After putting pen to paper and crafting a careful budget of cash flows, many prospective landlords feel confident to move forward on an investment property. However, there are considerations beyond the basic cash flows to review before becoming a landlord. Managing a rental property comes with managing tenants – and that can mean juggling both big personalities and big laws regulating housing.
First, prospective landlords will need to review the Fair Housing Act. It is illegal to discriminate against potential tenants based on protected classes including race, national origin and religion. While landlords can legally reject prospective tenants based on credit history and income, not all background screenings are equal. Landlords should be cautious before taking the plunge into the pool of information available on the internet and insure that all tenants undergo the same screening process. But federal law is only the beginning when it comes to legal considerations for landlords.
Beyond federal law, prospective landlords will need to review local city and state laws. There is an incredible amount of variation between different geographic areas with respect to housing laws. Landlords who consider proximity to their own occupied home may find themselves limited by specialized regulations in certain metro areas.
For example, some cities have enacted rent control while others require specific just causes for evictions. Cities may have their own housing agencies beyond the federal Department of Housing and Urban Development. Homeowners Associations (HOAs) may also enforce more specific rules in their communities. While a lease may seem like a straightforward contract, evicting tenants for failure to pay rent may be more complicated than landlords think. Future landlords will need to know the rules for evictions, tenant screening, security deposits and lease agreements (among other things!) before taking steps to manage a rental property. Landlords should also factor in the possibility and impact of rent control measures when forecasting cash flows.
So where should prospective landlords look for properties? Some landlord-friendly states include Texas, Indiana and Colorado. These states are considered friendly due to the relative ease with which they allow landlords to pursue evictions and breach of lease contracts. A growing metro area in one of these landlord-friendly states, such as Austin, may be especially attractive for an investment property. That being said, states absent from the “landlord friendly” list should not necessarily be avoided. If landlords perceive higher risk to managing property in these states, they may choose to charge higher rents or otherwise account for the risk.
Finally, prospective landlords should recognize that interpersonal skills may pay off more than an ironclad contract ever will. Remember to practice professional and respectful communication no matter how difficult the tenant or vendor. Some tips to communicate with difficult personalities include focusing on specifics, documenting communication in writing and remaining calm. Allowing a contractual dispute to become emotionally charged can only exacerbate problems.
Wherever potential landlords decide to invest in an income property, it pays off to research federal and local laws ahead of time. When in doubt, consult with an attorney. Knowledge is power!