6 Tips to Protect Newbie Landlords Against Bad Tenant Situations
1. Before you rent your property, come up with a “perfect renter” profile.
To do this, first list the main selling points of your house from a renter’s point of view. What does the perfect renter do for a living? Do they have children? What would be the renter’s interests? Once you have your avatar built, then you can actively start marketing your property to the perfect client.
For example, if the main selling point of your house its school district, then you might want to let the local PTA group of the grade school, middle school, and high school know that your house is on the rental market. You might also want to put up flyers of your house on the school’s community board.
2. Perform background checks.
This might seem like a very logical thing to do, but you would be surprised at how many landlords never ask the prospective tenant for a background check. The one I use is Tenant Background Search. This service provides me with an eviction report, FICA score, and nationwide criminal background report — and the best part is that it costs around $25 per report.
3. Have a real estate attorney provide you with all legal documents.
Don’t be cheap and buy your rental agreements off the internet at one of these do it yourself websites. Many of these agreements have loopholes that allow the renter too much wiggle room. As my father always told me, “Prepare for the worst, and hope for the best.”
To prepare for the worse, you should go into the agreement with the understanding that you might have to take legal action against the renter — so wouldn’t you feel more at ease knowing that your attorney provided the legal agreement?
4. Be upfront and honest with the renters before they rent.
I have one rental property here in Orlando that has joust windows. Now, these windows give the house a lot of character, and it does give the house a lot of appeal; however, these windows are not air tight, and the electricity bill can be quite expensive, especially in the summer months. I have always been very upfront with all the renters, and I even put this warning in the contractual agreement.
What is interesting is that I have had only one person who decided not to rent the house because of this language, and not one renter in the past 8 years has tried to get out of the rental agreement early due to the high monthly upkeep. On the flip side, the house next door has the same joust windows, and that house always seems to have a “for rent” sign in the yard. As a landlord it is always the best practice to be fair and upfront when dealing with your tenants.
5. Include routine maintenance in the monthly rental amount.
I had to learn this the hard way by having to re-sod the front yard to one of my houses because the tenants never cut the grass, and the yard was overrun with weeds. There is nothing that will hurt the value of a house more than poor curb appeal.
To protect your investment, include the upkeep of the yard, spraying of weeds, trash removal service, etc. in the monthly amount. This way, you can pay to have someone other than the renter provide these services, and you can make sure they are done properly.
6. Make sure the renters provide their own insurance.
It is always a good idea to put in the agreement that the renters must provide their own renter’s insurance. This way, if something unfortunate happens, it does not back up on you. I also think it is a good idea to have the rental property or properties set up in an LLC; this way, your personal assets are protected should something happen unexpectedly at your rental property. If your accountant tells you an LLC is not advantageous for you, then I would get a million or two million dollar umbrella policy for extra protection.
Being a landlord is really not that hard — just be careful and treat people fairly. Word of mouth is the best marketing, and people want to rent from good landlords.
Many people become landlords whether they rent their basement for extra income, rent their investment condominium or rent their property because they can’t sell it for the price they want, etc. But not everyone who attempts this endeavour understands the implications of getting into bed with the Residential Tenancies Act, which provides protection for residential tenants.
This law clearly favors tenants and I want to highlight a few issues that were raised at a Landlord and Tenants seminar conducted by Harry Fine, a licensed paralegal and an expert in this field.
1. There are specific business practices permissible to landlords in selecting prospective tenants for residential accommodation. Landlords have to adhere to the Human Rights code when advertising, selecting and during the tenancy to screen tenants. Nothing in this Regulation authorizes a landlord to refuse accommodation to any person because of race, ancestry, place of origin, colour, ethnic origin, citizenship, creed, sex, sexual orientation, age, marital status, same-sex partnership status, family status, handicap or the receipt of public assistance.
Case study: A landlord received a phone call from a prospective tenant about renting one of her units asking $2,500 a month. The landlord asked the prospective tenant what her monthly income was. The prospective tenant replied $3,100. The landlord said “you cannot possibly afford this rent” so she discouraged the prospective tenant from submitting an application. The prospective tenant complained to the Human Rights Commissioner and received an award of $1,000 for “hurt feelings”.
The law stipulates that you cannot discourage anyone from making an application to rent. The landlord is obligated to consider other factors besides income such as credit references, rental history information and credit checks in order to assess the prospective tenant and only then can the landlord select or refuse the prospective tenant accordingly. Therefore, to be safe, a landlord should allow everyone to apply and choose a tenant based on all the information. When you arrive at your decision simply say to all applicants that you selected the best tenant after you did your due diligence.
2. The rules related to giving notice for rent increases are very specific. A Landlord and Tenant Board approved N1 form is mandatory, the notice must be given ninety days prior to raising the rent, an increase can only be given every twelve month period and it has to be an amount set by Provincial guidelines. Any rent increase that does not follow these rules is not legal and leaves landlords vulnerable.
Case study: A landlord increased the rent every twelve month period for four years according to the Provincial guideline and notified the tenant via a letter. At some point, the rent was in arrears and the landlord took the tenant to court. Since the law stipulates that the tenants can raise any issues they deem necessary in a rent arrears hearing without notice, the tenant did just that. The tenant raised that the landlord notified him of rent increases via a letter and not via the mandated N1 form. As a result the court awarded the tenant an abatement of all the monthly rental increases he had paid for the last four years amounting to a few thousand dollars.
3. As soon as a tenant gives you notice they are moving out you have to mitigate your damages by trying to rent it to someone else. First and foremost make sure the tenant has signed an N9 (Tenant’s Notice to Terminate a Tenancy) in case they change their mind and you have already rented the unit to someone else. If you have made every effort to rent it for the same amount and have been unsuccessful, you can go to court to get back the shortfall. Be very careful about suing the tenant for under renting it though because the tenant can turn around and raise issues that will come back to bite you. The best thing you can do as a landlord is to rent it to someone else and move on.
If your tenant stops paying rent altogether, the shortest an eviction procedure will take is about eighty days. The length of the process itself and the fact that the tenant can ask for an adjournment or raise maintenance issues during this time can easily extend the eviction process six to eight months from the time the first month’s payment is missed. The cost of the eviction process and the loss of rental income will amount to a great deal of money. Remember that tenants have one year after moving out to sue you for damages such as bad faith notice, improper notice of rent increases etc.
These are just a few due diligence procedures you can follow to try select the right tenant:
1. Speak with the prospect personally and determine if they are consistent with their story about work, debt or current address.
2. Use a professional and thorough employment application form and be on the lookout for any gaps in rental history.
3. Ask for the name and contact number of their work supervisor. Call the employer and ask them to confirm income and how long the prospect has worked there.
4. Ask to meet everyone who will be living in the rental unit. You cannot refuse the tenancy to someone on the grounds that they have children. The only defensible ground for not offering a unit to a prospective tenant is their lack of creditworthiness, previous tenancy history or a bad credit report.
5. Call their current landlord but remember to use your creativity to screen against a tenant using their friends as a surrogate landlord.
6. Remember the former landlord may just be providing a positive reference to get rid of the tenant. Certainly I have heard of this happening many times.
7. Ask the former landlord if the tenant paid rent on time, if they ever took the landlord to the Board, disturbed other tenants or ever contacted municipal inspectors with unreasonable complaints.
8. Speak to the building superintendent if there is one. Just like your hairdresser, they seem to know everything that’s really going on.
9. Always use a professional screening service.
I have touched on just a few of the myriad of things that can go wrong. Therefore it’s critical you educate yourself about the law or consult an expert in this area before undertaking the important role of becoming a landlord. Mistakes or lack of knowledge can cost you a great deal of money.
The source for this information was taken from Landlord Solutions.
We receive phone calls regularly from people who want to sell their investment property and, of course, they want to fetch market value for it. These phone calls become heightened after we disclose a record breaking sale such as our most recent one at 233 Wychwood Avenue listed at $989,000 which sold for $1,208,500. Of course every caller insists that their investment property is also worth the same or more than 233 Wychwood Avenue because the market is “very hot”.
It is true that the investment property market is very strong but unlike single family homes whose ultimate high sold price can reflect an element of emotion, investment property sold prices are influenced more by an investment return. A huge factor that will determine market value for your property will be the income it generates.
During these conversations we probe deeper and ask many questions about the condition of the property and especially about the income it generates before we voice our opinion on value. The caller usually answers “well the rent is low but I like my tenant” or “the rent is low but my tenant has been here for a long time” or “I have a really good tenant who takes care of the property so I have given him/her a reduced rent”.
So then we respond “that’s really nice that you have a good tenant, but an investor who will pay you market value for your property also expects market value rents”. They respond “well they can always ask the tenant to leave”.
In reality a new owner cannot ask the tenant to leave and being a landlord you should know this. A tenant can only be asked to vacate, if they do not have a lease, and under these circumstances:
As you can see a new buyer cannot arbitrarily “get rid of a tenant”. Then these callers keep insisting that their property generating a cap rate of 2% to 3% is worth the same as one that generates a 5% cap rate simply because the market is hot. Unfortunately that is not the case. In reality if you have two identical properties in the exact same location in similar condition with one generating an annual net income of $50,000 while the other an annual net income of $40,000, the property generating the higher net income will sell for a much higher price.
So what can you do to ensure that your investment property will increase in value according to the market?
Time and time again we list tenanted properties and of course they require tenant co-operation for viewing times and presentation of the property. Many sellers will say “oh my tenant will be very co-operative and flexible because I’ve been so good to them over the years by keeping their rent low etc” only to witness, after the landlord tells the tenant they are selling, an overly uncooperative tenant or one that insists you abide by the letter of the law. Most tenants do not appreciate the possibility of being displaced whether you have been good to them or not so treat it like a business because most tenants assuredly will. Furthermore align yourself with a trustworthy real estate agent who will advice you properly on how to go about maximizing the resale value of your investment.
Were you prepared for the responsibility of becoming a landlady?
Once I began to consider an income property, I read the Ontario Residential Tenancies Act. It’s not an exciting read, but essential for learning about landlord and tenant rights and responsibilities as well as all the notification forms. Did you know that if you have to give a tenant a notice you should slide it under their door and not stick it to their door? It turns out that little details matter in law.
Having honest conversations with acquaintances that had landlord experiences was also helpful. I even chatted with one of the property managers of the building in which I was previously renting!
One area I wish I had investigated more before purchasing was developing connections in the skilled trades. I didn’t have a plumber, electrician, or carpenter that I knew and trusted and I would have reached out for names ahead of time instead of waiting for a problem.
What skills and qualities does one have to have to be a successful landlady?
Being a landlord is not just about managing bricks and mortar. It is managing relationships and you have to be an effective problem solver when there is a repair to be made, a noise complaint or late rent.
Unless you plan to have your property managed by a professional, you need to have time. That lawn isn’t going to mow itself and you certainly can’t wait to shovel the walkway on an icy day. Your best financial position is to be able to do some things yourself and that takes time.
Do you need to be handy? Yes and no. You will save a great deal of money if you can handle small jobs such as painting and yard work. If you are not up to the bigger jobs, watch more television. Seriously. Many programs and even youtube can be informative about larger home repairs and, although you may not tackle those jobs yourself, you will be better informed and less likely to be taken advantage of when you hire trades people.
Financial literacy is important. When you are making renovation decision, it is important to know what is a “write off” again your rental income for your current year’s taxes and what are “capital gains” improvements that you can use to your advantage when you sell your property. Even if you hire an accountant, you need to keep track of all of your income and expenses and have an organized system for bills and receipts. You also need to be organized to check references and the credit of potential tenants.
Flexibility is needed when remembering that your tenants are not you. They will not do things the way you would and as long as they are respectful and paying their rent, you may need to let some things go. This is especially important if you live in the building with your tenants. The ability to stay calm is essential. You may be tempted to shed some tears when the first time you run the tub and the water pours through the ceiling of the unit below, but you need to stay composed and call a plumber. (Okay, I’ll admit to a tearful episode before calling…)
If you had to do one thing over again what would it be?
Most issues I have had revolved around noise. During the purchase process, I would have brought a friend to viewings and requested that they make noise in one unit while I was in the others. That way, I could have gauged how sound traveled in the building. I probably would have still purchased this property, but I would have included soundproofing in my initial renovations instead of having to go back and make improvements later, at a greater expense. Did I really want to pay to have carpeting put back down after refinishing lovely hardwood floors? No.
Tell us about some of the issues that came up that took skill to work through?
Patience is a virtue. Even though you are the landlord, you may need to put yourself last for a while. When I purchased the property, I only had enough savings to renovate one of the units. Although I dreamed of a beautiful kitchen and a glistening modern bathroom, I spent my limited funds on one of the units to be rented out. Living with a dodgy kitchen with 1950’s broken drawers and a pink tiled bathroom with a worn green tub was no treat. However, by doing that I now get much more rental income and I am getting very close to turning my unit into a home.
According to this experienced landlady, to be a successful landlord one needs to be prepared and educated. Although it’s a great deal of work to manage a multiple family dwelling, the financial payoff can be rewarding. It’s a great way to build equity while paying down the mortgage with the rental income with a goal toward owning that single family you have so intently set your sights on. It isn’t easy so ask yourself before you undertake this monumental task: