Investing in rental real estate is an excellent way to diversify an investment portfolio and/or create an income stream. For every benefit, there are some drawbacks. It’s important to fully understand the logistics behind rental property ownership regardless of its property type (single-family or multi-family). At Chicotsky Real Estate Group, we help guide rental investors in their decision-making, taking into account the factors listed below.
Taking on an investment like a rental property requires a thorough understanding of your liability. You have rights as a landlord, but so does your tenant. You must know the federal, state, county, and city rules governing rental properties. Otherwise, you could find yourself spending hours in the courtroom. Additionally, there’s your financial liability. Even properties paid full in cash will have additional expenses, as detailed below.
Your liability starts with making sure your rental property is safe and habitable. The legal language is “implied warranty of habitability” and it covers all the structural elements of a rental property. For example: a roof that does not leak, doors that lock, working plumbing systems, heating and HVAC, and uncluttered common areas. Additionally, you must make sure the properties are free of vermin, mold, and you disclose environmental hazards like lead-based paint if the property was built before a certain year. See this list for a better reference of all that falls under the implied warranty of habitability.
Safety includes equipping every bedroom with smoke detectors and at least one on every level, a requirement by Texas Property Code § 92.255. As a landlord you must make sure these smoke detectors work before a tenant moves in. Texas law stipulates rental properties have security devices like exterior doors that have a doorknob lock or keyed deadbolt, a keyless lock, and a peephole. Sliding doors require a pin lock and a security bar or door handle latch. Texas law additionally requires the owner to rekey all exterior locks between tenants within seven days of new occupancy.
Reducing your liability means keeping up with important repairs. If you fail to maintain the rental’s habitability and safety, under Texas law, your tenants have several options including the right to self-repair and deduct the expenses from their rent.
Insurance, Taxes, and Fees
As a property owner, you are still liable for insurance and property taxes. You must account for these when investing in a rental. First-time investors buying a single-family home as a rental property can be shocked to find their property tax bill doubling.
Tarrant County residents will likely pay taxes to five local taxing units such as the county, a city, and school district. Some residents will be taxed by the Tarrant Water District or the Emergency Services District. The county offers a tax estimator tool.
Insurance on a rental property can be up to 25 percent higher than a standard homeowners’ policy. Another source claims the average landlord insurance runs $1,950. This is an area you can shop around, but you’ll still be incurring an additional expense.
Another consideration: if your rental property is subject to a homeowners association, you’ll need to budget for those annual fees.
2 - Rental Depreciation
Rental property ownership does have some tax benefits, such as rental depreciation. Owners use depreciation to deduct the costs of buying and improving a rental property. You must separate the cost of the building from the land, as land is not a depreciable asset. A typical process determines the separate fair market value of the land and subtracts this from the total purchase price.
The purchase and repairs cost is not fully deductible in the year you buy the property. Rather, the deduction is spread out over the usable life of the property, as defined by the IRS. Generally speaking, the useable life is defined in the Modified Accelerated Cost Recovery System (MACRS), which spreads the deductions over 27.5 or 30 years. Investigate the rules and consult with your attorney or tax professional about your specific rental property to understand how depreciation will work for you.
Typically, a rental owner will continue depreciating the property until:
- The entire cost has been deducted.
- The property is retired from service: sold, exchanged, converted to personal use, abandoned, or destroyed.
Note that rental property owners who earn over $25 million from their assets now have a limited interest deduction under the 2018 Tax Cuts and Jobs Act unless they spread their depreciation over 30 years.
3 - Think Like a Marketer
Inevitability, your rental property will sit vacant. If you purchase a multi-unit building, it’s likely your space will never be at full capacity. As a rental owner, you must be prepared to carry the property until the next tenant occupies the space.
Think like a marketer to minimize your downtime. Be ready to put wheels in motion as soon as you know the property or unit will be available. Start planning for any property improvements before the tenant leaves the space so you act immediately after they move out. Any downtime is incurring more expenses for you.
During the vacancy period, take measures to improve the property’s desirability by:
- polishing the curb appeal with fresh landscaping or new paint
- fresh, neutral paint on interior walls
- updating dated fixtures or hardware
- conducting capital repairs like replacing old appliances or installing a new roof
If you’d like to command a higher rental price, do market research. Gather data from market studies and tenant surveys to see what features attract higher rents and better quality rents. You can always talk to a real estate expert at the Chicotsky Real Estate Group to gain insights into market trends.
Single-family and multifamily dwellings, use the time before the property is available for showing to vet potential tenants and reduce the vacancy time. Have your application and pre-screening process ready before listing.
Marketing is another area rental property owners run into liability issues. The federal Fair Housing Act includes antidiscrimination rules when it comes to marketing and leasing properties. You are legally free to reject applicants on criteria like negative references from prior landlords or a history of late payments. However, you cannot reject tenants based on their race, religion, disability, sex, or familial status. A few exemptions do exist. We recommend becoming educated on the Fair Housing Act well before marketing and leasing your rental property.
4 - Handling Tenant Issues
Rental property ownership doesn’t mean turning into a crabby landlord. You can still be kind and have compassion. Nonetheless, you will need to be firm and ready to tackle tenant problems. If you are lucky, you will have excellent tenants who pay the rent on time and occasionally submit legitimate maintenance requests. Take our advice: it’s best to prepare for the worst and mitigate your risk.
Managing tenant issues start with a solid, legal rental agreement. Any mistake on the lease could lead to litigation problems when a tenant violates the agreement.
We use forms promulgated from the state of Texas, but if a client wants to use a lawyer specializing in landlord/tenant issues, they’ll need to ask for a compliant lease agreement. Under Texas law, landlords are required to make certain disclosures in the lease to their tenants. These include the tenants’ next steps if you fail to make requested repairs. You are also required to format in the lease a clause regarding tenant requests for security devices in boldface or underline and to have a domestic violence victims’ rights clause. These examples prove it pays to research what required statements you’ll need for a legally binding lease agreement. Other items to consider documenting in the lease:
- The tenant’s notice period when they choose to leave or if you choose not to renew their lease
- Notice about parking procedures at multi-family residences
- Procedures if the tenant fails to pay their metered utilities
- Procedures for failing to pay rent
- The eviction process
All rental property owners want tenants who take care of the properties and pay their rent on time. Sometimes, you will land these prime tenants. Other times, you’ll have tenants that won’t pay regularly or not at all.
Rental property owners need a foolproof way to collect rent. This process should be spelled out in the lease. Texas requires the late fee provision be included in the rental lease. Fees cannot be imposed until the rent is late one full day after it was due. You can charge an initial fee plus a daily fee for each day rent is late.
As soon as a rent payment is delinquent, you will want to set a process in motion. Do not back off on late fees. Understand that as a rental property ownership, you will need to call a bill collector and ready to start eviction at any time.
Additionally, if your tenants set down a deposit, Texas law requires the deposit be returned within 30 days after the tenant moved out, barring any reason for holding the deposit as laid out by state law. Normal wear and tear is not a condition for deducting the security deposit.
The Squeaky Tenant
Some tenants will contact the rental property owner only if absolutely necessary. Other tenants will call over every little item: a dead light bulb, the dirty air filters, the weeds in the yard. The cat next door. Your lease may want to define your maintenance responsibilities and your tenant’s responsibilities. Be ready with a game plan for handling a needy tenant.
The Problem Tenant
Other tenants are true problem tenants. Understand when you can and can’t start an eviction process. For example: if the tenant pays the rent every month but it using the premises for a drug operation, you have the right to evict.
Some tenants are nuisance tenants. Their behavior troubles the neighbors, or they have little regard for the property. As the rental property owner, you need to be ready to tackle complaints about a problem tenant.
No rental property owner wants to start an eviction process, but sometimes it’s absolutely necessary to remove the problem. Unfortunately, it’s not as fast a process as many owners would like.
State law regulates rent-related issues. For instance, if your tenant is overdue on rent, you must give them at least three days’ notice to move, unless specified differently in your lease.
You may want to change the locks on the property to keep problem tenants out. Fort Worth, Texas requires tenants to receive a written warning. This can be mailed five days ahead or delivered by hand/posted inside the front door with three days’ notice of the lock change. The warning must stipulate where the tenant can pay their rent and a number the tenant can call 24/7 for a new key to be received within two hours. If the tenant requests a key, the landlord must provide that key even if the tenant does not pay the rent.
Tarrant County requires evictions to be filed with Justice Court 1 and served in Tarrant County. Eviction cases are governed by Rules 500-507 and 510 of Part V of the Rules of Civil Procedure. There is a $46 filing fee and a $75 Constable fee for each person served with the notice. Filers will need to submit three copies of the Case Information Sheet and Sworn Complaint for Eviction. You cannot start an eviction lawsuit until 24 hours after posting a “Notice to Vacate” or a “Notice of Proposed Eviction.” Landlords may attach a claim for rent with the eviction case as long the unpaid amount is less than $10,000.
Once the case is processed, a court date will be provided. Adding the steps together, eviction cases can take weeks.
5 - Maintenance
Tackling maintenance will be an ongoing task of rental property ownership. All properties will require some work during their lifecycle. Proper maintenance reduces long-term capital expenses and repair costs. Owners have several options at their disposal for managing the upkeep of a rental property.
You can tackle the repair and maintenance of your rental property yourself. Be aware the law requires you to make any serious repairs quickly. If the water heater busts and floods the house, it’ll be your job to shut off the water, mitigate the damage, and replace the heater any time of day.
You will want a system to track all repairs and expenses. This is good for your tax records and for your liability. If necessary, you can prove to a court that you have conducted the repairs in a reasonable time frame.
Sweat equity can save money. Tackling basic projects like repainting and basic landscaping can add value without significant cost. However, for big repairs, like the HVAC unit or a busted window, you may want a specialized contractor.
Vetting a Handyman and Vendors
The less hands-on rental property owner may consider outsourcing repairs to a contracted handyman. Even if you do opt for the do-it-yourself route, you may still need to vet vendors like pest control companies or HVAC maintenance. The good news is by outsourcing, the liability for the repair work falls on the vendor.
It takes time to build a good contractor relationship. To find someone, you’ll need to do some research. Get quotes from various general handymen or service providers. For specialists like plumbers or electricians, read reviews and ask colleagues for recommendations.
For hiring an individual handyman, consider how they will be employed. Will they be an employee or a contractor? How will they be paid or reimbursed for parts? How will you be involved in the repair process?
In hiring someone to service your rental property, you can deduct their wages as a rental business expense. Research the specific tax rules governing hiring a rental property worker.
Property Management Companies
You can completely outsource the running and marketing of your rental property to a management company. As with vendors, vet the company. The most important question rental property owners ask is, “how much of the income the company will take?” Rates vary widely and according to different services. Clarify what the property management company will and won’t do as part of their services. For instance, some companies might include landscape maintenance, pest control, and repairs between tenants.
Alternative to Property Management Companies
Today’s tech solutions include property management platforms that operate as Software-as-a-Service. These platforms cater to rental property owners of all sizes and types to assist with rental maintenance management. Features include communicating with tenants, processing work orders, soliciting vendor quotes for repairs, and automated alerts. Some platforms include options for collecting rent. Others assist with property marketing, pre-screening tenants, and conducting background checks. Many work on mobile devices, allowing you to juggle property maintenance even when across the country. SaaS services work on a subscription basis and the fees vary widely.
Additional Considerations About Maintenance
Maintenance is necessary to retain your property’s value. However, unexpected expenses can occur. Even the best prepared rental property owners can find themselves facing a serious setback: a foundation crack in the basement, devastating flooding, faulty wiring. These unanticipated expenses mean risking a loss on the property when it’s time to sell.
6 - Preparing for Vacancy
Your property will stand vacant probably multiple times in its lifecycle. As the rental property owner, you must be able to float the property for several months. It’s essential to set up an emergency fund that can handle paying the property taxes, insurance, and mortgage while the property sits empty. Financial institutions do not care if you, the owner, have no income coming in. They will expect payment.
Debating Rental Property Ownership
Still not sure if rental property ownership is right for you? We understand it’s important to talk to as many experts as possible, like your financial advisor and a lawyer. We recommend consulting with real estate professionals, like at Chicotsky Real Estate Group, to learn about market trends in rental properties. Armed with this information, you will be well equipped to decide if rental property ownership is right for you.