In the last year or more, the cost of renting an apartment
or home has gone up significantly in the Western Montana Market which has
brought a flood of new investors and landlords to the area. The average 3-bedroom
apartment in Montana is $1200/month. When done properly, being a landlord can
have excellent tax advantages, provide monthly income and build your financial
security. When done poorly, being a
landlord can bring about legal proceedings, loss of income, and potentially
crippling monetary damages. So here are some tips for people that are looking
to maximize their potential on their investments:
1.
Find a
good property manager
Many people choose to manage their
property themselves and it certainly can be done. Keep in mind a good property
manager will provide you added security against legal risk, give you good and
detailed financial reporting, and have established relationships with contractors,
plumbers, electricians, etc. Most people find their rental properties are more
profitable when managed by a professional property manager.
Interview potential property
managers, ask for references. Ask specific questions on their maintenance
process. Ask about their eviction process.
2. Protect yourself and your investment
Make sure your insurance is
adequate for the property. Don’t be afraid to tell your insurance agent that
you are renting the property out, often you will see a reduction in premium for
a rental property vs. a home you live in.
Ask about loss of income coverage if the property becomes uninhabitable for
a period. If you have a property manager, consider adding them as an additional
insured.
Require renters to obtain renters
insurance and name you/your property manager as an interested party.
3.
Educate yourself
If you have a competent property
manager, this process is much simpler. Landlord/tenant laws change frequently, and
licensed managers are required to keep up with the changes.
There is a ton of misinformation
out there about what landlords can and cannot do as well as what tenants can
and cannot do. But you should always refer to the law itself. Montana
Landlord/Tenant Law can be found here. Violations of this law as well as Fair Housing Laws can come with very steep
penalties and are one of the most common ways private landlords get themselves
in legal trouble.
4.
Select the right tenants
Typically, the two biggest costs to
a landlord are vacancy and maintenance/repair. Both costs can be mitigated by
proper tenant selection. Good tenants typically take better care of the property,
and if you treat them well, they will stay longer. Taking a little bit longer
to place a tenant may cost a week or two of vacancy up front, but it generally
pays off in the end.
Perform background checks on applicants.
There are many services that will do this for you for a small fee. Make sure
you have clearly defined standards that you are looking for when performing the
background/credit check.
WARNING! You might think that
renting to friends or family might be a great idea. Friends and family have a
high likelihood of ignoring certain aspects of the lease or the
rules/regulations. Further, it makes it much more difficult to follow up on
late rent or decline other requests you would not do for another tenant.
5.
Get a good lease
Out of all the tips here this is probably
the most important. A good lease protects you and can make the difference
between being a successful landlord and one that goes bankrupt. It might be
tempting to write your own or download a generic lease for free or even a small
fee. There may be some sites that seem reputable, or landlord associations that
offer them but be wary. Any lease you obtain should be reviewed by a lawyer
that specializes in real estate law.
Make sure your lease outlines the
deposit amount, how/where it will be held and the requirements for the return
of it. What does it say about past due payments and the eviction process?
What does it say about normal wear
and tear? What does it say about pets (side note be incredibly careful about
service animals and therapy animals and the legal requirements for them)?
6.
Keep up with preventative maintenance
You are responsible for maintaining
the property up to code. You are responsible for repairing anything that deteriorates
due to normal wear and tear. Keep in mind that normal wear and tear for you may
be different than what a Judge considers normal wear and tear. Respond quickly
to tenants when they call with maintenance requests.
It can be tempting to save money on
repairs by performing it yourself, but keep in mind the laws for maintenance
and repairs can be different for a home you own vs. a home you are renting. This
is particularly true when dealing with plumbing and electrical issues. You may
be legally liable for damages to a tenant/tenant property for maintenance
performed by you improperly. It is best practice to hire licensed and insured
professionals for safety related repairs.
Have a repair fund. It can be devastating to be caught with a major repair that you are legally obligated to perform and have no funds to complete the repair. Performing full repairs on major items can cost more up front than the quick “band-aid” type fixes but may be more cost effective overall.
While this list is certainly not
all inclusive of what you need to know to effectively manage your income
property, it will provide a foundation that you can build on.