Breaking Federal, State & City Law… a Real Estate Investors Worst Nightmare
Recently, I was being interviewed by a mid-sized real estate investor. They had a nice home in the suburbs, where we met. They also had 50 or so residential properties that they had acquired that they were self-managing. It was getting too much for them to handle and they were considering the pros and cons of outsourcing to a professional property management company.
During the conversation, the investor had 3 major problems with their current property management.
- Not Issuing W9s to their contractors. Paying cash to contractors and not issuing a W9 may seem like a minor issue, but it’s not. Someone who does this is actively participating in helping their contractor commit tax fraud. This is a violation of federal law. If they’re paying cash, the don’t have the receipts to take the repairs as deductions on their tax return. If they do take the deduction on their tax returns, thereby paying less taxes and not issuing the W9 participating in the contractor paying no taxes, this is not going to make the IRS too happy if they find out.
- Holding too much security deposit. While different States have different laws, Pennsylvania State Law is clear. After 12 months of tenancy, a landlord can only hold 1 month’s security. If they’re holding more than that, it needs to be credited or given back to the tenant. This investor told me that they did not make the credits to their tenants according to State law.
- Smoke & C.O. detectors. Philadelphia city law states that all residential properties that may have children living in them need to either have a hard wired smoke detector or one with a 10 year lithium battery. This owner also told me that they do not possess the proper detectors in all of their units.
Each one of these items, in of themselves, may seem minor. However, if there is ever a fire, or a law suit or an investigation and these things come out, the combination of these factors could make this a very serious issue for the investor.
Along with the other services that property managers provide is making sure their clients are compliant with all laws and their investments don’t turn into a nightmare.