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The ins and outs of legal compliance for property investors

Legal compliance & taxes

The contract between property owners and tenants begins with basic phrases:

Lease term. Monthly rent. Security deposit. Cleaning fee. Pet policy.

But break down the lease and legal compliance — and toss in a myriad of federal, state and local regulations and old-fashioned paperwork and human interaction — and some of the policies that successful property owners follow can lead to their biggest battles.

Topping the list is an issue that can turn into a tug of war in the final chapter of a lease: Security deposit disputes.  

“A lot of owners make the mistake of charging too much for wear and tear,” said Travis Bohling, vice president of the West for Mynd. “At the end of the lease, owners sometimes feel like all charges should be put back on the tenant.”

Other obvious yet sometimes overlooked obligations toward clear and concise legal compliance involve a tenant’s right to privacy and enjoyment of the property; a landlord’s promise to provide a habitable and safe home; and avoiding discrimination and adhering to the standards of the Fair Housing Act.

“All these topics can look the same from a global vantage point,” said Giles Imrie, vice president, corporate counsel for Mynd. “But variations can be onerous from state to state and present legal landmines for landlords.”  

Credit: Getty Images

Credit: Getty Images

What is damage, and what is normal wear and tear?

Owners and tenants should agree in writing as to what distinguishes normal wear and tear from what is actual damage to the interior and exterior of a property. A lease, for example, might list scuff marks on a wall as everyday wear, while spilling a substance that leaves a permanent stain and ruins a carpet would be considered damage.  

Bohling stressed that owners should familiarize themselves with not only state laws but county and city statutes regarding how to approach collecting, holding and returning security deposits. An attorney can provide advice as well. 

Examples of the security deposit landscape nationwide include:

  • In California, a landlord can charge two months rent for the security deposit if the residence is unfurnished. That jumps to three months rent for a furnished place. Deposits are generally required to be returned within 21 days of the end of the lease, provided the property has not been damaged. 
  • In Florida, the state has no cap on security deposits, but county and city statutes vary significantly. Landlords have between 15 and 60 days to send back deposits.
  • Arizona’s landlord-tenant laws stipulate a security deposit cannot exceed one and a half month's rent. A deposit must be refunded within 14 days. 
  • Like Florida, Texas does not have a cap set by the state, but county and city laws might stipulate limits. Landlords in Texas have 30 days to return security money. 
  • In Nevada landlords may charge a tenant up to three months rent for the security deposit. A quirk in the law states that if a landlord and tenant agree, the deposit can be made using a surety bond — a three-party legally binding contract that typically involves an insurance company — for all or part of it. That money must be returned within 30 days after the lease ends. 

But regardless of the amount and refund timeline, the tenor of a security deposit agreement can be an early marker in setting an amicable or adversarial relationship with tenants.

“Owners (and property managers) always get the reputational risk,” Bohling said, “because people go online and write a bad review that can stay out there for a long time.”

Respecting a tenant’s right to privacy 

Credit: Getty Images

Credit: Getty Images

Common courtesy would appear to make privacy an issue easily resolved between two parties listed on a rental lease. But showing up unannounced still ranks as a mistake owners too often make. 

“You just can’t enter the property whenever you want,” Bohling said. “You have to give proper notice.”

Storing tools in a shed at a rental house might be an afterthought to some owners. But showing up to grab a hammer and saw from the shed without notifying a tenant violates most leases. Similarly, having a real estate agent show a property that’s for sale while it’s occupied can create a tricky set of challenges.  

Bohling again recommends consulting state and local statutes. One to three days’ notice are general guidelines in most jurisdictions, but simple communication and flexibility in visiting a property are basic keys to avoid confrontation and possible lawsuits. 

He also offers this advice on leases: “Don’t just download something off the internet. It’s got to be state specific. Have a property manager, or at least get a real estate agent to put together and sign off on the lease.” 

Mynd offers guidelines for lease agreements, and owners who opt for the company’s property rental services do not need to worry about those details. 

The promise of a habitable home

Credit: Getty Images

Credit: Getty Images

A washer or dryer sputters to a grinding halt. The refrigerator’s ice maker stops doing what it was designed to do. A sink’s garbage disposal starts making very scary noises. 

It’s all part of a residential real estate investor’s rite of passage. By law, habitability is a right tenants have, and property owners are required to provide. This includes ensuring the tenants are housed in a safe and livable space.

Taking care of the property and following the rules should be as simple as changing a light bulb for both landlord and tenant. But, as Bohling said, “owners too often ignore some issues that could easily be taken care of quickly.” 

Preparation and anticipation for property maintenance should be mandatory for all landlords. The quicker owners can call on reliable contractors to fix problems, the more likely they will have happier tenants and healthier properties. 

“The landlord is not required to guarantee that nothing will happen,” Imrie said. “But the law requires a prompt response.”

“Response and documentation are the keys to mitigating these issues,” he added.

Lapses in maintaining a habitable property can quickly lead to liabilities for landlords should legal problems escalate.

“Tenants are claiming it more and more often,” Imrie said. “They throw it against the wall for delaying rent or eviction. Habitability can be a very real liability (for owners).”

This past winter’s deep freeze and subsequent power grid failures in Texas illustrated how a strong network of maintenance pros can help owners and tenants weather a storm of expenses. 

As pipes froze and other issues arose across the region, “we had a team of plumbers and resources that we could use, get them out there quickly and pay promptly,” Bohling said of the services Mynd offers its clients. 

Summer brings rising heat indexes and often higher danger for tenants. Bohling has a simple message for when cool air stops blowing into a residence, especially in cities in Arizona and Texas where triple-digit temperatures are common.

Air conditioning problems are an emergency,” he said. “Stop everything and get that fixed. Put them up in a hotel or help them as far as the rent goes. That’s imperative in situations like that.”

Landlords must adhere to the Fair Housing Act 

Legal compliance for landlords essentially begins with standards set by the 1968 federal law that prohibits discrimination based on seven factors: Race, national origin or ethnicity, gender, age, family status, religion and mental or physical disability.

Imrie cautioned that landlords should be especially careful of “rules that weren’t intended to be discriminatory but have a disparate effect on people” in regard to the Fair Housing Act. 

For instance, attempting to limit the number of occupants in a property might seem reasonable. But, Imrie noted, that might carry a different meaning with people from varying races, cultures and religions whose live-in families include grandparents, aunts and uncles. 

“It isn’t discrimination on its face, but it can have a disparate effect,” Imrie said. 

Property owners can deny tenants based on information in a poor credit check and their ability to pay rent, or if they have a history of evictions or bankruptcies.

But the bottom line should be consistency in screening potential tenants and applying the same qualifying standards for every applicant, along with treating them with respect and dignity.

And always check state and local statutes in case they have additional requirements to federal law — a knowledgeable property manager or a local real estate agent should be able to help.

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