Should you invest in rental property?
Recently, two old friends stopped by my office. When my assistant buzzed my line and told me who was there, I grew very curious.
I hadn’t spoken to them in nearly 20 years, and we live in the same town. Everyone was just too busy.
After the usual “How have you beens,” we got to the heart of the matter. They had a wonderful real estate opportunity, they said, and wanted to discuss it. Nearly in unison, as if they had rehearsed the speech, they explained how they wanted to invest in a great deal, a rental property.
I stopped them right there, mid-pitch, with a warning that owning rentals can be an extremely difficult undertaking. They immediately told me about the possible financial gain. “You need more than that,” I replied, adding that they should have a passion for it, too.
After a lot of back-and-forth, they appeared to grow more and more disappointed that I was not endorsing this idea. But we pressed on.
“What is your issue with being a landlord?” they asked.
Then I told them what happened to me.
About seven years ago, I was involved in a local real estate deal. After the purchase, the tenants moved in, and things started out on the right foot. Within a few months, however, the husband lost his job, and they could not pay the rent. When the payment was due, I called them to ask when I could pick it up. They broke the news and said they would pay me something soon. A month went by. I started calling weekly for a status update, and then the communication just stopped. They did not take my calls and would not answer the door. After two months of no communication, I needed to take action.
Although I felt terrible about evicting them, I could not afford to keep paying the rent. I went to the district court and filed a complaint. Because the courts are extremely busy, the case was not heard until a few weeks later. Then the tenants transferred it to housing court to buy more time. Fast-forward a few weeks more, and the court was finally going to reach a decision in my case. I was confident, thinking that the court would immediately give me possession. The tenants hadn’t paid me in a few months. The court gave them an additional two months to vacate (it was winter and they had young children) and required them to pay $100 per month until the back rent was paid. Not a good situation for me.
After I finished my story, my old friends asked me for advice on how to prevent problems with tenants.
I gave them a few suggestions:
■ Do a credit check on the prospective tenants.
■ Get recommendations from their prior landlords.
■ Don’t hold title to the property personally to avoid a lawsuit targeting you individually.
■ Set up a separate escrow account for the security deposit. It’s illegal to commingle funds and use the deposits for other items. Hold it. Don’t spend it.
■ Walk through the property with the tenants before they move in, noting, and agreeing on, any existing damage.
■ Do monthly inspections of the property.
But what about tenants behind on their rent? How do you avoid that?
You can’t. It’s one of the risks that makes being a landlord so difficult.