So you want to rent my house to anyone? Good for you. One of the first things you need to do is to educate yourself on the various rental agreements and decide on one BEFORE you market your home. The rental agreement is the backbone of profitable property management.
Perhaps the most common question I get is, “I want to rent my home but I don’t know what kind of contract I should have a tenant sign.” Another common question I get is, “I want to rent out my house but what wording should be on my rental agreement or lease agreement?”
The rental contract specifies the legal terms and conditions for the agreement between the owner and the tenant. It is a legal binding contract between owner and tenant for the possession and use of the rental property in exchange for rent money each month. Perhaps the most important decision you can make is whether to use a lease or a month-to-month rental agreement.
A lease is a fixed-term contract that obligates you and the tenant for a determined period of time. The most common lease periods are for 6 months, 9 months, and 1 year. Most leases are written to automatically convert to a month-to-month rental agreement after the expiration of the initial term.
A lease is good for tenants because it freezes the rent in place for the term of the lease, and it’s good for you because you can count on having a tenant for a set period of time.
Owners usually charge a slightly lower monthly rental rate (usually $10 – $20 a month less) for a lease than for a month-to-month rental agreement because tenants on a lease are not as high a risk due to turnover as tenants on a month-to-month rental agreement.
With a lease, you can’t increase the rent or change other terms of the tenancy until the lease expires. Also, you can’t terminate or end the tenancy before the lease expires, unless the tenant doesn’t pay his rent or violates another term of the lease agreement. If you end up in court, you’ll have the burden of proof. You’ll be the one who has to prove that the tenant violated a condition in the lease agreement.
Keep in mind that even though the lease agreement binds both you and the tenant to the stated conditions, landlord tenant laws in almost every state favor tenants. A tenant can walk away from a lease and in most states, the owner has the responsibility of minimizing potential damages. In most states if a tenant walks away from a lease, the owner must make a reasonable effort to re-rent the unit and may only charge for the rent incurred until the new tenant begins paying rent.
You can’t collect “double rent” on your unit. That is you can’t collect rent because the previous tenant broke the lease while collecting rent from a current tenant at the same time. This is probably one of the biggest and most costly mistakes a new owner can make.
A month-to-month rental agreement is a 30-day lease that automatically renews each month unless the owner or tenant gives the other proper written notice (usually 30 days) to terminate the tenancy. Some owners prefer a month-to-month rental agreement over a lease.
With a month-to-month rental agreement you can raise the rent (with a 30 day notice), evict a tenant (with a 30 day notice) or change other terms of the tenancy with a 30 day notice.
The problem with a month-to-month rental agreement is that many prospects will be pass on your property because of the perceived increase of risk associated with living at your property on a month-to-month rental agreement. Specifically, they fear:
1) That you will raise the rent any time you like
2) That you might kick them out at any time. They probably don’t want to move again for at least another year (moving is a lot of work) and they want a guarantee in writing that they can at least stay somewhere for 1 year.
When determining whether you should use a lease agreement or a month-to-month agreement, research what kind of agreements are being offered in your area. If competing properties offer month-to-month rental agreements, you will find it difficult to attract prospects if all you offer is a 12-month lease.
The lease or rental agreement is can also save you a lot of money by laying down the law on important issues such as:
1) the number of people who can live on the rental property
2) who pays for utilities
3) whether the tenant may have pets
4) whether the tenant may sublet the property
5) the landlord’s access to the rental property, and who pays attorney’s fees if there is a lawsuit concerning the meaning or implementation of the lease or rental agreement
Always have all the tenants who will be living in your rental sign the lease agreement even if one of them has bad credit or a low credit score. Some professional tenants will try and get you to avoid doing this by saying, “Well my wife will be living here as well but you don’t need her name because she has bad credit and will not pass the credit check.” Don’t do this. Always have everyone who will be living in your unit sign your lease or rental agreement.
The reason you want to do this has nothing to do with whether or not someone will pass a credit check. The reason you do this is because it makes each tenant legally responsible for all terms in your contract, including the full amount of the rent and the proper use of the property. This way you can legally seek the entire rent from any one of the tenants should one skip out. You can also deduct damages from the security deposit if any tenant violates your lease agreement and causes damage to your property. Finally, you can evict all the tenants if any one tenant violates a condition in your lease agreement.
Click here to grab the three owner forms I use for my own property. The first is a rental application form. The second is a month-to-month rental agreement form. The third is a lease agreement form. These forms are from the California Department of Real Estate. The legal wording required for your state might be different. Check with your own Department of Real Estate website if you live outside California.
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