With a depressed housing market and historically low interest rates increasing numbers of individuals are purchasing residential real estate for investment rental purposes. In fact, earlier this week Warren Buffett identified single family housing as one of the most attractive current investment opportunities. However if certain precautions are not taken, investors often find that becoming a first time landlord is challenging to say the least. We offer the following tips if you are considering purchasing residential real estate for investment purposes:
- Form an Entity. In order to reduce your personal liability, we recommend investors form an entity to purchase and hold their rental properties. Limited liability companies are a typical choice due to their flexibility and tax treatment. Read our prior blog post for a comparison of entity types. The entity should be formed prior to the purchase of the property as a conveyance of the property from the individual investor into the entity may serve to invalidate the existing title insurance. If there is financing on the property such a conveyance may also trigger a “due-on-sale” clause which could result in the entire balance of the loan becoming immediately due.
- Get and Maintain Insurance. Not only should landlords carry property and liability insurance, there are new insurance products on the market aimed at protecting landlords from tenants who default on rent payments. A recent article in the Denver Business Journal describes how the Colorado Association of Realtors has recently endorsed rent default insurance.
- Have a Good Lease. Have your lease prepared or reviewed by an attorney prior to renting the property. Your attorney can provide advice regarding the enforceability of the lease and provide recommendations regarding existing or lacking provisions in the lease aimed at protecting your interest. It can be significantly more costly to discover deficiencies in the lease once a dispute arises or when an eviction becomes necessary.
- Perform Background Checks. Background checks can serve to eliminate undesirable tenants. A background check will provide information such as a credit score, criminal history, and verification of employment which will help you to decide whether to rent to a potential tenant.
- Don’t Delay in Evicting Bad Tenants. Once a tenant makes a habit of breaching the lease, especially in the case of nonpayment of rent, it is generally advisable not to delay in evicting the tenant. In most cases, delay merely results in additional lost rent and prevents you from replacing the bad tenant with a tenant who is willing to pay the rent on time and comply with the other terms of the lease.
If you would like more information regarding your investment real estate or landlord/tenant issues, please contact our Business Law Group partner, David A. Closson at [email protected].