We provide here a few questions that have been posted in the Community Forums and our answers to them.
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I have a prospective tenant who wants to do a lease/option. The couple advised me that they intend to declare bankruptcy in a month or two due to $200,000 in medical bills (open heart surgery). Am I nuts to even consider them for my house? What effect will the bankruptcy have on their requirement to pay rent? If I need to evict them will they be protected in any way?
I would appreciate any advice.
You might be nuts if you consider renting to them before they actually file for bankruptcy with the Court, as listing you as a creditor may result in your losing anything owed to you at the time of filing, whether they file in a month or a year. How their filing might otherwise affect you will depend on a number of factors including which Chapter they file under. A bankruptcy will require you to file a Court action to remove the stay as it applies to rent. There are a number of factors that can change what happens between the time of filing and final disposition.
After the bankruptcy is filed (usually a few months) they may be your best potential tenants because they can’t file again for a relatively long period thereafter, whereas, tenants who have not yet filed can file at any time. However, you would still need to know the details of the bankruptcy. For example, if a Chapter 11 or 13, can they afford rent on top of the Court-mandated payments to old creditors which can last for years?
Keep in mind that the idea of them paying you a lot of rent in advance, in the unlikely event they are even able to do so, in order to cover the pre-bankruptcy period has three potential problems. First, some states limit the amount of advance rent a landlord can require, second, they may not file until after that advance rent is used and they owe more, and third, the Bankruptcy Court could consider it an attempt to defraud other creditors and make you turn part or all of the funds over to the Court. Regarding the last item, a bankruptcy filing includes providing information about certain expenditures within a period before filing and rent paid in advance could technically be an asset for the tenant. The risk depends on a variety of factors including the honesty of the tenants.
Regarding doing a lease/option, keep in mind that the option might be considered an asset by the Bankruptcy Court, meaning any option payment could be treated as was discussed regarding advance rent above, or the contract itself could theoretically be assigned to someone else if it really had value (e.g., values increased significantly during the period of time that the bankruptcy action was in Court).
Most of the issues raised above and certain others potential problems probably have a low probability of occurrence, but they theoretically could cause you some stress, extra work, and/or financial loss.
The bottom line, unless there is absolutely no other possibility of finding an acceptable tenant, you should avoid doing the deal.
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I have a house which was being rented out to 2 people as unrelated roommates One of the individuals gave us a check for his half of the June rent and then it bounced. The other individual has stated that the pair had an argument and that she hasn’t seen him for weeks even though his belongings are still in the house. She is currently looking for a new roommate, but my problem is as follows: I know that she can’t make rent on her own, but if I do allow her to get a new roommate when he still has items in the house what kind of issues could I face? His name was placed on the lease as an afterthought and we neglected to have him complete an application initially (a rookie mistake). She filed a missing persons report on him but the police closed the case on the word of one of his previous co-workers.
There are several issues. One is collecting the rest of the rent. Another is terminating the tenancy of the departed person. Yet another is the personal property left behind by the departed person. I am limited in discussion of all the issues in this forum, but will give you some things to consider.
Regarding collection of the rent, a good lease makes each tenant jointly and severally liable for the entire rent and the statutes of some states accomplish that whether or not the lease contains the desired clause. Accordingly, depending on the facts of the lease and/or state law, you may be able to serve a “pay or quit” notice on the remaining tenant, evict her if the amount is not paid, and obtain a judgment against her for the total of unpaid amounts, including any damages to the property.
In most cases, even if you choose to not pursue the remaining tenant at this time, she may remain liable for the missing rent and any damages, depending on the original lease and what you do when allowing a new roommate in.
Unless the departed tenant has done something showing his intent to terminate tenancy, you may have to evict that tenant in order to obtain legal possession so that you can lease it to a replacement. Unless you have legal possession, the tenant could potentially later return and claim right of occupancy.
That will require being able to (1) serve him with a pay or quit notice, which is possible to do in some states without actually finding him, and (2) serve him with the complaint & summons, which will usually require locating him.
Whether there is a need to evict the missing tenant is an issue depends on the law of your specific state and various facts of the matter. For example, if a creditable witness would testify that the person stated his intent was to break the lease and not return as a tenant, you would have a defense in court. As another example, removal of all belongings would have shown intent.
Similarly, how the departed tenant’s personal property must be handled depends on whether the person intended to abandon it and whether you can prove such was his intent. Each state has different abandoned property laws and they vary significantly among states. Some states allow the landlord to dispose of it as the landlord wishes, while other states require specific procedures be followed including secure storage, publishing of legal notices, public sale, and/or other specific items. Again, if the departed tenant intended to abandon the property left behind, there may be no problem. However, tenants who leave belongings have been known to return and claim that junk the landlord disposed of was actually valuable antiques
The bottom line is that a landlord must know the laws of his/her state regarding the various issues. How much a landlord must be concerned about issues such as I’ve raised depend not only on the laws of the state and the facts of the matter, but also on tolerance of risk.
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My partner and I split everything related to operating our rental property 50/50. Recently, I’ve been having to contribute more money to capitalize the business. We’ve agreed that we’ll pay me 8% interest on these contributions. This will be paid when the building sells. Also, my wife and I seem to be doing more hands-on work at the apartments. My question involves how can our agreement be restructured to make it fairer for the partner who does more hands-on work. I’m not interested in keeping track of every minute of work.
First, there is the question of whether title to the property is vested in a partnership or simply co-owned as tenants-in-common (TIC). Many times people own real estate as TIC, but consider themselves partners. For certain issues, there can be differences.
Second, I will comment that there is a difference between a capital contribution and a loan. Whether or not the difference matters and how much it matters depends on the structure of your partnership. Issues of importance can include current capital accounts and how (1) cash flow, (2) profits & losses (not the same as cash flow), and (3) upon sale, how gain and depreciation recapture are allocated.
Third, the interest being paid to you (or will be paid) may or may not be deductible to the partnership. This depends on whether you are loaning all the money to the partnership as an entity or part to your partner as an individual so that he can make his share of contribution to capital. If to the partnership, remember that you will be paying your share of the interest and that the interest will be taxable to you based on the full amount received. If it to be a loan to the partnership, it is important that it be well documented to avoid having your partner and/or the IRS call it a capital contribution.
Fourth, if the interest is accruing until the time of sale, it will not be deductible during time of ownership unless the partnership is utilizing accrual rather than cash accounting, accrual being unlikely. Also, you must be sure that the interest rate being charged doesn’t violate any usury law of your state, particularly if compounded, as compounding can create a usurious loan out of an otherwise legal one.
Fifth, you need to be careful how you and your wife compensate yourself for labor, as this will potentially open up issues regarding income tax, self employment or social security taxes, workers’ compensation insurance, unemployment insurance, and other issues pertaining to employment laws. There is also the issue of whether the labor costs are deductible to the partnership and this will depend on a number of factors, including how it’s handled. You should clear your plans with your accountant.
Sixth, there are an infinite number of ways in which the partnership could be restructured and further discussion of the subject is way beyond this format. You should consult a competent business attorney regarding the matter.
The bottom line is that, as with many things, nothing is every as simple as it seems and the devil is in the details, particularly when income tax issues are involved.
Finally, I would comment that you should seriously consider vesting ownership of each separate rental property in a separate limited liability entity (typically a LLC) in order to limit your losses to only your equity in a single rental property in the event of a judgment by a tenant that is in excess of your insurance coverage or for an event not covered by your insurance. Otherwise, every asset (current and future) as well as future income of each partner is at risk of loss to satisfy the judgment. Any good attorney should be explaining to you why it is extremely important that you do so. An LLC can also provide more flexibility regarding certain income tax issues than can a partnership.