Jumping into being a Landlord, but is it legal?

21 Replies

So I am relatively new to investing and trying to learn as much as I can, asking questions and meeting with experienced investors i'm ready to jump off the edge, but in my competitive market its hard to find a deal that matches my investing criteria. however I'm not letting this deter me from my goals I look at my automatic MLS alerts everyday and analyze deals as much as possible. With that said I am open to any strategy as long as it helps me break through...

One day I was brainstorming, and I remembered that my parents have a rental in Farmington NM, that is just sitting vacant, that they use as a storage; trust me I know, its crazy to let an investment that could be producing cash flow, just sit and do nothing.  To explain my parents situation, they tried investing in rentals but soon, became the frustrated landlords that you always hear about on the podcast, making all the typical mistakes, to their eventual forbearance of their real estate investing goals. 

The property is paid for free and clear which means that through, better management, it would cash flow better than one that has a mortgage. So my question is can I act as the landlord and manage the property my self although my parents are the actual owners, and use the cash flow to buy my next deal and get free landlord experience at the same time? 

most states require a formal property manager to be licensed. That being said, I think most laws have grey areas when direct family is involved...that being said, do you think anybody will report you? Only true issue I could see arising is if you had to take a tenant to court. I think your parents would have to show up for that.

A better option may be to get them to sell, and loan you the money to get started.

Yeah I was thinking about the same thing, No one would know until I had to take them to court. What If I was to get them to put the property in my name or be a co-owner, in the event that they don't want to sell?

Legally it can be a grey area with family so you are probably ok to do this. However what are thier long term plans for this property? How long has it been storage? Consider what will it take to get rent ready? Is it a candidate for short term rental? This may be easier to get them to agree to and in the process you get it sale ready. Is the storage important to them? Short term may let them keep storage capacity. Got sibings, what will thier input be? Basically is your solution solving an issue for them or creating one?

You'll have to check the law but you can generally manage a property for an immediate family member without requiring a license.

@Colleen F. The property has been storage for about 2 years, its pretty much rent ready carpet is in good condition, has new appliances, also washer and dryer....  I may be wrong but this may not be such a good candidate to sell because it is on a 3 acre lot which has another rental on it which is rented out to my uncle. and my dad runs his ranching business on part of the property. Not only does this property have two mobile homes but raw land where my dad has his horses, and where he parks his horse trailers, tractors etc. in order to sell it we would have to sell the property as a whole. these rentals though in great shape and being updated would be classified as lower income properties. I just figured that this was a good opportunity to get experience for next to nothing, my parents even said that I could keep the cash flow.  Siblings are not involved, and have no interest in the property. 

@Nathan G. do you happen to know where I can check the laws on this matter? is there a reputable source 

You could reparcel the lot and break it into smaller ones if you wanted to sell just the land the house sits on.  That's if there is road access without driving through the rest of your land. 

Your parents can sign a POA (Power of Attorney) that covers their real estate, or just that one building and then you would have legal right to represent them even in court. I've done this with my parents for a property here in Florida even though they live out of state. I actually purchased the property, made it into a rental, and recently sold it, all without them ever being here in Florida.

@Jesus Moreno You don't think your parents would turn you in do you?

I bet if your parents gave you a power of attorney for the property you wouldn't be considered a PM but just acting on your parents behalf.

Sounds like if your parents want you to rent it you could check into a Power of attorney for the property. If it is in good shape your best bet to keep it that way is to keep it in use. If the rest of the family isnt going to interfere and you get a POA that might be the cleanest option. The issue will still be that the income is technically thiers.

@Sam Marcos that is a great idea, I never would of thought about that! @John Underwood You are right you’re not managing the property just acting in their best interest!

@Nathan G. Thank you so much for that information I really appreciate!

Colleen,

You are totally right about the cash flow and as far as I’m concerned I would be happy giving that to them I’m more interested in proving to my self that I can turn a profit on the property and the experience I would be getting.

One way to get around property management issues is to execute a long term triple net lease with your parents, called a NNN lease. Legally, the term must be at least 30 years, up to 99 years. You collect the rent, and you in turn are responsible for paying taxes, all repairs. Your parents would have fee simple interest, and you equitable interest. Usually, the lessee has the option to buy. You can also get a mortgage on a NNN. This is the cleanest way and often used in estate planning where owners owned properties for a long time, has good cash flow, and do not want to sell because of capital gains.

Another way is to add your name to the deed TIC, and as part owner, you do not need a PM license. The only issue with these approaches are the estate issues if you have siblings.

One investor I know use the NNN approach to acquire properties from tired landlords, which your parents are. But he started off using this approach as a no money down approach to real estate investing and found it appealed to tired landlords. So he wind up obtaining no money down properties from tired landlords, a win/win for both.

@Frank Chin , that's a great idea! Is this NNN lease kinda like a Master Lease Option (MLO)? Brandon turner talked about that strategy in his No money book, but I don't remember him mentioning having to lease for a min. of 30 yrs. If the NNN and MLO are distinct, what are the pro and cons of each?

Originally posted by @Jesus Moreno :

@Frank Chin, that's a great idea! Is this NNN lease kinda like a Master Lease Option (MLO)? Brandon turner talked about that strategy in his No money book, but I don't remember him mentioning having to lease for a min. of 30 yrs. If the NNN and MLO are distinct, what are the pro and cons of each?

A NNN lease is a usually a Master Lease, but not all Master Lease are long term NNN leases.

A Master Lease could be of any time length. You may or may not be responsible for taxes, insurance, and repairs, commonly referred to as single net or double net. All it means is you lease the entire property, and you then have the right to sublet to subtenants, collect the rents. You then are responsible for paying rent to the landlord.

A long term NNN lease of at least 30 years where you are responsible for taxes, insurance, and repairs are on the other end of the spectrum. Unlike just a master lease, it is treated like real property, where you can get a mortgage on it, sell it, use it in 1031 transactions. See here: Long term NNN leases

In real estate, you either own the property outright, or control the property through NNN leasing.

You can discuss with your parents what the deal you can both live with. You can try out a master lease scenario before going all the way with NNN. A NNN lease is treated like real estate, and must be recorded as such, though most regular leases can be recorded. If you do it, have an attorney do the paperwork. But either way, it makes it legal for you to collect rents, do whatever is it you have to do to manage it, without having to worry about PM licenses.

@Frank Chin Wow! thank you for all that information, you did a great job explaining that. I will keep this in mind moving forward. 

Thanks again to everyone that participated in this discussion it was very constructive! 

@Jesus Moreno the cash flow must be declared as income. Since they are using the property for storage currently, it is considered a "second home". Once it get's put in service as a rental property, they are required to claim depreciation and then recapture depreciation when they sell. Depreciation reduces the tax liability. If you are managing without owning it, I am not sure how that works. Talk to a CPA.

Hi Jesus. I own a property management firm in Farmington. Even managing a property three hours away can be challenging. Great idea to do a NNN lease as mentioned above. The same risks that your parents experienced when they managed it as a rental would still apply for you. Absentee landlords sometimes work but mostly they do not.

If you’re not looking for professional management that’s no problem but at least have one find a tenant, do the showings, marketing and screen applicants so you can be set up for success.

@Joe Splitrock you know Joe I didn't think about the tax liability, that just goes to show that one needs to take everything into account on a potential investment. Next time I talk to my CPA I will bring up this topic. thanks for the suggestion. 

@Shawn Johnson I will IM and we can chat a little more about this. 

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