Now that it seems you can purchase a decent rental property for less than a Honda Accord in Indiana, many clients at Halcomb Singler, LLP, are interested in becoming landlords. On the other hand, I am also seeing many people filing bankruptcy who are doing it in large part due to the expense of owning rental properties. So, I wanted to write an article about a few things I don't believe people consider before purchasing a home to rent out. Here are my Top 10 Factors to Consider or Do before becoming a landlord:
1. Make sure you can afford to make both your mortgage payment and the rental property payment;
2. Make sure you can afford to repair the home each time a renter moves out and don't assume the security deposit will cover the repairs/cleaning;
3. Have an attorney prepare a lease agreement for your rental;
4. Do your homework on your renter;
5. Consider whether you should create a legal entity for your rental property business;
6. Consider whether you have tough enough skin;
7. Know what your lease agreement says;
8. Are you willing to take the 3a.m. telephone call?;
9. Understand your responsibilities as a landlord when the tenant moves out;
10. Find out about the eviction process. Are you willing to do this?
1. The number one consideration should be can you afford it? By this I mean that you cannot count on renters to make timely payments (or to make payments at all for that matter). So, if you are considering purchasing a rental property make sure that you can afford to make the payments for an extended period of time if the renter fails to do so or if the property sits without a renter for an extended time;
2. Make sure you have the funds to repair a property after a renter moves out. I am not just talking about a shampoo cleaning of the carpet and some paint touch-ups. Unfortunately, some renters will have no respect for your rental property and will do things like put holes in walls, break appliances and generally fail to clean for what looks like years. Don't assume their security deposit will cover it. Make sure you have some cash reserves to pay for repairs;
3. Please, please, please do not print a lease agreement from the internet or borrow one from a friend who owns a rental property. This is a really bad idea. The lease agreement states the rights and responsibilities of either party and it is of the utmost importance in your landlord/tenant relationship. I have seen clients with terrible lease agreement that did not afford them the right to recover attorney fees or costs of collection. Some lease agreements will state a preferred venue that is not even in the same state. The bottom line is that an attorney can draft a lease agreement that is specific to your situation. I know most people don't want to pay an attorney to draft a lease, but in the realm of attorney charges this is a low cost and it could very well pay for itself in the event you have to evict a tenant....sorry, by if you have to evict a tenant I mean when you have to evict a tenant;
4. Make sure you check out your renter! The difference between loving your new role as a landlord and hating it is the renter. Some renters will pay a day early each month and leave the rental spotless when they move. Other renters will pay 7 days late each month and move out in the middle of the night after trashing the place. One easy way to help minimize your chances of having a bad renter is to have them complete a rental application...but don't stop there. You could also ask them to provide a recent credit report. In addition, many counties have civil court dockets online. I always encourage landlords to look up the last name of their potential renter in Hamilton County, Indiana. On more than one occasion a landlord has looked up a potential tenant only to find out that they had been evicted several times in the past year. Although there are never any guarantees, the more financially stable your renter the more likely you will receive your rent on time and have a great rental experience;
5. I recommend that you meet with an attorney to see whether you need to set up a business entity to protect yourself from personal liability. The pros and cons of this are beyond the scope of this article, but it is something you really need to sit down and discuss with your attorney;
6. Think about whether you can really handle being a landlord. Landlords often have to make tough decisions, such as to evict a family with nowhere else to go due to an illness or to evict a widow who lived on her late husband's pension who could no longer afford to pay the rent. As a landlord you will likely hear many stories of hardship. Some of these stories will be true and some will be untrue. However, unless you are in the market to run a charitable organization you will have to be willing to put your foot down if the rent isn't getting paid;
7. Once you have had a lease agreement drafted, know what it says. If you don't understand have your attorney explain it. At the very least you should know when the rent is due, what is the term of the lease, when is the rent late, what is the late fee and when, if at all, you have the right to inspect the property;
8. One of the greatest benefits to being a renter is that you don't have to deal with home maintenance, you just call the landlord. So, consider whether you are willing to take the 3a.m. telephone call about the hot water heater leaking and flooding the basement. I can say from my personal experience that this was my deal-breaker. My husband is in the military and was interested in purchasing a rental property. However, I am not willing to take calls in the middle of the night (or really during the day) from renters when he is deployed overseas. I also didn't want to have to worry about whether the rent was being paid or field a call about a clogged toilet, etc.;
9. When a tenant moves out at the end of their lease a landlord will have certain responsibilities. In Indiana a landlord has a specific number of days to either return the security deposit or give the tenant an itemized list of the damages/charges for the difference. Failure to do this can result in major costs for the landlord. Again, it is important to meet with an attorney to know what you should do when your tenant moves out;
10. The eviction process differs from state to state and even somewhat from county to county. Find out how the eviction process works in your state. For example, in Hamilton County it is probably going to take about three (3) weeks on average to get someone out of your rental. The judge will typically not order a renter out the minute they leave the court proceeding, but will give them about five (5) days to pack up and move out. And there may be a second hearing set at a later date to determine what, if any, damages there are to the property for which the renter should be responsible. In addition, you will need to go to Court. In some situations you may be required to have an attorney represent you in Court and there is a chance that your renter could turn around and countersue you for something whether it be warranted or unwarranted. If the idea of testifying in front of a judge makes you shake in your boots being a landlord is probably not for you.
If you follow the top 10 list it should help your rental experience. However, many people are currently sitting on many rental properties that they can't rent for the amount of the mortgage, that they can't rent for whatever reason or have bad tenants. I have met with many people regarding their rental properties for whom it makes sense to file a bankruptcy to surrender the properties because they are losing money, causing stress and there is no end in sight. If you would like to meet with me because your rental properties are causing serious financial hardship in your life and you live in Indianapolis, Carmel, Noblesville, Fishers, Zionsville, or any of the surrounding areas feel free to contact Halcomb Singler at 317-575-8222.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses
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