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Three Simple Landlord “Mistakes” That Could Send You To Prison

by Brandon Turner on December 6, 2013 · 21 comments

  
Landlord Jail

Do you look good in orange?

How about an orange, one-piece jumpsuit?

I recently watched the entire series of “Orange is the New Black” on Netflix, and although it was an entertaining look at life inside prison, it also made me realize how much I really don’t want to end up there. Frankly, I like my freedom and personal space just a little too much and orange looks terrible on me.

I’m going to do whatever it takes to make sure I stay out of jail. You wouldn’t think it would be that hard to avoid, right? I mean… don’t punch a postman, don’t rob a gas station, and don’t start a riot. Check, check, check.

However, I’ve got some bad news for you…

For all the great things real estate investing can do for you, it can also send you straight to jail- do not pass go, do not collect $200.  After all, in the words of Uncle Ben from Spiderman, “with great power comes great responsibility.”

However, have no fear! This post is going to throw open the doors on three of the most common ways real estate investors find themselves in prison and hopefully prepare you to avoid those simple mistakes so you can avoid the prison life.

1.) Killing Someone… By Accident

People die everyday.

I’m sorry to put it so bluntly, but it’s true.

In fact, if you really want to get specific about it, 169,000 people will die on planet earth today, which means by the time you finish reading this three minute article, 354 people will no longer be around (but don’t worry, in those same three minutes, we’ve added 762 to our numbers! Isn’t life grand!?)

The first key to staying out of prison as a landlord is to make sure you aren’t responsible for any of those deaths. Sure, I know you aren’t about to go hire a hitman for your tenant who paid late…(right?)… but what about accidents?

In Oklahoma, criminal charges are being sought for a landlord after a fire broke out in one of his rental properties and he did not have working smoke detectors in the home.

Don’t let a $1 battery send you to jail. Make sure each of your rental properties have working smoke detectors when the tenant moves in, and consider doing semi-annual inspections to ensure the alarms are working and present.

Additionally, make sure all your properties are as safe and up to par on all other areas. Decks and patios should be checked for rotten boards, electrical problems fixed by a professional, and maintenance concerns addressed promptly.

Accidents happen all the time and are sometimes unavoidable. However, to avoid the orange jumpsuit – make sure you’ve taken the necessary steps so you aren’t the one at fault.

2.) Discrimination: A Fast Track to a Fat Fine

The second major reason you might find yourself facing a major fine and possibly hauled off to prison for is something the government is VERY concerned about: discrimination.

As a landlord, you are able to choose the best tenant to rent your property, but you don’t have the ultimate authority to decide who can’t rent your property. Over the past fifty years, there have been multiple acts and laws which today make up the “fair housing laws” that govern what qualifying factors you can and can’t include in your real estate decisions.  These laws have created certain “protected classes” that you, as a landlord, must not refuse to rent, sell, steer, advertise, or charge extra fees for including:

  • race
  • color
  • national origin
  • religion
  • sex
  • familial status
  • disability

Keep in mind also that there may be other local protected classes in your area that you could face steep penalties or jail time for breaking. For example, the following states include “sexual orientation” as a protected class in regards to housing: California, Connecticut, Colorado, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Hampshire, New Mexico, New York, Oregon, Rhode Island, Washington, Vermont, and Wisconsin.   (source: HUD)

Will you really end up in jail?

Possibly. Although fair housing is a “civil” matter and therefore subject primarily to civil fines, a landlord could face jail time if the problem is severe enough. According to Kenneth L. Baritz & Associates, P.C., “If a landlord or property owner used threats, intimidation, harassment techniques or engaged in physical confrontations or violence to prohibit an individual or family from renting a particular property a court may decide to punish them. This punishment may include the payment of a fine, jail time, or both depending upon the severity of the particular case.”

When is it okay to discriminate? 

Though it might surprise you, there actually are “good” ways to discriminate. Refusing to rent to someone because they have terrible credit, horrible landlord references, too-low of income, or other qualifying factors are not only allowed, but a MUST for any successful landlording business.  Strict tenant screening is one of the most important keys to your success – so be sure to check my post, The Ultimate Guide to Tenant Screening for the best tips I have on weeding out the worst tenants, legally.

Stick with the “good discrimination” and run from the bad kind – or else you may find yourself in some deep trouble .  For more information on Fair Housing laws, see the HUD website.

3.) Tax Fraud – A Ticket to the Slammer

I hate taxes.

I work hard for my money (and my money works hard for me) and I don’t like to see that money disappear.

However, I also understand that hiding any income to evade taxes is a sure way to head off to federal prison.  It seems that a week doesn’t go by that I don’t hear of some powerful real estate mogul being investigated for tax inconsistencies. Since the beginning of the tax system, there have been real estate investors who have tried to hide their wealth and ended up paying for it through the loss of many free years of their life while they sit in jail. Many of these “imprisoned investors” are the real estate guru from past years, who made  a lot of money but didn’t want to share their wealth with the government. Bad idea.

Don’t end up in federal prison. Get a qualified CPA to do your taxes for you if you can’t do them right yourself, and pay the government what the government is owed.

Conclusion

Please, don’t go to jail. It doesn’t shine the best light on the real estate investing community and besides – I kinda like having you around. So buy yourself some smoke detectors, follow the discrimination laws, and give to Caesar what Caesar is due.

Besides, you look terrible in orange.

 

Do you have any additional tips for staying out of the slammer? Share your thoughts/stories/comments below! 

Population Sources: Wikipedia and    The World Health Organization 
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{ 21 comments… read them below or add one }

Bryan David December 6, 2013 at 8:53 am

Great article! I’d like to add a point on discrimination. Alcoholism and drug addiction can be considered a disability so be careful. Discriminating against a convicted drug dealer or someone who has a criminal record due to DUI is a whole different ball game since you’re discriminating based on criminal background.

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Brandon Turner December 6, 2013 at 9:28 am

Hey Bryan,

Thanks – and awesome point! Thanks so much for adding that!

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Cuong Le December 6, 2013 at 1:40 pm

Good add Bryan. Another one to add to the no discrimination list is AIDS victims. You can discriminate against mentally handicapped tenant who is in danger to himself and others. Thanks for the post Brandon.

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Robert Steele December 8, 2013 at 8:44 pm

I’d like to add a point on killing someone accidentally. The landlord is not required to replace the batteries in smoke detectors during the term of the lease. They just need to be working when the lease commences.

Furthermore if a smoke detector breaks, is damaged or stolen then the landlord is only obligated to replace it if asked to by the tenant.

At least that is how it is here in Texas. Your state law my vary.

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Brandon Turner December 9, 2013 at 10:16 pm

Thanks for adding that Robert! Same is true in Washington I believe!

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James Pratt December 6, 2013 at 10:21 am

That’s is just some of the reasons to have a PM, they provide a level of protection. They qualify the renters, make sure everything is in good working order and a monthly/yearly statement of ALL expense’s. I know way too many horror stories, a simple word can really ruin your day.

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Brandon Turner December 9, 2013 at 10:16 pm

Agreed James! I’m looking forward to the day :)

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Michael Gammage December 6, 2013 at 8:49 pm

Good stuff!!! Very informative. I’ve recently decided to get serious about REI now and I’m feeling like small multi-family buy-n-hold properties is the way for me so I hope to become a solid Landlord one day.. To add.. I’m heard of situations where the Landlord has tried to maximize cashflow by renting illegal units like poorly converted garages even small storage rooms and have actually been held accountable for deaths of their tenants caused by fire do to portable heating units.. I’m learning quickly from others to just do it the right way all the time no mater what.. It seems to payoff in the long run. Thx BT for BP .. Word!!!

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Brandon Turner December 9, 2013 at 10:17 pm

Thanks Michael! I couldn’t have said it better myself – do it the right way, all the time, no matter what. Wise!

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Tom Sylvester December 6, 2013 at 10:51 pm

Great post Brandon. I always recommend people do periodic inspections (ex. quarterly). As part of these inspections, we check the smoke detectors to insure they are working and have the tenants sign a document stating the same. One simple way to make sure our tenants are safe and that we are protected.

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Brandon Turner December 9, 2013 at 10:18 pm

Thanks Tom, I agree. I try to do them at least every 6 months. And smoke detectors are also a good excuse to get into every room of the house to inspect conditions!

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Craig Horton December 8, 2013 at 9:48 am

Three quick tips to add to this blog:
1. Have a very good real estate attorney on your team. Always get an attorney if you get a Fair Housing Complaint. We have an attorney in our town that is just the best. Well worth the fees he charges.
2. Always do a credit and criminal background check on all applicants for rentals. These screening tools tell a lot about a person.
3. Always try to have two people present when you interact with a tenant especially if you have a dispute with a tenant. This is not always possible but it really helps if you have a witness present in situations.
These are lessons I have learned in 39 years as a real estate investor

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Brandon Turner December 9, 2013 at 10:18 pm

Hey Craig,

All great lessons! Thank you for sharing!

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george December 9, 2013 at 10:50 am

You forgot a biggie… have all renters sign a Crime Free Lease Addendum. Without it, you can’t evict a tenent for dealing drugs (away from the property) – even if convicted, but the States Attorney could come and ask you for all that rent money back, since it was obtained through illeagal activity. While this might not end you in jail, it should could put you in the poor house. And if they are doing anything illegal on the property, and it can be proven you knew and still rented to them, you could end up in jail – though again unable to legally evict the tenant. In Skokie, IL and some other communities, the city is trying to take it a step further and revoke the landlords right to rent if they do not use the Crime Free Addendum or fail to evict upon demand. You can read about it here –> http://www.skokielandlord.org

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Brandon Turner December 9, 2013 at 10:20 pm

Ah George, definitely! We have all our tenants sign this form as well. Thanks for the tip!

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Jason Munck December 9, 2013 at 7:21 pm

Brandon,

Good job. I’m also happy for you that this article is getting a better reception than your PayNearMe advertisement…I mean article.

I couldn’t help it but the following sentence sent off red flashing lights in my head and the CPA in me just couldn’t hold back because this has the potential to spread some misinformation.

“However, I also understand that hiding any income to AVOID taxes is a sure way to head off to federal prison.”

Tax AVOIDANCE is perfectly legal and refers to taking legal steps (such as a 1031 exchange) to minimize the amount of taxes owed. Tax EVASION is illegal and refers to, one way or another, not paying or underpaying taxes owed. Underreporting income from taxing authorities is tax evasion. This distinction may not be well known so I think it’s really important to clear up. If you could please change “avoid” to “evade” in your article it would present the correct information to the reader.

Otherwise I enjoyed the article.

Thanks,
Munck

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Brandon Turner December 9, 2013 at 10:24 pm

Ha yeah, definitely a more positive response – but way more comments on the other. I guess there’s something people like about ads ;)

As for the line about tax avoidance… I agree that tax avoidance is great, BUT the sentence is still correct (I think) because I said “Hiding any income for tax avoidance.” In other words, doing something illegal in order to avoid taxes is bad. Correct me if I’m wrong, but I don’t think you can “hide income” in a good way? It’s like saying “lying under oath in order to protect a friend” is okay – but it’s not. It’s still illegal to lie under oath, even if it’s for a good cause. See my logic? Am I making sense!? Probably not :)

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Jason Munck December 9, 2013 at 11:01 pm

I see your logic and the point you are making in the article is a completely valid point. I just think that the way it’s presented could create some confusion for readers that don’t understand the difference.

“Hiding any income for tax avoidance” is an oxymoron. Tax avoidance and tax evasion are defined terms. We agree that hiding income is illegal but by definition tax avoidance is legal. So you are hiding income (illegal) for a legal purpose (tax avoidance)? I just find that confusing and think the point you are trying to make would be clearer if you didn’t use “avoid.” By definition any illegal hiding of income is evasion and not avoidance and I assume the point you are trying to make is the importance of landlords complying with tax laws so you are talking about evasion.

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Brandon Turner December 9, 2013 at 11:03 pm

Yeah, I agree. It’s confusing :) I’ll amend it!

John Thedford January 13, 2014 at 5:06 pm

Good article. I laughed at the “don’t kill your tenant” advice until I remembered we just had a landlord shoot and kill his tenant. The tenant was in arrears and the landlord went to collect with a firearm. Bad move! He is now facing murder charges.
The takeaway from your article is for landlords to act sensibly, honestly, morally, and responsibly. We can’t control the other party but we CAN control our actions.

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sunil January 20, 2014 at 10:40 am

Good information.
Tom – you said ” As part of these inspections, we check the smoke detectors to insure they are working and have the tenants sign a document stating the same”

Do you mind sharing the document that you use for this ?

Reply

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