Being a landlord may sound simple, but there is more to it than just running an ad, getting a great tenant and collecting a monthly check. So, what are the financial, legal and ethical obligations around managing a rental property? And how can you avoid the most common mistakes landlords make?
Today on Property Management Brainstorm, Bob is flying solo to walk us through the top ten mistakes made by landlords. He explains why it’s crucial to view your rental property as a business, understand the financial implications of renting your property, and maintain adequate records.
Bob discusses a landlord’s responsibilities around legal compliance, deferred maintenance and proper insurance and shares how to set a realistic rent rate, market your property and respond to inquiries. Listen in for insight on establishing a consistent tenant screening process and weigh the pros and cons of self-managing your rental versus hiring a property manager.
A time-stamped transcript of this episode is below.
Topics Covered
[2:27] Bob’s 20 years of experience consulting with prospective and existing landlords
[3:19] Why it’s crucial to view your rental property as a business + what questions to ask yourself before becoming a landlord
[4:34] Understanding the financial implications of owning a rental property
[5:20] A landlord’s responsibilities around federal, state and local legal compliance
[6:23] Maintaining adequate documentation and record keeping
[8:23] The two types of insurance policies required for a rental property
[11:13] How to set a realistic rent rate for your property
[12:45] Marketing a rental property + responding to inquiries
[14:08] Establishing a consistent tenant screening process
[15:38] Bob’s advice on having a sufficient lease agreement
[16:28] Responding to tenant requests and setting aside reserves for deferred maintenance
[17:49] The pros and cons of self-managing a rental vs. hiring a property manager
Connect with Bob
Email info@ncpropertygroup.com
Resources
California Civil Code: Hiring of Real Property
Reach Bob and his team through the North County Property Group ‘Contact Us’ page: https://www.ncpropertygroup.com/contact.
The new eBook, Best Practices for Renting Your Home, is offered as a free download on the North County Property Group website at https://www.ncpropertygroup.com/ebook!
Sponsor
Reduce hassle and improve your operating income through smart property automation and connected devices from PointCentral. Click on this link to learn more and get a free HVAC analytics test when you place your first order! www.pointcentral.com/brainstorm/
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Bob Preston: 01:44 Welcome, welcome, welcome to the Property Management Brainstorm show. I'm Bob Preston, your host as usual, broadcasting from our studio at North County Property Group in Del Mar, California. If you're new here, please subscribe so you have access to all our great episodes and if you like what you hear, please pay it forward with a positive review. Today's episode is going to be a little different because it's just me today kind of flying solo, if you will, and I'm going to discuss my top 10 list of landlord mistakes. I thought about doing this as one of my Five Minute Fridays, but the content is pretty extensive, and it would be tough to cover it in five minutes. So, what the heck? I thought it best to offer this up as a full episode of Property Management Brainstorm, so Fasten your seatbelts in. Here we go. Being a landlord can be a satisfying and monetarily compensating experience that because of the time and cash required and purchasing and owning a rental home, maintaining and leasing the property, the choice to become a landlord involves some serious consideration.
Bob Preston: 02:42 Through the years of owning my property management business, North County Property Group, I've consulted with hundreds of owners of San Diego residential properties who are landlords or were maybe considering becoming a landlord. Some of these individuals were coming to us because they had made mistakes along the way or perhaps even had a property who made mistakes that they were trying to undo. I'll also admit, you know, we've not been perfect over the years and we've made some mistakes along the way, which we've learned from and any viable property management company would admit to the same. Today's episode, I'll be sharing what I've seen and my 20 years of being a landlord as the top 10 mistakes commonly made by landlord. So here we go. Mistake number one, not viewing your rental property as a business. Another way of phrasing this might be being too emotionally vested in your rental property.
Bob Preston: 03:30 I hate to break it to you, but being a landlord is equivalent to running a business, it's not easy as some may make it sound. You run an ad, get a great tenant, collect a monthly check. Simple, right? Well, Hey, hold on a minute. Not so fast. Being a landlord comes with many financial, legal, and ethical obligations. I always encourage my clients to consider and honestly answer some of the following questions before embarking on becoming a landlord, such as, am I ready to share my home with another person or does that feel strange? Is it going to bother you thinking about a person living in your home using your appliances, sleeping in your bedroom, using your bathroom? Am I too emotional about all the great times spent at the home with my family? Another good question to ask yourself is, am I levelheaded and can I remain calm and reasonable when conflict resolution is required with a tenant?
Bob Preston: 04:18 If you answered no to any of the above questions or maybe you're not sure, don't worry. Most people get a bit nervous when reviewing this list, but if you're not completely confident in handling all these items properly, you could still be a landlord, but in that case, it's probably a good idea to consider hiring a property management company. Common mistake number two, not understanding financial implications of being a landlord. It's extremely important to understand your financial implications. Even the basics such as what rent rate can be expected from the San Diego investment property, what the expected gross yield would be, and ultimately what is the projected return or loss after all of your expenses. I get it. Some homeowners become accidental landlords and end up renting their home as an interim step and determining the long-term strategy for the home, but even in those cases, a landlord should know at least the basics of how the property is expected to perform and the financial implications of renting it.
Bob Preston: 05:12 As a San Diego property management company. We help our clients crunch these numbers all the time and we'd be happy to consult with you regarding a financial analysis of your home as well. Number three, this is a big one. Failing to stay within legal compliance as a landlord, you will need to have a solid understanding of your state's landlord and tenant law. There are also federal aspects of housing law pertaining to fair housing and reasonable accommodations for service animals. You will also be responsible for compliance within a local ordinance building and housing codes and licensing such as city business license or rental permit within your community. These laws can range from simple things such as placing smoke and carbon detectors and the proper places within the homes to more serious such as prohibiting landlords from discrimination against protected classes. In many cases, your HOA may even have bylaws which you will need to be in compliance with.
Bob Preston: 06:07 It's important to remember that these laws apply to your advertising casual conversations with prospective tenants and screening selection of tenants. If you say or do the wrong thing, you can be held responsible for your violation and misconduct as a landlord and subject to lawsuit or penalties by the regulating agency. Number four, inadequate documentation and record keeping. An important part of your rental property business will be accounting and record keeping. You must keep accurate records and retain the supporting documentation of your income and expenses on each property in case of an audit. You'll also need to keep really good records pertaining to the tenant such as move in, move out inspections, photographs and things like this as well. As mentioned earlier, it is also important to track the financial implications of your rental property to determine the performance and for providing records to your tax advisor and preparation of your federal and state tax returns.
Bob Preston: 07:01 My recommendation is to start with best practices right away and stay on top of it by spending a few minutes every month. You don't want to be scrambling at tax time to pull together property records. You also don't want to be caught unprepared when your tenant is ready to move out and you don't have good records on the condition of the property when they happen to move into the property the very beginning of their lease. Keeping such records can be as simple as a pad of paper, an envelope with receipts to track income and expenses, photographs, things like that. Or you can use computer programs such as Microsoft Excel, Word, Quicken or even QuickBooks. If all of this sounds complicated and too cumbersome, a San Diego property management company might be the way to go. For example, at my company, North County Property Group, we just finished our year end accounting statements and tax documentation process for our clients.
Bob Preston: 07:49 They can then simply provide these documents to their tax preparation advisor and have electronic records in case of an IRS audit. Regarding move ins, move outs, photographs and things like that. We have access to inspection software that provides for that entire process and we can certainly keep on top of all that. One of my mottos is document today as if you're going to be in court tomorrow. You want to make sure you're well prepared with all of your tenant interactions and particularly documenting property condition and move in and move out when it comes to the security disposition process at the end of the lease. Common mistake number five. Improper insurance policies. In the scenario of long-term rentals, which are typically unfurnished, rented under a 12-month lease, there are two types of insurance policies that should always be required by landlord. The first type of insurance is a rental dwelling policy purchased by the owner of the property.
Bob Preston: 08:42 This is substantially different than a typical homeowner's policy, but you would be surprised how many landlords are still renting their property under their original homeowner policy. The rental dwelling insurance policy is different because it should be a minimum of 1 million public and premises liability insurance. This is likely more than would be provided by homeowner policy, mainly because a renter is now living in the home. It's important also that your insurance company knows that the home is being rented and is occupied by a tenant. The insurance company might deny a liability claim by a tenant if you do not have a rental dwelling policy secured on your property, but instead have the basic homeowner's policy. The rental dwelling designation is also critical if the house were to become uninhabitable due to catastrophic or major incidents such as a flood at the home and the tenant is required to move out of the property in such a case, the insurance would pay the property owners lost rent during the rebuilding period. The second type of insurance I always recommend be required is renter's insurance obtained by the tenant to protect their personal belongings and provide tenant liability coverage. In addition to protecting the tenant’s belongings, renter's insurance protects the landlord if something should be caused by the tenant that damages a home, say a bathroom flood or kitchen fire caused by the renter. Renters insurance would also pay for temporary housing for the tenant if the home were to become uninhabitable for no cause of theirs.
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Bob Preston: 11:14 Landlord mistake number six, set in the rent rate incorrectly. I see many examples of landlords setting their rent rate based on hearsay in the neighborhood, kind of what I call mailbox talk or from perhaps what I call breathing their own fumes, so to speak in regard to their own opinions of their home's worth and value. My advice in setting the rent rate is to do your homework in advance and have a rent range that you have in mind that is realistic and conservative in relation to the current real estate market and market comparatives. Remember as a landlord you can set the rent rate at whatever you want for your property, but ultimately the market, what the rental rates should be. Just as there are rent rate analysis tools available to property owners of perspective. Tenants can search for market comparatives as well and easily reference the Zillow's estimate of the market rent value on any home.
Bob Preston: 12:06 If you list the property at too high of a run rate, you may not get any inquiries at all and it may sit vacant on the market for weeks. Set the rate too low and it may not cover your expenses. Don't forget to consider seasonality also as a factor when listing your property and setting the correct rent rate and our rental market. For example, in San Diego County, we experience a slowdown in long-term leases during the summer months of July, August, and again in the holiday season of November and December. If new clients wish to list their property during any of these seasonal times, we encourage them to sharpen the pencil a bit on their rent rate to have the best chance of getting the property leased during the slower market period. Landlord mistake number seven, inferior marketing and slow response rate to inquiries. I speak to a lot of prospective clients and many of them think it is easy to get a property rented in today's market.
Bob Preston: 12:57 I always make it clear that it's just not about getting it rented. It's also placing a qualified and reliable tenant who will be responsible and care for the property like it's their own. There's a lot more involved in this process than placed in a quick Craigslist ad and waiting for the phone to ring. This means you will need to take the time to create an accurate well-worded description of the San Diego property with top notch photographs within legal boundaries of fair housing laws. Video tours of the home are also useful and giving a virtual representation of the property and your advertisements should also provide a factual summary of the specifications of the home such as square feet, number of bedrooms, bathrooms, pet policies, etc. Have you thought about all this? Are you skilled at writing these kind of property summaries and ads? Many of the property listings I see are incredibly bad with poor photographs and really bad listing descriptions, so even if that Craigslist ad gets you a lot of phone calls and email inquiries, what do you do then?
Bob Preston: 13:48 How do you know who to rent it to? How do you show it? How do you get people there? Who's going to answer the phone and the texts when you're at work? Who's going to show the property if a prospective tenant wants to see it on their lunch break? Even though it seems like it's easy to rent a property because of the demand and the market is very extreme right now. The process of making it happen can still be quite complicated. Number eight, poor tenant screening process. When screening tenants for your rental properties. Very important to have a published set of criteria and stick to it. I know that a lot of people who apply for rental properties seem nice. They might drive the type of car you like. You might have a lot of things in common, but if you stick to your criteria, this will assure that all prospective renter applications will be evaluated consistently within these guidelines when compared to other applicants at North County Property Group, we publish our rental criteria and make sure all applications are aware of the criteria before they apply.
Bob Preston: 14:43 I'm going to put a link to our rental criteria so you can check it out and it's on our company website. To determine if an applicant is a match, you’ll also need to put them through a screening process. What is that going to be, and do you have a plan on how you're going to do that? Are going to check their credit score? Are you going to check their eviction history, their criminal background, make sure this is done thoroughly and in a timely fashion so that you can get back quickly to a tenant if you have more information you need from them or if they haven't submitted a complete application and you need additional documentation. At North County Property Group, we utilize an online application process which can be accessed directly from the respect of properties listing page and then we can screen them instantly for credit score, criminal background, and also eviction history.
Bob Preston: 15:28 This is super quick, easy and of course we always want to make sure we check previous landlord references as well. All these things will help you pick a good tenant for your San Diego property. Number nine, an insufficient lease agreement. It goes without saying that every rental arrangement with a tenant should have a lease or a month, a month rental agreement documenting the understanding as a contract between both parties. Verbal rental agreements, even if they're done with family and friends should always be avoided. Recommending the form of the lease is beyond the scope of this podcast because it needs to be within the context of your respective state laws. I can tell you however that at North County Property Group, I'm a broker in the state of California so we use the lease agreement from the California Association of Realtors. It's well vetted and fully compliant on both sides of landlord and tenant law.
Bob Preston: 16:16 If you're not sure about which lease you should be using or if your lease is sufficient, just check with somebody who is in the know and perhaps a property manager in your area or perhaps your attorney so they can take a quick look before you have a tenant sign it. Number ten, deferred maintenance. To me, this is one of the most important aspects of being a landlord and renting your property like it or not keeping your Sa Diego property well maintained as part of being a landlord. Not only does handling repairs quickly and properly keep your tenants happy, but it also assures your property is well maintained along the way and kept in form of its top market value. This means having someone available 24/7 to answer maintenance calls and respond to tenant issues. Many landlords can get annoyed by this tenant making maintenance requests, but you just have to remember that things you found okay to live with in your home may not be deemed acceptable to a tenant.
Bob Preston: 17:07 If you've lived there for years with certain idiosyncrasies about the home, then you know the small issues may need to be handled to make your home safe, secure, and livable in the eyes of a tenant. When a tenant first moves into the property, there's also likely going to be what I refer to as kind of a stabilization period, so be ready and expect this to occur. You become familiar with the homes, freckles, but these may be annoying to your tenant once they move in. My guideline is set aside 10 to 15% of your rental income as a reserve for maintenance on your rental property. Another rule of thumb that’s common is the 1% rule landlord should expect to spend about 1% of the home's value each year for ongoing maintenance. So, for example, if your home is worth $500,000 plan on spending as much as $5,000 a year for ongoing maintenance.
Bob Preston: 17:52 When acting as a landlord, it's your responsibility to collect the rent, do your accounting, create and enforce rental policies, handle the maintenance and be on call for tenant communications all while remaining in compliance with local date and federal law. And on the rare occasion a tenant stops responding or paying rent, eviction may be required. Does all of that seem overwhelming and not worth the blood, sweat and tears? As part of your process of being a landlord, you should ask yourself these very same questions and consider the possibility of hiring a property manager. I'd be happy to consult with anyone considering becoming a landlord. Just remember, I'm a broker in the state of California and will need to keep my advice or tips within that context, but feel free to reach out to me through our contact page from our website. I'll list that in the episode notes of this particular episode, or you can just call us at (800) 436-2235. As I wrap up today, I'd like to make another quick plug to our listeners to click on the subscribe button and give us a like and also pay it forward with a positive review to encourage me and other guests in the future to come on the show and give you some great content. Thank you for joining the Property Management Brainstorm show. Until next time, we will be in the field working hard for our clients to maximize their San Diego property value and rental income and maintain top notch tenant relations and we will catch you next time.
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