Carolyn is a retired property manager and former business owner.
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What You Should Know If You Own Property
The first time you rent space, an apartment or room in your property or house in exchange for money (rent), you have conducted a business transaction. You have invested a substantial amount of money purchasing your real estate investment. You need business policies and operational procedures to protect and maintain your investment to its highest and best use.
There will always be situations beyond your control that will have a financial impact on you and your real estate. If you are loaded with credit card debt, get a divorce, or you get laid off from work, chances are, you will not be able to pay your mortgage. If you do not have at least three months of rent in a savings account for your property, and the tenant fails to pay the rent, the mortgage will still have to be paid. The bank does not allow missed mortgage payments because your tenant does not pay the rent.
So, your first business policies should begin with you. What financial precautions do you need to have in place in the event you lose your job, become disabled, or have a tenant problem? You need to develop policies that will ensure your property is financially protected. Here are some good business practices to follow.
§ Do Not Put Your Rental Income in the Same Bank Account as Your Personal Income. Open a checking and savings bank account for the property you own, even if you live in it. Put the rent and your share of the mortgage in that account, and pay the mortgage with it. Call the property bank account something like “Household Operating Account”. If your property is a trust, open up the account in the trust’s name. Do not co-mingle funds. That is, do not put your paycheck into this account.
Anything the property needs to buy should come out of the operating account. This account will tell you whether or not you are able to pay the property’s bills with the tenant income. If you pay toward the mortgage, cut a check from your personal bank account and deposit it into the operating account. When income tax time arrives, you have all the information you need about the property in one place.
§ Put All Excess Rental Income in the Property’s Saving Account. Until you know you have enough money to get through a year, save all the monthly profits. As stated before, you need at least three months of mortgage payments in a savings account. If you use your rent profits on yourself, what will you do if or when the tenant doesn’t pay the rent?
You need money to fall back on if you are unemployed or disabled for six weeks. At some point you may need to buy an appliance, replace a hot water heater, or pay for snow removal during a particularly hard winter. You may want to buy another piece of property in the future. You may need to pay your insurance deductible if your building is flooded, pipes break, etc. Emergencies should be paid from the property profits, not your paycheck. Set aside excess rental income for replacements, emergencies, or personal loss of income.
§ Maintain an Interest Bearing Savings Account with at least three rent payments in it or three full mortgage payments, depending on how much extra cash you have each month. This cannot be stressed enough. If the tenant fails to pay the rent for a month or so, or you have to evict the tenant for non-payment of rent, having property savings will help you not having to go into your pocket to pay the mortgage.
§ Never Spend the Tenant’s Security Deposit. It is to be put in a savings account of its own until the tenant moves out. In some states like Massachusetts, you have to put both the security deposit and the last month’s rent in an interest bearing savings account. You must also tell them the name of the bank where the deposit and last month’s rent is held.
§ Use a Tenant Screening and Selection Process to choose the kind of tenant that you want to live in your building. Who you move into your real building could impact the way your tenant-landlord relationship will evolve. Take the time, attention, and money, complete due diligence in renting out your vacant apartment. Use the same screening process for each and every rental applicant. Prevention is always cheaper than legal eviction action. There is a book that provides detailed information and practical methods of tenant screening titled, “How to Pick the Best Tenant”, available in bookstores and online bookstores.
§ Prevention is Always Cheaper Than Taking Legal Action. A divorce, the unexpected loss of employment, crippling drug use, or disabling injuries are only some of the reasons why you may have to evict a tenant for non-payment of rent. A tenant dealing drugs from the apartment, frequent loud parties, and vandalism of your building or appliances are other reasons you may have to evict.
One way to avoid eviction is to address the problem early. Don’t wait until your property is destroyed, your good tenants leave, or you are on the brink of bankruptcy to take eviction action. Your policy should be to deal with a potential tenant problem before it gets larger. That means rent is due on the first and late on the second. Do not wait until month two to see if the rent will be paid.
§ Once You Begin the Legal Process, Continue it Until the Problem is Resolved. Some tenants will try to prolong the eviction process by promising their income tax refund toward the rent arrears. Or, they will give you a written payment plan to pay the arrears and the current rent each month.
Neither of these, or any other stalling tactic, should cause you to stop the eviction process once you initiate it. You have already spent money on constable fees, court fees, and perhaps even attorney fees. Let your tenants know that if they get behind in the rent, you will not stop until the rent is paid in full. Go ahead to court, and let them make their rent payment plans in front of the judge. They will think twice before they violate a court payment agreement.
§ Never Accept Verbal Payment Plans. If the tenant promises to pay you when she receives her income tax refund, do not believe it until she or he puts that promise in writing. If you insist on doing a rent payment plan without going to court, get it in writing and notarized. Then when he or she breaks the agreement, you have something to show the housing court judge.
§ Have a Rent Collection Policy that you will follow and the tenant can expect you to carry out faithfully. An apartment where the tenant is not paying rent is the same as having a vacant apartment. You are not collecting the income you need to run the property and pay the bills. Moreover, the longer you allow your tenant to not to pay the rent, the harder it will be for them to catch up. You are not doing your tenant a favor by allowing him or her to get behind in the rent.
This list is not all you need to know. If you own rental property, you are obligated to get all the information you need to be in the real estate business. If you have an attorney, go over the rules and ordinances of renting to tenants. If you own rental property and don’t have an attorney, get one soon. You never know when you will need one
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This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2011 Carolyn Gibson