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.
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.
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?
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!
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!