This week’s episode, Podcast Host, Property Manager & Business Owner, Andrew Schultz, goes over when to start considering charging double the amount for a deposit.
Now that we’re in 2023, it’s becoming more and more popular to start digitizing leases. Find out the best places to create, manage and monitor your digital leases.
Last, but not least, are you considering renting to a short-term rental business? Here’s everything you need to know.
Andrew Schultz: (00:00)
Hey everybody. Welcome back to another episode of the Rent Prep for Landlord’s podcast. This is episode number 398 and I’m your host, Andrew Schultz. On today’s episode, we’re gonna be talking about charging a double security deposit for a rental property, the best ways to sign leases digitally, and renting your long-term rental to a short-term operator. We’ll get to all that right after this.
Voice Over: (00:26)
Welcome to the Rent Prep for Landlord’s podcast. Now, your host, Andrew Schultz.
Andrew Schultz: (00:31)
Have you joined the free Rent Prep for Landlord’s Facebook group. Our members get access to our Sherwin Williams and PPG paint discount programs can ask questions in our monthly AMA sessions and if you have a question or a situation that you’ve never encountered before or just need to bounce an idea off a group of over 13,000 housing providers, this is the place. If you haven’t checked it out yet, do it today over at facebook.com/groups/rentprep. Don’t forget to mention the podcast when answering the questions so we know how you found us.
Voice Over: (01:03)
Forum quorum, where we scour the internet for ridiculous posts from landlords and tenants.
Andrew Schultz: (01:12)
We’re gonna jump right in this week with our forum quorum segment. This one comes to us via the Rent Prep for Landlords Facebook group. Let’s go ahead and hop right in here. At what point or credit score do you feel the need to charge a double deposit? It is legal in my state, so that’s actually a really interesting question for me because we actually have a lot of experience with either a double deposit or first-month last month in security deposit and unfortunately that’s no longer the case, but we’ll get to that in a minute. It’s good that you mentioned that a double deposit is legal in your state, and there are several states out there where security deposits or prepaid rents are limited, so spending a little bit of time doing some research on what the laws are in your state will definitely help you to understand what you can and can’t do.
Andrew Schultz: (01:56)
When it comes to deposits in prepaid rents, double deposits or prepaid rents are now pretty much all but eliminated here in the state of New York. Back in 2019, New York State passed the H S T P A or the Housing Stability and Tenant Protection Act, which was the largest rewrite of landlord-tenant law in New York State in decades. We’ve talked about it a couple times on the podcast before a part of those updates included restrictions on what landlords can and cannot charge for deposits, we’re now limited to a security deposit of no more than one month of rent, and alternatively, you can have up to one month of prepaid rent in escrow for a tenant, but you cannot have both. In New York state, it’s either one or the other. This presents issues when you have a tenant that has pets. For instance, you can no longer collect a pet deposit, so you’re basically left in a situation where you have to bump the rents for people with pets and use that as your way to increase the deposit a little bit.
Andrew Schultz: (02:47)
The downside to the tenant obviously is that they lose all of that extra rent money that they’re paying in the event that their pet doesn’t actually do any damage to the rental, and I guess the positive to the landlord is obviously that they’re collecting that money regardless of whether or not there’s damages, but really this is only the tip of the iceberg. The problem with this legislation, in my opinion, is that it essentially hurts the very tenants that it’s designed to help protect. Let me explain. We used to use a double securing deposit or collect an extra month of rent to keep an escrow whenever we had a tenant that was high risk. What I mean by high risk is a tenant that didn’t necessarily meet all of our selection criteria, but they were close enough that it was worth taking that risk. If you can offset the risk by having some extra funds on hand in the event that the tenancy doesn’t pan out, essentially we no longer have that option.
Andrew Schultz: (03:35)
New York data said that we can no longer collect these extra deposits or extra months of rent, which leaves us with no way to offset that added risk. So what did that mean for our selection criteria? Well, we didn’t decrease our criteria. Instead, we ended up converting all of those tenants that may have had an option to rent from us if they were willing to pay the extra deposit to basically flat-out denials without having the ability to offset that risk. It simply did not make sense for us as third-party property managers to take that risk on behalf of our clients. In talking to a lot of other landlords throughout New York State, we were not the only ones who went this route. I don’t know of any landlords that decreased their selection criteria once these laws went into effect. In fact, many landlords increased their selection criteria because they were even more concerned about their tenant screening.
Andrew Schultz: (04:22)
So prior to H S T P A, our credit score cutoff was 600 below 600. That would increase the chance that a tenant would wind up in the high-risk category and be required to pay an additional deposit. Our credit score criteria is still 600, uh, and I think it’s worth mentioning that that’s something that’s gonna be market dependent. So here in Buffalo, I’m dealing with largely class B and C rentals that are somewhere between 75 and 125 years old. On average, if you’re dealing with brand new construction class A type properties, you’re likely going to wanna set a higher credit score as part of your selection criteria. Take a look at what other landlords in the area are using and copy them. That’s the easiest way to figure out what works in your area. I also wanna mention that we don’t just look at the credit score, we also look at the payment history.
Andrew Schultz: (05:07)
Essentially, I wanna take a dive into that person’s credit history and see why their credit is the way that it is. Do they have unpaid medical debt, unpaid collection accounts, unpaid utilities, all of that would count against them when they’re scored as part of their application? Same for unpaid debt to a previous landlord. All of these things are in our scoring rubric and the more damage to the credit, the fewer points that the tenant is going to score on our rubric. Medical debt is a classic example of this. Medical debt can be very, very easy to attain and it’s very, very easy to ruin someone’s credit with medical debt. It’s incredibly easy to wind up in a ton of medical debt in this country. That said, the way that medical debt is reported on credit profiles is being updated right now with a lot of medical debt coming off of credit reports altogether.
Andrew Schultz: (05:54)
There’s a lot more to this and we can do a little bit more conversation on this topic if you’re interested, but my point here is that when one industry’s debt stops being reportable on credit reports, it’s a pretty clear indicator that other industries are going to be lined up for the same treatment. I don’t think it comes as a shock to anyone here that the housing industry has a target on its back when it comes to stuff like this, and I don’t think that it’ll be too long before we start seeing a push to eliminate all housing related debt from people’s credit histories as well. Right along with that, I think you’re going to see more states start cutting off the ability to have an additional security deposit or an additional month or two of rent on hand as the restrictions get tighter and tighter across the country.
Voice Over: (06:34)
Water cooler wisdom expert advice from Real Estate Pros.
Andrew Schultz: (06:43)
Moving right along, we’re gonna jump into our water cooler wisdom segment. This one comes to us via the Rent Prep for Landlord’s Facebook group as well. Let’s go ahead and take a look. What is the best service for digitizing and signing leases? DocuSign, authen. I’ve been old school with paper or P D F editor and I need to make this easier for new leases and updating our existing leases. I’m not looking for an all-inclusive property management software, so we’ve been doing pretty much all digital lease signings for several years now. I’ll never go back to pen-and-paper leases again. The time savings alone when it comes to using digital leasing is worth any associated software costs, bar none. The amount of time that you save makes it totally worth it. Essentially, we started with a Word doc for our lease. From there, I converted the word doc into a P D F file and made that P D F file into a form fill P D F using Adobe Acrobat.
Andrew Schultz: (07:36)
I’m sure there are free tools online that’ll do the same thing, but we already pay for an Acrobat subscription here in the office. Pretty much for stuff exactly like this, we’d like to convert a lot of our forms into form-fill PDFs to make our workflows easier and honestly, Acrobat isn’t all that expensive if you’re using it even just a couple times a month. Adobe also has their own in-house digital lease signing service or digital signing service. Uh, but I haven’t used it so I can’t really speak to its quality. So we have our lease as well as all of our various addendums set up as form-filled PDFs. This would include our lead-based paint documents, the state disclosures that we have to give out, the fair housing disclosures that we have to give out, things of that nature. Basically, we generate all of the documents that we need to for our lease packet.
Andrew Schultz: (08:19)
Then we upload those documents into our signing software and send it out for digital signature. The signing software is going to give you the ability to add in multiple signers as well as drag and drop into your document wherever people need to sign date, initial things of that nature. The nice thing is most signing softwares won’t let you complete the signing of the document until you’ve signed and initialed every spot that you need to. This prevents you from winding up with a half-signed lease or a tenant claiming that they didn’t see that page or whatever the case may be. We require all of our tenants to initial the bottom of every page of their lease, so that way there’s never, never an option for them to say, well, I didn’t see that, or it wasn’t there. If they initialed it, they’re telling us that they read it.
Andrew Schultz: (09:00)
Another huge benefit of digital leasing software is exactly that. You’re gonna have the ability to go in and see how long it took someone to read that lease before they signed it. So if you had someone that opened the lease and then signed it 30 seconds later, you can pretty much guarantee that that person didn’t actually read the lease that they signed. At that point, it’s probably time to have a conversation with the tenant about the fact that they just signed off on a legal document without actually spending any time to read the document that they’re signing off on. This also gives the tenants the ability to spend as much time with the lease as they want prior to signing it. We give our tenants five days from the time that their lease is sent to them to sign the lease and pay their security deposit.
Andrew Schultz: (09:39)
So if they wanna spend time reviewing the lease themselves or send it to an attorney or whatever it is that they wanna do, that’s well within their rights during that five-day timeframe. We can’t provide them with legal advice about their lease, so giving them time to seek guidance if they so choose is kind of a nice feature. There are quite a few different digital signing softwares out there, and honestly, most of them do pretty much the same thing. The best thing is a lot of these softwares offer some sort of a free trial so that you can get a feel for them before you actually have to commit to buying them. In our office, we’re currently using authe Sign basically because that’s what’s included with our M L S subscription. I like Authentic sign and it gets the job done well. It was updated recently, which made it a lot more usable, and it also gave us the ability to edit our forms prior to sending a lease out for signature.
Andrew Schultz: (10:25)
So if we saw an error in our lease, we can change what’s in the form field before it goes out to the tenant for signature, whereas previously we would actually have to delete that document, fix it on the computer locally, and then re-upload it to Authentic Sign. Authen is not a cheap piece of software and I don’t know as though it would be my recommendation if it wasn’t included in a subscription that I’m already paying for. DocuSign is probably the most popular software out there right now. Pretty much everybody knows DocuSign and most people have probably used it at some point to sign a document digitally for someone else. DocuSign is again, not necessarily the cheapest option out there, but if you’re only using it a few times a year, it probably won’t be too bad. Some other softwares that are out there that might be worth looking into are Pan AOC and Hello Sign.
Andrew Schultz: (11:10)
Both of these companies are currently offering free trials as well. In addition, I wanted to mention that some property management softwares also have digital signings integrated into them. I know you mentioned that that’s not necessarily what you’re looking for here, but in our instance, we are using AppFolio, which has digital signings integrated right into the software. We use AppFolio for our management software, but we don’t like their digital lease signing interface, so we never really adopted it in our office. Essentially, you have a ton of different options out there, and I don’t know of any state currently where we still need to sign via pen and paper. I could be wrong. I’m not an attorney, but I’m pretty sure every estate allows for digital lease signings. At this point, my recommendation would be to move to a digital lease sightings as soon as you possibly can.
Andrew Schultz: (11:54)
The amount of time that you save and the amount of errors that you can reduce by using digital signings pays for itself very, very quickly. Moving on to our last segment of this episode, we have our second water cooler wisdom of the day. This one again comes to us via the Rent Prep for Landlord’s Facebook group. Let’s take a look. Leasing my property to an S T R business. I received an inquiry about possibly leasing my townhouse to a business that will use it as a short-term rental. My H O A has no restrictions. I assume it will be used as an Airbnb. This business will just pay me the rent like any other tenant. What are the pros and cons to leasing to such businesses? Looking for some advice as I have no clue. Thank you in advance, and again, this one comes via the Rent Prep for Landlord’s Facebook group.
Andrew Schultz: (12:41)
This is an interesting question. I don’t think I’m gonna have a lot of pros on this one, unfortunately. Uh, I think it’s going to be mostly cons. I guess I should probably preface this by saying that my management company is not actively engaged in the management of short-term rentals, AirbnbS, anything along those lines. We strictly do long-term rentals on our units as it sits currently. Short-term is not a space that I’m really looking to get into, but I do have a lot of friends and clients that are involved in the short-term space, so I drew from their experiences as well as my own experiences, a long-term manager when answering this question. So the first thing that I would wanna do in a situation like this is find out, does this short-term operator actually know what they’re doing? Do they have any experience doing this? Do they have a track record or any other units that you can look into?
Andrew Schultz: (13:27)
Essentially, you don’t wanna be someone’s Guinea pig for a business model that they’re just getting started in and they may not know all that much about. I’m not saying that every short-term operator’s going to be clueless, but you have to treat them just like any other tenant, and I feel like a lot of new short-term operators fall into this subset. Actually, I’m gonna clarify that a little bit. I’m using the term short-term operator a little too broadly here, and what I should be saying is short-term arbitrage operator. Now, what exactly does that mean? What is arbitrage? It’s essentially recognizing a gap in the market where there’s money to be made by taking advantage of the price differences between the buy side and the sell side. So in this instance, they’re going to be buying your rental for let’s say, a thousand dollars a month and then selling the rental on a day-by-day basis at a significantly higher price.
Andrew Schultz: (14:13)
The difference between the thousand dollars a month and whatever they’re getting for the unit is the arbitrage. Airbnb arbitrage became huge a few years back, and there were a lot of short-term arbitrage operators that were making really, really good money doing this right up until the point when Covid hit. Airbnb took a massive hit during the early onset of Covid because no one was able to travel, not to mention the crazy restrictions throughout different areas of the country and things of that nature. A lot of people that were doing Airbnb arbitrage ended up washing out during this timeframe because they could no longer afford the rents on the units that they had leased without having the money coming in on the backend from the Airbnb bookings. As a result, a lot of landlords ended up getting screwed on those leases with these Airbnb arbitrage operators.
Andrew Schultz: (14:58)
So I think my biggest concern would be what happens if the operator can’t fill the unit. Are they going to be able to continue to pay that rent or are they just going to walk away from the lease and leave you to try to find a new tenant? I do have some other concerns as well. Some of these may be unfounded. As I said, I’m not in the short-term game, but I’ve stayed in a bunch of Airbnbs and I have a lot of clients that operate in the short-term space. So here’s a couple of more concerns that I would have. One of the first things that would come to mind would be insurance. Do you need different insurance on your property? If you’re leasing units short-term versus long term, chances are pretty good that you will need to change your insurance policy in some form, or the operator is going to need to have some sort of an additional insurance policy that covers you for their short-term guests.
Andrew Schultz: (15:41)
This is a conversation that you need to have with your insurance company prior to making the move into doing any sort of short-term rentals. My next concern would be the legal side of things. Laws differ greatly in some areas between short-term and long-term rentals. For instance, in some states, short-term rentals are actually governed under in keeper’s laws similar to the way a hotel would operate and in other states, you’re left to the regular real estate laws, which typically haven’t caught up with short-term rentals. In a lot of instances, you’re gonna wanna spend some time making sure that your lease is ironclad before you sign anything with a short-term operator. You definitely need to be working with an attorney that has some experience in the short-term space, even though you are going to be executing a long-term lease to make sure that you’re covering the bases when it comes to things that you may not think about or may not know when it comes to dealing with short-term rentals.
Andrew Schultz: (16:27)
Another concern that I would have would be, what happens if the short-term guest doesn’t leave at the end of the stay. Is there a possibility that any of that could become your problem with you being the property owner? Ultimately, you are still responsible for the tendencies in the building, so you may be in a situation where someone overstays the reservation and you now have to deal with your short-term operator, try to get that tenant out. Another concern that I would have would be, what happens if a guest does massive amounts of damage? Who’s going to be responsible for the repairs, both routine repairs and repairs as a result of damage? I’m sure we all understand that the cost of everything has gone up substantially over the last few years, and oftentimes a security deposit isn’t going to cover all of the damages in a unit.
Andrew Schultz: (17:07)
If there’s more than a couple of things that were damaged. For instance, we just had to buy a replacement refrigerator handle and it costs us $32, $32 for a piece of plastic injection mold and two screws, that stuff adds up very, very quickly. If you have a little bit of a higher-end unit with nicer appliances and things of that nature, damages can rack up very, very quickly. It’s also worth noting that you really aren’t going to have any knowledge of who’s coming and going from the property. The short-term operator is the one who’s going to have that information. They’re going to be the ones who are accepting and booking all of the stays, so they might have that information, but the chances of that information being relayed to you on a regular basis is gonna be pretty slim. This could create potential issues in the event that something does happen in the property that isn’t legal or again, causes damage or something along those lines.
Andrew Schultz: (17:57)
This is something where you really need to have a good working relationship with your short-term operator so that you can contact them in the event that something goes wrong. Honestly, at the end of the day, if I was gonna take a risk like this, I would just run the Airbnb myself and skip the middleman altogether. I think that there’s probably some good short-term arbitrage operators out there, but I’m willing to bet that the people doing short-term arbitrage are probably running on thinner margins than we realize, and I think a lot of them are more likely to wash out when things get rough rather than actually deal with the situation. I could be completely wrong. This is just my 2 cents, but that’s my take on the situation. You can save a lot of time by knowing what questions to ask potential tenants. In our latest post, we’ll go over the top 20 pre-screening questions to ask future renters.
Andrew Schultz: (18:43)
Check that out today at rentprep.com/blog. That pretty much wraps up this episode of the Rent Prep for Landlord’s podcast. Thank you all so much for listening. We truly do appreciate it. Our goal with the podcast is to help as many people as possible make educated decisions when it comes to real estate, and you can help us to reach our goal. If you heard anything in this week’s episode or any other episode that will help somebody that you know, please do us a favor and share it with them. If you’re looking to get in contact with me, I can be reached over at whatsdrewupto.com. From there, you’ll find links to everything going on with me over at Own Buffalo, as well as the other projects that we’re working on. Grab a copy of our free deal analysis tool today over at whatsdrewupto.com.
Andrew Schultz: (19:24)
There’s no obligation, and it comes with a free companion video showing you how to use it If you’re looking for top-tier tenant screening services, and on over to rentprep.com, there are multiple products to choose from, including a tenant-paid option, and if you’re over 50 doors, ask about the enterprise level programs and pricing. I’ve been an enterprise user at Rent Prep for over a decade now, and it’s definitely changed the way that we screen our tenants. Check that out today over at rentprep.com. Again, thank you all so much for listening. We’ll be back in two weeks with an all-new episode that you won’t wanna miss. Until then, I’m Andrew Schultz with ownbuffalo.com for rent prep.com, and we’ll talk to you soon.
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