5 Common DIY Landlord Mistakes
As a professional property manager I’ve had the opportunity to help a lot of Do-it-yourself-landlords undo or correct issues they have caused by trying to manage their own rental property without the proper tools, training, and knowledge. Over the years I’ve been able to compile a list of items that I see as the root of most DIY Landlord problems. I hope this article will help those that may be encountering some difficulties while managing their own rental property or help future landlords avoid some common pitfalls.
If you own rental property or are considering purchasing an investment property then you will want to avoid making the following common mistakes that DIY Landlords often make. If the list below is too overwhelming for you then you may want to consider hiring a good property management company to manage your rental for you (what to look for in a property management company is a topic that we will discuss in a future article).
1-Renting to Unqualified Tenants
2-Using a Weak Lease Agreement
3-Too Lenient on Rent Due Dates and Collecting Late Fees
4-Never Inspecting the Property After Tenants Move In
5-Improper or Lack of Record Keeping
Let’s examine each item and see what type of problems can stem from making these mistakes and what should be done to get a more positive outcome.
Renting to Unqualified Tenants
Too often I hear landlords tell me that they put an ad on Craigslist and rented to the first person that was able to pay them first month’s rent and security deposit. We all want to rent our properties as quickly as possible, but just because a tenant can scrounge up enough money to pay the first month’s rent and deposit does not mean they are qualified to rent a particular home or apartment.
While vacancy expense is something that every landlord wants to minimize it shouldn’t be minimized at the expense of finding a qualified tenant. Unqualified tenants can end up costing much more than vacancy expense. Many times tenants that are not screened properly will pay a month or two of rent and then the rent payments stop. Now you have no rental income and you can’t rent to another tenant until you get rid of the non-paying tenant. Not to mention the attorney fees you will incur to evict the unqualified tenant and the cost to repair damages they most likely caused.
While there are no guarantees in the rental business you can greatly reduce your risk by properly screening your tenants. At minimum you should be examining the following criteria before renting to a tenant:
Income: The combined gross income for all tenants should be 2.5 to 3 times the rent. For example if the rent on a home is $1,000 per month then the tenants should make at least $3000 in gross monthly income. The tenant’s income should be verified by having them provide 2 to 3 months of paycheck stubs or their most recent tax return and 3 months of bank statement if they are self employed .
Credit: You will need to subscribe to a service that will allow you to pull a tenant’s credit report. You should set a minimum credit score or maximum amount of delinquent accounts that is acceptable to you. The lower the credit score or the higher the amount of delinquent accounts makes a tenant more risky. You may even require an additional deposit if you are going to consider renting to a tenant that doesn’t meet your minimum credit requirements.
Criminal Background: You should be able to subscribe to a service that simultaneously pulls a tenants credit and criminal background. You should examine the criminal background to make sure the tenants have not been convicted of a crime that may increase your risk as a landlord. You may want to be careful renting to tenants who have had convictions dealing with: sex crimes, check fraud, or drugs. Tenants with these types of convictions could increase your risk and or liability as a landlord.
Previous Landlord Reference: You should get a landlord reference for the tenant’s current and previous landlords for the past 2 years. You want to ask questions such as: Did they pay their rent on time?; Did they cause any damage to the property?; Do they still owe any money?; Did they have any police or neighbor complaints? It is best if you contact the previous landlords yourself to ensure they are indeed a landlord and the tenants have not created a reference letter themselves.
Using a Weak Lease Agreement
The internet makes it very easy to get most any information you need. You can even find lease agreements online. However, it’s usually not a great idea to find a generic lease agreement online. Typically these generic lease agreements limit your rights as a landlord to current state statutes which isn’t always best.
Typically with real estate lease agreements most states have specific statutes that deal with common lease issues and often the state allows for the statute to be overcome if specified in a lease agreement. In Utah, an example of this is right of entry. Per Utah state statute a landlord must provide a tenant 24 hours written notice before entering a rental unit unless specified differently in the lease. It may be difficult to do a surprise inspection for a suspected lease violation if your lease agreement defaults the state statute in this example. Another example in Utah is the state statute only requires a tenant to give a 15 day notice to vacate at the end of a lease term or in a month-to-month tenancy. However, most landlords would prefer tenants give them at least a 30 day notice to vacate, so they can have sufficient time to advertise and find a new tenant. If your lease hasn’t been prepared by a landlord attorney who understands these types of state specific nuances then you could be getting the short end of the stick.
Lease agreements should be written by experienced landlord attorneys and need to be specific for the state where your rental property is located. The National Apartment Association is a national organization that provides ongoing support and training for landlords and most states have local chapters. Members local chapters may have access to state specific lease agreements that are available upon payment of annual membership dues of a few hundred dollars. The Utah Apartment Association which is the local Utah Chapter of the NAA offers many state specific forms for its members.
Too Lenient on Rent Due Dates and Collecting Late Fees
Most lease agreements have a rent due date of the 1st of the month and some sort of grace period where the tenant doesn’t incur any late fees. For example, on the lease agreements I use for my property mangement company I have a rent due date of the 1st of each month and no late fees are charged until the 6th calendar day of the month. This gives tenants a reasonable time period to get their rent paid without suffering any consequences. But what happens to tenants who don’t pay on or before the grace period expiration?
More often than not when I have a landlord contact me to take over management of their property and evict their tenant it is because the landlord hasn’t been diligent in enforcing the rent due date or late fees. When landlords continually waive late fees and offer extensions on the rent due date their tenants will exploit that situation every chance they get. Tenants must be trained and understand that there are financial consequences to their actions. It should be the tenant’s responsibility to solve their financial crisis and not the landlords responsibility to extend or offer credit to the tenant. No landlord wants to evict a tenant, but it is better to act swiftly if a tenant has lost the ability to pay rent than to allow the tenant to build up a balance of several months rent and then evict.
I offer the following advice when collecting rent and late fees. This advice is most applicable to Utah landlords, but may be applicable in other states depending on specific state laws.
You should explain to your tenants upfront that you have a “zero tolerance” policy for late payments. This means that if a tenant pays past the rent due date and grace period then the late fee is charged. My policy is the payment must be in my possession on or before the 5th of the month otherwise it is late. Post marks don’t count. If the tenant calls and tells me the payment is going to be late then I explain that the payment will need to include the late fee. I never allow a tenant to carry a late fee balance for more than one month. For example, if a tenant calls and tells me his payment is not going to be made until the 6th of the month and I explain to him that his payment must include a late fee of $50, but the tenant’s check arrives in the mail on the 6th and doesn’t include the late fee. I then call and explain to the tenant that I will accept his rent payment but he now has a balance on his ledger of $50, for the late fee, which must be paid on or before the next rent due date. Fast forward to the beginning of the next month. Now let’s say the tenant paid his rent payment on the 3rd of the month but still did not pay his late fee from last month. At this point I would call the tenant and let him know that he has short paid his rent by $50. He will of course pretend to be confused and I will remind him that he had an outstanding late fee of $50 from last month and his payment was first applied to the late fee (make sure your lease allows for this) and therefore he has $50 in unpaid rent for this month. I then encourage him to pay the $50 balance before the 5th to avoid further late fees and service of notice fees. Now the 6th arrives and our tenant has still not paid his balance. At this point I would charge another late fee of $50, so his balance is now $100 and he would go on my list to serve a 3 Day Notice to Pay or Vacate. I serve my 3 Day Notices (beginning of an eviction) on the 7th of each month. It is now the 7th, so I fill out my 3 Day Notice to Pay or Vacate for the tenant and add a $35 service of notice fee for having to deliver the notice. The tenant’s balance is now $135. I deliver the notice to the tenant and he is not home, so I affix the notice to the door as instructed by my attorney. The tenant now must pay the balance of $135 or Vacate the premises by the 10th. The tenant will most likely call and complain and you will have to remind him of your “zero tolerance” policy for late rent. The tenant will complain that he can’t afford the fees and please waive the fees or ask if he can pay it next month. You will have to stick to your guns and explain that because you have served a legal notice he must pay the amount by the 10th. You may remind him that it will be much cheaper to pay the by the 10th because on the 11th the matter is turned over to your attorney and attorney fees will apply at that point. Rest assured that your tenant will pay the balance by the 10th because he knows you aren’t messing around. He now understands your policy and will make his rent payment to you a priority because if he doesn’t it will get expensive for him. I know this may seem harsh or aggressive to some of you, but after working in the property management industry for over 10 years I have found this to be the most effective method of ensuring tenants pay their rent on time and don’t become chronic late payers.
Never Inspecting the Property After a Tenant Moves In
Many landlords assume that if a tenant is making their rent payments on time that they are also taking care of the rental. What if the tenant is diligent in paying their rent on time because they believe this will keep you, as their landlord, from wanting to inspect the premises. Perhaps they don’t want you to see that they decided to start rescuing cats and even though the lease permits 1 cat they now have 7 and a very unsanitary home. Or imagine that they are paying rent each month to keep you satisfied, so you don’t stop in and see the field of marijuana plants they have growing in the basement. Tenants should be made aware upfront that you plan on conducting regular inspections of the property to check for lease compliance issues and to ensure the rental is being properly maintained.
The number of inspections that you conduct during a 12 month period should be between 2 and 4 inspections. Tenants have a right to quiet enjoyment of the property or unit they are renting from you, but you also have the right to inspect your property to make sure tenants are honoring their lease agreement. Inspecting a property more than 4 times per year may annoy your tenants and encourage them to move rather than being long term tenants. Make sure you aren’t pestering your tenants, but are conducting routine inspections to ensure lease compliance and property preservation.
Prior to conducting a routine inspection it is typically a good idea to give your tenants at least 24 hours notice so they can tidy up. You should review their lease prior to inspecting to make sure you know what types of lease violations you should be looking for. You should be aware of the number of occupants, pets, and vehicles on the lease. You should also know if the lease is a smoking or non-smoking lease. You should fill out a form and take pictures during your inspections for your records. If you find a lease violation you should address it immediately with the the tenants, apply any violation fees to their ledger, and give them written instruction on how to rectify the violation by a specific deadline. Depending on the severity of the violation you may need to deliver a 3 Day Notice to comply or vacate. As you conduct routine inspections your tenants will be more mindful of caring for the premises and you can stop small problems before they become big, expensive problems.
Improper or Lack of Record Keeping
Whether you use a paper, tenant ledger and physical files or you use accounting/property management software and electronic files you need to make sure you maintain thorough records for each tenant. Too frequently I see landlords who have kept inaccurate records and may have lost out on rental income or a judgement against a tenant because of incomplete records.
Each tenant that rents a unit from you should have their own tenant ledger. The tenant ledger is where you keep record of charges to the tenant (rent, late fees, lease violation fees, etc) and payments from the tenant. You should never accept cash payments from a tenant as cash offers no paper trail other than a handwritten receipt. If you don’t like accepting personal checks from tenants then you may want to require cashier’s checks or electronic payments. This will allow you to know at any given moment if a tenant owes you money and how much. Your tenant ledger also becomes critical if you ever need to evict a tenant. Most landlord attorneys will not file a complaint against a tenant without a current and accurate tenant ledger.
In addition to keeping accurate records of tenant payments and charges you will also want to make sure you keep record of any legal notices you serve to a tenant (3 Day Notice to Pay or Vacate, etc.). It is also a good idea to keep record of email communications and any important phone conversations. You should also have a move-in inspection for each tenant. This inspection should include a property condition form and pictures or video to document the condition of the property before a tenant moves in. This will be critical in charging the tenant for any damages upon them moving out. Without proper record keeping it will be your word against the tenants word.