Risk Management for Landlords
Owning a rental property can be a lucrative and profitable experience, but it does come with risks, and how you as a landlord handle those risks will ultimately determine how successful you are. This is part three in a four-part blog. We’re talking about federal laws. In part one, we discussed insurance and in part two we discussed tenant safety. The final part of this blog series will cover not renting to the wrong tenants.
When you decided to become a landlord, you became subject to a lot of federal, state and local laws that affect rental properties. If the home you’re renting out was once a personal property, you give up your property rights and become subject to these laws. There are a number of federal laws that regulate your property, and they have teeth. There are serious consequences if you are found violating them.
Fair Housing Act
This act makes it illegal to discriminate against people in protected classes. It governs how you advertise, select and manage your rental properties. I have not yet met a landlord who wanted to discriminate against someone, but if you don’t understand this law, you can do it inadvertently. The head of Fair Housing enforcement at the Department of Housing and Urban Development told me that there are thousands of Fair Housing complaints filed against landlords and property managers every year. We have blogged before about the Fair Housing Act, and what we have learned is that it’s just as important to be seen not discriminating as it is to actually not discriminate.
So here’s an example. If you have a property that is popular, you may get multiple applications. If someone who meets your rental requirements is not given the property, that applicant may think it is for discriminatory reasons. That’s a problem. So, our advice is to show that you’re not discriminating. Have a lot of transparency in the rental selection criteria. If there are two families applying, and one was a military family and they were being assigned to the area for up to three years and the other family planned to buy a property ultimately but wanted to rent for a year before purchasing, you would have a legitimate reason for selecting the long term tenants. If that’s the case, let the applicant who wasn’t selected know why they weren’t chosen.
Another area affected by fair housing is the non-renewal of tenants. If you don’t renew a tenant, have a good and well-documented reason for why you aren’t renewing. If they belong to a protected class and they think they weren’t offered renewal for discriminatory reason, they might file a complaint and you’ll have to prove you didn’t discriminate.
Americans with Disabilities Act – ADA
This act ensures that people with disabilities have equal access to and enjoyment of rental housing. An area where this comes into effect is when a person in a wheelchair looks at your property. That potential tenant might come to you and ask if they can rip out the bathroom and put in an accessible shower that will accommodate the wheelchair. The prospective tenant might want to hire contractors and pay for the work. If you decided that you don’t want to do that and change your bathroom, the court might find you guilty of violating the ADA. Court actions brought under the ADA can be very unpleasant and expensive.
Federal Fair Credit Reporting Act
This is important when you do background checks on people and pull their credit. You really need to know about adverse action letters – which need to be sent if you do take adverse action – and red flags that will help you protect your applicants’ identities.
Internal Revenue Service Laws
You must keep excellent tax records for your rental properties. If you have vendors who work for you and you pay them more than $600 in a tax year, you must send them a 1099 MISC and report those earnings to the IRS.
As a landlord, you must comply with the local, state and federal laws that affect rental properties. Make sure you obey them. If you have any questions about staying in compliance, please contact us at Hoffman Realty.