Legal Things to Know Before Investing in Rental Properties
With the rise of the DIY movement and the expansion of the mobile workforce in the U.S., investors are clambering to purchase rental properties. Whether they are rehabbing and flipping properties or buying them and turning them into rentals, more investors are interested in the potential returns of real estate investment. If you have attended a seminar, read a book or listened to a podcast on real estate investing, or if you are personally interested in investing, here are some legal issues to consider as you move forward in the rental market.
Sheriff’s Sales and Tax Sales are Much More Dangerous Than You Think
It seems almost too good to be true. All of these properties are available at your county’s tax or sheriff’s sale for tens of thousands of dollars less than what they are worth, according to the best estimate you can find. Why not start your investing there? Well, although sheriff’s sales can represent an incredible opportunity to purchase a property, that purchase can bring its own difficulties. For example, a sheriff’s sale does not extinguish junior liens if those lienholders were not properly notified of the sale. Although the senior lienholder (the one trying to sell the property) is technically responsible for notifying all junior lienholders, it is the new buyer who is left with a property encumbered by liens when proper notification is not given.
Also, there are several title problems that can arise long before the sheriff’s sale. Someone who claims to own a property and even has secured a mortgage for it might not have a clean title. Purchasing a property at a sheriff’s sale does not guarantee you a clean title. In fact, it guarantees you nothing at all except that you have title against the lienholder who sold it and, in most cases, against the debtor who previously owned the property. This is not to discourage you from attending a sheriff’s sale or a tax sale. These can be great investment opportunities, but you must do a careful search of any properties you are considering purchasing to make sure that there are no legal problems or a cloudy title lurking in their past.
Form an LLC for Each Property
You should form an LLC for each property you purchase. These often are named for the street address of the property, but that is not a hard and fast rule. Forming an LLC can be relatively inexpensive once you begin to work with a real estate lawyer or business lawyer you can trust, and you should do so for each individual property. The reason you want an LLC for each property is that it protects the property in the event you have problems in other parts of the business. For example, a slip and fall at property A will limit any claims against Property A to that LLC. These claims will not affect the LLCs holding the other properties. Forming LLCs also allows you to sell off individual properties or businesses at a future time more easily, and it can help you to avoid taxes in that case. Managing properties as part of the portfolio also can be easier when you have an LLC for each property. As the ownership of an LLC in Pennsylvania is not a matter of public record, there also is additional privacy protection in this approach.
Eviction and Ejectment
If a tenant stops paying rent, the landlord’s remedy is eviction. If an occupant never had a right to be there in the first place, the remedy is ejectment. That is the basic difference between eviction and ejectment under Pennsylvania law. Unfortunately, evictions are part of being in the rental business and can take several months. In fact, they can take up to a year depending on all the circumstances involved. Even property owners who are very selective find that they occasionally must evict a tenant who stops paying rent or who damages the property. In most counties in Pennsylvania, getting before a District Justice for an eviction hearing can be done quickly, and the time to bring a case is statutorily prescribed. Nonetheless, obtaining the eviction order can be rather difficult as judges might rely on nonlegal reasons for granting a tenant an extension while they clean out the unit or find new housing. These extensions are more common during the colder months.
Anyone considering being a landlord should speak with an attorney and learn more about Pennsylvania’s Landlord and Tenant Act. Understanding landlord-tenant actions can help you avoid some of the cost and time associated with completing an eviction. Furthermore, when you purchase a property at a tax sale or a sheriff’s sale as discussed above, you might have to remove an individual who has no right to be in the property in the first place. This can be the former owner or a regular squatter, in which case an ejectment is necessary. Unfortunately, this process can take as long or even longer than an eviction.
Conclusion
If you are thinking of renting real estate to others, it is important to know the landscape of this area of law. Contact a real estate attorney at Cornerstone Law today to discuss your options and get to know how to better predict potential problems in the rental business.
