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6 Things To Do Before Agreeing Your First Lease
So after the merry-go-round of property hunting, the nightmare of managing contractors, and navigating the rough seas of real estate agents and tenants, you have finally met a serious prospect that seem to agree with your terms of rental.
And he is ready to put his money where his mouth is and sign your first lease agreement.
But don’t pop the champagne just yet. Because you are now officially walking into a mine zone. And any mistake on your entry can have dire consequences on your business as a landlord.
Here are 5 key things you should do before signing that tenancy agreement.
1) Consider your options for separate entities
The goal here is to not allow your business financials to intertwine with your personal finances. That can become a real mess. And you’ll end up having to give all your profits to a CPA to sort out the mess when the IRS calls.
Asset protection is something every business person must take seriously.
But most importantly, and probably on your mind as well, is that you don’t want your personal assets to be under the hammer should your venture into landlording fails.
And having that kind of pressure on you could also affect your performance as a manager.
In almost any small business, it is just 1 lawsuit away from going bankrupt. That’s not that unlikely a scenario when you take into account the suing culture that is prominent in capitalistic economies.
Even if you had never given this a thought, you eventually will as you mature as a business-minded landlord. And if you had done nothing about this issue from the start, you’d probably regret not putting plans and structure in place to address the issue.
So it’s best that you take this seriously from the start.
The simplest way is to incorporate and use a limited liability company for your real estate activities. Although that would mean extra expenses when you are just starting out, the peace of mind will be well worth the money.
Just take note that hiding behind a corporate facade does not offer you 100% protection. A judge in court can still issue an order to go after your personal assets.
This is why you might also need a second level of protection.
Some people feel that insurance is as evil as the devil.
Here are hypocrites making money off putting fear into people about the unpredictability of life and death. They take our monies willingly and find every possible reason not to pay up when you make a claim. Executives then pay themselves mega bonuses while placing risky bets (think sub-prime) in the financial markets… then want the tax payers to pay for their failures.
I just wonder why taxpayers did not have a choice of rejecting their “claims” during 2008 like how insurers often reject ours.
Yet whatever the case with consumers, insurance is critical for business. Especially real estate.
What you should get yourself familiar with are:
- Liability insurance
- Renter’s insurance
- Fire Insurance
- Flood Insurance
- Umbrella policies
You can read more about this topic here.
3) Banking facilities
Remember that you are not freelancing as a landlord where what the business makes is what you make.
Logically speaking, you can set up your operations that way. But it is not a smart way to do things. Wouldn’t it be easier when all your business transactions are in an account solely used for these activities?
At the minimum, you’d want to have a current account that you can write checks for. This account will allow you to deposit rentals and pay for expenses like maintenance and repairs.
Some features to look out for and consider include:
- Free checkbooks
- Interest on deposits
- No charges on low running balances
- Credit cards and debit cards linked to account
- ATM cards
- Internet banking functions
- Mobile app
- Monthly statement sent by mail so that you cal file them for reference
4) Prepare documents
The lease agreement is not the only form that you need to prepare. No, that would be too easy.
If you have not come to your senses yet, it’s time to do so and throw the concept of good faith out the window.
You will be dealing with tenants… and people can be as cunning and shrewd as you. This is why you need to document all the stuff you do concerning the property in black and white.
You might think that this is exaggerating and surely a “whirlwind in a teacup” type of thing. But when you run into problematic tenants and realizes that a one-piece acknowledgement document would have swung conflicts in your favor, these documents won’t look so stupid after all.
As real estate regulations differ from state to state and country to country, it is best that you have a good chat with an experienced real estate investor regarding what forms and documents you need to have in your cabinet.
Get advise from a lawyer if need be.
5) Organize the documents
Many rookies feel that since they are only starting with 1 house for rental, they can get away without any proper filing protocols.
They may have a point there… provided you don’t misplace important documents.
Once you scale up your operations, things can get pretty messy pretty fast. It’s best practice to organize your documents property from the start.
Use a separate file or folder for each apartment, and for each tenant.
6) Create your system of operations
The difference between a good landlord and a great one is in the use of systems.
Now I’m not talking about computers, servers and software. I’m talking about how you manage issues concerning every aspect of the business.
You need to have your policies in place so that whenever a pesky tenant calls you in the middle of the night, you have a set of processes in place to determine whether to act immediately or wait. And when a bad neighbor parks his car in front of your property ticking off a tenant, what will be your course of action.
What if a common house lizard gets into the place and you have a tenant who is absolutely terrified of such a harmless creature? What do you do?
Write and draft out your policies. Then file them in your own bible of rental property management. This will most likely be the documents that you access the most often. And when you hire people to manage your operations, it will offer them the guidance of how you want your business operations to be conducted.