Investing in rental properties is a great way to make money in real estate as you benefit both in the short term (from the rental income) and in the long term (from natural appreciation). Buying a foreclosed property is an even better way to make money as you get to buy a cheap property under market value and rent it out at the market rental rate after some repairs and fixes.
However, if you are a first-time rental property investor, there must be thousands of questions about becoming a landlord running through your mind. To help you feel at ease about this process, we provide you with the most important things a first-time landlord buying a foreclosed property should know.
When you buy a foreclosure, the property could have been either a primary residence or a rental property. In case it was a rental property, it could come with or without tenants currently living on it. First, we will take a look at what you should keep in kind in case you buy a foreclosed property with tenants living on it as this is the most complicated situation.
1. You Cannot Simply Evict Previous Tenants from a Foreclosed Property
Since the “Helping Families Save Their Homes Act of 2009” came into power, buyers of foreclosures cannot evict preexisting tenants unless they intend to live on the property. In this case they still need to give a 90-day notice before terminating the lease.
However, since you bought the property to rent it out, this situation does not apply to you, so you have to honor the lease and let the tenants remain on the property.
2. You Should Consider Your Options of What to Do with the Preexisting Tenants
Although you are obliged by law to continue the lease, you should investigate very carefully why the previous owner of the property had to go into a foreclosure. The reason could have actually been the tenants. If they were delaying the rent each month or not paying it at all and the landlord was too hesitant to evict them, this could have contributed to his/her financial distress and inability to pay for the property.
It is thus best to try to approach the previous owner and get his/her honest opinion on the tenants. Also, give them a couple of months to see how they will be as your tenants. Maybe they are good tenants who were treated badly by the previous owner.
If everything seems to be going well with the current renters, then this is great news for you as a first-time landlord buying a foreclosed property as you actually get a rental property with tenants, so you can skip the whole process of marketing your property, tenant screening, etc.
If, on the other hand, the tenants have contributed to the foreclosure or they start causing troubles to you, you have to be ready to depart with them. To learn how to do that – keep reading.
So, in case you purchased an inhabited distressed property, you have to know a few things as well:
3. You Should Only Fix Your Foreclosed Property As Much As It Makes Financial Sense
If you invest in a foreclosed property, chances are that the previous owner might have left it in a very distressed condition. Most foreclosures need serious work before they can be rented out.
Though you are probably quite excited about buying your rental property under market value, you should be careful not to waste the money you saved from the purchase on fixing the distressed property unnecessarily.
By all means, a rental property should be in a fully livable condition; all functional problems should be eliminated; it should be repainted and cleaned. However, there is absolutely no need for lavish redecorating and for luxurious furnishing.
Conduct diligent analysis before starting repairing the property to see how much each fix will cost and how much extra rental income it will bring you each month. Make sure that any further investing in the rental will bring a positive return.
After you’ve fixed up your distressed property, it’s time to start looking for good tenants for it.
4. You Must Conduct Careful Tenant Screening
Do not make the mistake of hurrying to rent your property to the first tenant who asks to live in it because this might cost you dearly. Instead, as a landlord you should engage in careful screening of prospective tenants to find a good one.
As you take the time to market your rental, sit down and put a detailed list of all the criteria a good tenant should meet. Don’t forget such factors us:
- Previous tenant history: Ask for recommendations from previous landlords. A history of eviction is a particularly strong red flag.
- Employment history: You want a tenant with a stable job who will be able to pay rent on time. Ask for a recommendation from the current employer as well as a past one.
- Credit history: You want a reliable tenant with all finances figured out.
- Criminal history: If your prospective tenant has broken the law ones, he/she might do it again.
After you go through the applications, take the time to meet personally with and interview each short-listed candidate. The time invested in choosing the right tenant will be worth it once you rent out your property to a reliable individual paying his/her rent every month and taking good care of the place. So, do not hurry to rent out your property to just anyone to fill in the vacancy.
5. You Cannot Discriminate Against Tenants
While you should screen potential tenants carefully, you have to make sure that you don’t discriminate against them during the screening process or after you start renting out to them. According to the “Fair Housing Act”, discrimination on the basis of race, color, religion, sex, familial status, or national origin is strictly forbidden and will get you in trouble with the law.
While you have the right to choose who lives in your rental property, you should use objective and measurable indicators such as income, employment history, and credit history.
6. You Need to Draft a Strong Landlord-Tenant Agreement
As you are preparing your distressed property for renting out and selecting your tenants, you need to start working on a lease agreement. There are plenty of good templates you can find online which you can adjust to your specific situation as required. In the landlord-tenant agreement, make sure to cover every aspect of the rights but also the responsibilities of both the tenant and the landlord. The more detailed the agreement, the easier it will be to deal with your renter in the future as he/she will know what exactly to expect from you as well as what you will expect from him/her and what will happen if any of you fails with his/her responsibilities.
7. You Should Familiarize Yourself with the Eviction Process
Although one of the last things you want as a landlord, especially a first-time one, is having to go through an eviction, you have to learn all about this process before you even rent out your property. You need to know what situations allow for an eviction and what don’t. Moreover, there are certain notices you have to give to the tenant before you can start an eviction. Also, remember that you cannot enter the property and try to evict the tenant or remove his/her belongings on your own. You need a permission to do that. Since eviction laws vary from one place to another, make sure to study the local legislation to be prepared.
Reading about all the things that you need to know as a first-time landlord of a foreclosed property might sound stressful and even intimidating. However, being a real estate investor in distressed properties and a landlord does not have to be a negative experience. To the contrary, as long as you enter the business prepared and with the right knowledge at your disposal, rental properties remain one of the best ways to make money in the short and long term.