Disclaimer: This blog post is for informational purposes only and does not constitute legal advice. Consult a lawyer for legal matters.
Lost rent. Legal fees. Time diverted from family or other endeavors. Headaches. I’d rather blow out my flip flop and step on a pop top than deal with evictions.
How can apartment owners reduce the risks associated with problematic tenants?
- Know the laws of the land – state and local
- Establish proper tenant screening
- Documentation. Keep track of communications – dates, time, and substance
1. Know the laws of land – state and local
When it comes to owning apartment buildings, it’s crucial owners and their property managers understand their state and local laws regarding tenants’ rights. Cashflow and ultimately the valuation of the property may suffer should an owner fail to perform proper due diligence.
“Ignorance of the law is no excuse in any country. If it were, the laws would lose their effect, because it can always be pretended.” – Thomas Jefferson
Heed Thomas Jefferson’s wisdom because it’s almost certain a judge will.
So where should you start?
Fortunately, with the help of AI, getting up to speed with state and local laws has never been easier…seriously. Using Google’s Bard, I searched for tenant and landlord rights across CA, NV, AZ, CO, UT, and TX. I then prompted Bard to create a simple chart comparing the states. Within 30 seconds I had a table that I could export to Google Sheets, copy and paste into Canva, dress up, and voila.
The table below is merely an overview of several major categories. As they say, the devil is in the details, and one should go to the primary source (text of the law or regulation) to understand the nuances.
Skipping the fine print on rent restrictions and eviction laws? All aboard Ozzy’s crazy train.
Take Berkely, California, as an example (See below). Should an investor project rent to grow on average by 3% vs. Berkely’s rent-controlled growth of 1.8%, the difference in one year is 67%… not 1.2%.
(1.8% – 3.0%) / 1.8% = 67%
Because revenue is typically the largest line item on the income statement, a 67% difference in rent growth dramatically impacts cash flow and ultimately the valuation of the property. The rotten cherry on top is that the difference compounds over time.
Buyer beware! Three notorious examples of rent-restricted cities are NYC, Berkely, and Santa Monica.
1. New York City, New York:
- Rent Stabilization Law (RSL) and Emergency Tenant Protection Act (ETPA): These laws cover millions of apartments in NYC, limiting annual rent increases to a fraction of 1% for stabilized units and 4% for unsubsidized units in most cases. Vacancy decontrol allows landlords to raise rents significantly when a tenant moves out, but specific vacancy and hardship exemptions apply.
2. Berkeley, California:
- Rent Stabilization Ordinance: One of the strictest in the US, it caps annual rent increases at just 1.8%, with even lower increases for low-income tenants. Extensive vacancy and just-cause eviction protections exist, making it difficult for landlords to remove tenants.
3. Santa Monica, California:
- Rent Control Charter Amendment: Enacted in 2018, it limits annual rent increases to CPI (Consumer Price Index) + 3%, with vacancy decontrol allowed only after 10 years of vacancy. Strong tenant protections against evictions and rent hikes for renovations are in place.
2. Establish proper tenant screening
“An ounce of prevention is worth a pound of cure.” – Benjamin Franklin
What’s the best way to deal with a problem? Be proactive. Don’t wait for something to become a problem.
Like getting in shape, it’s easier to maintain a healthy weight with a routine of diet and exercise than it is to lose 20 lbs. The same goes for issues with tenants.
By implementing a system to screen prospective tenants, you are saving yourself the disappointment of waking up one morning, looking in the mirror, and realizing you let yourself go. The amount of time and energy needed to deal with problem tenants takes away from growing your business or spending time with your family.
What steps can an owner take to mitigate tenant risk?
- Hire a competent property manager. A competent property manager will have the systems already in place and will be aware of the current laws and regulations regarding tenant screening. When vetting property managers, ensure the property manager uses property management software (i.e. Yardi, Appfolio, Realpage). The software will have a leasing workflow with internal controls providing consistent screening and mitigating legal liability of discriminatory practices.
- Credit Checks. Does an applicant have a history of not paying their debts on time? That’s a sign they may have a problem paying you. National credit bureaus like Experian, Transunion, and Equifax offer inexpensive screening options ranging from $15 to $40 per applicant. While credit checks aren’t perfect especially for applicants who don’t have a credit history, running a credit report is one tool in the tool bag for assessing an applicant’s ability to pay rent.
- Employment/Income Verification. Verify the applicant generates sufficient income to cover rent. Like peanut butter and jelly, the credit check and income verification go together. Used with the credit report, income verification should give you a grasp on the applicant’s ability to cover their debt obligations and their lease obligation.
- Criminal Background Checks. Know the laws and regulations before factoring in criminal convictions into approving or denying an applicant. These vary by state. For example:
- Rental History Check. When checking rental history references, keep in mind a savvy applicant won’t list bad references. Look for gaps in the rental history.
3. Document. Document. Document.
This one’s simple. Communicate in writing whenever possible. Avoid “he said, she said” by showing up with receipts. Follow up verbal communications with an email repeating what was discussed in the conversation. Keep it concise and the tone consistent with the relationship.
Examples of email intros include:
Formal:
- “Hi [Name], Following up on our conversation earlier today about [topic], I wanted to summarize the key points and next steps discussed.”
- “As per our discussion today regarding [project/issue], I’m sending this email to confirm our understanding and outline the agreed-upon action items.”
- “As promised, I’m sending you a quick email recapping the main takeaways from our meeting today concerning [topic].”
Informal:
- “Hey [Name], Just wanted to touch base after our chat earlier about [topic]. Here’s a quick recap of what we covered…”
- “Following up on our conversation this morning – wanted to make sure we’re on the same page about [specific point].”
- “Quick email here to jog our memories from our discussion earlier on [topic]. Just to clarify…”
Scottish essayist, Thomas Carlyle, wrote, “Ignorance is bliss only in paradise.” Operating an income-producing property is far from paradise. By understanding the laws, implementing tenant-screening processes, and documenting communications with tenants, you’ll increase your chances of ending up on a beach somewhere smelling the shrimp beginning to boil than arguing in a fluorescently-lit court room.
Arm yourself with knowledge or hire someone to do it for you. It will pay dividends.