The Legal Issues of Being a Long-Distance Landlord
Finding information about renting out your home is fairly easy; what is challenging is finding information about being an absentee landlord. The reality is that most military families who decide to rent out their home or apartment do so at a distance, sometimes even another country. Sometimes extra challenges arise simply because the choice to rent is made out of necessity, which means you may be a reluctant landlord.
Whether you purchase a home with a view to renting it out (on your way to building a property portfolio) or you feel like your hand has been forced, you may have horror stories playing in your head – tenants trashing the house or property, dealing with repairs at a distance, or your property standing vacant for long periods of time. Very often, information helps you mitigate potential risks and make better decisions for your family.
So, let’s talk about legal issues to consider when renting from a distance!
Financial Pressures of Maintaining Two Residences
If you can, consider refinancing to a longer term mortgage before renting – this may give you more wiggle room for negotiating the amount of rent a tenant may pay and still cover your mortgage. Be aware that in order to refinance a current VA loan, you need to either be occupying the property or plan to within the next 12 months, so if this is something you need to do, do it before you move out.
As they say, more property, more problems! Maybe not, if you have the right team in place! For example, talk with your accountant about how rental income may impact your overall taxable income and about possible tax deductions. Get advice early about what records you need to keep for deductible expenses. Be sure to also discuss how having a tenant may impact your tax burden (specifically capital gains type taxes) if you decide to sell the property in the future. The rules around this often include needing to be the owner/occupier for two years out of the last five, but you should obtain advice for your own situation.
Seek out an appraisal every 2-3 years while renting your property. If you do not plan to put your house on the market, you may need to pay for such a property appraisal, but it should give you good information about the value of the property, the state of the market, and whether you can increase the amount of rent payable for the next tenant (or allow you to increase – within the law – for the current tenant).
Lease Agreements/Rental Contracts
As much as we all want to make verbal agreements, you should avoid making an agreement or changing any terms of a lease without a written and signed agreement. It is very difficult to enforce an agreement or changes made to an agreement unless it is in writing. A lease agreement should cover amount of rent, when rent is due, and consequences for failure to pay, procedures for approval of pets, and notice requirements for vacating the property.
You should note that many states have slightly different legislative or case law requirements for landlord-tenant agreements. You should seek legal advice from an attorney to make sure you are complying with local laws. If you have a property manager, ask for a copy of their standard lease agreement in advance.
It may be prudent to include a clause that allows for you to give notice should you receive military orders back to that location and would intend on retaking residence in the home.
One of the most important decisions facing a long-distance landlord is whether to engage a property manager. A great property manager can make owning a rental property at a distance a breeze, but one who will act as your agent and make the same kind of decisions you would are much harder to find.
Be sure that any contract with a property manager addresses responsibility for property oversight, responsiveness to the tenants and you as property owner, and all fees that may be payable. Make sure that you understand all the services they provide to both you and the tenant. This is key for the long-distance landlord!
Personal and Property Liability
Renting your property can mean you have increased liability risk, because injury that occurs to tenants or contractors due to inadequate maintenance can mean the owner is liable. You also risk false allegations from tenants or prospective tenants and fraudulent or illegal behavior on the part of tenants or property managers. You should consult with your insurance broker about needed liability insurance for the property to protect you in the event of personal injury claims or allegations against you as landlord.
While you can attempt to indemnify yourself as the property owner for any damage done to the tenant's property as a result of damage to your home, you will still likely need a property insurance policy that covers any damage renters may do to your home. Consider which background checks you want to do on prospective tenants. For example, you or a property manager can run credit checks, speak with the tenant's employers and former landlords, and ask for personal references. Consider also the amount of security deposit you require and ensure that you have standardized policies in place so that you adhere to anti-discrimination laws.
You should familiarize yourself with whether the Fair Housing Act applies to you as landlord (for example, if you do not use a property manager, it may not apply as long as you don’t advertise in a discriminatory way). Property owners may be subject to allegations of discrimination. You should speak with your attorney about written policies that demonstrate adherence to Fair Housing laws, whether federal, State, or local.
If renting to another military family, be sure to familiarize yourself with how the SCRA applies to military renters.
Ensuring that your property is repaired and maintained can save you money in the long term! This might sound counter intuitive, but regular maintenance can save you much larger expenses later on. Regular maintenance isn’t just about saving you money; timely repairs may be required as part of your lease agreement with tenants and as part of state law. For example, some agreements require plumbing repairs to be made within 24 hours, and essential services to be repaired within a specified period.
Some areas have contractors who offer home repairs and servicing of appliances on a retainer basis. For those that don’t, a good property manager will have a go-to list that you can pre-approve, which can even be given directly to the tenant for specific pre-approved repairs (plumbing issue on a weekend, air conditioning issues in the hear of summer). Having a property condition report completed by both the tenant and your representative is also prudent – this can help prevent problems before they happen, specifically with older appliances.
Avoiding Property Vandalism
Avoiding long periods of vacancy can be one of the best ways to deter property vandalism. Your insurance company may also consider an occupied property a lower risk for vandalism or property damage. But, for properties that are occupied, consider organizing periodic inspections for each new tenant.
Unless you are renting out a furnished property, be cautious about leaving any personal property in the rental property. Even when renting out a furnished property, be aware that normal wear and tear will occur and the furniture will not be in the same condition after tenants, regardless of how respectful and careful they are.
Leave only the appliances that are required by the rental market you are in – for example, some markets will offer a premium for a washer and dryer while others will expect a refrigerator as a bare minimum. The more appliances in the home, the more risk there is of repairs being needed.
Being a Long-Distance Landlord Is Possible!
Being a long-distance landlord is possible and can be a great solution for military families, whether in building a property portfolio or to buy some time in a challenging property market. Do your research, approach the situation with solutions in mind, and build a great team to help you be successful as a landlord!