The Real.Est List
Rent Coach: Should I rent to a trust funder?
Q. A potential renter for an investment property I own presented an application listing liquid assets that exceed $1 million, held in the name of a trust. I'm troubled that the assets are not in her name and that her employment income is less than $50,000.
The rent is $4k per month and I usually like to see at least $160,000+ in annual income.
What are your thoughts on her trust assets? Should I ask for any other documentation?
A. A trust is a legally created entity that protects and distributes assets. There are three parties to a trust: The settlor, who establishes the trust and provides its assets; the trustee, who cares for the assets of the trust; and the beneficiary, for whose benefit the trust was set up.
While it's likely that your prospective tenant is the beneficiary of the trust named on the financial statements in her application, she does not have control of those assets.
You should begin by asking that she provide a notarized letter from the trustee outlining how and when the trust’s assets are distributed to her and whether she can access the trust funds at will. If the beneficiary only receives a $1,500 per month distribution, for example, she will fall far short of the income metric you are you looking for--having only $68,000 per year in employment and trust income, even though the trust has $1mil+ in liquid assets.
Make sure the letter from the trustee also addresses tax obligations: You need to know if the trust or the beneficiary is responsible for them.
This is important because you will want to know if monthly distributions should be treated as pre-tax or post-tax when you’re calculating the applicant’s annual income. A $2,500 per month distribution is worth significantly more if the beneficiary does not need to pay taxes on that income. Remember that your preference for $160,000+ in income assumes that such income is pre-tax.
Mike Akerly is a New York City real estate attorney, landlord, and real estate broker. He is also the publisher of the Greenwich Village blog VillageConfidential.
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