Heed the warning signs
Here are some basic no-no’s to be aware of and avoid when acquiring investment property. These are related to strictly tenant issues here for brevity’s sake. When you understand how you can get burned, you tend to steer clear of these pitfalls more easily, and heed the warning signs that are associated with these particular set of investment property dangers.
The Tenant Slide
The slippery slope of leasing to tenants is a definite learning curve. Hopefully, you can scope these common dangers out before they hurt you financially. Tops among tenant problem areas is that, by and large, renters have a bundle of legal rights that protect them. So, for example, you can’t simply throw a tenant out if they don’t want to leave, without first going through an eviction proceeding. They didn’t pay you rent last month? They won’t allow you n to inspect their unit? You’re getting complaints from other tenants in the building about them? Tough. You still can’t legally throw them out until you go through the formal eviction.
You’ll still have to pay an attorney to take you through the eviction process – and win. And this not only costs in terms of their fees, but the time spent could be several months – of lost rent. Not to mention the clean-up and repairs after the tenants trash your place. How to prevent this? Always find good tenants. And that’s not always so easy to do…
And speaking of lost rent, vacancies are another lurking property investment danger. Even in a tight rental market, when one renter leaves, you still have to show the unit and usually clean it up, or even simply paint it, before the next one can move in. That’s a month of lost income right there. Naturally, you build in a vacancy rate for all your units when figuring out your cash flow – but don’t think you’ll escape unscathed in softer rental markets, or areas with stiff competition for apartments. Don’t be surprised if you’re losing several months’ rent when you lose a tenant.
The “bad” tenant
Of course, another key investment property danger is the Tenant from Hell. And yes, there are a few of them out there. Most landlords can relate their “Tenant From Hell” story. It ain’t pretty. A seemingly “normal” renter can become a bad tenant almost overnight. Your unit will suffer the most. Bad tenants have a nasty reputation for tending to destroy units. It’s usually not willful…think of it as more “playful” destruction of your property. It’s just in their genes. And it will cost big bucks to repair said unit after you successfully remove the tenant through the aforementioned eviction process.
Lawsuits and you
And also don’t forget this fun investment property danger: when your tenant sues you. They could slip and fall on a patch of ice in your parking area, or fall on a cracked walkway, or trip on a poorly lit stairwell in the building. Whatever the reason, if the tenant is determined to see some cash from your misery – they will be relentless. This is mainly due to our legal system, as well as how our insurance companies work. Naturally, as any smart landlord, you have adequate liability insurance on your building. (Remember my article on you and your insurance agent, right? The one where the agent tells you his recommendation for how much liability insurance would make sense for your size building?)
Well, even with the right amount of liability insurance, a suing tenant will traditionally have hired a personal injury attorney who only gets paid if there is an award of cash damages. They traditionally receive a third of the award. Then they sue you, your insurance company’s attorney reviews the case, and in long order (yes, it takes months if not years in some cases), the insurance company authorizes a settlement amount to pay out to your tenants and their attorney in order to avoid a lengthy and potentially devastating court case and heftier damages if they lose in court. This is our judicial system. Welcome to it. Yet another potential investment property danger just waiting to snag you.
photos courtesy of investors.housez.ca, kristinandcory.com, mcclurepropertymgmt.com, tenantchecker.com, clickpropertymanagement.co.nz, tenantscreeningblog.com, thegreatestrealestateblog.com