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Current demand for single family rental homes is driving rent prices up. With the housing down turn and economic crisis, families have been reluctant to buy a home, and banks have been slow to lend. These same families have the money, the credit, and the desire to live in a home rather than in an apartment—hence the demand and the rising rent prices.
Because of relatively high rent prices and relatively low sale prices, home owners who want to move or build a new home are renting out their homes rather than selling them and taking a loss. This strategy is similar to holding a stock while it is on sale and waiting until the prices rebound to sell the stock at a profit, all the while collecting a dividend each month the stock is held. People who held onto their stocks, or even bought more, during the down turn are smiling today.
While the strategy sounds great, what are the risks?
When you rent your home to a tenant, you enter a new world: a world with rules, penalties, traps, and unknowns. How can you protect yourself and your investment? How can you limit your risk? What are the dangers and what can you do about it? Let’s look at a few of the most important.
• Applications--Ben Franklin said, “An ounce of preventions is worth a pound of cure.” Doing your work up front qualifying tenants can save you money and headache later. Some people use the “feeling” approach to tenant qualification. The landlord meets the person and depending upon how they “feel” at the meeting, accept or reject their application. There are two problems with this approach. Ask yourself this, “When I make decisions in my life based solely on feelings, how did they turn out?” While emotion is always part of our decision making, our best decisions are made when we base them on data. We look at Consumer Reports when buying appliances, reviews when buying on line, or gas mileage and horse power when buying a car. The second problem involves Fair Housing law. Without a written policy of standards for accepting or rejecting an applicant, you can easily be investigated for discriminating based upon race, religion, sex, age, etc.
• National Criminal Check
• South Dakota Criminal and Civil Check—A national check does not pull criminal or civil crimes committed in South Dakota. You have to have the court house pull the records for you. Current cost is $15. This report will show you speeding tickets to felonies. http://www.sdjudicial.com/courtinfo/cricivrecords.aspx
• Credit Check—you need permission from the tenant to pull this information and you need to know the laws on how to handle the info once you have it. For example, you cannot share it with anyone, including the tenant. (They can go to the credit bureau for a copy if they want it.) You must keep the reports under lock and key, etc. On this report you are looking for collections, judgments, bankruptcies, and a history of paying their bills on time.
o Landlord references—Talk to their previous landlords to find out how the applicant treated their property, if they paid on time, left owing money, and kept the terms of the lease.
• Sex Offender Check http://sor.sd.gov/
• Verify employment and make sure the tenant makes enough money to pay the rent each month. Depending upon the property and what is included in terms of utilities rent can range from 30-40% of gross income.
• Federal Fair Housing http://portal.hud.gov/hudportal/HUD?src=/program_offices/fair_housing_equal_opp Federal law prohibits discrimination based on the following 7 classes. 1. Race 2. Color 3. National Origin 4. Sex 5. Religion 6. Familial Status 7. Handicap. Refusing to rent to otherwise qualified tenants because they are members of these classes can result is hefty penalties. South Dakota adds two more protected classes, 1. creed 2. ancestry. Knowing and keeping the law can save you thousands. It is also the right thing to do.
• Legal Documents—You must have a lease. You could have an attorney draft one for you. Or, a great way to save money and add value is to become a member of the South Dakota Multi Housing Association. http://www.sdmha.com/ As a member you have access to their leases, pet addendums, notices, ect. They have lots of education on various topics concerning landlord/tenant issues such as bed bugs, companion animals, etc. In addition you are supporting an organization that is a voice to the city and state government on behalf of landlords. Property management companies also have their own leases, notices, and legal documents. Hiring a manager gives you access to all their documents, systems, and experience.
• Conduct regular inspections—Because you have done your homework upfront in terms of qualifying tenants and singing a written lease, most likely you will have minimal problems with your tenants. However, conducting regular inspections inside and out help you make sure the tenant is abiding by the terms of the lease and not damaging the property. Make sure to give the tenant notice or you could be trespassing. In addition, regular inspections help keep up with maintenance items.
• Insurance—when you turn your home into a rental, you must talk to your insurance agent. Often your premiums can go down because you are no longer insuring personal property, only the structure. Also, many insurance policies will not cover things like water damage from a pipe burst if the property has been vacant for more than 30 days. 30 days goes by very fast once you move out and have listed the home for sale or rent.
• Know the South Dakota Land Lord Tenant law. The law is quite short, so read through it. This is the law governing how you the landlord must do business. http://legis.state.sd.us/statutes/DisplayStatute.aspx?Statute=43-32&Type=Statute
• Besides these six important considerations, you must think through the following issues
• Will you accept pets? How will you set the rent price? How much does vacancy and turn over cost? How will you take care of maintenance? What other liabilities will you incur by renting out your home? How will you handle collections, evictions, and the return of the security deposit? How will renting my home affect my tax liability? You can see my blog for more on these topics www.expressrpm.com and click on “Online Tools.”
Renting your home can be rewarding when you take the proper precautions. The market is presenting a great opportunity to either rent your home or buy several rentals as investments. If you educate yourself and hire the correct professionals you will have gone a long way to becoming a successful and profitable rental property owner.
Bio: Josh Kattenberg is the owner/manager of Real Property Management Express specializing in the full service management of single family homes, plexes, and small apartments in Sioux Falls and NW Iowa. Real Property Management Express is part of the national Real Property Management family which manages tens of thousands of properties including the portfolios of the three largest national mortgage banks. He is the father of two toddlers. In his spare time he enjoys rock climbing, Ultimate Frisbee, and works as a volunteer EMT.
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