All Forum Posts by: Jeff Takle

Another example:

In contrast, Massachusetts doesn't allow landlords to charge any fees for late payment.

Every state is different.

I disagree a little bit with Frank. I know quite a few landlords who look at late fees as an added source of income. Some landlords even plan a certain percentage into their projected cash flows.

(I was trying to sell them on automatic, recurring rent payment setup and they thought it would HURT their business!)

The answer, as Frank points out, is state specific. Google "YOUR STATE Landlord Tenant Law" and you'll be able to navigate to the actual law. There should be a section in it on Late Fees.

Virginia, for example, allows you to charge both a one-time late penalty fee AND a daily fine as long as they're "reasonable" which seems to mean about $50 for one time and $10-$25/day for the fines.

If you do use fines and they don't pay, then you're able to sue the tenant for back rents + accumulated fines and fees. The judge will likely wave part or all of the fines or fees if tenant pays back rent, which helps in collection.

-Jeff

I think we're mixing two, very different, questions in this discussion. First, how --and should-- you INVEST in rentals in another state. Second, how --and should-- you MANAGE those rentals from out of state. One at a time...

Investing - I agree with Wheatie; if you buy a property sight unseen and your due diligence is done all on a laptop, you are cruisin for a bruisin. That's just not smart. I like the one-week, tax deductible "fact finding" trip to the site of a potential investment to meet with a lot of different people. Talk with local realtors, interview PMs, drive around during rush hour, take public transport, talk with Chamber of Commerce, neighbors, etc.

Managing - Let's break down what a PM does and how they do it (I used to run a PM company and am an agent so any mud is co-flung at myself):

1. Advertise vacancies. You can do this cheaply and just as well.

2. Answer questions about the property. Whether you answer tenant calls or the PM interview questions, you're going to have to provide the same answers.

3. Show the property- This is tough to do yourself. Here's a blog article http://blog.rentingyourhome.com/2008/09/property-management-tips-for-showing-rentals-in-another-state/ that suggests alternatives but it's a trade-off between cost and convenience.

4. Screen the tenant. PMs pull a raw credit report (no FICO) and hand it to you anyway. The questions, debate, and decision are still yours either way. You're making the call (or should be).

5. Provide the lease. PM leases are almost always the local Real Estate Board lease for sale; $9. Signatures can be done in person, by mail, fax, scan/email.

6. Collect rent. Tenants either pay a PM or you; not much difference to them. Set tenants up for automatic payments (e-check or credit card) and you don't have to worry about going to the bank either.

7. Evictions. They typically just refer a lawyer b/c it's then a legal issue, not a PM one. Referrals are easy and free.

8. Solve maintenance problems. Can you look through Angie's List or similar vendor review website and select a Plumber, HVAC, Electrician and Handyman's phone number? Can you write those phone numbers down on a piece of paper and store them for later? Great, then you've got the bases covered.

The biggest boogieman PMs sell is that "You don't want to get the 2am phone maintenance call from a tenant!" Well, considering 8% fees on one of my rentals costs $1,440/yr and I get an average of 1 late night phone call/yr per rental, that's a call I'm happy to answer.

I think the whole picture changes when you've got 20 or more different units -- definitely time to outsource for help.

Sorry, a few more quick thoughts.

You have to look at each type of coverage and see if the risks outweigh the benefits of coverage. I'm not an attorney and I'm not an insurance broker, but here's what they cover:

Errors and Omissions: This will help cover you if your written or verbal contracts are incomplete or errant. If you improperly handle escrow money, security deposits, etc., this comes to the rescue. If you pay a quality lawyer for your paperwork and are a diligent professional in setting up procedures and systems for doing business, then you can mitigate a lot of this risk yourself.

General liability insurance: This helps cover the LLC if someone slips and cracks their head open on the sidewalk, gets hurt at work, etc. Comes in pretty much any amount you'd like.

I agree with Gary. An umbrella policy is dirt cheap...usually much cheaper than the state LLC annual filing fees...and is much more likely to protect you in the event that something goes wrong.

Regarding working as the PM separately, here's my take. If the LLC owns the property and employs you personally--as an outside vendor and not as an internal employee--and something goes wrong and you get sued:

1. The injured party can sue both the LLC as the owner, the one ultimately responsible for the non-negligent management, and

2. The injured party can also sue you as the agent for the owner (LLC).

3. Since it appears your agency status as a PM is a sole proprietorship, they can attach your personal assets.

4. Since the owner of the property is the LLC, the judgment can also attach the assets of the LLC which include this property and any others it owns.

Which entity gets sued? That depends on which entity the attorney thinks has more money. If they sue the LLC and fail, or don't get a large enough judgment, they'll next try coming after you the individual, or contractor, or sole proprietorship...

A better solution would be to work either as an employee of the LLC and have the LLC perform both PM and ownership duties. (unless you've got 20+ properties, in which case you might want to open a separate LLC just for PM of all the units) If there is a legal employment agreement (or "work for hire"/independent contractor) in place between the LLC and you the employee, then only the assets of the LLC can be attached in a judgment and your personal assets are safe. Unless the infringement is gross negligence on your part as an employee (drunk on the job, etc.) in which case you're personally fully liable regardless.

And of course, you have to be running the LLC as a legitimate business, as mentioned above...

-Jeff

You can also try BiggerPockets! :-)

And Facebook has the ability to list properties too. I've gotten a fair number of leads (but no buyers or renters yet) off Facebook so I'm not sure how effective it is, but if the property is in a college town, I'd do it.

Great topic and discussion. Lots of nuggets buried in 50+ posts...

A few clarifying points:

[list]Early post implied that starting an LLC would make claiming real estate classes as business expenses 'easier' or 'less in the gray area'. That's not really true. Using the LLC only makes it easier to defend against the IRS, should you ever be challenged on those specific business expenses in an audit. However, if you are, in fact operating as a business (sole proprietorship, for example where you have no forms to file whatsoever except a Schedule C with your 1040), and you have separate bank accounts, receipts, etc. then you're just as legit to the IRS. There's no difference in the "gray area" as both LLC and sole proprietorship are acceptable business entities under the IRS code.

Rules and fees vary widely from state to state.

Don't make it more complicated than it needs to be. The LLC entity only protects your liability under a narrow set of circumstances you aren't likely to encounter unless you've got a LOT of property or run your business like Slim Shady. If you have <5 properties, you'll probably get far greater liability coverage by upping your insurance policies and you'll save a lot of administrative and tax hassles.

I think forming LLCs for real estate is largely a hot topic among newbies and small investors because it sounds exciting and people will pay to attend the "guru's" conference or buy their "how to" materials, not because they add materially to your liability protection or your investing portfolio. [/list:u]

Finally, if you're buying properties under your name and secured by your personal assets, and you tuck it into an LLC, if the LLC is sued and you have to come up with the mortgage, the judge can still attach your personal assets up to the mortgage amount...so the liability protection you're getting from the LLC is pretty slim...only exists AFTER your personal assets are attached up to the remaining mortgage, only AFTER the remainder of the suit exceeds your insurance policy, and only AFTER you still refuse to settle with the plaintiff.

-Jeff

Welcome to BP! I own some investments in the Charlottesville area myself and will be traveling down there in the next couple of weeks to check in on everything. If you want to grab a cup of coffee and trade idea/stories or whatnot, let me know.

It's a great area that's continued to grow and weather the slumping market pretty well. I've found good success outside of Abermarle Cty in the surrounding areas. Where in C-ville are you focusing?

Also, if you need/want contacts in the area, I know a few good folks. Helps to have a good team around you.

Cheers,
Jeff

Or I suppose you could buy one of those fake CCTV cameras and put it up in the laundry room for $39 to appear like the room is being monitored...would feel pretty "watched" cheating the laundry.

To be frank, I've been lucky so far; all the tenants bought in. In the event that they don't, I suppose I could separate them with different locks/keys.

Fraud could be a problem in the future, but I don't think it will be moreso than people cheating coin laundry...guess we'll see!