Second in a series of three articles
by Robert Locke, RMP, MPM
In the first article on this topic of "protecting the landlord" we established that the first protection for the owner of a rental property was to get the property out of your name into a trust or LLC. Keeping title in your name paints too big a target on your back and a little effort cam shrink that target substantially.
The second step was to never manage in your own name. Always have a property manager (a business) between you and the tenant, even if it's an LLC you set up to do the managing. This is a critical step in the process of protecting any landlord and should never be ignored.
Note: Over our 30 year history of professionally managing rentals we have managed for over 3,000 owners and have never had one them named in a legal action by a tenant. I have personally owned and managed over 150 houses and have never been named in a legal action. Stop managing rentals in your personal name
After these important steps have been taken look to "knowing the law and practicing good property management" to protect yourself from the big risks of landlording. This may raise some eyebrows but trust me when I say the biggest protection for rental property owners is not insurance because insurance does not protect you from most of the risks of being a landlord, but rather following the laws and intelligent management. Most of the risks (expensive fist fights) come from reckless inexperienced managers that don't know what they are doing. It is never the house fire, burst water heater, missing roofs and burst water pipes that creates the risks in landlording. It's the lost rent of an extended vacancy; the lost rent during a strung out eviction; the inability to collect rent while the tenant plays you in court and the costs of skips or abandonment. The big risks of landlording rests in building your management practices out of the law and having good tenant selection practices, aggressive rent collection policies, consistent maintenance responses, strong leases and the commitment to enforcing them consistently. The days of managing a rental by the seat of your pants, making decisions based on the hairs on the back of your neck, intuition, and rules of thumb are long gone.
The courts are filled with brawls between landlords and their tenants and are, for the most part, the result of owners not knowing what they were doing. It astounds me how many small landlords (and licensed managers) I meet who have never read the laws that govern their business.
Here are just a few to make a study of:
Federal and State Discrimination laws
Refuse to rent to someone for the wrong reason and you could go to jail and not collect $200. These laws apply to every landlord not just licensed agents.
Federal fair credit reporting act
Failing to handle their credit information correctly can get you into real trouble with the FTC. Sending the adverse action letter when you turn someone down is mandatory for anyone using credit to make business judgements, including private and licensed landlords.
Federal red flag rules
These laws regulate how you are to protect the privacy issues of your tenants' credit, employment and other information. Better read it closely before you send your HOA their personal information.
Americans with disabilities act
These laws mandate that you adapt the property when needed to accommodate handicapped people and let them have comfort animals even though you do not allow pets.
State landlord tenant laws
Every state has special laws that require landlords to handle certain management issues by the book and generally carry severe penalties when you don't. They address such things as move in/out inspections, holding of security deposits, maintaining habitability, appliance repairs, evictions and so on. These are the laws your state legislature laid out to limit abuses by rogue landlords who try to take advantage of naive tenants.
Many naive landlords think these laws only govern licensed professional landlords. Not so. They govern anyone managing a rental property no matter the rent, location, size or type.
I think the problem of ignoring the law is exaggerated by the mistake rental property owners make thinking that it's just a rental house and not really a business. You would be wrong. The day you convert home sweet home to a rental you change it into a commercial enterprise and as such you become subject a number of laws that judges will use to access your behavior with the tenant and property. Not embracing this reality can cause you a lot of pain and money.
If you're collecting rent, these laws apply to you. To make this worse, judges think the landlord (not the tenant) should know these laws and follow them. Usually it's not the tenant that is doing the abusing but the landlord. Judges are out to protect tenants against cruel or abusive landlords. Their assumption is that wealthy real estate barrons (your title when you're in court) not the tenant, should know what the laws are and structure and manage the property by them. Landlords are expected to know the laws. Tenants are not a protected class, but in court they are the favored class if landlords are abusing them in the eyes of the judge. Manage by the book and put the law on your side.
Protecting your self as a rental property owner is a layering process. Like asset protection it's a lot of little steps you take to build that all important fortress of protection between you and the litigation that comes with owing this type of asset. In the next article we address how insurance can be used to help build this fortress
