Purchasing real estate for investment purposes may be the easy part. Managing the property can be the challenge. Multiple unit dwellings and commercial buildings are often managed by a property manager or property management company independent of the property owner. Single unit or single properties or duplexes, on the other hand, are often managed by the owner. While managing your own property can save money, it may also lead to disastrous consequences. There are many regulations which govern rental property, and too often new landlords are unaware of limitations on their rights and the extent of their obligations. New landlords also frequently underestimate the amount of time that owning a rental property can consume.
You purchased rental property and you are ready to rent. Where should you begin and what do you need to know? For purposes of this article, I will assume that the newly acquired property is in excellent condition and ready to rent.
The first step is to find a tenant. You place an advertisement in the local paper and put a sign up on the premises, or perhaps you employ a real estate broker to market and lease the property for you. However, before that first tenant moves in there are some things you should do. You should make a thorough inspection of the property and insure that all appliances and other items are working properly. You should take a complete inventory of the property and list the condition of every item. Since a picture is often worth a thousand words, a video tape or photographs of the property and its inclusions may be appropriate. A decision must also be made on how much of a security deposit to require and whether to require first and last month’s rent up front and additional deposits for pets.
Most importantly, you should make sure you have a written lease agreement that is appropriate for the type of property you will be leasing and that covers items that are of concern to you. For example, if you own a single family residence, you may need a lease that addresses care of the landscaping, pets, snow removal, utilities, and trash collection. Although simple form leases are convenient and easy to purchase, the lease form may not contain all of the terms and conditions you need to protect yourself and your property. A properly drafted lease which addresses your concerns may save you time, money, and possible headaches in the future.
Once you have some interested prospects, you need a procedure for checking their financial ability to pay the rent and to check their references. There is nothing more disheartening than renting property to tenants who are immediately in default because they lacked the financial capabilities to pay the rent, or for other reasons the property was not appropriate for their needs.
Once you are satisfied that you have found appropriate tenants, it is time to collect the security deposit, execute the lease agreement and conduct an initial walk-through with the tenants. I suggest having a checklist that you and the tenants complete together and sign at this time. The checklist should indicate the condition of the property and its inclusions on the day the tenants took possession. You may use photographs in place of a verbal description.
The lease agreement is signed and the tenants have moved in. Now all you have to do is sit back and collect the rent. You may receive a call from the tenants and make some minor repairs, but you probably will not hear much from the tenants unless there are major problems.
Your first lease period goes smoothly, but the tenants decide for various reasons to move out at the end of the term. If you have done the initial walk-through with the tenants, you should conduct a final walk-through after the tenants move out. This affords you the opportunity to inspect the property and take notes of any problems you see or any items which have been damaged. You can let the tenants know that you will be retaining a portion of the security deposit for any damage that is not ordinary wear and tear. You and the tenants will probably disagree.
After the tenants move out, you must, as soon as possible, but not later than the statute provides, return the security deposit or any remaining portion of the deposit to the tenant along with a written itemization of the amounts you have withheld for damages, rent, or other charges. If you fail to timely comply with the statute, you will be liable to the tenants for treble the amount of the security deposit, plus costs and the tenants’ attorney fees to obtain return of the deposit. If you miss the deadline for providing the tenants with the written itemization of the amounts you intended to retain, you must return the entire security deposit to the tenants. You may commence an action against the tenants for damages, but you cannot keep any portion of the security deposit if you fail to timely provide the itemization.
What happens if the tenants fail to pay rent, breach some other term of the lease, or decline to vacate the premises at the end of the lease term? This is known as an unlawful detention and the tenants may be evicted. However, there are certain procedures which must be followed. You may not simply change the locks while the tenants are out or march into the property and toss out the tenants’ belongings and the tenants. You cannot take possession of the property unless you can do so without a breach of the peace.
To begin the eviction process, you first serve the tenants with a three day demand notice. For a breach of the lease, you serve the tenants with a three day demand for compliance or possession. If the tenants cure the breach within the three day period, the tenants may stay in the property. In the case of holdover tenants, you serve a three day demand for possession and the tenants have three days to vacate. If the tenants do not cure or vacate the premises within the three days, you may file a complaint in unlawful detainer and have the tenants evicted. If the tenants attempt to pay rent after the three day period has passed, the landlord is under no obligation to accept the tendered rent and may proceed with an eviction.
To commence an eviction proceeding, you must file a complaint in the district or county court and have an attorney or the clerk of the court issue a summons. The tenants must be served with the summons not fewer than five but not more than ten days after its issuance. The summons will specify a date and time for the hearing on the issue of possession, which must be not fewer than five days after the tenants are served. The eviction process is an expedited one, because the owner of the real property is being deprived of possession. Since an action in unlawful detainer is one in rem, if personal service upon the tenants is not possible, after diligent effort, service may be by posting and mailing.
Once service is accomplished, the hearing on possession will occur on the date in the summons. If service is by posting, the only issue the court will entertain is the issue of possession. If service is personal, then the court may also award damages. Damages may include past due rental, future rentals, in an appropriate case, physical damages to the property, and the cost of releasing, and you may recover your costs and attorney fees for the eviction. The hearing on damages may be set for a later date, which means two court appearances. If you lose the eviction hearing because you were not entitled to possession or because you did not follow the proper procedure, you may be required to pay the tenants their costs and attorney fees. Therefore, you should commence eviction proceedings with care and for good cause only.
If the court determines that you are entitled to possession, the court will enter judgment for possession. This does not entitle you to the right to immediate possession. You must wait 48 hours, then apply to the court for a writ of restitution. Once the writ is issued, it is taken to the sheriff and the sheriff sets a date and time for the eviction. The sheriff will post notice of the date and time of the eviction on the property. If the tenants have not vacated by that time, the sheriff will evict the tenants. You, however, are responsible to remove the tenants’ personal possessions from the property.
Once the tenants are evicted, possession of the property is yours and you can now begin the process of finding appropriate tenants all over again. If you have a judgment for damages you can also begin collection on your judgment. Obtaining the judgment is usually easy, compared to collecting the money you are owed. If the tenants had to be evicted, they probably do not have sufficient income or ability to pay. The collection process and how to proceed is not within the scope of this article.
Proper preparation, a well written lease agreement and diligent inquiry of prospective tenants will help minimize typical problems that landlords experience. Whether your property is residential or commercial, spending some time, effort, and money up front to insure that you, as a landlord, are protected will be well worth the investment expense.