There's no doubt about it: A good tenant and the right property can be a joy for a landlord's peace of mind and pocketbook, whereas the wrong pairing can be a nightmare for both. It's not easy finding the perfect balance between profit and the best match, but it's crucial to take the time to make the right choice for the good of your property. And, whether you recognize it or not, by renting your property through Airbnb or a more traditional method, you are the owner/manager of a micro business. And as with any business, there are important legal variables that you can't afford to gloss over.
Here's a checklist of five considerations, developed with Rocket Lawyer On-Call Attorney Mazyar Hedayat, to help you -- before embarking on a search for new property and tenants:
1. Understand the Local Landscape: It's not uncommon for landlords to reside in one state and simultaneously own commercial or residential property in another. Therefore, it's vital to understand the local landscape where your tenants reside in order to stay legally compliant. Seek guidance from a local agent who can assist you in the case of an unexpected event (tenant dispute, regulatory change, etc.). Even if you own property in your city of residence -- this still applies to you! Always familiarize yourself with local regulations and ordinances, especially in light of the emerging "Sharing Economy." Service providers in this space may or may not be legal dependent upon which city or state you happen to call home.
2. Know the Rules... Before You Buy: Consider this: You buy a condo and intend to rent it out for supplemental income, only to discover that the conditions of that development restrict you from renting to a third party. This error happens more often than you'd expect. Before purchasing residential property, always determine who the condo board is, and review the board's bylaws before making any purchasing decision. Some smart questions to ask include: What percentage of units are owner-occupied? What percentage is tenant-occupied? What covenants, bylaws and restrictions govern the property? Always ask for a copy of the bylaws before you buy to determine if you can live within them and make sure to review the property documentation with your attorney.
3. Don't Underestimate the Costs: Landlords and property managers often underestimate how much it costs to maintain a property. Many prospective landlords will only consider the costs of physical upkeep, repair and renovation -- fixing leaks, refreshing paint, updating light fixtures, replacing windows, upgrading countertops and recurring care for landscaping. However, there are also legal costs to consider. Always maintain liability insurance on the property and require renter insurance as a mandatory clause in your lease agreements with tenants. In addition, if the property is owned by an entity that you established, be sure to keep it in good standing by making mortgage and tax payments on time.
4. Do the Math: Big Data isn't just for techies anymore! Variables such as the average rent paid in a neighborhood, the occupancy rate of property, tax rates, the average income of residents and much more can be quantified. Some data will be expressed as numbers, others as a range, and still others as percentages. Whatever form they take, these are the factors that show you the real cost of owning rental property. Online tools like the recently-merged Trulia and Zillow provide resources like local experts and rental search tools that can help you find tenants and make informed choices about the value of your property. If you don't do the math, you take your chances in today's data-driven marketplace!
5. Keep it Consistent: When it comes to your relationship with your tenant(s), consistency is key. It's understandable if you occasionally allow your tenants to pay rent late -- so long as it's the empathetic exception. However, if you consistently allow your tenant to color outside the lines, it may damage your chances if you eventually decide to take them to court. A judge might be inclined to rule in favor of the tenant, viewing the lease as something you never reinforced or the tenant's behavior as something you never reprimanded. Always err on the safe side and remain consistent, instead of blurring the lines between what is and isn't acceptable.
Whether you're planning to rent property in your own city or out of state, following these set of considerations will better prepare you for a stress free management experience. And, as a general rule of thumb, always make sure you have affordable access to an attorney. An attorney knows the legal landscape and can assist you throughout the entire renting and/or buying process, helping you to be the best landlord possible while keeping your tenants happy and compliant with local and statewide ordinances.
Lisa Honey is the Business Lead for Rocket Lawyer's Legal Documents business line. She left the traditional practice of law after seven years in commercial and civil litigation to join Rocket Lawyer. She's licensed in California, Texas and Arkansas.