DIY Landlords & the Power of Formality, Part 1: Why Worry?

It’s OK to relax, isn’t it? They’re your friends, right?

A man lounging shirtless on a couch.DIY landlords have to do everything that a property management company does, and that’s a pretty long list. (Check our last post for a good example!) The advantage that a DIY landlord has is that they frequently don’t have to be as formal as a property manager — but that informality can quickly become a disadvantage if things don’t go easily.

Informal Landlording: A Summary
When you’re a DIY landlord and you choose to be informal about your landlording, you save yourself a huge amount of time on the day-to-day grind. You aren’t contractually obligated, for example, to keep separate accounts for maintenance and CapEx expenditures, or even separate accounts for each property. You do have to keep security deposits in escrow, but that’s not so difficult.

You also aren’t contractually obligated to track the effectiveness of your advertising, or to file eviction notices the day after rent is due, or collect bids from three different contractors before you choose one to do a repair, or any number of things that a property management company must do in order to fulfill our obligation to the property investors that we serve.

It’s a good thing, too, because you probably have a day job, and if you had to commit to the level of formality that we do, you’d have a very upset family and no social life. But! There are some areas of landlord-ery that even a DIY landlord absolutely should be extremely formal about, because the risks vastly outweigh the gains of being informal.

When Informality Gets You in Too Much Trouble
The general rule is “If being informal about a process would put you at the mercy of a tenant, don’t do it.” That means at the absolute minimum, you should remain strictly formal about your:

  • Tenant screening (with a caveat, see below),
  • Lease writing (and signing),
  • Late rent policy, and
  • Eviction process.

The reason why is simple: no matter who your tenant is, even if it’s your beloved daughter or Aunty Em, when something goes wrong and they’re forced to decide whether to pay you or their electric bill, you become the enemy. Not literally, of course — they will want to pay you, but the simple fact that they know you better than they the lady at the electric company will mean that you will generally get paid last when other bills are on the line. And the greater the financial tension between the two of you becomes, the more your prior relationship will suffer…and the chances are they will blame you for it.

This extends to situations where the lease should insist the tenant pay for something vital like pest removal or carpet cleaning, and very much extends to the evictions process. No matter how close you are with your tenant now, if they do something to necessitate an eviction, you will immediately become their arch-nemesis for the duration of the eviction process and probably a few years thereafter.

The Tenant Screening Caveat
Just throwing this out there: if your tenant is someone whose circumstances you are already familiar with — you know where their income comes from and how predicable it is, you know how they treat their residence, and so on — you don’t have to stress about the formality of screening. But you need to be careful, because many of you will end up in a situation where someone close to someone you know — like the daughter of a good friend — wants to become your tenant. You cannot assume that the good qualities of your friend are going to be shared with their daughter.

Posted in: 1. Property Owner Blog Posts, Investing Strategy

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