How to Avoid the Legal Pitfalls of Being a Chicago Landlord

Guest author Randy Weinstein has been a licensed attorney focused on real estate since 2006. Randy has been recognized by Superlawyers magazine as a rising star for the past two years.

Randy Weinstein graduated from the University of Denver with a juris doctorate and a masters of science in real estate and construction management. 

Contact Randy at his website http://weinsteinlegal.com or by email rweinstein@weinsteinlegal.com.

Homeowners in Chicago who are looking to purchase a new home and rent out their current home must take proper precautions to be cash flow positive.

Changing Your Mindset - Becoming a Business Owner

The first thing that people must understand when they go from living in their home to renting out their home is that they are going from home-owners to business-owners.  By turning your home into your business, you must take the same precautions that you would take in starting any other business.  People should be prepared to consider:

1. Properly forming an Illinois Limited Liability Company (LLC) 
2. Executing a Quit Claim Deed from themselves personally into an Illinois Limited Liability Company
3. Hiring a real estate broker to obtain qualified tenants 
4. Engaging a real estate attorney to review and/or draft your lease
5. Consider a property management company to handle repair issues and rent collection. 

Steps 3-5 are particularly important for properties located in the City of Chicago and Evanston. This is because these municipalities have strict Residential Landlord Tenant Ordinances (RLTO) to protect tenants.

Beyond failing to maintain a habitable property and failing to provide essential service, tenants in these  municipalities can have claims against their landlords for actions and/or inactions, including, but not limited to:

1. Failure to identify the financial institution holding the security deposit.
2. Failure to place the security deposit funds in a separate escrow account
3. Failure to pay interest on the security deposit
4. Failure to provide tenants with a RLTO summary

These mistakes are common place in the City of Chicago.

If one were to search google for "Chicago apartment lease" the first result is a Microsoft Word© document for a Chicago lease.

Getting Some Guidance

A landlord who uses this lease and accepts a security deposit is likely going to violate the Chicago Residential Landlord Tenant Ordinance simply because the landlord doesn't know the laws related to accepting a security deposit.

In the above example, there is no place on the lease to indicate the location of the financial institution where the security deposit is being held.

If there was a $1,000 security deposit and the landlord did not write on the lease where they were keeping the funds, then the tenant would be able to sue the landlord for $2,000 (two times the security deposit) + the return of the security deposit + attorneys fees and costs.

As the security deposit is usually equal to the rent that is a minimum of 3 months of rent lost (before attorney's fees and costs are factored in).

There are very few properties in Chicago that have a mortgage and can remain cash flow positive without 25% of their revenue.

In conclusion, going from homeowner to landlord is the same as going from homeowner to business owner.  Like any business owner, these people should rely on professionals to find them good clients (tenants) and execute legal contracts (leases) to bind those client.  Failure to rely on experienced professionals for either of these steps can turn a profitable idea into a business loss.