Top 4 Nightmares For Real Estate Investors
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 not without risks; the good news is, they don't have to keep you up at night. Here we have a look at some risks that can haunt rental property owners and what they can do to scare them off. (For background reading, see Tips For The Prospective Landlord.)
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- Tenant Terrors
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.
However, while most state laws have reasonable provisions that allow landlords to evict bad tenants, balancing tenant and landlord rights is a tough balance to strike. As such, most states also allow the tenants to fight the eviction notice in court, which can turn into a drawn out battle as the both tenant and landlord fight to prove who is abusing whom. The best defense against this problem is to choose your tenants very 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. (Becoming A Landlord: More Trouble Than It's Worth? Find out here.)
- 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 multi-unit 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. If this happens, it can mean 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 in which your property is situated 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. (Learn more about property investment in 8 Ways To Make Money With Real Estate.)
For example, in the borough of Belmar, New Jersey, 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 which bylaws you could fall prey to, you can make take steps now to protect yourself.
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- The Value Abyss
The recent real estate bubble and foreclosure crisis in the U.S. created a bit of a scary alternate universe for property owners to fall into. It's called slumburbia, and it often comes complete with dark, abandoned buildings, shady characters and a definite 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 extensive article that appeared in The Atlantic in March 2008 cited rising crime rates and gang activity as problems in these areas as well. 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. So, 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 such extreme swings in the property's desirability and value. (For more tips, see Top 10 Features Of A Profitable Rent Property.)
The Bottom Line
Real estate investing has its risks, but you can't just cover your eyes and hide whenever being a landlord has you on edge. Instead, it's best to examine the risks that could become nightmares for you and take steps to protect yourself.
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