You’ve bought a three-flat-your first income property. Now, you can sit back in your home on the first floor and let the rent from upstairs help pay your mortgage. All you need is a couple of good tenants. Easy, right?
It may look easy, but Ed Sacks, author of Chicago Tenants’ Handbook and The Renters’ Survival Kit, says owning a building is work. “Whether he likes it or not, the new landlord is now in the residential real estate business, and he will either perform and deliver or he will not be successful,” says Sacks.
“Landlords must get and keep good tenants,” he says, and they must “maintain the building, and make timely building repairs and improvements.”
Stuart Miller, managing broker of The Apartment Source, a 3 1/2-year-old rental firm in Chicago, agrees: “The landlord is in the residential rental business and this is a buyer’s market.”
That may make finding tenants even more difficult than normal-especially the good ones who will pay the rent on time, who’ll be trustworthy and respectful of you and other tenants. But there is a method for doing it-starting with the search and a good tenant screening.
“Of course, word of mouth is always best,” Chuck Stuparits of Re/Max Exclusive Properties in Chicago says of finding good tenants. He always asks current tenants if they know of any friends or family members who are looking for an apartment.
Stuparits also recommends placing a classified advertisement in the major Sunday papers, the Reader or Apartments and Homes, a free real estate guide.
A well-written advertisement can effectively screen prospective tenants, says Stuparits. He suggests landlords clearly describe the apartment’s location and features.
“It is important to state the rent amount and it helps to mention that a security deposit or references are required,” he says. This way, tenants know upfront if they can afford to rent the apartment.
Suburban landlords can place an advertisement in their local newspaper, he says. Stuparits does not recommend posting a sign on the property. “It raises a red flag that the unit is or will be vacant.”
First-time landlord George Morby adds a personal word on tenant selection. “Go with your gut feeling.”
Morby, a cement contractor, and his brother, Will, a truck driver, bought a brick three-flat in Edgewater last August. They have no complaints about their two tenants.
Will Morby suggests landlords take the time to find the right tenant. “Never get desperate,” he says.
The application
Once a tenant sees an apartment and expresses interest in renting it, he needs to fill out an application. A standard application form can be purchased at any office supply store or a landlord can create his own, says Ellen Weisz, a Chicago attorney whose concentration is in evictions and collections.
According to Weisz, an application should request this information: tenant name, current home address and telephone number, Social Security number, employer name, address and telephone number, bank account numbers, major credit card numbers, and previous landlord name, address and phone number.
Under federal law, a landlord is prohibited from asking questions about race, color, national origin, gender, religion, disability or handicap. Further restrictions under City of Chicago law cover items like source of income, sexual orientation and age.
Credit
The experts generally agree that no matter how good the tenant looks on the application, it behooves a landlord to reserve final judgment until he conducts a credit check.
“The most important question a landlord can ask himself about a tenant is, `Is he able to pay the rent?’ ” says Sacks.
The credit report can cover a wide range of financial information, such as the tenant’s bank account numbers, credit card numbers, charge account numbers, marital status, outstanding debts, debt history, and any judgments or tax liens on the tenant’s record.
For the smaller landlord, a small credit reporting agency will usually charge $20 to $25 to conduct a single credit check. But you’ll need a written authorization from the tenant to get the report.
Etta Worthington, a self-employed writer and corporate trainer who became a first-time landlord six years ago, found out the value of a credit check personally. She rented an apartment in her Oak Park two-flat without doing a credit check and wound up in court trying to collect the rent from the tenant.
That experience didn’t deter her, though: Last year she bought another two-flat.
Security deposit
As an assurance that the tenant will take care of the apartment, a landlord should obtain a security deposit. A month’s rent is the customary security deposit in the Chicago area, although some seek less and others more. Check your local ordinances for any cap on security deposits.
While the Chicago Landlord and Tenant Ordinance requires that security deposits be kept in an escrow account and that landlords pay 5 percent interest on the deposits each year, many small landlords are exempt from these regulations. In Chicago, owner-occupied buildings of six of fewer units are exempt from these and most other provisions of the ordinance.
A landlord holds the security deposit in trust for the tenant, says Sacks, and it’s assumed the landlord will return the money to the tenant within a reasonable amount of time after the termination of the lease, unless there are damages to the unit or unpaid rent.
The lease
If you’re at the security deposit stage, you should have already picked out a lease.
Choosing a lease can be perplexing because there are dozens available. Chicago attorney Sanford Kahn advises landlords that when selecting a lease for an apartment not bound by an ordinance, make sure it doesn’t incorporate provisions of the ordinance.
The major difference in non-ordinance leases, says Kahn, who primarily represents landlords, are that a landlord can (1) set his own late charges, (2) set limits on liabilities, (3) provide that a tenant has to reimburse court costs and attorney’s fees in the event the landlord and tenant go to court, (4) use different methods to serve notices of default, and (5) note that he is not obligated to give a tenant 30 days’ advance notice of intention not to renew a lease.
Beware of any lease that was written before 1986, says Robert A. Boron, a Chicago attorney who specializes in landlord-tenant matters. That’s because it almost certainly won’t comply with Chicago’s ordinance.
When it comes time for the signing of the lease, landlords should be certain they sign it along with their tenants. If problems arise later, the signatures indicate that both parties accepted the terms and conditions of the lease, says Sacks.
Rules and regulations
“What every landlord in Chicago needs to know,” says Sacks, “is that the Chicago Residential Landlord and Tenant Ordinance covers all residential rental properties in the City of Chicago except owner-occupied buildings of six units or less.”
However, a number of subsidiary ordinances for the City of Chicago cover subjects like fair housing, physical security, and the cost of heating and air conditioning. Each law contains different exemptions based upon the number of units in a building, says attorney Boron.
Additionally, federal, state and local fair housing laws apply to all rental property. In other words, small landlords are not exempt.
If you’re in doubt about whether you’re covered by these laws, consult an attorney.
Keeping ’em
The apartment is rented. The tenant is reliable. You’ll not want to lose this valuable asset when the lease is up and have to go through the tenant-search process all over again. How can you keep them from leaving?
“If you want to be a successful landlord, you need to understand and respect the tenant’s needs and privacy,” says Sacks.
“Security is another important consideration to potential renters,” says Re/Max’s Stuparits.
All landlords in the City of Chicago are specifically required to provide dead bolt locks and peepholes on entrance doors of each unit, says Sacks. Chicago landlords are also required to provide a self-closing door that automatically locks at the entrance of the building.
Sacks also suggests this: Don’t wait for your tenants to call you with a problem or complaint. Contact them from time to time and ask them how things are going. When a problem arises, find a solution.
Miller, however, advises landlords not to become friends with tenants, but instead to aim to have a mutual respect for one another. Then, if the rent is late, asking for it is strictly business.
