Owner-landlords who are not professional property managers often make simple mistakes that might cost them money. Over the past 15 years we've noticed these mistakes most often when the property used to be the landlord's home. Here are the three most common mistakes and easy ways to avoid them.
Mistake #1 - Standard Lease
Owner-landlords often pay a few dollars online to download a lease that is advertised as compliant with all applicable state laws and regulations. Unfortunately, some counties and cities are also imposing local laws that should be mentioned in the lease. For example, local rent control and tenant's rights laws might apply only to the actions of the landlord, but tenants must be advised that the laws exist. Other laws, such as noise abatement and open flame cooker regulations, apply to what a tenant may do on the property. Rather than assuming that tenants will research these requirements, applicable laws should be included in the lease by reference or in a House Rules addendum. Any additional requirements that a landlord might want to add to a lease should be reviewed by an attorney to make sure the requirement is properly stated and legally compliant. Professional property managers typically keep a library of lease addendums and clauses they can use to customize a lease as needed. The library is periodically reviewed by the manager's attorney and updated.
Mistake #2 - Personal Property
It's common for owner-landlards to provide major appliances for their tenants, such as a stove, refrigerator, clothes washer, and clothes dryer. Even when the property is rented unfurnished. Where some landlords make a mistake is when they provide additional personal property that may be broken, lost or taken by the end of the leasing period. These commonly include garden tools and free standing counter-top appliances such as microwave ovens or toasters. Even when the items are included in a written inventory or photographed in move-in condition photos, the replacement cost can turn into a point of contention between landlord and exiting tenant. Better to store them off-site and avoid the mistake.
Even items installed with bolts and screws can go missing, so we always recommend that landlords remove anything of value - financial or sentimental - before putting the rental on the market. The photo below shows hanging kitchen lamps the tenant installed because they didn't like the glass lamps that were there when they moved in. Unfortunately, the tenant lost the original glass lamps that were very expensive, custom made, and had sentimental value to the owner-landlord.
Mistake #3 - Market Rent Analysis
A Market Rent Analysis (MRA) is a study that produces an estimate of the rental value of a property based on what other landlords are charging in the neighborhood. The value is usually expressed as a range, providing owner-landlords with guidance regarding how much they can expect potential tenants to pay. The mistake of not conducting an MRA can have two results:
1. The landlord will have trouble renting the property because they ask too much.
2. The landlord will not receive the maximum return on their investment because they ask too little.
Benefits of conducting an MRA include:
1. Knowing how much rent to charge.
2. Knowing if any affordable improvements can be made that would increase its rental market value.
3. Knowing if the property is not competitive in the market and the landlord would be better off selling it.
Some landlords make the mistake of setting the rent amount based on operating costs and desired profit. The more accurate approach is to balance operating and ownership costs with market conditions as determined by a thorough Market Rent Analysis.
Conclusion
Owner-landlords face a number of risks in operating their properties. Avoiding these common mistakes can increase their potential for profitability.