A Guide to Rental Law
Rental properties can be an excellent investment that provides substantial returns over a lifetime when handled properly. Unlike flipping homes or general housing development, rental property investors have the luxury of waiting out slow markets with minimal losses because rental agreements are binding contracts that are often renewed annually, limiting the risk when a rental is occupied. There are, however, several regulations that govern rental properties and the agreements made with tenants. Failure to follow rental laws can dramatically reduce your return on investment, resulting in wasted time in court, payment of fines levied against you or covering repairs for damages caused by tenants. To help you understand the legal obligations of a rental property owner versus those of your tenants, here is a comprehensive guide that covers federal laws, common state laws, legal limitations, areas that will require clarification and how these rental laws impact you as an investor.
Key Point Module
- 1 The Fair Housing Act and Fair Credit Report Act are key laws to understand
- 2 More nuanced rental laws are typically decided by individual states and can vary from location to location.
- 3 State laws can require a high degree of expertise to understand them fully.
- 4 Property managers can save owners time and money associated with learning and following state rental laws.
Federal Rental Laws
The federal government, for the most part, leaves it up to individual states to determine the detailed legislation that governs rentals within their borders. However, there are two important acts passed by Congress that can have a major impact on you as a rental owner.
The Fair Credit Reporting Act
Most rental property investors choose to protect their income by running a credit check on any potential tenants. Although this is common practice, it’s important to recognize the responsibility that goes with the ability to access this kind of personal information from applicants. The Fair Credit Reporting Act (FCRA) is enforced by the Federal Trade Commission (FTC) and outlines the appropriate ways credit information can be accessed, what it can be used for and what your obligation is after you run the credit check. The key factors to remember are:
- You must have an applicant’s permission to run a credit check and can only do so for consideration of a new or renewed lease.
- You can not use the information you receive for any purpose other than housing, and you must disclose to the reporting agency that the report will be used for housing.
- Any adverse action (denial, increased deposit, co-signer requirements, etc.) taken as a result of the consumer report requires that you give oral, written or electronic notice to the tenant or applicant. This notice must include the name, address and phone number of the reporting agency used, state that the reporting agency was not responsible for the adverse decision and inform the consumer of their right to dispute any inaccurate information and receive a free copy of their report.
- Submissions of any late payments or evictions, to credit reporting agencies must be accurate and complete.
The penalties for failing to comply with the FCRA can include a lawsuit brought by the injured consumer and fines imposed by the FTC.
The Fair Housing Act
The Fair Housing Act (FHA) establishes the limitations set by the federal government when it comes to choosing your tenants and negotiating your rental agreement, working to eliminate discrimination by landlords and lenders. Rental property owners are prohibited from denying a rental application, setting rental rates, evicting a tenant, choosing a rental location, changing rental terms or conditions and any other biased actions based on:
- National Origin
- Family Status
Violations of these regulations can result in hefty fines, punitive damages and attorney fees. The fines can be as high as $100,000 if the Justice Department is involved and all charges filed through the U.S. Department of Housing and Urban Development (HUD) are made public.
State Rental Laws
Rental laws at the state level can vary, but there are some laws that almost every state covers in some variation. Since state laws often cover the finer details of the rental agreement, these regulations will have a significant impact on the wording in your written lease. It’s important to check your state’s exact statutes and make sure you understand your legal obligations, limitations and the relationship between you and your tenants as defined by law. Here are some of the most common rental law subjects you’re likely to encounter:
- Security deposit: Most states define the time frame within which a property owner must return a security deposit to a previous tenant after a rental is vacated and will identify what charges can be deducted. Some states may even impose limits on the amount, require a dedicated bank account to hold deposits and outline record keeping requirements.
- Rent: You’ll often find laws determining how much notice must be given before raising rent prices, define the rights of the property owner if a tenant abandons the rental and whether a tenant is allowed to deduct rent for repairs or loss of essential services, such as heat and water. There may also be laws that cover the assessment of late fees, grace periods for late payments and returned check fees.
- Entry and notices: Common state laws regarding notices will usually cover the time frame in which a notice must be given for common rental scenarios and the limitations imposed on the property owner regarding entry of the rental property. These can include the minimum notice required to terminate a lease, the time frame and method of giving notice for inspections, when entry is allowed for repairs and maintenance and how to legally enter the rental when a tenant is absent for an extended period.
- Landlord’s duties: These laws outline the property owner’s obligations to the tenant. They generally include compliance with state and local ordinances when it comes to housing conditions.
- Tenant’s duties: Laws regarding tenant’s duties determine the responsibilities of the tenant when it comes to cleanliness, damages, use of appliances, trash disposal, use of the property for lawful purposes and preventing injury to others on the property.
- Evictions: Eviction statutes are often found in state rental laws, covering the process by which a property owner can remove a tenant for failure to comply with tenant duties or the lease agreement. Since this may involve a court proceeding, it’s a good idea to familiarize yourself with small claims regulations and any statutes of limitations regarding unpaid rent or damages to your unit.
There are other laws that may be set by your city or state on various topics, such as requiring a business license to rent out property, how domestic violence situations affect the property owner, walk through requirements and the property owner’s responsibility to mitigate damages by making efforts to find new tenants when a lease is broken. It’s important to remember that a lack of awareness does not protect you from consequences if these regulations are broken, so take the time to research the rental laws in your state.
What Rental Laws May Not Cover
Although rental laws are comprehensive, there are some issues that may not be covered. In these cases, it will be up to you to determine the guidelines and outline them clearly within the rental agreement. For example, pet deposits may not be governed by law in the states that allow them, yet many property owners find them necessary to cover the normal wear and tear a pet can cause. If you choose to allow pets, you must clearly outline any restrictions you wish to place on the size, number and type of pets residing in the rental property. You must also clearly state the amount required for a pet deposit, should you choose to impose one, and whether that deposit is refundable. Although many states will not allow a non-refundable security deposit, pet deposits are often exempt from this.
You may find other rental issues that do not have an applicable law on the books in your state. In each of these, it’s good practice to cover them clearly within the lease agreement so you have legal recourse if your tenants choose to ignore your requirements. As long as your requests do not violate any of the federal, state or local laws, any agreement can be made between a landlord and tenant.
What Rental Laws Mean for You
As a property owner, rental laws work to establish a more seamless relationship between you and your tenants, offering protection for each party. The protections offered to tenants can sometimes feel restrictive when it comes to the management of your property, but it helps to ensure a consistent experience for tenants, giving them the confidence to continue engaging in the rental market. Happier tenants lead to a greater chance that your rental will remain occupied, providing you with the greatest return on your investment. Compliance with these laws will also reduce your risk of being taken to court, saving you the time and expense of defending yourself against unhappy renters.
The protection rental laws offer property owners give you clear recourse if you happen to find yourself with a noncompliant tenant. Instead of attempting to fix your issues creatively, there are specific steps outlined to remove renters that threaten the condition of your rental or choose not to pay what they owe. Although this process can take time, it gives you the ability to reclaim your property and hold your tenants responsible for any damage they cause. If you are confronted with tenants who refuse to follow the rental laws of your state, you may need to start these eviction proceedings immediately to minimize the timeline.
This dual role of protecting the property owner and the tenant means rental laws can be complex, requiring a significant time investment to ensure all regulations are followed. Although it’s possible to do this on your own, it’s often beneficial to work with an attorney when drafting your lease agreement to make sure everything is compliant and any stipulations not covered by law are legally enforceable.
How a Property Management Company Can Help
For many rental property owners, hiring a property management company is an excellent way to reduce the workload associated with managing your units. Owners who prefer a hands-off approach to their investment can turn over the bulk of their operations to a professional management company and enjoy the stress-free return. Some of the duties property management companies may provide include:
- Staying up to date on rental law changes
- Marketing vacant rental properties
- Handling the application process
- Development of a compliant lease agreement
- Rent collection and late fee assessment
- Coordination of maintenance and repairs
- Beginning eviction proceedings
Sometimes property owners are hesitant to bring in a management company because they don’t see value in the costs associated with their services. Although property management companies do charge a fee to oversee rentals, the value of what they provide can be worth it. Having access to professionals with significant rental experience, who understand the current regulations that must be followed, can save you thousands of dollars by dodging accidental noncompliance, not to mention the hours of time saved by avoiding court proceedings. For times when court is unavoidable, such as an eviction proceeding, some companies will even give you the option of designating one of their professionals as your representative by creating a power of attorney for your case. The time you save can be used to focus on hobbies, spending time with your family or pursuing other professional ventures.
These services can also give you peace of mind, knowing that someone is available to collect rent checks when you’re out of town, apply pressure to collect late payments, handle the initial move-in process and stand in for you when dealing with noncompliant tenants. Property owners who have multiple units, or those with rentals out of the area, can especially benefit from a property management company. These companies already have established systems in place to handle multiple rentals and any out of state properties will be safe in the hands of a company in the local area. When you hire a property management company, you’re partnering with a team of professionals who will apply their experience and combined knowledge to protect your interests and get the most out of your investment.