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Angie Wieck, Published March 14 2014

So you want to be a landlord? Five things to know before renting out property

Fargo -- Brian Meckler will close on a home next week with his new bride.

Rather than sell his bachelor pad, Meckler has decided to rent it out. He has a good interest rate and less than 10 years left on the mortgage.

“I’m not expecting to make a whole lot of money immediately on it, but in five, 10, 20 years down the road, I see it providing good extra income,” Meckler said.

Rental property may seem like an easy way to make money, but area professionals caution investors to do their homework first.

Here are five issues to consider before getting into the rental business:

  • City notification: All rental properties, including single-family homes, must be inspected and found to be in compliance with the city’s basic maintenance code.

    Building inspectors check everything from carbon monoxide detectors and smoke alarms to structural requirements such as egress windows, bedroom square footage and ceiling height.

    Moorhead property owners also are required to attend an eight-hour landlord training program conducted by the Moorhead Police Department. A similar program is offered in Fargo, but attendance is not mandatory.

    Classes cover issues such as applicant screening, lease agreements, fair housing issues and warning signs of criminal activity.

  • Financing: Borrowers without a prior history in rental property ownership will not be allowed to use rent as income when applying for a rental property mortgage, said Dan Van Winkle, president of First Class Mortgage in Fargo. In the past, new owners were allowed to do so as long as a lease was in place.

    Generally speaking, the required down payment will be larger and interest rate higher for a rental property mortgage, as well. These vary based on factors such as the property type and the number of units.

    Van Winkle advises borrowers to finance on a shorter term than a traditional 30-year mortgage.

    “A lot of investors we work with prefer 15- to 20-year terms because, generally speaking, they are within 15 to 20 years of retirement,” Van Winkle said. “This way they build up equity quickly. When they do retire the homes are paid in full and the rent becomes their retirement income.”

  • Lease agreement: Krista Andrews, an attorney who specializes in real estate and landlord/tenant law for Anderson Bottrell Sanden & Thompson Law Firm in Fargo, said a thorough lease is one of the most important factors in successful rental property management.

    She advised using a lease that has been approved by an organization such as the North Dakota Apartment Association or one that has been drafted by an attorney.

    “People think ‘I can research this myself on the Internet and draft a document like a lease or partnership agreement,’ ” Jacobson said. “Before you know it, you’re in hot water.”

    She said generic forms most likely do not reflect North Dakota or Minnesota state laws. States vary widely on the rights of tenants versus landlords and issues such as eviction.

    Andrews also recommended owners become knowledgeable about fair housing laws, protected classes and what is considered discrimination.

  • Insurance: When a home becomes a rental property, the owner must carry a rental dwelling policy instead of basic homeowner’s insurance.

    This policy primarily covers the structure of the home, said State Farm agent Jill Henning. Tenants should purchase renter’s insurance to cover their personal property.

    Be advised that most rental dwelling policies do not include sump pump and sewer backup coverage, so property owners should review their policies carefully.

  • Property management: Kumar Sharma, president and CEO of RKAK Realty & Property Management, said many new owners underestimate the time commitment required for successful rental property management.

    Rental management companies, such as RKAK, will manage vacancies, screen tenants, collect rent and take 24/7 emergency and maintenance calls for properties ranging from single-family homes to multiunit apartment buildings.

    Sharma’s fee is based on a percentage of the collected rent, so Sharma said he has a vested interest in successful property management.

    “If I don’t collect anything, I don’t get paid,” said Sharma.

    He said one of the most common mistakes he sees new owners make is not keeping the property well-maintained.

    “If I buy a $100,000 Mercedes, I will really take care of it. Wash it, change the oil, take it to the dealership, but I always see people who buy a $200,000 property and have tenants who trash it. They don’t have the time to follow up, so they just let it go,” Sharma said.

    He said that while an automobile depreciates, real estate that is well cared for will often increase in value.

    “I always say when you put money in stocks there is not much you can do with it,” Sharma said. “Real estate is tangible. You can put more equity in it. The property can appreciate.”

    Readers can reach Forum reporter

    Angie Wieck at (701) 241-5501