Building a strong relationship with a new tenant and protecting your real estate investment is of paramount importance when crafting a lease agreement. There are a multitude of considerations at this juncture that are essential to understand. As a seasoned landlord and top expert on landlord-tenant relationships here are my top tips for new landlords as a helpful tool for navigating lease creation and the ongoing considerations of managing a rental property.
How to Build a Strong Lease & Relationship with Your Tenant
- Build an airtight lease agreement by knowing the laws that apply in your state through a state-specific lease. Each state has slightly different laws that impact a landlord-tenant relationship. Accordingly, use a state-specific lease instead of a general lease to best protect your real estate investment. For example, California requires all lease agreements to include clauses mandated by Megan's Law, and every state has different limits on security deposits, late fees, etc.
While not an exhaustive list, other elements a lease agreement should clearly define include: Who is responsible for paying the utilities, which appliances are included and who is responsible for maintaining them, whether the lease auto-renews and for what term, details surrounding fees and deposits, and whether is there an option to purchase – and if so what are the terms?
- Know your tenant by thoroughly screening each prospective renter to avoid problems down the road. This can be accomplished by a few simple steps. First, conduct a professional credit check to learn an applicant's credit history and if they have been fiscally responsible in the past. Bad credit can serve as a red flag and you may wish to avoid such tenants.
Next, ask for references from past landlords. However, be on notice that while references from prior landlords are worth a quick phone call, they aren't particularly telling, because tenants can give fake names and numbers, and even if they don't, the old landlord may well be painting a rosy picture of the tenant in order to get rid of them.
What a landlord should verify are the rental applicants' credit, employment/income (and historical stability), criminal background, and eviction history. When landlords run these checks, not only can they determine the best rental applicant, but the landlord can defend against any discrimination lawsuits by producing hard data used to choose one rental applicant over another.
- Devise a Moving In and Moving Out procedure and be sure it is clearly defined. One helpful tool is a comprehensive walk-through checklist. This document will be used for the landlord/manager to walk through the rental unit with the tenant and document the condition of the unit upon move-in and move-out.
- Offer performance incentives: While most lease agreements include a late fee, landlords can further incentivize timely rent by offering a reward for early rent payment, renewing for a longer term period, and/or any other behavior you want to encourage. Rewards can range from the simple, such as rent discounts, to the complex, such as point systems where tenants earn points and exchange them for rebates, gift cards, updates to the rental unit, etc.
- Establish a relationship with at least two good contractors. Landlords and property managers need at the very least a licensed contractor who can handle large jobs, and an inexpensive handyman who can affordably fix minor issues. Don't wait until your tenants' heating system stops working in January, or the roof collapses, as the time lost in trying to find a contractor by that time will cost real money. Instead form these relationships before you actually need them, and then you will simply be able to make a phone call and have the problem resolved immediately.
- Stay capitalized. One of the most serious problems small landlords face is lack of cash, as being a landlord involves unexpected expenses. These range from tenants suddenly ceasing to pay their rent, to unexpected repairs, to lawsuits, but the only predictable aspect to these unexpected expenses is that they will happen, and with some frequency. Set aside a hefty amount of cash specifically for rental expenses, and resist the temptation to use it for anything else.
- Understand the eviction process. Although many of us don't wish to think about worse case scenarios, it is important to become familiar with the eviction process and be ready to start the process immediately when a tenant violates the lease. While the specific documents required are different in each state, all states involve the same general eviction process. The landlord or property manager must serve the defaulting tenant with a particular notice, wait a specified period of time, file in court, attend a court hearing, schedule a date for the actual eviction, and so on, and landlords are well advised to understand this process before actually having to go through it, because it is extremely expensive and takes far longer than most landlords anticipate.
- Understand the Fair Housing Act and how it applies to your rental. When advertising for a new tenant, it is critical that landlords and property managers understand and comply with the Fair Housing Act. The Fair Housing Act prohibits landlords from using any of the following criteria when evaluating potential tenants: race, color, national heritage, religion, gender, disability, and familial status. While that may sound simple on the surface, consider that stating in a rental listing “perfect for a single professional” is a violation of the Act (bias against familial status). Advertising only in your church's newsletter discriminates by religion. What landlords can and should use to evaluate potential tenants is financial data, credit histories, and other background data.