APPLICATION FRAUD GROWS AS RENTS INCREASE
TO USE AN LLC FOR REAL ESTATE 5 REASONS
23 SMART WAYS TO INCREASE YOUR PROPERTY VALUE
Sam Liebman, author of Harvard Can’t Teach What You Learn from the Streets returns with an exclusive course designed to help you master investing. Watch the trailer below! FUNDAMENTALS OF REAL ESTATE COURSE BEST-SELLING AUTHOR ANNOUNCES MASTER THE
IN 10 MAJOR U.S. CITIES Q4 RENT TRENDS
PAGE 29 To Increase Cash Flow, NOI, and Property Value WATER AND SEWER EXPENSES DECREASE
Photo by Neil Tandy
THE OFFICIAL PUBLICATION OF THE AMERICAN APARTMENT OWNERS ASSOCIATION
Editor in Chief Robbie Cronrod Staff Editor Nancy Abrams
Marketing Manager Alexandra Alvarado Contributors Allen Artcliff-Cronrod Andrea Hardaway Chris Missling Courtney Shier Daniel Sharabi Destiny Roxas Donna Meeuwsen Elaine Simpson Elizabeth Campbell Gita Faust Garret Sutton Gary Lipsky Jason Kogok John Weis Joseph Marino K’Dia Brooks Kathelene Williams, Esq. Kelly Stumphauzer Koi Peterson Kevin Hudoba Lisa Cozzi Logan Freeman Matt Arnold-Ladensack Matt Picheny Mike Butler Nancy Abrams Richard D. Gann, JD Rob Beardsley Ashley Wilson Casey Denby Cassie Wells Ryan Hoover Sam Liebman Scott Varney Shara Limoges Steve Haskell Terrie Schauer The Rentometer Team
06 10 13 16 20 29 24 26
APPLICATION FRAUD GROWS AS RENTS INCREASE
QUARTERLY RENT TRENDS IN 10 MAJOR U.S. CITIES
4 REASONS TO CONSIDER ALL-CASH/ DEBT-FREE INVESTING DURING TURBULENT TIMES 5 REASONS TO USE AN LLC FOR REAL ESTATE INVESTMENTS COULD YOU BE SUED FOR USING A CRIMINAL BACKGROUND CHECK TO SCREEN TENANTS?
CELEBRITIES ON THE MOVE
ARE YOU STUCK IN A 1031 EXCHANGE SYSTEM?
DECREASE WATER AND SEWER EXPENSES TO INCREASE CASH FLOW, NOI, AND PROPERTY VALUE
WELCOME! To end a very tumultuous economic year, we have dedicated our last 2022 RENT issue to your financial health. From our cover story, “Decrease Water and Sewer Expenses to Increase Cash Flow, NOI, and Property Value,” by Sam Liebman, author of Harvard Can’t Teach What You Learn from the Streets, to protecting you from application fraud, we want to help you begin the new year prepared for a very lucrative 2023. You’ll learn the benefits of debt-free investing, using an LLC for real estate ventures, adding an ADU (accessory dwelling unit) and utilizing renovations to improve cap rates and property value. Our expert contributors also share the steps to structuring the perfect real estate deal, preserving your wealth and what to do if you are stuck in a 1031 exchange system. Other informational articles cover how to prevent kitchen fires during the Fall holidays, a rundown of the FCC’s new broadband rules, the Q4 ‘22 rent trends in 10 major U.S. cities and “AAOA’s Top 10 Investing Books of the Season.” Don’t miss our regular features “Ask an Attorney” and “Celebrities on the Move” as well as an article on your legal exposure when you run a criminal background check to screen tenants. As we say goodbye to 2022, we wish you a very happy holiday season and a most profitable new year.
23 SMART WAYS TO INCREASE YOUR PROPERTY VALUE
3 TOP THINGS MULTIFAMILY OWNERS SHOULD KNOW ABOUT THE FCC’S NEW BROADBAND RULES HOW TO PREVENT KITCHEN FIRES DURING THE FALL HOLIDAYS
58 60 70 67
ASK AN ATTORNEY
AAOA’S TOP 10 INVESTING BOOKS OF THE SEASON
3 PILLARS OF REAL ESTATE WEALTH PRESERVATION
4 REASONS FOR INVESTORS TO ADD AN ACCESSORY DWELLING UNIT THE INFLATION REDUCTION ACT & RENEWABLE ENERGY: HOW MUCH CAN YOU SAVE?
USING RENOVATIONS TO IMPROVE CAP RATES AND PROPERTY VALUE
HOW TO STRUCTURE THE PERFECT REAL ESTATE DEAL
7 TYPES OF TENANTS EVERY LANDLORD SHOULD WANT
FEATURED AAOA MEMBER
CONFIDENTIAL OFF MARKET
CENTRAL FL COAST | 250 UNITS Class A property, $2,300/mo rent Less than 10 years old Confidential listing, price subject to offer
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TOWSON, MD | SINGLE FAMILY 2900 sq. ft., 4 bedrooms, 3 bathrooms Completed basement with in-law suite Access to attic from primary bedroom
TEMPE, AZ | TOWNHOUSE 1008 sq. ft., 2 bedrooms, 1.5 bathrooms, Big backyard patio, detached storage Tenant paying $1350/mo, 5.4% cash ROI
HOBART, IN | DUPLEX Big fenced backyard w/doubled gated entry Basement w/2 entries, potential for 3rd unit
MONTEREY, CA | CONDO 855 sq. ft., 2 bedrooms, 2 bathrooms HOA covers utilities + pool, sauna, clubhouse
PAGE 4 Ready to list your property with AAOA?
CONTACT AN AAOA REAL ESTATE AGENT
PROPERTIES FOR SALE
SUBJECT TO OFFER
MINNEAPOLIS, MN | 52 UNIT + RETAIL New construction, completion in December Mix of Studio to 2 bedroom units 18 indoor parking spaces, 52 bike spaces Near downtown, MSP, Mall of America
RIVERSIDE, CA | 14 UNIT PORTFOLIO Riverside & San Bernardino Counties, CA $454,788/yr. rent, 6.02% CAP rate, 95% occ. Includes single family, duplex, triplex, vacant land
WICHITA, KS | 46 UNITS Class B+ property (27) 2/2, (17) 3/2, (2) 3/1 Two years left on an NPR program refunding 75% of taxes back to the owner
HARTFORD, CT | 25 UNITS 4 – studios, 20 – 1 bedroom, 1 – 2 bedroom Fob entry system, 12 security cameras Assumable $1.5M loan at 5%
NAMPA, ID TOWNHOME LITTLE ROCK, AR | COMMERCIAL ZONED .61 acres, currently 3/4 home, 3606 sq. ft. Recently re-zoned “General Office District” 1,114 sq. ft., fenced backyard 3 bedrooms, 2 bathrooms
ROGER'S PARK, IL | 22 UNITS 2 laundry rooms, walk to lake, large units NOI $327,000, 6.1% Cap Rate
Interested in one of these investment opportunies?
As selling prices of homes accelerated throughout the pandemic, more and more buyers were priced out of the market and forced to become renters. Unsurprisingly, the number of new renters joined the number of renters already in the marketplace to create a demand for homes that far exceeded the supply available. And when demand exceeds supply, prices increase. For the first time, apartment seekers were entering into bidding wars and even lining up for hours waiting for leasing offices to open. It seemed that price did not matter—whether they could afford it or not. Application Fraud Grows as Rents Increase
How lack of inventory breeds dishonesty When rents increased beyond the amount people could pay for a home, many turned to illegal methods in order to qualify for a place to live. According to Daniel Berlind, CEO of Snappt, about 11 million fraudulent rental applications were submitted last year in the U.S. The fraud detection company also notes that one in eight financial documents had been altered out of the more than 1 million it scanned.
Additionally, between 2019 and 2021, reports of fraud, identity theft and other deceptions spiked 67% in the U.S., according to the Federal Trade Commission. In a 2020 analysis, LexisNexis found more than 30,000 fraud rings who were involved in forgery, filing false claims, identity theft, identity manipulation and fake bank checks.
Fraud, the pandemic and social distancing Since people were encouraged to isolate themselves from others during the Covid-19 pandemic, landlords began to allow applicants to send an application online without ever meeting face-to-face. Digital interactions became increasingly popular between landlords and tenants, especially in urban centers where virtual communication is often preferred. While the digital age offers many benefits, such as larger applicant pools and easier communication, it has opened the door to more fraudulent applications. It is well-documented that fraudsters found numerous ways to exploit the vulnerable. When so many Americans were laid off, unemployed or furloughed, fraud reached a high of 15% compared to 10.3% over the same period in 2019. Transunion noticed that fraud steadily increased over the course of the pandemic and 22% of applicants failed authentication or were identified as fiscally high risk. FRAUD STEADILY INCREASED OVER THE COURSE OF THE PANDEMIC AND 22% OF APPLICANTS FAILED AUTHENTICATION OR WERE IDENTIFIED AS FISCALLY HIGH RISK.
What are the most common types of application fraud? Consumer credit reporting company Experian notes that application fraud tends to fall into two categories: deception intended to improve the tenant’s perceived ability to pay rent and deception intended to hide evidence of past mismanagement of their finances. The company also points out that “even the most basic home computer can provide ample functionality to capture and re-use digital images or to scan and edit documents. As software continues to emphasize ease of use, more and more tenants will be able to engage in this type of behavior.” People with a questionable financial history are inclined to manipulate their identities in the hope that the altered information won’t be matched to their negative history. Given digital tools such as photo editing software and document editing packages which can scan and then reproduce a fake version, misrepresentation is easier than it seems. It’s not hard for a person to doctor a paystub or bank statement or buy counterfeit ones online. When these renters move into apartments and can’t pay, it can eventually lead to eviction.
The most common lies and misrepresentations by fraudulent applicants include:
1. Listing friends and relatives as rental references 2. Fabricating credit reports, previous addresses, paystubs or bank statements 3. Providing false income or uploading an altered photo 4. Pairing a fake Social Security number with a real address to create a fake identity to gain access to a rental property 5. Using another person’s identity or information to qualify for a rental property by misrepresenting who they are with someone else’s Social Security number, nam, and date of birth 6. Lying about having a pet 7. Justifying the withholding of rent by claiming the home is uninhabitable 8. Illegally subletting the unit, pocketing several month’s rent payment in advance and then disappearing
People are also using stolen identities to access apartments for more unacceptable reasons like a criminal enterprise or financial fraud.
How can a landlord avoid application fraud? Landlords should watch for the following red flags to protect themselves from application fraud: Applicant can’t or won’t meet in person, only via Zoom All documents forwarded are new or created recently, i.e., passport, driver’s license Applicant has no proof of employment and refuses to provide any The applicant asks to move in right away without explanation They have no social media visibility or presence on publicly accessible websites
The following Dos and Don’ts offer protection from scams targeting property owners. Learn more at USA.gov.
✓ Run an AAOA credit check ✓ Check evictions ✓ Check tax liens ✓ Check small claims judgments ✓ Call at least 2 previous landlords or order a landlord verification ✓ Call their current employer or order an employment verification ✓ Make sure the paystub is accurate by calling their employer, reviewing their tax returns, or requesting a bank statement showing the deposit ✓ Verify the Social Security Number, if provided ✓ Ensure the name on their ID matches the name on all their documents ✓ Google search their name and email and see if others have flagged them as a scammer ✓ Use Google image search to see if an imposter is using your property in any unauthorized listings as part of a scam
× Do not accept overpayment for rent × Do not deposit a check that’s for more
than the specified amount × Do not rent sight unseen
What to do if you’ve been scammed If you feel that you’re the victim of a renter’s scam involving the internet, report it to the FBI and contact your state attorney general’s office. The office will explain your legal rights as a landlord. Also ask how to file a complaint against a renter or potential renter. × Do not accept a cashier’s check if the tenant says they are out of the country × Do not accept unexplained urgency to rent the property As a part of your anti-fraud prevention, the American Apartment Owners Association makes it simple to do tenant credit checks as well as eviction, criminal and federal background reports. Contact us today to start your journey to reliable renting and tenant screening.
NANCY ABRAMS Assistant Editor American Apartment Owners Association (866) 579-2262 email@example.com
Nancy Abrams has enjoyed a long career in real estate marketing throughout Southern California and Las Vegas. She formerly represented 19 Merrill Lynch Realty branch offices, property managers The Roberts Companies, new home developers, including master planned communities Peccole Ranch and The Valencia Company and shopping centers for Sandy Sigel of NewMark Merrill.
SUMMARY In this rent report, we analyze how rent prices for two- bedroom single- family rentals (SFRs) in ten major U.S. cities have changed between Q1 and Q2 of 2022. ANALYSIS Rentometer’s data and analysis for the selected cities is presented here:
• Geography: The scope of this report is ten major cities across the U.S.
• Property type: Two-bedroom (2-BR) SFRs with any bathroom count.
• Analysis: Average rents were analyzed quarter-over-quarter for each city.
• Data: New rent data collected at the beginning and end of each quarter reports, excluding outliers below $500 and above $10,000.
Average rent prices increased in all but three cities analyzed from Q1 2022 to Q2 2022. Of the cities analyzed, Miami, FL saw the highest quarter-over-quarter rent price increase at 14%. Quarterly rent prices decreased in Atlanta, GA; Philadelphia, PA; and Houston, TX, with Houston seeing the highest decrease at -19%. New York City had the highest average rent price in Q2 2022 at $5,367, and Columbus, OH had the lowest average rent at $1,429. As always, thorough due diligence and assessment of current market conditions are critical to making successful real estate decisions. Whether you are setting your rent or evaluating an investment property opportunity, we recommend identifying sources of reliable market information and contacting local professionals familiar with your target rental markets.
This article was contributed by the Rentometer Team Visit rentometer.com to analyze rental addresses and neighborhoods today. Rentometer uses proprietary technology and data to provide a thorough rent comparison analysis in seconds.
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PAGE 12 Service is not available everywhere. Quantum Fiber may change, cancel, or substitute offers and services, or vary them by service area, at its sole discretion without notice. All products and services listed are governed by tariffs, terms of service, or terms and conditions posted at www.q.com/legal. Restrictions apply. © 2022 Q Fiber, LLC. All Rights Reserved. Quantum, Quantum Fiber and Quantum Fiber Internet are trademarks of Quantum Wireless LLC and used under license to Q Fiber, LLC. Although our fiber service usually means 100% fiber-optic network to your residence, in limited circumstances Quantum Fiber may need to deploy alternative technologies coupled with a non-fiber connection from a certain point (usually the curb) to your residence in order to provide the advertised download speeds.
Have you been thinking about a 1031 Exchange to avoid a large tax bill? Or perhaps you are within the “45-Day Window” for identifying a replacement property and not sure what to buy. Or perhaps you are looking to diversify your real estate portfolio and not put “all your eggs into one basket.” If any of these situations apply to you, Delaware Statutory Trusts might be a good option for you. REASONS TO CONSIDER ALL-CASH/DEBT-FREE INVESTING DURING TURBULENT TIMES
There are many advantages for investors who use DSTs for your 1031 Exchanges including: ✓ Providing a reliable contingency or back-up property strategy in the event a 1031 Exchange deal falls through. ✓ Providing greater flexibility by offering you a variety of combinations to help you achieve your desired equity and debt targets. ✓ Providing investors like you the ability to create greater diversification and passive ownership.
Many 1031 Exchange investors believe that taking on debt is a good strategy in order to move up in asset size or help achieve greater depreciation and tax efficiencies. However, Kay Properties has always believed in being conservative and emphasized capital preservation above all else, including avoiding taking on unnecessary debt. We remember investors who, despite our advice against it, took on extreme levels of leverage (sometimes 80% - 90%) in highly risky assets like senior care facilities and hospitality. When the recession came in 2008, many of these same investors lost their properties. While many 1031-eligible assets have debt associated with them, and not all debt is bad, many investors want to remain debt-free and take a conservative position on their 1031 investments. Personally, many of my clients remember vividly when they paid off their loan on an investment property and felt incredibly proud that they now owned their asset free and clear.
These people don’t want to go back into debt for an exchange. This is the time of their lives when they want to reduce their exposure to potential risk and not increase it. Debt-free DSTs offer the perfect opportunity to invest in multiple asset classes and in different geographical regions without incurring debt. Plus, there are a number of practical reasons for considering all-cash/debt-free DST investments, especially in today’s turbulent times.
MANY INVESTORS WANT TO REMAIN DEBT-FREE AND TAKE A CONSERVATIVE POSITION ON THEIR 1031 INVESTMENTS.
Investors who sold their buildings have turned to all-cash/debt-free DSTs to provide themselves zero risk of lender foreclosure while also providing greater resilience to hold throughout any potential market downturns, world events, or recessions. If there’s one thing we’ve learned during the COVID-19 pandemic, black swan events can drastically alter economic patterns. Investors who invested in single-tenant net-lease buildings occupied by iconic brands such as Brooks Brothers, Guitar Center, and Pier 1 faced a harsh reality after they went out of business and were unable to pay rent. All-cash/debt-free DSTs can have a better cash flow potential. With no monthly debt service to a lender, the all-cash/debt-free DST potentially can pay larger monthly distributions to investors. REASON 2
All-cash/debt-free DSTs can help protect entrepreneurs and investors from the financial catastrophe of a complete loss of their principal due to a lender foreclosure. While it is not common, investment property foreclosure can and does occur, causing investors to lose their entire investment. However, with all-cash/debt-free DST investment, investors never have to worry about a lender foreclosure because there is no monthly debt service attached to the investments. in the stock/bond markets turn to all-cash/ debt-free Delaware Statutory Trust properties as a strategy to diversify away from stocks and bonds. All-cash/debt-free DSTs provide investors the ability to diversify a portion of their 1031 Exchange dollars into unlevered assets to lower potential risk. Many entrepreneurs who have invested heavily REASON 4
Times are indeed turbulent but considering all-cash/debt-free DST investments might be a good way to reduce investment risk and avoid lender foreclosure. Click Here to Download Your Free Listings of DST Properties.
STEVE HASKELL Vice President Kay Properties and Investments (855) 899-4597
Steve Haskell works with 1031 exchange and direct investment clients throughout the country and is based out of Kay Properties San Diego office. Steve comes to Kay Properties and Investments after serving for seven years as an officer in the United States Air Force in the special operations community where he led hundreds of military and civilian personnel. Prior to his military service, Steve worked in sales and marketing for multiple businesses, which included providing energy management solutions to institutional multifamily apartment owners. Steve holds a Masters degree from the American Military University and a Bachelors in Accounting from Point Loma Nazarene University where he graduated as International Development Student of The Year for his work providing business education to entrepreneurs in impoverished areas in Mexico, Nicaragua, and San Diego.
Disclosure: Securities offered through FNEX Capital, member FINRA, SIPC. Potential returns/appreciation not guaranteed and loss of principal is possible. Speak with your CPA/attorney for tax/legal advice.
After diligently searching the market for the perfect piece of real estate, you have found a property that will provide cashflow and appreciation. You know you need to protect this asset, limiting your personal exposure to the risks involved with property ownership. How do you do that? REASONS TO USE AN LLC FOR REAL ESTATE INVESTMENTS One way to reduce these risks is to hold the property in the name of a Limited Liability Company (LLC). By doing this, you will ensure that you have the flexibility and control that you need. Although other limited liability entities are available, the preferred entity for real estate investments is the LLC for the following five reasons:
1. Protect Your Personal Assets from Inside Lawsuits by Tenants
As in any business transaction, one of your primary concerns in real estate investment is your liability. Owning property either as an individual or in a general partnership creates unlimited liability. Tenants, guests, and, in some cases, trespassers may sue you directly for real or imagined grievances. If they prevail, they may seek to use your bank account, home, and other personal possessions to satisfy the court’s judgment. By using an LLC for your real estate investments, you can avoid personal liability for accidents that occur on the property. Any liability you may face will be limited to the extent of the LLC’s assets. Of course, we always recommend that the LLC have regular insurance coverage.
But having the LLC on title to the property is your second line of defense. If anything goes wrong on the property, and your insurance isn’t enough or denies coverage, you will appreciate the protection that an LLC provides.
BY USING AN LLC FOR YOUR REAL ESTATE INVESTMENTS, YOU CAN AVOID PERSONAL LIABILITY FOR ACCIDENTS THAT OCCUR ON THE PROPERTY.
2. Protect Your Assets from Outside Attacks by Anyone Else
3. Flexible Management Structure, Estate Planning and Gifting Opportunities Available Depending upon your specific situation, an LLC may provide the flexible management structure you need. There are two management structures associated with an LLC. First, the LLC can be managed exclusively by its members (or owners). Real estate investors who want to have more control in the LLC may prefer this structure. Second, the LLC can be managed by some of the owners or by an outside manager or a group of managers. This structure is ideal where investors prefer a more passive role in the LLC’s affairs. We prefer manager management to better clarify and separate the roles between ownership and management, which can help solidify the corporate veil of protection. Additionally, LLCs are flexible in terms of the number of members they may have. Many states allow only one person to form an LLC. This can come in handy if one investor decides to invest on their own. Why bring in extra owners if you don’t need to? LLCs also offer estate planning and gifting opportunities. Investors who include their children in deals may take advantage of these.
As our chart illustrates, the inside attack is where a tenant sues the LLC itself for a problem on the property. The outside attack comes after a car wreck, for example, where the claim has nothing to do with the real estate. The car wreck victim has a judgment and would like to get at your real estate to satisfy their claim. By having a Wyoming LLC (which features very strong protections), you can prevent the victim from trying to get the properties inside the two title holding LLCs. Both California and Utah are weak states and would allow the car wreck victim the right to barge in and force a sale of the real estate. The Wyoming LLC serves to block that from happening.
4. Flexible Taxation
The LLC can select how it wants to be taxed. You can choose partnership, S-Corp, C-Corp, or disregarded (one owner) entity taxation. Partnership and disregarded taxation are the most common for real estate investments, whereby all the tax obligations and depreciation benefits flow through the LLC and onto your personal return.
If you are fixing and flipping properties (which the IRS considers a trade or business), you may want S-Corp taxation to minimize any payroll taxes. We rarely see LLCs choose C-Corp taxation (which involves being taxed at the entity level and the owner level – or double taxation), but with the LLC’s flexibility you can make that unique choice as well.
5. Property Transfers are Less Expensive
If your LLC is taxed as a partnership or a disregarded entity, you can move the property in and out of the LLC without tax consequence. Let’s say your bank, as part of a refinancing, insists that title be in your name when the financing occurs. You transfer the real estate out of the LLC into your name without tax consequence. After the financing is on title, you transfer title back into the LLC without tax consequence. If you had held title in an entity taxed as an S-Corp or C-Corp,
you would have to recognize any gain on such transfers.
THE LLC OFFERS GREAT FLEXIBILITY FOR ALL REAL ESTATE INVESTORS.
GARRETT SUTTON Attorney, Best-Selling Author, and Robert Kiyosaki’s Rich Dad’s Advisor
Corporate Direct (800) 600-1760
Garrett Sutton is an attorney and author. He has written a number of books for entrepreneurs and real estate investors, including Loopholes of Real Estate and Start Your Own Corporation. His newest book, Veil Not Fail, deals with the most overlooked facet of asset protection, protecting the corporate veil against legal attacks. Garrett’s firm, Corporate Direct, sets up and maintains LLCs and corporations in all 50 states. For a free 15-minute consultation with an incorporating specialist on these issues, visit https://corporatedirect.com/schedule/.
DEFER CAPITAL GAINS Without Doing a 1031 Exchange
Quite often, investment property owners feel very stuck. They’d like to sell their highly appreciated property and use the funds to pay o debt of other properties or simply invest in another financial vehicle and retire, but if they sell, they are faced with a steep tax bill.
Great News! There are multiple ways to defer capital gains taxes! Join our webinars and learn more about your options.
REGISTER FOR A FREE TAX STRATEGY WEBINAR
PAGE 19 Schedule a Consultation | Visit Our Website | Call Us: 1-888-977-1222
When it comes to criminal history screening policies, one size does not fit all! Several factors must be considered to avoid even the appearance of disparate impact discrimination. COULD YOU BE SUED FOR USING A CRIMINAL BACKGROUND CHECK TO SCREEN TENANTS?
What is Disparate Impact?
Legally, disparate impact refers to practices in employment, housing and other areas that adversely affect one group of people of a protected characteristic more than another, even though rules applied by employers or landlords are formally neutral. Although the protected classes vary by statute, most federal civil rights laws protect based on race, color, religion, national origin, and sex as protected traits, and some laws include disability status and other traits as well. So, what does that mean in layman’s terms for the housing industry? Essentially, disparate impact comes into play concerning a property’s policies
and procedures. These policies and procedures may not seem to discriminate against anybody on the surface. Still, when the policy is implemented, it disproportionately and negatively affects a protected class. A perfect example of this is criminal history screening.
WHEN IT COMES TO CRIMINAL HISTORY SCREENING POLICIES, ONE SIZE DOES NOT FIT ALL!
Criminal History Screenings and Disparate Impact
To begin to understand why criminal history screening policies are the focus of disparate impact claims, we need to look at where we get our criminal history screening data from. We usually go to our screening companies, and they look at county, state, and federal criminal justice data. Then, we make our decisions accordingly. Unfortunately, the facts show that, historically, minorities in this country—particularly African Americans—have been arrested, prosecuted, tried, and sentenced at a much higher rate for a much longer time than other races. And there have been studies done that confirm that our criminal history data and criminal history processes in this country have not been consistent or fair. Any policy that a housing provider has that solely relies on that data can be challenged as having
a negative or discriminatory impact due to the fact that the data is prejudiced. To avoid even the appearance of disparate impact discrimination, a property’s policies and procedures should be carefully and thoughtfully curated.
TO AVOID EVEN THE APPEARANCE OF DISPARATE IMPACT DISCRIMINATION, A PROPERTY’S POLICIES AND PROCEDURES SHOULD BE CAREFULLY AND THOUGHTFULLY CURATED.
The first thing to keep in mind is that the simpler or more blanket the criminal history screening policy is, the greater the chance a claim of disparate impact discrimination will be levied. Basically, if your policy is that “if you’ve ever been convicted, you can’t live here,” it will be viewed as too restrictive and eliminate many people. The Basics of Criminal History Policies
Let’s consider the following four basic things that initially should be considered when creating a property’s criminal history screening process and policies.
1. Breakdown of criminal offenses
IF YOUR POLICY IS THAT “IF YOU’VE EVER BEEN CONVICTED, YOU CAN’T LIVE HERE,” IT WILL BE VIEWED AS TOO RESTRICTIVE.
2. Lookback periods
3. HUD considerations
4. Appeals process
Breakdown of Criminal Offenses Having an objective policy that breaks down criminal offenses based on seriousness and assigns each of them a specific lookback period will aid in showing that your policy has been carefully crafted to be the least restrictive possible. Remember, not all criminal offenses carry the same weight and should be treated accordingly—for example, the difference between a misdemeanor and a felony offense. Lookback Periods Lookback periods need to be balanced and not overly restrictive as well. Criminal justice statistics show that an ex-offender who has gone beyond seven years after release is no more likely to commit another crime than anyone else, including people who have never had a conviction. So, based on this, seven years is the gold standard for lookback periods. The American Apartment Owners Association limits searches to 7 years. You may be able to push that to 10 years, but any more raises your risk if challenged in a disparate impact lawsuit. Also, keep in mind your specific state requirements as they may also limit your lookback period.
HUD Considerations In addition, if your property receives federal funding or is a HUD-funded property, there are further rules that you will need to apply to your criminal history application and screening policies. Appeals Process Now that your policy has been broken down to allow greater access, an appeals process is in your best interest should an applicant be denied. Going this extra step will aid in your defense if a disparate impact claim is ever made. As we said, these are just a few of the things to consider when creating a criminal history screening policy. It’s always a good best practice to have a Fair Housing attorney look over your policies for added protection.
Also, let’s not forget training! Does everyone on your staff know how to appropriately handle a prospect who has a criminal history? Having each of these policy elements will aid your property's superior level of compliance.
IT’S ALWAYS A GOOD BEST PRACTICE TO HAVE A FAIR HOUSING ATTORNEY LOOK OVER YOUR POLICIES FOR ADDED PROTECTION.
KATHELENE WILLIAMS Attorney and President The Fair Housing Institute
Kathi Williams is one of the founders of Fair Housing Institute. FHI is the accomplished vision of Kathi who views its educational courses as the best method housing providers can use to accomplish compliance and avoid litigation. Kathi is also a partner in the Law Firm of Williams Edelstein Tucker, P.C. providing defense and preventative representation for the housing industry in all civil rights matters. During the many decades Kathi has been advising her housing provider clients, she developed a unique understanding of the most effective methods of communicating fair housing best practices through training. Click here to watch Fair Housing Educational Videos.
ON THE MOVE
Mark Wahlberg Mark Wahlberg and family have prepared to move to Las Vegas while their 30,500 sq. ft. Beverly Park mansion (pictured) waits for a buyer. Priced at $87.5 million, the mega-mansion features 12 bedrooms, 20 baths, a two-story wood-paneled library, movie theater, massive gym, skate park, five-hole golf course and a basketball court on 6+ acres. Meanwhile, in Las Vegas’ exclusive Summit Club community, Wahlberg paid $14.5 million for a 7327 sq. ft. home the family will occupy while they build a new custom estate on an undeveloped 2.5 acre parcel they purchased for $15.5 in the same neighborhood.
Just days after she closed on a fabulous oceanfront property formerly owned by Cindy Crawford and Rande Gerber, Kim Kardashian listed a 3874 sq. ft. home on 1.5 acres in Hidden Hills for $5.3 million and a 2260 sq. ft. condo in nearby Calabasas for $3.5 million. Another Hidden Hills home will remain her main residence. Overlooking the Pacific Ocean on the Encinal Bluffs, her new getaway (pictured) spans 7450 sq. ft. on 3.18 acres of prime Malibu land and boasts walls of glass for spectacular whitewater and sunset views. It includes four bedrooms, six baths, a gym and a home theatre.
Conan O’Brien also spent the summer trading high-end beachfront properties. After putting his Carpenteria getaway on the market for $16.5 million, he paid $23 million for a gated 3476 sq. ft. beachfront home on 1.2 acres in the same Santa Barbara County town. The new home (pictured) is accented by numerous decks and patios and a meandering walkway to the beach. Their original retreat was purchased in 2015 for $7.9 million by the O’Briens who then extensively remodeled the 2142 sq. ft. main house and 1151 sq. ft. guest house. O’Brien also owns a $20 million Pacific Palisades mansion.
ON THE MOVE
Sandra Bullock For just $30,000 per month, you can rent Sandra Bullock’s newly remodeled, gated two-bedroom, two-bath bungalow in Malibu. With its endless ocean views, the 1347 sq. ft. home comes with walls of glass and a chef’s kitchen equipped with Wolf and SubZero appliances. Want something larger with income potential? Bullock has also listed her sprawling 91-acre avocado ranch in northern San Diego County at $6 million. The property includes a 6000 sq. ft. Mediterranean-style home, a second residence, avocado and citrus groves, a chicken coop and panoramic views of the surrounding mountains and valleys.
Ozzie & Sharon Osbourne
Built in 1929 on .56 acres, Ozzie and Sharon Osbourne’s Hancock Park estate offers six bedrooms and 11 bathrooms spread over 11,000 sq. ft. of living space. Priced at $18 million, the gated Mediterranean villa was extensively renovated by the Osbournes with elaborate chandeliers, hand-painted ceilings, built-in bookcases and cabinetry, elegant paneling and custom moldings. The ornate master suite is highlighted by custom wall coverings, a sitting area with a carved fireplace and his and her baths and dressing rooms. The property also includes a self-contained guest/staff apartment.
Oprah Winfrey to Jennifer Anniston Oprah Winfrey recently sold a four-bedroom, 3.5-bathroom Tuscan-style farmhouse to her friend, Jennifer Anniston, who joined the growing list of celebrities becoming Montecito property owners. Set on 1.03 acres and spanning
4320 sq. ft., the home boasts ocean views and mature landscaping. A long, gated private driveway and a motor court capable of parking 15 cars are additional features of the estate, which Winfrey bought just last year. There is also a very small, detached guesthouse or standalone gym on the heavily wooded premises.
THERE ARE WAYS TO RESCUE FAILING EXCHANGES AND DEFER CAPITAL GAINS TAXES WITH MORE FLEXIBILITY AND WITHOUT HAVING TO DO AN EXCHANGE.
ARE YOU STUCK IN A 1031 EXCHANGE SYSTEM? Systems. Life all around us is built on systems that help to organize, measure, or are simply to be applied as a way of doing things. Putting a system into place is supposed to help increase efficiency and success. Some systems work fabulously. Some turn out to be really bad. And in some cases, a particular system could work fabulously in one scenario and be a disaster in others.
In the world of real estate, investors often operate in a system that utilizes 1031 exchanges. These exchanges are a means to buy, sell, buy, sell and continue to add to one’s wealth via real estate. It’s a great way to build wealth. Some live by the mantra of “swap until you drop,” which means you keep exchanging real estate through 1031 exchanges. Then, when you pass away, the step up in basis will eliminate the capital gains taxes for your heirs. It’s a great plan. However, not everyone wants to keep their real estate through their retirement years. They want to eliminate dealing with the “tenants, trash, and
toilets.” They also have other personal needs and goals that they want to use the funds for. But they feel like they are stuck. Either they keep the real estate with all of the weighty burdens that they want to eliminate from their life or pay all of the significant capital gains taxes that have accumulated for decades. They feel stuck in the 1031 exchange system. Most investors are not aware that they do not have to be stuck in that system. There are ways to rescue failing exchanges and defer capital gains taxes WITH more flexibility and WITHOUT having to do an exchange.
Some of the alternate solutions in the marketplace utilize IRC 453 and IRC 643 as well as other tax codes. Here are some to name a few:
Defer taxes for 30 years and utilize the funds for business or call a financial advisor to put the funds into a financial vehicle of choice. TAX DEFERRED CASH OUT
Three of this options can also rescue a failing exchange. This is a great way to still receive tax deferral if an investor is one of those whose exchange falls into the 40-60% of failed exchanges. Those are the tax deferred cash-out, structured installment sale, and deferred sales trust. All this hinges on having a Qualified 1031 Exchange Intermediary, also known as an accommodator, that cooperates with Tax Code 453 options for rescuing a failing (not failed) exchange.
COMPLEX SPENDTHRIFT TRUST
Defer taxes for generations and use the funds to pay for all assets in the trust (pre-tax) such as a primary residence, cars, boats, etc.
STRUCTURED INSTALLMENT SALE
Spreads out the capital gains taxes with the goal to be in lower tax brackets. One can utilize an annuity that can spread out the taxes for 5-40 years.
Eliminates capital gains taxes and provides a charitable deduction.
DEFERRED SALES TRUST
Another means to spread out the capital gains taxes over a period of time that one sets up the contract for.
Just remember, if someone feels like they are stuck in the 1031 exchange system, they could use a dose of hope that there are more flexible solutions that may be of great benefit to them. They also need a capital gains tax strategist that will take the time to look at the numbers, assess their true goals, and consider their personality to see if there are options that make a lot more sense than the system that they have known for years, and maybe decades. There are options! Conclusion
To get a free tax deferment consultation to find the strategy that works best for you, click here.
SCOTT VARNEY Capital Gains Tax Strategist Financial Tax Strategies (408) 569-0778.
Scott Varney is a capital gains tax strategist as well as a financial services professional. He helps clients think through options to defer, reduce, or eliminate capital gains taxes upon the selling of a highly appreciated asset, in this case, apartment buildings. He has a background in real estate as a top 1% producer nationally in the realm of residential real estate. He enjoys being with people and loves the opportunity to help solve challenging issues.
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DECREASE WATER AND SEWER EXPENSES TO INCREASE CASH FLOW, NOI, AND PROPERTY VALUE Any unnecessary water usage that is the result of mechanical malfunction or leaks from toilets, sinks, showers, pipes behind walls, foundations, pools, irrigation systems, etc. can cost you a fortune. If these inflated water and sewer costs are not corrected, not only will you lose substantial cash flow, but your NOI and property value will also be adversely affected. Sam Liebman, author of Harvard Can’t Teach What You Learn from the Streets , shares his street tips below!
Property owners generally focus on seeking value-add opportunities to increase rents to increase their cash flow, NOI and property value. As important as this may be, many owners overlook
buried treasure lying in the bones or infrastructure of a property that can also increase cash flow, NOI and property value substantially. A great example of this is to locate and repair water leaks.
MANY OWNERS OVERLOOK BURIED TREASURE LYING IN THE BONES OR INFRASTRUCTURE OF A PROPERTY.
Street Tip #1
Ground zero for increasing cash flow, NOI and property value is to realize that a $100 dollar increase in revenue has the same effect on NOI and property value as a $100 decrease in operating expenses. For example, a 5 cap translates to a $2,000 increase in property value for each $100 reduction in water and sewer expenses.
Water and sewer charges constitute a large portion of the property’s operating expenses, especially in states such as Florida and Las Vegas where water costs are extremely high. Every building is going to have water leaks, but many owners don’t realize how much money can be lost. To sit back and do nothing to correct the problem is akin
to throwing money right down the drain. Multifamily properties generally contain a large number of units that were built at the same time. As a result, plumbing, water heater failures, leaks, etc. tend to occur in batches. Additional problems caused by water leaks can subject owners to more liability, cost, and aggravation.
While performing due diligence on a prospective property, watch for the following problems: • The water and sewer expenses are extremely high • You notice dripping faucets, leaking toilets, and hissing sounds in the units • No water-savings devices were installed
Fixing these problems may provide an opportunity to significantly reduce water and sewer costs and operating expenses while increasing NOI and property value.
Important Facts about Water Leaks
• Water leaks lead to mildew and bad odors in the units which creates irate owners and tenants. • Tenants rarely report to management signs of leaks, such as hissing sounds from a leaking toilet or dripping sinks, showerheads, faucets, or the outside sprinkler. • As temperatures plummet, the risk of pipes freezing and bursting skyrockets. Pipes most at risk are those in unheated interior spaces, such as basements, attics, and garages.
• Sewer charges in many municipalities are directly affected by the amount of water consumption multiplied by a fixed factor amount. The higher the water usage, the higher the sewer cost. • Water leaks can subject tenants to significant health risks from mold, mildew, toxins, etc., and can result in an insurance nightmare stemming from multiple claims when one unit’s water leak quickly spreads to other units. • A dripping faucet can waste 3,000 gallons a year. That’s as much water as 180 showers.
Observable Signs of Water Leaks or Wasted Water Consumption
Non-Observable Signs of Water Leaks
• Broken or malfunctioning water meters • Foundation leaks: underground pipes are in constant contact with the soil. Electrolysis occurs over the years causing leakage and corrosion of the pipes • Pool leaks • Broken and/or corroded pipes behind walls • Timing of the irrigation system • Equipment with the water off can still leak
• Visible drips from faucets, showerheads, and toilets • Hissing sounds from the toilet and the hot water boiler • Constantly needing to refill the pool • Curling vinyl floors • Peeling paint on the walls • Mold spots • Over-occupied units
A DRIPPING FAUCET CAN WASTE 3,000 GALLONS A YEAR.
Simple Water Leak Prevention, Detection, and Solutions
Finding the exact location of the leak is the challenge. You can’t replace a broken pipe if you can’t find it, but finding the exact location involves a combination of hide and seek, trial and error, and detective work. You may need to hire a company that provides professional water leak detection services.
Unfortunately, my experience is that even the professionals need to play detective, although they have more tools and experience at their disposal. Having a proactive approach in mitigating water damage will help save a property owner thousands to tens of thousands of dollars in wasted water and sewer costs and flood damages.
• Get practical advice designed for the real world of real estate investing • Learn all the financial components of multifamily investing and the tricks of the trade the pros use • Click here to get access to the course first!
Implement a Water-Saving Training Program Implement a water-saving training program for the maintenance staff and do routine preventive procedures. These include but immediately notify management of any hissing sounds or visible leaking faucets, showerheads, and toilets. 2. Advise the maintenance staff that while they are in the units to complete work orders, they should also follow this checklist: are not limited to the following: 1. Periodically advise tenants to
MANY STATES AND CITIES OFFER WATER CONSERVATION PROGRAMS WHICH PROVIDE FREE TOILETS AND FIXTURES.
Street Tip #2
5. Have the town periodically check the meters for malfunction. 6. Check the timing for irrigation to see how many times a day the sprinkler system is on and inspect the irrigation system for leaks, especially in freezing and extremely cold temperatures. 7. Insulate pipes for sprinkler systems or hot and cold water all year round. 8. Check the pool for leaks. Ask how many times a week the staff needs to add water to the pool. 9. Schedule an annual plumbing inspection. This can inform you of signs of wear and tear to pipes, equipment, etc. so you can be aware of any potential future issues. 10. Extensive landscaping requires a large consumption of water usage. A partial solution is to use Xeriscape. 11. Many companies offer affordable technology so owners and property managers can monitor their property’s water use in real-time by logging in with any internet-accessible device.
Have maintenance staff put a few drops of food coloring
or dye in the tank and wait about a minute. If the color can be seen in the bowl, then there is a leak.
3. Have management notify tenants in advance that the water will be shut off for a two-hour period. Turn the water off and check the meter readings, then check the meters again after the two-hour period. The meter readings should read the same as before the shutoff. If the reading changed, there are probably water leaks. 4. Install water saving devices, such as new low- flush toilets, more efficient showerheads, and aerators in the kitchen and bathroom faucets. These efficient devices can save approximately 15% - 20% of water and sewer costs. Many states and cities offer water conservation programs which provide free toilets and fixtures to owners who are then responsible for the labor cost to install them.
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