protective-lease-agreement-1030x773-1-980x735

Most landlords know that it’s important to have a signed, written lease agreement. But is a two-page freebie you scrounged up somewhere online going to protect you?

The quality of your lease contract matters. That’s a lesson far too many mom-and-pop landlords and rental investors learn the hard way.

Real estate investments typically cost in the six-figures. That’s a lot of moolah! So you better make dang sure that you protect that investment.

Enter: the battle-ready lease agreement.

 

1. Guest Clauses

The biggest cause of wear and tear on any property is people.  Constant trampling across the carpeting flattens it and gradually ruins it. More people using your investment property means racking up mileage faster. More stress on the flooring, walls, systems; even the yard!

Over my decades as a property manager, I have always conducted walk-through inspections with tenants after they move out. Those rentals with many people living in the unit? Always the heavily damaged ones. And the tenant’s usual line is “It wasn’t me, it was my kids, friends, relatives that caused that wear and tear. But you can’t deduct normal wear and tear from my security deposit anyway, so hand it over.”

How on earth do you handle this as a landlord?

By making sure that you have a strong occupancy clause. Some states and municipalities do have occupancy standards in place but that rarely means anything to a renter. It is mucho importante that you have a strong lease clause that not only specifies how many people will reside in the unit, but also restrict overnight guests to a specific (low) number of nights each month.

Lastly, make sure that your agreement includes these words in as many sections as possible: “Tenant is responsible for the actions, liabilities or damage created by any and all occupants, guests and invitees.”

 

2. Utility Responsibility

Who pays for what?

Perhaps you figured it’s a no-brainer. Just add what the tenant is responsible for in a nicely-written rental agreement utilities clause and call it a day, right?

Nope. False. Wrong. Everything must be spelled out to the proverbial “T”, either in the lease agreement itself or in a separate landlord-tenant utilities agreement addendum.

For instance, some multi-units do not have separate metering for water. How are water bills split? Does the landlord pay the bill and then bill each tenant? What if one tenant uses more than another?

These are all items that need to be clarified in a landlord-tenant utilities agreement.

And it does not stop there. To make sure that you have a compliant, state-specific lease agreement, check out the state landlord-tenant laws regarding whether it is even permitted to bill the tenants for a shared utility. When that’s done, go and check your local laws, too.

 

3. Over-Use of Utilities

Some landlords cannot avoid including some utilities and services with the rent. Sadly, what I’ve witnessed is that more often than not, any desire for energy conservation flies out the door when a tenant does not have to pay for usage.

For instance, when heat is included in the rent, I have seen thermostats set to 77 degrees! Ironically, take that same tenant and make them responsible for the utility bills, and suddenly they develop a sense of environmental custodianship. And the thermostat drops to a more affordable 68 degrees.

It’s the same for water, electricity, gas; you name it.

What’s a landlord to do if they include utilities?

Make sure that you include a clause in your lease agreement that if there is evidence of over-usage, the tenant will pay the difference. But be specific about usage, and consider setting a ceiling to trigger billing. Your lease agreement might say “If the gas and electric bill is under $50/month, the landlord will pay it on behalf of the renter as a courtesy. If the gas and electric bill is over $50 in a given month, the renter will be responsible for their own bill, in its entirety.”

Obviously the exact figure varies from property to property, so make sure you know what is a moderate bill for that rental unit. Review the billing history for that unit as a baseline, before setting a ceiling in your landlord-tenant utilities agreement.

(article continues below)

Free Tools to Automate Your Rentals:
Rental Application & Free Background Check
Full Credit, Criminal & Eviction Reports (free for landlord)
Lease Agreement
Automated Rent Collection

4. Utility Malfunction

So often, I have had a tenant call and scream at me that the electric company shut off the electric. Whether it was their own fault or that there was an electrical issue, it was nothing I caused; yet the landlord seems to be the perpetual punching bag.

Include a clause in your lease agreement that clearly states that if a utility or service should become unusable (not caused by the landlord’s doing), the landlord is not liable. This protects you from running around purchasing and delivering candles for your tenant should a storm knock out the electric.

I have had tenants demand that I “must put them up” in a hotel because the central heat dropped. There were times where I have done that as a courtesy, but I do not want to be forced to do it simply because my lease agreement is not more landlord protective.

 

5. Property Inspections

How would you know if the renter snuck more people into your property? Or if new pets? How would you know if the property is a complete mess and being damaged?

By visiting the property, of course.

Most leases do contain “right of entry” clauses that specify how much notice must be given. But rarely do I see the words regular inspections used. Add it in!I recommend either quarterly or semi-annually.

This does not give you the right to pop on in and sit down with some popcorn to watch Netflix. However, it does leave you room to make an inspection – just to be sure all is status quo.

And guess what? If the renters know that you will be regularly inspecting the property, they tend to keep it in better order in the long run.

 

6. Specifics On Use & Repair Liability

Make sure that your tenant understands that if little Timmy throws the matchbox car in the toilet, and it blocks up the plumbing, that they as tenants will be footing the bill. Anything caused by neglect or abuse by a tenant should be paid for by that tenant! Period.

You may think detailed rules are silly nitpicking. Well, it’s that very nitpicking and attention to detail that will save you money! In the rules section, include “nothing in the toilet except toilet tissue and excrement.” Yes, I do get that detailed!

Hardwood floors? Make sure you add a clause in the lease agreement that the tenant must protect the flooring with felt pads under their furniture legs, and no high heels (yep, we are asking their guests to remove the shoes)!

I had a fireplace in one of my rentals and added a clause that it was for décor only and not available to use. By doing this, I am protecting against fire, and liability against injuries.

That does not mean your tenant is going to listen. But if something does happen, guess who is on the hook?

(article continues below)

What short-term fix-and-flip loan options are available nowadays?

How about long-term rental property loans?

We compare several buy-and-rehab lenders and several long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

7. Fees Protection

Let’s face it: there are rules, laws, and regulations all across the board that limit the fees landlords can charge. Especially late fees!

However you likely have a mortgage to pay, and there’s certainly no hesitation by the mortgage company to charge you a late fee. Yet, in so many states, there are absurdly strict landlord limitations.

One little clause may not be the “solve-all” but it sure can assist. Here it is (now this is an insider secret):

“The Tenant understands that it is impossible or extremely difficult to compute the specific damages suffered by the Landlord for Tenant’s failure to make payments when they are due, therefore, the Landlord and Tenant agree that these fees are a reasonable and fair estimate of the costs incurred by the Landlord.”

This clause does not mean that you can charge out the wazoo. But it certainly can assist in states that have the restriction of “reasonable charges” listed in their leasing laws.

These are just a few of many, many clauses that may seem mundane or even ridiculous… until your tenant calls you screaming and flinging demands. Legal clauses are often the only barrier standing between a landlord and a lengthy, expensive lawsuit, so take them seriously – they may just save you thousands of dollars in the not-too-distant future.

 

8. Property Protection

The lease is protection not only for the landlord against liability, but for physically protecting the property as well. It is crucial for real estate investors to grasp that a renter is not going to go out of the way to protect, let alone take care of, “your stuff”.

So, in order to be sure that they have incentive to care, make sure to add in lease contract clauses for tenants about each item. For example, new beautiful flooring was installed right before Mr. Renter moves in? Don’t just tell him to make sure he puts felt pads on his furniture, include it as a requirement in the landlord lease agreement!

Just had the bathtub refinished? Make sure and include care instructions in the lease!

 

9. Subleasing Requires Landlord’s Written Permission

Subleasing (AKA subletting) occurs when a tenant rents out your rental property to someone else. It sometimes makes sense for landlords to allow sublets. However, as a landlord you need to know if your tenant has moved out and rented your rental property to another.

The good: Tenants fall into bad times. Perhaps a transfer of their employment comes up. What better way at reducing stress than to have your current renter find a future renter. Be sure that you are in the “know”. Once there is an interested party, have your current renter provide you with all the necessary information to conduct full tenant screening. Once approved, get a brand-new lease ready to be signed.

The bad: Current tenant needs to move. Tenant finds his long-lost cousin who needs a place to live. Secretly, he moves his cousin in and leaves. Your new inherited tenant causes problems. First, there are complaints of noise and parties by the neighboring units. Secondly, you learn of an unauthorized pet. Last, rent remains unpaid. You see, your inherited tenant has no real legal liability. And that leaves a nightmare scenario for the landlord.

The bad scenario is just one of many. So, what is a landlord to do?

  1. Make sure that your lease provides a strong clause regarding subleasing including the requirement that in order to do so, the landlord must provide written approval.
  2. Conduct regular inspections.
  3. As soon as it becomes known that there is an unauthorized person living in the rental unit, send formal notification to the renter.

Making sure your lease agreement details when visitors may become occupants is particularly important in order to secure and protect your property and you.

 

Final Thoughts

Here’s a secret: these clauses aren’t always 100% enforceable, but they do help. At the end of the lease term, when the inspection is done, and there is a huge scratch on the floor, it is much easier to have that damage deducted (and stand up in court) by sprinkling these landlord-protective clauses throughout.

 

What clauses do you like to include in your lease agreement? Where have you run into trouble with renters in the past? Share your experience!

 

 

More Reading on Leasing

I want to know more about…

FREE Webinar: Open $250K in Credit Lines for Investing

On Wed. 3/23/22 at 2pm & 8pm EST, Deni & Brian are hosting Fund&Grow for a free webinar to show you how to open up to $250,000 in unsecured business credit lines for real estate investing.

Free Background Check

Run a FREE housing & identity check!

Credit, criminal, eviction reports also available.

Want to create passive income?

 

We’ll email a series of videos in our free course,

to help you start earning income from rentals.

[mc4wp_form id=”501″]

Privacy Policy: Your info will never be shared or sold to a 3rd party. Even if Dr. Evil offers us 1 million dollars 🙂

Rental ROI Ebook

Want to earn more from your rentals?

 

Download our free Ultimate Guide to Higher ROI and be dazzled by the charming wit, disarming frogs and invaluable tips for higher profits and less work.

 

[mc4wp_form id=”501″]

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies

Free Mini-Course: Passive Income from 2-4 Unit Multifamilies

 

Ready to build passive income from small multifamily properties?

Over the next week, we'll email you a free series of videos, so enter your best email and let's get started!

You're in! Check your email to confirm, and you can email us directly at [email protected] with any questions :-)

Free Webinar: Earn 15-50% on Passive Real Estate Syndications

LIVE masterclass on Tues. 10/25 @ 8pm EST

Your seat is reserved! Check your email to confirm.

Inside a group real estate investment

Here's a quick video breakdown of a past group investment — and how it's performed since our Co-Investing Club invested in it in early 2023.

You got it! Check your email for the link, and some other fun freebies.

Ready to Build Passive Income?

Ready to Build Passive Income?

 

We'll email you the course videos over the next week, so enter your best email!

You're in! Check your email to confirm.

Ditch Your Day Job: Free 8-Video Course

 

Our brand new course on how to reach financial independence and retire early (FIRE) with rental properties is open for one week from Oct. 23-30!

You're in! Check your email for the link, or click here for the 1st video!

How do group real estate investments work?

If you want the cash flow, appreciation, and tax benefits of real estate without hassling with loans or landlording, learn how to invest passively. 

Awesome! Check your email :-)

learn private equity real estate investing

Hack the Rich: 7 Secrets We've Learned from Private Equity Real Estate

In a live online meetup, we'll be sharing and discussing 7 secrets we've learned from the rich over the last few years of investing in private equity real estate syndications.

Awesome! Check your email :-)