Becoming a Landlord – Part I: Tenant Deposits

for_rent_signBack in February, I posted on issues related to converting your home into rental property (“Converting to investment propertyFebruary 2, 2012). The current post is a continuation of the subject matter, but focuses on what I believe are the key things you need to know if you decide to get into the landlord business. The Massachusetts landlord/tenant laws are considered some of the toughest, most pro-tenant in the country. Many landlords don’t understand the requirements surrounding tenant deposits. If you are going to be a landlord, you need to know how this works.

  • What can you collect in advance?

Mass. General Laws c.186 s. 15(1)(b) specifically states that “no lessor may require[emphasis added] a tenant or prospective tenant to pay any amount in excess of the following:

(i) rent for the first full month of occupancy; and,

(ii) rent for the last full month of occupancy calculated at the same rate as the first month; and,

(iii) a security deposit equal to the first month’s rent ……

(iv) the purchase and installation cost for a key and lock…”

Notice that the exact language of the law is “no lessor may require[emphasis added]…”  Landlords who charge extra fees such as “cleaning fees,” or “pet fees,” or even “credit check” fees are in blatant violation of the law. In those cases, a tenant could later deduct those amounts from her rent, and the landlord would likely have little recourse. The trickier case is where the landlord  and the tenant work out an arrangement where the tenant pays a large portion of the entire lease, such as 6 months or a year, up front. There are situations where this is clearly desirable for both parties. For example, a tenant with marginal credit  might make an offer of six months rent up front to make the deal work. It may not, however, be a legal arrangement. If you are considering making a rental deal and taking more than first, last and security deposit, you should consult an attorney to consider the risks and benefits.

  • What to do with the security deposit and last month’s rent?

The specific requirements set out in the Massachusetts General Laws are nothing short of onerous. See also: Massachusetts Security Deposit: Last-month’s Rent Traps for the Unwary Landlord. For example, the security deposit has to be put into an account that is entirely separate from the landlord’s own funds.  The landlord must also pay the tenants the interest every year and it must be the “actual” interest or the “statutory” amount.  The logistical issues related to setting up an escrow bank account in someone else’s name is not that difficult for one single tenant, but gets much trickier for a set of tenants sharing an apartment. If you want to withhold money from a security deposit at the end of the lease, you will also have to have handled the required “condition statement” properly. Then you can only withhold money for specific repairs where you can substantiate the actual cost of repair. Last month’s rent is easier to handle as it does not need to be put in a separate escrow account. However, the landlord is still subject to the interest requirements. Very few landlords handle all of these requirements absolutely correctly, and are at some risk in the event of a lawsuit. With experience, and often trial and error, you just have to decide what works, what doesn’t, and what risks you are willing to take.

What Condo Association Budget?

condo-budgetCondominium association budgets come in all shapes and sizes. If, like me, you live in a very small association with 2 or 3 units, it may be questionable whether an actual written budget even exists. Large associations, made up of hundreds of units, often have detailed budgets prepared by professionals. In either case, when you went to sell your condo in the past, only the prospective buyer cared about and reviewed the budget. In today’s lending climate, it is standard practice for the buyer’s lender to review the budget. Fannie Mae, the quasi-public company through which most mortgages pass, does not require a written budget for 2–4 unit associations, but does require it on associations of 5 or more units. Many lenders also have an “overlay,” which is essentially an additional requirement that 2–4 unit associations have a written budget. The bottom line is that it is a good idea to have an actual written budget, because it is likely that the lender will ask for it when someone goes to sell a unit in the association.

The lender reviewing the budget will want to see a line item for a 10% reserve. 90% of the annually collected fees must account for all of the regular recurring expenses, and 10% must be saved as reserves. According to the lenders I work with, it is unnecessary to have a separate reserve account. Be careful, however, as buyers looking to get mortgages guaranteed by the Federal Housing Administration (known as FHA mortgages) require condominiums associations to meet stricter requirements.

Most condominium budgets can be set up to show a 10% reserve. All obviously recurring expenses, like insurance, water and sewer, the common electric bill, and all clearly recurring maintenance (snow removal, for example) must be budgeted for in a line item. I also recommend some money be put in a line item labeled “maintenance,” because not having any money for general maintenance is not realistic or credible. Expenses that do not come up every year do not have to be budgeted for in advance and can come out of reserves. For example, if your association plans to spend $10,000 in the upcoming year on a new walkway, the budget can still show a 10% reserve for the year that you build the new walkway. The following year, when you produce a “budget vs. actual” report, you would show that you spent the money out of reserves.  As a matter of fiscal prudence, your association may still want to raise fees or collect money via a special assessment, but that is a different conversation.

I always enjoy a good conversation about condominium association budgets, so please don’t hesitate to contact me or write a comment and tell us about your condo association budget.

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A Peek at the Ultra High-End

Hi. Welcome to my new blog. If you are reading this you are also reading the very first entry.

Did you happen to read the Boston Globe on Friday July 8th? You might have caught the front page article entitled “What price luxury.” See the Boston.com article here. In a nut shell, the 6,829 square foot Penthouse at the Mandarin on Boylston Street in the Back Bay just sold for $13.2M (Hey you do get 4 parking spaces for your $10,000+ per month condo fee, and 3000 sqft of deck space). The sellers paid about $13.1M about 3 years ago, and never even moved in. secure server . Interestingly, these same sellers put it on the market for $16.99M and it took 32 months for it to sell.

This appears to me to be the most expensive condominium ever sold in the city of Boston. Second Place goes to another Mandarin unit that recently sold for $12.2M and 3rd place to a Penthouse Unit at 51 Comm. Ave. that sold last year for $10.8M. That unit took 4 years to sell. Currently there two other off-the-charts Penthouses available. One at the new Clarendon for $6.75M and the other at the Four Seasons for $8M. If you’re really interested in the Clarendon unit, ask me about as I saw it a couple of weeks ago.

New York has had $10M+ apartments for a long time so why not Boston? I don’t think it says too much about the real estate market in general. One, it means that Boston is attracting some of the super rich. That is good as it helps maintain Boston’s reputation as a world class city. And two, no matter what the price range, overpricing your property is still a bad strategy.

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