Tenants, Landlords, Multifamily, Commercial

The business of renting out your real estate properties is often confused as simply being an aspect of the business of investing in real estate. But make no mistake, when you buy a property and rent it out you are now effectively running a business and in order to protect you and your asset you'd better know the law.

"If you're just treating rental property, especially residential, as an investment and you're just doing it on your own like stocks and bonds, you're really running a huge risk for liability that could cost you your entire investment," says attorney Ted Kimball who specializes in landlord/tenant law.

Landlords frequently ask about the best way to screen tenants, Kimball cautions them, "That's an area that is fraught with potential liability."

His law firm Kimball, Tirey and St. John is a full-service real estate law firm, which has offices throughout California. Kimball says on top of having to watch out for violating federal laws, every state also has regulations that apply to screening tenants.

There are three basic areas that landlords need to check: credit history, past tenant behavior and criminal history. But there are federal acts and various state laws that protect the person being investigated, without having this knowledge, a landlord could easily violate them and end up owing a lot of money.

"There are fines and penalties that go with them, $10,000 per incident are typical fines for some of these violations," says Kimball.

Some of the greatest risks involve violating federal acts such as the Federal Fair Housing Act which identifies seven protected classes: religion, national origin, race, ancestry, sex, familial status and disability. There is also the Federal Credit Reporting Act which states things such as if you turn potential tenants down you must give notice in writing to them explaining why they were turned down if it was fully or partially based on their credit report. You must also let them know that they can dispute the information that is on the report with the credit reporting company that produced the report and you must provide name, address and phone number of the credit reporting agency.

Violating the Federal Fair Housing Act could happen this way, "[Tenants] could claim that you're using different standards for them from those for someone else," explains Kimball. Let's say, that you bring in a tenant who is not a member of a protected class, but the one you turned down is a member of a protected class and is also just as qualified, on paper, as the person you accepted. The one you turned down may claim illegal discrimination as the reason for not being accepted.

Kimball says the best way to get good tenants for your property and protect your assets is to use a property management company.

But if you not interested in doing that, Kimball recommends, at least, hiring an objective, third party to handle the screening of your tenants. This way when a credit check is being done you have a standard already in place.

"The [screening companies] that work best are the ones that actually give you a credit score. So you decide what level [score] you want to qualify and if the [prospective tenants] score above that level, then you accept them. If they don't [score above that level] then you don't accept them," says Kimball.

The bottom line, according to Kimball, is in order to protect your bottom line you'd better hire professionals who know the laws to handle this area of your business.

• < Prev
• Next >