We`ve all heard the stories.
A friend of a friend buys a condo. Then he moves up to a bigger place. Or, perhaps he and his wife get transferred to London for five years. Or, maybe they go on an extended vacation.
Whichever version of the story, the ending is always the same.
This friend of a friend finds a wonderful tenant. Then he rakes in the dough as rents increase steadily because the neighborhood has ”turned.” When the condo ”maxes” out in price, he sells it for twice what he paid.
Then he buys two condos with the profits and starts all over again.
Sound great?
Well, unfortunately, there probably are better ways to make a living. The hours can be long, the tenants annoying-or, worse, destructive and late in paying their rent. If you have to hire someone to manage the property, it can cost you several hundred dollars a year. And, since 1986, the revised tax laws have eliminated several benefits for landlords.
On the other hand, people need a place to live and they like renting condominiums. And, right now, market conditions favor the landlord, says Barbara Stewart, leasing agent for Rubloff Realtors.
”This isn`t such a good market for selling your condominium, but my business has picked up incredibly in the last two years,” Stewart says with a sigh. ”I`m working seven days and seven nights a week.”
Stewart`s business is leasing condos for owners who either don`t want the hassle or have left the area-and, in many cases, the country.
Stewart has leased more than 125 units-with monthly rents from $500 to $7,500-since January. She says she keeps an ”inventory of between 60 to 70 condo listings all over the price spectrum” at any one time.
Her fee is a month`s rent for a one-year lease and 1 1/2 month`s rent for a two-year lease.
”There are a lot of condos people can`t sell,” she says, ”and I have a lot of business people who are coming in from major corporations who don`t know the markets and want to rent before they buy so they know what they are doing.”
Richard Druker, a sales agent with Kahn Realty`s Lincoln Park office, also owns and operates Lake Shore Management Inc., a real estate property management company. In the past few years he has rented a couple hundred condos.
He agrees that the softening sales market is opening up new venues for landlords, but other problems remain.
Checking `em out
”Finding a good tenant is still the key,” Druker says. ”But even if you find someone who looks perfect, you still have to do a credit check, and a referral check.”
According to one landlord who owns several condos on Lake Shore Drive
(and asked to remain anonymous), ”There are no magic formulas for finding good tenants, but there are some things we look out for.”
He says he tries to avoid renting apartments to students, to people who want a month-to-month lease and to those who want to give you a check or cash upfront so the landlord will forgo referrals and credit checks.
Tenants renting condos also need to understand that they must follow all the rules of the condo association.
”Sometimes the owner fails to make sure the tenant understands all the rules and obligations that go along with renting a condominium,” says Jamie Pinley, manager of the 2650 N. Lakeview Ave. condo building.
”If a rule is broken by the tenant, the owner must answer to the building association,” she says.
Stepping in
Some building managers do get involved with condo rentals, particularly when an owner lives out of town.
Marcy Berman, a publicist who lives in Lincoln Park, says her building manager showed her several units that were available at the time. The manager walked her through the rental process, including checking her references and having her sign the lease.
”She made sure I understood the building rules, and the building occasionally circulates copies of the rules to make sure we know that we can`t play music loud, can`t use the garbage chutes at night, things like that,”
she says.
Once an owner has thoroughly checked out the tenant, and he has agreed to all the rules, it`s time to sign the lease.
The Lake Shore Drive landlord says he uses a Building Owners and Managers Association lease, which is more often referred to as a BOMA lease.
”It`s a standard lease form you can pick up in any stationery store for about $1 per form,” he says. ”It conforms to Illinois law and was recently revised to incorporate some of the things those tenants` rights organizations wanted.”
But beware the tenant who kicks up a fuss.
”If they object to anything, you don`t want them,” the landlord says.
”We`ve learned over the years that you just have to walk away from the negotiators.”
Tenants who don`t pay on time are far and away the biggest irritation, landlords say, because that often means they might try to skip out on the last month`s rent.
”One way to counteract that is to get double rent security, plus
(require) a month`s rent (upfront),” Druker says, though he admits it`s tough for those renters who pay $600 per month to scrape together $1,800 upfront.
Messy business
He says it`s also irritating, not to mention expensive, when tenants trash the property. ”I`m always surprised how people will take care of their own property, but think nothing of ruining someone else`s,” Druker says. ”A lot of people think they own the place just because they pay rent.”
Most problems can be handled by the owner or building manager. If, however, you find you need to evict your tenant, you`d better think about giving your real estate attorney a call first.
”Evicting tenants is a tough thing to do and it is at least a two-month process,” Druker cautions. ”You`ve got to go to court, file and serve notice. You should definitely (consult) a lawyer for it.”
But beyond all the irritations, the bottom line between selling the condo or renting it out is simple mathematics.
According to accountant Phil Ravid, the changes made in the 1986 tax laws have virtually eliminated most of the economic benefits derived from owning and renting a condominium.
”Since the Tax Reform Act of 1986, the incentives to buy a condo and rent it out are gone,” he says. ”That`s one reason the condo market stinks right now. You don`t have the investor buyer who can use the tax writeoff to offset other income.”
He also says that in a real estate recession, buyers generally won`t see their property appreciate fast enough to show any quick profit.
Still, if you`ve already decided to rent out your condo, here are a few things you should keep in mind:
– Obeying the law: If your condominium is in Chicago, you are bound by the Residential Landlord and Tenant Ordinance. You should familiarize yourself with its rules-you must keep a security deposit in a separate, interest-bearing account, for example-and also hand a copy of the ordinance to your tenant before he signs the lease.
– Marketing your place: Running an ad for your unit in the local neighborhood paper usually produces significant results because you are targeting a group that already lives near your condo.
– Playing by the rules: Although your tenant is living in the building, you are ultimately responsible for any problems he creates. Be sure your tenant understands all of the building`s rules. Also, familiarize yourself with all the condo association`s rules for renting units.
– Hiring help: Expect to pay a management company several hundred dollars a year for taking care of the property and collecting the rent. It usually pays to hire a property manager when you have several units to rent, or if you will be out of the country and unavailable should something go wrong with the unit.
– Keeping things working: Be sure you and your tenant determine who will be responsible for doing any repairs in the unit. If you are going to hire the contractors, be sure your renter knows your whereabouts.
– Collecting rent: The first time your tenant is late with the rent, make sure you set the record straight. Just because your late payment fee doesn`t kick in until the 10th of the month doesn`t mean the renter has a 10-day grace period.
