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Rental Property: Great Investment or Nightmare?

No one profits from their own ignorance. Thinking ahead is your best guarantee when considering whether to rent a property into the future or to sell for a fixed profit today.

If you want to keep a property in the hope of taking advantage of tax breaks and capital appreciation, but hope to offset the expense, consider both those upsides and some potential downsides to renting.

As the owner of a property you are legally liable for all normal costs of ownership — payment of a mortgage, taxes, insurance, etc. In addition, you will almost certainly be contractually obligated to pay for or perform needed repairs not due to a renter's negligence or willful damage. Even when it's not explicitly stated, leaving major repairs undone will incent renters to forgo rent and become lax in other ways that hurt you. Having justifiably angry tenants is not in your self-interest.

Before you get to that stage, plan ahead.

Consider the tax consequences of keeping the property versus selling. Make a guess, based on studying the current market, interest rates, and past trends, about where prices are going. Once you've decided to rent, learn your legal rights and obligations.

All prospective tenants should fill out an application that supplies you with information allowing you to perform a thorough background check. Take that info and actually do one. Check credit history — noting especially any history of late payments. Verify employment and talk to previous landlords.

Write a fair contract that spells out as clearly as possible respective rights and responsibilities. Write it in plain language, so one has any valid claim to failure to understand a clause. Make sure it's fair to both parties. Spell out the amount of deposit required, how much notice is required for landlord inspections, who is responsible for what kinds of maintenance, and so forth.

Carry out your part of the bargain by adhering to the agreement, then go a step beyond what's required. Respond quickly to reasonable requests for repairs. Tenants have usually only one weapon short of legal action — failure to pay rent. Don't provide any justification for them taking that step. Both parties benefit by fair and responsible behavior.

Make sure you have adequate insurance for serious repairs (roof, carpets, air conditioning systems, etc), or can carry out these repairs yourself.

Keep accurate records of payment dates and amounts. When a payment is late, don't delay finding out the reason. An occasional delay of a few days is not generally a reason to get excited — everyone has unexpected expenses from time to time. But a tenant who is perpetually late is a cause for concern.

Call and discuss the issue calmly and professionally. Make clear that, in the contract, you're entitled to levy a late fee on late payments. Use that as a bargaining chip to encourage on-time payments. Make sure you know the law or have good legal advice available before it's required.

Check with the neighbors from time to time, without displaying hostile suspicion, and find out whether the tenant is acting like a good neighbor. They don't have to be a friend to all, but if they are making life miserable for those around — leaving trash around, damaging property, excessive noise, etc — the value of your property can be affected. Neighbors can provide uncomfortable information for future tenants and prospective buyers.

If legal action is required, try to opt for arbitration. Issues get settled quicker, cheaper, and usually all parties are happier at the outcome.

Do your homework and keep up the property before and during renting. That provides the best protection of your investment you can muster. That way whether renting becomes a nightmare or a beneficial investment strategy is up to you.