Corporate/Non-profit SFH rentals?

[Bill Briscoe]

We just rehabbed a foreclosed SFH and listed it for lease or lease/purchase. I got a call from a group that places mentally challenged girls with a caretaker. They have a house 30 miles out of town with 3 girls which they want to move closer in and said our house would be perfect. Are there any concerns I should have or specific questions when dealing with this type of renter? Are non-profit renters more/less likely to pay rent on time, cause problems, etc?

[Bill Gulley]

Bill, Andrew's set up appears to be tenant based with the non-profit feeding them to you, that can work, but Andrew pointed out some of the issues.

A better way is to lease to the non-profit holding them responsible.

Section 8 payments are paid to the owner in title, however if you are in the Kansas City HUD district (I think you are) agreements with non-profit housing organizations can be placed in an administrative position and manage the property and receive payments. Much the same as a check paid to a real estate manager for the owner.

I suggest you have your dealings with the non-profit.

I posted a thread long ago "Profit with a non-profit" I think, several options were discussed.

As Andrew mentioned, these occupants are judgment proof, they have nothing and won't ever have anything and you can't tap their benefits (unless the co-mingle their money with other cash), so looking to them for rents or damages is a risk.

Look hard at the non-profit, is it a N/P that is really paying an executive director as I mentioned in the described thread above or are they a civic based organization that provides other services? Civic types will be much more credit worthy, reliable and usually sufficiently supported by the community as well as by government. "Private type N/P" will usually have less support, funds and public charm or reputation....and they will usually not be providing other services as they will be limited to housing.

Next issue, zoning, you need to see if your property needs to be approved as a "group home". Often the cut off is with having 3 unrelated parties residing in one unit. You mention 3 women and they may have a live in care taker, that's 4 people in one unit.

You also need to check with you insurance agent as you will no longer be renting to the general public, but to a special group, a rider may be needed.

Utilities should be under the N/P as well, most utility companies provide a landlord arrangement where utility bills default to the landlord if unpaid without services being disconnected, the N/P should be responsible.

Safety issues: When you have physically challenged tenants you may have unique issues. Mentally challenged may forget, be destructive or put themselves or others in danger. The N/P will certainly appraise the situation and evaluate the client, but you need to address a few issues I'd say. I suggest you secure the stove in some manner so that these tenants would not have access, that's from experience. The care taker needs to be present when appliances are used.

One solution was a small apartment fridge in a common are for snacks and drinks and a microwave. The kitchen was locked up except at meal times.

Rents: You can command higher rents with N/Ps in several ways as you are dealing with a corporation, this will fall into a commercial lease arrangement. They can be responsible for maintenance and repairs, in whole or in part. A triple net rent is possible taking care of insurance issues.

Consider a three year lease which avoids any due on sale clause you may have. Guaranteed rents have value, so a higher rent might be brought back to market with maintenance issues taken care of, net will be better. I suggest you not just roll in with higher rent levels as a N/P is usually very financially astute compared to some individual, so if you appear to be supporting them rather than trying to profit unreasonably with them, you can have tenants forever.

Don't think in terms of month to month so much as year to year. Examine cash flow required, lump sums can be paid annually or at other times. This some times helps the N/P as their income is rarely a monthly revenue. They receive grants at different times. They have fund raising periods and donors usually don't give on a monthly basis. Suggesting some flexibility with rents will make you a hero!

Your due diligence includes reviewing their liability policy and financial statements which non-profits are required to make public. Make sure they are a 501C3 or approved for tax benefits as this is the standard by which limited liability for such entities is based.

If you have tax issues, consider tax deductions through the rents as well.

Moderate income leasing can be a gold mine with N/Ps. Good luck! :)