First check your state statutes and local ordinances to see if home-based businesses are addressed by statute or codes. Whether you should allow a tenant to operate a home-based business from your rental unit may also depend upon the type of business and the business practices involved. Some cities or jurisdictions may have ordinances that regulate certain types of home-based businesses operated from a residential property such as child care services.

Many standard leases utilize a lease clause that restricts the use of the premises by the tenant to residential purposes only. A business run from a residential property could be treated as a commercial operation and subject to requirements and limitations under applicable laws. How that would affect the landlord’s business would need to be determined regarding possible issues related to business licensure, inspections, insurance, taxes, and liabilities.

Operating a home-based business from a rental unit could be a potential violation of local zoning codes or other city codes. A landlord would need to check with local offices to determine compliance standards or restrictions on such use of the property. Zoning laws often address issues of the type of business, the size of business, business signage, the amount of traffic that may be generated, the availability of vehicle parking, the number of employees, and any unique requirements of the business.

A landlord should check with his insurance provider regarding current coverages and determine if there are restrictions or prohibitions against a tenant home-based business operating from the rental property. The landlord may need to purchase special coverage for potential liability for the tenant’s employees, guests, or customers that visit the rental property. Additionally the landlord may want to require the tenant to purchase his own special business liability insurance coverage to protect against potential liability if a client, customer, or employee was injured on the rental property.

Landlords must also take into consideration the duty of care to protect the current tenants’ rights to quiet enjoyment of the rental property, and protect against nuisance and negligent acts of others that come onto the property.

Parking issues could become a problem if your property doesn’t have the necessary extra parking and there’s not adequate street parking available.

Potentially the issue of most concern is that you and your friend don’t formalize the arrangement as a business relationship of landlord and tenant. A landlord should always keep his professional life separate from his personal life. If your friend rents from you, you are his landlord.  You should require your friend to follow the same rental procedures as any applicant – including application, fees and deposits, references, lease signing, move-in inspection, etc. You should conduct your normal tenant screenings. While there could be some potentially awkwardness in requiring your friend to furnish personal and financial information, keep in mind that you need to protect your business and comply with applicable fair housing laws and landlord-tenant statutes. Renting to family or friends should not be a problem if you communicate clearly to them that renting from you is a business transaction. The lease agreement is a legal contract between landlord (you) and tenant (your friend) with specific duties and obligations.

Your friend should understand that no special treatment can or will be given and that you require him to comply with all lease terms and conditions. You as the landlord will enforce your stated rental policies and practices in the event of a lease default by your tenant such as late or missed rent.

You should research what your state’s statutes say regarding the issue. An oral lease in most states is a legal contract enforceable against landlord and tenant if the rental term is month-to-month or for a term of one year or less. However as a practical business matter, all leases of any duration should be in writing because the written document provides a record of the terms of the landlord-tenant relationship so that lease terms and conditions can be easily and clearly understood by the lease signers, their heirs, or assignees.

Oral leases can cause problems for both landlords and tenants because many important rental issues are not covered or discussed in detail during a brief landlord and tenant conversation. A number of problems can potentially result if either landlord or tenant misunderstands the initial offering of terms and conditions of the rental agreement, misremembers or forgets certain terms during the tenancy, or one party makes false claims against the other regarding what was said in the conversation. As example, the tenant could claim the landlord made certain promises regarding rent terms or waiver of fees. A landlord would be limited in his defense of the claim because there was no writing of important rental terms and conditions.  A dispute regarding terms of an oral agreement if taken to court may end up with a decision based on circumstantial evidence, oftentimes a decision more favorable to a tenant.

In almost all states the Statute of Frauds laws require that contracts related to most real estate transactions be in writing. Real estate contracts for terms of more than one year must be in writing.

Typically landlords require a new tenant to pay the first month’s rent and a security deposit at the time of move-in. Some landlords also collect the last month’s rent as well. Whether the practice of collecting last month’s rent is a good business practice may depend upon the landlord’s business necessity and/or market conditions.  Whether that practice is even permissible for the state and local jurisdiction of his property must first be determined by the landlord.

In some states the last month’s rent is regarded as part of the security deposit. Including the last month’s rent as part of the security deposit may place restrictions on the amount, use, and accounting of the security deposit.

The purpose of a security deposit is to protect the landlord from financial damage caused by a tenant. Specifically a landlord may only recover funds from a tenant’s security deposit if the tenant has defaulted on his obligation to pay rent (owes past due rents) and/or the tenant has caused physical damage to the property that is beyond normal wear and tear allowed by statute. Last month’s rent is exactly that, the amount of money equal to one month’s rent. The money is to be used as payment of rent during the last month of tenancy.

The landlord views the security deposit and last month rent as two different types of money collections that offer financial protections against tenant defaults. However when the amount of the tenant’s security deposit is exactly the same amount as the tenant’s monthly rent, it can cause tenant confusion, misunderstandings, or conflict when the tenant is ready to move-out.

As noted above, due diligence is required to understand how state statutes address issues of deposits and rents. Some landlords mistakenly believe that last month rent can be used in the same manner as the security deposit – that is, to cover unpaid rent and property damages. If the last month’s rent is collected and designated as the last month’s rent, the landlord is limited in his use of the funds. The last month rent amount cannot be used for any other purpose other than last month’s rent.

Some tenants mistakenly believe that their security deposit can be used automatically for the last month’s rent. The landlord’s lease agreement terms and conditions should address in detail all issues regarding rents and deposits, and move-in/move-out policies and practices.

The total amount of funds to be collected must be researched. Most states limit the amount of security deposit that may be collected to an amount that is equal to one to two months’ rent. In those states that regard the last month rent as part of the security deposit, the total deposit amount that a landlord could collect would need to be split between the security deposit and the last month rent amount.

The landlord has a business decision to make regarding rents and deposits as financial protections against tenant defaults and damages.  As applicable to statutes and ordinances, should the landlord have a policy of collecting the last month’s rent at lease signing? It depends.

Collecting first and last months’ rent plus a security deposit is a significant amount of money. A landlord could feel fairly confident that he has protected his business as best he can from known risks. On the other hand a tenant after paying a significant amount of money upfront may feel that he doesn’t have to be too concerned about upkeep and move-out since they’re already paid for.

If the landlord only collects the first month rent and a security deposit, the landlord has the risk that the tenant will ride down his security deposit as the last month rent. The landlord will not have the security deposit to cover any property damage and will need to file a lawsuit against the tenant to recover monies advanced for property repairs.

There are other considerations. It can get complicated if the landlord does not have good attention to detail and utilize an adequate property management tracking system.

The last month’s rent is a prepayment of rent. If the tenant has a multi-year lease agreement or renews for several years, there must be a proper paper trail that documents the original agreement and payment. A landlord or tenant could misremember or even forget that the payment was collected.

If the present landlord arranges a sale of the property during the tenant’s residency, the landlord is responsible to provide the buyer with all the paperwork and funds accounting for the current tenants. If the current landlord does not provide complete documentation, the buyer and the tenant in residence will have a conflict at the tenant’s date of move out.

If the landlord collects the last month’s rent and the tenant renews his lease, but with a rent increase, the last month’s rent amount will not cover the rent amount in effect at the time of the tenant’s move-out. As example if the move-in rent was $1000 a month, the collection of the last month’s rent was $1000, but rent was increased to $1200 during the renewal year, at move-out, the landlord will probably be out the difference of $200. In most cases, the tenant will not be liable. Could the landlord have asked for an increase in the last month’s rent amount at the time of rent increase? In most states, unless adequately covered in the lease agreement, the landlord and tenant would have had to agree to the rent increase and increase of last month rent at the same time the rent increase went into effect rather than after.

If the landlord asks for first and last months’ rent and security deposit, many tenants will not have the money to move-in. A landlord can narrow the potential renter pool by having such requirements. A consideration also is whether the competition has such a requirement. If a potential tenant has a choice of similar rental properties, but one is more affordable, a landlord having the requirement may find it more difficult to fill his vacancy. There are also some potential tenants who will choose not apply for a vacancy even though they would have the financial resources to do so.

In some states a landlord may be required to pay interest on tenant funds held by the landlord as the last month’s rent. This requires additional paperwork and accounting on the landlord’s part.

Whether the landlord’s decision is to collect the last month’s rent or not, the landlord’s lease agreement should address how the security deposit cannot be used. As example a lease clause may state “Tenant may not without Landlord’s prior written consent apply the security deposit to the last month’s rent or to any other amounts due by this Agreement. The landlord should clearly communicate this term and condition to the tenant during orientation.

Despite the restriction of the lease clause, the landlord may receive a request from the tenant to use the tenant’s security deposit as the tenant’s last month’s rent. The landlord must decide whether he can afford to take a risk and allow the tenant to use the security deposit for the last month’s rent.

The risk that the landlord may incur is that there may be property damage when the tenant moves out and the landlord will not have any deposit to apply to repairs or cleaning. The landlord will have to absorb the costs or take legal action against the tenant to recover the costs.

The landlord could decide to grant the tenant’s request conditionally. If the tenant has been a good tenant and there is reason to believe the tenant will leave the rental unit clean and in good condition, the landlord may, after a quick property inspection, allow the tenant to use the security deposit for the last month’s rent.

Despite having options, most landlords choose not to collect a last month’s rent. To those landlords, a better business practice is to collect the maximum security deposit allowed by state statute. If the statute allows collecting more than one month’s rent as the security deposit, the landlord would be covered if the tenant skips paying the last month rent. The landlord could apply as necessary excess funds to cover any property damage or cleaning. The landlord would need to file legal action against the tenant if the damages exceeded available funds.

Employers use pre-employment screenings to quickly and effectively qualify an applicant to determine if the applicant can be advanced as a candidate for employment.

While application forms serve to collect basic applicant information, written and/or oral questions asked during pre-employment screenings provide additional information to determine if the applicant’s qualifications meet job requirements. With appropriate questioning, a pre-employment interview provides an objective basis from which to evaluate the skills, knowledge, and abilities of the applicant, work history, and experience.

The concern of some employers is how to develop questions for screening that meet permissible guidelines for business necessity.

Guidelines

There is reasonable assumption that all questions asked of the applicant during a pre-employment interview have a specific purpose and that answers to these questions will form the basis of a hiring decision. The employer should make only those inquiries necessary to determine the applicant’s eligibility for employment. All questions asked by an employer should be asked of all applicants.

The operating guideline behind any questions asked of an applicant on employment application forms or during pre-employment interviews is whether there is a legitimate business necessity for asking such questions. Employers should ask themselves:

Is the information being asked necessary to evaluate the applicant’s qualification to perform the job?

Is this question permissible on the basis of bona fide occupational qualification?

Would this question screen out a qualified candidate because of a disability before he/she can demonstrate ability to perform the job?

Will the answer to the question have a disparate effect in screening out members in a protected class?

The intent behind the questions and how the information is used by the employer are important criteria in determining whether the questions are appropriate for the initial screening process.

As a general rule, employers should not ask questions if they don’t intend to use the answers, but the overriding rule is that all questions asked should have business necessity.

Many employers develop their screening questions from the job description that details job functional tasks and responsibilities and the job specifications that describes the personal qualifications required for job performance.  The following information may be helpful in determining key requirements questions.

Requirements for job performance list minimum skills, knowledge, and abilities, also known as competencies, which the individual should already have or can be expected to have. A job specification may include requirements for the type of and minimum level of work experience and education, special skills such as foreign language or computer hardware/software expertise, industry training, certifications, or licensure.

Required skills as used in the work context may include physical abilities; technical proficiencies; vocational abilities; language and communication skills for reading, writing, and speaking; mathematical reasoning abilities; and self-management capability.

Job specification statements for competencies should clearly define the skills or abilities, the level of skill required, the range of experience required, if equivalencies may be considered as acceptable substitutes, and what context and purpose these requirements serve for work performance.

Since the screening is conducted pre-employment, the employer should determine the key requirements of the job and initially develop no more than six or seven questions relevant to the job duties and requirements. Too many questions may cause the applicant to lose interest or return a canned response. However it is in the employer’s interest to determine upfront if (1) the applicant is still interested in the job and available for work and (2) the salary range is acceptable to the applicant. If the answer to either question is no, there is no point to continuing the screening.

Discrimination

Discrimination can occur during pre-employment interviews as a result of direct, purposeful disparate treatment between applicants. This means that applicants are treated differently because of their race, color, religion, national origin, sex, disability, or age. For example, disparate treatment occurs when employers do not ask the same questions of all applicants.

Discrimination can also occur when employers engage in hiring practices that have the effect of excluding members of protected classes. While it may not have been the employer’s intent to discriminate, the employment practice has an adverse impact on members of a protected group with the effect of a disproportionally higher percentage of applicants being rejected from employment consideration.

Bona Fide Occupational Qualification (BFOQ)

In certain narrow circumstances, employment practices that would constitute discrimination against individuals with protected characteristics of religion, national origin, sex, or age are allowed when reasonably necessary for the normal performance of duties in the normal operation of that particular business. This bona fide occupational qualification exception is an employer’s defense to acknowledged discrimination. It is the employer’s responsibility to prove that the qualification required for the job is necessary for job performance and that there is no reasonable alternative with a lesser impact on the protected classes.

Employment Laws

The United States Equal Employment Opportunity Commission (EEOC) is responsible for enforcing federal laws that make it illegal to discriminate against a job applicant or an employee because of the person’s race, color, religion, sex (including pregnancy), national origin, age (40 or older), disability or genetic information. The most familiar federal laws are Title VII of the Civil Rights Act of 1964 as amended (Title VII), the Age Discrimination in Employment Act (ADEA), and Americans with Disabilities Act (ADA).

Title VII and ADEA specifically prohibit discrimination because of race, color, religion, sex, national origin, and age. Pre-employment inquiries that express, directly or indirectly, any limitation or discrimination on the basis of race, color, religion, national origin, sex, disability, or age unless based on a bona fide occupational qualification are therefore prohibited. Accordingly the employer must not ask any questions of the applicant whose answers would identify the applicant as having protected class characteristics.

Employers are prohibited under ADA from asking applicants during pre-employment interviews about a disability, including its nature or its severity. ADA requires the employer to isolate an employer’s consideration of an applicant’s non-medical qualifications from any consideration of the applicant’s medical condition.

Employers should also research their state and local laws regarding equal employment, employment discrimination, and employment screening restrictions and prohibitions. Some states have more restrictive requirements than the federal laws.

Preliminary Assessment of Candidates

The pre-employment screening is a preliminary assessment of candidate qualifications.  Screenings can be conducted by telephone interviews, face-to-face interviews, team interviews, or video interviews or a combination of screenings.

Telephone interviews are usually conducted as pre-employment screenings and are low cost alternatives to a face-to-face interview. However a phone interview can provide a great deal of information about the candidate in just a short period of time. It is an efficient tool to quickly pare down the applicant list into a shorter list of qualified candidates. Those candidates advance to the next step in the hiring process, possibly a personal interview.

Personal interviews are usually structured to allow the candidate to elaborate on his skills, knowledge, and abilities. The employer‘s goal is to discover as much as possible about the candidate’s work history and experience. The employer is also assessing what the candidate will bring to the organization and how the candidate will assimilate into the organization’s culture.

A bad hire is a costly hire. An employer will use all available screening tools to adequately assess that the applicant/candidate competencies meet job requirements and specifications.

Compensation for a resident manager may be dependent upon the manager’s duties and responsibilities, the number of hours worked, the work schedule (days and time), on-call availability, employee benefits, and comparable wages/salary paid for similar job positions in the local rental community. Compensation can be paid as a flat salary or by an hourly wage. Owners will need to comply with wage and hour laws, equal pay laws, and other employment related requirements for hours, wages, overtime, holidays and benefits.

The resident manager by definition and design is also a tenant at the property. While some owners may consider offering reduced rent in exchange for manager services, there is consensus that this arrangement is not usually in the best interest of the business or the employee. It is difficult to fully and fairly exchange hours worked for rent allowance and there can be problems with wage and hour laws, possible overtime hours violations, rent control issues in some areas, and issues associated with termination of employment. Owners should ensure all employment obligations are met regarding hours worked and compensation provided.

In some states there are regulations regarding maximum rent charges for a manager who is required to live on-site as a condition of employment. You will need to research your state’s laws regarding any such regulations.

You should make it clear to your new manager that the employment is an at-will agreement. You could legally fire the manager at any given time with or without reason as long as you do not terminate his employment for an illegal reason. Your manager also could exercise his right to quit at any time for any reason with or without notice.

Your obligations as an employer remain the same whether you decide to compensate the resident manager with a reduced rent arrangement or you pay your manager an agreed upon salary/wage and the manager pays full rent for his unit.

Once you and the resident manager have agreed upon terms and conditions of his employment it is a better practice to record all terms and conditions of the work arrangement in a written employment agreement. While an oral agreement between you and the manager regarding his employment is usually legal and binding upon both parties, a written document will help to protect against possible future disputes or claims of unfair treatment.

Remember too that the manager is also your tenant. While the employment agreement covers the employment relationship, you will need a rental agreement with your resident manager for tenancy. The resident manager should be screened to your written tenant screening standards. A month-to-month rental agreement should be drawn for the rental terms and conditions. You or the manager/tenant may terminate the rental agreement as per the required written notice per state statute. The employment agreement and the month-to-month rental agreement serve two distinct business functions and should not be combined into one document, although depending on terms of employment, it is sometimes important to cross-reference between the employment and rental documents.

Once the decision to employ a resident manager is made, your next consideration is to define the manager’s duties and responsibilities. By writing a detailed job description, you have a better idea of the skills and knowledge required for the job, how to determine the expected work schedule, and what to offer in compensation.

For many owners, the job duties and responsibilities for the resident manager are to provide customer service (such as inquiries, showings, and maintenance) and management reports. Other owners have the resident manager responsible for many rental duties such as applications, tenant screenings, tenant selection, lease execution, rents, repairs and maintenance.

A list of resident manager duties may include the following:

• Answering phone inquiries about vacancies
• Keeping business office hours per set schedule
• Showing vacant units
• Accepting applications, fees, deposits
• Screening and selecting tenants
• Conducting lease signing and new tenant orientation
• Conducting move-in and move-out inspections; completing inspection checklists
• Collecting rents and late charges
• Maintaining rent records
• Handling routine banking deposits
• Serving notices
• Cleaning vacant units
• Handling tenant maintenance requests; maintaining a service request log
• Scheduling contracted maintenance and repair services
• Providing certain maintenance work for which qualified
• Preparing business reports

The size of the property, the extent of the job duties, and the type of responsibilities may determine whether the manager’s job is a full-time position or a part-time position. You will need to determine the number of hours that the manager is expected to be on the property (e.g., office hours or maintenance work) and the scheduled hours of availability for contact by tenants.

If you haven’t already done so, you need to research state and local laws regarding real property management in general and those specific to the issue of resident managers.  In some states and cities a landlord may be required to hire a manager for rental properties having a specified number of units. Most states require that a property manager be licensed as a real estate broker or as a salesperson working for a broker who has legal responsibility for the management. However, most states allow use of a non-licensed person who legally resides on a rental property to manage that particular property, but only the property on which the person is a resident. In other words, the person cannot manage a legally separate property even if the property owned by the same owner is nearby.

A resident manager is generally considered an employee, not an independent contractor. Therefore you will be the employer of the resident manager. You will have many of the same obligations for federal, state, and local new hire reporting; fair labor standards and wage and hour laws (including minimum wage and overtime requirements); income tax reporting; payroll reporting including withholdings for Social Security, Medicare, and Unemployment taxes; Workers’ Compensation insurance; employee sick leave or other benefits; general business recordkeeping and reporting; and any other legally required employer obligations as does any other employer. Since some of these items might vary by the state, county, or municipality in which the property is located, you must know the rules for that location.

While hiring a manager can free you from many time consuming aspects of property management, it may also create work of its own. Transferring tasks to your manager does not necessarily reduce your own work load. Your work load changes from performing landlord tasks to supervising the tasks of your resident manager and deal with employment and tax law issues.

That being said, many landlords can benefit from hiring a resident manager to handle routine day to day rental operations. You set the responsibilities and duties of the resident manager according to your business needs and per applicable laws.

You should recognize that business liability risks increase as more responsibility and authority is transferred to the manager. Owners are potentially liable for violations of landlord-tenant statutes, fair housing laws, and health & safety laws and for any injury or damages that their employees cause. You must ensure that your resident manager fully understands applicable laws and performs according to compliance standards.

Employers can be held liable for negligent hiring or tortuous acts of their employees if the acts occur when the employee is acting within the course and scope of employment. Therefore you should have risk management measures in place to help protect against potential liabilities of your manager’s acts.