Most owners of rental real estate are part-time investors with full-time jobs elsewhere. For this reason many of us don`t have much time to devote to property management. Yet we derive considerable benefits from our properties, such as appreciation in market value, modest cash flow, tax shelter, and pride of ownership.
One of the key ingredients to successful management is the tenant rental agreement or lease. Without a good written agreement, the owner is usually in big trouble.
There are many well-drafted professionally printed leases available from local apartment owner associations, attorneys, and real estate printing companies. Without a written agreement, the income property owner is at a severe disadvantage.
Yet thousands of owners still rent apartments and houses on oral rental agreements. In most states if the rental term is less than a year from the date of agreement, a verbal rental arrangement is legally enforceable in court. However, if a dispute between landlord and tenant arises, proving the exact terms of a verbal agreement can be nearly impossible so a written agreement should always be used.
One of the first decisions a landlord must make is whether to offer a one-year lease or a month-to-month rental. If the local housing market has few vacancies, the landlord can dictate the choice. But when there is a glut of rentals and few renters, then the landlord must be happy with either alternative.
The supposed advantage for the landlord of a one-year lease is the tenant won`t be moving so the owner needn`t worry about a vacancy for the next year. That`s a delusion.
If a tenant decides to move out, there is little the owner can do except sue the tenant for any lost rent the landlord suffers. Good luck getting the judgment and trying to collect. The disadvantage of a lease for the landlord is the rent cannot be raised during the lease term even if expenses dramatically increase. Of course, tenants love this rent certainty.
On the other hand, the month-to-month or 30-day rental offers the tenant flexibility to move out merely by giving the landlord a 30-day notice of the intended move. However, the rent can be increased by the landlord, usually by giving a 30-day advance notice to the tenant.
There is no right or wrong answer for the residential landlord to the annual lease vs. monthly rental choice. As an owner, I prefer the annual lease but if a well-qualified tenant asks for a monthly rental
agreement, I will agree but with a six-month minimum occupancy.
The next decision is the amount of the tenant`s refundable security deposit. The correct answer is ``As large as the owner can get without disqualifying good applicants.``
I`ve found the security deposit should never be the same amount as the monthly rent. The reason is the tenant will then be tempted to try using the security deposit to pay the last month`s rent.
Although many residential rental owners ask a new tenant to pay (1) the first month`s rent, (2) a security deposit, plus (3) the last month`s rent, many quality rental applicants can`t afford that total. Some owners allow the new tenant to pay the last month`s rent over the first two or three month`s of occupancy, but I have found this cumbersome and difficult to enforce.
A better alternative I`ve found is to charge a large security deposit of more than a month`s rent and forget about collecting the last month`s rent in advance. As a result I usually have several applicants for my vacancies so I can pick and choose the best qualified.
I will always be grateful to Jack Miller of Tampa and John Schaub of Sarasota, Fla. for telling me about their discount rent program. Thousands of their other students also have discovered it works to (1) get rent paid on time or early and (2) keep the property well-maintained by the tenant.
Miller and Schaub recommend writing the lease or rental agreement with a monthly rent at its top market value. But the tenant is then given a discount if (1) the rent is received by the first of the month, (2) the tenant pays for minor repairs up to $50 per month, (3) the tenant maintains the property to the owner`s satisfaction, and (4) the tenant doesn`t phone the owner except for serious emergencies such as fire or flood.
If the tenant doesn`t meet these requirements, the tenant loses the $50 rent discount for that month.
In other words, the tenant is rewarded for behaving properly but penalized for bad conduct. If the tenant doesn`t properly maintain the property, when he moves out any neglected repairs are deducted from the security deposit.
Starting with a good, printed rental form for either an annual lease or month-to-month tenancy, and adding provisions for the discount rent program, landlords can create their own ``perfect lease.`` Consultation with a real estate attorney can further improve the landlord`s ideas.