Real estate investing can be a powerful tool to create wealth, but it can also be an investing nightmare. Difficulties abound for landlords, but these difficulties multiply when the landlord resides in another state.
Important Lease Provisions for Out of State Landlords
Landlords can make their job easier by adding a few key lease provisions to their standard leases if they know that they will have limited ability to access the property due to their location. First, landlords should require tenants to be responsible for all repairs. While this might require the landlord to lower the asking rent, it will prevent the late night calls and the impossible task of organizing workers in another state. Typically this provision can be written in such a way that it cover all repairs up to a certain dollar amount.
Something to the effect of “tenant shall be responsible for all repairs under $1,000 or repairs that result from their negligence” will take care of 95% of all potential home repairs. The goal of this clause is to prevent tenants from calling landlords for clogged toilets or broken door knobs. While a tenant will still call for things like a broken furnace or hot water heater, these are larger items that will require less frequent attention.
The second provision revolves around the lease termination and dispute resolution. The lease should state clearly that the tenant is solely responsible for finding a replacement tenant at their own costs if he/she chooses to vacate the property before the end of the lease term. Many times leases state a specific fee, which may be one or two months rent. This can still be problematic for an out of state landlord because that fee might not cover the cost of commuting between states to market the property and find the right tenant.
Out of state landlords should consult a real estate lawyer to craft an appropriate lease. Landlords should be sure to inform them that they will be out of state and they would like this property to function essentially as if the tenant owns the property.
Out of state landlords should be meticulous when it comes to selecting the right tenant for their property. In addition to a credit check, landlords should run a detailed check of their references and their last two landlords. Avoid tenants that appear to move often or tenants with pets or small (potentially destructive) children. While this advice might seem controversial, remember finding a self-sufficient tenant looking to stay long-term is the goal. Ideally, a tenant moving from a home or relocating for work would be good examples of what landlords should be looking for.
Consider a property management firm instead of trying to be an absentee landlord. Property management firms will charge a fee (6% – 10% of gross rents), but will save landlords a lot of potential headaches. In addition to cutting down on phone calls, good property management firms can provide a landlord with rental data, yearly maintenance recommendations and an easy to use accounting summary around tax time. Being cheap should not be a reason to sacrifice peace of mind. If real estate is not an investor’s primary pursuit, he/she should strongly consider letting someone else manage the investment.
Tough tenants and properties challenge out of state landlords on a daily basis. Strong leases, tenant selection and potentially the help of a management company can ease these burdens significantly.