I am not sure where this came from or who starting teaching it.  I have heard many old-school landlords say that they use a PO Box for their rent checks.  I guess the theory was that you don’t want your tenants to know where you live.  I suppose in case of a zombie apocalypse that would be a problem or if you are a real jerk landlord I can see why you want to hide.  Now days, using a PO Box to hide your location really doesn’t work.  Using the Internet and Google, you can find out a lot about a person.  Plus, the county typically has your address on your tax statements and those are on-line also.  You would have to go to great lengths and expense to be invisible from Google and your tenants.

A more recent example is one that Kevin Stevensen from The Cleanout People.  I always knew this rule, but never found anyone that missed it and got caught by it.  Kevin sent this message:

Scott

Here is a good fyi to pass on to other landlords, we took a tenant to housing court for non payment of rent. Well she got legal aid and they found that on our lease we have a PO box for the mailing address for rent.  Well I guess as a landlord we cant do that we need a physical address.  

Minnesota state law requires that you have a physical address for you or your rental company on your leases.

504B.181 LANDLORD OR AGENT DISCLOSURE.

Subdivision 1.

Disclosure to tenant. There shall be disclosed to the residential tenant either in the rental agreement or otherwise in writing prior to commencement of the tenancy the name and address of:
(1) the person authorized to manage the premises; and

(2) the landlord of the premises or an agent authorized by the landlord to accept service of process and receive and give receipt for notices and demands.

I am 90% sure that you can still have the checks mailed to a PO box (which can be useful if you have an accountant or business partner doing the books), but you need to list a physical address per the above statute.

Here is how I handle this.  As I mentioned previously, I buy my leases from the Minnesota Multi-Housing Association.  While they cost me about $2 per lease (they are 2 part carbon), they have been approved by the Minnesota Attorney General and all Section 8 programs.  This tells me that I should not get myself into any hot water over anything in that lease.  They have a provision in the lease that handles the above law.

Here is a snapshot of that section of my lease:

I am not an attorney, but the 2nd section speaks to accepting service of process, which can never be done to a PO Box (they need to serve a person).  I am uncertain if I could put a PO box in the first section.  Probably to be safe, I would put a physical address in there and then in the Notes section of this lease write:  Mail all rental payments to:  PO Box 123, Minneapolis.

If you have only listed a PO Box on your leases, you may quickly want to post a physical address at the property and/or send a letter to all your tenants to get into compliance with this Minnesota statute.

Tax Court Case favors the IRS-Taxpayer did not meet real estate professional 750-hour requirement

If you are claiming to be a Real Estate Professional here is another case that points out that taxpayers needs to be documenting their time when performing real estate activities. A recent tax court case held against the taxpayer claiming that he did not qualify as a real estate professional. The Tax Court held that being “on-call” does not count towards the 750 hour requirement (Moss, 135 TC No 18).

SITUATION: The taxpayer was employed full time. The taxpayer and his wife owned a number of rental properties, including four apartments and three single-family homes. The taxpayer was directly involved in the rental properties performing rent collection, repairs/maintenance, and screening/evicting the tenants. For record keeping purposes the taxpayer kept a log detailing the dates he spent performing these activities. The taxpayer neglected to include the time spent but later was allowed to go back and prepare a time summary. The taxpayer’s total hours were 646 and did not meet the 750 hour test (as required to be a real estate professional). NOTE: Not to mention the fact that over 50% of his service must be in the real estate profession.

The taxpayer also argued that he was on-call during his employee time to handle rental issues. The Tax Court took the position that service time must be actual performance of such service. The tax court also rejected the taxpayer’s claim that his calendar reflected only 75% to 85% of his time- failure to provide proof.

CONCLUSION: The Tax Court ruled in favor the IRS and the taxpayer was subject to additional income taxes and accuracy-related penalties.

TAKE AWAY: Taxpayers claiming to be real estate professional need to keep detailed records of their time and services when working on their properties.

Greg Nelson, CPA, MBT

Olsen Thielen CPAs

www.otcpas.com/blog

Fall is a great time of year.  The grass slows down growing, I can open the windows and not have to run the A/C.  Kids are back in school.  I am realizing I like fall because of all the things that I don’t have to do or take care of!  Oh well.

This is also a great time of the year to get in and take a look at your rental properties.  If nothing else, it is an excuse to tell the tenant that you need to do your bi-yearly inspection so you can go in and take a look around at how they are treating your property.  Here are some other items that are worth doing as a preventative maintenance to potentially prevent emergency calls later:

• Turn on the furnace!  I can’t tell you how many calls I get once we have a cold spell from tenants that say their heat is not working.  Often, those calls are at 9pm at night once the temp drops.  Frequently, it is simply someone turned off the electrical switch next to the furnace, not knowing what it was.  Fire up that furnace now, make sure it runs, and more importantly, make sure the tenant knows it runs.
• Change the furnace filter and leave a box of 6-8 more filters for the tenants to change out every 30 days.  While I am pretty realistic that most tenants won’t change out the filters, at least the correct sized filters are next to the furnace.  Then if I ever need to go in for any other service calls, I can simply grab one and throw it in.  You will find that older home and homes that have smokers tend to have full filters much more often.
• Turn off the outside water spicket and drain it.  You do not want that to freeze and potentially flood the basement!  In fact, in many of my multi-family rentals, I simple remove these outside faucets.  There is nothing that a typical tenant needs that outside water for.
• Double check the operation of the front door locks and the garage door.  While this is not a cold winter item, these parts of the building take a lot of abuse.  Make sure they are lubricated and the screws are tight.
• Pour some drain opener down the drains.  Even if there is not a problem, this is an excellent preventative process.  I had to go over to a tenant’s property on Thanksgiving day once to unclog a kitchen sink.  She called me all in a panic because her sink was clogged and company was coming in 4 hours!
• Change the batteries in all the smoke detectors and carbon monoxide detectors.  I can’t tell you how many times I have seen tenants take the smoke detectors down and put them in a drawer because they were either beeping because they burned a pizza or because they were low on batteries.  This way, you insure they have them mounted and insure they will not beep.
• If you are responsible for supplying a shovel and/or sidewalk salt, make sure both are ready to go.  Fill up the salt container or leave another bag.  Better to do this now than when it snows at the end of October and you are running around!
• Winterize the lawn mower by at the very least putting some fuel stabilizers in the tank.  If possible, drain the oil, change the spark plug and air filter and sharpen the blades.

While all of these items may not be necessary for every property you own, getting into your units twice per year (once in the fall and once in the spring), can help you head off other maintenance calls and keep an eye on how your tenants are treating your investment property.

Most of us are so used to buying REO properties in the last couple years, we forget all the details of buying a home with tenants in it!  I know I do.  In fact, I am so used to showing vacant houses that I recently showed up 2 hours late to a house (assuming it was vacant and not a big deal to be late), only to walk up the sidewalk and find the lights and TV are on!  Oops.

Writing offers on tenant occupied properties needs a little more attention to ensure that you get what you think you are getting when the closing is over.  If you miss something or simply assume everything will be fine, you may get a rude awakening after closing.

Here is one example:  my client put in an offer on a short sale in February and the seller accepted our offer.  During that process, we got copies of the lease and confirmed the rent amount.  We showed up at the closing today to find out that the landlord had signed a new lease with the tenant in March, dropped her rent by $300 and let her use the damage deposit to cover the March rent when she was out of work.  Now we received a much smaller amount of cash at closing, no damage deposit, and need to have a delicate conversation with the tenant that we’ll be raising the rent $300 (and she needs to pay a new damage deposit). I can see I need to update my boilerplate rental addendum.

Here are some tips on how to craft your purchase agreement when buying investment properties with tenants in them.  Most of these will take the form of an additional addendum on the purchase agreement.

• Write into the purchase agreement that the seller is not allowed to sign any new agreements with the existing tenants without written approval from the buyer. This would have fixed our problem today or at least have given us more notice than 1 hour before closing.
• In the purchase agreement addendum, write in the amount of the security deposit and language that effectively says:  “Seller will provide the buyer the security deposit in the amount of $xxxx at the closing in certified funds, regardless of the disposition of those funds between the tenant and seller, as long as tenant remains in the property”.
• Do not allow the old landlord and his bad rent collection skills to start you off in the hole.  Add language that the rents will be prorated at the time of closing between seller and buyer, again regardless of the collection status of the rents.
• Also, make sure the seller understands that you want to be notified instantly of any tenant issues at the property, such as rent collection, notice to move out, or other problems.  This can be especially important when dealing with short sales that can take months to close after you offer on the property.
• Do not allow the landlord to sign any lease extensions as it is a good idea to let them roll month to month so you can see how the tenant perform with everything prior to signing a new lease.  Worst case, if you don’t like them, give them the 60 days notice and move them out.

Buying an investment property that has tenants in it takes some additional due diligence and purchase agreement language to insure that you get what you think you are getting.

I got an email from another member of my team today that was asking for some suggestions on how his customer should handle a tenant issue.  Here is his opening email:

I have a client that is very green in the rental business. He signed a lease with a tenant for 6 months.  The tenant moved in but hasn’t paid him a dime.  No month in advance, deposit, rent etc.  What can be done to get this person out?

Ouch!  Now, I suspect that 90% of new landlords have made the mistake of not getting a security deposit prior to move in, at least once in their career.  In my experience (and I have made this mistake before), you will get that deposit only about 10% of the time.  Once they move in, you have zero leverage to get that deposit.  That tenant has no fear of you actually doing anything to them.  In fact, you can’t!  No eviction in the world is going to work to get that deposit paid.

When the tenant signs the lease, you should get the damage deposit.  And before they move in, you should get the first month’s rent.  Worst case, if the time is short, get all of it prior to move in.  If the time is long between lease signing and move in, always get a deposit as the tenant can simply walk away from the lease.  While you could try to sue them for lost rent, good luck.  Actually, you could get into a wierd situation where legally you need to evict them to break the lease even if they never lived there.  Worst case, hold the keys until they give you the security deposit and first month’s rent.  This is the last leverage you have.

Another mistake that I am sure happens, but I made only once in my earlier landlord years was to accept a personal check for the deposit and/or first month’s rent.  I am sure you can guess what happens next; the check bounces.  Now you have a tenant living in your investment property that has not paid anything to be there.  Much like the guy above.  If you have several weeks prior to move-in, you have time for a personal check to clear.  Also, if the check is drawn on a local bank, drive it over there and have it cashed immediately so you get the funds directly instead of depositing in your bank, they send it to the tenant’s bank and then it gets returned 14 days later NSF.

A slight twist on this mistake is when you are dealing with a tenant that get’s a rental subsidy like Section 8.  The tenant talks the talk like they know exactly how it all works, saying they have talked to this person or that agency and you are going to get your money.  Never take the tenant’s word for it.  Call the agency or have the tenant provide written proof of the subsidy.  Just because they say they are getting emergency assistance to pay the security deposit, doesn’t mean they qualify for it.

Taking some precautions and holding the keys ransom for the money is the best option.  By they way, I told this agent to file the eviction immediately (since they also owed the first month’s rent).

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.