Do you look good in orange?
How about an orange one-piece jumpsuit?
I recently watched the entire series of Orange is the New Black on Netflix, and although it was an entertaining look at life inside prison, it also made me realize how much I really don't want to end up there. Frankly, I like my freedom and personal space just a little too much, and orange looks terrible on me.
I'm going to do whatever it takes to make sure I stay out of jail. You wouldn't think it would be that hard to avoid, right? I mean... don't punch a postman, don't rob a gas station, and don't start a riot. Check, check, check.
However, I've got some bad news for you...
For all the great things real estate investing can do for you, it can also send you straight to jail -- do not pass go, do not collect $200. After all, in the words of Uncle Ben from Spiderman, "With great power comes great responsibility."
However, have no fear! This post is going to throw open the doors on three of the most common ways real estate investors find themselves in prison and hopefully prepare you to avoid those simple mistakes so you can avoid the prison life.
1.) Killing Someone... By Accident
People die everyday.
I'm sorry to put it so bluntly, but it's true.
In fact, if you really want to get specific about it, 169,000 people will die on planet earth today, which means by the time you finish reading this three-minute article, 354 people will no longer be around (but don't worry, in those same three minutes, we've added 762 to our numbers! Isn't life grand!?)
The first key to staying out of prison as a landlord is to make sure you aren't responsible for any of those deaths. Sure, I know you aren't about to go hire a hitman for your tenant who paid late...(right?)... but what about accidents?
In Oklahoma, criminal charges are being sought for a landlord after a fire broke out in one of his rental properties and he did not have working smoke detectors in the home.
Don't let a $1 battery send you to jail. Make sure each of your rental properties have working smoke detectors when the tenant moves in, and consider doing semi-annual inspections to ensure the alarms are working and present.
Additionally, make sure all your properties are as safe and up to par on all other areas. Decks and patios should be checked for rotten boards, electrical problems fixed by a professional, and maintenance concerns addressed promptly.
Accidents happen all the time and are sometimes unavoidable. However, to avoid the orange jumpsuit -- make sure you've taken the necessary steps so you aren't the one at fault.
2.) Discrimination: A Fast Track to a Fat Fine
The second major reason you might find yourself facing a major fine and possibly hauled off to prison for is something the government is very concerned about: discrimination.
As a landlord, you are able to choose the best tenant to rent your property, but you don't have the ultimate authority to decide who can't rent your property. Over the past 50 years, there have been multiple acts and laws which today make up the "fair housing laws" that govern what qualifying factors you can and can't include in your real estate decisions.
- national origin
- familial status
Keep in mind also that there may be other local protected classes in your area that you could face steep penalties or jail time for breaking. For example, the following states include "sexual orientation" as a protected class in regards to housing: California, Connecticut, Colorado, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New Hampshire, New Mexico, New York, Oregon, Rhode Island, Washington, Vermont, and Wisconsin. (source: HUD)
Will you really end up in jail?
Possibly. Although fair housing is a "civil" matter and therefore subject primarily to civil fines, a landlord could face jail time if the problem is severe enough. According to Kenneth L. Baritz & Associates, P.C.:
If a landlord or property owner used threats, intimidation, harassment techniques or engaged in physical confrontations or violence to prohibit an individual or family from renting a particular property a court may decide to punish them. This punishment may include the payment of a fine, jail time, or both depending upon the severity of the particular case
When is it okay to discriminate?
Though it might surprise you, there actually are "good" ways to discriminate. Refusing to rent to someone because they have terrible credit, horrible landlord references, too low of income, or other qualifying factors are not only allowed, but a must for any successful landlording business. Strict tenant screening is one of the most important keys to your success -- so be sure to check my post, The Ultimate Guide to Tenant Screening for the best tips I have on weeding out the worst tenants, legally.
Stick with the "good discrimination" and run from the bad kind -- or else you may find yourself in some deep trouble. For more information on Fair Housing laws, see the HUD website.
3.) Tax Fraud: A Ticket to the Slammer
I hate taxes.
I work hard for my money (and my money works hard for me) and I don't like to see that money disappear.
However, I also understand that hiding any income to evade taxes is a sure way to head off to federal prison. It seems that a week doesn't go by that I don't hear of some powerful real estate mogul being investigated for tax inconsistencies. Since the beginning of the tax system, there have been real estate investors who have tried to hide their wealth and ended up paying for it through the loss of many free years of their life while they sit in jail. Many of these "imprisoned investors" are the real estate guru from past years, who made a lot of money but didn't want to share their wealth with the government. Bad idea.
Don't end up in federal prison. Get a qualified CPA to do your taxes for you if you can't do them right yourself, and pay the government what the government is owed.
Please, don't go to jail. It doesn't shine the best light on the real estate investing community and besides -- I kinda like having you around. So buy yourself some smoke detectors, follow the discrimination laws, and give to Caesar what Caesar is due.
Besides, you look terrible in orange.
Do you have any additional tips for staying out of the slammer? Share your thoughts/stories/comments below!
This post originally appeared on BiggerPockets.com.