Security Deposits are Essential for rented properties

 One of my colleagues recently had to evict a tenant.  The tenant stopped paying the rent, waited for the full proper service of notices to vacate (this took almost 2 months), and they encountered more problems than they had ever hoped they would.  This is the kind of scenario that almost every rental housing investor has encountered.  The kind that makes investors sell and never be landlords again.

However it is also an opportunity to learn from common mistakes, and figure out how to better your system next time.

Problem 1 - They didn't run a credit check.  In case you missed this post on tenant screening, go back and re read it.  Not knowing your tenants will hurt you in the long run (as evidenced here).

Problem 2 - Didn't follow up with the tenant.  This tenant brought in a dog.  This was a clear violation of the lease agreement, but since the owners weren't checking up on the property, they never knew.  A good landlord, and a good property management company will do these sorts of follow ups, in order to stop landlord deposit claims and will know when something like this happens on the property.

Problem 3 - No plan in place to evict.  These owners didn't have the process down cold.  Most landlords and management companies could run through an eviction without thinking about it, there is a very simple process to follow, and timeliness is the name of the game.  Get up to date on the processes in your area, or become a hostage to your tenant.

Problem 4 - Not enough security deposit.  This is one that is difficult to learn, but some people end up waiving their security deposit, cutting back their security deposit, or losing track of the security deposit.  This can be very damaging, especially in certain states (California).

You need to take the maximum security deposit allowable according to your state laws.  Here are some guidelines to follow -

First, figure out the total cost to re-carpet and re-paint the property.  Add to that 1 years worth of maintenance costs.  Add to that one year's repair costs for appliances.  Take that number, and add 1 years inflation, and that should give you a rough guideline of what you are going to need to spend when that tenant leaves.

The easier number that most people use is 1 month's rent.  This is also where state law comes in to regulate the amount you can request.  However here is a strategy you can use:

1) Collect the month's rent in advance (this way when they give notice, you have the rent already for that month).
2) Collect a "security deposit" equal to another month's rent, or your pre-determined number.
3) If you can legally do it, put the security deposit into an interest bearing account equal to the length of the tenancy (Check your state laws on this).

Second step, have contractors lined up for each of the aspects you will need to prepare the unit for rental once the current tenant leaves.  A rough sketch of who you need (and it is good to have roughly 3 contacts for each category):

- Carpet Cleaning
- Carpet Replacement
- Painting
- Unit Cleaning
- Plumbing
- Electrician
- Air / Heating Company
- Tile & flooring work
- Landscaper
- Debris Hauling

If you have 3 contacts lined up, you can bring in receipts and quotes to cover your costs in a timely manner.

Some states have begun requesting that the landlord provide receipts for any money that comes off of the security deposit.  Being able to turn this information quickly is important, you don't want to be caught up in paperwork when your job is to get the unit re-rented.

Third Step, begin marketing the property as soon as the previous tenant moves out.  Don't wait until it is fixed up, get the property out there in front of the eyes of potential renters immediately.  Use this time wisely, and keep a list of what your actual costs are for repairing the property.  This can be your baseline deposit for your next tenant.

Again, check with your state and local laws, but don't get discouraged.  Yes the laws favor tenants, yes the laws make things difficult for landlords... but the one thing the laws do provide, is a methodology for establishing a good system for managing your property.  Take it as a learning experience, not a problem.

Comments

Post a Comment

Popular posts from this blog

Brownfield Site Acquisition: Six Ways To Reduce Your Liability

 Land for development comes at a premium, however brownfield development sites offer a potentially cheaper market entry alternative. Prospective developers choosing this route are best advised to seek the advice of a professional to mitigate any risks. In this week’s blog article, it is my pleasure to introduce the author Rob Allen, an environmental consultant specialising in the assessment of land quality for developers: As an environmental consultant specialising in assessment and remediation of contaminated land, I am regularly contacted by developers looking to acquire brownfield sites.  Cleaning up pollution can be a costly process so naturally, my clients look to mitigate these risks wherever possible.  In this article I have distilled some of my usual advice into six key points. 1.) Risks from Contamination Might not be Obvious Clearly, if you are purchasing a chemical factory or petrol filling station, then considering the risks from contamination and tenancy depo...
Read more

The California property Roller Coaster

 The California Real Estate Market is quite the roller coaster.  In the 70's it was flat, in the 80's it spiked, in the 90's it fell, in the earlier half of this decade it shot through the roof, and now it appears flat again.  This up and down performance has many analysts, investors and economists scratching their head, and postulating about what the upcoming year will do for California real estate.  All the advice of which is for not, because no one truly knows.  However California isn't as hard to read as all of that. First understand the history. In the 70's real estate was flat because interest rates were extremely high. In the 80's huge investment in technology and aerospace brought lots of jobs to California In the 80's the interest rates came way down as well. In the 90's aerospace jobs and tech jobs hit a wall, and left California In the late 90's tech investment again surged In early 2000 the interest rates came further down In mid 2...
Read more

The importance of landlord and tenant licensing

 As we progress into 2018, Brent council is proceeding with it’s tightening up of controls for property in the borough. A new announcement made of a selective licensing scheme covering five wards, which will come to force on 1st June 2018:     Dudden Hill     Kensal Green     Kilburn     Mapesbury     Queen’s Park Brent already operates a borough wide additional licensing scheme in the wards of Harlesden, Wembley and Willesden. In July 2017, Brent Council’s cabinet had a majority vote in extending licensing to all privately rented properties in the borough. This was over ruled by the government, after a permission request to the Secretary of State denied the borough wide licensing scheme. However Brent were allowed to enforce the council’s area 1 designation, which established on the grounds of poor housing conditions, anti-social behaviour, migration and high levels of crime. This now means that every priva...
Read more