For many real estate investors, finding the right lease for rental property can be overwhelming. There’s almost an infinite number of templates available online, many of which are for different purposes. You can lease almost anything (i.e. cars, equipment, apartments, land, furniture, etc.).
There’s also contract law and other specific rules that apply depending on the state where your rental is located. For example, Pennsylvania has a plain language requirement, as well as laws that apply when there isn’t a written lease in place.
Of course, you should go through the proper channels to make sure your lease is lawful, whether that means consulting with a real estate attorney, a real estate broker, or other experienced landlords in your REI networking group. Or there’s the option of having an experienced property management company handle the leases, taking it off your plate almost entirely.
But while there’s plenty of information out there on how to structure your lease to best protect your interests as the landlord, is that really the sole purpose of your lease?
Read Your Lease Through a Judge’s Eyes—Is it Fair?
After working as a property manager for several years, I learned that there’s a difference between what’s written on the lease and what really happens when you find yourself in court with one of your tenants.
Instead of analyzing the legal implications of the contract itself, the judge may ask about the fairness of the terms set forth in your lease, how these terms were communicated, and what efforts have been exhausted in order to work things out with the tenant.
Also, some jurisdictions are more tenant-friendly than they are landlord-friendly. For example, some areas have things like rent control and a slow eviction process.
Even if the court does rule in your favor, in some cases it may not have much of a monetary impact. For example, if your rental is in a low-income area or your tenants don’t have any assets, there may be limited recourse (if any) for them not paying rent. Sure, they’d likely be evicted and it could damage their credit score, but that may not be much of a deterrent on its own.
Good Lease Agreements Keep You Out of Court
Really, by the time you, the landlord, take a tenant to court, you’ve already lost in terms of unpaid rent, legal fees, and having to deal with a bad relationship. The best thing by far is never having to go to court.
Personally, I like to think of my rental lease not only as a legal document, but also as a tool for creating a pleasant culture and for reducing turnover. I think this purpose is just as important, especially since turnover can dramatically cut into your overall yield.
How can you make your lease more effective at reducing turnover? How can you implement the culture you want?
3 Questions to Ask to Make Your Lease More Effective
1. It is reasonable for both parties?
There are landlord-friendly leases, and then there are neutral leases that are more reasonable for both parties. Over the years, I’ve found that neutral leases are the way to go and that most courts prefer to see these as well.
For example, are your late fees reasonable? Where I practiced property management, most judges frowned on late fees above 10 percent.
Do you give reasonable notice for changes to the terms/renewals?
Do you follow the appropriate protocol for security deposits?
Even if you are using a neutral lease, you can still include certain rules and regulations or even a description of how things should operate.
2. Does it define the relationship?
Personally, I think the most important function of a lease is that it communicates what the relationship should look like between the landlord and the tenant. As a landlord, you really want to demonstrate the core values of your operation and also explain how things should run..
Whether you manage the property yourself or through a property management company, you should outline where they can send rent, how they can contact you, how they can request maintenance, and maybe explain how you handle complaints.
Overall, a good lease will describe what communication will be like between you and your tenant.
Of course, you still need to get specific about what you’re offering as a landlord and what actions are required of the tenant.
3. Does it outline what to expect?
It’s important that the tenant has a clear understanding of not only what’s expected of them but also what they can expect from you.
In the lease, you can cover your policies on pets, use of common areas, renewal times, renter’s insurance, grace period, use of the property, smoke detectors, etc.
But you also want to cover what is included. What utilities will the tenant be responsible for and what will you cover as the landlord? These usually vary depending on the type of property. For example, in an apartment complex, shared utilities that don’t have a separate meter are typically covered by the landlord. This could be anything from water and heat to sewer and trash. Also, you’d be covering electric or whatever utilities are needed for common areas. In a single family residence (SFR), the tenant typically is expected to cover their own utilities.
You should also define your expectations about the process for breaking the lease. After all, in life, things change. What happens if they break the lease early? What happens if the landlord sells the property or if the government takes it?
Remember that just because something is written in the lease doesn’t mean it will be honored in court. For example, let’s say someone is breaking his year lease after a few months. Technically, the lease may say that the tenant owes the full year’s rent, but if taken to court, the judge may decide the tenant only owes rent for the months that the property was left vacant, especially if it’s filled again by the time you get to court, which is sometimes the case.
Instead, if you have a solid relationship built with the tenant and he/she knows what to expect, maybe the tenant will come to you in the event that an early move-out happens, and you’ll have the opportunity to reach a solution together without going to court. Maybe you could work with them to quickly get the property ready for a new tenant.
These are my 3 tips for good leases—what are yours?
Will the content provided in your lease help to reduce turnover time and cost? I believe so, if you keep these 3 tips in mind. But I’m sure there are many strategies that I didn’t mention that could make your lease even more effective.
So, what’s an absolute necessity for your rental’s lease? Better yet, what tips can you offer newer real estate investors who may be renting out a property for the first time?
Leave your comments below!