Have you been thinking of adding an investment property to your portfolio?  Here are the top 10 issues you need to consider when becoming a landlord.

1.  Collecting a security deposit.

Security deposits are a great way to encourage tenants to take care of the property, and a great way for you to be reimbursed if they don’t.  If you decide to charge a security deposit, make sure to follow the Residential Landlord and Tenant Ordinance, “RLTO,” (or your local equivalent if the property isn’t located in Chicago) for providing receipts and notice of where the security deposit is held.

You should also have a record of the condition of the property when the tenant moved in.  One way to accomplish this, is do a walkthrough with the tenant prior to the start of the lease term.  On this walkthrough, write down the condition of the premises and have the tenant sign it.  This way, if the tenant tries to dispute that they caused any damage, you have a signed written document stating otherwise.

2.  Make sure to look at the current leases if you are buying a property with tenants.

If you are purchasing a property that currently has tenants, you want to make sure you see a copy of all leases.  This will tell you the ending date of all leases, the rental income you can expect, and any of your obligations as landlord once you own the property.  This is especially important if you are dependent on the rental income to make your monthly mortgage payments.

You also cannot change the terms of the current leases.  You cannot change the rent because you don’t think it’s high enough.  You can’t suddenly require the tenant to pay their own utilities if the lease requires the landlord to pay.  You are legally required to follow the terms of the lease.  You can only change the terms of the leases once the current lease expires, so make sure you can fulfill the current obligations as landlord.

3.  Don’t forget to pay interest on the security deposits.

Under the RLTO, you are required to pay the tenant interest each year their security deposit is held.  If you fail to do so, the tenant can be awarded twice the security deposit in damages.  It doesn’t matter why you didn’t pay them the interest.  This means, if a tenant pays a $1,500 security deposit and you fail to pay them the interest (usually less than 25 cents!), they can be awarded $3,000 by a judge if they decide to sue you.

4.  Make sure you follow the RLTO on how to transfer the security deposits if you are buying a property with tenants.

As you are probably starting to notice, it’s very important to be familiar with the RLTO.  If you buy a property and the current owner took security deposits from the tenants, you will need to make sure that the current owner transfers the security deposit to you according to the provisions of the RLTO.  You then have to provide the tenants with notice the deposit has been transferred.

5.  A good property manager can make your life easier.

Maintaining a property and following up with tenant repair requests can be a full time job all in itself.  Oftentimes, repairs have to be addressed immediately (for example, if the heat goes off in the middle of winter, or there’s a leak in the unit).  This can be a burden if you have a full time job.  A good property manager can make life easier.  Make sure you read reviews and thoroughly research the company to ensure they will do a good job.  You should also make sure you take this cost into consideration when budgeting.

6.  Limit your liability exposure to lawsuits.

No one thinks that they will get sued, but it happens frequently.  Tenants, or their visitors, may slip down the stairs, or they may slip on ice outside on the property, and injure themselves.  You should consider forming an LLC or a Corporation to own the property.  Correctly forming and maintaining an LLC or Corporation will protect your personal assets in the event of a lawsuit.  Make sure to check with your lender on how this will affect your mortgage terms.  You should also make sure you have great insurance coverage on the property, and consider adding umbrella insurance to your coverage.

7.  Be aware of the laws surrounding late payments and evictions, and follow them!

The RLTO outlines what you as a landlord can do when your tenant does not pay their rent on time.  It also outlines the steps you need to take if you wish to evict the tenants.  You should make sure you follow these provisions to the letter, or else evicting your tenant can become messy and cause you unnecessary headaches.

8.  If you own a condo make sure you know of any rental restrictions.

If you are thinking of renting out a condo unit, make sure you know the association’s rules regarding rentals.  Is there a rental cap?  Are rentals allowed at all?  Are there rules surrounding how long leases have to be?  Make sure you do your homework on this before you own a condo that can’t be rented out

9.  Properly screen potential tenants.

A good tenant will make your life easier.  Before a prospective tenant signs a lease, make sure that you properly screen them.  You can run a credit and background check (make sure you get consent!).  You can also contact their last two landlords, but verify the landlord’s contact information independently so that you know you are speaking with the actual landlord.  Make sure you are aware of the federal, state, and local discrimination laws when you are screening applicants so that you do not open yourself up to a discrimination lawsuit.

10.  Have an experienced real estate attorney you can call and rely upon.

As outlined above, there are a number of legal issues to be aware of as a landlord.  A competent real estate attorney can help you navigate the legal hurdles and take complicated legal matters off of your plate.  The Law Office of Meghan Stokes LLC has experience with rental/income properties and can help address any questions you may have.