Top 4 nightmares for real-estate investors
Owning rental property has its risks, but you can take steps to protect yourself.
If you're a landlord, or hope to be one, you've surely heard horror stories about the perils of owning rental property. Any landlord will tell you that renting out your property is risky; the good news is that the risks don't have to keep you up at night. Here we look at some of the risks that can haunt rental-property owners and what they can do to scare them off.
If you treat your tenants well, most will treat your property with respect. Some will not, and if you end up with one of these tenants, you could be in for a long, hard fight. Tenant rights vary by state; in California, for example, a landlord can terminate tenancy with only three days' notice if the tenant has "materially damaged the property," according to California's Department of Consumer Affairs. (Bing: Are you a bad tenant?)
However, while most state laws have reasonable provisions that allow landlords to evict bad tenants, balancing tenant and landlord rights is tough. Most states also allow the tenants to fight the eviction notice in court, which can turn into a drawn-out battle as both the tenant and landlord fight to prove who is abusing whom. The best defense against this problem is to choose your tenants carefully, to ensure they are aware of the terms of their lease agreement and to hold up your end of the agreement by fulfilling your responsibilities as a landlord. Tenant horror stories abound, but setting yourself up to avoid these issues will go a long way.
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The scourge of zoning
A common problem for new landlords is buying a property without checking zoning permits. For example, suppose that you buy a multiunit building only to be notified later by your city that the previous owner had not obtained the necessary permits required to convert it from a single-family dwelling. This can mean paying big fees or even being forced to turn the dwelling back into a single-family home. This is bad news if you were counting on three rents to cover your mortgage payments.
Similarly, rezoning can pose significant headaches for real-estate owners who are counting on the appreciation of their rental property. For example, a city might want to amend the zoning ordinance that applies to the area where your property is in order to allow a parcel of land in that area to have a different use than the surrounding district, such as adding commercial real estate to a residential area. Generally, residents in the neighborhood get the opportunity for input, but if it is rezoned anyway, it could affect vacancies, rents and property values.
Municipal and state regulations are designed to protect both tenants and landlords, but when new regulations — also known as ordinances or bylaws — are passed, this can create a hassle for property owners. For example, some municipalities have adopted what are referred to as "animal house ordinances," which can hold the landlord responsible if the tenant's behavior disturbs the neighborhood or puts others in danger.
For example, in the borough of Belmar, N.J., a landlord can be required to post a bond of up to $5,000 if an administrative hearing finds that the landlord has not taken adequate steps to prevent such problems. Other similar ordinances may fine landlords for noisy or disruptive tenants. As a landlord, you can avoid this headache by being aware of the bylaws and your responsibilities as a landlord. If you know the bylaws, you can take steps to protect yourself.
The value abyss
The recent real-estate bubble and foreclosure crisis in the U.S. created a scary alternate universe for property owners. It's called slumburbia, and it often comes with dark, abandoned buildings, shady characters and a sense of foreboding. Essentially, as a result of the real-estate market crash and the increase in foreclosures, some newer suburban areas were left with so few residents that many homes sit vacant and the neighborhoods have fallen into disrepair. An article in The Atlantic in March 2008 cited rising crime rates and gang activity as problems in these areas. As you can imagine, this didn't do much to prop up property values that were already sinking.
Although the mortgage crisis was an extreme case from which many property owners could not escape, landlords can protect themselves from this peril by buying property in neighborhoods that are likely to retain their desirability. If you own a property that's in a central location or is near a major university or other important local amenity, you are less likely to experience extreme swings in the property's desirability and value.
As a former real estate agent and current landlord, the article has some value for the first time investor. I totally disagree with the animal house ordinance as I will never understand how they expect landlords to keep tenants behavior in line when in a lot of cases the police have a hard time enforcing the law. I also feel the need for legislation and laws to draw the line between civil and criminal behavior in the willful destruction of property by a tenant. It doesn't seem to matter how good of a background check you do and how much of a deposit you get, when a tenant gets angry they take it out on the property and you are left holding the financial bag. MN Statute 504B Sec 178, sub. 8 states that the security deposit cannot be used to pay the rent by the tenant when they move out but how often does this occur. No penalty so why the law???? I could go on and on.
Anyone who reads the newspapers, or looks out their window can see house prices will continue to drop for years to come. Real estate will not be "an investment" for years to come.
On top of that, costs for owning are soaring----taxes, insurance, maintenance---and then the expensive cost of evicting a tenant.
Courts are so back up it takes months to evict a dead beat. Add that to the costly damage a mad tenant can do......It's hard to beleive RE agents are still pumping this dead horse.