As the prices for homes continue to drop as foreclosures and abandoned properties continue to pop up in virtually every neighborhood,
there may be a few people considering whether these homes could make for good investments either as properties to fix and
sell or to buy and repair for a rental property.
While this can work in some situations, particularly if the person fixing or renting is handy and can handle home-improvement projects without having to pay someone else to do them, attorneys who have done this or considered doing this suggest that others proceed with caution.
John Floreancig, executive director of the Indianapolis Legal Aid Society, decided to rent his old home after he bought a
new one. He happened to know a couple who was looking to rent, so he lucked out when it came to finding new tenants. However,
even though he said his tenants were great, there is no such thing as perfect tenants.
For instance, the kitchen floors required a particular kind of cleaning solution, but the tenants used the wrong kind and ruined the grout. While living there, they also broke the refrigerator, which Floreancig had to replace because appliances were included in the lease. He also said they didn’t always call him right away if there was a leak or other issue that, had he noticed it in his own home, he would have fixed right away.
He said he enjoyed the experience overall and was able to make some money because he was able to do most of the small jobs himself, such as handling minor plumbing issues. He said attorneys or anyone considering becoming a landlord should think of it as another business.
“I was always thinking about it, wondering if something would go wrong,” he said.
He added if he got a call from the tenants on a Saturday morning, he would have to check on it, even if he had other plans.
He also said all landlords need to be aware of the various laws as they relate to landlords and tenants, something ILAS handles for clients.
To start, landlords need to screen their tenants. Floreancig suggested landlords ask the tenant’s permission to get a credit report.
“If someone won’t give you the information you need for a credit report, that’s a red flag,” he said.
Another potential red flag is if they’ve moved more often than would seem reasonable to the landlord, particularly if they don’t seem to live in the same place for more than a few months at a time.
He said landlords should ask tenants about pets and be clear as to whether pets are allowed.
Next, landlords need to have a good lease to protect them but something that is also fair to the tenant, he said. The HUD lease for Section 8 housing is typically a good start, he noted. It also is important for basic things to be covered – how much is the rent, what is the exact due date for rent and what is the grace period, what is the penalty for late or unpaid rent, what happens when the lease expires – can the landlord raise the rent between leases, what happens if the tenant needs to break the lease, and does rent include utilities, Floreancig said.
It’s also a good idea to include conditions regarding what’s expected of them to repair and maintain, he said, and if the landlord wants the tenants to provide the appliances.
Some of these issues will come into play for landlord/tenant cases, said attorney Chris Webber, a retired attorney who sometimes works two days a week for ILAS, and who has represented tenants.
Webber and his wife considered buying and flipping properties a few years ago to make income, but when they noticed the market had started to go bad, they decided to hold off on that idea.
While some neighborhoods have good deals on homes – he said they quickly noticed that even if they could fix up a home and do most of it on their own or for a good rate, there was no guarantee they’d be able to sell the home.
Regarding the time he was considering the idea, he said, “If you wanted to find something with a low enough entrance price, flipping became a reasonable possibility.”
But now, he said, “you are generally finding areas where it’s not the only home on the block. I think there’s always a risk you may create a rose but the rest of the garden isn’t doing real well. If that’s the case, it’s hard to get someone to see that as a good opportunity. So we decided to back away, and we both decided to retire and decided not to take on anything extra.”
Another thing to consider, whether renting or flipping a home, is insurance, said Sheila Jenkins, director of the Community Development Law Center.
While she wouldn’t go into detail regarding a home she had been renting out for many years, she did say that she was unaware that her insurance on the property lapsed after the home had been vacant for 30 days.
She strongly suggested anyone who has a rental property to learn what the insurance covers and to consider getting insurance that will cover the home even if it is vacant.
For anyone thinking about being a landlord, they also needed to be aware of the property-tax issues for a home that is not a primary residence, she said, and how much more difficult it is to get a loan to repair a rental property compared to one’s primary residence.
She had tenants until fairly recently, and she said she enjoyed it. Because the house was already paid off, she said she could offer a nice home at a low rate to her tenants who may not have been able to afford a similar place otherwise.
Overall, being a landlord can be a good experience, Jenkins and Floreancig agreed. But it’s not something to be taken lightly.
“Lawyers can go to small claims court if something goes wrong, but that’s a day off work and you have to think, ‘Is it practical? Is it worth pursuing them in court?’ You have to weigh all the factors. And if they’re not working, you can’t squeeze blood from a turnip,” Floreancig said.
But if things go well, “Now it can be hugely profitable,” he said, “but it’s not a passive investment like an IRA. You have to ask yourself, ‘How adventurous do you want to be with your life?’”•