Investing in a rental property can be an incredibly smart choice when you’re looking to secure your financial future. Given the increased demand for rental housing coupled with a limited supply of new units, it’s no wonder that many investors are on the lookout for rental properties that can provide a steady source of income.
To ensure that you’re protected from preventable losses and liabilities, you must draw up a rental lease agreement that complies with pertinent laws and regulations. Let’s explore why having even a basic lease agreement is crucial for rental property owners and how to read it to make sure you (and your tenants) understand every clause.
Rental Lease Agreements Protect Your Investment
What is a lease or rental agreement for buy and hold investments? Simply put, it’s a contract between two parties—in this case, between the property owner and the prospective tenant. A lease outlines the conditions under which a renter can occupy and use the property you own.
Some inexperienced investors may wonder why it’s necessary to draw up a lease agreement at all. While it would be nice to trust your tenants to do the right thing implicitly, the reality is that there will always be folks who try to take advantage of rental owners. In addition, even well-meaning tenants will benefit from referring back to their lease whenever they have a question or concern about the property.
Having a formal lease in place—whether it’s a month-to-month lease agreement or a lease that’s valid for a year or longer—is the best way to ensure both you and your tenants are properly protected. Like with any type of business arrangement (including the purchase of rental properties), real estate investors should have a contract outlining their responsibilities and rights. The lease also details your tenants’ responsibilities and rights while leasing the rental unit.
At the very least, a thorough rental agreement can cut down on confusion by spelling out clear terms and conditions for your professional relationship. At worst, having a rental lease agreement can help bolster your case if you ever need to take legal action against a tenant or protect yourself against a lawsuit.
While having a signed lease doesn’t necessarily prevent your residential property from becoming damaged or other risks, it can provide you with legal leverage and peace of mind.
How to Read a Rental Lease Agreement
So, what do rental property owners need to know about reading and understanding the lease agreement? Whether you created the lease or not, it’s crucial to understand every term, clause, and language throughout the document to enforce the lease and help residents understand the rules.
How Does It Start?
In most cases, a basic lease agreement starts by defining the parties involved and the property in question. This introduction will also outline the property’s address and other identifying information. As the property owner, take time to review this section thoroughly to make sure all names and property addresses are correct.
Then, the lease will usually include rental terms. This covers the monthly rental fees that the tenant must pay, as well as the security deposit, parking fees, or pet ownership fees. This section will also outline the length of the lease. If it’s a month-to-month lease agreement, the lease might not feature a definitive end date. However, if the lease is for a year or other fixed term, the start and end dates should be explicitly stated. The option for lease renewal should also be specified. Make sure all of these elements are in your lease agreement.
The monthly rent due date should also be included in the lease. Your tenant needs to know when rent is due each month and where payments should be made, as well as information regarding late payment dates and associated fees. The lease should also let your tenant know the different ways they can pay their rent (by mail, in person, or via an online portal). Additionally, you may need to include information about prorated rent if a tenant’s lease does not begin on the first day of the month.
Review Utilities and Occupancy Details
Next, the lease will typically outline considerations like utilities, such as gas and electricity, heat, water, cable, and internet. Again, it’s best to clarify these terms to minimize confusion and ensure tenants know which utilities are included or excluded from the lease and their monthly rental payment.
Rental property investors should spell out the terms of occupancy, including what’s allowed regarding pet ownership, guests, noise, illegal activity, trash disposal, cleanliness, security, and general building regulations. Maintenance, repair, and renovation clauses are also commonly included in leases, as they document who’s responsible for upgrades and what the tenant is allowed to do to a rental property during their occupancy.
Document Lease Termination, Eviction Policies, and Right of Entry
A thorough lease should include a clause about early lease termination and the eviction process. Although you hope to never deal with these issues, they’re more common than you might think. For example, you might allow your tenants to break their lease early or sublet the unit, depending on the circumstances, without penalty. However, some property owners will require one or two months’ rent to terminate the lease before it ends. Terms of eviction (due to non-payment of rent or illegal activity) should be explicitly stated, as well.
Property owners should also mention the right of entry as a landlord. In most cases, owners must give tenants 24 hours’ notice before entering a rental unit. You should also specify that entry will take place only during reasonable hours (or during a specific timeframe). Keep in mind that you’ll want to note an exception for true emergencies.
There are certainly other clauses that may be included or omitted from rental contracts, but these are the top considerations to keep in mind when reading through a lease before new tenants sign.
Handling Rental Lease Agreements For Your Investment Properties
Knowing what to include in a month-to-month lease agreement (and learning how to read a basic lease agreement) is essential for any rental property investor. Having a solid rental agreement can set you apart from your competitors and protect your investments, no matter the markets where you choose to invest.
Before asking a tenant to sign the lease, make sure that all parties clearly understand all policies and fee requirements. While many contracts contain a fair amount of legal language, much of that text could be required by local, state, or federal laws. Before finalizing a lease, run it by a legal professional with experience in rental properties to ensure that all terms and conditions are compliant with local and state laws.
Many rental property investors also rely on an experienced property manager to create and manage lease agreements. If you invest in multiple real estate markets, working with a local property management company in each market can help protect properties and boost your income!
Create Custom Leases For Every Property In Every Market
Having a custom rental agreement for every rental property is non-negotiable for real estate investors who want to maximize returns! It’s also critical to find and purchase excellent properties at the best prices to build a successful rental property real estate portfolio. To have the best investment opportunities delivered directly to your inbox, choose the Privy Advantage! Reach out soon to learn more about how our software helps investors build more success.
Get more expert insights about leases for rental property investments! Download our free resource, “The Ultimate Guide to Lease Agreements.”