We all know this guy. He has a few doors, he seemingly does pretty well for himself or doesn’t seem to have an issue with money for some reason. He doesn’t ever seem to have any problems with his properties, or if he does he always seems to not be worried about them.
I affectionately refer to this person as ‘The Hobby Landlord’ because he still probably works somewhere else, and uses his real estate as a retirement plan for the future. He does not know the exact rules of how to be a Landlord, and pretty much flies by the seat of his pants as far as lease agreements are concerned.
Because of his happy-go-lucky personality, this Hobby Landlord may not know that there are some major rules that he is breaking, especially since COVID has been met with a whole new set of regulations. Most Tenants may not know about these rules, so they go off of what the Landlord and the Tenant have agreed upon verbally, but not all Tenants are like that and you as an investor will never really know which ones those people will turn out to be.
Because of this, we are looking at a few categories that should be watched as to avoid as much legal involvement as possible:
- Lease Agreements
- Life, Health, and Safety
Our favorite Hobby Landlord is back at it again! He needs to rent out his recently vacated unit, and he places the property on the market for rent. Because he has not priced the property to correct market rents he is flooded with inquiries almost from the minute it is posted. This is a great problem to have as a Landlord, so he starts to go through the applications received.
His criteria seem to be fairly straightforward, and after his first review, he is left with three applications. All potential tenants qualify for the property under his requirements, however, two of these tenants are of Caucasian descent while one is of Asian Indian descent.
Our favorite Hobby Landlord then decides to throw out one of the applications because he doesn’t want to be left with the curry smell in his house after these tenants move out. Now, this may seem like a harmless choice to some people, however, this could be construed as discrimination against Asian Indian people because of their origin, and the food of their country. If these people were to find out this could get our favorite Landlord in major trouble!
Take the time to understand the different laws around discrimination and check out the Fair Housing Act to help out with some further understanding as well as a Housing Investor.
Now that Hobby Landlord has found his Tenant, he has moved on to trying to create an agreement between himself and the Tenant. He chooses not to use a professional company, but instead to download a random form off of the internet to create his agreement with his tenant. Now in doing this, he has in fact saved himself about $200, but because he did not take the time to review the lease agreement he realized that although he had signed an agreement there were terms that were not taken into consideration.
For example, now that Hobby Landlord has found his Tenant for his rental, he has waited a few months, and decides that he would like to see the interior of the property to determine if there are any damages to the unit. Because of this he goes down to his property and knocks on the door and lets the Tenant know that he would like to inspect the unit. The Tenant proceeds to let him know that he is not welcome in the unit and slams the door in his face.
Obviously upset, Hobby Landlord goes back to his home office to check his lease agreement to see how he can get into the property and realizes that there is no clause which allows him into the unit if the Tenant has possession of the unit. So now he will not know unless the Tenant actively lets him into the unit, what the condition of the unit is.
My question is, what about those other instances that you haven’t thought about or gone through? Are you protected for those? Is it worth saving $200 to see if you will end up doing fine with this real estate investment?
Life, Health, and Safety
Mr. Hobby Landlord, has now placed his Tenant (and to this point it seems like has had some issues without proper management)!
This Tenant takes the property, and continues to quietly use the property for a number of months before our Hobby Landlord finds out there has been an issue. The water heater on the property has gone out. Because he has just been notified he tries to get a plumber out to the property to light the pilot light, as that would be the easiest fix possible. Once the plumber comes out to the property, they notice that in fact the pilot light is on, but that there is another issue with the water heater, and it will need to be replaced. In order to replace it, the plumber will charge around $1800. Mr. Hobby Landlord hears this number and starts to panic because he doesn’t have these funds just lying around. He decides that he is going to not replace the unit but look for a better price.
Because the water heater is out, and he wants to get the unit replaced relatively quickly he decides that he is going to call some other “plumbers” (i.e. go down to the day labor pool at Home Depot). These “plumbers” say that they will replace the water heater for $900 in total. That is HALF of the amount of our previous plumber! What could go wrong?! So Hobby Landlord hires our Home Depot Joe who goes out to fix the water heater.
Our Hobby Landlord now feels much better knowing that his problem is being taken care of by Home Depot Joe, but what he doesn’t realize is that Home Depot Joe has hooked up the water heater incorrectly, so although the water heater is replaced, the Tenant still does not have hot water. This takes another three days to fix, and now Hobby Landlord’s Tenant who is irate because they haven’t had hot water in almost a week says that they are not going to be paying rent for the time they didn’t have water.
This is going to cost Mr. Hobby Landlord another $500 in rent cost, so although he did save $400 in this transaction, the Tenant is now irate, and starts to report all of the items wrong with their unit. This in turn costs more headache, time, and effort on Hobby Landlord’s part which makes this not look like so much of a win-win over time.
At the end of the day, for the seemingly “worth it” cost savings there can be a lot of downside which you just don’t recognize until you are a part of the world for long enough. Although Landlording is not rocket science, there is a degree of finesse and the world is also everchanging which changes the regulatory environment of these real estate assets because of this I feel that it is important to have someone in your corner that is taking the time to learn and understand these processes so you can be protected as a Landlord.
Thanks for taking the time to read this information!
Until Next Time,
Sanjeev Advani (Sunny)
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