Rental Property

With an improving economy people are again looking at buying rentals as another source of investment income.  Although I personally like the added control of owning and managing your own investment, there are some things to consider:

Get a security deposit.  It’s common to have some needed repairs and major cleaning when your tenant terminates the lease.  Minnesota law requires that security deposits be placed in separate interest bearing accounts.  You are also required to provide your tenant a timely notice itemizing why you retained some or all of this deposit.

Have a written lease.  Both you and your tenant should have a copy of a written lease that is easy to understand to hopefully avoid future disputes.  One major point here is many people think that this is just a normal contract between landlord and tenant and general contract law applies.  In reality, Minnesota Statutes Section 504B has a long list of protections for tenants as they often have less familiarity with contracts and are less likely to have legal assistance before entering into a lease.  As a result, many provisions I have seen in leases over the years are unenforceable as they are prohibited under this statute.

Rate of return.  Many first time landlords look at the rent rolls of a property and their proposed mortgage payment and see large dollar signs.  Some people do simply get lucky and have great tenants that stay for years and always pay their rent.  A smart investor, however, should build into their projections some of the potential risks.  You should expect that some rents will go uncollected and there may by collection fees or other fees related to removing tenants.   There will be gaps between renters where you are receiving no rent but that mortgage payment is still due.  Finally, buildings need constant maintenance and some needed repairs can totally ruin your investment.  The landlords that seem to do well know how to fix some things on their own and are able to properly analyze a building before the purchase and avoid money pits.

Proper management.  Some landlords cut corners, ignore tenant complaints and avoid needed repairs.  In the short term, this behavior increases your profit.  In the end, however, this is still a small town community and word travels fast.  Poorly managed rentals seem to attract poor tenants and the cutting corners just leads to lots of management headaches in the end.  If you don’t have the time or ability to manage properties, you should consider a management company.  There do charge a fee of course but rental properties are not the same game as the stock market; this type of investment is more hands on and requires your attention or things can get out of hand.

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