On this Flashback Friday episode, Jason Hartman talks with Janet Portman, author, attorney, a nationally recognized specialist in landlord/tenant law, and managing editor at Nolo. They discuss landlord business basics, finding good tenants, complying with applicable rental regulations, and dealing with problem tenants.
Announcer 0:00
This show is produced by the Hartman media company. For more information and links to all our great podcasts visit Hartman media.com.
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Welcome to the flashback Friday edition of the creating wealth show with Jason Hartman. As he rapidly approaches 1000 episodes of this podcast, he has hand picked individual episodes that he feels is going to be good review for you to prepare you for the future by listening to the past. Let’s dive in.
Announcer 0:29
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants Get involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day, you really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 1:19
Thank you so much for joining us today. Today we’re going to talk about landlording long term investing, we have a conference call for our monthly call coming up on the self management details of how to properly self manage your properties. Even from a long distance, as you’ve heard me talk about on prior shows, I’ve had very, very good luck with that. And that will be the subject of our call, which you can register for at Jason hartman.com. It is $20 for non members and if you’re a member in one of our membership programs, it is free so make sure you take advantage of that. And by the way, speaking of the website, we have had the past oh six or seven days some tremendously horrific website. challenges. So I do apologize if you visited any of our websites, we have had some pretty big problems. I’m not sure what’s happened, we still have not figured it out. But we may have been hacked. I’m not I’m not sure. And we’re working on that. So if you ever need to reach us and the web becomes undependable, for any reason, feel free to call us, our number is 714820 4200. That’s 714820 4200. And we’ve had problems from time to time with the websites. But boy, this has been a tough a tough week last week with the website. So we’re trying to get back on track and hopefully that will come to its fruition very soon, and we’ll be up and running at full capacity again, but the show runs off a different server so the show should be getting to you just fine. And speaking of shows, we haven’t had much time to publish a lot of shows lately. We’ve been just incredibly busy since the meet the Masters event and want to thank all of you for coming out for that. It was a tremendous success, and we’ve planned our next one for October here October 2018. And another couple people just registered today. And I gotta tell you, I am so pleased and impressed to see so many of you registering for the events so early. And of course, you’re getting that fantastic early bird pricing of about $250, which just can’t be beat for the event. So thank you for registering so early, it helps us make our plans and you get the benefit of that great low low pricing. The other thing I want to talk to you about, well, we’ve got two guests for this show. Actually, we’ve got Doug coming up here and we’ve got another guest where we’re going to talk about landlording and some of the legal challenges on landlording with an attorney and author but before we do that, I just closed on another property. I purchased an apartment building in Scottsdale, Arizona, and we are doing so much business in the Phoenix area right now in the Greater Phoenix metro area that we have decided that we want to do our very first real estate tour and this tour would be slated for the middle of May we want to do it pretty quick. Because of course it gets hot in Arizona, but it is a dry heat as they say. And we want to do that in mid May. And we’ve got some good group pricing on hotel rooms at the ultra swanky Ritz Carlton of all places, Ritz Carlton Phoenix. So we’d love to hear any of your feedback on that you can give us feedback by just giving us a call or going to the website Jason Hartman calm and putting any comments you have in the Contact Us form or on our Facebook page. If you go to Facebook and look up Empowered Investor investor network, we’re thinking the cost of this tour with accommodation with everything but airfare basically, we either cover all or most of your meals, we cover the hotel at the Ritz Carlton. So it’ll be absolute first class accommodations. If we end up going with the Ritz Carlton, we are in negotiations with them now. And it’ll cover the cost of the transportation around town to look at the properties so we’d we’d rent the buses and so forth and all of that we’re thinking this would probably land somewhere around $700, maybe 799. And the only thing you have to do is get yourself to Phoenix. And other than that, pretty much everything else would be all inclusive. Remember, you’re listening to flashback Friday. Our new episodes are published every Monday and Wednesday. So let us know any feedback you have on that. Again, it’s our first tour. And we haven’t really done tours before, but we want to do that and we want to do a Dallas tour in the fall. So we’d love to hear what you think about that.
So without further ado, we’d like to really make this show on the focus of landlording and long term investing. And I have Doug here with me to talk about that today. Doug, how are you?
Doug 5:38
I’m doing great Jason, how are you?
Jason Hartman 5:40
Well, good. How are things up in Portland Oregon,
Doug 5:44
they’re nice and green rainy right now, but it’s it’s April so that’s what happens.
Jason Hartman 5:48
Well, April showers bring May flowers, right.
Doug 5:51
As they say. Anyhow,
Jason Hartman 5:52
it’s really sunny and nice down here in Southern California today, but I’m glad you wanted to be on this call, Doug because I think I made a little bit of a mistake. steak at the last meet the Masters event by getting people a little too excited about flipping opportunities. And I have done a few flips over my investing career that spans over 20 years now, but I’ve made most of my money, I’ve made millions of dollars with a long term investments, and flips are great when you can do them and make some quick money. That’s pretty good. You do get beat up on taxes pretty well as you’re going to talk about. But the problem with flips is I haven’t been able to really duplicate them. That last one I did was in Indianapolis, my profit before taxes is hovering right around $25,000. And I just closed on the sale of that property, purchased it about three months ago, just resold it and closed on it. So I’m glad to say that but boy, I’ve been trying to buy some more and I just can’t find any more to buy where I have a comfortable enough profit margin to do a straight out flip. Now listeners might be asking, you know, what’s the difference? Well, if the property is a good deal, it’s a good deal. No matter what you No, not so quick. If you’re flipping the property, you may not really care as much about the location, the neighborhood and really the long term potential of the property where you’re buying and holding it. It’s a different criteria in that respect. But what are your thoughts on that duplicate ability of flipping and also the tax aspect because even though I made that 25 grand, which was nice, gosh, I’m gonna give half of it to Uncle Sam, aren’t I?
Doug 7:26
Well, so what do you think you want to start Jason the duplicate ability to the taxes because they’re very different topics?
Jason Hartman 7:31
Well, let’s start with taxes, life, single largest expense for anybody listening.
Doug 7:36
Okay, so the first thing to consider is that when you flip as you said, you’re going to pay full price on taxes. So let’s just let the listeners think for a second that whenever you flip a property that that falls into current income tax, which means you pay the current normal income tax rate, which tops out at 35% for the feds, and if interstate like Oregon or California is going to Nick you for about another 10% on the state. So you’re talking about 45% the maximum hit so you could lose up to half of whatever you make right off the top. And I
Jason Hartman 8:06
will because being in the Socialist Republic of California, I’m hit with the state tax plus the federal tax. And it’s all ordinary income tax rates where if you get hit on tax with a property, you’d be crazy to do it because you can always 1031 tax deferred exchange them when they’re the buy and hold type properties. But even on one of those, if you should get hit on the tax and not exchange for another property, then you can at least pay the lower long term capital gains rate in the worst case scenario, right?
Doug 8:36
Exactly I because the federal cap gains rate tops out of 15%. So let’s say that you’re in California, Oregon, and you pay 15 plus 10, that’s still 25. You know, your max hit is 25% versus say 45%. Or if you can do a 1031 exchange, you can defer your gains indefinitely. So from a tax perspective yet flips really don’t do you any favors tax wise. Now of course, the advantage of setting that is that you see your money right now, as opposed to an income property, which is where you see your money in a compound in cash flow stream over time. But for somebody whose investment horizon is relatively long, that compound, a cash flow stream can be really advantageous. Because if you figure you buy a property, you’re getting rent, you pay a mortgage, you have X amount leftover. Well, every year that you hold on to that property, you’re presumably going to raise the rent a few percentage points. And since your mortgage just fixed, you’re going to see your net continue to go up every year. Well, then at some point down the line, you’ll probably sell it and then rebuy something else if you’re smart, you’ll do a 1031 exchange when you buy that new property. And then what will happen is you will theoretically you’ll start amplifying the number of holdings you have you’re either change one big property into multiple smaller properties or multiple smaller properties into bigger properties. But what will happen is you’ll start you’ll start having more and more bigger deals as you’re trading appreciated properties for something else said that has more units or that has units with higher rents or something like that. And so with You’re with an income property portfolio, what you do is instead of having a transaction where you make one lump sum of money right now that pays a maximum tax hit, what you’re doing is you’re taking a regular residual growing cash flow that’s highly tax optimized over a long period of time. And you have the two if I’m talking time period, that’s more than just this year, I would much rather have that long term cash flow than a one time cash hit.
Jason Hartman 10:25
I think the flips. I mean, they’re great and they make for great infomercials and our competitors. We don’t have very many competitors, but there are a few out there. They’re always promoting this type of quick buck mentality. And it’s great when you can do it but I liken it to the the mythological sirens where the sailors heard the siren song and they had to tie themselves to the mast of the ship so they wouldn’t crash onto the rocks, putting wax in their ears. Yeah, wax in their ears. Exactly. And fortune can reverse very, very quickly when things don’t go right on the floor. But when you buy and hold for the long term investment potential, I just find that it’s safer. It’s more stable really is just a much more of a sure bet type of thing. Any other thoughts, duplicate ability, scalability, anything on that pain?
Doug 11:16
Well, there’s a couple things to think of in that regard. The first is that if you think of the market conditions that are necessary for a flip, so in order to have a successful flip, you need to have a market where you’re able to buy below market value, somehow add value to the property to where you can sell it at that market value and have the total be below enough to where you can make a profit. So just by simple math, that situation can’t last forever, because eventually what’s going to happen is, if flips are attractive, people are going to be attracted to flips, they’re going to start bidding up the price and then eventually all the profits going to disappear from people bidding the price up so high and that’s what’s happening in Indianapolis right now because you said you can’t find any more flips because most of the stuff that you’re finding Prices getting bid up because people have seen it, there’s flips available. And so certainly, you know, now they’re trying to go in for the quick buck, the quick buck artists bid up the price, and then all of a sudden, it gets really hard to do the to do the turn and flip. The other thing to consider is that flips are very, they’re very overhead intensive, meaning that you have to manage the by transaction, you have to manage the rehab, you have to manage the sell transaction. There’s a lot of paperwork and a lot of coordination that’s involved with doing flips. And it can most certainly be worth your while. But the thing that we’re really trying to do as long term investors is really create mailbox money, which is to create a portfolio of assets that send us money every month with a bare minimum effort on our part, because when you figure that you have to spend 30 hours a week managing all your flips, well, you have another job, and it may be a well paid job, but it’s another job where you may make a lot of money, that money may suddenly dry up and either way you’re having to spend a whole bunch of time managing it. I mean, if it’s something you can do, you have the opportunity to do it. may be something worth going after. But it’s not something that’s really smart to base your financial future on what you really want to base your financial future on is owning those assets that create passive income.
Jason Hartman 13:12
Just a reminder, you’re listening to flashback Friday, our new episodes are published every Monday and every Wednesday. Yeah, I couldn’t agree more. And when you said overhead, I thought you were going to refer Doug to monetary overhead. But the time overhead is pretty intensive. And you know, what it really it makes me think is, is that every business looks so simple from the outside and flips are a business that is a business with a lot of moving parts, and there’s just a lot involved in it. And any business can be lucrative, but it’s a business and that’s what people should understand in our local market specialist in various markets. I mean, they’re basically most of them are flippers to one extent or another. That is their business. But
Doug 14:00
they have offices, staffs, companies, corporate structures and a lot of resources. And again, if you want to open up any business and you go into it like a business, hey, it can be great but just understand it has complexity moving parts, and it has a network of people, a team and a network of resources, you must be able to coordinate and facilitate and one of the other things to consider also, for any of the people listening who are potentially catching flip fever is that most of the local market specialists who are flippers don’t make all that much money on each of the properties they flip, because in order to sell them in order to move their inventory quickly, they have to discount below market price just like how Platinum clients who want to do flips, if they want to sell that flip quickly, they’re going to need to discount below market price which will of course compress their margins. Now the reason why most local market specialists do their flips below market price is because a lot of them own property, man Insurance companies. So what they’ll do is they’ll set up a deal. they’ll sell it to you where they make a small profit, but you get to buy something below market price, and then they’ll be able to set up the management. And so then
Jason Hartman 15:09
and that becomes that becomes their annuity or their mail house,
Doug 15:12
their annuity. Yeah, their mailbox, right. Yeah. And the thing to consider is that the people that do flips for a business in order to turn their inventory have to discount the properties as a one deal at a time investor. It’s potentially dangerous if you want to just walk into the flips against professional investors because they’re probably going to be undercutting you on price.
Jason Hartman 15:31
Well, and and all of the people listening that want to do buy and hold investments get to take advantage of that, because the one thing that a lot of people don’t really understand about developers or rehabbers, and rehabbers, or flippers, whatever you want to call them are local market specialists are in many ways. They’re the same as a developer that develops real estate from scratch. It’s just a lower degree of development as all it really is.
Doug 15:57
A lot of it right now, too, is that there’s no money, no money. Being a developer
Jason Hartman 16:00
right now, not from scratch. No, when you can buy below construction cost, there’s no money in it at all. But that’s another topic. What I did want to say about that, though, is that what people listening have to realize is that there is a virtue and a bottom line profit benefit to turning their machine quickly rather than milking the last dollar out of a deal. So to your point about the way they discount and our clients get to take advantage of that, because it benefits them because they’re getting the property at a good price. If they can move their machine faster and turn their inventory faster. There’s a lot of money just in that. So so that’s why our clients see the benefit of getting these discount price properties.
Doug 16:44
And that’s one of the things to consider is that you if you think you want to go into the flipping business, you’re going to be competing against the professional flippers who Buy Wholesale, you know, or who basically buy for extremely low prices and sell it wholesale versus for somebody like me who would buy wholesale and then sell retail.
Jason Hartman 17:01
Exactly, exactly. Well, hey, those are some very good points. Thanks for coming on and talking about this. I know that after the meet the Masters event we might have given some people flip fever. And I’m not saying it’s bad. I’m just saying it’s hard to duplicate because now we’ve got a lot of people and their expectations are way up there. And they’re all focused on flipping and they think they’re going to get rich tomorrow. And largely, that doesn’t really happen in real life, you bet way.
Doug 17:24
Another way to think about is that is, you know, you can also consider doing you know, what I like to call a long term flip, which is, say where we do is you buy something that is completely appropriate to be an income property, say and hold it for one to two years, and just wait for a little while until until you flip it. So are you going to get the fast cash right away? No, but at the very least, you only get stuck with cap gains. And in a best case scenario, you might be able to do a 1031 exchange, but the thing is that you’ll be protected because if it turns out that the market price isn’t high isn’t as high as you thought it was, and you’d have to discount it again. So in order to sell it, you just hold on to it.
Jason Hartman 18:02
Yeah. Right, because you’ve got a stabilized property. So either way, you’re gonna win the game. And by the way, I have to mention about winning the game with long term properties, we are finally starting to see some real strength come back into the rental market. And ideally, everyone listening would raise their rents 4% annually. Now, I think we’re just starting to move into the time where we can see that happen, because on our conference call last week, where we talked about taxes and so forth. That was our member conference call. There was one article and I actually put it on our Facebook page for Empowered Investor investor network that talks about how tenants should renew their leases now, because they could see rent increases as high as 10%. Wow. And in one of my properties in Austin, Texas area, I just raised the rent on that one by 30 bucks a month it went from I think it was 1195 to 1225. no problem whatsoever. So we are seeing some signs of real strength in the rental market now, which is, which is great. And I know that a lot of these things investors have had to had to wait because of the financial crisis, all of the predictions I’ve made are pretty much coming true. They just took a two year sabbatical, I think with a financial crisis. So so they’re definitely coming through now, though. Any thoughts on that? But yeah, the the thing
Doug 19:22
that, just to remember is that if you really want to win long term, that it’s it’s the buy and hold investors that are really going to be in the most advantageous position from the long term, especially people that are buying right now, just because your total cost of ownership right now is probably the best it’s going to be in our lifetime. And by total cost of ownership, I mean, the combination of financing and market prices because at some point in the near future, it’s very likely that rates are going to go up very significantly, and that could drive prices down even even lower than they are today. But what will happen is your mortgage payment will probably be higher, because even though you’ll be buying on safe Five to 10% lower price, you’ll be paying an interest rate. That’s probably almost double what it is right now.
Jason Hartman 20:05
Yeah, no question about it. And that doesn’t have to necessarily even come from appreciation in the price. You’re talking about the mortgage aspect of it. But I just want to talk about what we really hit on heavy at the last meet the Masters event, which is what we call regression to replacement costs. And the reason I bring that up, Doug, is because you just sent me that email this morning about the commodities price index or the Turner construction,
Doug 20:29
construction cost index, it’s a I think the q1 11 forecast is out. And I think they’re forecasting just about 0.7% increase quarter on quarter. But the thing that’s important to remember about that is that if construction costs are going up, then that’s a leading indicator of replacement costs going up, which means that at some point in the near future, demand is going to bottom at some point in the future and then it’s going to start growing from wherever a bottoms Well, when it starts growing. There’s going to be no new inventory on the market. There’s almost zero new houses being built right now, the only building permits that are that are being used right now are building permits that have been that have been flipped in bankruptcy. So to pay the person that originally took out the bit that the developer took out the building permit went into bankruptcy, somebody else bought it at a discount, and now they’re another building a home for about half of what it costs at the peak so they can afford to sell it for cheap. That’s the only construction that’s happening right now.
Jason Hartman 21:23
Yeah. And then when you say only you’re saying that as a figuratively, I mean,
Janet Portman 21:26
of course, of course. But apartment buildings are doing pretty good right now.
Jason Hartman 21:30
And I tell you, Doug, back in 2004, I was always saying it’s all about housing, housing, housing, much more so than retail or office space. People have to have a place to live and of the commercial real estate sector. apartments are the darling of that sector. I mean, they’re doing quite well now in the midst of some very, very challenging times for other other segments of the market. And I just want to close with the idea because we’ve got to get to our guest interview. And talk about landlording. And she’s an attorney and author. And you know, I think if attorneys were involved in everything, no deals would get done what they dug because they’re there. They’re all about being super cautious and putting the brakes on things, right.
Doug 22:13
The thing you have to remember is that, you know, attorneys are trained to see everything that can possibly go wrong with any deal, that that’s what they’re trying to do. They are trained to see every humanly possible way that any deal can go wrong.
Jason Hartman 22:25
Hey, but in every silver lining, there is a cloud.
Doug 22:29
Yes, exactly. Exactly. So yeah. So as with all things, when you’re talking with the sales guy, you need to take it with a grain of salt, when you’re talking to the attorney need to take it with a grain of sugar,
Jason Hartman 22:39
some somewhere in the middle is the reality of the situation. Right? Exactly. Yeah, absolutely. Well, just remember on this flipping subject, folks, as I’ve always, always said, and I’ve just seen it happen over my career for many years now. The people that flip the properties, they have spending money, the people that buy and hold have real wealth and hate spending money ain’t bad. But real wealth is a lot better than spending money. So keep your eyes on the long term prize of the buy and hold investor. And with that, let’s go to our guest. And I just want to mention one more thing, before we go give us some feedback on that Phoenix tour, it’s coming up pretty fast. So we do need to know what you think about that. If you’d like to come if you’d like to participate, we’d love to have you. And that’ll be a really, really fun event really first class too. And if anybody listening needs a cash partner for deals, I am wanting to buy up every piece of property practically in our network right now that I see come across my desk, the deals are so good. So I’d be happy to be a cash partner with you. So expressed some interest, raise your hand, let me know if you’re interested in that. And we can explore that further. Doug, thanks so much for joining us today and sharing some of your thoughts on the flips and so forth.
Doug 23:50
Not a problem. Appreciate it.
Jason Hartman 23:51
We’ll go to our guests here in just a moment.
Announcer 23:56
You know, sometimes I think of Jason Hartman as a walking in cyclop pedia of the subject of creating wealth
Announcer 24:02
while you’re probably not far off from the truth, Penny because Jason actually has a three books set on creating wealth that comes with 60 digital download audios.
Janet Portman 24:12
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Jason Hartman 25:28
It’s my pleasure to welcome Janet Portland to the show. She is an expert who has authored several books on landlording. And one of the books that we’re going to talk about heavily today is every landlords legal guide will discuss leases, deposits, fair housing laws, repairs, rent, privacy terminations, disclosures, various state laws, and she has written under the Nolo press Spanner and you’ve probably heard of no lo. I’ve used their website extensively. They’ve been around for a long time. Great company. And Janet, it’s great to have you on the show today. Welcome. Thank you very much. So let’s talk a little little bit about what landlords need to know, especially in today’s somewhat treacherous economic climate. I am sure we have seen more tenant defaults and problems with people paying the rent nowadays because these are these are just tough times out there. And my statement there is somewhat anecdotal. I don’t have any specific stats on it. But I just know from experience, what are some of the things that landlords really need to know about when when screening tenants maybe we’ll start there,
Janet Portman 26:24
okay, that’s that’s a good place to start. Because that is actually the most important part of any landlords business is choosing the tenant. If you make a mistake, then you’re setting yourself up for all sorts of problems down the line, which can not only harm but actually destroy your rental business. So it pays to spend a lot of time screening carefully. And that begins by knowing what questions you can ask and what questions you can’t ask. And what I’m talking about here is fair housing. You talk to any landlord who’s been in the business for any length of time, he or she will tell you that fair housing is the elephant in the corner. If you make a mistake with a fair housing issue, you are likely to either face a complaint from a fair housing group or a lawsuit from a disappointed applicant. On the other hand, if you don’t know which questions you can ask without fear of legal problems, you won’t get the information you need to choose the right tenants. So the most important thing is knowing knowing what you can ask in the Fair Housing context.
Jason Hartman 27:24
Right, right, Janet, I think the fair housing laws are very easy to obey and comply with and this should not be an area that a landlord ever has a problem with, in my opinion, and believe me, they don’t want a problem with this one because it’s rather serious. So what are some of the things landlords can and can’t do as far as fair housing?
Janet Portman 27:41
Well, they can certainly ask any question that has a legitimate business motivation behind it, such as, What is your current income? Will you give me the names and contact information of your current landlord and your employer, landlords can ask for credit reports. They can either even ask for more detailed reports called investigative background reports, what they can’t do actually, though, Jason and sometimes this isn’t, this is pretty surprising to most to many people. And it’s not that easy to know. They can’t ask questions like, Are you two married? In many states, they can’t ask questions like, what are the ages of the children who will live here? And what is their gender? They can’t ask questions like, this is a adults only community are you comfortable with with that they can even do things that they might think are actually well intended. Such as I see that you have children, I think he would be more comfortable in this particular area of my property that’s called steering. And even though the landlord might think that it would be better for the kids to be on the ground floor, for example, they can’t do that. So some of the questions in a fair housing context you’re right are obviously the ones that are easy to learn and avoid others. are surprisingly not intuitive. And that’s why landlords need to spend a little bit of time learning what the law is,
Jason Hartman 29:06
I have to confess, I have never heard that you can’t, I’ve never done it myself, I don’t think but I’ve never heard that you can’t ask the ages of the kids. That’s sort of an interesting one,
Janet Portman 29:17
you wouldn’t want to do that. Because you wouldn’t want to suggest your applicant, that that is a factor in your decision making. If it becomes a factor in your decision making, it gives the applicant perhaps reason to think that you may be discriminating on the basis of their family. Now, in fact, in this example, suppose you turn them down because they simply don’t earn enough to just to pay the rent. They may think that once they answered your questions about their family, that your real reason had to do with the age and sex of their kids. The fact that it didn’t is not going to prevent them from complaining, and maybe resulting in an investigation of why you turned them down. In other words, you never want to get Would anybody a reason to think that your decisions are based on anything but sound and legal business reasons? That’s why you don’t ask about the kids. You simply want to make sure that the rental is big enough for the number of people, but the age and sex of the kids is none of your business. And you don’t want to give anybody an opening to claim that you use that as a basis for rejection.
Jason Hartman 30:22
Yeah, yeah, that’s interesting. So name the protected classes, if he will, obviously, race, religion, familial status, maybe you want to go into that one a little bit, because we’ve sort of just talked about it and all the other classes and then maybe talk a little bit about the more complex or newer ones like sexual orientation. That one I think is a big one, but the other one is weight, obesity and things like that. Is that a protected class? No.
Janet Portman 30:46
Well, it is in some states, but somewhat indirectly, it is not under the federal guidelines or the federal rules, but in some states, and in particular, California, it may well be now in California, we have an old Supreme Court case But it’s still good law that prohibits landlords from using what’s called arbitrary discrimination. And arbitrary discrimination has been held to cover things like refusing to rent to people with long hair, or beards than with beards. It really in its classic form, it means refusing to rent to somebody whose personal characteristic or trait is the reason that you turn them away. So for example, somebody who is obese, that’s a personal characteristic or trait if you had a rental policy, either explicit or not, but said, I won’t rent to overweight people, you could very well be violating California’s ban on arbitration. I mean, arbitrary discrimination.
Jason Hartman 31:43
That’s interesting to know, I suppose like tattoos or piercings would fall under that. Yeah. Okay, good. So So landlords need to be careful again, these things are easy to obey, but
Janet Portman 31:53
not so easy. No, I have to tell you.
Jason Hartman 31:55
Well, you know, I think the reason once you know about it, you just got to be really smart, but I Tell me where landlords mess this up maybe and tell me about sexual orientation? Is that a protected class? Now?
Janet Portman 32:05
It is in California and in many states, but not under the federal
Jason Hartman 32:08
laws. So the federal law is the most lenient I guess we should say. And then some states add to the federal law and make it more stringent.
Janet Portman 32:17
Yes. And some cities within states become even more protective. Wow. To get back to your to your original question. The federal rules under the federal Fair Housing Act prohibit discrimination on the basis of race or color, religion, national origin, gender, age, familial status, which includes pregnancy and having children and physical or mental disability, which also includes recovering alcoholics and people with a past drug addiction. Now, again, I would say to you, those aren’t so simple
Jason Hartman 32:49
that you’re right, those aren’t so so they’re not No, they’re not interesting Genet. One of the other issues, especially in southern states or states that border Mexico, what about legal status? What about immigration? So I mean, this is all over the news nowadays,
Janet Portman 33:02
the Federal position on that is that being in the United States without permission, namely, without legal status is is not a protected class. It doesn’t fall within any of the protected categories that we just enumerated. And from a federal point of view, it’s not illegal to ask an applicant. Can you show me that you are in the United States legally. However, California is a huge exception to that. It is not legal period for a landlord in California to inquire about legal status, and there are significant penalties if a landlord does certainly Arizona does not have that protection. Nor does Texas right California does. We also saw in years past these, these statutes have pretty much gone away. We saw several cities starting with the city of Hazleton in Pennsylvania, not a border state attempt to pass a local ordinance that will Would penalize landlords, I think they would face a fine and actually lose their business license if they rent it to people who were in the country illegally. That was struck down as a impermissible attempt to enter the area of immigration law which the federal government occupies exclusively. And there were about two dozen other states, which had our I’m sorry, two dozen other cities that passed similar ordinances. A few in California, including the city of Escondido. None of them have survived. But it was it was an attempt on the local level to basically make it impossible for people who did not have legal status to rent in those particular cities. And as I say they were either withdrawn when the legal landscape became very clear, or they were thrown out by the courts.
Jason Hartman 34:50
Let me take a brief pause. We’ll be back in just a minute.
Janet Portman 34:55
Now you can get Jason’s creating wealth in today’s economy home study. course, all the knowledge and education revealed in a nine hour day of the creating wealth bootcamp created in a home study course for you to dive into at your convenience. For more details, go to Jason hartman.com.
Jason Hartman 35:18
What about advertising your your rental property, you want to make sure in the ad obviously, that you comply with fair housing and that you’re not saying things like family area or perfect area for singles or something like that. Right?
Janet Portman 35:30
Right. You don’t even want to say things like near the Catholic Church. Good point that may in fact be true. But what you’re doing is sending perhaps, a subtle message that you want people in the Catholic religion and not others to apply. Now, that would be a conclusion that would maybe be reasonable or not. The problem is that if you say that and someone decided to challenge you want it you may ultimately win. But you will have spent a lot of time and trouble fighting defending yourself. So you want to avoid even getting entangled in any kind of a claim.
Jason Hartman 36:06
Very good point. What else about advertising the property besides fair housing laws?
Janet Portman 36:10
Well, you want to make sure from a practical point of view that you give enough information to whoever’s reading the ad, that they will self select and not bother you. Right. And it’s a, it’s a delicate balance to reach the market that you really want to rent to, and not exclude people whom you might ultimately want. And at the same time, make sure that you don’t get diluted with people who aren’t suitable and who just take up your time.
Jason Hartman 36:35
So how do you how do you do that? Yeah,
Janet Portman 36:37
well, you want to certainly give the you want to give the rent. You want to explain what the amenities are, if any, you want to make sure that if you were rental is, for example, in an area that has great shops and restaurants that you mentioned that you want to make sure that if you if the town has an outstanding school system, you mentioned that, you’d want to Make sure for example that if you are near a major employer, you’d want to highlight your proximity to that employer. And if that employer has a housing office in which they help their newly arrived employees find housing you want, you probably want to work with them. And the same would go for university.
Jason Hartman 37:17
So you want to you want to self select because you get a lot of calls in these rental ads. So it’s good if they self select and you tell a lot about the property in the ad, of course, keeping in mind fair housing laws and making sure you don’t skip over those.
Janet Portman 37:30
And you want to make sure that you you state the deposit which can be quite a bit of money these days, many states, most states limit the amount of deposit but it’s not uncommon to ask for twice the monthly rent and in many states that’s perfectly legal. When you add that to the first month’s rent, we’re looking at several thousand dollars in many cases. And and if you require a deposit of that size, you should say so so that people who don’t have it aren’t going to call you and take up your time.
Jason Hartman 37:56
My understanding at least with California I believe, although I haven’t dealt with this directly in yours is that an unfurnished property you can have the first month’s rent plus two months is the highest allowable security deposit. And then if it’s furnished I believe it’s although I’ve never rented a furnished property, it’s three months rent right as the security.
Janet Portman 38:15
That’s correct. And if by chance your tenant has a waterbed, it’s hard to leave. So many people still have these days. But you can add you can add another half month’s rent to the deposit in either furnished or unfurnished.
Jason Hartman 38:28
That’s interesting. Can you do it with a fish tank or anything like that? No. Okay, just a water bed. Right? And what about in other states? Those vary a lot?
Janet Portman 38:36
Yes, they do. Some states don’t set a limit at all. And when that happens, the market will limit what you can ask for. If you ask for much more than a couple months rent, you just aren’t going to get people because that’s just too much money. And some states specify only one month’s rent. It’s important to know what you can ask one of course you can find out by looking at the 50 state charts in every landlord. Legal guide from Nolo, which gives you that precise information.
Jason Hartman 39:03
Excellent. Well, I had one tenant who applied to me I remember this many years back where he had just recently declared bankruptcy. And he wanted to pay me the rent like six months in advance, not a security deposit, but advance payment of rent. Can he do that? Can I accept that?
Janet Portman 39:19
Jason? It depends on the state. Now, was this by chance in California? Yes, it was. Well, California specifically does allow that. It allows the landlord to collect up to six months rent in advance. Honestly, I’m not sure whether the the statute was written with this situation in mind. But I do know that it’s written in a way that makes it legal for the tenant to make the offer. I’m not sure it’s legal or it was intended to allow the landlord to make the demand. But in California, there is a specific provision allowing the tenant to do that. But you know, that there’s a there’s another way that that that situation could be handled, that would be certainly safer. For the tenants, because suppose the tenant puts that amount of money, give that amount of money to the landlord. And then after the second month, the landlord lets the place deteriorate, or there’s some major habitability problem that the landlord doesn’t deal with. And the tenant is entitled to leaves and wants to leave. If he does leave, he’s got to sue to get his money back. I mean, giving you six months rent in advance with a lot of a lot of risk that the better thing to do would be to put that that rent money into an escrow account in a bank with instructions to release it to the landlord on the first of every month.
Jason Hartman 40:37
Yeah, that definitely shifts the power in the landlord’s favor in that situation, no question about it. He What do people need to know about renting a property that’s still occupied? Can they show it can they get gain access? What I’ve done sometimes over the years is I’ve just sort of bought the tenants cooperation, saying I’ll give them a rent reduction if they helped me lease it to a new tenant. Sometimes I’ve had that I’ve seen it written into leases in advance that upon their last 30 days. of occupancy that they’ll agree to cooperate with showings of the property. And I’m sure this varies state by state,
Janet Portman 41:05
you need to do both. You need to find out what the rules are in your state for access to rental property. And many states are very, very specific. They specify how much notice you have to give, when you can enter, and for what reasons. And in California, in fact, there’s even a separate set of rules regarding showing it for the purpose of selling or renting to new tenants. So the first thing you need to know is what the structure is in your state. After that, there’s absolutely nothing wrong with saying within this structure, I appreciate your cooperation. I know it’s a hassle for you to have people coming in and to compensate you for the aggravation and annoyance that this will cause I will reduce your rent by a certain amount. That is a very smart thing to do, because there’s nothing more like the kiss of death than to show prospective buyers or tenants. property that has resentful people living there Already, what gets communicated is, you know, not the nice granite countertops, but the messages this landlord is a pain in the neck to deal with and you’re likely to lose those prospects. So what you need to do is both you need to know the law in your state for entering occupied property and then you need to put on your street smarts hat and, and get the cooperation of your current tenants by compensating them for the aggravation of treats into their house.
Jason Hartman 42:28
What should people know about dealing with tenants and accepting and rejecting applications?
Janet Portman 42:33
The most important thing to know is that if you have ordered a credit report or a background report, but most people are really just dealing with credit reports, and if you decide to reject somebody based in part or wholly upon what you read in the credit report, you have to send them a federally required notice called an adverse action notice it has to have specific language in there appraising the tenant of the basis for your decision and where they can get more information. We have such a form in every landlords legal guide. And it’s very important that you follow that rule and send that letter. If the credit report played any part in your decision to reject or impose a higher, higher rent, or increase the security deposit or do anything negative with respect to that client,
Jason Hartman 43:22
I’ve always said that landlord should keep all the applications they receive from a tenant and some people just kind of throw them away for their shredding them because they’ve got confidential information on them. And they only keep the application of the tenant they’ve accepted. I believe that the best practice is to keep all applications in that file, right?
Janet Portman 43:39
Wrong. Oh, really? Oh, no,
Jason Hartman 43:42
no, there’s no Oh, is it because every landlord’s legal guide you know what the federal I know what you’re gonna say? Yeah, I didn’t think of that
Janet Portman 43:49
federal disposal rule. That’s what it’s called. And employers and landlords are required to get rid of material like that. Applications and credit reports when they are no longer needed. Now that of course raises the question. At what point are they no longer needed? Right? Quite arguably, the tenant you rented to five years ago has been gone for four years, is not likely to be a part of your business life ever again. And you not only need to get rid of his file, you need to do so in a way that will ensure that it can’t become the subject of identity theft, right? Yes, read it, shred it. Or if you have all that information on your computer, you need not just delete it, because we all know that deletion is never really deleted. You need to use a program that will wipe the disk. It’s very important that you that landlords know about that rule and constantly go through their files and get rid of information that’s no longer needed.
Jason Hartman 44:50
Yeah, you know what? Yeah, yeah, I would just want to tell you where I got that from. I remember years ago, I used to be a member of the apartment Owners Association and they said keep all applications but this was before For the big movement on identity theft and privacy, and all of that stuff was really before that all came about. And their their thinking was that if you turn down a tenant, you should be able to produce or at least refer to that application and say, Look at these were the reasons and you should write notes on the application as to why you didn’t accept that tenant.
Janet Portman 45:18
Well, that’s true. But the disappointed tenants have only under federal law two years in which to bring the lawsuit. So once that statute of limitations has passed, there’s really no reason to keep it.
Jason Hartman 45:29
Do people Janet insulate themselves from a lot of these problems when they hire a property manager? I mean, I know the law the agency is but the nice thing is it puts a third party in between them and the tenants. So they’re not making any statements to the tenant and they’re not asking their manager, what is their familial status or anything crazy like that, that would that make them discriminatory? Talk to us maybe a little bit about using property managers and how that impacts the whole thing?
Janet Portman 45:55
Well, the value of a property manager from a liability point of view is not so much that you Got a firewall, because oftentimes you don’t the law of agency in principle is very, very tricky. You might think that because you’ve turned the whole show over to a management company, you’ve got a firewall and you might be find yourself in particular situations, sadly disappointed. The real value in terms of liability is that you’ve got somebody else’s insurance policy to respond, if something that the management company does blossoms into a claim or a lawsuit. If you pick the right insurance management company, they are insured, you yourself should be insured, so that any unpleasantness that follows from what the management company has done or not done is at least handled by your insurance companies. In the end, you know, who actually ends up paying the judgment or the settlement. As I say, it’s not always very clear that you have protected yourself by hiring somebody, but it hardly it really doesn’t matter that much if you’ve got a policy that’s going to pay
Jason Hartman 46:58
so you’ve got their areas. and omissions or professional liability insurance, that’s what you’re referring to. Right? Right. Anything on finders fees for people that are not using a manager and they’re wanting to get some help and renting the property. What I’ve seen a lot of times is people will use like a handyman that they have a good relationship with and have the handyman put up some signs for him and maybe help him find a tenant and kind of that kind of thing and pay him a finder’s fee. Is that legal to do that? I’ve never really known the answer, but I’ve heard about people doing it.
Janet Portman 47:27
Yeah, it is legal. You’re basically paying somebody to find you, you know, a client, a tenant, where it sometimes gets tricky is sometimes there’s an attempt to provide that the fee will be clawed back so to speak, will be forfeited if the tenant turns out not to, for example, honor the terms of his lease, you know, by breaking it and leaving early. In other words, landlords get a little get a little greedy in the sense that they say okay, I’ll pay you this fee, but only if everything works out. Of course, you know, the person who’s done the finding, may not have done the screening. So how how was your hand Man good to know that this person has a background that you didn’t check out thoroughly and the person ended up being a bad tenant. So that’s where it gets. That’s where things get get tricky, but there’s nothing wrong with paying somebody to advertise and bring you somebody. I think as a responsible landlord, you have to realize that at that point, whether you rent to him, this applicant or not, it’s your responsibility and, and not not something that you can put on the shoulders of your finder,
Jason Hartman 48:26
right? And so that finder that maybe handyman or whoever it is, doesn’t have to have a real estate license or anything like that. Right. Right. And you can pay them $200 or something to find a
Janet Portman 48:36
tenant, right? I think so. I mean, there are states that require management companies or resident managers to have either a license or be working directly under the wing of a licensed person, but if you’re really just talking about doing nothing, bringing me an applicant, I doubt that that would fall within those rules. What about co
Jason Hartman 48:56
signers on the subject of having a cosigner I find this little lot in student housing type of properties where the student goes away to college student rentals can be extremely lucrative for landlords because the rent to value ratio is very high in some cases and the student that’s renting the property there, they are harder on the property, there’s more maintenance to consider usually, but they also don’t have any credit. Usually they they they’re just a new adult and they don’t have a credit report and people worry about them being flaky and they want to get their parents to co sign the lease and a lot of parents are more than willing and understand that it’s fairly normal to cosign, but if they do cosign, can you really hold them to it?
Janet Portman 49:35
Well, if you’ve done a proper cosign agreement, yes, the one in every landlords legal guide is, is inclusive and it does the job. The The important thing to remember as a landlord is that if you’ve got a parent who lives in New York, and the kid is going to school in Arizona, you’re not going to be able to easily go after the assets of that parent in New York. Unless either you’re willing to go to New York to serve them with papers for the lawsuit, or you’ve done what we do in every landlords legal guides agreement, which is to make the child, the agent for service of process for the adult. Oh, that’s a little loyally trick. Yeah, you didn’t mention at the beginning of your, of my introduction, but I am a lawyer. And that enables you to serve the child, which which brings the parent into the lawsuit, and then they do have to respond or they they will find themselves with a default judgment against them. So that’s one way to deal with an out of state out of state parent. The other thing you would want to make sure about is that the out of state parent actually is worth something. So you would need to in a sense, screen your cosigner at least financially, as carefully as you screen your tenant you’d want for example, tax returns. If that parent doesn’t have any money, they’re not going to do you any good even if you can’t,
Jason Hartman 50:58
right but a guy I do have to really compliment you that agent of service little oily trick there, you just mentioned is absolutely brilliant. Thank you for sharing that. That’s really, really something good. So co signers, you can check their credit report and they they sign the lease and then sign this addendum that you talked about. Right?
Janet Portman 51:14
Right. He agreed to be financially responsible for the consequences of financial consequences to the rental.
Jason Hartman 51:21
Let’s talk a little bit about the bad side of it. And I just have to comment that in in 23 years of being a landlord now myself, I find that people really overplay some of the bad sides of it, but it can happen you’re the attorney so you’re obviously the careful person and one that doles out all the caution as as you should, but let’s talk about evictions, and and maybe about collections after evictions, too. When things go wrong. What should a landlord do? How do they do it? They serve a notice they can hire an attorney service to do this. What should they know about that part?
Janet Portman 51:57
Well, if the rent hasn’t been paid, for example, The tenant apparently has a dog and the lease says no pets, the first thing they need to do is contact the tenant. And if the tenant isn’t willing to immediately pay the rent or get rid of the dog, the first step in any eviction process is service of a, of a notice of legal notice. That tells the tenant that if they don’t pay the rent, or get rid of the dog within the legally specified amount of time, and it varies by state, that the landlord will proceed with an eviction. landlords who don’t take that necessary first step and go right to court will find that they’ll have to start all over, they’ll waste a lot of time and money. What landlords also need to keep in mind is that in almost every state, if they when they actually get to court, their case is going to be put ahead. It’s going to jump the line of all the other civil cases, almost all the other civil cases, it’s going to go through much faster than a personal injury case, that contracts us between businesses. And that’s it. that’s intentional, and it’s legal. It’s what enables them to get into court quickly, although it may seem rather long as the tenant fights it, but it’s certainly much, much faster than any other civil case. Now, the thing they need to remember, though, is that the price they pay for that expedited trip through court is that they have to follow their state’s rules very, very precisely. And if they don’t, they’re going to have to stop and start all over. Which is why it’s very important to start right by serving the termination notice according to law, and then handle the eviction correctly. If they live in California. They can use no Lowe’s book on how to file an eviction which has all the forms with instructions. There is no such book for other states, so most landlords and other states are going to have to hire an attorney. But the price they pay for fast trips to the court is that it’s a very tricky and complicated process.
Jason Hartman 53:52
Janet, this has been some great advice. Thank you so much for sharing it on the show. What would you say to wrap this all up and tell us where people can learn more?
Janet Portman 53:58
Well, people can learn a lot. About the landlording [email protected]. That’s the website of my company normal press. And there, you’ll find lots of very free articles on all sorts of issues important to landlords. You’ll also find sample chapters of the landlord and tenant books that I’ve written. You’ll see the tables of contents, the forms, and you’ll see great descriptions of the books that we’ve talked about today. Every landlords legal guide, and first time landlord, and it’s been a pleasure to talk to you too. Thank you so much. Thank you, Janet. These books
Jason Hartman 54:37
are great. Everybody go out and get them they need to be in your library. appreciate having you on the show. Janet, you’re very welcome.
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Jason Hartman 55:48
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