Whether you are ready to make the move into renting out several homes, buying an apartment building, or you want to rent out your own home, you need to prepare to become a landlord. Keeping several rentals in your portfolio can be profitable if you have good tenants and if you take the necessary steps to manage your rentals properly. Continue below to learn everything you need to know.
Not only will you have to manage your tenants, but you will also have to manage your rentals as a business. It requires a lot of work, so be prepared for it. After you go through each stage, from setting up the rental to signing a lease agreement, you will hopefully have a good tenant. Maintaining a landlord-tenant relationship is an ongoing responsibility though, so your work does not stop once the tenant signs the agreement.
When you have a business that deals with people and property, one of the ways you can protect yourself – in addition to having insurance – is to create a business entity. Certain business entities are separate from your personal entity for legal purposes.
Should something happen on your property, the injured person can sue you or your insurance company. An LLC can protect you against personal liability. If you run your rental business as an LLC, an injured person, whether it is a tenant or a tenant’s guest, can sue the limited liability company instead of suing you personally. Different states have different laws regarding LLCs – be sure that you set up the LLC so that it protects you.
Creating an LLC can also help protect your assets, as long as they are titled in the business name. If you co-mingle business assets with personal assets, the corporate veil can be pierced. Asset protection works both ways when you set up a company.
If your company is properly set up as a separate legal entity, this prevents someone from attaching your personal assets in the instance that the person was injured on business property. Similarly, if someone is injured on your personal property, the corporate veil prevents that person from going after your business assets.
You can even take this a step further. For example, if you have three homes that you rent out and you list all of them as assets for XYZ, LLC, then someone who tripped and fell on a crack in the sidewalk can sue the company for damages. If the damages are in the millions, perhaps because the person suffered a traumatic head injury, he can also attach the other homes that are listed as assets of the LLC.
However, if you set up a separate business entity for each rental home, the person injured at the home owned by XYZ, LLC cannot pierce the corporate veil to attach assets in ABC, LLC and 123, LLC, nor can the injured person attach your personal property.
In creating separate companies for each of your rentals, you must also keep separate books for each of the properties; if you do not, the court could determine that you commingled funds, which exposes other assets.
Before you turn the keys to your investment over to a tenant, you should screen the tenant for several checks, including financial qualification.
The rental application helps you “qualify” a potential tenant. It asks about the potential tenant’s previous rental history, employment and employment history, income and income history, additional tenants, including those who might be partially responsible for rent, and background information, including whether the potential tenant has filed for bankruptcy or been convicted of a crime.
It is important to conduct the appropriate screening checks on all tenants. You cannot trust that what they put on the application is the truth, especially regarding questions about income, credit history, and criminal history. Always get a social security number so that you can run a criminal history background check and a credit check.
If the prospective tenant lists another state in his or her previous rental history, be sure to do a criminal background check in that state as well. You can also glean more information by asking the tenant questions in casual conversation.
Before you have a tenant sign a lease agreement, make sure you read it carefully. You might need to change some of the standard clauses in a lease agreement.
Most lease agreements have standard clauses relating to various options, such as allowing pets, allowing waterbeds, smoking in the unit, access to certain areas of the property, and more. Sometimes, a lease agreement might not include a term that you want – you can add that term to the lease agreement.
Some of the terms you might change include the following:
These are just some of the examples of paragraphs in the lease that you can change, delete, or add.
You should provide additional documentation along with the lease agreement, including the following:
A fixed-term lease and a periodic lease are similar in wording. However, the periodic lease – a rental agreement – will have language relating to a term-to-term rental. Most rentals go month-to-month, though some, such as a room, will go week-to-week.
It is easier to make changes with a periodic rental agreement than it is with a fixed-term lease. With a periodic rental agreement, either party can negotiate new terms on a monthly basis.
As stated earlier, both you and the tenant should fully inspect the property. The tenant should then sign an inspection form stating that at the time he or she is taking occupancy, there is no damage to the unit, except as otherwise indicated on the inspection report.
After a tenant clears out his or her personal property, you should make an appointment to inspect the property with the tenant. Be sure to bring the original inspection report and photos with you; this will be helpful in the event that you have problems with the tenant admitting to damage caused by the tenant or his or her guests.
As you go through the inspection, make note of all damages and take photos, as you will need to refer to them when you make repairs to the unit. They will help you remember what needs to be done, and will come in handy should you take your tenant to court.
Landlords must keep tenants’ security deposits in a separate bank account. You cannot commingle these funds with personal funds or with other business funds. Some local ordinances might require that you pay interest on the security deposit. Always check your state and local tenant laws regarding security deposits. Landlords must keep tenants’ security deposits in a separate bank account. You cannot commingle these funds with personal funds or with other business funds. Some local ordinances might require that you pay interest on the security deposit. Always check your state and local tenant laws regarding security deposits.
Some landlords will accept a letter of credit in lieu of a security deposit, though this is more common in commercial rentals. If you agree to accept a letter of credit, the bank holds a line of credit for the tenant. Make sure the conditions to get the money do not hinder you from collecting, though. Before accepting a letter of credit, make sure you know what the bank will accept as proof that the tenant did not pay his or her obligations.
When a tenant signs a lease, you must also provide the tenant with disclosures. Learn more about what disclosures landlords must make to new tenants.
The Environmental Protection Agency requires you to hand out a pamphlet about lead paint. It is titled, “Protect Your Family from Lead in Your Home.” You must also notify tenants of any lead-based paint in the building, along with records generated from lead paint evaluations for the building. The lease should also include a lead warning statement that states that you complied with lead paint notification requirements.
The rule does have some exceptions, including lofts, studios, efficiency apartments, housing built after January 1, 1978, tenancies that last less than 100 days, or a room rented in your home. Additionally, if a lead inspector accredited by the state certifies that the rental unit is lead free, you do not have to provide the disclosures.
Finally, housing that is specifically for those with disabilities and senior retirement communities are also exempt, unless a child under six years of age is expected to live there or visit frequently.
States may have laws that require additional disclosures, including the following:
Not all states require all of these disclosures. Be sure to check with your state and local authorities for disclosure requirements.
To avoid possible claims down the road, you should always give notifications of certain events, even if state, local, or federal law does not require such notifications. Should a tenant decide to sue you for something (i.e. lead poisoning, the landlord entering the premises for an emergency, the tenant having a reaction to chemicals used to make meth even though the unit went through remediation), you will have proof that the tenant was forewarned of these events.
Your duties as a landlord do not end once you find a tenant;in fact, they increase. You will have to keep up with inspections, repairs, collecting rent, and other duties.
Most states require that you keep the unit habitable, which means that you must do a certain amount of maintenance and repairs. It is also up to the landlord to keep the home safe. If issues with the structure of the home arise, it is up to the landlord to make those repairs. When appliances that are included with the home break, it is the landlord’s responsibility to repair or replace those appliances. If the tenant does not pay the water bill, that is not the landlord’s concern; however, if the pipes or the hot water heater breaks, it is up to the landlord to make those repairs.
When you draft your lease, if you do not include a washer and dryer as your responsibility, make sure you point that out. Look for a clause that says “all appliances,” and be sure to edit that.
Most states require a landlord to make sure the property has several items to make it a habitable and safe home, including working plumbing, electrical that is up to code, working locks on doors and windows, and more.
While the landlord is expected to make timely repairs, some repairs are the tenant’s responsibility. If the tenant punches holes in the walls or lets the dog chew the carpet, those items are the tenant’s responsibility. If a hurricane rips off part of the roof and causes water to leak inside, damaging walls and flooring, that is the landlord’s responsibility.
If you do not make repairs right away, the damage could escalate. For example, a dripping faucet could bloom into a huge leak and cause damage to cabinets, floors, and walls – this could irritate the tenant and he or she could leave or even sue you. In some states, tenants are not allowed to withhold rent because of issues that you fail to attend to, but in others, this is allowed.
However, just because the law says a tenant can not withhold rent does not mean that he or she will not do it anyway. It is less costly in the long run to make the repairs.
You can offer your tenants several ways to pay rent. Make sure each method is detailed in the lease, along with terms such as: when the rent is considered late, when the tenant will pay a late fee, and when the tenant will receive an eviction notice if the rent remains unpaid.
You can provide online platforms, have the tenant mail the rent, have the tenant pay in person at your office or home, or even send the rent via an online payment system such as Paypal. Whichever way you choose, be sure to account for fees you might be charged.
Most states will not allow you to enter the property without good reason. They will also require that you serve a notice to enter at least 24 hours ahead of time, with the exception of emergencies. If you need to enter the property for an emergency and someone is home, it is a good idea to call and inform the tenant that you are on the way and will be entering the property whether anyone is home or not. If you get a voicemail, always leave a message.
While it is better if the tenant is home when you enter, in some cases, that is not possible, especially during an emergency. If you need to enter, and it is not an emergency, try to arrange a time with the tenant. This makes it harder for the tenant to accuse you of damaging or stealing their property.
The bane of a landlord’s existence is a tenant who seems perfect on paper and on initial meeting, but ends up being one of the worst tenants you have ever seen. Whether it is because the tenant ends up being a major slob, insists on having a dangerous dog breed against your wishes, decides to grow marijuana on your property, or refuses to clean up the yard, these tenants are, at the least, a pain to deal with, and at worst, could cause you extensive liability responsibilities.
Dogs & Other Pets
Some states and/or insurance companies consider certain breeds of dogs to be dangerous. Even if your lease says that the tenant cannot have certain breeds of dogs, you could still be held liable for any damage done by the tenant’s dog, (i.e. biting someone) if you know the tenant has that dog. In cases where states do not allow landlords to take action because of a dangerous dog, it would be harder to hold you liable. You can mitigate the risk of becoming personally liable for a tenant’s dog by carrying your own insurance that includes the breed that the tenant has. Other exotic – and often illegal – pets, such as snakes, monkeys, foxes, and more, can also cause damage which you could be liable for. Whether because of an attack or damage to your home, you could be held liable if you know about the illegal or dangerous pet.
Drug use, growth, and manufacturing are also a large liability if you have knowledge and do not report it. Depending on your state laws, fines and other sanctions could be hefty. Additionally, those who try to grow marijuana in secret can do a lot of damage to your home by putting holes in ceilings and walls for grow lights and getting water on the walls and floors from watering the plants. The excess water and humidity could cause mold to grow, which could require thousands in remediation costs. Additionally, those who manufacture methamphetamine in your home risk causing an explosion with the chemicals, causing illness and more.
If you have knowledge of illegal activity in your rental home, you could be held liable for your tenant’s activities. If you suspect illegal behavior, such as growing or manufacturing drugs, prostitution, or other illegal activities, be sure you report it in order to mitigate your liability. You can also take steps to evict your tenants if they do not cease and desist.
Being a Slob
While your definition of clean might be different from your tenant’s, there is such a thing as being too messy. It is one thing to have toys on the floor, or not to dust every day, but it is another when you have a hoarding problem on your hands. Gathering too much stuff can make a home hazardous. You can require that the tenant clean the unit or face eviction. If you know of the mess – especially when children live in the home – you could face liability, so you should report squalor and dangerous situations to the appropriate authorities in order to protect yourself.
While most landlords will not allow pools unless they are properly fenced in and have other safety measures, tenants could buy an above-ground pool. Most states require that pools have fences and/or a way to lock access to the pool. If neighborhood kids see the pool in the backyard, they are going to be tempted to enter the yard for a cool dip, whether there is anyone home or not. If you learn that a tenant has installed a pool without your permission, you can insist that the tenant remove it or report the tenant to the proper authorities. If the tenant does not remove it and something happens, you can mitigate the risk of being held liable by providing proof that you attempted to have the tenant remove the pool.
As a landlord, if you do not want your tenants to sublease, be sure to include that clause in the lease. If you do allow a tenant to sublease, you should spell out the rules, including having the substitute lessee fill out the same application that your tenant completed. Make sure your tenant knows that if his or her lessee damages the unit, the tenant is responsible for the damages. When creating a sublease, your tenant should let you know who will be in the unit and should provide you with all of the pertinent information regarding his or her tenant. The one benefit of allowing your tenant to sublease is that you have the right to recover damages caused by the person subleasing from your tenant.
When it is time to end the tenancy, follow the instructions outlined in your lease agreement. While it is important to know your state’s laws regarding terminating a tenancy, your lease agreement will determine what notice is required. For instance, your fixed-term lease may state that it will automatically renew as a month-to-month periodic tenancy if neither party provides notice of their intent to terminate the lease. It is common for leases to require 30 days’ prior notice to terminate.
Once the tenant moves out, you should schedule a property inspection. While your tenant does not need to be present for the property inspection, it is better that they are. If you have any questions, you will be able to ask the tenant.
You can use our property inspection form that comes with our lease agreement when performing your inspection. The form ensures that you do not forget to check anything. If the tenant left the property in good condition, you could then return his or her security deposit.
If you find issues that are a tenant’s responsibility, be sure to obtain estimates for repairing the damage. If the amount to repair the damage is less than the security deposit, you will need to refund the balance of the deposit.
Unfortunately, you sometimes have to evict a tenant. Each state has specific laws about serving evictions, including the amount of time required for the tenant to leave the premises. However, you can use our eviction forms for your eviction.
If you run into trouble with a tenant who refuses to leave, you must follow the appropriate legal steps prior to taking any direct action to evict the tenant. Doing any of the following prior to receiving a formal court order for eviction can have serious legal repercussions:
Before using an eviction notice, make sure you have a valid reason for the eviction. In addition to lease violations, you can evict a tenant for not paying rent on time, not paying rent at all, causing property damage, causing the property to become a safety hazard, or breaking the law.
If the tenant leaves and does not owe anything for repairs or other damages, you must refund the security deposit. Each state has its own rules regarding when to return the deposit. Some states give as little as 10 days and others up to 60 days, either from the date the tenancy ends or after the landlord determines that he or she must withhold part of the deposit.
If you do have to withhold part or all of the security deposit to repair damages or to make up for unpaid rent, notify the tenant of the amount you are keeping and why you are keeping it. In some states, such as Tennessee, if the tenant does not respond to a notice that he or she has a refund due on the security deposit within 60 days of the notice, the landlord can keep the security deposit.
If your state has such laws, it is best to send the tenant a certified letter containing the notice of a refundable security deposit so that you have proof of notification should the tenant not respond, then attempt to sue you later.