Monday, October 23, 2017

0224 SW Hamilton Street, Suite 301, Portland, OR 97239

Text Size

Becoming a Landlord? A Few Items to Consider

HomeSubscribePrintE-mailPdf

As local housing prices continue to fall, many people will be looking to buy distressed properties as investments.  Buying low is just one part of the equation.  landlord1
Another is managing the asset.  If you are thinking about becoming a residential landlord, an ounce of planning may prevent a house full of cure.    What type of risks do you face as a landlord?  I think there are three main categories.

Legal and Regulatory Compliance 

You should become generally familiar with the laws and regulations applicable to the residential landlord-tenant relationship.  Landlords can do much to determine the relationships they will have with their tenants by the terms contained in a written rental agreement.  However, a tenant has certain rights under the law.  Oregon’s Residential Landlord Tenant Act (the “Act”) outlines certain rights and obligations of the parties that may not be overridden by contract (i.e., the rental agreement), in addition to default rules that may be overridden by contract.   For example, the Act includes notice requirements for (i) terminating month-to-month tenancies without cause, (ii) terminating a tenancy for certain outrageous conduct (e.g., substantial property damage, injury to another tenant, selling or manufacturing an illegal substance), (ii) terminating a tenancy for non-payment of rent and the tenant’s right to cure, (iii) terminating a tenancy for violation of a “no pet” policy and the tenant’s right to cure, (iv) declaring a default of other material terms of the rental agreement and the tenant’s right to cure (v) dealing with repeat violations after having given the required notice, and (vi) dealing with a tenant’s deposit upon termination.  

There are also legal requirements for the installation and maintenance of carbon monoxide detectors (in addition to smoke alarms), the proper disclosure of smoking and pet policies, and for proper tenant screening.  Keep in mind that it is unlawful for a landlord to discriminate on the basis of any protected class as defined by federal and state fair housing laws.

General Liability  

One important consideration is whether or not to form a limited liability entity through which to conduct business as a landlord.  By doing so, you can limit your general liability exposure.  General liability includes events such as personal injury to a tenant or guest of the tenant while on the rented property.  General liability should be distinguished from contractual liabilities.  Contractual liabilities can be limited to the extent the obligations are not personally guaranteed by the owner and to the extent company business is conducted in a manner wholly separate and apart from that of its owner.  The most common business entity used in Oregon for residential landlords is the LLC (limited liability company).

The first line of defense to general liability exposure, however, is adequate insurance.   Landlord property insurance ordinarily includes coverage for (i) damage to the property, (ii) damages the insured may become legally liable for, (iii) the cost of defense (legal fees and expenses), and, in many cases, (iv) lost rental income.  A good insurance agent familiar with this type of policy is a great asset.  

Counterparty

The third category of risk arises out of a party’s failure to perform his or her contractual obligations to you.  This can be managed though proper tenant screening and otherwise performing the appropriate due diligence with respect to contractual counterparties.   If, for example, you choose to do business through a property management company, make sure that you have a minimum comfort level with its reputation, its procedures and its personnel.  After all, a property manager is acting as your agent when dealing with your tenants.