Mistakes to Avoid When Renting Out a Property
In honour of real estate investors everywhere, we put together this primer on mistakes to avoid when renting out properties.
As a real estate investor and landlord, Jarek Bucholc believes one of the biggest mistakes investors, especially green investors, make is miscalculating the expenses generated by their investment property. Landlords often overlook expenses such as property taxes, insurance, maintenance and the cost of having no rental income because their rental unit is vacant.
Bucholc advises investors to be prepared for such inevitabilities as a leaky roof or a tenant who skips town by thinking ahead. Landlords should plan or put aside two month’s rent for the yearly maintenance of their property, he says. Also, be aware that tenants tend to move on average about once a year so you could be faced with no income for a period of time.
He also recommends that landlords not subsidize their investments by using their own money or outside income to pay for the investment. The mortgage, maintenance costs and taxes should be covered by the rent.While doing that can be tough in markets with high and rising values, Bucholc says inexperienced investors will do so with the hope that their property rises in value. “Often, people want to rent out their properties out of desperation and then they get in trouble because they haven’t prepared for these expenses,” says Bucholc, a Calgary resident and founder of Canada Real Estate Investors Club (www.canadareic.com). A common mistake made by landlord is that they conduct sloppy or inappropriate screenings of potential tenants. Not only should you get a credit check and previous landlord check but to be extra safe think about getting a criminal check as well. To suss out whether a renter is serious or not, consider charging them a $20 fee for the credit check.“If they pay the $20 they are serious about renting,” Bucholc says. “If they don’t, they’re tire kickers.”
If you’re suspicious that the renter lied and has given you a friend’s phone number instead of a previous landlord’s try this tip, advises Bucholc. Call the number and ask if they have any properties or apartments for rent. That ought to trip up anyone who isn’t a legitimate landlord.
Landlords also need to be sticklers when it comes to drawing up contracts with their tenants. Will you charge late fees when a tenant is late paying their rent? Do you want your tenants to be responsible for taking their garbage to the curb side? Should you inform tenants of the need to obtain contents insurance? Again, Bucholc recommends investors prepare for any and all inevitabilities.“This is to avoid future conflicts, misunderstandings and possible court cases,” he says. “Try to cover every possible situation where the tenant can say I didn’t know about that or I didn’t think I had to do that.”
Hamilton realtor Robert Morrow, who specializes in buying and selling student housing (www.emailhomes.ca/studenthousing.php), says the lack of knowledge of the Landlord Tenant Act causes him great dismay. He believes the Act is designed to favour the tenant but a good landlord–who follows the rules to the letter–will always be treated fairly both by the tenants and the legal system.“I see a lot of investors cutting corners to save money short term,” Morrow says. “In the long term, however, they usually lose money via unhappy and therefore transient tenants, or expensive repairs once ordered by the court.”
One big mistake landlords make is that they are tardy when responding to tenant concerns and building maintenance issues. Morrow recommends investors treat their property as if they were living in it and wanting to fully enjoy the space.“Does that make it harder to earn profit?” he asks. “Sometimes in the short term, yes. But long term, you won’t have as much turnover and the quality of tenant will be superior. One conclusion to draw here is that short term rental investment is not a good idea. The investor should consider a 5 to 10 year investment minimal to be profitable.”
When it comes to student housing, aesthetics take a back seat to functionality. Meeting fire and safety codes is much more pressing than the colour of the living room. But often investors don’t recognize this and end up prettying up their investment property not for the 20-year-old student who will be renting there, but for themselves. That is a mistake, says Morrow.“As long as the stove top works, the fridge is large and relatively clean; the kitchen has utensils, dishes, and cookware supplied; the bathrooms are updated (to accommodate up to 8 people showering every day); and there is common space to put a TV for gaming–and of course, the internet is lightning fast– then the student tenants are happy to pay top dollar rents.”
Oftentimes, parents purchase student homes for their own kids who are attending college or university and they upgrade the homes to their own living standards. This is also a mistake as professional investors see no value in the improvements and won’t pay extra for them. Unless they sell to another parent, chances are they will lose what they spent on renovations.
Other common errors made by real estate investors centre on inappropriate inspections. When it comes to assessing the damage to a rental unit it’s important to have clear evidence and nothing is better and more binding than photographs, says Bucholc. Make sure your tenant signs the inspection sheet, which in effect, means they’ve agreed to the damages found and any dents and scratches made subsequently will be on their tab.
Make sure your unit is rental ready when potential tenants are viewing it. Bucholc has actually seen a property that had dog poop on the floor. You want it to be clean and tidy otherwise how can you expect tenants to take pride in their home?
“If it’s dirty that builds bad karma,” he says, “and the tenant will not take care of the house and will not consider it as their own home.”When marketing your rental property, go outside of your immediate area to market it. Remember, says Bucholc, as a landlord, you’re in the relocation business.
Don’t overprice your rental unit as – surprise, surprise – no one will want it. And even if you do find a tenant, they won’t last. You’re driving them out with high-priced rents.Finally, says Bucholc, don’t rent to family or friends.“This is business,” he says. “If they have a problem and can’t pay the rent it’s hard to say no to family and friends. Don’t mix business with pleasure.”
Property Wire Canada
