Owning Property
Returning the Security Deposit
I attended a landlord seminar today that was hosted by an attorney that represents tenants. It was a fascinating look at landlord issues, but with a tenant advocate teaching it. He spoke about many of the loopholes and other places that landlords have a tendency to not follow the law or the letter of their [...]
I attended a landlord seminar today that was hosted by an attorney that represents tenants. It was a fascinating look at landlord issues, but with a tenant advocate teaching it. He spoke about many of the loopholes and other places that landlords have a tendency to not follow the law or the letter of their leases and how the tenants can win lawsuits or defend against evictions.
There was quite a discussion about security deposits and I thought it made sense to lay out some of the gotchas and give you some reminders on how the process is supposed to work.
- If possible, take pictures of the unit prior to the tenant moving in and store them on your computer. The attorney explained that often the “move-in” form is simply filled in with OK and a line through the entire column for each room. He stated it was easy to defeat this in court as meaningless. Pictures before the move-in will give you considerable ammunition if you get pulled into court by the tenant for the amount withheld from the security deposit.
- A landlord has 3 weeks from the date that the tenant moves out or the receipt of the tenant’s new address, whichever is later, to get the security deposit or security deposit disposition letter in the mail. That is the law, but the attorney recommended that even if you do not know the new address of the tenant, you should still put the letter in the mail to the old address. If that letter forwards to the new address, great. If it is returned, put that in your file so you can show you tried.
- Even if at the end of the lease or tenant’s occupancy, there is nothing left of the security deposit, you must still send a written disposition letter. Even if the tenant owes you 3 months of rent, do not neglect this.
- If you fail to send the letter or security deposit within 21 days, the tenant can take you to court. If they win, you owe them double the entire security deposit, plus interest (without any deductions for missed rent or damages), plus $500 as a penalty. For example, if the damage deposit was $1000 and the tenant lived there 1 year, the amount would be $1000 + $5 + $1000 + $5 + $500 = $2510. That is a lot of money!
- You can only deduct for physical damages beyond “ordinary wear and tear”. So what is wear and tear? Although that is somewhat subjective, repainting and cleaning carpets is NOT considered excessive, normally. If they are really worn or dirty, you could make a case that it is excessive damage (and I have seen excessive). Make sure to document this fully.
- When you put amounts on the security deposit disposition letter, make sure to use real numbers. A friend of mine was sued by a tenant for the damage deposit money withheld. The tenant won the case. The judge said that if my friend would have had receipts he would have easily won. Do not put round numbers for supplies and repairs. Did you really spend $20 on cleaning supplies? Was the carpet cleaner really $60? Use the exact figure. It may help convince the tenant that you have receipts and you may not end up in court. Use a time sheet if possible to account for your time if you do the work. Do not round the hours.
- Before you start any work or cleaning, take pictures of all the problems. Then you can use those pictures to compare to the before photos if you get to court. As a side note, if your tenant leaves the property a mess and they are on rental subsidies, like Section 8, send the after pictures to their case worker. It may help the next guy (and you can get some secret pleasure out of getting the tenant in trouble).
- Do not always assume you are keeping the security deposit. I know some landlords that are keeping the deposit despite having a good tenant. They find anything they can not to give it back. Be honest and fair. Otherwise you may end up in court.
- Effective August 1, 2010, the time you as a landlord are required to store your tenant’s left over stuff has been reduced to 28 days.
Following the letter of the state law and the details in your lease is the proper way to keep yourself out of court fighting over the disposition of security deposits.
Renting in an Association
Many of us purchased townhouses as the market was going bust and home builders were dumping their excess inventory of townhouses. I know of developments were more than 50% investors. The deals were good and we all felt like the market could not drop as far as it has.
While a home in an association has [...]
Many of us purchased townhouses as the market was going bust and home builders were dumping their excess inventory of townhouses. I know of developments were more than 50% investors. The deals were good and we all felt like the market could not drop as far as it has.
While a home in an association has less maintenance because a lot of it is taken care of by the association, renting a home in an association takes a little more work that you may expect. Unlike a regular single family home or even a multi-family building, you have the association watching over your property for things.
Some associations are great and they function and as long as nothing is out of control, they leave everyone alone. I had the misfortune to be involved with one association where the president made her personal crusade to be the mother hen of this 60 unit townhouse development. She literally watched secretly out her window as people walked their dogs and would take pictures of anyone that did not pick up after their dog or let the dog walk on the grass. She would then send the pictures to the management company and the offender would get a warning or a fine.
This happened constantly and was not limited to dog cleanup. She called the police on her neighbor for loud music or loud voices over 15 times. Only 3 of those were documented by the police as a nuisance. If you forgot to bring in your garbage can within 24 hours after garbage pick up, she would get you fined.
She seemed to especially hate tenants. This project had about 15% of the units rented. My tenants had 2 dogs, which was the association limit. One day I get an email from the association management company with a picture attached of 3 dogs playing in the yard with my tenant another woman. They were giving me a warning saying my tenant had 3 dogs and that I was in violation of the association rules. I immediately called my tenant who explained that the 3rd dog was her sister’s who stopped over for a couple minutes (this explains the 2nd woman in the picture).
The reason I am telling you all this is that if you own a property in an association, you need to be sure that your lease states something to the effect of: “tenant has read the association rules and bylaws and will obey both. Failure to comply with the rules can be grounds for eviction. This lease is subordinate to the association rules.” This will help you in the situation where your tenant decides to do something outside the rules. For example, if my tenant decided to keep a 3rd dog, without this provision, I would have no legal ground to do anything about it. And the association would have kept fining me indefinitely.
If you own a property in an association, make sure to have your leases include the above language and consider having an attorney review it prior to executing it with a tenant. This will save headaches later.
North Minneapolis Property Owners Workshop
No charge for owners with property in North Minneapolis!
Where: 4th Precinct Community Room
1925 Plymouth Av. N.
Parking in the lot directly across the street, or nearby on avenues crossing Plymouth.
Time: 6pm to 8:30pm
Dates:
Thursday, June 17
Thursday, July 15
Thursday, October 14
(These are the same workshops, please RSVP for only one)
Topics: [...]
No charge for owners with property in North Minneapolis!
Where: 4th Precinct Community Room
1925 Plymouth Av. N.
Parking in the lot directly across the street, or nearby on avenues crossing Plymouth.
Time: 6pm to 8:30pm
Dates:
Thursday, June 17
Thursday, July 15
Thursday, October 14
(These are the same workshops, please RSVP for only one)
Topics:
ABC’s of Property Management – Presented by Jennifer Olsen with Guardian Property Management.
* Before you hand over the keys–Screening Applicants
* When things go bad–Lease Enforcement
* Terminating a tenancy–Eviction Process and Housing Court
Rental License Requirements of Owners Dealing with Criminal Activity – Luther Krueger, Crime Prevention Analyst
* Conduct on Premises notice process
* Management Plans and Workshops
* Working with the MPD on crime problem-solving in/around your property
Resources Available to Owners and Managers of Rental Property – Lisa Peilen, Minnesota Multihousing Association
Networking with other owners
* The last half hour will be set aside for Q&A, and those able to stay past 8:30 are welcome to keep up the dicsussion.
Space is limited to maximum 40 seated, please RSVP by June 15th to me for the June 17th workshop, and July 13th for the July 15th RPOW–include a current list of your Minneapolis properties. We are limiting this inviation to north side owners only and due to the high demand citywide will be adding 4 more workshops to fill in the schedule for 2010.
Luther Krueger, Crime Prevention Analyst
Strategic Information and Crime Management Division (SICM)
Minneapolis Police Department
3000 Minnehaha Av. S. + Minneapolis MN 55406
612-673-5371 + Luther [dot] Krueger [at] ci [dot] Minneapolis [dot] mn [dot] us
For citywide crime stats and MAPS link to: http://www.ci.minneapolis.mn.us/police/crime-statistics/codefor/
For your first contact regarding crime issues in your area link to: http://www.ci.minneapolis.mn.us/police/outreach/docs/safe-staff-map.pdf
Considering Hiring a Property Management Company?
When I meet with new investors, this is often a major part of the discussion. Who is going to manage the property? Are you going to collect rent, but have someone else do the maintenance. Alternatively, maybe you see this as a hobby and want to do all the maintenance. Other investors see this as [...]
When I meet with new investors, this is often a major part of the discussion. Who is going to manage the property? Are you going to collect rent, but have someone else do the maintenance. Alternatively, maybe you see this as a hobby and want to do all the maintenance. Other investors see this as a passive investment and are not interested in even knowing the names of their tenants.
Chris Thorman wrote a long post of many things to think about when you are considering using a property management company. Go over and take a read at software advice.
Broke My Own Rules
I am human. I make mistakes. Sometimes I don’t even take my own advice. This time I was desperate/frustrated/annoyed that I could not rent out a great 1 bedroom apartment that we just renovated with new windows, redone hardwood floors, new kitchen and bathroom. I was renting it for $725 per month and then dropped [...]
I am human. I make mistakes. Sometimes I don’t even take my own advice. This time I was desperate/frustrated/annoyed that I could not rent out a great 1 bedroom apartment that we just renovated with new windows, redone hardwood floors, new kitchen and bathroom. I was renting it for $725 per month and then dropped it to $695 per month with a couple showings, but no applicants.
Finally a guy shows up with his pregnant girlfriend. Very well spoken. He is a contractor and made decent money. She had a full time job. Things were looking good
. Until he tells me he has 2 pit bulls. I knew that I knew I should never take this guy. But it was coming to the end of the month and I was going to lose another month’s worth of rent, so after he convinced me they would be OK and not a problem, I agreed.
That decision bit me in the ass, (figuratively). The dogs were very aggressive to anyone in the yard. They tore up the grass and even cornered a neighbor lady and wouldn’t let her move until the tenant called them off. The final straw is when the neighbor saw the tenant hit the dog with a shovel in the head when it was barking. Now I have animal control calling and wanting to get a warrant to break down the apartment door to take the dogs. Multiple trips to the apartment later, the dogs are mysteriously gone when animal control shows up.
Repeat after me: never, never, never take aggressive dogs. No matter how sweet the owner says they are, these dogs were bread for their aggressiveness, it is tough to train this out. I have nothing against the dogs, but they are by their nature aggressive. This is no different than trying to teach a pet alligator not to bite. By the way, if a tenant ever says they have a American Staffordshire Terrier, that is simply another name for a pit bull.
Should You Transfer the Title of Your Investment Property Into Your LLC?
In a perfect world, banks and/or lenders would lend money to new investment property LLC with no income or credit history, thus allowing you to purchase your investment property in the name of your LLC.
Should you transfer the title of your investment property into your LLC? You could probably ask 10 different people for their [...]
In a perfect world, banks and/or lenders would lend money to new investment property LLC with no income or credit history, thus allowing you to purchase your investment property in the name of your LLC.
Should you transfer the title of your investment property into your LLC? You could probably ask 10 different people for their position on this issue, and receive 10 different answers. My position is that I do not like to transfer title from the individual to the LLC – for a couple of reasons. First, transferring the title when the mortgage is still in your name triggers a due on sale clause within the mortgage/note. Second, if you ever go to refinance, you will have to transfer title back out of your LLC to you individually, creating a strange series of transactions for your lender and/or title company to sort through.
My position rests on the assumption that you have properly formed your LLC, complying with all of the statutory corporate formalities including organizational minutes, bylaws, appointing the Board of Governors, Managers, Membership Units, etc. In addition, all of your business dealings are done in the name of the LLC – your lease with the tenant will be between the tenant and the LLC, the tenant should pay the LLC, and the LLC has a separate bank account and accounting records.
From a legal standpoint, the tenant’s contract is with the LLC, not with the investor as an individual. If something goes wrong, they should sue the LLC, not the individual. That is not to say that someone couldn’t try suing the individual – it is not uncommon for a litigious person to throw everything against the wall to see what sticks. Even if your strategy was to transfer title from your personal name to the LLC in order to “tie” the property to the LLC, the mortgage would still be in your name anyway, thus leaving the same issue for that litigious person to throw against the wall. In addition, if you completed all of the other steps to adequately form and operate your LLC, the argument to be made is that it would be bad policy if a court ruled that in order to receive liability protection from your LLC, that you should have violated the due on sale clause in your mortgage/note.
Again, every new business must start the ball rolling somewhere. Every new business is started with the capital or credit of the owner. Eventually when you have built your portfolio, built your LLC’s credit history and property equity, you will no longer need to purchase properties with your own credit and in your individual name. Your goal will be to get loans through the LLC and thus title in the name of the LLC.
Remember, most banks do not make loans to brand new LLC’s, therefore you must start the ball rolling by purchasing your property personally. Perhaps the bank/lender will allow the LLC to purchase the property with the individual’s personal guarantee or co-signature on the note. If the bank will not accept the personal guarantee, there are several other options to consider. Some strategies could include the individual leasing the property to the LLC, which would then lease the property to the tenant. Alternatively, there could be a written agreement between the individual and his LLC whereby the individual pledges and confers upon the LLC the right to possession of the investment property. All of these alternatives should be documented through company minutes of the LLC that acknowledge and authorize the LLC’s use of the investment property. Having these added formalities can only strengthen the liability shield created by the LLC.
Please feel free to contact me at the number below if you need assistance, have questions or concerns with respect to properly forming your LLC or incorporating additional investment property ownership strategies to strengthen the liability shield created by the LLC.
Matthew A. Engel, Esq.
Aase, Engel & Kirscher, PLLC
2499 Rice Street, Suite 236
Roseville, MN 55113
651-209-6884
matthew [dot] engel [at] aeklawfirm [dot] com
