7 Ways Small Landlords Risk Income Loss (and How to Avoid It)

by Chris on January 15, 2018

Small landlord businesses – those with a few units or renting out their own houses — are particularly vulnerable to income loss. Renting only now and again is like having a part-time job. It takes longer to build experience.

Fortunately, there are many ways to minimize income loss and keep a small rental property business profitable for years to come. The secret: recognize the major causes of income loss for small landlord businesses:

1. The tenant or a guest is injured at the property.

Safety concerns can be particularly problematic for landlords who have lived at the property before converting it to a rental. More diligence is needed when the property goes into service because tenants are unfamiliar with it. Safety precautions need to be taken seriously or the landlord could be liable for any resulting injury. Premise liability lawsuits easily can net hundreds of thousands of dollars for the victim.

Anticipate possible risks. For instance, basement apartments need extra security and easily accessible escape routes. Carbon monoxide and smoke detectors should be installed and routinely inspected. All entry doors need deadbolts. Parking areas and access routes should be well-lit, and sidewalks clear of debris. Effort should be made to discourage crime at the property, including running tenant background checks on new tenants and requiring long-term guests to undergo a tenant background check. Each rental unit should be safe for children.

2. A rental applicant files a discrimination lawsuit.

One of the mistakes first-time and inexperienced landlords make is seeking out tenants based on biases as to what sort of tenant is most appealing. Race, gender, religion and similar characteristics have no bearing on the person’s ability to pay rent or care for the property, and therefore should never be taken into account when choosing tenants.

Landlords cannot advertise for a specific class of renters — a student, a senior, or someone who works at a neighboring factory. By listing those preferences, landlords not only are breaking the law, they are discouraging qualified rental applicants from applying.

It is important to recognize that a rental applicant may look like the ideal tenant and still be the tenant from hell. (The most polished scammers are counting on inexperienced landlords to make that mistake.)

Renting to the “right” tenant while rejecting other applicants illegally will, at best, be a financial wash. A landlord hit with a discrimination claim easily could lose that entire year’s income.

The secret to avoiding discrimination claims: Advertise the property, not the specific type of tenant that the landlord visualizes. Then, treat each and every application the same. For instance, if the landlord is willing to accept a co-signatory for one applicant, that offer must be extended to any other applicant.

3. The landlord is attracting bad tenants.

The worst tenants — the ones who’ve ripped off other landlords or damaged a previous rental property — seek out smaller landlords. That’s because these landlords tend to be more lax about the rules. All it takes is one problem tenant to kill a year’s worth of profits.

Unfortunately, the damage from a bad tenant goes far beyond lost rent or property damage. Once the reputation of the property has been damaged by a bad tenant, it will be difficult to get good tenants to apply for the next vacancy.

Repel bad tenants by remaining professional. Rental ads for vacancies should look polished, include major policies like no-smoking, and warn applicants that a tenant background check is required. Have the proper paperwork in place beforehand, and demonstrate confidence about the leasing process.

Prequalify the applicant on the phone to determine that the individual is ready to move, has the requisite income from a legal source, is willing to abide by the landlord’s rules, and can demonstrate a good rental history. Ask the person to complete a rental application. Review the application to see if the tenant is qualified on the face of it.

Then, VERIFY THE INFORMATION IN THE RENTAL APPLICATION to determine whether the applicant is being truthful.

If the applicant appears qualified, run tenant screening reports, including a tenant credit check to flag irresponsible behavior, along with a previous eviction report and a national criminal background check.

The worst thing a landlord can do is fall in love with an applicant who is charming — or sad, or victimized — and then forego the tenant background check. Bad tenants are counting on it. Just because someone tells a good story doesn’t mean that story is true — or that it hasn’t been used time and again to rip off landlords. Never waive the tenant background check for any applicant or rent to an applicant on the spot — especially if the applicant is offering to pay cash or higher rent. Those are telltale signs of a scammer.

For safety’s sake, the best practice is to prequalify the applicant over the phone before agreeing to meet and then checking a photo ID before offering a property tour.

4. The landlord is making it up as they go.

Property management policies matter. And, it also matters that these policies are thought through before the property is advertised as a rental. Landlords can incur legal liability for changing the rules in play, and also suffer financial losses by negotiating away their legal rights.

Take the time to work out policies — like parking issues, whether to allow pets, smoking or no-smoking, and what income requirements might make sense — ahead of time. Don’t try to make policy on the fly. Consider the day-to-day management of the property. Noise limits and related restrictions that keep the peace can be contained in the lease agreement, but the lease can’t be modified mid-term unless the tenant agrees. Those restrictions already need to be in place.

Once those policies are worked out, it is far easier to spot bad tenants — they’re the ones who are testing to see if the landlord will bend the rules, or has no rules to begin with.

5. Landlord’s not around to manage the property.

Part-time landlords run the risk of training tenants to be bad. Much of this stems from the perception that the landlord is not in control. Tenants may take matters like repairs or disputes into their own hands, or become disgruntled and act out.

A lack of active property management may come from reluctance to manage, the demands from another job, or physical distance. Regardless of the reason, absentee landlords stand to lose the most in terms of unpaid rent and property damage. Some lose their rental licenses.

Telling the tenants that they are “in charge” is a risky practice. Every landlord needs to create the impression that they are always available and always on top of it.

Landlords who live a distance away still need to visit the property regularly. The quantity of time at the property is not important, but the quality is. And that takes some planning.

Take the example of a landlord who lives a few hours away from the rental property. The landlord could tell the tenants she is not available, and ask the tenants to manage on their own. Or, the landlord could stay in touch via email each month by sending a rent invoice. The lease can provide that rent is mailed to a P.O. box in the same town so the tenant isn’t constantly reminded that the landlord’s residence is three hours away. When the landlord comes to town to pick up the rent, she can drive by the property to see if anything seems amiss. Every third or fourth month, the landlord can schedule a property inspection and chat with the tenant. Meanwhile, she is committed to responding quickly to any emergency or request, even if the answer is no.

Experienced, full-time managers take vacations and sleep at night. It doesn’t matter where the landlord is at the moment. What matters is whether the landlord has a plan in place and can step up at a moment’s notice. Requiring tenants to mail rent to the Bahamas, telling tenants that they are “on their own” when it comes to maintenance, or ignoring tenants altogether inevitably leads to income loss. Maybe not right away, but eventually it will, and probably when the tenant stays long-term.

6. The tenant didn’t read the lease.

The tenancy agreement is only effective if the tenant understands what’s in it. Meet with the tenant in person to explain provisions in the lease before the tenant signs it. The tenant’s signature should be a commitment, not a meaningless formality.

One of the most important provisions to review is reporting monthly rent payments to a credit reporting agency. TVS provides this service at Report Rent Payments. That rental payment history is shared with TransUnion and associated with the tenant’s credit report. A Notice to Tenant should be included in the lease agreement. Once the tenant understands that late rent payments will be reported, it serves as an incentive to pay rent on time every month — which minimizes income loss. But for the incentive to work, the tenant needs to be aware of the potential consequences of paying late or missing a payment.

Encourage the tenant to keep the lease handy so the tenant can refer to it later as questions come up. Most tenants will try to abide by the rules, so long as they know what the rules are, and so long as the landlord is following the lease as well. Never allow a tenant to move in before signing a lease. That compromises the landlord’s legal rights.

7. The landlord didn’t complete property condition reports.

A dispute over security deposit deductions is one of the most common reasons that a landlord winds up in court. A move-in condition report and the corresponding move-out condition report are crucial steps when taking security deposit deductions. A landlord who fails to complete these reports will be hard-pressed to win a dispute over deductions or to obtain a judgment against a tenant for property damage. These reports may be the only way to show that any damage to the unit was caused by that specific tenant, and to get reimbursement for those losses.

The property condition reports also flag any repairs or updates needed to keep the property in service and avoid additional property damage due to latent conditions like water leaks.

Landlord Tip: When managing more than one rental, make a notation of the unit or room number on all receipts for repairs before filing them away.

This post is provided by Tenant Verification Service, Inc., helping landlords reduce the risks of renting with fraud prevention tools that include Tenant Screening, Tenant Background Checks, (U.S. and Canada), as well as Criminal Background Checks, and Eviction Reports (U.S. only).

Click Here to Receive Landlord Credit Reports.

Disclaimer: The information provided in this post is not intended to be construed as legal advice, nor should it be considered a substitute for obtaining individual legal counsel or consulting your local, state, federal or provincial tenancy laws.

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