Making the Move from
Homeowner to Landlord

In the mid-1990s, Dan Levitan decided to lease out his condominium in Manhattan's Greenwich Village. Mr. Levitan's marketing strategy was simple: networking with friends and associates. Through this method, he quickly found a New York City lawyer who needed an in-town apartment.

Then the management problems began.

The tenant began sending terse notes with his rental payment saying that he was "deducting $100 because the heater wasn't working properly," recalls Mr. Levitan. "He did this all the time. He knew that I'd have to hire a lawyer to make him pay the proper amount per month, and that it would cost me a lot more than it would cost him."

Finally, the problem solved itself.

The tenant moved from the apartment -- before the lease expired.

"That was my first big lesson in the difference between being a homeowner and a landlord," says Mr. Levitan, a partner with the Home Mortgage Acceptance Corp., New York City.

Many new landlords nationwide experience similar problems, whether it's collecting the rent, repairing leaky faucets or dealing with recalcitrant renters. "There are so many little things that a landlord really needs to be educated about," says Jeffrey Taylor, author of "The Landlord's Kit" (Dearborn Trade Publishing, 2002).

One way that new landlords can get up to speed quickly is by joining a local real-estate association and participating in its monthly briefings, which can feature advice from lawyers, accountants and repair specialists. They also should start reading real-estate trade journals and management magazines for ideas. "Even if you're renting out just one property, it isn't passive income," says Mr. Taylor. "It's not something you do on the side. You've got to see it like a business and run it like a business. You can't be too trusting."

After getting a grip on the reality of the real-estate business, homeowners making the transition to landlord might want to assemble an informal board of directors to advise them on problems as they arise.

"Assemble a success team that you can work with -- an attorney, an accountant, a handyman, a real-estate broker, and another landlord," says Mr. Taylor. "They will help you deal with issues that you are not able to handle yourself. You can lean on their expertise."

Jeffrey Schwartz, a partner in a Garden City, N.Y.-based law firm that advises landlords, cites the following four areas of concern for new landlords:

1. securing a certificate of occupancy,
2. ensuring that your mortgage allows you to rent your property,
3. buying the right insurance, and
4. setting the terms and conditions of the lease.

If not handled properly, these matters can cause new landlords significant problems. Take, for example, the certificate of occupancy, which is usually issued by a city's building department to purchasers of new properties.

"The certificate tells you what the premises can be used for," says Mr. Schwartz. "For example, if you have a one-family building, you cannot put three families in there. So when you do a lease with a renter, you have to be specific and limit the use of the space to one family or even certain, named people."

That will prevent you from running afoul of city building regulations if, say, the renter's cousin Vinny moves in for a while.

If you're contemplating renting out your property, it's also vital to examine the terms of your existing mortgage. Some mortgages are silent on the issue. "But others will have specific provisions regarding renting," says Mr. Schwartz. "There may be a provision which states that the borrower intends to occupy the property as his primary residence for a year. That's because there are different types of mortgages for homeowners and for investors. There are different mortgage rates, too."

Purchasing new levels of insurance for your rental property is also wise.

"You've got to replace your homeowners' policy with a rental-dwelling policy," says Mr. Schwartz. "There are standard-rental policies which pay the landlord for minor damage, but pay the bank for major losses as the mortgagee. You also might want to have an umbrella policy for any excess coverage that may be required."

Lastly, don't forget the lease itself. Make sure you set the terms in a way that's favorable to you. But don't violate local housing or federal fair-credit-reporting laws. "You need to learn about landlord-tenant laws for your particular state," says Mr. Taylor, who is also publisher of the Mr. Landlord newsletter  for the trade. "I travel across the country, and I see so many landlords who don't even know the laws that they're supposed to be abiding by. That can get them in a whole lot of trouble and cost them a lot of fines."

For example, every state has different laws that govern the return of tenants' security deposits. Your state also may limit the amount of rent that can be accepted up front, e.g., first month's rent, last month's rent, security deposit. Check with your lawyer before making a mistake, Mr. Taylor advises.

Many states also have laws governing how to handle the rejection of prospective tenants due to poor credit reports. Landlords must provide applicants who were rejected for this reason with a copy of the credit-report rejection, and the name and address of the credit agency that provided it.

"The problem is that many landlords, when they're first starting out, don't realize how highly regulated their industry is," says Mr. Taylor.

Mr. Taylor and his wife started their small real-estate investment business 20 years ago when he was a college teacher and they rented out their home.

Like Mr. Levitan, Mr. Taylor experienced the angst of being a landlord. "When I started, I was very naive. I was too trusting -- to the point where it would cost me money," he says. "Now, I don't take things for granted. Nothing can be assumed; everything should be in writing. If residents know what to expect, they will go along with the program."

Most renters aren't difficult for landlords to deal with, industry insiders say. But some experienced real-estate professionals caution that even if agreements are in writing, unscrupulous tenants still may try to exploit you.

Diane Saatchi is president of Dayton Halstead Real Estate in New York. Her clients rent their exclusive Long Island properties for the summer to the wealthy and would-be wealthy of New York.

Ms. Saatchi recalls how a group of young men ran a con on these property owners during a recent summer. The young men pretended they wanted to rent a property together -- and built trust with the broker showing the home.

But they actually sublet the rented property to others – apparently for a financial killing. "It becomes something of a business to rent a house and then sell shares in it," says Ms. Saatchi. "They amassed 10 houses. This is somewhat frustrating for the real landlords."

-- Mr. Koprowski is a business journalist based in Chicago.

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