Congratulations on buying your first investment property. Smart investors know the best way to safeguard their investment from potential tenant trouble is to craft a solid lease agreement that includes these key things:
1. The basic clauses. Every lease agreement must list the parties to the agreement, which would be you and the tenant, along with the property’s address. You also want to state the term of the lease, which could be month-to-month starting on the first with a particular end date or an automatically-continuing lease that remains in full force and effect.
2. Security deposit clause. Your lease should require the tenant to put up a security deposit that matches one month’s rent or more, depending on the value of furnishings and repair costs if something goes wrong. Some states require you to place the tenant’s security deposit in a separate interest-bearing account and, at the end of the lease, you must give the deposit plus interest to the tenant, less any damages. Make sure to check with your state and judicial regulations and, to save time and money over the long term, check with your real estate attorney to make sure your lease follows the law. Security deposits can be a problem if not handled correctly.
3. Maintaining the premises. The lease should tell the tenant that he is required to maintain the premises, abide by noise control rules and not change the locks without your written approval. You will want to itemize the appliances and furniture that are part of the lease, and note their condition and any other special considerations. Don’t expect a tenant to follow oral requests, such as not parking in the driveway. All requirements must be spelled out in the lease. Also note whether the tenant or landlord will be responsible for utilities. Take the time to clearly write out the details of your agreement.
4. Warning of concealed defect. In some jurisdictions you have a duty to warn of a concealed defect known to you, or a defect that it is reasonable for you to know about. If you know the deck is crumbling and you fail to warn your tenant, then you may find yourself explaining the situation to a judge. Better to disclose the known defect in the lease and, best of all, fix it before the tenant moves in.
5. Subleasing clause. At some point, most landlords have a tenant who wants to sublet the apartment to a friend or stranger. To avoid trouble make sure your lease includes a subletting clause that requires the tenant to obtain your written permission before turning the property over to someone else. When the tenant asks to sublet the property, you will be in a position to decline or accept their offer. But heed this caveat: If you want to agree to having the new tenant move in, then it’s best to end the original tenant’s lease and start the process from scratch with the new tenant. You should go through the entire background check with the new tenant, including a new security deposit and lease. Do not get stuck trying to enforce your original lease against a new tenant who was not a party to the original lease. That situation is a risk you cannot afford.
6. Termination. The best practice is to know your jurisdiction’s rules on terminating a lease and include those details in your lease so your tenant will not be surprised. Terminations occur at the end of a non-continuing lease and also when there is an eviction. Evictions are one of the most dangerous areas for the self-advised investor. You may think you know the rules, but if you improperly notify your tenant of a coming eviction and lock out, you may find yourself on the wrong end of a lawsuit. You can find free eviction paperwork online, but if you are planning to evict a tenant, you would be wise to consult with an attorney.
7. After the tenant leaves. Would you ever hold a tenant’s personal property for unpaid rent? In some states it’s against the law for a landlord to confiscate a tenant’s property and demand rent money in return. Other jurisdictions consider the property abandoned and allow the landlord to dispose of the items. Most states require a landlord to hold the tenant’s property for a short period of time and give notice to the tenant, and some allow the landlord to claim a storage fee for the hassle. The key is to check your local laws and spell out in the lease what you plan to do with personal property left behind by the tenant.
Include these important clauses in your residential lease agreement and you will be well on your way toward building a successful real estate investment empire.
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Southern California-based Kelly Zinser is a real estate broker, attorney and legal analyst for Avvo.com.