Landlord's Legal Kit For Dummies

By Robert S. Griswold and Laurence C. Harmon

Howdy, landlord! Get on the right side of the law with Dummies

Landlord's Legal Kit For Dummies contains all the resources landlords need to unpack the legal side of renting properties. Inside you'll find worksheets, templates, and friendly explanations that will help you find success. Once you have your property and your tenants, you'll need to make sure you operate within your rights, complete all the necessary admin, and handle taxes in an accurate and timely way. This book can help you do just that, with the latest paperwork, helpful details and examples, and a breakdown of taxes and laws. Plus, you can go beyond the book by accessing online documents that take your learning to the next level.

• Understand all the latest housing laws that pertain to your specific rental situation
• Find drafts of all the legal forms you’ll need as a landlord
• Access easy-to-use tax worksheets and clear descriptions of tax rules without legal jargon
• Recognize your rights as a landlord and understand your tenants' rights

This is the perfect Dummies guide for both new and experienced landlords who need a hands-on legal reference for all the laws surrounding rent, rental properties, and tenants.

• Language: English
• Publisher: Wiley
• Release date: Aug 5, 2022
• ISBN: 9781119896357

Book preview

Introduction

Success as a landlord requires more than attracting tenants, collecting rent, and performing repairs and maintenance. You also need to be familiar with and abide by federal, state, and local laws that govern residential rental housing. Failure to do business in compliance with those laws can result in severe and very costly consequences.

You need a guide to bring you up to speed in a hurry about the legal aspects of managing residential rental property and provide you with the contracts, forms, and other documents that will help you to comply with those laws. You also need sound expert advice and guidance on how to avoid and protect against legal claims commonly filed against landlords. Landlord’s Legal Kit For Dummies, 2nd Edition, is your guide.

About This Book

In this book, we lead you through the legal minefield of owning and managing residential rental property, from the time you purchase your rental property and market and advertise the property until the rental contract ends, the tenant moves out, and you provide the accounting for their security deposit. You avoid legal problems in three ways:

Understand and comply with all relevant laws — federal, state, and local.

Honor your legal obligations as a landlord to your tenants, so they’re less likely to file a claim against you — and if they do, they’re less likely to win a judgment.

Document all landlord-tenant agreements and communication, so you have evidence that stands up in court.

This book is based on our personal experience and lessons from our many years of owning and managing residential rental properties, as well as helping other owners of tens of thousands of rental units successfully own and achieve positive financial results through competent management, including complying with federal, state, and local housing laws.

To make your life easier, we’ve included many of the contracts, forms, and other documents — whether you’re just starting out with a single-family rental home or condo, you have a handful of rental units, or you possess a whole portfolio of rental properties. To access these online forms, see the instructions in the "Beyond the Book" section later in this Introduction. We strongly recommend that you have your local legal counsel review them, and then print them out and start putting them to use.

Foolish Assumptions

In order to provide you with the guidance you need, we had to make a few assumptions about who you are. We assumed the following:

You own or manage or you plan to own or manage rental property.

You’re specifically interested in finding out about laws that govern residential rental properties, not commercial properties.

You’re committed to operating in accordance with all federal, state, and local laws.

You want to avoid having legal claims filed against you.

When a legal claim is filed against you, you want to win.

Icons Used in This Book

Throughout this book, icons in the margins highlight different types of information that call out for your attention. Here are the icons you’ll see and a brief description of each.

Remember We want you to remember everything you read in this book, but if you can’t quite do that, then remember the important points flagged with this icon.

Tip Tips provide insider insight. When you’re looking for a better, faster way to do something, check out these tips.

Warning Whoa! This icon appears when you need to be extra vigilant or seek professional help before moving forward.

Beyond the Book

This book comes with some access-anywhere goodies on the Web. First and foremost, bookmark this website:

www.dummies.com/go/landlordslegalkitfd2e

This site is where you'll find all of the forms, agreements, and documents discussed in the book, including the following:

Sample Lease Agreement, Move-In/Move-Out Inspection Checklist, Eviction Notice, and dozens of other essential legal forms and documents

Resources for finding state and local statutes and additional legal information

References to organizations, government agencies, media, and vendors/suppliers that provide additional information, training, tools, and services to make you a better landlord

Also, check out the free cheat sheet at www.dummies.com for tips on screening applicants, establishing security deposits and procedures, meeting your obligations as a landlord, and more. To access the cheat sheet, type Landlord Legal Kit For Dummies cheat sheet in the search box.

Where to Go from Here

You can approach this book in three ways:

Read it from beginning to end. Although being a landlord isn’t a linear process, we present topics in the order you’re most likely to encounter them. We start with setting up your business and taking possession of a residential rental property; move on to advertising vacancies, screening applicants, and fulfilling your legal obligations to tenants; cover collecting rent, properly maintaining your property, preventing or minimizing hazardous environmental conditions, and providing a reasonably safe premises; and end with a tenant moving out.

Skip around. Each chapter is a stand-alone lesson on a specific legal aspect of property management. If you want to know about fair-housing laws, skip to Chapter 5. Head to Chapter 10 for guidance in developing a security deposit policy. For information regarding your legal obligations to perform maintenance and repairs, flip to Chapter 12. If you just need some quick advice on how to avoid having legal claims filed against you, skip to Chapter 21, where you’ll find ten tips for staying out of legal trouble.

Use it as a reference book. Whenever you need information and advice on a specific legal aspect of being a landlord, turn to the index, look up the topic, and flip to the chapter or the specific page where that topic is covered.

The more you use this book, the more confident you’ll be that you’re complying with federal, state, and local laws and that you’ll have the documented evidence you need to take legal action against a tenant and defend yourself when a tenant or someone else takes legal action against you.

Part 1

Getting Started with Landlording Fundamentals

IN THIS PART …

Get a bird’s-eye view of your legal rights and obligations as they relate to owning and managing residential rental property.

Discover the benefits of operating as a legal entity, such as a limited liability company (LLC), instead of as a sole proprietorship.

Understand your tax obligations, so you can plan ahead and have enough money set aside to cover your tax bills.

Find out how to conduct legal research to find out about state statutes and local regulations regarding residential rentals.

Take possession of a rental property the right way, so you get everything you paid for and avoid any legal snags.

Choose and buy the right insurance policy to cover your rental assets in the event of unavoidable mishaps and disasters.

Decide whether you want to outsource some of your landlord chores to a property manager or management firm, weigh the pros and cons of each option, and find the right individual or firm for the job.

Chapter 1

The Legal Fundamentals of Managing Residential Rentals

IN THIS CHAPTER

Bullet Incorporating for legal protection and income optimization

Bullet Stepping into a residential rental property as its new owner

Bullet Getting up to speed on landlord legalities

Whenever you approach a subject for the first time, you probably try to wrap your brain around it before getting into the specifics. This chapter helps you gain the big-picture perspective by highlighting the key legal aspects of being a landlord and managing all types of residential rentals, including single-family homes; condominiums; and small, medium, and large multifamily apartments. Think of this chapter as a framework on which you can hang all the detailed information, guidance, and insights we present throughout this book.

This chapter begins by laying out the legal foundation for your residential rental operation. The first section stresses the importance of running your business as a legal entity in order to protect your personal assets, mitigate risk, minimize taxes, and maximize profits. The second section touches on important steps to follow when taking ownership of the property. The third and longest section in this chapter introduces your legal obligations as a landlord; here you find out how to fulfill your obligations while protecting your rights and avoiding legal problems.

Running Your Operation as a Corporation or LLC

Unless you take steps to give your business the status of a corporation or limited liability company (LLC), you're operating as a sole proprietorship and, for legal purposes, placing your personal assets at risk. If you can't pay what you owe to a creditor, such as a contractor, a utility company, or the lender that holds the mortgage on your property, they can pursue your personal assets to collect what you owe. Operating your business as a corporation or LLC insulates your personal assets from your business assets, thus protecting your personal assets from such claims. In addition, operating your business as a corporation or LLC potentially reduces your taxes, increasing your net profit.

Most landlords choose to operate as an LLC because it provides the protection of a corporation without the costs and complexities of forming and managing a corporation. Any claims by creditors against the LLC are limited to the LLC's assets, protecting your home, personal financial accounts, and other personal or unrelated business assets from those claims.

Warning An LLC doesn't provide complete protection. If a court finds that your carelessness or negligence contributed to a tenant’s injury, for example, you could be held personally liable. We recommend that you purchase a landlord insurance policy that covers such scenarios, as explained in Chapter 3.

Structuring your business and operating it as a corporation is much more complicated and expensive than forming an LLC. You need to register a name for your corporation with your state's Secretary of State, write and file articles of incorporation and bylaws, issue stock (at least one share), have regular corporate meetings, prepare and file minutes from those meetings, and comply with regulations for recording and reporting financial transactions. In addition, to take full advantage of tax savings, you may need to pay a portion of your profits from the rental property to yourself as a salary, which requires payroll processing.

See Chapter 2 for more about the options for structuring your residential rental business.

Taking Ownership of a Rental Property

Assuming you've completed the closing on your rental property, you realize that transferring ownership of any real estate is a somewhat complicated endeavor. The process is even more complicated when transferring ownership of a rental property. When you buy a rental property, make sure you get the following items from the seller:

A list of personal property included in the sale

All leases or rental agreements and all documents in each of the tenant files

Seller-verified rent roll, including a list of all security deposits

Building blueprints and site plans

All required governmental licenses and permits

Recent utility bills with all account numbers and due dates

Every service agreement or contract

Copy of the seller's current insurance policy, including 5-year loss history

Chapter 3 contains additional information about these items.

Remember Meet with a reputable insurance provider and purchase a policy for the property with an effective date prior to taking possession, so there's no lapse in insurance coverage when you take possession. If the property burns down before closing, it's the seller's problem. If an uninsured property burns down or floods after closing, it's your problem. For more about choosing an insurance policy that provides sufficient coverage, see Chapter 3.

After you become the proud owner of the residential rental property, you have a few tasks to attend to as soon as possible, including the following:

Meet with the tenants in person, introduce yourself as the new owner, and answer any questions they may have.

Inspect the outside of the rental property carefully and make a list of any maintenance and repair issues. Address these issues as soon as possible.

Evaluate the current rent. You can't raise the rent for current tenants until their lease expires or at the end of the month (for month-to-month renters), but analyze how much rent your tenants are paying now. Also consider how much you need to charge new tenants to cover your higher expenses as the new owner and turn a decent profit, so you know how much to raise the rent for existing tenants when that time comes.

Use current professional forms from your local affiliate of the National Apartment Association (NAA) or landlord-tenant legal advisor to prepare rental contracts (either a fixed-term lease or a month-to-month rental agreement), so they're ready for new applicants and for current tenants who decide to remain after their rental contract expires.

Avoiding the Legal Pitfalls of Managing Residential Rental Properties

Owning residential rental property comes with legal obligations and risks. You're legally responsible to comply with fair-housing laws, keep your property in habitable condition, ensure your tenants’ rights to quiet enjoyment of the property, comply with laws for handling and refunding security deposits, take reasonable steps to prevent crime, and eliminate any known dangerous or hazardous conditions. If you have employees, you may be liable for their legal actions as well. And tenants can file a claim against you for any number of reasons, regardless of whether those claims have legal merit.

The following sections highlight many of the most common legal issues you need to be aware of and prepared to resolve. We also guide you in best practices that help you avoid legal problems in the first place, such as screening applicants carefully and legally, as well as always honoring your tenants’ legal rights.

Obeying fair-housing laws

Fair-housing laws prohibit landlords from using certain criteria, such as race or sex, to target tenants in advertising or to refuse housing to applicants. When screening applicants, for example, you're permitted to consider only factors that are likely to indicate whether the person will pay their rent on time, take care of the property, get along with the neighbors, and comply with your other policies. You may use criteria such as income, credit history, past evictions, criminal history, and similar factors to determine the prospect's qualifications. You can't use race; color; national origin or ancestry; religion or creed (belief system); sex (including gender, pregnancy, sexual orientation, and gender identity); familial status; or physical or mental handicap; plus certain other state or local municipality criteria.

In the following sections, we explain the federal Fair Housing Act and look at how some states expand coverage of that Act. We also stress the importance of considering fair-housing laws when advertising your rental property.

Federal law: The Fair Housing Act

The Fair Housing Act prohibits you, as landlord, from discriminating against or giving preferential treatment to people based on their protected class status — a characteristic that can't be used to discriminate against or in favor of an individual or group. The Fair Housing Act specifies the following seven protected classes:

Race: Ethnicity or culture, such as African American, Caucasian, Hispanic, Asian, or American Indian

Color: Skin color or shade, which may seem to be the same thing as race, but people of the same race sometimes discriminate against one another based on lightness or darkness of skin

Religion or creed: Christianity, Islam, Judaism, Hinduism, and so on

Sex: Male or female, but also relates to pregnancy, sexual orientation, and gender identity

Handicap: Physical or mental handicaps or disabilities, including mobility, hearing, or visual impairments; chronic alcoholism; and HIV/AIDS

Familial status: Whether a person or couple has a minor or is expecting or adopting or gaining custody of a minor/minors; it also makes no difference if the adult members of the household are single, related, married or civil-union status, separated, divorced, or widowed

National origin or ancestry: The country or area a person was born in, such as Canada, Mexico, the Middle East, or Nigeria

Tip Consider only those characteristics that reflect the likelihood that the person will pay their rent in full and on time, treat your rental property with care, and get along with their neighbors. As a landlord, you should consider nothing else.

State and local laws

Some states and municipalities have extended the Fair Housing Act to other protected classes, including the following:

Age

Occupation

Educational or student status

Medical status

Broader definitions of HIV/AIDS status

Broader definitions of sexual orientation

Source of income

Victim of domestic violence, stalking, or sexual assault

Military/veteran status

Political affiliation

Genetic information

Personal appearance, including physical size

For more about the Fair Housing Act, protected classes, and state additions to the Act, see Chapter 5.

Although several states do not have laws prohibiting discrimination against unmarried couples who live together, many prohibit any distinction in access to housing based on marital status. The majority of states have very broad fair housing laws forbidding all arbitrary discrimination on the basis of a person’s characteristics or traits. Such laws can prohibit the use of appearance as a basis for housing decisions. If an applicant has tattoos or piercings, for example, or wears clothing that could be construed as being typical of a gang member, you can’t legally use that information as a reason to deny their application.

Remember Always be sure to fully understand the fair-housing requirements and limitations that apply to your rental property.

Fair-housing laws also are a consideration when you're marketing and advertising your property. To comply with fair-housing laws in advertising, follow these four general guidelines:

Avoid any obviously discriminating words and phrases that state or imply that certain protected classes are unwelcome or that you prefer a certain type of clientele, such as singles, married couples, or affluent individuals.

If you use photographs or pictures of people in your advertisements, make sure they convey diversity in race, sex, familial status, and so on.

Don't use location, place names, directions, and other factors that may suggest exclusion or preference for a prospect who may be a member of a certain protected class. For example, stating that the property is near a certain country club or religious facility may be construed as a preference for some prospects while discriminating against others.

Include the U.S. Department of Housing and Urban Development's (HUD's) Equal Housing Opportunity logo or statement on all advertising to invite people of all protected classes to apply.

Most landlords avoid blatantly discriminatory language and images in their advertisements. They're more likely to inadvertently commit a violation by showing a picture of a young couple, for example, or mentioning that the property is perfect for certain classes of prospects.

Tip Have someone who's well versed in federal, state, and local fair-housing laws review all of your advertisements before you start running them. For more about complying with fair-housing and other laws in your advertising, see Chapter 6.

Setting rents and payment policies

Sometime prior to renting out a property, you need to set your rents and payment policies to address the following aspects of rent payments:

Amount: You want to charge enough rent to cover your operating expenses, earn a decent profit, and remain competitive. In a few cities in a handful of states, you also may need to consider rental rate regulation or rent control as well.

Due date: We recommend that your lease requires that all tenants pay the rent in full on the first of the month. If the tenant moves in on a day other than the first, you collect the first month's rent in full and then prorate the second rent payment. This way you collect more money up-front and minimize the risk that your tenant will gain possession of your rental property by just paying you a nominal amount of rent.

Payment form: This may be cash, check, money order, cashier's check, online/electronic payment, or even the latest cryptocurrency, depending on what you're willing to accept.

Late payments and penalties: Specify when payments are considered late; for example, Payments received more than five (5) days after the first of the month are considered late payments. Also specify a penalty, perhaps a certain dollar amount or a specific percentage late fee when the payment is past due.

Penalties for returned checks: Penalties may include a flat fee to cover the fee your financial institution charges you plus a little extra for your time, inconvenience, and aggravation. You may also want to specify that if a certain number of checks are returned unpaid, the tenant will be required to pay rent only with a secure, electronic payment method (of which there are more every day).

Penalties for missed payments: The penalty for missed payments is usually that the tenant is in violation of the lease provisions and is subject to being evicted.

For more about legal issues regarding rent collection and rent control, see Chapter 7.

Screening applicants

Carefully screening applicants is essential to keep your rental units occupied with tenants who pay on time, take care of the property, and get along with their neighbors. Careful screening can help you avoid legal issues, because you have less need to take legal action against good tenants, and they're less likely to file legal claims against you. To screen applicants, take the following steps:

Have the individual complete and submit an application that includes their name, current address, Social Security number, employment history, rental history, income, financial resources, and so on.

Visit www.dummies.com/go/landlordslegalkitfd2e and click on the Leasing folder for a sample application.

Order a credit and background check for the prospective tenant.

You can find several services online that perform credit and background checks. Your application should include language specifying that the applicant agrees to a credit and background check. Note that California has unique requirements for the legally required disclosure language, including a very specific check box. Be sure to only use the latest application forms from the Institute of Real Estate Management (IREM), your local affiliate of the National Apartment Association (NAA), or your landlord-tenant legal advisor.

Contact the applicant's employer to verify the applicant's employment and income and find out how long the applicant has been employed there.

You may also want to require copies of pay stubs, recent W-2s and 1099s, the previous year's tax return, and a recent financial institution statement.

Contact the applicant's personal references.

Contact any landlords the applicant rented from in the past and ask about payment history, the condition the applicant left the property in, and whether the applicant caused problems with their neighbors.

Interview the applicant in person.

Ask why the person is moving and why they chose your property. Ask questions related to information you gathered previously to determine whether what the applicant tells you is consistent with what you already know. Inconsistencies can be a red flag.

Remember When screening prospective renters, you must comply with fair-housing laws, so certain questions are off-limits. You can gather information about a prospect's employment status, income or financial resources, credit history, housing history, and certain aspects of their criminal past, but you're prohibited from asking an applicant whether they have minors, what country they’re from, their religion, and so forth. For additional details on how to screen applicants, see Chapter 8.

Drafting a lease or rental agreement

Your rental contract (either the lease or month-to-month rental agreement) establishes the legal contract that you have with the tenant, including who's going to be living in the unit and paying rent and for how long, the rent amount and when it's due, the security deposit amount and what it can be used for, your obligations, the tenant's obligations, whether pets are allowed and under what conditions (not to be confused with service or companion animals, which are considered durable medical equipment), and so on.

We recommend that you start with an existing lease and modify it to suit your specific needs. You can obtain a sample lease by doing any of the following:

Visit www.dummies.com/go/landlordslegalkitfd2e and click on the Rental Contract folder. In Chapter 9, we explain the terms of this lease and modifications you may want to consider.

Search the Web for your state, followed by lease or rental agreement. Sometimes attorneys or property management companies post the lease or rental agreement they use.

Ask a reputable local attorney who specializes in landlord-tenant law or real estate for a copy of a residential lease and a residential rental agreement. You may be able to obtain the lease for free or for a modest fee.

Use an online legal service such as www.rocketlawyer.com to obtain a state-specific lease or rental agreement. (Many of these services advertise free lease. The hook is that they lead you through a long process of creating a rental contract and then require that you sign up for the service and provide credit card information. You may be able to sign up for a free week or month of the service to get the contracts you need and then cancel the service.)

Contact your local affiliate of the National Apartment Association (NAA), the Institute of Real Estate Management (IREM), the National Association of Residential Property Managers (NARPM), or a similar rental industry group about membership. They often have comprehensive, up-to-date legal forms that comply with all applicable laws for your area available for their members at a reasonable cost.

Managing security deposits

Prior to when a tenant moves in, you need to collect the first month's rent (or prorated rent) along with a security deposit — a lump sum that you hold until the tenant moves out in order to cover the cost of any unpaid rent and damages (beyond ordinary wear and tear). As we explain in Chapter 10, you should have a security deposit policy in place that specifies the following:

Amount: Usually no more than the equivalent of one- or two-months’ rent. Some states and municipalities have specific limits.

Due date: Usually due at the signing of the rental contract.

Allowed uses: State and local laws usually allow landlords to use security deposits only to cover unpaid rent, damages to the unit beyond ordinary wear and tear, cleaning expenses (only to make the unit as clean as it was when the tenant moved in), and to restore or replace damaged or missing property, including keys and appliances furnished with the unit.

Where the deposit will be held: We recommend depositing all security deposits into a separate interest-bearing account and passing along any interest earned (unless nominal) to the tenant when you return any unused portion of the deposit.

Return of the unused portion: Specify the maximum number of days you're allowed to hold any unused portion of the security deposit before returning it to the former tenant. State law may establish a limitation.

Moving tenants in and out

Two very important days in the course of a tenant's stay are the first and the last — the day they move in and the day they move out. In the following section, we cover the essential tasks you need to perform on these two days.

Moving a tenant in

How well you manage the process of getting a new tenant moved in can affect your relationship over the entire term of their occupancy. Get started by performing the following steps leading up to and including move-in day:

Agree on a move-in date with the tenant.

Make sure any utilities the tenant is responsible for paying are transferred to the tenant's name and are turned on by the move-in date.

Review important terms of your rental contract and any addenda to the contract, and answer any questions the tenant may have.

Collect the rent and full security deposit, if you haven't done so already.

Inspect the property with the tenant, complete a written or electronic checklist to record the property's condition, and make sure you and the tenant sign the checklist.

We recommend taking photos or a video, so you have a visual record of the property's condition as well.

Orient the tenant to the rental unit and any appliances in the unit, utility shutoffs, and common areas, such as parking, clubhouse, fitness facilities, business center, laundry, pool, and hot tub.

Present a move-in letter and a copy of your policies and guidelines (aka rules and regulations).

These documents may include instructions for requesting maintenance and repairs, taking on a roommate, replacing lost keys, paying rent, and so on. You may also include policies for guests, parking, wall hangings, ceiling hooks, pets, and so on.

Give the tenant time to read the move-in letter and the policies and guidelines and then have them sign and date two copies of each document — one for their records and one for yours.

Give the tenant keys or instructions for entry devices to the rental unit and their mailbox.

For details on moving a new tenant in, see Chapter 11.

Moving a tenant out

To avoid disputes and litigation after a tenant moves out, manage the process appropriately. Here's how:

Require that tenants notify you in writing a certain number of days (30 days is common) prior to the date they intend to move out or the lease expires.

Present the tenant with a move-out letter with instructions on how to prepare the rental unit for the move-out inspection. Include a reminder of your policies and guidelines for returning the security deposit after any lawful deductions for unpaid rent or damages beyond ordinary wear and tear.

See Chapter 9 for more about what ordinary wear and tear means.

Sign and have the tenant sign a termination agreement, so you have documentation that the tenant officially moved out.

Inspect the unit carefully for any damages or missing items that were furnished with the rental unit, and record your observations on a written or electronic move-out checklist.

Take photos or video to document any deductions for damages or missing items, or a failure to return the rental unit to the same level of cleanliness as it was upon their move-in.

As soon as possible, perform the repairs/replacements, maintenance, and cleaning required to bring the rental unit back to the condition it was in before the departing tenant lived in it.

Keep receipts for all materials and labor.

Deduct the costs of any repairs/replacements, maintenance, or cleaning that qualify as beyond ordinary wear and tear, and return the remainder of the security deposit (with interest, if required by state or local law), along with an itemized list of expenses deducted with an explanation and/or photos/video.

Some jurisdictions require you to provide the former tenant with receipts for work done upon request.

Of course, not all tenants move out this smoothly. Sometimes, tenants simply skip town, abandoning the property without notifying you. In other situations, such as when a tenant fails to pay rent or breaches the contract in other ways, you may need to either get the tenant to leave voluntarily or evict the tenant. These exceptions to the standard move-out scenario have particular legal procedures you must follow according to state or local law. See Chapter 20 for details about moving tenants out and Chapter 19 for more about evictions.

Fulfilling your maintenance and safety obligations

Your rights as a landlord are based on your rental contract and your state's landlord-tenant laws. Your obligations, however, are primarily in the form of written laws or implied warranties and covenants (agreements). In the following sections, we summarize your legal obligations to your tenants, whether they're in writing or not.

Recognizing your duty to maintain habitable living conditions

According to the implied warranty of habitability, you must provide tenants with dwellings that are fit to live in. For example, the unit's plumbing and electrical must be in working condition, tenants must have running water and reasonable amounts of hot water, and the unit must be heated in the winter.

Remember If you fail to maintain habitable living conditions, tenants may be permitted by law to withhold rent, have the repairs done and bill you for them, sue for damages, take legal action to force you to solve the problems, or move and terminate the lease. See Chapter 12 for details about your obligation to honor the implied warranty of habitability.

Addressing potentially dangerous conditions

Accidents happen regardless of how careful people are, but if anyone is injured on your property as a result of something you did or failed to do, you could be held liable for the person's medical bills and lost pay and may even be subject to punitive damages (for any reckless or intentional acts that cause injury). Here are a few areas to consider focusing your safety program on:

Fire safety: Educate tenants on the most common fire hazards, provide and maintain working fire extinguishers and smoke alarms, and provide tenants with a copy of your evacuation procedures. Your local fire department can help you comply with the fire-safety codes in your area. Carbon monoxide alarms are also important if you have gas appliances and are now required in most jurisdictions.

Pool and hot tub safety: If you have a pool and/or hot tub, enclose it with fencing and gates that comply with your local building codes, and post required signage to inform tenants and their guests of your rules, such as no diving allowed and adult supervision required for minors.

Exterior lighting: Make sure parking lots, stairways, walkways, and entryways that are all routinely used have adequate lighting to keep people from tripping or bumping into things.

Safety within units: Use safety or tempered glass in shower stalls or tub surrounds, use window coverings with safe or no cords, make sure all openable windows have working locks and screens, and use outlets with ground fault protection near water (in bathrooms and near the kitchen sink).

General maintenance issues: Fix any loose railings, stairs, or handrails; repair uneven pavement in sidewalks and parking lots; replace burnt-out exterior lights; and so on. Shovel and de-ice walkways in the winter as needed. Make sure that you immediately mop up any spills and that you place signs to warn tenants when floors are wet/slippery.

Set and enforce pet policies: If you allow pets, make sure your tenants comply with local leash laws, as well as licensing, spay or neutering, or any other requirements.

Construction site safety: Make sure contractors secure their construction sites to prevent injuries to curious minors and adults.

Tip Team up with tenants to improve safety. Encourage them to report any safety concerns to you, respond immediately to their concerns, and thank them for their efforts. For more about improving safety, see Chapter 13.

Disclosing and responding to environmental hazards

We define environmental hazard as anything that may adversely affect a person's health, including the following:

Asbestos

Carbon monoxide

Formaldehyde

Radon

Lead-based paint

Visible mold

Hazardous wastes, including chemical residue from meth labs

Pests, including rats, mice, cockroaches, silverfish, and bedbugs

Each of these hazards has specific laws regarding the landlord's obligation to disclose and address.

Warning The best course of action isn’t always to remove an environmental hazard. In fact, if not done properly, attempts to remove harmful substances, such as asbestos, lead paint, and visible mold, may increase the danger. If you notice an environmental hazard, head to Chapter 14 to find out how to proceed.

Protecting tenants and workers from criminal activity

Landlords are legally obligated to take reasonable steps to prevent crime on their property, which is a job that's more challenging than most landlords realize. If a crime occurs on your property and the courts find that you could have, should have, or didn't take measures to prevent it, you may be held liable for any injuries or property losses that result. Here are several of your primary responsibilities for protecting tenants and workers from criminal acts:

Provide and maintain basic security features, including doors with deadbolt locks and peepholes for rental units, key locks, or keyless (smart key or entry device systems) for external doors, windows with working latches and insect screens (and in some jurisdictions, locking devices), and sufficient visibility lighting.

Report suspected criminal activity to local law enforcement and inform tenants of any significant criminal activity in the area that comes to your attention.

With proper legal advice, take steps to evict tenants who commit serious crimes, within a certain number of days of being notified by local law enforcement.

Safeguard sensitive tenant information to prevent identity theft and other crimes.

Secure master and duplicate keys, or entry device systems, to prevent unauthorized entry to rental units. This also applies to common areas if they're access-controlled and to the extent that it's reasonably feasible.

As permitted by law, seek criminal background checks on prospective employees of the rental property and monitor employee activity for any signs of criminal activity.

Tip Team up with local law enforcement agencies. Many law enforcement agencies have pamphlets or booklets (some available online), with valuable guidance on how to secure rental properties. Refer to Chapter 15 for more information.

Knowing the limitations on your right to enter the premises

Landlords frequently believe that because they own the rental property, they can enter rental units whenever they want. You do have a right to enter rental units you own, but your right of entry is balanced against the covenant of quiet enjoyment that gives a tenant the right to undisturbed use of the property. In most states, a landlord can enter a residence only under certain conditions, some of which require the landlord to give reasonable advanced notice, and some that don't:

You can legally enter a rental unit without notice to respond to an emergency that threatens health, safety, life, or property; when a tenant has abandoned the property; when responding to a court order; or when you ask for and a tenant gives you permission to enter.

You can legally enter a rental unit with reasonable notice to check smoke alarms and carbon monoxide alarms; inspect for and make necessary repairs; check for problems during a tenant's extended absence; or show the property to a prospective renter, buyer, or lender.

For more about your right to enter the premises and a tenant's right to quiet enjoyment, see Chapter 16.

Dealing with co-tenants, sublets, and assignments

Every landlord recognizes the importance of screening applicants before permitting them to move into a unit. Unfortunately, tenants often try to move others into their unit without your permission by taking on a roommate, subletting the unit to someone else, or assigning their lease to someone you don't know. Such practices significantly increase your exposure to risk, because it opens your doors to people who have no contractual obligation to you. You're not given the opportunity to screen the person, and you don't have the power of a legal contract to enforce your rules.

Remember Screen everyone prior to allowing them to live in one of your rental units. Have the person complete an application, and then follow your standard screening procedure, including performing background checks. If you give approval, make sure the person signs a rental contract. A roommate may simply sign the existing rental contract. Instead of subletting and assignments, we recommend terminating the previous tenant's lease and creating a new one for the new tenant. For additional details about roommates, sublets, and leases, see Chapter 18.

Terminating rental contracts

All good things (and bad things) must come to an end, and the same is true of rental contracts. The process differs depending on whether you're terminating a lease or a rental agreement and on the circumstances surrounding the termination:

Lease: A lease is a rental contract for a fixed term, usually 1 or 2 years. You can terminate a lease in any of the following three ways:

Let it expire and don't renew it. In this case, you should serve your tenant a Notice of Nonrenewal 30 or 60 days prior to the date on which the lease expires.

Mutually agree with your tenant to end the lease, in which case you should both sign a Mutual Termination of Lease Agreement.

Require that the tenant move out for breach of contract. In this situation, you must serve the tenant a termination notice giving them a certain number of days to move out.

Rental agreement: A rental agreement is a month-to-month contract. You typically can terminate a rental agreement with or without cause:

With cause: If the tenant breaches the contract, you may be able to require that the tenant move out in as little as a few days.

Without cause: In most states, you can end a rental agreement without cause, as long as you give the tenant sufficient notice, typically 30 to 60 days prior to the termination date.

For more about terminating rental contracts and obtaining the required notices and forms, see Chapter 19.

Chapter 2

Protecting Your Legal Assets

IN THIS CHAPTER

Bullet Reducing personal liability through incorporation

Bullet Brushing up on the laws that govern residential rentals

Bullet Having an attorney cover your back

Bullet Dealing with taxes

As a landlord, you have a lot to lose and many ways to lose it. You have the same concerns as a homeowner, including damage or loss from fires, natural disasters, theft, and vandalism, plus the risks of being sued for accidents and crimes at your property, alleged housing discrimination, breach of contract, and a host of other issues. If you’re not careful, lawsuits may even imperil your personal assets, including your home.

In this chapter, we explain how to protect your personal and business assets from the risks of residential rental property ownership. Here, you find out how to incorporate and establish a separate legal entity to protect your personal assets from claims against your business, and how to keep current with the laws that govern residential rentals so you’re less likely to commit a violation that impacts your business and personal assets. We also discuss how an attorney can help you and what you also need to know about your rental unit’s property taxes.

Forming Your Business

You can own and manage your residential rental property as an individual or as a business entity. However, if you take ownership of a rental property personally, you expose your personal assets to increased risk and forfeit some of the tax advantages available to business entities. We recommend that you keep your personal and business assets separate.

Here we compare the different forms of real estate ownership, each of which provides benefits and limitations that impact your profitability and personal liability. None of these forms of ownership is ideal; depending on the property itself and your investment goals, one form may be better than the others. You should make this decision only after consulting with your financial, legal, and tax advisors.

Choosing a legal structure

How you choose to structure your business depends on your willingness to share its future — and yours — with others, your willingness to take risks (or desire to avoid them), and your long-term assessment of residential real estate as a desirable investment.

Remember The various forms of real estate ownership can accommodate any or all of these considerations, giving you options that range from sole proprietorships, which facilitate your willingness to take personal responsibility for the performance of the business; to partnerships and corporations, which pool the capital and experience of people with different backgrounds. Table 2-1 provides an overview of the various forms of real estate ownership along with each form’s taxation status, owner liability, and management structure; the sections that follow provide details.

TABLE 2-1 Forms of Real Estate Ownership

Sole proprietorships

Some landlords operate as sole proprietors, which enables them to conduct business without the constraints and complexities of partnerships, corporations, and other more formal business types.

Remember As a sole proprietor, you’re personally responsible for the consequences of every business decision. You have total control of the rental property and are entitled to all the proceeds that the property generates. You’re free to let it sit vacant whenever you choose, and you may sell it, give it away, or transfer it to your heirs after your death. Perhaps best of all is the sole proprietorship’s simplicity, including the fact that you don’t have to comply with complex filing requirements associated with other business entities.

Owning a rental property as a sole proprietor has one main disadvantage: As sole proprietor, you’re personally liable for debts incurred by the business, which means that unpaid creditors can pursue all of your personal assets to cover your debts. You’ll also have more difficulty getting a business loan, because of the frequency of defaults by sole proprietors.

Tip Two or more investors may choose to own real estate in joint tenancy or tenancy in common, both of which are appropriate for smaller portfolios. The joint tenancy ownership form transfers legal title to the other joint tenant(s) when one of the joint tenants dies, based on the legal principle known as right of survivorship. Each owner (tenant) in the tenancy in common has an undivided interest in the property; when the tenant dies, this interest passes to their heirs.

Partnerships

A partnership is similar to sole proprietorship but has more than one owner. Profits and losses generated by the property are distributed to the individual partners as specified in their partnership agreement, which is often based on how much money each partner has invested in the property. While the partnership must report its