The Anatomy of a Great Lease & Finding the Perfect Tenant

There are many reasons you may find yourself as a landlord. You may have moved into a new home and are looking to rent out your old home instead of selling it. Or, you may be wanting to break into investing in real estate to diversify your portfolio.

Regardless of the reason, you could stand to make a decent profit, while also building equity in the property since your tenant will be paying the mortgage through rent. But, you’ll want to make sure you have the basics down before getting too far in — and that starts with having a solid screening process and a good lease in place.

Screen Tenants

You’ve heard the horror story about your co-worker’s cousin’s step-dad Marty who had that awful tenant who was three months behind on rent and left the home destroyed, right? Next time, ask your co-worker what process Marty used to screen potential tenants before moving them in.

Sure, there’s always the chance someone will apply to live in your rental home who is highly skilled at cheating the system. They may be able to ace the screening process and share a heart-wrenching story, only to later get behind on rent, refuse to comply with the lease, or be an all-around horrible tenant.

But generally, you can avoid these types of renters by weeding them out of your prospective pool early by using a thorough screening process and sticking to that process each and every time. By doing this, you’ll take intuition and emotions out of your decision to approve or deny, also helping you avoid any discrimination lawsuits in the future — which are becoming more and more common.

Screening tenants may be the most important part of being a successful landlord. To properly screen tenants, a landlord should — at a minimum — always run a background check, call past landlords, run a credit report, and confirm employment.

You may even wish to come up with minimum qualifications — especially for things like a credit score or monthly income. A good rule of thumb is that a tenant should make three times your monthly rent charge in income. This ensures your tenant has the ability to pay rent each month and their funds won’t be tied up in paying off other debt obligations.

Process tenant applications or a rent application on a first-come, first-served basis to again avoid those expensive discrimination lawsuits. If you find a potential tenant that doesn’t meet your qualifications, document the reasons they were denied and let the tenant know as soon as possible.

Hire a Property Manager

As you can see, being a landlord is not for the faint of heart. And if you’re the empathetic type and likely to be swayed by an emotional story, you may be better off hiring an experienced property manager to take care of everything. Or, if you live out of state, a local property manager is essential.

While you still own the property and generate a profit, the property manager handles the day-to-day needs of tenants and the property — and this often includes screening tenants and moving them in. In the unlikely event that you need to evict a problem tenant, they can help with that also.

If a pipe leaks or light switch doesn’t work, the tenant contacts the property manager instead of you. The manager will then send over an in-house or third-party maintenance person to make the fix — billing you for both their time and any replacement parts (and potentially an added percentage.) 

As a base rate before any maintenance calls, property managers usually charge around 8% to 12% of gross monthly rent in exchange for their service. They may also charge an added “leasing fee” for moving in a new tenant — in the ballpark of one-month’s gross rent or a portion of it. If you don’t have experience with this, it may be well worth the money and save you future headaches!

Writing the Lease

The second piece of the puzzle is writing an airtight lease that adheres to any local or state landlord/tenant laws. State-specific leases can be found online, but it is always a good idea to consult a lawyer to make sure you catch everything, and that the lease is up-to-date with any changes in the law.

It is essential that the lease cover payments and fees, due dates, security deposits, a disclosure agreement, a delivery of possession agreement, maintenance, and liability. You’ll also want to lay out who is responsible for paying utilities, the length of the lease, what happens when it expires, how many can reside in the property, if pets are allowed, and if so, how many. If you’re renting out a condo or townhome, you may want to check with your HOA agreement to make sure you adhere to all its rules as well.

If you’re renting to multiple tenants in the same property, think through how you want to structure their leases. The most common way is to include all names on one lease with all tenants signing at the same time. If this is the case, each tenant can be negatively affected by the others’ actions. For example, if one tenant fails to abide by the lease or is late on rent, all parties will face eviction.

However, some landlords — usually in apartment complexes — may allow each tenant to sign their own lease. While this means you only have to deal with evicting one person, you’ll want to lay out in writing what this means when that person is no longer around to pay rent. You’ll either be shorted on rent going forward, or — if you require the remaining tenants to foot the bill or find another roommate — there could be even more trouble. 

You may think that certain items are common sense, but always include them. (No, you don’t want your tenant renting out one of their rooms on AirBNB, partying on the roof, or running a daycare on the property without your permission.) It’s much easier to deal with a disagreement — or evict if it comes down to it — with a lease that clearly lays out all your expectations in writing.