My Tenant is Managing Rental Properties…

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1

My tenant is managing rental properties from my duplex where I occupy the other unit, resulting in the tenants visiting my property to pay their rents. Can I prohibit this activity?

A1

It may depend upon how much of an irritation this really is, your lease agreement, and/or other issues. Running a business in a residence can be prohibited by the lease for a rental home, by zoning laws, by business licensing requirements, by the landlord’s insurance, and/or by CC&Rs.

Whether the tenant receives compensation for management service or only manages his own rentals or does it for free as a favor to a relative or friend could be an issue. Managing one’s own rentals or doing it as a favor would usually not be prohibited by either zoning laws or CC&Rs. However, operating a property management business could be prohibited by either or both and/or by your lease agreement. In addition to possible zoning laws restrictions, most cities require a business license for operating any business, no matter where located.

Furthermore, managing real estate for compensation requires being licensed as a real estate broker in most, perhaps all states. Real estate brokers are also subject to other rules, including office location or signage in some states. You being aware of violation of licensing laws would probably provide leverage against the tenant for mutually agreeable early lease termination.

However, keep in mind that, even if the tenant is not doing something that is illegal or affected by any of the previously listed items, the landlord can increase the rent upon renewal or refuse to renew the lease. If month-to-month, he can raise the rent or terminate the tenancy with the minimum notice required by the law of your state (30 days in most states).

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Q2

My ex-tenants left damages costing about half of their security deposit to repair and did not provide a forwarding address. What do I do regarding returning what is due the tenants and an accounting of the unreturned amount?

A2

Send a check and the accounting to the address where the tenants lived at your property using one of the special addressing services called “ancillary service endorsements” that give the Postal Service specific instructions for how to handle the mail if it is undeliverable as addressed. Ancillary service endorsements include four basic phrases that are printed on the address side of your envelope:

    Address Service Requested

    Return Service Requested

    Change Service Requested

    Forwarding Service Requested

Undeliverable mail is handled differently depending on the class of mail, the endorsement you use, and how recently the addressee has moved. Some of these actions have fees associated with them. See the USPS Web site (http://usps.com) for details of the types of endorsements as they apply to different classes of mail and for the fees, if any, charged for the services.

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Q3

I am a rental property owner who has used a property manager to manage my property for some time, but now the property manager is requesting my Social Security Number in order to release the rent receipts paid to him by the tenant. At first the property manager’s reason was the new software needed my Social Security Number. Now the reason is the rent receipts cannot be issued without my Social Security Number. Is this legal? My Social Security Number is sensitive personal information. Is there a legal basic for requesting my Social Security Number? Please comment.

A3

Either or both reasons given could be entirely legitimate. The new software used by the property manager (PM) may indeed need the SSN information in order to print even if the old software didn’t. Many such programs cannot print until all data fields have info in them. Furthermore, although often ignored by PMs, a PM is required by law to file 1099s with the IRS and with state taxing authorities showing the gross rents collected on your behalf if they total more than $600. Failure to provide 1099s regarding collected rents can be very costly to the PM if caught.

This is almost certainly the reason for the software requirement. Accordingly, using a phony SSN to make the software print is not a solution. The fact that the software needs your SSN should not mean that your SSN is provided to the tenants and it wouldn’t hurt to get a guarantee of this from the PM. However, some states have rental related income tax credits for tenants and the law requires that the tenant be provided a taxpayer ID of some kind associated with the landlord in order to claim the credit.

Your SSN was probably not needed in the past because the PM was not obeying one or more laws and he was using software that did not force him to do so.

This should not be an issue for owners who are holding title to rental properties in the name of a limited liability entity such as a LLC. All real estate investors should absolutely be doing this, with a separate LLC for each individual property. Each such entity can and should obtain an Employer Identification Number (EIN) and that is what should be provided to the PM, governments, tenants, and anyone else requiring such information. Doing this avoids the need to provide a social security number to anyone for any reason related to the rental properties other than to a lender if/when financing or refinancing a property.

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

This entry was posted on October, 2010 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.