September 2, 2014
By: Mark W. Wasmund
Being a residential landlord is not always what it’s made out to be on HGTV. Investing in and managing rental real estate can be either a nightmare or a prudent investment. Ensuring the latter takes homework, hard work and the proper due diligence before investing, as well as continued commitment of time and effort. Knowing the property and knowing your limitations are crucial to sound investing.
Knowing your limitations and capabilities can mean the difference between a nightmare scenario and profit. Before investing, it is essential that you become intimately familiar with the property and know what it will take in time, money and effort to not only make the property habitable and code compliant, but to keep it that way. Even if you feel you have the requisite skill, certain work such as electrical and plumbing repairs may require a licensed professional pulling a permit from the applicable municipality and then completing the work. Time limitations must also be considered. Will you have the needed time, and are you willing to invest that time, into making the property a viable investment and not a part-time hobby? Unlike a half-hour episode of HGTV, successful property management requires an ongoing investment of time and effort.
Being familiar with the property you intend to invest in sounds simple but can often be more complex than anticipated. Knowledge of the property is comprised of knowing the municipality having jurisdiction over the property; verifying the zoning and legally permitted use of the property; and being familiar with the potential tenant pool and the rental range the property will command.
Knowing the jurisdiction where the property is situated is important from the standpoint of compliance issues as well as tenant enforcement matters. For compliance purposes you will need to know whether the property and you as owner/landlord need to be registered, what building codes apply, and what permits and possible inspections will be required. On enforcement matters, it is helpful to know the cost and feasibility of evicting a non-paying tenant or possibly suing a destructive tenant in small claims court. Court costs, court calendars and monetary jurisdiction levels vary from jurisdiction to jurisdiction. Although no one hopes for bad or delinquent tenants, these concerns must be factored in to your cost of doing business.
Knowing the property also means actual knowledge, not “assumed knowledge.” Simply because a property has been historically used in one way does not necessarily mean that the use is a legally permitted one. Often properties are converted over time without the necessary permits. In these instances the current use or occupancy may be illegal. For example, a property which is currently in use as a four unit residence may have been converted illegally and may only be a legal two family residence. If you purchase such a property without doing the necessary due diligence, you could be stuck with a property that generates half of the income that you counted on. The only alternatives may be a costly modification to the property or a variance application (which may or may not be successful).
It is also essential that you know the potential tenant pool that the property will draw from and the rent the property is likely to garner. The old adage of “location, location, location” is as relevant to rental potential as it is to property value. You will also need to consider whether the property is likely to attract – and whether you will accept – subsidized tenants receiving either Section 8 or public assistance benefits. This directly impacts the rent you can charge, the additional regulations and inspections which will apply and your ability to collect from delinquent tenants.
Being a residential landlord can be a rewarding and prudent investment if done correctly. This will require knowledge, hard work and the proper due diligence. Don’t rely on what you see on TV. Working with a realtor who is experienced in rental and commercial properties and consultation with an experienced real estate attorney before investing will put you on the right track.