Investing in Rental Property with Confidence
How to Avoid Legal Pitfalls and Protect Your Assets
For over a decade, I’ve owned rental property (3 properties in 2 states that I don’t live in, to be exact) and worked with various property management firms and HOAs. During that time, I’ve had my fair share of problems.
I’ve also learned in recent years, from speaking to other landlords, that deceptive contracts are on the rise.
Of course, anytime you deal with people — and Money, you will likely encounter issues at some point, but don’t let that steer you away from this lucrative world of passive income.
PREPARE, instead.
I started my real estate investment venture at the age of 19. I learned a lot the “HARD WAY,” and I’m writing this for YOU so you don’t have to.
If you are considering investing in rental property or you’ve recently started this journey, this article is for YOU. If you’ve been a landlord for a while and need some guidance, these tips will certainly help.
By the end of this article, you will know how to take steps to protect yourself from bad renters, dishonest property managers, and tricky HOAs.
I can’t promise that you will never encounter a messy situation, but I can offer resources so you are better prepared to protect yourself legally and financially.
The following recommendations are based on my 10+ years of experience owning rental property:
- Obtain a list of trusted attorneys a. Ask friends and family for referrals, and keep their contact info handy when you need advice. b. Many attorneys offer free consultations, but they can be difficult to reach. If you mention a referral source, you will likely connect faster. c. Don’t trust every attorney. Interview several, read their reviews, and trust your gut.
- Set up an LLC & Trust Account a. Since I’m not qualified to give legal advice, you will need to discuss this with an attorney who specializes in Real estate law and knows your unique situation. b. This is worth looking into and understanding the benefits.
- Set up a Living Trust a. You will need to go through an Estate Planning Attorney for this. b. As of the date of this article, the cost usually starts at $1,500–2,000, depending on your state and the complexity of your assets.
If you are able to, you will want to put these safeguards in place as soon as possible.
4. Join an Association for Landlords There are several out there, such as The National Landlord Association and the Rental Housing Association in your state.
Do a little research into what’s available in your state. An annual fee of about $100 is common and well worth the cost. The many resources on their websites can be beneficial even if you don’t become a member.
Some of the most valuable member benefits that I’ve found include: a. An attorney on staff who will talk to you for free. b. Referrals if you need to hire an attorney. c. Training and classes on how to manage your own property. d. Up-to-date information about new laws in your state. e. Free property management contracts and other related documents.
5. Consider Joining a legal service a. For about $30 a month, you can join a legal service such as Legal Shield or Rocket Lawyer. b. They offer legal advice and referrals. c. They also write letters to tenants and property managers on your behalf. d. In most cases, your problems will end once your tenant or property manager knows an attorney is involved.
6. Conduct thorough Background, Credit, and Reference Checks a. Do this for every candidate and property manager — whether or not you know them or like them. b. Be objective with your findings; if your person has bad credit or a poor rental or management history, that can put you at risk. c. You can hire a property management company that will find a qualified renter and then hand it back over to you to manage or d. You can hire a property management company to do both for you.
This may come as a surprise, but most of my challenges have come from Property Managers — not tenants.
Since the majority of my problems have been with property management companies with shady contracts and poor screening processes, this portion of the article weighs heavily on dealing with that group.
And since a good management company usually brings in good tenants, that is where you’ll want to start.
But first, let’s address how you can avoid problems from tenants. 1. If you have a good management company, they will handle this for you. 2. If your prospective tenants are thoroughly screened, then usually, this is not a problem. 3. A bad management company, however, might fail to do proper screening, resulting in damage to your property, unpaid rent, and eviction. 4. Even when all precautions are taken, however, Murphy's Law sometimes happens anyway, and that’s when you might need an attorney and the above-mentioned safeguards to protect your assets in the event of a lawsuit.
What to know about HOAs 1. HOAs can be very difficult to deal with, and depending on your state, there may be little, if any, legal protection. 2. Familiarize yourself with your state laws first, so you don’t waste thousands of dollars on attorney fees. 3. Sometimes, it’s better to sell and reinvest rather than fight an HOA, depending on your issue. 4. Consult with an experienced Real Estate attorney whom you trust. 5. Above all, READ the contract yourself. I’ve had attorneys fail to catch important clauses in my contracts. 6. Use AI to analyze contracts for you, but ALWAYS review and verify.
A Side note on AI Use ChatGPT as a second pair of eyes, but do not rely solely on AI. It can interpret, explain, and provide recommendations, but it cannot replace a human or an attorney, at least not yet.
AI should never be relied on solely; instead, it should be used as a tool to help you. Always review and double-check everything that comes from AI. It makes mistakes, too!
With that said, know that AI can be extremely useful. For instance, ChatGPT recently saved me over $8,000 by finding a deceptive clause in one of my contracts that was missed by two separate attorneys. It also saved me another $500 in attorney fees by decoding and interpreting misleading jargon in one of my contracts.
How to safeguard yourself from bad Property Managers a. Do not rely solely on reviews, check their background and call your local Department of Real Estate to verify their license. You should be able to Google the number or find it on one of the websites provided in the links above. b. Always READ every line of the contract in detail before you sign. c. Address and negotiate anything that seems unclear or unscrupulous in your contract. Contracts tend to favor the person who drafted them. d. Request clarification in WRITING. e. Manage the property yourself, using resources, training, and rental agreements provided by the above-mentioned association.
What to do when problems arise with your Property Manager 1. Always be respectful and professional, especially in writing. 2. Keep a paper trail using text and email as your primary form of communication on important matters. 3. Document the issues, including the date, time, and a description of the situation. 4. Attempt to work things out with the manager first by clarifying any miscommunication. 5. The more informed you are, the less likely you are to be taken advantage of.
If you are unable to work things out with your management company, you can do the following:
Contact your local Real Estate Board and BBB (Better Business Bureau) 1. Sometimes, these agencies offer mediation services between you and the property manager for much less than it would cost to go to court. 2. If that doesn’t work, you can file a complaint with these agencies if the company is in violation of any laws or statutes. 3. They will usually do an investigation, so be prepared to present your documentation. 4. The management company could be fined and suffer other disciplinary action, which could help your case if you go to court. 5. For a few hundred dollars, you can have an attorney write a letter to the management company. For a less expensive option, you can have Legal Shield or Rocket Lawyer send a letter for you (see links to websites for details).
Often, the person in question will shape up and comply once they know an attorney is involved.
If that doesn’t work, you may need to go to small claims court and/or hire an attorney. To do this, you will need to: 1. Make sure you have a physical address where you can have the Property Manager served. 2. Be prepared for an additional process to recover money if the court rules in your favor. 3. Request legal fees and other expenses associated with your case to be reimbursed by the defendant. 4. Organize and present all receipts and documentation for your expenses to the court. 5. Make sure your case is strong enough to take to court. If you lose, you could be liable for the defendant's legal expenses.
Conclusion Avoiding pitfalls associated with rental property ownership requires unique expertise. It’s important to educate yourself and prepare as much as possible in advance. We’ve all heard horror stories, but with the right approach and strategies, the benefits far outweigh the risks.
Disclaimer This information is not intended to give legal advice. This is for informational purposes only to provide resources and available options. Do your own research and speak to an attorney regarding your unique situation and the governing laws in your state.
If you enjoyed reading this article, have questions, or want to add anything I missed, I would love to hear about it in the comments.
Follow me at https://medium.com/@IrieCRose