How do I identify and prevent my rental property from becoming a Breaking Bad nightmare?
Breaking Bad, the hit television series based Albuquerque, New Mexico, is in its final season.?While many of us are sad to see this show end, I for one am grateful that my everyday life is not a Breaking Bad world of meth labs and drug dealers.
However, I am trying to not be naive. Meth labs are often set up in rental homes, so landlords and property managers are at risk of having their rental properties turned into methamphetamine production facilities. This is a big deal because the chemicals that are used to make meth are highly flammable and explosive. And meth residue is extremely toxic and considered hazardous waste. Once it is discovered, the property owner is responsible for cleanup, which can cost tens of thousands of dollars, and most insurance policies will not cover it. In addition, meth residue can permeate an entire building, which means remediating all affected units, losing rental income, and relocating residents.
Given the physical dangers and financial consequences of renters setting up meth labs in your rental home, I thought some meth guidance might be in order:
What are signs my rental property is becoming a meth lab?
Certain ingredients are necessary to make meth. If you watch Breaking Bad, you might recognize some of them. When you see the list, you understand why it is ?so toxic and why it is good to spot these toxic residues:
- Large amounts of cold, diet, or allergy pill boxes (over-the-counter ephedrine or pseudoephedrine)
- Sheets or filters that are stained red or have a white, powdery residue.
- Empty containers of anti-freeze, white gas, ether, or starting fluids.
- Drain openers, freon, lye, paint thinner, acetone, or alcohol.
- Ammonia or propane tanks, anhydrous ammonia (in coolers).
- Camp stove fuel containers or other compressed gas cylinder.
- Jars or bottles with rubber tubing attached.
To make one pound of methamphetamine, six pounds of hazardous, toxic waste is produced. Besides ending up in the walls, floors, HVAC system, carpet and other places, some of the waste is often dumped on the ground, so also look outside for dead grass or plants, and stained soil.
How can I prevent my rental from becoming a meth lab?
Screening your tenants is and critical. People who cook meth tend to end up in rentals that are self-managed and do not have a standardized tenant screening procedure. So make sure to:
- Have a solid tenant screening system in place, or hire a property management company?that does.
- Call previous landlords to confirm that your applicant was a good tenant in the past (make sure the phone number you have is to the actual landlord, and not someone pretending).
- Check employment references, and verify income. Follow up if your tenant pays for rent in cash.
- Include in your lease agreement that there will be regular inspections (with the proper 24- or 48-hour notice, as required by state law. Regular inspections may deter someone who is engaged in illegal activities.
- Let the neighbors know you are the property owner, and that if they notice anything suspicious you’d appreciate a phone call to either yourself or your property manager.
Should I let new tenants know that the unit was previously contaminated?
The answer depends on which state you live in. Scripps Howard news service examined state meth disclosure laws in 2012 and found that seventeen states require property owners to tell renters about prior meth contamination, although several of those states waive that requirement if the meth residue has been officially cleaned up.
One more warning for rental property owners: if you are planning on expanding your rental property inventory, make sure you are confident that any properties you purchase were not used as meth labs in the past, because as soon as you own it, you become liable for the cleanup. During due diligence, if you have any suspicions, consider checking with the local police department, and have the property tested during the inspection. If you find suspicious residue, you can even test it yourself with a ten-pack meth residue test kit from Amazon.com for about $30. If you get a positive result, that $30 would be money well spent.
Have you had any Breaking Bad experiences with your rental property?
Are you looking for a local property manager expert?
As always, the information provided here is just that–it is for informational purposes only and is not legal advice. If you have any particular questions or issues, please consult an attorney.
By Tracey March
 For those who don’t follow it, Breaking Bad is about a high school science teacher (played by Brian Cranston) turned methamphetamine cooker and dealer to provide additional income for his growing family when his cancer treatments start eating up his savings.
Known as the “Mile-High City” because of its elevation of exactly one mile– or 5,280 feet–Denver seems to have become one of “the” places to live in recent years as it offers incredible outdoor opportunities with the benefits of living in a city–and a cool city at that.
Located between the Rocky Mountains and the High Plains, Denver is known for its great access to world-class ski areas, craft breweries, great restaurants, and its healthy economy. The city boasts over 200 parks, 12 recreation centers, and numerous community gardens; it also owns several mountain parks including Winter Park Resort and Red Rocks Park.
Denver has four distinct seasons, claims 300 days of sunshine a year, and because of its elevation and location on the edge of the Rockies, extreme weather isn’t uncommon.
Denver’s diverse economy includes strong performances in areas such as telecommunications, energy, technology, tourism, finance, and distribution. Forbes lists Denver as #6 in its listing for Best Places for Business and Careers. Unemployment in metro Denver was 6.5 percent in 2013, a decrease of 1.2 percent from 2012. The Metro Denver Economic Development Corporation (Metro Denver EDC) projects employment growth in 2014 will increase 2.7 percent; the unemployment rate is expected to fall to 6 percent.
With a population of about 634,000 Denver is the 23rd most populous city in the US. The city has a relatively young population, tying for third with Seattle for its increase in 25- to 34-year-old residents. Median household income in metro Denver is a healthy $61,453, significantly higher than the average for US metro areas as a whole ($53,607). Net migration for metro Denver was 23,344 in 2013 and is projected to be 23,675 in 2014.
Denver Real Estate Market
The median sales price of single-family homes in Colorado’s metro region was $273,000 for Q4-2013, marking an increase of 7.8%, year over year, according to the Colorado Association of Realtors. The number of days on the market decreased compared to the prior year, dropping 26.2 percent, from 65 days to 48. As of December 31, 2013, there was a 2.3-month supply of single-family homes.
Denver Rental Market
Metro Denver EDC reports that the number of new residential units in 2013 was 12,235; that number is expected to increase to 14,885 in 2014.?The Denver Post reports that despite the addition of these new rental units, average rents in metro Denver increased by $63 in 2013, from $978 to $1,041.
The apartment vacancy rate in Q4-2013 was higher than it has been in two years, at 5.2 percent, according to the Denver Post. Demand by younger professionals for high-end apartments close to Downtown has been blamed for the increase in rents. According to Ron Throupe, a professor of real estate at the University of Denver, the city has been one of the hottest spots for young adults and “when they come to town, they aren’t going to buy a house. They are going to move in with a friend or get a unit on their own,” so they’re more likely to rent.
Apartment rent and vacancy rates aside, looking at vacancy rates for all rentals of 1-4 units, the Colorado Division of Housing reports the metro Denver vacancy rate in Q3-2013 was 2.9 percent, with average number of days on the rental market at 48.2 and an average rent of $1,140.55, up from $1,090.76 the previous year.
So How’s Denver Doing?
Denver’s economy, real estate market, and rental market are strong. CoreLogic Case-Schiller predicts home prices will increase 2.7 percent from Q3-2013 to Q3-2014, and 3.4 percent from Q3-2014 to Q3-2015. 10,000 to 12,000 apartments are expected to enter the metro Denver rental market; predictions are these will be absorbed over the next 2-3 years. Their impact on rents and vacancy rates is yet to be seen, but the influx of young professionals, seeking a solid career and great lifestyle options, doesn’t seem to be slowing.
Are you a property manager or realtor in Denver? We’d love to hear how things are on the ground, please comment!
By Tracey March
Freezing temperatures signal winter is here and the end of the year is just around the corner. Whether you’re a self-managing landlord, or you have a property management company managing your rental property, five things should be on your mind:
- winterizing your rental
- preparing for snow and ice storms
- filling vacancies quickly
- end of year tax to-dos
- planning for next year
We asked some of our best professional property managers about their end-of-year priorities, and we got some great advice.
Here are some critical checklist items for winter that you can’t afford NOT to do:
Winterize Your Rental:
Proper winterizing will help you in a myriad of ways, including preventing slip and fall lawsuits, lowering heating bills, and saving thousands in potential maintenance disasters, like frozen pipes or severe water damage from leaks.
Fred Musilli, Broker of Record at DJCRE Sales, Leasing, & Property Management in Philadelphia, says that while there are many preparatory items an owner needs to be concerned with in the winter, he ranks these two items as priorities: chimney safety/CO2 detector maintenance and snow removal responsibility.
Chimney safety and carbon monoxide detectors go hand-in-hand, advises Musilli. If your rental property is not exhausting properly, tenants can be seriously injured, or even killed. Much further down on the list of reasons, he adds, a chimney and burner cleaning will also improve energy efficiency and prolong the life of your heater.
Musilli also advocates a review of your snow removal plan, which should include not only who should be doing the dreaded task, but also how much needs to be cleared, by when, and proof of compliance. Somebody has to do it, and it is important not to make clear who has responsibility for what.
Another checklist item (for the over-achieving landlord), suggests Musilli, is a review of tenants’ intended use of individual space heaters, which can wreak havoc on an electrical system and create needless emergency calls when the electrical box fails. If tenants use cheap, non-UL rated, or damaged extension cords, a house fire is more likely. Discuss use of these heaters with your tenants in advance to avoid expensive repairs, and increase tenant safety and overall satisfaction. If haven’t done so already, consider addressing space heaters in your lease agreements or “house rules.”
Checklist: Winterizing Tips
- Chimney safety inspection
- Carbon monoxide detector inspection (and smoke detector while you’re at it).
- Review snow removal responsibilities.
- Review your tenants intended use of individual space heaters.
- Clean gutters.
- Block leaks from outside.
- Check to see if you need to add more insulation to any attic areas.
- Take down screens and install storm windows.
- Wrap pipes, and consider heat tape if frozen water in your rental property’s pipes is likely.
Prepare for Snow and Ice Storms:
While general winterizing is a critical part of taking care of rental property, being prepared for the unique issues raised by severe winter storms is worthy of separate consideration. Kyle Beck, of Your Local Leasing Company, which is located in Philadelphia (so he’s seen his share of snow storms), has the following advice for preparing for winter storms:
Checklist: Preparing for Winter Storms
- Maintain an adequate supply of snow and ice removal tools, including salt or sand, snow shovels, and possibly a snow blower to remove large amounts of snow.
- Make sure your snow removal contractors are alerted and prepared to tackle forecasted storms.
- In case of a power or gas outage, be prepared with flashlights, bottled water, and blankets. Keep an extra stockpile of those supplies in case a tenant needs them. A warm blanket can go a long way toward making a miserable night a little bit better.
- Check your properties for loose or low-hanging tree branches. Gusty winds or ice build-up can cause loose branches to fall, presenting a hazard to both tenants, employees, and visitors.
- Keep an eye out for loose roof tiles or faulty furnaces. While this should be a part of your annual winter inspection, it’s imperative that these items continue to function properly throughout the winter months. Heavy snow buildup can quickly lead to damaging leaks in a unit, and you certainly don’t want a furnace to stop working during a winter storm.
- Stay on top of the situation. With 24-hour weather available via television and the Internet, it’s easily than ever to track storms and their potential to hit your properties.
Minimizing Your Vacancy Rates
Winter has the worst vacancy rates, and you lose rental income every month your rental home sits empty. Having a tenant move out at this time of year is often considered the kiss of death because finding tenants in the winter is more difficult. Kevin Haag, Founder and CEO of Douglas Realty & Development, Inc., encourages his rental property owners to offer something nobody else would to avoid an empty rental property in December and January. Consider an incentive such as “sign your lease before Christmas and get the first week of January free” or “sign your lease before New Year’s Eve and get a $100 gift certificate from your local grocer or well-known restaurant.” Haag suggests that if you dare to be different your results will improve.
In addition to offering incentives, compare your rents with those in the area to make sure your rent is fair. There are many different ways to do this, from checking comparable properties on rental property websites, to using an online service such as Rentometer. While your rental unit or home shouldn’t be priced too high, make sure it’s also not priced too low for two reasons. First, you want to maximize your rental income. Second, if potential renters think the rent is too low for the area, they may assume that something is wrong with your rental property and not even come and look at it.
Also, If you or your property management company (if you have one) doesn’t have a professional website to advertise your rental property, now’s the time to try to do something about that. Recent studies show that the vast majority of renters rely on the Internet to find rentals. And having a rental property on a landlord’s or property management company’s professional website is one way potential renters can confirm the rental home isn’t part of a rental scam. If you feel ill-equipped to take building a website on yourself, seriously considering hiring someone to help you.
Checklist: Minimizing Your Winter Vacancy Rates
- Offer incentives to move in to prospective tenants.
- Make sure your rents are fair for the area.
- Set up a website, or consult with a company that can do it for you.
- Consider being more flexible on the length of the lease.
End of Year Taxes:
While tax returns aren’t due until April, to minimize your tax burden the strategy of accelerating rental property expenses should be considered now, according to Larry Nelson, CPA and partner at Kerkock Katter & Nelson LLP in Bend, Oregon. With twenty years of experience assisting rental property owners, Nelson suggests that deducting these expenses this year could be more important than ever, especially if you’re affected by the new Affordable Healthcare Act tax. Under the Act, if your modified adjusted income exceeds $250,000 (filing jointly) then you’ll pay an additional 3.8% tax on any rental income or other passive income above that amount. Rental property expenses are deductible only in the year they are paid, so December is your last chance to pay for any rental property-related expenses that you want to deduct this year. Additionally, you can pay your expenses in advance, so consider paying in December some expenses due next year (such as a mortgage payment, property taxes, or utility bills) to offset this year’s income.
As far as rental income is concerned, don’t be tempted to defer rental income for December rents to next year. The Internal Revenue Service matches 1099s for commercial leases, and they want to see rental income match up with 1099s. While residential rental owners don’t receive 1099s from their tenants, Nelson says he has been involved in audits where the IRS examined residential lease agreements and had issues with the rental owner declaring less than a full twelve months of income if the unit was occupied for the entire year. But what if you were on vacation for all of December and didn’t check your mailbox until mid-January? Nelson says that’s still income for December.
Nelson also says it’s important to not make assumptions about rental income losses–he’s seen several clients get burned because they thought they could deduct these losses. The problem is that rental income losses fall under the “passive income rule” which can be a complicated beast. Rental income is considered passive income, and under the rule, passive income losses can only be offset against passive income, which means you need to have another rental property that makes money or some other passive income source. The rule is different if your adjusted gross income is less than $150,000. Nelson emphasizes that passive income rules are very complex and everyone has a different situation, so it’s critical that you consult with your tax advisor before you act on any assumptions. Also see our article on Tax Tips for further ideas about legitimate deductions.
Checklist: End of Year Taxes
- Meet with your accountant to discuss end of year tax strategies.
- Consider paying now expenses due next year to offset this year’s income.
- Let your accountant know if you anticipate any rental losses next year, or if you’re planning on refinancing, buying, or selling rental property as these activities may have tax consequences that might be partially mitigated with informed planning.
- If you formed an LLC or S-Corporation to hold your rental property, order 1099s now to send to your unincorporated vendors (to whom you paid more than $600) by January 31st–it can sneak up quickly.
Revisiting and evaluating insurance policies and rental regulations and laws is key to protecting your rental property investment. John Bradford, CEO and Founder of Park Avenue Properties, LLC, recommends that rental property owners set an annual calendar reminder to review their insurance policies for proper and adequate coverage and check on new local ordinances affecting landlords.
Insurance policies and their respective coverage amounts change frequently. Bradford has seen many owners move out of their property and convert it to a rental but forget to call their insurance provider to make sure their policy is updated from a primary occupant policy to a landlord policy. If an owner does not make this policy change then it is very likely a future claim will be denied for the wrong policy classification. Bradford cautions that he has witnessed firsthand a property owner who received a claim denial because the policy was still considered a primary occupancy policy and not a landlord policy. The classification change to a landlord policy will likely result in a premium increase but without the proper classification the property owner is not adequately insured which, in the end, will be a much bigger price to pay.
City ordinances can change quickly and are difficult for distant and even local landlords to be aware of. While a local professional property manager should be able to help you with local ordinances, Bradford cautions that it is ultimately the property owner’s responsibility to make sure rental property is compliant with local city and county ordinances. The City of Charlotte, for example, recently required all landlords within City limits to register their rental properties online with the local police department. There is no charge for this registration but failure to register rental property could result in unnecessary fines.
In addition to local ordinances, make sure you understand federal and state laws that impact rental property, such as fair housing requirements and your state’s landlord-tenants laws. Your property manager, if you have one, will be an important resource here. If you self-manage your rental property, consider joining a state or local landlord association, as these groups often have attorneys provide updates on changing laws as well as provide other benefits.
Checklist: Year-end Review
- Review rental property insurance policies; update amounts if necessary.
- If you don’t have an umbrella liability insurance policy, consider one.
- Make sure that if you have converted your primary residence to a rental property, that you made that classification change with your insurance company.
- Review local city or county ordinances for changes, such as registration requirements.
- Review federal and state laws, including fair housing rules and your state landlord-tenant statute, for any changes.
Planning for Next Year:
While it might be a slower time for year for landlords and property management companies, the winter, especially December, can nonetheless get busy because of the holidays. However, it’s important to have a game plan for the coming year. Schedule a planning meeting to meet with key people, including any co-owners of your rental property or your property manager, if you have one, to address these issues:
Checklist: Planning for Next Year
- Confirm annual or six-month rental property inspections are scheduled.
- Review lease agreement template.
- Review policies or “house rules.” Consider adding a policy addressing space heater safety.
- Review rents and consider an increase.
- Discuss whether any significant repairs, such as re-roofing, need to be undertaken in the coming year.
What year-end tasks would you add?
Please comment–we’d love to keep adding to the list!
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