If you’ve been renting or looking to rent for a while, you’ve probably come across the “3x rent rule.” The 3x rule is a common way landlords and property managers vet potential tenants. It states that a tenant’s adjusted3x rent rule gross income, or take-home pay, should be 3x the proposed rent on a property.

Adjusted gross income is your total monthly income minus any deductions, like taxes, alimony, interest from student loans, contributions to an IRA or 401k, or a car payment.

If we look at a property with a monthly rent of $2,000, for example, the 3x rent rule states that a tenant must have a gross monthly income of $6,000 or $72,000 annual salary to qualify for that rental. The income itself can come from wages, dividends, capital gains, or retirement accounts.

The rule generally applies to household income, so a couple’s combined annual gross income must be 3x the monthly rent amount. But in many roommate situations, the landlord will require each roommate to meet the 3x rule separately to ensure that they still have a viable tenant if someone decides to move out.

While this can be a headache for prospective tenants, especially in areas where rental rates outpace average income, the 3x rule protects landlords from missed payments and helps prevent evictions.

Background: Housing Act of 1937

The 3x rule originated in the Housing Act of 1937, which was part of FDR’s New Deal. The Housing Act offered housing assistance to low and moderate-income families.

The Act was originally proposed in 1934, but wasn’t passed until FDR’s second term. In his second inaugural address, President Roosevelt promised to make adequate housing a priority and signed the act into law in September of 1937.

Section 8 of the Housing Act offers federally-subsidized rent assistance to families in the private market. Section 8 requires families to pay 30% of their adjusted income toward rent. The program then covers the gap between 30% of their income and the actual rent cost.

This eventually became the standard rent-to-income ratio for the housing market.

Why the 3x Rule? Prequalifying Prevents Evictions

Section 8 explains where the 3x rule came from, but why do we still use it? What if an individual can afford to spend 40% of their income on housing? Shouldn’t they be able to qualify for a more expensive rental?

Though it can have drawbacks, the 3x rule is an important part of the prequalification process. It is not one-size-fits-all, but if your income is 3x larger than the rent, you are less likely to miss a rent payment or regularly struggle to afford rent.

Evictions are horrible for everyone involved. Tenants are thrown into temporary turmoil at best, and homelessness at worst. The property owner loses money from missed rent and spends time, energy, and resources pursuing an eviction and back rent.

Pre-qualifying tenants can help minimize the likelihood of an eviction, protecting the tenant and landlord from pain and heartache. The 3x rule benefits both parties by ensuring the tenant doesn’t get locked into a lease agreement that they can’t afford, and that the landlord receives their payments on time.

Ideally, landlords and property managers will use the 3x rule as one part of the prequalification process, but also run a credit check, talk to references and previous landlords, and verify employment.

Meeting the income requirement is only one piece of the puzzle.

How Landlords Can Verify Income

Gathering proof of income can be a lot of work for an independent landlord. Tracking down income verification documents, bank statements, and making phone calls eats up a lot of time, but again, the goal is to3x income prevent evictions. Finding the right tenant upfront will save you time and money down the road.

We have compiled a list of items to check with different types of tenants—employed, self-employed, and retired—to simplify the verification process for you.

Employed Applicants

Verifying income for employed applicants is the simplest, but you can also find excellent self-employed and retired tenants. Just be prepared to do a bit more legwork

For employed applicants, ask for pay stubs from the past 3 months. This will give you an accurate picture of their current earnings and cover a long enough period to reveal any fluctuation in income.

W2s show total income from the previous year. W2s can indicate how financially stable an applicant is and if their earnings are consistent. If the applicant has changed jobs, however, this may not be particularly useful.

Lastly, a simple phone call to the applicant’s employer will offer insight into their employment status and character. Consider asking what the applicant is like as an employee. Do they show up on time, work hard, and get along with their coworkers?

3x rent for self employedSelf-employed Applicants

This group of applicants includes freelancers, gig workers, and entrepreneurs. We value and admire our freelancers and small business owners, until they want to buy or rent a home.

We often perceive small businesses as more susceptible to market changes—they may not have the financial stability to weather dips in the economy. This perception can make it difficult for self-employed individuals to get approved for a rental or home loan. But it doesn’t have to!

Plenty of industries that provide consistent and stable work to freelancers and gig workers. Just because a business is small, doesn’t necessarily mean it’s vulnerable. Even large companies can go through periods of financial struggle and layoffs.

If you are willing to do a bit of initial research, you may find yourself with an amazing, reliable self-employed tenant.

Bank statements from the applicant’s business account will give you the most comprehensive information about their earnings. Look for consistent deposits, and make sure that expenditures don’t exceed their deposits—this could indicate a lack of profit.

Talk to the applicant. Ask them how long they have been in business and what services they offer. You can also ask about industry stability, or research the industry yourself once you have a bit more information.

Research the business. Are they registered with the state government? Do they have a business license (if one is required)? Colorado Springs, for example, only requires licenses for specific industries, like food and liquor. Also, see if they have a professional website.

Checking the applicant’s credit report will reveal any red flags, such as a history of late payments, or any bankruptcies or foreclosures. You’ll also want to pay attention to balances on loans and credit cards.

Previous landlords are a great resource for any potential tenant, not just self-employed ones, since they can answer questions about payment history. Most importantly, ask if they would rent to the tenant again!

Unemployed or Retired Applicants

It can be difficult for retirees and the unemployed to qualify for rentals, since the same pre-qualification standards are used for all applicants. They may not have a consistent income, or may not have the necessary verification documents. Here are a few examples of documents to ask for in this situation.

Social Security statements are a great place to start, as Social Security provides a steady source of income for retirees that can be easily verified.

Ask for annuity statements. Many retirees rely on annuities to replace their paychecks, and this income can also be used during the verification process.

IRA, 401k, or pension distribution statements can also help verify income.

Bank statements will reveal any consistent deposits that are not listed on the previous types of statements. They may have another way to supplement their income that does not fall into any of the previous categories.

If you have an unemployed applicant, ask them to provide unemployment statements. These statements act as proof of income from the government.

Qualifying When You Make Less Than 3x

We mentioned at the beginning of the article that the 3x rent rule can make finding a place difficult. In many markets, wages do not keep pace with housing costs. Unfortunately, our own lovely Colorado falls into this category.

In 2019, the Denver Business Journal published an article, saying that the average wage earner in Denver cannot afford to buy a median-priced home. For workers making $65,000-$75,000 a year, over 40% of their income would go toward their mortgage.

Home and rental prices are continuing to climb, leaving prospective tenants without many options. Some will seek out roommates, hoping to pool their incomes to meet the 3x rule. This doesn’t always work. Many landlords and property managers will expect each tenant to meet the rule separately.

This is an understandable precaution since roommates can move out without notice, but where does that leave you? If you are hoping to rent with roommates, a private landlord may be more flexible with income requirements than a property manager or institutional one.

You can also work to strengthen your rental application in other ways to compensate for your financial situation. Having a good credit score is especially important in these situations since it demonstrates that you pay your bills on time and take your financial commitments seriously. Adding a cosigner or making a larger security deposit can convince a landlord that you are less of a financial risk.

Some rentals don’t require an income check. If you know you can afford a house or apartment, but don’t meet the 3x rule, this may be an ideal situation for you. Just be careful not to overextend yourself financially.

Rely on word of mouth to locate a private landlord that will consider your application. Think about the Kevin Bacon effect. If every actor can be linked to Kevin Bacon in 3 steps or less, someone in your network can put you in touch with a suitable landlord or point you toward an apartment in your price range.

Find a roommate already in a lease, which will eliminate the need for you to pre-qualify. Make sure that you have a written rental agreement with your roommate, laying out terms and financial responsibilities.

Also, if you can’t afford rent in your home city, Section 8 was made for you! In general, your household income cannot exceed 50% of the median income in your area to be eligible. You can check out our blog post, “What is Section 8?” for more information.

Takeaways for Landlords and Tenants

The 3x rule is a good general rule of thumb for landlords to protect themselves from missed rent and the messy process of evicting a tenant, but it is not a perfect solution. A tenant may miss payments for reasons other than an inadequate income, or a tenant that wouldn’t normally qualify, may be perfect for your situation.

If you are a private landlord, think about rental costs in your area vs average wages. If it is not a favorable ratio, consider how you might compromise with potential tenants without putting yourself at risk. Maybe you’re okay with roommates pooling their incomes, or would accept someone with a lower income level if they paid a higher deposit?

If you are a prospective tenant with a lower income, focus on strengthening other key parts of your application, such as your credit score. You can also brainstorm people who might be willing to cosign for you, such as a trusted family member.

And, of course, ask around! There are private landlords that are willing to work with a good tenant, even if they don’t meet the 3x rule.

colorado eviction processThere are a lot of misconceptions and misunderstandings about the Colorado Eviction Process. Because the process is very specific, failure to understand the appropriate steps can add significant time to the eviction.

The pandemic of 2020 and subsequent eviction moratorium has also made the colorado eviction process even more confusing.

If you are involved in residential leasing as a Property Manager, Landlord, Property Owner, or Tenant, you should understand your rights and responsibilities in the State of Colorado.

We will provide a comprehensive overview of what the eviction process within Colorado entails. As an aside, you'll often see eviction referred to as "forcible entry and detainer" (FED) when it comes to Colorado statutes, so keep that in mind.

The statewide moratorium on eviction cases is set to end on June 30th. 2021. The formal legal process should return to normal after this moratorium is lifted.

Under What Circumstances Can a Tenant Be Evicted in Colorado?

First of all, if you're going to go through with evicting a tenant via termination of their lease before the end of their lease term, you'll need to have a sound legal reason.

The most obvious and most common reasons for eviction will be for non-payment of rent. Colorado law also allows for the violation of a condition of the lease or rental agreement as a reason for eviction.

Eviction filings based on a lease violation happen when a tenant refuses to follow the guidelines of the lease. For example, they are failing to adhere to the covenants in a community with an HOA. Other situations that can result in eviction are violations related to issues like an unauthorized pet violation or undisclosed roommates. Colorado landlords and property managers do see a lot of lease violations around growing marijuana in a rental property.

In Colorado, the tenant can also be evicted in the case of a public trustee sale. If the tenant commits a violent criminal act or is involved in a drug-related activity (referred to as a substantial violation), this also provides a legal basis for eviction.

What Reasons are Not Sufficient to Pursue Eviction?

Of course, there are also protections for the tenant against unfair eviction.

For example, a landlord or property management company cannot attempt an eviction in response to the tenant filing a complaint about a violation of what's called the implied warranty of habitability. This is laid out in the Colorado Revised Statutes in Section 38-12-509.

What is the implied warranty of habitability? It's simply a fancy term for how livable or unlivable the apartment is. If a tenant complains living conditions are poor, they can't be evicted for this reason, though in this case, the burden of proof is on them.

A federal law, the Federal Fair Housing Act prevents eviction of a tenant on the basis of race or color, religion, national origin, familial status, or sex. When you get into issues involving the Federal Fair Housing Act, it’s a good idea to seek legal advice.

It also covers disabilities: if the person requires a service dog, this need overrides any pet restrictions present in the lease. Colorado state law also provides protection against discrimination on the basis of ancestry or belief systems, marital status, and sexual orientation.

Depending on what city in Colorado the property is in, there may be additional protection.

How Much Notice Am I Required to Provide?

Colorado eviction laws mandate that you must provide your tenant with 10 days' notice. Previously, the requirement a 3-day notice, but this was changed in May of 2019. Obviously, it's important to take note of this recent change, especially if you have been a landlord for years and are used to the notice requirement being only 3 days.

In the case of a failure to pay rent, you must provide a 10-day notice - a period of 10 days in which the tenant is permitted to pay rent - before you can go forward with the formal eviction procedure.

What Does the Colorado Eviction Process Look Like?

If the eviction is due to unpaid rent, the first step in the eviction process is to post a 10 Day Notice, usually on the front door of the property. While most leases have language that talks about when rent is due and when it’s late, the notice can be posted as soon as the rent is late. You will deliver or post in a visible location, usually on the entry door, either a Demand of Compliance or Possession Notice (JDF 101) or the Notice to Quit (JDF 97).

These notices should also provide the reason for eviction to the tenant. Both forms can be downloaded at this link: https://www.courts.state.co.us.

Once notice has been served, the ten-day period must elapse. However, if the last day of this ten-day period is either a Saturday or Sunday or a legal holiday, the period will be extended an additional day. This means ten full days are required, not including weekends or holidays, after issuance of either a Demand of Compliance or a Notice to Quit before pursuing an eviction.
If the 10-day period elapses without a resolution, you'll continue the eviction process by filling out the Complaint in Forcible Entry and Detainer (JDF-99) form.

You'll also have to fill out the Summons in Forcible Entry and Unlawful Detainer form (CRCCP Form 1A) and the Answer Under Simplified Civil Procedure form (CRCCP Form 3). Of course, you'll have to pay filing fees of around $97, plus the cost of producing copies for the defendant or defendants along with the court.

Delivering these forms to the court requires some precise timing: make sure the Summons Complaint and Answer to the Defendant(s) are both submitted within one day of when the JDF-99 has been filed. These need to be sent with first-class mail and prepaid postage. Finally, a court date can be scheduled by a court clerk within 1 to 2 weeks.

A summons will be issued to the tenant by a sheriff or private process server or any qualified adult who has no ties to the eviction process. You will have to pay a service fee in the case of a sheriff or private process server, though the amount can vary.

Finally, we get to the actual court hearing. If the tenant fails to respond to the summons, a summary judgment, default judgment, or court order may be issued to the landlord. Expect a bit of a legal battle as the tenant might file a counterclaim (a response to the landlords’ allegations) or even request a trial by jury. Colorado also may require meditation with the tenant and landlord before the hearing.

Should the landlords' case win in court, they must then file for possession of property with a Motion for Entry of Judgement (JDF 104). You'll receive the Order for Entry of Judgement (JDF 107). The tenant must vacate the rental within 48 hours - if they don't, the landlord will need to fill out the caption on the Writ of Restitution (JDF 103) and deliver it to the court. Upon approval, the sheriff's office will forcibly remove the former tenant from the premises.

What Do I Do with the Tenant’s Personal Belongings?

Should the eviction proceedings go in the landlord’s favor, they'll need to remove all of the belongings with a crew while being supervised by the sheriff’s department. If you don't expect your tenant to comply with an eviction order, it's best to make preparations to have a team ready to move everything out with boxes, tarps, trash bags, etc.

Colorado is unique when it comes to removing a former tenant's belongings when they have to be removed by force: you are not required to store the items. The former tenant has 15 days to retrieve the items and, if they don't, you are legally free to sell or discard them.

What's the Difference Between a Demand of Compliance (JDF 101) and the Notice to Quit (JDF 97)?

The Demand for Compliance is to be issued in cases where you want to give the tenant a chance to rectify the issue. They'll have 10 days in which to, for example, pay outstanding rent or reverse any violation of the lease agreement. Should they fail to make amends, you are then able to proceed with filing the forms necessary for eviction.

The Notice to Quit, on the other hand, can be used if you want the tenant removed as early as possible and don't want to give them the opportunity to rectify. The Notice to Quit is best used, for example, in the case of a tenant violating the law and can get them out in as little as 3 days.

How Long Will the Colorado Eviction Process Take?

You can expect to wait no longer than 2 weeks for a hearing after the filing process is completed. Of course, the length of it takes for the hearing to occur can be drawn out by appeals or continuances. Usually around one month is enough time for a completed eviction to occur, though it depends on so many factors.

What About Payment?

The state of Colorado is a loser pays state: this means that, should you have a solid case and valid reason for evicting your tenant you can expect to pay reasonable court and attorney fees. However. you have to specify this in your lease in order to qualify for recovery.

Conclusion

The Colorado Eviction Process (or in any state for that matter) can be difficult, but they aren't always. We hope we've shed some light on how it all works and what you need to know if you're considering evicting a tenant. If you file forms correctly and have a valid complaint against the tenant, the law should be on your side and the rental vacated as expediently as possible.

Peyton, Colorado is located in the eastern portion of El Paso County just northeast of the Falcon area and west of Calhan, Colorado. Peyton property management is a unique challenge because of the way the eastern plains have developed. While Peyton is for the most part a rural community, there are newer subdivisions in the Falcon area that have a Peyton address. This is because the U.S. Post Office in Peyton provides mail service to homes located in the Falcon area for the entire 80831 zip code. This includes newer suburban neighborhoods like Woodmen Hills, Meridian Ranch, and Paint Brush Hills.

Managing this diverse range of rental property types requires both skill and experience. Since Peyton has everything from custom golf course homes to horse properties on large acreage property managers in this area need an extensive skill set. An effective property management company will need to have years of experience and knowledge of everything from working with an HOA to understanding how to maintain a well and septic system.

Peyton Property Management
Rural Peyton, Colorado

Finding Quality Tenants

Finding great tenants is the key to effectively managing properties, and the first step in finding them is to sell the area. At first glance, Peyton doesn't appear to have a lot to offer prospective tenants, but if you are familiar with the area, this couldn’t be further from the truth. Peyton is home to some great amenities and activities like Homestead Ranch Regional Park, The Rock Island Trail, and a wide range of shopping and restaurants

Schools are another important consideration for many tenants and while the Peyton School District 23jt is a small school district it consistently scores above the state averages on standardized testing scores. The class size and quality of education in the Peyton school district is another advantage when seeking great tenants.

Our area's military bases also provide a great source of quality tenants. While the Peyton area is not close to Fort Carson, it is close to both Peterson Air Force Base as well as Schriever Air Force Base. When it comes to finding great tenants for the rental properties we manage, we have an aggressive marketing campaign for each property we manage. We start with professional photography in order to capture the most desirable qualities of the property and showcase the home in the best possible light. These photos become the basis for our marketing efforts. In our experience, great photos in the right places, generate interest in a property faster than any other marketing tool.

The internet has replaced print media as the best way to find rental properties. We send our rental listings to a wide range of property rental websites in order to generate as much interest as possible. We feel like the deeper the pool of applicants, the more success we have in finding a great tenant.

Tenant Screening

Once we have our applicants, we begin the screening process. Proper tenant screening is one of the basic aspects of our Peyton property management services. Screening involves processing the application, pulling a credit report, credit reports show us if the applicants have a strong enough positive credit history. We also perform criminal background checks as well as contact employers and former landlords in order to check the applicant's work and rental references

We can’t overstate the importance of great tenants, and screening is the most effective way to stack the odds in our favor when it comes to finding them. This process requires a lot of work but we do this to provide our clients with the highest level of service, it also makes our job easier throughout the term of the lease.

Lease Agreements

The lease agreement is the next level of protection a good property manager should provide for the property owners. A well-written lease eliminates questions and clearly outlines what is expected from everyone involved with the property. The lease should explain expectations around rent payments when they are due and what the penalties are for late or missing rent.

The signed lease should be accompanied by the security deposit and explain how maintenance requests are handled and which if any maintenance items are the tenant’s responsibility. This becomes especially important when leasing rural Peyton properties with valuable livestock equipment and facilities.

When it comes to maintaining your property, professional property managers should use professional contractors. These vendors also require screening and management but at the end of the day, they reduce the potential of problems due to incompetence.

The lease will also outline the expectations as far as living within an HOA community. This is important in those newer neighborhoods in the nearby unincorporated area of Falcon. These newer subdivisions have homeowners associations as well as restrictive covenants. Failure to adhere to these covenants can cost the homeowners in fines and levies. The lease should make clear that abiding by the neighborhood covenants is the responsibility of the tenant and failure to do so will result in penalties and in some rare cases eviction.

The lease should also outline what the eviction process will look like in the event we need to remove the tenant. The eviction process is difficult and can be messy, the eviction process alone can be worth the price of a good property manager's management fee.

Additional Peyton Property Management Services

Beyond finding qualified tenants, screening them, executing the lease, and collecting rents there are a number of other services a good management company should provide.

Pricing the property is an essential skill in professional property management. Price the rental rate too low and the owner leaves money on the table every month for the term of the lease. Price the rent too high and the rental could take months to lease, also costing the owner thousands of dollars. We provide a rental market analysis at the end of every lease term. This ensures that we remain relevant with our rental rates.

Financial reporting is an important part of property management. The property owner should receive monthly statements showing where the money is going. The statements should show any fees or expenses associated with the day-to-day management of the property. The manager should also provide year end statements, these are essential when it’s time to prepare your taxes.

Property inspections are another important aspect of good property management. The property manager should perform regular inspections of the property to make sure the tenants are taking care of the property. The manager should also be checking for the appropriate number of tenants, we don’t want anyone living in the property that hasn’t been screened. They should also be on the lookout for any pets that are not supposed to be on the property.

Deposit disputes are a major part of dealing with rental property. A good Peyton property management company will do thorough documentation of the property before and after each occupancy. Our property management company takes hundreds of before and after photos of the property. We also do a 360-degree inspection of the property using a Matterport camera. This allows us to view the entire property on a very detailed level. As an added bonus we can share this tour with the property owner as well as the tenant. Having this level of documentation helps us eliminate a good deal of the drama around deposit disputes. These are also great tools for marketing the property.

Here is an example of our 360 scans of a rental property.

Property Management service should extend to the tenant side of the lease as well. We make every effort to keep our tenants happy. This involves offering flexible payment options like online payment options through our online tenant portal or with a credit card. This is also where the tenants can make us aware of any repairs or maintenance requests they have.

We also provide an online owner portal, this allows you to get any important information you might need regarding the property or your account 24/7.

Residential property management is a serious business with a constantly changing landscape. This is why we are also members of NARPM, the national association of residential property managers. This organization is the gold standard in the real estate industry for property managers. NARPM provides up-to-date information and education for real estate professionals that manage single-family homes and small residential properties.

If you are considering a Peyton property management company to manage your home or investment property, you should look for a professional that offers a wide range of services that will protect your property as well as your investment in your property. If you want to talk to this type of company, please give us a call, we would love to talk to you about your rental property.

The end of a lease is an important event for landlords and tenants alike. It can also be a time of conflictingwear and tear vs damage expectations. Both tenant and landlord need to understand the difference between normal wear and tear versus damage.

The landlord will usually expect their property to be returned to them in the exact condition that it was in when the tenants moved in –and if this doesn’t happen, are often happy to use the tenant’s security deposit to make it this way. Tenants, on the other hand, more often than not will expect their full security deposit back, even if there has been some damage to the rental.

In order to help manage expectations, and make the move-out process as simple and straightforward as possible, it’s important for both landlords and tenants to be on the same page. This includes having a good understanding of security deposits, and what they can and cannot be used for.

At the Time of Move-Out

At the time of move-out, the landlord or property manager is responsible for repairing any damages to the property, as well as assessing and documenting normal wear and tear. A good Property Manager will have a move-out routine that includes items like:

  • Making sure the property is clean
  • Replace all furnace filters
  • Check smoke and CO detectors are in good working order
  • Replace burnt-out lightbulbs
  • etc...

They’re also responsible for deciding who will pay for any repairs, maintenance, and cleaning that’s required to bring the property back into rentable condition.

This is the part of the process that’s often full of contention. When it comes to assessing damages, the landlord’s job is to assess the property and determine what falls under the category of damages, and what should be considered simply normal wear and tear. While damages are the tenant’s responsibility, things that fall under the category of normal wear, should not be taken out of the security deposit.

It's important that landlords not use the security deposit to pay for things that go above and beyond the scope of normal wear. They may attempt to use it for things like worn carpeting or faded paint on the walls, things that aren’t damages, but instead are just the result of normal usage. In most cases, landlords know to use the security deposit as intended, to repair damages to the property, only for the tenant to contest this, and seek to get it back. One important exception to this rule pertains to items spelled out in the lease. Examples might be cleaning or carpet cleaning. If these items are stipulated as tenant responsibility in the lease, the landlord is within their rights to use security deposit funds to pay for them, if the tenant left these items undone.

When it comes to repairs, though, the law stipulates that the security deposit should only be used for repairs to damage that goes beyond what’s considered to be ordinary wear and tear.

Colorado Law (C.R.S. 38-12-102) defines “normal wear and tear as “Deterioration which occurs, based upon the use for which the rental unit is intended, without negligence, carelessness, accident, or abuse of the premises or equipment or chattels by the tenant or members of his household, or their invitees or guests.”

That’s a bit confusing for landlords and tenants alike. To help clear things up, here’s a list of examples of both normal wear and tear and damage.

Normal Wear and Tear vs. Damage

Normal Wear and Tear Damage
Worn out Carpet Torn, Stained or Burned Carpet
Faded Window Coverings Torn, Mutilated or Missing Window Coverings
Worn out Keys Lost or Missing Keys
Dirty Walls Holes in Walls
Dirty Windows Broken Windows

When determining costs, the landlord will also make decisions about repairing versus actual replacement. In some cases, repair is the best choice. A good example of this would be a recent experience we had. A tenant had backed a car into the side of a home damaging a section of masonite siding. The siding was already in rough shape and the product was failing and the particular pattern was no longer available. The owner was planning to reclad the home in stucco in a couple of years anyway, so we just applied a patch using every the favorite body putty of every motorhead, "Bondo".

Wear and Tear

This repair worked out well because the owner already had a plan in place for new exterior stucco and was willing to kick the can down the road. Had this not been the case, the repair could have cost the tenant a lot more money. It’s important to note that in some cases, a landlord may charge replacement cost for an item that could be repaired with a short-term fix. So, for example, suppose a tenant punches a large hole in a wall. The landlord may choose to repair it in the short-term by simply patching it. While this temporary fix is fine for the short-term, the underlying fact is the wallboard is not the same, and the owner may choose to go back at some point and replace the entire wallboard so they are within their rights to charge for replacement.

Calculating Repairs Cost

If the item can be repaired, though, in most cases the landlord will choose to go that route. In this case, the landlord will deduct for labor, materials, and travel.

  • Calculating Average Repair Costs-It’s also important for the landlord to determine material and labor costs based off of averages. This will help to avoid conflicts, and in the event of litigation, the courts will also require a list of repairs, and having average costs will make it easier to prove your case.
  • Factoring in Depreciation-Depreciation also factors into how much the tenant ends up being charged for damages. Depreciation takes into account the fact that things have a life expectancy. This includes carpet, appliances, paint, tile, and more. This life expectancy needs to be factored into the cost of repairs or replacement.

For example: if a five-year-old carpet is destroyed and that particular type of carpeting had a 10-year life expectancy, the landlord may only charge the tenant 50% of the replacement cost. This is a good practice, and extremely important as it helps to prevent landlords from using deposit funds in order to upgrade their properties.

Here is a Sample Life Expectancy Chart:

Water Heater 10 Years
Carpeting (builder grade) 5 Years
Air Conditioning Units 7 Years
Ranges 20 Years
Refrigerators 10 Years
Interior Paint-Enamel 5 Years
Interior Paint-Flat 3 Years
Linoleum Tile 5 Years
Window Coverings (shades, screens & blinds) 3 Years

These are estimates are produced by HUD. Manufacturer estimates will vary.

Assessing the Condition of the Property

Assessing the condition of the property is the responsibility of the landlord or property manager.

This will allow the landlord to determine whether there are any damages that are the tenant’s responsibility, and therefore should be paid for out of the security deposit. It also allows them to set the condition baseline before a new tenant moves in.

The challenge is determining and documenting the condition of the property before the damage occurred. This is important in the event that the tenant disputes the damages, or if the case goes to court, as having proof that the affected or damaged area was in good condition before will generally resolve the issue.

Documentation Methods Include:

  • Written Reports: Written reports are an old method, but one that’s still in use today. With a written report, the landlord or property manager does a walk-through of the property and takes notes on its condition. Relying solely on written reports isn’t the best option, since it can be subjective, and doesn’t really provide much proof of the condition one way or the other. In most cases, property managers and landlords would be better served by using another form of documentation in addition to, or instead of a written report.
  • Apps: Some landlords prefer to use an app that prompts them for pictures and notes. Although this certainly is a step above the old-fashioned written report, in that it makes it easy to capture images and notes to go along with your report, in some cases, they just aren’t thorough enough.
  • Video: Video footage is an especially good method of documentation. To capture video footage, the landlord or property manager will perform a walk-through inspection of the home with a video recorder or phone, compiling a detailed video of the condition of the unit. However, this method can be problematic. When it comes to finding the affected item in question, having video footage means that the landlord will have to fast forward and rewind through quite a bit of footage. This can be time-consuming and uncomfortable in court. Just imagine fast forwarding and rewinding while the judge waits! Of course, you could capture image stills before you go to court, but again, this could be a time-consuming process.
  • Pictures: Taking photos is one of the best ways to document the condition of a property. And it’s especially affordable since the advent of digital photography and affordable storage options. You can take hundreds of pictures of a property and if there's damage, it's fairly easy to go back and find the photograph that references the newly-damaged area. If you choose this method, just make sure you use your digital camera’s time and date stamp feature.
  • 3D Imagery: Another new method for documenting the condition of a property, using 3D photography like the Matterport 3D camera allows landlords to do realistic virtual walkthroughs on properties. Since the footage is stored in the cloud, you can use the mouse to walk right up to the area that’s damaged and check to see what the condition was prior to their move-in. You can also take additional pictures inside cabinets, closets, and other places the camera can't see. A secondary benefit from these tours is showing prospective tenants –especially out-of-state applicants, the property before they agree to lease it.

Tenant Should Protect Themselves

Of course, there’s a lot that tenants can do to help ensure that they’ll get their deposit back at the end of their lease.

First, of course, tenants should ensure that they keep the property in good condition while they live there, and avoid anything that might cause damage to it.

Secondly, if a tenant would like to contest the landlord’s decision to apply the security deposit to damage, they can do so. The best way to do this is by being able to furnish proof of the condition of the property. In most cases, tenants should consider taking their own photos. Generally speaking, the more documentation, the better. Photos that are taken at the time of move-in could provide proof of the condition of the property, and images that are obtained, say; a month into the lease could be used as proof of damage caused by movers. It’s also a good idea to use a camera with a time and date stamp feature and to show any pictures of post-move-in damage to the landlord.

It’s also worth noting that if a landlord fails to follow Colorado security deposit laws, the tenant could be awarded up to three times the amount that was wrongfully withheld, plus attorney’s fees and court costs, so it’s important for landlords to ensure that they remain in compliance with the law, and handle the security deposit properly.

Being Clear on the Terms of the Lease

For tenants, it’s important to remember that normal wear and tear versus damage are broad definitions, and much of the detail about the condition that you’re required to leave the property in at move-out will be specified out in your lease.

It’s important to read the lease before signing it and to make sure you ask questions to ensure that you’re clear on what’s expected of you. For instance, in some cases a landlord may state that the carpets are to be professionally cleaned at the time of move-out, others will require you to perform regular, outdoor grounds keeping maintenance, so make sure you fully understand your responsibilities and requirements before you move in.

Successful and straightforward move-outs are always the result of good documentation and communication, from both parties. It’s important for landlords to spell out their expectations in the lease document, and for tenants to ensure that they’ve read the lease –and are clear on their responsibilities both in terms of maintenance, and the condition that they’re expected to leave the property in at the time of move-out.

 Additional Resources:

It all starts with being "Move-In Ready"

Rental Security Deposit disputes usually occur because of a misunderstanding between a landlord and a tenant. At the end of a lease term, the tenant is usually required to leave the property in “move-in ready” condition. This means the same condition in which they received the property, minus any normal wear and tear.

Since normal wear and tear are well defined, most landlords or property managers should have a strong grasp on what constitutes damage vs normal wear and tear.

At the end of the lease term, usually, after one to three years, the landlord inspects the property. This move-out inspection determines if the property is "Move-in ready" for the next tenant.

If the property needs cleaning or repairs to be move-in ready, those costs are paid from the previous tenant's security deposit.

Landlord Rights and Responsibilities

Each individual state regulates its own landlord, tenant laws. In spite of this, most state laws are very similar. Most states allow deductions from security deposit funds for the following:

  • Unpaid rents
  • Cleaning to return the property to move-in condition
  • Repair for any damages that are not normal wear and tear
  • Repair or replacement of personal property, things like keys, appliances, furniture or televisions.

When using security deposit funds, the landlord is responsible for:

  • Providing the tenant with an itemized breakdown of costs for deducted items.
  • These charges must be reasonable and within industry standards.

Inappropriate use of security deposit funds can cause problems for the landlord. When security deposit disputes go to small claims court the guidelines are clear. The landlord can incur penalties for failing to adhere to the appropriate guidelines.

Avoiding Small Claims Court

Because of the dollar amounts involved, security deposit disputes that cannot be resolved without the help of a judge end up in small claims court.

The small claims process is very straight forward, the Judge looks at the following:

  • State Law
  • The Lease Agreement
  • Evidence:
    • Documentation of Condition before and after (photos, videos, etc…)
    • Receipts
  • Any other pertinent documentation

The rules about security deposits are clear so disputes are usually about what "move-in" condition is. The responsibility falls to the landlord to document the condition of the property prior to any new tenant moving in. 

Problems occur for the landlord if they fail to adequately document the condition of the property. In these cases, it becomes about the landlord's word against the tenant's word and the courts can be more sympathetic to the public. 

When a landlord fails to appropriately document the condition of a property, it speaks volumes about how they do business. There are instances when the damage to a property occurs someplace so obscure the landlord could not have been expected to document that area. This is, of course, the exception, not the rule.

Proper documentation of the property and open communication with the tenant are the best way to avoid small claims court.

Documenting Rental Property Condition

There are a number of methods available to facilitate the effective documentation of a property. Digital imaging and cloud storage have made it very simple to record and share any media or reports.

Photos are a great way to document property condition. Digital storage is cheap and photo-documenting a property is easy. Sharing photos with the tenants enables them to check out the original property condition. Just being able to see move-in photos goes a long way to heading off any potential condition disputes.

Another advantage to photographs is that in the event you end up in court, you can print before and after pictures. This saves time in court and shows that you've done the proper documentation.

Video has become another popular method of documenting the condition of a rental property. Lightweight high-quality cameras make this an attractive option for landlords and property managers. One advantage of video is that the person shooting the video can also comment about what they are seeing. This avoids having to make notes or guess about what the photo is about.

Like photographs, videos are easy to store and share. Videos can be more difficult to deal with in a courtroom setting. Patience can run thin while fast-forwarding or rewinding as you look for something specific. Higher quality cameras allow you to take good quality still photos from video clips. We recommend this if you need to go to court.

Virtual tours have become very sophisticated over the last five years. Matterport is a 360-degree camera that produces so pretty awesome virtual walkthroughs. This is a great way to share the current condition with the owner as well as creating a record for the tenant time of move out.

In the event we need to go to court, these virtual tours allow us to zoom into an area and take a very high-quality still photo. Our Colorado Springs Property Management company uses this method and it's working great.

Reports are another effective way of documenting the condition of a property. Popular property management software usually comes with some type of reporting module. These modules usually come in the form of an app for a mobile device. The landlord walks through the property and takes photos of any issues. These apps have a place to write comments as well.

We have used these apps in the past and they produce a really attractive report. The only problem we have found is that they only capture current problems. We have found that it's best to have a comprehensive snapshot of the entire property. This way if a problem arises, we have documentation of how the area looked.

How to Avoid Security Deposit Disputes

Security Deposit Disputes and How to Avoid Them

A little transparency, communication, and participation can also go a long way in reducing security deposit disputes. Move outs are easier when both tenant and landlord are on the same page. One way to accomplish this is to get participation from the tenants right at the beginning of the lease period.

It's a good idea to get the tenants involved in documenting the condition of the property right from the beginning. We like to give out tenants the opportunity to take pictures of any damage or dirt they find prior to any big furniture or appliances being moved in. If you have set up a file for move-in documentation, these tenant photos can be incorporated.

Obviously, there needs to be a reasonable deadline for these types of discoveries. But, we have found that this one simple action has really helped reduce our security deposit disputes.

Another effective action is to perform a pre move out inspection walkthrough. This is an informal walkthrough where the landlord can point out or make a list of any items that might be an issue. 

This gives the tenant heads up and allows them the opportunity to make the item right before they move out. If they choose not to repair or clean something found on this walkthrough we always interpret that it's something they're willing to have taken out of their deposit. This pre-inspection walkthrough gives them a clear picture of what's going to happen so they don't feel blindsided. 

Another good way to avoid any misunderstanding about expectations at move out time is to provide the tenant with a cleaning checklist. In most cases, a general checklist works well. If the property is really unique the landlord may need to provide more detailed instructions for the tenants.

Unexpected surprises are the primary cause of disputes over security deposits. Transparency and communication help eliminate surprises. While the tenant may not appreciate the deduction, knowing that it’s coming and why it’s coming goes a long in avoiding a trip to small claims court.

Renting to Tenants With a Criminal Record

Landlords who have a rule banning applicants who were convicted of a crime-may want to rethink that policy. Recent guidelines issued by the US Department of Housing and Urban Development (HUD) on April 4, 2016 call for landlords to do away with blanket bans, that disqualify applicants based on prior convictions or arrests. Having a general ban on renting to tenants with a criminal record, precludes applicants from housing solely on the basis a criminal record, could be considered a violation the Fair Housing Act.

The Fair Housing Act

The Fair Housing Act signed in 1968, prohibits landlords from discriminating on the basis of race, color, religion, sex, or national origin. While criminal history is not a protected class, under the new HUD guidelines, turning down applicants on the basis of a criminal record, without considering the nature of the crime or facts surrounding the conviction, can’t be legally justified –and could, indirectly, be a violation of the Act.

As many as 100 million U.S. adults, or nearly one-third of the population, have a criminal record of some sort. Additionally, the United States prison population, with 2.2 million adults, is the largest in the world. Since 2004, an average of over 650,000 people have been released every year from both federal and state prisons –and 95 percent of those currently incarcerated, will be released at some point in the future.

For individuals who are released, the ability to secure safe and affordable housing is a crucial part of their successful reentry into society. Yet many individuals who were formerly incarcerated are finding it extremely difficult to secure housing –because of their criminal history.

Troubles Securing Housing

Michael Bowers, a single father, has had his share of trouble finding housing in Austin, Texas.

This is due to the fact that Bowers has a criminal record. As a teenager, he was arrested for stealing a debit card and going on a $340 shopping spree.

“I was young,” says Bowers, speaking of his crime. “We were drinking. There was a card. I was like, ‘I’m going to use that to buy stuff that I want.’ It was a dumb mistake.”

This crime led to Bowers spending a few days in jail and being put on probation. Today, however, nearly ten years later –one consequence of this mistake continues to plague him –most landlords still refuse to rent to him.

“The most frustrating thing is I’m just a single dad,” says Bowers, who lives in Austin with his daughter. “I work hard, and I just want to give my child a place to live.”

The fact remains that many landlords are rejecting tenants on the basis of their criminal history –or even an arrest that never even led to a conviction, without taking into account the nature of the crime, how long ago it occurred, or rehabilitation.

For people like Bowers who are trying to get their life back together, finding housing remains one of the most difficult hurdles.

Renting to people with criminal history

The HUD Guidelines: Disparate Impact

While many landlords refuse to rent to tenants with a criminal record, doing so may be a violation of the Fair Housing Act.

A landlord violates the Fair Housing Act when their policy or practice has an unjustified discriminatory effect, even if the landlord had no intent to discriminate. This is known as “disparate impact” –which occurs when policies or practices that appear on the surface to be neutral, result in a disproportionate impact on a protected group.

“Criminal records-based barriers to housing are likely to have a disproportionate impact on minority home seekers,” the guidelines note. Black and Latino Americans are disproportionately affected, the memo notes since they are incarcerated at rates disproportionate to their share of the general population. Black and Latino individuals comprise an estimated 58 percent of the U.S. prison population, despite accounting for only 29 percent of the total U.S. population.

Under this standard, even a policy that may seem neutral on the surface –could have a discriminatory effect against protected classes, and thus could be a violation of the Act, if it’s not supported by a legally sufficient justification.

It’s important to note that while HUD doesn’t recognize having a criminal record as a protected characteristic under the Fair Housing Act; proponents argue that criminal history-based restrictions on housing opportunities could, indirectly, violate the Act.

Additionally, proponents state, that by making it easier for people with an arrest record or criminal history to find a home, housing providers will help to increase the chance of an individual’s successful reentry to society.

“The fact that you were arrested shouldn’t keep you from getting a job and it shouldn’t keep you from renting a home,” says HUD Secretary Julian Castro. “The ability to find housing is an indispensable second chance in life.”

JoAnne Page, President, and CEO of the Fortune Society, which works with formerly incarcerated individuals, also highlight the importance of housing for individuals with a criminal background. “We know that if a person does not have a stable, affordable place to live, being a contributing member of society is extremely difficult,” she says.

Considering a Criminal Record: A Landlord’s Requirements

While the HUD guidelines outline what landlords should not do when weighing up a potential tenant’s application, they’re less clear on what type of criminal convictions can be used when assessing an applicant.

As there are no guidelines on which crimes should be considered acceptable, and which are not, aside from certain drug-related charges. In most cases, landlords are advised to use their discretion, with the HUD guidelines stating that they should consider circumstances on a case-by-case basis.

Case-by-case, means that imposing a blanket ban on individuals with a criminal history, is no longer an option. Instead, landlords and property managers will have to put a bit more care into evaluating applications on an individual basis.

Industry groups, such as the National Apartment Association, are weighing in on the new guidelines. The NAA released a white paper on best practices to members, which advised taking measures such as adjusting screening policies to include only certain types of offenses –rather than a blanket ban, outlining clear justifications for those policies, and giving applicants a chance to explain mitigating circumstances.

While the HUD guidelines are just that, guidelines –and landlords are not bound by law to follow them, the best practice is for landlords to take the HUD guidance seriously, and change any current policies that automatically exclude applicants with a prior conviction; as well as any policies that have not been thoughtfully developed and justified.

Steps Landlords Should Take to Comply With the New HUD Guidelines

While these guidelines may sound daunting –the good news is that for most landlords, they may not be as formidable as they sound.

“Employers have been taking most of these steps for years,” explains attorney Denny Dobbins, “It will not be difficult for good Landlords to comply.”

In order uphold these guidelines, though, landlords will need to need to be a bit more thorough when it comes to documenting their reasons for denying an applicant. They’ll also want to ensure that their policy’s approval criteria, as it pertains to a person’s criminal history, are supported by a legally sufficient justification. For example –if a landlord has an apartment complex, they must also take the safety of the other residents into consideration; therefore they may be able to prove that banning individuals who have committed violent crimes is a justifiable decision. Additionally, landlords who house families with children may not be able to rent to anyone on the Sex Offender Registry. Thus, denying a registered sex offender would not constitute a violation of the Fair Housing Act.

But under these guidelines, landlords cannot institute a sweeping ban on all applicants with a criminal history, and cannot reject applicants for arrests that did not lead to a conviction. Additionally, landlords must take care to ensure that all potential applicants are treated the same; and that comparable criminal histories are assessed similarly; without considering race, national origin, or any protected class.

Consider the Crime

HUD states that a housing provider must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety or the property and criminal conduct that does not.

Landlords are advised to take into consideration the nature of an individual’s conviction as well as time elapsed since the conviction. The only clear exception that the guidelines make is for convictions for manufacturing or distributing drugs.

Factors that landlords should consider include:

  • The nature of the crime
  • The facts or circumstances surrounding the criminal conduct
  • Time elapsed since the conviction
  • Evidence of rehabilitation

The Nature of the Crime

Landlords that oversee multi-unit residences must balance out their nondiscriminatory screening policies, with their duty to ensure resident and property safety. This means assessing the nature of the crime to see if there is legally sufficient justification to ban an applicant from the housing. Unfortunately, this is a gray area –and one where landlords and property managers alike much exercise diligence and discretion.

While the HUD guidelines aren’t clear, HUD indicates on their website that for public housing authorities, a criminal background investigation must be performed to determine lifetime registered sex offenders –which then may be precluded from housing. It would seem to follow, that if public housing authorities can draw the line at registered sex offenders that non-public housing landlords could do so as well. But when it comes to offenders who are not on the registry, the guidelines are less clear.

“The nature and gravity of a sex crime may be so serious that even the slightest amount of risk may be too much when contemplating the protection of your substantial and legitimate interest(s),” says Denny Dobbins, attorney. “A case-by-case evaluation based on the facts is necessary for how long to prohibit residency for those with a sex crime who do not have a lifetime sex offender registration status.”

Landlords who are uncertain should consult with an attorney.

The Facts or Circumstances Surrounding the Criminal Conduct

Landlords are advised to assess the circumstances surrounding the criminal conduct. This means that they should consider the age of the applicant at the time of the crime, as well as any other mitigating details. Landlords should also take care not to exclude applicants based on arrests alone since an arrest doesn’t always lead to a conviction.

Time Elapsed Since Conviction

The amount of time that’s passed since the conviction occurred should also be taken into account. Although the HUD hasn’t given a specific timeline that’s reasonable for felonies or misdemeanors, some have suggested a period of six or seven years for some felonies or high-risk crimes.

Evidence of Rehabilitation

If an applicant presents evidence of rehabilitation, this should be taken into consideration as well.

Practically Screening Applicants

There are practical ways that landlords can maintain compliance with the HUD guidelines regarding renting to tenants with a criminal background. Here’s a look at a few things landlords should consider doing:

Run Criminal Background Checks Last

When it comes to the application process, landlords and property managers may want to consider running criminal background checks last; until after an applicant has already passed employment and income verification, credit checks, and previous rental history. Not only will this help to keep housing providers from having to make many potentially difficult decisions, it will also save time when processing applications.

Avoiding Problem Screening Questions

One key area where landlords should tread especially carefully is when screening tenants. Asking potentially problem questions such as, “Have you ever been convicted of a crime?” and instead, looking to ask more relevant questions, such as “Have you been convicted of a crime in the last seven years?” is a better option; one that shows that the landlord isn’t imposing an outright ban on applicants with a criminal history; and instead is asking relevant questions and assessing applicants on a case-by-case basis.

Ask for Proof of Mitigating Circumstances

Landlords and property managers should consider informing applicants that, if they have a criminal background, they are welcome to submit proof of mitigating circumstances at the time of the crime as well as proof of any rehabilitation efforts. Requesting this information is a step in the right direction, and also shows that the landlord isn’t implementing a sweeping ban on applicants who have a criminal background.

Review Existing Policies for Renting to Tenants with a Criminal Record

Finally, landlords and property managers should review their existing rental policies and tenant screening procedures. Landlords should pay special attention to ensure that there are no qualifying questions that could be considered discriminatory against potential tenants. Doing away with sweeping statements, such as disqualifying all applicants who have a criminal background; and instead implementing policies that allow for a case-by-case analysis is an important step that housing providers should take to protect themselves.

Renting to Tenants with a Criminal Record

Landlords should inquire with the current and previous landlord to assess an applicant’s qualification. Questions to ask include:

  • Did the applicant pay the rent in full and on time?
  • Did they abide by all the terms of the lease?
  • Were there any problems with the applicant?
  • Were there complaints from other tenants about illegal activity?
  • What was the timeframe that the applicant rented in the unit?
  • Would you rent to the applicant again?

Landlords should also obtain a consumer credit report and carefully check the information therein. Landlords should:

  • Check the information for accuracy. Ensure that the information on the report matches what is on the application –including the name, date of birth, and address.
  • Was each credit grantor paid on time?

Every landlord should have a written list of rental criteria, and ensure that they uphold it consistently with each rental application. Examples of rental criteria include:

  • Sufficient Income
  • Proof of Income That’s 3x the Rent
  • Good Landlord References
  • History of On-Time Rent Payments
  • A Good Credit Report
  • The Ability to Abide by the Terms of the Lease

If an applicant fails to meet the above criterion, the fact that they may have a criminal record becomes irrelevant. In the end, the best way for a housing provider to avoid claims of discrimination and ensure equality for all applicants –is to ensure that decisions are not based on one single factor; a criminal record, and instead seek to use other qualifying questions when making a decision.

In addition to helping to prevent claims of discrimination, this method will also help to alleviate fears of landlords, who may be concerned about safety implications that come from not having a blanket ban in place. As Chris with Tenant Verification Services writes, “In most instances…individuals who have a criminal record and continue to lead that type of lifestyle, will not meet your criteria anyways.”

Finally, landlords should make sure they have a look at the HUD Guidelines for themselves, as well as this helpful white paper from the NAA. They should also consider consulting with an attorney, to ensure that they are screening applicants, qualifying questions, and applications –before refusing to rent to a tenant with a criminal record.

Tenants: do the HUD guidelines affect your home search?

Disclaimer: The information provided is for and advisory purposes only. Springs Homes for Rent accepts no responsibility for its accuracy. We recommend that you consult with an attorney familiar with current federal, state, and local laws.

So you’re thinking of renting to relatives and want to know the tax implications After all, it’s something that seems to make perfect sense. Your child; or maybe it’s your mother or a cousin needs a place to stay and you have a rental property.

If you were to let them live there rent-free, or maybe for reduced rent, you’d be doing them a tremendous favor, and they’ll be able to look after your property for you; helping to keep it in great condition. It’s the best of both worlds.

But while your plan does make sense, there’s just one problem: if you’re not careful, renting your home out to family could mean that you’re no longer eligible for certain tax deductions.

While tax law allows generous tax deductions that many landlords are eligible for, it also has strict criteria that it insists landlords meet in order to remain eligible for those deductions. There are a number of things that a landlord could do, even unwittingly, that could push the property outside the definition of a rental, and into the criteria of a personal residence; eliminating many of these tax deductions.

Let’s take a look at renting to relatives and the tax implications to ensure that you’re eligible for those valuable deductions.

What’s Considered a Rental?

Renting To Relatives Tax ImplicationsFirst up, let’s take a look at what, exactly, the IRS considers to be a rental property.

A property is considered to be a rental if it is rented during the year in question, and used by the owner less than the greater of 14 days – or 10% of the number of days that the unit was rented to others; as long as it was rented at fair rental value.

If, however, you occupy the property yourself for a portion of the year – or rent it out for a reduced rent, then limitations may apply to a number of expenses that you’re able to deduct.

Additionally, if the property is mixed use, then it may be rented and used by yourself for more than 14 days of the year, however, it’s important to note that expenses like insurance, mortgage insurance, taxes, and more will be allocated between rental and personal use.

It’s also important to note that if the property’s rented out for fewer than 14 days during the year, then it’s considered a personal residence, and as such you won’t be able to claim as many tax deductions; only mortgage interest and property taxes. You also won’t be required to report any rental income.

However, complications arise when you are renting to relatives.

These issues usually surround the question of “fair-market-value rent,” and how the IRS classifies rental properties that are rented for less than this amount. Normally people decide to rent out to relatives because they’re looking to give that family member a good deal. But it’s important to realize that for each day that you rent the property for less than its fair market value is considered a personal use day.

Too many personal use days, can quickly push the property into the category of personal use. This could mean that you’d end up having to claim the rent as income, but not being able to claim many of those value tax deductions.

Rental Property Deductions

Part of the appeal of rental properties is the myriad of valuable tax breaks that landlords are eligible for. Some available deductions that many landlords are able to take include:

  • Mortgage interest
  • Property taxes
  • Utilities (If you pay them)
  • Maintenance and repairs
  • HOA fees
  • Depreciation
  • Insurance
  • Professional and legal fees
  • Contractors
  • Some travel expenses to and from the rental

These deductions can add up quickly and make a real impact on the amount of tax that a landlord owes at the end of the year. However, if your rental loses its status as a rental, then most of these deductions will disappear. The exceptions are mortgage interest and property taxes, which you’d be able to claim anyway.

Tips for Keeping Your Rental Property Deductions

If you’re looking to ensure that your property keeps its rental status –and your rental expense deductions intact, the good news is that you can rent to a family member; there are just certain rules that you should follow.

First of all, in order for the property to be considered a rental, you cannot use the property yourself for more than 14 days –or more than 10% of the total days that you rent it to others at a fair rental price.

If you’re not residing in the property yourself, then you’ll want to ensure that you abide by the following:

  1. Charge a Market-Value Rent – And Be Able to Prove It - First up, no matter who you’re renting to, you’ll want to ensure that you’re charging a fair-market-value rent. This applies whether you’re renting to a friend, family member, or any other tenant. The best way to do this is to gather evidence that your rent is at fair-market-value. You can do this by printing or screen capping listings that show properties similar to your own, with rent that’s priced close to your own. Check out a website like Trulia or Zillow to see what other properties are going for. You may also want to get an independent appraisal for the property, just so you’re clear on what a fair-market-value rent is. If you do choose to rent the property to a family member at a rate that’s below market value that’s fine, but you’ll want to make sure you’re aware that you’ll need to reflect this on your tax return –and there will be limitations on how many deductions you’re able to claim.
  2. Be Wary of Giving Heavy Rent Discounts - While in some cases you may be able to give your friend or relative a “good tenant discount,” be careful that this discount isn’t too heavy. In some cases, 20% has been allowed, but it’s a lot easier to defend a 10% discount.
  3. Avoid Giving Gifts to Subsidize the Rent - Next, take care that you don’t give your family tenants financial gifts to help them pay the rent. The IRS could deduct the amounts that you gift them from the rent value, which may disqualify your property as a rental; pushing your property into the personal residence category.
  4. Be Sure the Family Member is Using the Property as Their Primary Residence - Finally, if you’re planning on using the rental property as a rental, and continuing to claim deductions for it, then you’ll want to ensure that your family member using it as a primary residence. If they don’t, each day that the relative spends in the property will be considered a personal use day for you. This means that if the relative stays in the house for, say, four months out of the year, but has their primary residence somewhere else; your property won’t be eligible for the rental property classification anymore.

For more information on renting to relatives and the tax implications, be sure to see IRS Publication 527, Residential Rental Property. Remember, neglecting to categorize your property properly, and taking deductions that you may not be entitled to could land you in serious trouble should the IRS decide to do an audit. Your best option is to be informed, and talk to a tax professional if you’d like to learn more about the tax implications of renting to family members or using the property yourself.

At the end of the day, renting to relatives and tax implications is something that appeals to many. Just make sure you’re going into the decision fully informed about the implications of renting out your property to a relative –particularly how it will impact which deductions you may no longer be eligible for.

Resources:

Note: This article is intended to inform and to guide; it is not meant to serve in place of tax advice from an attorney or licensed tax professional. Please consult a CPA for help implementing tax strategies, or for more information on how renting out your home to a family member may impact you from a tax perspective.

Understanding Cap RateCapitalization Rate or “Cap Rate” is a ratio used by real estate investors to determine the desirability or profitability of a specific property. This ratio compares the relationship between the property value and the potential income that property may produce as if you had paid cash for the property.

While there are certainly more sophisticated analytical tools we can use when evaluating rental properties, cap rate is a good quick reference tool used to assess whether or not a property is even worth considering.

We use this formula when we are working with our investor clients. Knowing property values and rental rates along with a good sense of average repair and maintenance costs and potential vacancy rates allow us to calculate a rough cap rate on the fly.

As we narrow down the properties our client is interested in, we can do a more precise calculation prior to making an offer on any properties.

Establishing Cap Rate

Cap Rate is established by dividing the Net Operating Income (NOI) of a property by the value of that property. The cap rate essentially shows the relationship between the property value and the potential income that particular property could produce. The higher the cap rate the more attractive the property is.

cap rate formula

Net Operating Income NOI

Let’s look at the Net Operating Income half of the cap rate equation. NOI consists of all revenue from the property, minus any reasonable operating expenses. NOI is a pre-tax figure, appearing on a property’s income and cash flow statement, that excludes principal and interest payments on loans, any capital expenditures, depreciation, and amortization.

In order to establish Net Operating Income, you total the annual rents collected for a property, this is the Gross Income. Once this figure is established you would subtract the following expenses.

  • Annual Property taxesCap Rate Calculator
  • Any Insurance
  • Maintenance
  • Repairs
  • Vacancy rate
  • Property management fees

Property Value

The other half of the equation is “value”, this is the price you paid for the property or the current value of the property. If you are looking at properties and have questions about value, your agent should be able to give you a reasonably good idea of what the property’s true value is.

Working Backwards-Using Cap Rate to Establish Value

Cap Rate can also be a helpful tool to use in order to determine your bottom line when evaluating a property you are interested in purchasing.

Let’s say you are interested in a property that is listed for $300,000. Your goal is a 10% cap rate on any property you purchase. Let’s say the NOI for this property is $27,000, which gives us a 9% cap rate, not bad but you want 10%. This means you would need to acquire this property for $270,000 in order to get your 10% cap rate.

Each situation and market are different but knowing that $270,000 is your bottom line helps you decide if you want to even pursue this property or if the price is too high for the return you’d see. In some markets, an offer that is 10% below asking price is a common practice while in other markets it would be a slap in the seller’s face. Each market is different and these are decisions investors need to make.

Other Methods

It’s important to note that cap rate looks at potential financial performance, not actual returns. In order to get a better idea of how a given property will perform, there are other methods of evaluating a property that will give you better results. Methods like cash flow analysis and cash-on-cash returns are potentially better metrics to use, assuming you know your numbers.

The vacancy rate, maintenance, and repairs all affect an investor’s bottom line and all three are fairly unpredictable. Controlling these costs without compromising the health and safety of your tenants is the key to long term profitability from rental properties.

In Conclusion

There are a number of methods investors can use to analyze an investment or rental property. Cap Rate should be just one tool in an investor's arsenal but it is an important one. Remember to use cap rate in the early stages of new property acquisition.

The key to successful investing in the residential real estate rental market is buying the property at a great price. This one key detail makes all of the other factors easier to work with and cap rate does a great job when you are looking for deals.

If you are a landlord, then you are all too familiar with the frustration that comes when you find out that the heater has gone out at your rental unit, or that there’s a leak –yet again. If you’re tired of the frustrations that come from dealing with breakdowns, and costly repairs eating into your profits, there’s a solution that you may want to consider: purchasing a home warranty for your rental property.

Today, you can buy warranties for almost anything, including homes. Home warranties are particularly popular with landlords, who know all too well that if something can go wrong at a rental, it will. A good home warranty can help a landlord to save a significant amount of money if costly repairs are necessary. It can also help landlords to ensure compliance with state and federal laws.

While home warranties can be invaluable for landlords who are interested in protecting their investment, it’s important to note that not all warranties are created equal. Each warranty is unique in terms of the coverage that it offers, the exclusions, and terms and conditions.

If you’re interested in a home warranty for your rental, there are a few things that you should know before purchasing one. Here’s a brief rundown on what, exactly, a home warranty is, the benefits and disadvantages of getting one, and finally, what you can do to ensure that you choose the best option for your property.

What Is a Home Warranty?

The term ‘home warranty’ is enough to cause some confusion for those who are unfamiliar.

Traditional warranties are a type of guarantee of the quality of a product or service, usually made by the seller or manufacturer to the buyer. Home warranties, though, are not guarantees, but instead, contracts to provide repairs and replacement for home systems and appliances that break down or fail due to normal wear and tear.

Home warranties were first started in 1971 by American Home Shield. The industry has grown considerably since then, and today dozens of companies offer home warranties. A few main players include American Home Shield, Total Protect, SEARS, and First American, as well as HMS Home Warranty and Old Republic Home Protection.

Some people may also confuse home warranties with insurance, but there are some distinct differences between the two. Insurance provides coverage for specific events, such as fire, flooding, and theft; while home warranties cover the components or major appliances in a home against breakdown.

The best way to think of a home warranty is to view it as a home services contract. Home warranties for rental properties are designed to provide repairs for breakdown or damage to specific home components, as well as replacement if they cannot be repaired.

Benefits and Disadvantages of Home Warranties

Home warranty plans offer a number of advantages for landlords. If something goes wrong, you won’t have to start looking for an electrician or plumber –or rush to the rental to make the repairs yourself. Instead, you can just place a call to the home warranty company, and they’ll send someone out for you. Having a home warranty will also make it easier to budget for expenses and repairs, helping you to avoid being caught out by unexpected issues. You simply budget for the premium and keep some money for the service call fees. No need to worry about forking out hundreds of dollars all at once for a new water heater when the old ones goes out.

However, home warranty plans have some disadvantages too. Just like insurance, you pay for the plan even if you don’t end up using it in the end. Most policies cost a few hundred dollars, usually somewhere between $400-$800 per year. In some cases, it may work out to be more economical to pay for issues as they arise, rather than prepay for potential repairs that may or may not be required. Additionally, most warranty companies will attempt every repair before authorizing a full replacement. Another issue with home warranties is that you run the risk of claims being denied. If the home warranty company considers the breakdown to have been caused by neglect, improper use, or a pre-existing problem, they may choose not to accept the claim. Additionally, some landlords may realize when making a claim that their warranties don’t include coverage for the item in question. Finally, there is also the issue of wait times. Sometimes repairs can be delayed during high-demand seasons.

Most home warranties usually include the following:

  • Refrigerator
  • Dishwasher
  • Built-in microwave
  • Garbage disposal
  • Stove/Oven
  • HVAC
  • Electrical system
  • Plumbing
  • Washing machine and dryer
  • Ductwork
  • Ceiling fans
  • Water heater
  • Garage door opener

While more premium warranties may also include coverage for:

  • Sump pump
  • Pool
  • Ice maker
  • Stand-alone freezer
  • Well pump
  • Lawn sprinklers
  • Plumbing fixtures
  • Lighting fixtures
  • Roof repairs
  • Septic systems
  • Water filters

Things that are not usually covered include:

  • Structural issues
  • Problems that are the result of neglected maintenance
  • Damage caused by frozen pipes
  • Outdoor repairs
  • Permit fees
  • Disposal fee for old appliances
  • Rust
  • Improper installation
  • Mismatched systems
  • Pre-existing problems
  • Anything that’s outside of normal wear and tear

As always, the list of what is and isn’t covered will vary considerably from company to company so be sure to ask for a list of things that are covered when weighing up different options.

Tips for Selecting a Home Warranty for your Rental Property

To be sure, having a home warranty can provide you with peace of mind if things go wrong, writes Anthony Giorgianni of Consumer Reports, “But you should also realize that the providers of these plans have built-in wiggle room that can make it easier for them not to make payments. As a result, hundreds of consumers have complained to the Better Business Bureau about their plans, often because they didn’t get the payouts they expected.”

To ensure that you find the best warranty for your rental property, and to help prevent disappointment when it comes time to make a claim, you’ll want to make sure you understand exactly what’s included in your home warranty, and have a clear understanding of the terms and conditions.

With this in mind let’s take a look at how you can ensure that you find a home warranty that’s a good fit for you and your rental property. As always, being informed is key to ensuring that you make the best decision possible, and will help you to choose a warranty that’s right for you.

Read the Fine Print to See What’s Covered

When considering a home warranty, it’s important to read the fine print. Each home warranty is different, with their own set of particular inclusions, exclusions, and conditions. For example, some warranties will not cover washing machine repair, even if you opt for appliance coverage. Some, that claim to cover plumbing, may not cover common parts that often go out, such as faucets, but instead will only provide coverage for the pipes that are in the walls. Before signing up for a warranty program, make sure you take the time to read the contract carefully so that you fully understand what’s covered, and what isn’t.

Check online reviews

Next, you’ll want to ensure that you’re buying from a reputable company. Before signing an agreement, have a look at the Better Business Bureau and online review sites to see what people are saying; and to find out what their rating is.

Find Out How the Warranty Company Selects their Contractors

Another important consideration is how the company selects their contractors. Are they vetted in any way? How do they ensure they are qualified? How long have their vendors been working with them? Will they be able to guarantee that the work will be completed in a timely manner? You should also ask what happens if a vendor doesn’t meet your expectations. A reputable home warranty company should allow you to request that subpar vendors not be used for future call-outs.

Find Out What the Waiting Period Is

You’ll also want to keep in mind that most home warranties also include a waiting period between the date that you sign up, and when you can actually begin to use the service. Usually, this period is anywhere between 30-90 days.

See If the Company Will Work With Property Management Companies

If you have a property manager overseeing your property or plan to enlist the services of one at some point in the future, you’ll want to check with the home warranty company to see if they work with property management companies. Some companies will allow the landlord to keep a credit card on file to cover service call fees. Others, however, require payment from the tenant when the technician arrives –something that could lead to potential problems and complications.

See What the Service Fee Is

The service fee or call out fee is the flat rate that you’ll pay out-of-pocket for repairs. Similar to a deductible on an insurance policy, most service fees range between $75 and $125 per claim. In some cases, you’ll have the option to pay a higher service fee for a lower monthly payment.

See What the Limits of Liability Are

Most home warranties have a limit on the amount of money that they will pay out in a year. In some cases, the company may assign a specific limit to each item. For instance, if they have a $400 annual limit on dryers, it will only pay up to $400 each year for the dryer to be repaired or replaced. According to Reviews.com, half of the 17 home warranty companies that were analysed cap their coverage at $500. Limits can make or break a warranty, so be sure to find out where your coverage will be capped before making your decision.

Ask About the Recall Period

Often home warranty companies will provide what’s known as a “workmanship guarantee” for any repairs performed by one of their contractors. This means that if anything goes wrong with the repair or installation during a specific amount of time after the work was done, the home warranty company will repair it at no additional charge to you.

Ensure that the Warranty Coverage Is Right for Your Property

When purchasing a home warranty policy, you’ll want to make sure that it’s the right one for the property. You can choose warranties that include various degrees of coverage, including ones that cover the rental’s major systems such as electrical and plumbing, as well as a more premium plan that extends to cover appliances. You’ll also want to consider the age of the property when making your decision. While newer properties that are less than ten years old, most of the appliances will already be covered by manufacturers’ warranties, so there may not be a need for an extensive warranty. Additionally, “Many states require the builder to repair defects in materials and workmanship for a few years – typically two to 10 years,” writes Don Vandervort, founder of Home Tips. For older properties, though, it may make more sense to purchase more extensive coverage.

If you’re on the fence about a home warranty, be sure to consider the pros and cons of coverage to see if it’s something that you could benefit from. Remember, plans vary considerably, so if you’re not happy with a quote that you received from one company, don’t be afraid to look elsewhere. It doesn’t hurt to ask for a discount as well –some companies may be willing to negotiate.

Having an emergency fund to cover unexpended costs could stand in for a warranty. But you’ll want to honestly assess whether you’re disciplined enough to set aside a certain amount of money each month for emergency repairs. For landlords who would like to have as much coverage as possible, or who may not be able to commit to putting $100 in a repairs account each month, having a home warranty may be an ideal solution. Some landlords find that warranties are especially helpful in the beginning, until they’ve had time to build up some reserves. Other long-distance landlords use warranties to reduce some of the stress and hassle of having to coordinate repairs from afar.

No matter which way you’re leaning, at the end of the day you’ll want to ensure that you make a decision that will benefit both you and your property, so have a look to see what’s out there before making your final decision on whether to buy a home warranty for your rental property.

What is Section 8?

If you are involved with residential leasing as an investor, renter, or landlord, chances are you've heard of Section 8 at some point. You're probably at least aware that it's a form of low-income housing, but beyond that, you might not know much.

Well, have no fear: in this post, we're going to dive into the details of this housing voucher, look at it from the point of view of both tenants and landlords, and discuss the benefits and drawbacks as they apply to each group.

There are many myths surrounding Section 8, and we're here to dispel them.

How Did it Originate?

First, a little background: the advent of Section 8 housing dates back to the Great Depression. It was first introduced as part of Franklin Delano Roosevelt's "New Deal" program back in the 1930s, In fact, the term "Section 8" comes from Section 8 of the Housing Act of 1937. As you might expect, it's evolved a lot between then and now.

The most important development came with the Housing and Community Development Act of 1974, which introduced the Housing Choice Voucher Program.

The Development of Section 8

The Housing Choice Voucher Program is what most people mean when they refer to Section 8. It was established in response to criticism of government-owned public housing - people felt the government, while well-intentioned, was just creating poverty-ridden areas that made the problems faced by low-income individuals and families worse, not better.

You've probably encountered the term "the projects" before. This phrase is shorthand for "public housing projects," i.e., housing that is owned by the public sector (that is, the government). This used to be the only kind of this type of housing available up until the introduction of the Housing Choice Voucher Program.

Nowadays, Section 8 housing can be in any apartment or house which passes inspection - the tenant has a choice when it comes to the type of housing.

Section 8 For Tenants

Let's first take a look at this housing voucher as it applies to tenants. If you find yourself facing financial difficulties, is applying for Section 8 housing a good idea for you? You may have become discouraged as people tell you it's too difficult to get, or that all the accommodations will be dirty and undesirable.

These, however, are just more myths surrounding this program. Plenty of people's lives have been greatly improved by the help offered by the Housing Choice Voucher Program, and they've paid low amounts of rent per month for decent or even high-quality dwellings.

To apply, you will visit a Public Housing Authority office. To find your local office, go to the Department of Housing and Urban Development website. Applications are free and can be filled out in person, sent through the mail, or even submitted online.

Section 8 works through vouchers which can be used to pay for a certain amount of rent. There are two types of vouchers: project-based vouchers and tenant-based vouchers.

Project-based vouchers, as their name implies, can only be used for projects, buildings or areas that have been specifically set aside to house Housing Choice Voucher Program tenants.

Tenant-based vouchers, on the other hand, are used to pay private landlords who have made their properties available to Section 8 tenants and have passed inspections. These are issued under the Housing Choice Voucher Program.

Actually, depending on the municipality you live in, landlords may be required to accept Section 8 tenants.

Pros and Cons of For Tenants

The most obvious advantage of Section 8 is that it can help you pay your bills. A lot of people can get to the point where paying for rent is their primary concern - this housing voucher is here to help alleviate this rent burden so you can pay for other necessities such as food.

Section 8 affords low-income families the opportunity to improve their situation

One major drawback of applying for Section 8 is that you will most likely be placed on a waiting list

One major drawback is that you will most likely be placed on a waiting list - it may take as long as a year or two for Housing and Urban Development to determine if you or your family qualify. However, during this time you will likely be able to use project-based vouchers.

Although you will most likely be placed on a waiting list - the demand for vouchers is greater than the number of accommodations available - Section 8 is not a first-come, first-serve system.

There are certain qualifications that can give you preference when it comes to getting housing. Some of these include:

  • The family being homeless.
  • The family currently living in substandard housing
  • The family paying more than 50 % of their income for rent
  • The family has been involuntarily displaced

If any of these conditions apply to your situation, be sure to let the PHA (Public Housing Authority) know as you may be able to get housing faster.

How Can I Qualify for as a Tenant?

Qualification for this housing voucher is based mainly on your income, and the amount also varies based on whether you're an individual or have a family to support. It also depends on the area you live in: as a rule of thumb, you can not earn more than 50 % of the median income of the area in which you live in order to qualify.

As a Section 8 tenant, it's your responsibility to report any changes in income or family composition to your local PHA.

In general, you must be a US citizen in order to qualify for Section 8, though there are certain exceptions.

Section 8 For Landlords

If you are considering becoming a Section 8 landlord, you probably have a lot of questions. First and foremost, you'll be wondering: "should I become a Section 8 landlord?" Well, there are benefits and drawbacks to accepting Section 8 tenants. We'll start with some of the benefits.

Pros for Landlords

If you've been a landlord for any length of time, you'll know that one of the most frustrating things about being a landlord is overdue rent; you've probably heard that rent is guaranteed with a Section 8 tenant, and what could be more appealing than this? Well, it's at least partially true, and one of the biggest advantages of renting out to a Section 8 tenant.

Basically, the government will only pay a certain percentage of the rent - this you can expect to receive every month (although when first starting out with a tenant, it might take a few months to get rent; more on this below)

Given that the whole point of public housing is for the government to guarantee accommodations to those who can't afford it, it might seem strange that they're only paying a portion of the rent, but that's the way it works, unless the tenant is making no income in which case they'll probably cover it completely.

As you can see, saying Section 8 means "guaranteed monthly rent" is a bit of a misnomer. As with any tenant, it's your duty to evaluate the Section 8 tenant, looking at things like their credit history. 

Since the government will be paying most of the rent, market-based rental increases are less traumatic for tenants.

Fill up vacancies more quickly with Section 8

Another benefit of agreeing to accept Section 8 tenants is that you'll be able to fill up vacancies more quickly. Since there is a shortage of landlords who are willing to work with housing voucher clients, these apartments and houses are continuously in short supply and high demand: we don't want to say it's guaranteed that a vacancy will fill up in a few days, but there's a good chance that, in a lot of cases, it will be filled more quickly than if it were being rented out the normal way.

Since a lot of landlords will not accept Section 8 vouchers, this also means tenants are less likely to leave this type of housing (ideally, yours) once they've found it. Section 8 leases are usually for a minimum term of one year.

Cons for Section 8 Landlords

Above, we mentioned that apartments or houses that wish to become Section 8 housing must pass inspection. As with any federal government program, there can be a lot of red tape!

Once a year, an inspector will visit the property to ensure it meets standards and habitability requirements. You may be required to make changes at your own expense, though there are preventative measures you can take to make sure this doesn't happen.

Of course, although the government pays around 70% of the rent, the other 30% is not guaranteed. Obviously, it's a good idea to look into the history of the person who wishes to become a Section 8 tenant - don't go in assuming that you will get all your rent!

Additionally, these types of tenants are more difficult to evict than regular tenants.

So, overall, there are advantages and disadvantages to becoming a Section 8 landlord.

Determining whether or not it's right for you can seem like a balancing act of weighing the benefits against the drawbacks and vice versa.

In spite of all the myths you have heard, this is not necessarily a disaster, nor is it a magical, higher-than-average guaranteed rent situation.

We recommend really doing your research, taking your time and especially researching the experiences other landlords have had with Section 8 tenants so you can learn more about the perks but also be on the lookout for any potential problems.

Pros and Cons of Section 8 For Tenants and Landlords

Conclusion

Section 8 is a valuable program that benefits both tenants and landlords. It can help tenants get back on their feet, saving them from homelessness if they can't otherwise afford rent, and it helps landlords have steady access to a large supply of potential tenants.

Whether you are a person who needs cheaper housing, or a landlord who needs more tenants, Section 8 is certainly something worth looking into. If you have any questions regarding this topic, feel free to contact us.

Springs Homes for Rent

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