Real Estate Investing Pitfalls and How to Avoid Them
One of our responsibilities at Mynd Property Management is to keep our owners in compliance with all of the federal, state, and local laws that govern and regulate rental properties. We have a department that oversees regulatory aspects, and we work hard to keep up with all of the legal and regulatory changes that impact our owners, our investors, and even our tenants.
Today, we are focusing on the regulatory aspects of real estate investing. This topic isn’t always a fun one for our real estate investors, but it’s critically important. If you’re going to invest in real estate and rent property out to tenants, you need to be comfortable navigating and identifying the different statutory regimes.
Understanding Diverse Real Estate Regulations
If you’re interested in entering a new market or even renting out homes in a new city, you’ll have a new set of rules and laws that apply to the way you do business. As most of you are aware, each state has its own landlord and tenant act and its own regime of statutes that govern the relationship between property owner and renter.
Many cities and municipalities have laws that augment and enhance what the state already requires. A lot of times, those city ordinances are more onerous and have more details. If you’re caught by surprise or you’re not aware of the regulatory and legal issues in your market, you can have a technical foot-fall that may lead to costly errors. So, be aware of what’s out there and what’s required.
Implications of Making Legal Mistakes
The implications of not being aware of the laws that affect you or running afoul of those laws can be costly and create headaches. It’s essential that you educate yourself because if you’re not aware of the laws and the requirements, the statutory penalties will also surprise you. The trend among many cities and states right now is to assess treble damages, which means a dispute or a mistake can cost you three times the amount that it should.
This is especially common with security deposit disputes. If the security deposit amount in question is $1,000, and you are found to have violated the security deposit law, you will have to return the tenant’s entire $1,000 deposit, even if damage was left behind at the property. Not only that; you’ll face punitive damages of three times the original deposit amount, which adds $3,000 to your bill. So, the tenant is entitled to full refund plus three times the award, and sometimes attorney fees and costs as well. You do not want to find yourself in this situation, and tenants’ rights attorneys are always more than happy to take these cases to court.
Rent Control in Certain Cities
A more obvious example of a city and local law that require your attention is rent control. If you’ve never had to deal with rent control before but you’re in a new market which does have a rental control ordinance, you’ll want to spend some time understanding exactly what that means.
According to the cities and jurisdictions with rent control laws on the books, once you enter into an initial lease with a tenant, you are capped on how much you can increase the rent once the initial term is up or your lease goes month to month. It’s usually the city or a rent board that determines how much of an increase is acceptable and permitted.
The rent control laws we work with often include a just cause ordinance too, which prevents evictions without a very good reason. Tenant are permitted to stay in your property for as long as they want, as long as they are paying the rent and complying with the lease. So, you could find yourself with a tenant who has been in place for 20 years, leaving your rent at a level that’s dramatically below the market norms.
Some cities have a just cause ordinances that stand alone and don’t come with rent control laws. These just cause regulations serve the same purpose; they prevent landlords from evicting tenants or terminating leases for reasons that aren’t a nonpayment of rent or a lease violation. You can increase rent once the lease term has expired, but the tenant is otherwise entitled to stay as long as the tenant wants to as long as rent is being paid. Landlords cannot arbitrarily terminate the lease agreement.
Local Security Deposit Requirements
Security deposits can be another hotspot for local ordinances. They will differ and have variances, so it’s important to understand whether there’s a maximum amount you can charge in a security deposit, if there’s a particular place you need to hold it, and what you can and can’t do with your tenant’s security deposit.
Local laws will dictate when you can apply funds from the deposit, and how long you have after a tenant moves out to return all or part of the deposit. Your security deposit accounting will be extremely important, and must be well-documented. Some states will require you to disclose in your lease agreement which bank holds the deposit. Other states will require you to pay interest on the deposit. Sometimes, you will be required to apply the interest annually and provide the tenants with an account of what has been accrued in interest.
There are little nuances to every state’s security deposit law, and it’s easy to find these details buried in larger landlord/tenant statutes. Make sure you take the time to know what’s required, and be careful about disputes with your tenants. Documentation is critical, and if you don’t document well, you could find yourself at a huge disadvantage when it comes to managing your tenant’s security deposit.
Disclosures and Registrations of Rental Property
You’ll have to provide several different disclosures and other materials to your tenants with your lease. Some of the most common disclosures are federally required, such as lead-based paint disclosures. In each state, there are different sets of disclosures that layer on top of the federal requirements. Cities will often require their own disclosures in the lease agreement as well.
It’s possible you’ll have to provide a document that outlines all of the tenant’s rights and the landlord’s responsibilities. Some cities have this ordinance. You might have to provide it with the lease or as an addendum to the lease agreement. Make sure you know what’s required.Rental registrations are also required in some cities. You may have to register your rental unit with the city, or register yourself as a landlord. This will require a fee, and in most jurisdictions will trigger annual inspections or regular inspections that you’re required to coordinate with licensed inspectors.
Source of Income Protections
Something that’s gaining momentum in a lot of communities is preventing discrimination based on source of income. It can launch a discrimination complaint if you reject a tenant based on how they earn income. In most jurisdiction, landlords can choose whether they want to participate in Section 8 or other housing voucher programs.
But, some cities may designate that a voucher is a protected source of income. All of a sudden, landlords cannot choose to allow Section 8 tenant to apply; failing to consider those tenants will subject the landlord to a discrimination complaint because those housing vouchers can be considered income.
Tips on Navigating and Identifying Statutory Regimes
Compliance starts with having the right forms. Your lease agreement should be vetted by local counsel, and that will set the groundwork for putting you on the right foot in complying with requirements. You need the right notices and forms that are current and up to date with legislative activity
.Landlord/tenant law firms are well-established in most markets, and they are a great resource when you need someone to review a lease agreement. Try to get on their email lists and subscribe to their newsletters. You’ll be exposed to all the common legal issues that landlords in your area deal with.
Join local housing associations for similar resources. They will also have forms you can use, and they’ll be kept up to date and with the right language. That’s your starting point, and then make sure you have the processes and procedures that align with those requirements.A local attorney and a good property management company will have the best forms and processes and systems.
Lastly, something that does get overlooked more than anything else is your tenant relationship. No one is perfect. So, develop a good relationship with your tenants. If you have trust, open communication, and empathy, you’ll have tenants who come to you if there’s trouble or something goes wrong. With a good relationship in place, you’ll resolve 99 percent of issues before there’s a big problem.
Make sure you have a good property management company that’s responsive and knows how to provide outstanding customer service to your tenants.
We can get into detail on any of these topics, so if you have any questions at all, please contact us at Mynd Property Management, and we’ll put you in touch with the right person to help.
About Giles Imrie
Giles Imrie is VP, Corporate Counsel for Mynd. Giles has more than 14 years of legal experience in the real estate industry and extensive property management. Prior to Mynd, he was VP, Legal Counsel at Invitation Homes.
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