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Study up before becoming a landlord

Becoming a landlord can be a good way to make money if you play your cards right. But it doesn't happen overnight. Be prepared to do some homework before you get started, or you could lose money when you move and place your home on the rental market. 

The price is right

If you live in an area governed by a homeowners association, make sure the association allows rentals. If renting is an option, one of your first tasks will be setting a rent price. Landlords usually get a rough idea of rents in their area by looking at newspaper classified ads, says Robert Cain, publisher of the Rental Property Reporter in Portland, Ore.

You've been living in the home, so you know what it costs to run and maintain it. Can you rent it for enough to cover those costs? Can you even make a profit? If not, you might want to consider selling the property.

According to the U.S. Census Bureau, 38.4 million homes were rented during the fourth quarter of 1999 -- that is about a third of all homes.

Keep in mind that local laws may cap rent amounts and rent increases, so check with your state's housing services or consumer affairs office before making a final decision to rent out your property.

Making the leap

Joining a local apartment or landlord association can help you stay current with landlord-tenant issues. An association can tell you where vacancies are, enable you to talk with other landlords and provide state-specific lease/rental agreements.

Bill Moore, chief executive officer and president of Landlord.com in the San Francisco Bay area, says you can have a prospective tenant fill out any application form as long as it asks for the information you want. You need to make sure, however, that the lease or rental agreement upholds state law. Forms dealing with an eviction, a rent increase, or entering the dwelling also vary from state to state.

Know the law

Even though laws vary from state to state, Cain says essentially there are two landlord-tenant laws that are the same everywhere: tenants have all the rights of ownership except the right to sell the property or will it to someone. And the tenant has the right to live on the property as long as he can pay the rent. But he says tenants never have the right to trash the property.

Cain says a landlord is required to keep the property in a habitable condition, which means you have to have working locks on doors and windows, working heat and a roof that doesn't leak. But check your states' laws regarding landlord repair and maintenance responsibilities.

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Also, know the terms of the U.S. Department of Housing and Urban Development's Fair Housing Act, which prohibits discrimination according to race or color, national origin, religion, sex, familial status, and handicap or disability. 

Find tenants

Prior to interviewing tenants, it is important to know the discrimination laws and what questions you're permitted to ask the tenant. It may not be a good idea to rush through the tenant-selection process. Compile a set of criteria or standards to help you decide who would be a good tenant. Make sure applicants know what the standards are when they apply.

"I've talked to so many landlords who are just up to their nose in it because they've been stupid," Cain says.

Moore says you may want to set standards for the number of occupants, rent price, pets, security deposits, who pays utilities, minimum income requirements and whether you take HUD Section 8 participants. The housing authority gives economically disadvantaged people certificates or vouchers that guarantee the government will pay a portion of their rent.

Standards to consider
Income -- You can set a minimum. A common criterion is a gross income that equals at least 3.5 times the annual rent amount. You can require that other bills, such as contracted debt (rent, credit cards, etc.) not exceed a specified amount, but contracted debt can not include such things as utility bills, cable bills, etc. when doing the math.
Employment or income stability -- Lenders require at least two years in the same line of work to buy a home. You can require something similar.
Length of time at last residence -- Preferably at least two years at the last residence.
Evictions -- If the tenant has been evicted, you may not want him.
Home life -- You can take into consideration the length of time at the last residence, or complaints from previous landlords or neighbors.
Number of occupants
Number of vehicles
Smokers vs. non-smokers
Bad credit -- A tenant who does not pay someone else may not pay you either. Look for consistently late payments and collections.
Unverifiable information -- If you can't verify what the applicant has written on the rental application, do not rent to him.
Source: Jon Petrie, author of Landlord Secrets

When you find a prospective tenant, and they meet your criteria, the next step is to screen the applicant. This can include performing a credit report check, searching public records to see if the applicant has a felony conviction, verifying past employment and contacting previous landlords. Moore says long-term tenancy shows stability, and a good tenant always pays on the first of the month.

Cain suggests asking for identification from the applicants so you can make sure the address on the ID matches the address on their application.      

"The business the landlord is in is to provide housing. Many times they forget landlording is a business. There are only two times when a landlord gets in trouble," Cain says. "When he's in a hurry and when he feels sorry for somebody. The bad tenants have these incredible sob stories that may or may not be true."

If you'd prefer not to find a tenant yourself, there are tenant-screening services whose cost can range from $3.95 to nearly $100 for a full report on a married couple.

Yet, even a good tenant can go bad. So is it safer to rent to a friend or relative than a stranger?

You've got a friend

Jon Petrie, author of Landlord Secrets, cautions against renting to friends or relatives: "Well, you tend not to look at it from a business standpoint. What you would like to have is an arm's-length transaction. Then you are not obligated to anybody for anything."

By the same token, if you become friendly with your tenant, Petrie cautions against letting the tenant work on the unit, even paint the walls.

"If they make repairs on the house and somebody injures themselves, you could be liable for that," Petrie warns.

Vacancy filled

State laws vary regarding rent due dates and collection. But if you're lax in the beginning, you can have trouble enforcing the lease later. For example, Cain says if you accept rent late then turn around and try to enforce the initial due date, then you've already waived your right to require the tenant to abide by the rental agreement.

If you eventually find out that you've rented to a bad tenant -- such as one who is in arrears on rent or posing a danger to others -- don't let the problems get worse.

"It's important as a landlord that if you've rented to someone you should not have that you take action immediately," Cain says.

If you treat being a landlord as a business, then good customer service for good tenants wouldn't be a bad idea either. "Take really good care of your good customers because it costs seven times more to find a new tenant than an old one," Cain says. Perhaps give them gifts at lease renewal time to let them know they're appreciated.

Hiring out

If you're leasing your home out-of-state and you can't manage the property on a regular basis, you may need to consider a property manager. Property manager duties can include cleaning and showing the place, taking maintenance calls, and collecting rent. Costs can be as much as 10 percent of the monthly rent.

"[Property managers are a good idea] if you don't feel competent enough to handle it and think you'll blow it," Cain says. Such an arrangement might allow you to watch what happens in an eviction without having to do it yourself.

Eviction/termination

If a landlord wants to remove a tenant, he first terminates the lease and then evicts the tenant. Termination is notice from the landlord that the tenant has to move out by a certain date. There are different types of terminations that vary depending on state law.

Eviction is a legal process in which the landlord has to justify in court why the tenant has to move. Cain says evictions are costly, and in some places you will have to hire an attorney. States have specific laws outlining the eviction process, and if the landlord doesn't fulfill requirements, they could lose the eviction case. Cain says the most common way to lose an eviction is by filling out forms incorrectly or harassing the tenant. He says you can't bother a tenant once you have filed an eviction.

"It's really upsetting," Cain says, "to have to do an eviction -- both for the landlord and the tenant."

-- Posted: March 29, 2000

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