Protecting The Owner
In this model the owner signs a listing and management agreement with the broker. The agent/manager executes a rental agreement with the tenant. The characteristics of this arrangement are very different than the Broker Style, especially as it relates to the liability of the owner.
The characteristics of this model include:
- The agent identifies himself as the Landlord and property manager.
- The tenant leases from the Landlord/manager not the owner.
- The Landlord/manager sends vendors to the property as their vendor, not as the owner’s vendor.
- The owner remains anonymous, and hidden from the tenant.
The differences between this model, and the Broker model, are substantial. In this model the owner is not named in the lease and is out of sight of the tenant. The owner is safely tucked away in the bunker, far behind the line of battle and safe from most of the liabilities of owning rental property. The Landlord/manager is the one fighting the battles on behalf of the owner and stands in the gap between the parties. The Landlord/manager acts as a liability shield for the owner and attempts to keep him out of the line-of-fire on property management disputes.
In this model the Landlord/manager sends the contractors to the property as their vendor and keeps the owners name off the record. All the liability for what the vendor does (or doesn’t do) falls on the Landlord/manager instead of the owner. It should be the Landlord/managers insurances at risk when something goes wrong.
In 30 years of managing rentals we have always named ourselves as the Landlord/manager in the lease. Most professional managers do. Not once, in 30 years, has one of our owner/clients ever been named in a law suit, even though we have been named in several. Defenders of this model would never knowingly expose the owner’s name (much less their address) to the tenant. In this model the Landlord/manager lists their address for the serving of legal notices and will be named in the legal action when there is any.
When you use a Landlord/manager to look after your property you can still be involved in all the important decisions. Most Landlord/managers have maintenance spending limits and have to consult with the owner for all major decisions. The Landlord is not taking away your authority over the property but making minor decisions and protecting you from the liabilities of being a rental property owner.
Correcting a commonly promoted error.
Some leasing agents tell their clients “you need to be involved in management decisions (or manage the property yourself) to qualify for the tax benefits of owning rental property. This is utterly false. The tax code requires you to be the owner, not the manager, to get the tax benefits. Talk to a CPA and get this straight before you buy into this argument. You do not need to be active in the management of the property to get the tax benefits. That story comes from leasing agents that don’t want to do property management or want to use the Broker Style of management to reduce their liabilities.
Another misnomer, promoted by untrained property managers, is the suggestion that “the law demands that the owners name be listed on the rental agreement.” This is certainly not the case in Georgia and I have yet to find any other state that demands it. Georgia law requires that either the owner, or their designated agent, name must be on the lease, giving managers the option of listing the owner or not.
If you decide to use a Broker Style manager see an attorney first and put into place some asset protection strategies. An attorney will advise you to add some levels of protection to yourself before you rent the property. These strategies will include such things as…
Deed your property to a liability shielding entity, like a Limited Liability Company (LLC) or a Land Trust, to get it out of your name and protect your other personal assets. If you’re going to be listed as the Landlord in the lease, you need to be sure your other assets are shielded from the risks of owning rental property. We can do this for you at a third of the cost of an attorney, but doing it is critical to your financial well-being.
Boost the liability coverage in your landlord insurance policy from the typical $300,000 to $500,000 or $1,000,000. The cost is small and the coverage is absolutely necessary.
Secure a personal umbrella liability insurance policy. For about $300 a year you can have an additional layer of coverage to shield your personal assets from the risks of owning a rental property. This policy is inexpensive and covers a lot of your stuff.
Add a commercial liability umbrella policy if you have several rentals. Your personal umbrella policy voids out when you reach three or four properties. The cost is very low and the coverage is comprehensive.
Get with your insurance agent and make sure “if the agent sends a vendor to the property in your name that your policy covers the liability issues.” Many times it does not and you have to get extra coverage to address this risk. It’s important you not assume you have coverage when some one else (the agent) sends a vendor in your name.
The liabilities of owning rental property are real but they can be substantially reduced by placing a well-trained property manager as a shield between you and the tenant. Don’t let your name be put on the lease and never let your address be listed for official notices. Put distance between you and the property by making sure vendors are doing work in the name of your manager instead of you.
Being a smart property owner begins with picking the right manager. Knowing how the manager operates is part of the process. I hope this helps you with your decision of selecting the right property manager.