenance, but in many instances forget about the mortgage,” Pond said. “A lot of people buy vacation homes with the idea that they can rent them.
"(But) one thing I always caution those who are thinking about a second home is to always assume you’re going to get zero rent.”
Of course, many property owners are not landlords by choice. More often, they’re leasing property they couldn’t sell or maintain for whatever reason.
Detailed information on this market segment is hard to obtain. The most recent data from the National Assn. of Homebuilders in Washington said about 4% of the nation’s households owned approximately 5.2 million second homes in 1990. It expected increases each year through 1995.
“A lot of people backed into being landlords. The market fell and a lot of people got stuck,” said Warner.
Rental demand often reflects the overall market for real estate. When prices are soft, especially if there’s a building glut, it’s tougher to find tenants, experts say. But like all real estate, location is key.
For instance, a two-bedroom cottage five blocks from the ocean on the northeastern coast of North Carolina might rent for $500 a week, according to Jim Perry, who runs Jim Perry and Co. in Kill Devil Hills, N.C. That same cottage would fetch $800 a week on the bay and up to $2,000 a week on the ocean, he said.
Warner says many property owners can handle their own rental arrangements if they’ll invest some time.
His “Landlord’s Law Book"--which focuses on California law but is geared to all landlords--advises owners to first adopt a plan and to stick with it. “If you don’t treat all tenants more or less equal . . . you can fairly easily be accused of discriminatory conduct.”
The plan should include some basic decisions, like how much rent to charge, when it is payable, whether to offer a fixed-term lease or a month-to-month tenancy, and how much of a security deposit to require.
For some, it might be helpful to “shop the market” by reading ads of similar properties offered for rent and even visiting a few.
Warner says it’s also important to check with an accountant or a good reference book on applicable tax laws and to obtain a copy of a state’s landlord-tenant law. Co-op owners may also need to review the governing rules of a building.
Among the other suggestions in his book: Advertise the property in an honest, non-discriminatory manner; verify everything on an application; keep records of the screening process.
“I do think of it as a lot of common sense,” Warner said.