As a rental property owner, your leases are the legal instruments by which income and expected income from your buildings is defined. They don't just set the terms between landlord and tenant. They also create the value of the property itself, because an investment property's market value is based on the income it generates.
In other words, leases are your assets, so you'll want to take great care with them.
The proper document. You need some kind of formal, signed agreement with all your tenants, whether it's a lease with a one- or two-year term, with rent increases detailed, or a rental agreement that goes month to month and can be ended by either the tenant or the landlord.
- Standard issue. Many small-property landlords get by with printed leases pulled from the Internet or bought at an office supply store. That's okay if you don't have any problems. But if you end up with a difficult tenant, you'll wish you had paid more attention to the rental terms.
- Get a lawyer. A good real-estate attorney should have a standard, rock-solid lease that incorporates local law and customs and can be individualized for your use. If paying some lawyer fees saves you one hearing in housing court, the cost will be worth it.
- Keep your copies. If you ever expect to sell your building, you will have to document its income with written leases or rental agreements.
The fine print. The lease should cover everything from who lives in the rental to who is responsible for what.
- Names, please. The name of every adult in the rental property should be on the lease and each of them should sign it. This makes everyone living in the building responsible for all terms, including the full amount of the rent.
- Pay day. The document must state the amount of the monthly rent and the day it's due, usually the first of the month. Specify whether you are paid by check, money order or electronic payment, along with terms for late payments. You may also want to consider an incentive for the tenant to pay early.
- Deposit details. Spell out the exact amount of the security deposit and what it covers. The deposit, often one month's rent, should cover damage and misuse and shouldn't be used to pay the last month's rent. The lease should specify whether the deposit is held in an interest-bearing account and under what circumstances it will be refunded.
Maintaining good terms. A tenant has the right to privacy in his or her home, but the lease should explicitly lay out the circumstances in which the owner can enter the rental. The lease should also state that using the property for any illegal activity terminates the tenancy.
- Who fixes what. The lease should clearly delineate what you are required to do and what the tenant is required to do. Generally, you should agree to regular maintenance and make all repairs in a timely manner.
- The tenant's job. The tenant should agree to keep the property clean and pay for any damage resulting from abuse. You also want to restrict the tenant's ability to make repairs or alternations without your approval.
- Regular check-ups. If you perform routine maintenance and checkups, such as inspecting heating units, refrigerators, and the like twice a year, you will have a chance to see if the space is well-cared for.
What not to do. Don't forget to give yourself plenty of outs. Managing a rental property is full of potential headaches, so make it easy on yourself.
- Don't skimp on the late fee. A $25 fee probably isn't going to deter anyone. Instead, charge 10% for the first late payment and 15% the second time (assuming your state doesn't cap late fees). Make three late payments cause for eviction.
- Don't allow extra tenants. You should limit occupancy to those adults on the lease and minor children. No new roommates, boyfriends or girlfriends should live in the rental without adding their names to the lease.
- Don't commit to strict renewal terms. You may prefer noncommittal oral assurances, like "I'm sure we'll be able to work out something mutually agreeable when it's time." Avoid written commitments that could bind you, in case you end up with problem tenants.
Adapted from The Wall Street Journal. Complete Real-Estate Investing Guidebook, by David Crook (Three Rivers Press, 2006).