Transcript - Rental Income Podcast with Dan Lane

Inspiring interviews with today’s top landlords. This is the rental income podcast. And now Dan Lane.

DAN LANE: There are a ton of legal things to figure out when you own a rental property. I hear a lot of the same questions over and over again from listeners. And I thought it would be a good idea to bring on an attorney today to pick his brain and figure this stuff out from an actual attorney. Jules Haas is joining us on the podcast today. He is an attorney in New York. He does a lot of real estate work out of his office in Manhattan and he’s agreed to come on the show and answer whatever questions I throw at him. So let’s take a quick break, we’ll come back and we’ll dive right into the interview.

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DAN LEE: Jules, welcome to the podcast.

JULES HAAS: Thank you Dan, appreciate you inviting me today and I look forward to having this time to talk to you and your audience.

DAN: I’m really excited too. Now, before we get going, I feel like we should maybe give some kind of a disclaimer before we get into the discussion. I know our audience is pretty smart and they realize they're not going to be experts on the law after listening to this podcast, but is there anything else that we should maybe warn them about before we get into the topics today?

JULES: Okay, well, the disclaimer sort of goes as follows: I’m an attorney admitted to practice in New York so really the only advice that I could give relates to New York and certainly with respect to our discussion today, what I’m going to be doing is talking you know with respect to general areas and not giving any direct advice with respect to anything. However, for the folks out there that are not New York people you certainly have to check with your local laws and see how this applies, but a lot of the concepts that we’ll talk about really are generally applicable throughout the country and obviously every state varies, so you have to check as I said and if I talk about any specifics you know I’ll refer to New York and the way it’s done here. So with that being said, you know, you can always followup with me as far as something in New York or check with your local professional in the state where you live or where the question might be applicable.

DAN: Sounds good, yeah, because it is incredible how complex the law can be and how much it varies from state to state, but – alright, the first question I have for you, it’s about LLCs. And this is probably the number one question that I personally hear from investors is whether they should own a property in an LLC or if they should own it personally. And I imagine this is probably not a simple answer but what’s your opinion on this.

JULES: Okay, so the standard approach to whether or not you should own property in individual format or in LLC format, some folks own it in an S corp, you know, small business format as well really is a couple of reasons. First and foremost really goes to liability reasons. Certainly anything that you owned personally can result in personal liability if something should go wrong. So if the building blows up and somebody sues for you know $10 million and gets a judgment against you personally that would affect all of your assets including the property itself that’s maybe one of many assets that you own. On the other hand, if the property is owned by an LLC, unless there’s some reason or basis for someone to look past that LLC which is very hard to do, or a small business corporation, the liability is going to be limited to the assets of that company and the assets of that company is obviously going to be that real estate or whatever other real estate that company owns. There may be other issues that folks should discuss with their tax advisor as to the form of ownership, whether it should be in a corporate form or LLC form. And again, a lot depends on other things as well because you may have partners and so all of the partners probably don’t want to all own it individually and it may be a lot more beneficial to own it through an LLC or an S corp, particularly if you have a number of partners, shareholders or members of the LLC. So you have to check with your tax advisor and look at the [inaudible] _00:05:14_ from your local law standpoint. As far as the liability issue goes, it’s always important and regardless of what your motivation is for putting it in LLC form or corporate form, you should always have a lot of insurance. You know, insurance is relatively inexpensive compared to the liability that you may occur and as everybody knows nowadays, people trip on your sidewalk and they sue you for $10 million because they claim that their life has been ruined. So you should always have sufficient insurance, you should have a good insurance person to sit down and make sure that it’s covered. There’s umbrella insurance out there for folks as well that’s relatively inexpensive. So you really have to think in those terms as well.

DAN: Now I know I’m probably not going it be able to get an answer out of you, but how much insurance should somebody have? Is there maybe a ballpark or maybe a formula that someone should use?

JULES: Again, it’s going to be dependent on each situation and you have to speak with your insurance person.

DAN: Okay.

JULES: So you may have a property, you know, let’s put it this way, if you have a property that’s worth $100,000 you're probably not going to get $10 million worth of insurance, you probably couldn’t get it.

DAN: Right. Okay.

JULES: So depending on the value of the property you have and the level of insurance that you feel that you may need, that’s going to dictate how much you’re determined to get. And obviously within that context the cost of the insurance premium that you're going to have to pay.

DAN: Okay. Now, let’s say…

‘JULES: And there’s levels of – there’s different insurance. There’s replacement insurance for the structure, and then there’s the liability insurance that covers the bricks falling on someone’s head and them getting injured.

DAN: Okay.

JULES: The replacement cost is going to be dictated by what the replacement would be for that property.

DAN: Okay. Now, we have a lot of listeners that maybe live in one state but they invest in another state. So say for example someone lives in New York but maybe they buy properties in Ohio. Would you advise them to get an LLC in New York or in Ohio where the property is?

JULES: Well, that is a tough question to answer directly because again, it depends on everyone’s situation. Certainly if you have property in Ohio it may be perfectly okay to get your, form your LLC in Ohio and have that LLC own that property. Again, you should check with your tax advisor to see how all that’s going to be reported. You could probably own it in your LLC in New York as well, but if you're going to have multiple properties you may want to have separate LLCs for each one.

DAN: Okay. Yeah, that’s another question that comes up a lot. So is that generally the safest way to do it? To have one property, to have an LLC for each property?

JULES: Well when you have – your liability on each property is going to be limited by the value of what’s in the LLC. So you're never going to, you shouldn’t have to worry about being responsible for more than that one property in that one LLC if there’s ever an occasion where your liability exceeds your insurance.

DAN: Yeah. You know, one thing that a lot of listeners struggle with is the LLC fees, they vary a lot, state to state. So someone who lives in California, their annual fee is $800. So for them I feel bad for them because it almost makes it cost prohibitive, where you may be don’t want to have an LLC for each property if you’re not making a lot of money off each property, like that can really suck up your profit. Yeah, so I guess it’s something that people need to look into, talk to your local attorney and figure out the level of risk you're comfortable with.

JULES: That’s correct. And your tax advisor too, although when you think about it, $800 is a good investment once you're invested in the protection.

DAN: That’s true.

JULES: So that’s the – again, it’s all a cost/benefit and a business decision as to what you're doing.

DAN: Now let’s go back to that tenant tripping and falling and suing you for $10 million. Now, if that happened, if a tenant fell at one of my properties and sued me I think my initial reaction would be to turn that over to my insurance company. Is that the right move or should I also get my own attorney?

JULES: Well, the right move is, as you said, turn it over to your insurance company I eh first place because that’s why you have insurance. And then your insurance company is going to have to make an assessment as to whether or not it’s covered under the policy. And of course you always hope that it is because you don’t want to have to a) worry about an adverse result, you want to have the insurance backing you up. And the insurance company of course is going to have a lawyer (do) the insurance company defending that case. Now that doesn’t preclude you from having your own attorney representing you as well and working with the insurance company. So that’s a personal decision, but then again you're coming out of your pocket to pay your own attorney as well as having the lawyer for the insurance company defend whatever the problem may be. But you should always do that because if you don’t’ contact the insurance company right away and it turns out that you see that, oh my god, I really should have called the insurance company and they don’t know about this right away – let’s say you wait a year or 6 months or whatever, they may say well we’re going t decline coverage because your policy requires that you report it to us and it went so long now that we can’t cover it. So you should always report it and make sure that they’re going to cover it to protect yourself.

DAN: Now if they’re not going to cover it for whatever reason, maybe you were negligent and they think it’s not covered, what, ballpark, would a defense cost? And I know it’s probably going to vary case by case and how much work’s involved, but is this something that would be tens of thousands of dollars or like $100,000?

JULES: Okay, that’s really difficult to say because you don’t know what’s involved in any case. But it could easily be tens of thousands of dollars, and add those up, whatever. So you know it depends on the injury and it depends on the circumstance and what occurred. But yes, it can be very expensive.

DAN: Okay. Now another thing that I hear a lot from landlords is that they are afraid of losing the house in a law suit. Is this something that could really happen? Could there be – that tenant trips and falls – could a landlord actually end up losing the house as a result of the law suit?

JULES: Okay. It’s not that they lose the house per se. In other words somebody brings an action for whatever, the judge doesn’t say okay, they get the house. What they do is the judge would, or the court would, you know, the award would be for X number of dollars and that X number of dollars may very well, in the worst case scenario equal or be more than the value of the house. And so in order to collect on the judgment, they might foreclose on the house. So they wouldn’t get the house as an award, but they would get the value, a value that might be equal to it and look to the house to collect it.

DAN: Now, what if there was a mortgage on the property. So maybe the house is worth $750,000 but there’s a mortgage for $700,000. Would that, would the judge still have the power to foreclose on the property and would the judgment be paid off before the mortgage?

JULES: Yeah, it gets very complicated. The mortgage company has the first lien and the judgment creditor would be behind the mortgage most likely and that gets into some very complex areas of local law as far as whatever. But just understand the concept that if somebody has a judgment against you it could be collected against or a lien on any asset that is subject to that liability, whether it’s an LLC or personal liability or whatever. So that’s really the key to understand and if some even occurs that causes concern you would then look into what the long term issues might be in defending that law suit.

DAN: Okay. Let’s talk about leases because this is something that landlords are dealing with constantly as they’re turning over properties. There’s a lot of ways that people can get leases and I feel like these days a lot of people are going online and finding a lease online. Are those leases safe in general or should somebody always sit down with a local real estate attorney to review it and make sure everything in there is compliant with the law.

JULES: Okay. So I can’t comment on what, the good, the bad or the ugly of any online document, whether it’s a lease, a will, a contract or whatever. And I know that you know certainly there’s an assortment of legal papers out there for use by the general public. And as an attorney you might say that my view is a bit prejudiced, but regardless of what you do, whether or not you're buying a car, whether or not you're getting a lawyer or a doctor or somebody renovating your home, I think it’s always a good idea to sit down with somebody who has some experience in dealing with the issues that are presented to know that what you're doing is going to reflect what your intentions and desires are and that you fully understand what the ramifications are in connection with that document. So a lease like any legal document can have a lot of parts to it. There may be options to purchase, there may be provisions in there with respect to a default or with respect to landlord/tenant eviction proceedings if someone doesn’t pay their rent or who’s responsible for paying utilities or whatever. And in each jurisdiction, whether it's New York or New Jersey or Connecticut or wherever it might be there may be particular language that might be beneficial or have a special meaning in landlord/tenant relations that might benefit a landlord in one of these documents. So at the end of the day, it’s always good to sit down with someone who’s seen these things and even if you have to incur a little bit of an expense I think that it’s just a matter of education which doesn’t mean that the document that you get online was incorrect. It’s just you're paying to educate yourself as far as whether or not there are things in there that you may not understand and want to know more about so it gets done the way you want it to be done.

DAN: I think that’s really good advice. I really think that somebody should – it’s a good idea to sit down with an attorney, and to do it probably every year or two because there’s always changes to law and things are always being updated, so your lease might be good today, but might be really outdated in 5 years.

JULES: Correct, exactly. So if I was going to lease something in a jurisdiction, another jurisdiction, I would probably not know anything more or less than anyone else because I would know nothing about the landlord/tenant or lease laws in Nevada. So I’d probably want someone to educate me about that so I knew what I was doing. Maybe 5 or 6 or 10 leases down the road if I’ve done it enough, then fine, I might feel good, okay I don’t need somebody to tell me what to do.

DAN: Right. Now let’s talk about what happens when someone dies. So you own a property and – let’s say you live in New York but maybe we’ll go back to that property in Ohio again. What happens when you die. Say if you don’t have a will and you die, what’s the process? Is that very complicated? The whole probate process?

JULES: So this is a very complex area that folks really need to focus on. And I could probably spend 6 hours alone just discussion this because I do a lot of estate work, whether it’s estate planning and probate and estate administration here in New York. And New York is a very, real estate particularly in New York City and the surrounding area is a very real estate-intense place. And the first thing that a person really needs to understand is when you own something, whether you own it in the jurisdiction where you live or you own it outside the jurisdiction where you live, how do you own it. So do you own it in your name alone. Do you own it jointly with somebody else as joint tenants? Do you own it in the form of an LLC? Or do you own it in what we call “tenants in common” where you each have an equal interest. Because the manner in which you own it is going to determine how that property passes on your death. So let me give you this quick example. If you own something jointly, again I could speak specifically for New York and probably generally for the country, if you own something jointly with a joint tenant with the right of survivorship and one of those owners dies, the property is going to automatically go to the joint owner. Now, if you write a will, a will is usually only operate on assets that you own individually in your own name. So you might write a will and say well I give everything that I own to so and so. But if you own property jointly with a different person, that will is not going to control and the joint ownership is going to take precedence over what the will says. So the property is going to go to that joint owner. People don’t always recognize this because they don’t really always remember how they own property and they think that if they write a will it doesn’t matter, but it does matter. So the first thing you need to understand and the first thing you need to take an inventory of is what do you own and how do you own it. Once you know that then you can start making decisions about how you want to plan your estate and what the results would be if you pass away. So if you own it in your own name and you have a will and it says give property X to my cousin or my wife or whoever it is, then the will in your state is going to control the property in your state. Now just to, and I know I’m giving tons of information here and I’m speaking fast because I know the time is somewhat limited, but just to give you another little example here to followup on your question. Let’s say you’re a New York resident and really a domiciliary, which means New York is your home, and you write a will and you say okay leave all of my assets to my son, my daughter, whoever. Right, you own a house here in New York and you own something out in Ohio. The will is going to be able to pass the New York property directly to your beneficiary. But the property that’s in Ohio, the will that’s probated here in New York cannot pass that property without that will being filed and reprobated in a way in Ohio, because every state controls its own real property. So what you end up with when you have a person dying with property in their own name in multiple jurisdictions is a concept called “ancillary probate.” So you would have to take the New York will and basically bring what we call an “ancillary probate proceeding,” which means it’s ancillary to the main probate proceeding, file that proceeding in Ohio with an Ohio attorney and then the Ohio court would then issue the authority to the executor, same executor, to transfer the Ohio property, because the New York court cannot give authority to someone to transfer real property outside of New York. Now, the difference is that if you own something in an LLC, you don’t have to do that because you own a membership interest. You’re not transferring the real property, all you're doing is transferring the membership interest which is not real property, it’s personal property. So you can transfer the membership interest and then become a member of that LLC depending on the rules and regulations of the limit and liability company and the membership certificate. So you wouldn’t necessarily have to go through the ancillary probate process. So I know that’s a mouthful of stuff… but (its’ good) to get it out there.

DAN: I think that’s really good and I think the big takeaway for me from listening to all that is it probably makes a lot of sense to sit down with an attorney to plan the stuff out before you die to make it a lot easier for your heirs, right?

JULES: That’s 150% correct, because if you plan it out at least you're going to have the ability to get it done the way you want. If you don’t plan it out not only might not it happen the way you want, but your heirs or your beneficiaries or whoever it is you’re trying to benefit are going to be left with a big mess.

DAN: Right.

JULES: And believe me I’ve seen this in the stuff that I deal with all the time. People just don’t pay attention and then we’ve got all kinds of issues that we gotta deal with.

DAN: Alright. Well one final question that I have for you – we’ve gone a little bit over here but I do have one more question that I think people will be interested in. How does someone go about finding a good real estate attorney. Obviously if they’re in New York they need to call you, but for someone that’s in another part of the country, what are some resources that are some ways that somebody could find an attorney like you?

JULES: Well, finding a real estate attorney is pretty much like finding any other kind of professional that you want to hire. So obviously personal recommendations are always good. Who did you use, your friends, relatives, neighbors, whatever. You can certainly check the local bar associations. You can look online, and you know it used to be you know finding somebody online was like wow, this is a foreign type of thing, who does that. But nowadays everybody does it. And it’s really like one of the first resources that people go to. So for instance so I have a very extensive website that has loads of information about real estate and estates and wills and all of that and a blog about probate so when you go online, you see some site that you find interesting or seems to have the information that you want and call the person up and speak to them and meet with them and then ultimately make a decision as to whether or not this is who you want to retain to help you with your issue.

DAN: That sounds great. That sounds great. Well Jules, thank you so much for coming on the show. If somebody wants to reach out to you, if they have some followup questions or they want to sit down with you, what’s the best way for someone to get in touch with you?

JULES: Sure. As you said my name is Jules Haas. So if you take my name and you punch it into Google you're going to come up right to my website and if you go on my website you’ll see, you’ll have all my contact information, my phone number, 212-355-2575. You’ll see my website of course and you can always email me. My office is at 845 Third Avenue New York, New York which is right at Third Avenue, midtown Manhattan, but I practice throughout the New York metropolitan area. And people call me up or send me emails or try to contact me all the time and I’m happy to speak with folks and if I can help them out, ask them a question meet them in my office, just let me know and we can move on from there.

DAN: Perfect. And I will go ahead and put all of Jules’s information on our website. You can find it at rentalincomepodcast.com/episode103 Well Jules, thank you so much for your time I appreciate it and thank you for listening. My name is Dan Lane. This has been the Rental Income Podcast.