Evaluating a rental property is much more than just making sure it cashflows or is a good investment financially. There are several items that you should do your best to evaluate before you make an offer. This may be difficult if you are evaluating from out of state but if you have a good realtor or contractor on your team in that location, they can certainly lend a hand and make sure the following structural items are evaluated prior to buying a rental property.
We want to put it out there right up front that we are not contractors and we are sharing the information that we have learned while purchasing our properties. If possible, please get a licensed contractor or experienced investment realtor (flipping, renovations, etc.) to walk the property if you cannot. Do not rely on Google. The photos you see may be several years old and the property could be in worse shape than it appears.
Yet, another reminder of making sure you have a good team in place regardless of where you invest. It starts with “boots on the ground” to lend a hand for inspections. For information on how to create a good investment team, check out our blog Landlording, A Team Sport
The following information is a guideline so WHEN you have the conversation with your contractor or realtor you can impress them with a little knowledge 😉 Let’s jump into the list:
Exterior
Roof
Oftentimes you’ll see in the description of the property online “new roof.” Like you, I would be excited to have a large expense already taken care of! One thing to be mindful of is how many layers of roofs does it have?
When we purchased our single family home rental we noticed it was in need of a new roof. What the bummer ended up being is that it had a total of three roofs on the home. It is common to layer a new roof over an old one but this can create issues where the roofline meets the gutters plus they don’t tend to last as long. If there were prior leaks, the sheeting likely was not pulled off and could be dry rotted if the roof leaked for awhile. Sometimes adding a roof over the old one is just adding a band aid. Not fixing the problems can lead to way more problems down the road as well as expense.
Lastly, the cost to remove them all was much more than if there was just one roof, plus dumping and garbage rates are crazy expensive to dispose of all the materials.
Materials Used
When looking at the roof, look at what type of materials were used. Try to avoid wood shingles if the property is located near a wildfire zone. According to the pro’s, asphalt shingles are the most common and best material when considering life and expense.
Of course, roofing materials change depending on the climate so make sure you have a good understanding of cost if you’re evaluating a roof in a different area of the country than you are used to living and operating your rental property business. Roofs in California are much different than those in Florida. Completely different climates, extreme rain and wind with humidity in Florida, while California has more mild weather climate but high wildfire danger.
Gutters and Downspouts
Clearly you can see if the gutters appear to be rusted or have missing downspouts. It may not seem like a big deal, but if rain water is not directed away from the foundation, it can find its way into the crawl space or basement and create a mold issue.
Foundation
For properties with a crawl space or a basement, it’s really important that you are checking the foundation and around it. Look at the foundation and see if you can find any cracks. Small cracks are ok and usually easy to fix. Large cracks with gaps may require structural repair and that adds up fast.
Many properties don’t have a foundation and are located on a concrete slab. Cracks in the slab would only be seen inside, and only if the flooring was removed so good luck with that.
Sloping near foundation
Every landlord needs a good contractor. No if’s, and’s, or butts about it. Unless YOU are the contractor, ensure that your team includes someone you can call for any task, from replacing a garbage disposal to building new stairs. More importantly, landlords need to use independent contractor agreements when allowing others to work on their property.
The General Contractor
Let’s start with defining a contractor. We are referring to general contractors or “GCs” for our purpose. Typically, you find GCs run and manage a construction project. They are licensed, insured, and bonded (more about this below) and may or may not be the person doing the physical labor.
Often, our GCs will do most of the work and then oversee the subcontractors they hire to do other tasks they are not licensed or experienced in. For instance, most of the time, our GCs will hire their go-to plumbing or electrical contractor to run water or electrical wiring for the project. Similarly, even though no license is typically required, they will also sub out tile work, countertops, and flooring installation.
License, Bonding, and Insurance
We suggest only using licensed, bonded, and insured contractors when allowing them to work on your rental property. A contractor who takes the time to pass the general contractor test puts up the money for a surety bond, holds proper liability and workers compensation insurance is one who likely wants to do right by their business and your project.
General Contractors License
In a perfect situation, a contractor would have worked for another GC to learn the basics, then study codes and practices, take and pass the General Contractor Test for the state they wish to work. But unfortunately, getting licensed is not cheap. It can cost hundreds to apply to test and thousands if they take courses in advance to learn material not taught on the job.
Surety Bonds
Many states require a licensed contractor put up money for a surety bond. This bond is what you can go after should the deal go south. The bonding company will cover your lost expense and go after the GC to get the money back. It removes the task of you having to go through a lengthy legal process to get your lost funds returned.
Insurance Policies
A reliable GC will be adequately insured. If you know us, proper insurance is a big deal. We’ve written several blogs about insurance for rental properties alone. Contractors should carry liability insurance if they perform a task that causes damages. For instance, they are working upstairs and bust a water pipe that floods the unit below. Yes, you have insurance, but why should your rates go up from filing a claim when the contractor has proper insurance to cover the issue?
If a GC has employees, they must have worker’s compensation insurance to cover them in case of an injury on your project. Accidents happen A LOT so make sure the contractor you choose carries this insurance. Be mindful of a contractor that picks up a couple of day workers at the big box store to work on your project. Who do you think they are going after to receive compensation if they get injured? The property owner for sure.
Why are these items essential? Because if a person is willing to go through the trouble and expense to do things the correct way, they likely will have this same drive and responsibility to do right by the jobs they are hired for.
Screen Your Contractor
Now, let’s be real. Many states do not require a general contractor actually to test on building codes and tasks. Much like getting ordained to marry others, in some states, anyone can go online, apply, pay the fee, and boom! You’re a licensed contractor. This is why it is of utmost importance to screen a contractor like you screen your tenants.
Make sure they are licensed. Simply go to your computer and search “(Your state) contractors license search,” and the link to verify if they are licensed should pop up.
Verify their bond and insurance are current by asking to see a copy of it. The expiration date will be noted so you can see if it has lapsed or not.
Interview them
Ask:
- How long have you been in this line of work?
- Do you have a specialty in the field?
- How many employees work in your business?
- Do you pull permits, or do I?
- When would you be able to start working? What’s your timeline?
Check out their social media and google them:
Many contractors will start social media accounts to show images of the jobs they’ve performed. Check the comments below to see if anyone has good or bad things to say about their quality of work.
Check the Better Business Bureau
This will show you if any complaints have been filed against them. Yelp even has a section for contractor ratings.
A good GC will have references ready to go. Often, their last client will allow a potential client to come to their home to see the work performed and talk to the homeowner about their experience.
If you’ve found someone reliable, hire them to do a small task first. This job will give you a good sense of the contractor’s time management, skill, and temperament before getting into a large project. We did this. Our painter (friend) had recommended a general contractor who had worked on his mom’s house. We hired this GC to do some dry rot repair on the back of our 6-plex to gauge his experience, workflow, and ability to be mindful of expense without cutting corners. Although he was slow, he was meticulous. All corners were tight, there were no large gaps to fill, and he was not wasteful of materials. The cost he charged was much less than we had paid before; however, his performance was slower, and the cost per hour ended up being around the same when the project was all said and done.
We fell into our GC by referral. Ask other rental property owners in your area who they use. Ask your realtor if they know of someone reliable who has done work for them or a client. Then, if all else fails, head to the big box stores at 6 am and hang out around the contractor desk.
Use an Independent Contractors Agreement (Contract)
Ok, here’s why landlords need to use independent contractor agreements. When you finally find that perfect GC, make sure you both sign a contract that states explicitly at a minimum:
- The scope of work to be performed
- The timeframe in which the job is to be completed
- Who is responsible for what tasks? Owner or GC to pull permits, select materials, etc.?
- Compensation schedule (deposit plus following payments to be paid at which points during the project)
- Which subcontractors will be working on the project, and when will they be working?
- Dumpsters needed and placement of those during the project
- Will they use your toilet, or do you want them to order a portable one?
- Cleanliness expected: clean the site every day, or not?
Keep in mind that these agreements protect both you and the general contractor. Often, a GC will have its own legal contract to use, which states the limitations and responsibilities of both the contractor and property owner.
The contract should also include a copy of their valid bond and liability insurance (with your property noted as additionally insured).
This contract is much like a lease. It will keep everyone honest and protect you if the project goes awry. In addition, it gives you the legal right to sue the contractor if work is not performed according to the agreement. Lastly, it will provide the GC with the right to place a lien on your property if you don’t pay.
Hiring A Handyman
Hiring a handyperson to do tasks around your rental property can be tempting. However, be mindful that if that handyperson is not licensed. For example, let’s say they install an appliance for you. Should the installation be completed incorrectly, the warranty on the appliance may not be covered. Often you can find a handyman who is an older contractor, a licensed general contractor who still is young enough to work, just not on large projects or ones that require a lot of lifting or strength. Not to say they are not strong enough, but smart enough to know their limitations and prefer a project that takes a couple of days or weeks, not several months. Again, this handyman should be licensed, insured, and bonded.
Something Else to Consider
Where this blog focuses primarily on persons who physically work on your rental property, the fact that landlords should use independent contractor agreements applies when hiring an independent contractor to work in your business as well. For instance, if you hire someone to do your bookkeeping or cold calls for wholesaling, it is essential to have an agreement that states specifically what the tasks are, their compensation for such tasks, and anything else that is pertinent to the position.
The last word of advice is, NEVER prepay for work performed. Feel free to give a deposit in the event materials are needed and give small amounts as the project progresses but beware of anyone needing full payment in advance.
Check out our other blogs to guide you on your self-management journey as a landlord:
How To Improve Tenant Relations
How The California Deck and Balcony Law Affects Your Property
Security Deposits: 5 Tips Landlords Should Know
Cash Reserves for Rental Properties, How Much is Enough?
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Looking for a community of DIY landlords you can ask questions and bounce ideas off? Join the Your Landlord Resource Facebook Group, a discussion group for support, tips, and guidance to help create successful landlord-tenant relationships.
Our Stories:
We have now had TWO instances where we have needed and had to file claims for vacancy insurance!
First, let me tell you a quick story about how we came to know the who, what, when, and why of residential vacancy/unoccupied home insurance. In late 2020, sadly, my brother passed away suddenly. I advised our family’s insurance broker of the news and he asked if the home was going to be unused for 30 days or more. Because we needed time to grieve before removing his many personal belongings, I responded “yes”. He recommended that we add a vacancy endorsement on the policy and boy, am I glad he did! Here is why:
Residential property that remains vacant or unoccupied for longer than 30 days, may not be covered by liability insurance. Why? There is a higher risk of catastrophic damage occurring from fire, vandalism, or injury when there is no one around to call 911 to report a fire, get rid of squatters, or control who steps on your property.
What happened next
Since my brother’s passing had been discovered, the property has experienced several crimes. It has been broken into multiple times, with one occurrence resulting in severe smoke damage. We have had a vehicle and several personal items stolen, as well as vandalization and damage to many parts of the home. Unfortunately, where the vehicle had insurance, the contents of the home were not covered. You see, my brother lived in a rental home of my parents. He did not carry renter’s insurance, therefore, his contents were not insured. This is exactly why we now require our tenants to carry renter’s insurance. Read more about that in our blog Why Landlords Should Require Renter’s Insurance.
Because we added a vacancy endorsement on our policy, we are covered for the broken doors, windows, smoke damage, and vandalism. We would not have been covered without that endorsement. Clearly you can see why we needed residential vacancy insurance! Continue reading to learn about the second time in two years that we needed this policy!
What happened to our sweet 100 year single family rental property
In October of 2021 we had just completed some updating and remodeling to our small single family rental property in Chico, California.
We had installed all new windows, flooring, repaired a dry rotted deck, and had painted the entire inside of the property to get it ready to rent after we had college kids move out.
As the home was vacant, our son decided to take a vacation to go up to the area and stay while he hiked the local trails. When he walked in, he said it sounded like someone was in the shower! As he walked to the bedroom he noticed the floors were wet. When he got to the bathroom found that the water supply line to the toilet had broken and flooded 1/3 of the home!
The floors, baseboards, and several feet up the walls were wet and had to be removed. Thankfully the water penetration was caught within a day or two so mold had not set in…yet.
He shut off the water, removed all the carpets, opened all the windows and began to dry the home out. Meanwhile, we contacted our insurance agent who assured us all was well because we had added the vacancy endorsement to our policy.
Unfortunate Circumstance
The damage from this water intrusion ran us nearly $30,000 in repairs. We had to gut the main bathroom and replace all flooring, baseboards, and sheetrock in several rooms. The tough part of this was because this home is located in an area that experienced the worst wild fire in the country just two years prior. We were unable to find a reliable contractor or subs to start any of the work for nearly 6 months!
Read below for information on who and when a property owner would need to add vacancy insurance on to their policy.
Who, What, When You Need Vacancy Insurance
First, who needs this? Anyone who’s home (rental or personal residences) will be unoccupied or vacant for 30 days or more for any reason. It is a special endorsement for full time inhabited homes. Most second homes or recreational homes have this coverage within the policy already.
Second, what is this coverage? It is an additional insurance rider to cover the increased liability of an unoccupied home. Most home liability coverage has it specified that the policy does not apply if the home is vacant for 30 days or more. Read the fine print of your policy.
Lastly, when should someone should consider getting vacancy coverage?
- A rental or primary home will be unoccupied for 30 days or longer due to prolonged vacancy after a tenant exits.
- A remodel is being done to a property and occupants have moved out.
- A rental vacation property is managed that has long gaps in use. For example, you own a summer rental that is closed up for winter months.
- Someone who goes on an extended vacation for longer than 30 days. Congrats if this is you!
- A new property has been purchased but there will be a delayed move in. For example, you need to place new tenants.
- Someone who lives alone and falls ill or has surgery which requires a stay in a medical or rehab facility for a prolonged period of time (this is for those with elderly parents).
Additional Items To Note
There is a significant increase in cost, up to 50% more, for this coverage. Some companies have an entirely separate policy to take out, others add an endorsement on to the existing policy. They may accept having a caretaker check on the property every few days to avoid needing the vacancy policy. In any event, we hope this has showed you why it is recommended to speak with an insurance broker to see what your current policy covers and if you are someone who should consider a residential vacancy endorsement when your properties are unoccupied.
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Here are some other articles we have written for landlords that you may find helpful as well:
Cash Reserves For Rental Properties, How Much Is Enough?
Marketing Your Rental Property: Get to Know the Neighborhood
Tips For Taking Great Rental Property Photos
Security Deposits: Top 5 Tips Landlords Should Know
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If you found this content useful, please do us a favor and leave a comment below. It really helps!
So, you own a rental property and keep hearing about how maybe you should put your ownership in an LLC. From liability protection and anonymity to more secure for group ownership, an LLC is certainly something to consider creating. This blog will answer your questions about the pros and cons of holding your rental property in an LLC and much more.
What is an LLC?
A Limited Liability Company (LLC) is a business structure you can create by yourself, with a partner, or with a group. Owners of LLC’s are “members” of the LLC. Each state has their own regulations and price structure when it comes to creating and maintaining LLC’s. As we note in nearly every blog we write, please take the time to research the specific laws and information for the state where the rental property is located. Most Secretary of State offices will offer this information.
You’ll be surprised to learn that there’s more benefits than just protection of liability and more headaches than cost and management when creating an LLC.
PRO’s and CON’S
Pro’s of Holding Your Rental Property in an LLC
1.Your Personal Liability is Limited
Should you find yourself in a legal battle, there are protections an LLC provides that holding in your personal name do not. Only the property (or properties) held in that LLC are at risk. If you own a personal residence and your rental properties in your personal name only, then ALL assets under your personal name would be at stake. This is the primary reason rental property owners hold their property in an LLC.
2. Pass Through Taxation
During a recent call with our CPA, we discovered the benefit of pass-through taxation which is allowed for individually owned businesses. Typically, the profits earned by a corporation must be taxed AND then taxed again when the owners draw income. With an LLC you get the benefit of passing the company’s net income through and only paying taxes (and tax prep) once.
3. Ability to Separate Rental Properties Into Their Own LLC’s
It is advisable to create an LLC for each rental property owned. This will limit the liability to that property in the event of a legal battle. Should you own several rental properties under one LLC, ALL those properties are at risk if you must pay a financial award to someone who gets injured (or worse) on your property. Separating the ownership limits the liability to that one property and protects the others.
4. No Comingling of Personal and Business Funds
An LLC will have their own bank account and accounting of income and expenses is separate, making it much cleaner and easier to track. This function will make claiming expenses against income clear and concise. You will have no worries of comingling of funds (primarily security deposits) or questions of using business funds for personal use.
Con’s of Creating an LLC
1 .A lot of Red Tape
The paperwork to create an LLC can be daunting. You should have a rental property business plan in place to which you would need to add an Operating Agreement. This agreement outlines the rights and responsibilities of each member. The legal jargon that should be included in the Operating Agreement can be overwhelming, so you may want to consult a real estate attorney to draw it up and make sure all members are protected in the event of a legal battle.
The members may also have to conduct an annual meeting with notes to show they are actively involved in operations of the rental property business.
2. Getting a Mortgage Is Much More Difficult
If you create an LLC prior to owning the property, when the time comes to purchase said rental property, you might find the mortgage process tougher. You would be applying for the loan in the company name and corporate loans generally include a higher interest rate.
3. Transferring a Personal Loan into An LLC May Not Be Permitted
Let’s say you bought the property in your personal name and now you want to transfer that rental property into the LLC name. Many conventional loan or banking institutions will not allow you to transfer ownership into an LLC. You may want to inquire prior to applying as there are a few companies that allow it for a fee. Many will call the loan (cancel it) and force you to apply for a new loan at a higher interest rate. If they do allow the transfer into the existing loan, usually they will charge assumption fees or have other costly conditions.
Additionally, you may incur a Title Transfer Tax to move from your personal name into an LLC.
4. Operating LLC’s Can Be Expensive
Many states require annual tax filing fees to keep the LLC in good standing. In California, this fee is $800 annually but some states have no annual fee at all. Additionally, California requires a $20 fee every other year to update your statement of filing information. This is the paperwork that states who the members are, where they live, the address of the company, as well as the who the registered agent for process is.
In addition to the state’s annual fees, to create the LLC you’ll have to pay to register the LLC, publish a note of intent, create an operating agreement (lawyer fees), and pay a filing fee. The cost can be well over $1000.
When Is the Best Time To Create An LLC?
If you are unsure as to when the best time to create the LLC is, before or after purchasing a rental property, then here is some information for you to consider.
Creating an LLC and then purchasing the property allows you to buy the property under the LLC ownership. Putting the deed in the name of the LLC immediately removes liability from your personal assets and avoids a Title Transfer Tax that you would pay after the fact.
Additionally, by buying the property under the LLC, you begin the leases and tenancy under the LLC name. This alone saves you (or your property manager) the hassle of creating all new leases and managing the change of to whom the rent payments are paid to.
Lastly, you avoid the chance of your mortgage company forcing a loan cancelation down the line. If your mortgage company forces you to close the loan and reapply, you will be charged closing fees all over again.
As you can see creating an LLC prior to ownership certainly has its perks.
LLC’s For Out of State Properties, Where to Create an LLC?
If you live in one state but your rental property is in another, you will create the LLC in the state of the rental property, not where you reside. Why? The laws will follow the property. If you reside in California but own property in Indiana, you’ll find the landlord-tenant laws are much different in California and tend to be more tenant friendly. Whereas the laws in Indiana are more landlord friendly so you would want to have those laws protect your LLC. California laws are not applicable in Indiana, so you want to create the LLC in the state the property is located to avoid legal issues.
Additionally, the fees to operate an LLC in California are among the highest in the US ($800) and are due annually. That’s a pretty big chunk our of your bottom line, especially if you own multiple properties, each operated under their own LLC. Most other states have more reasonable fees with some being a one-time creation fee and not renewable each year.
One issue you may run into is double taxation depending on the state where you reside. As the member of the LLC, you may have to pay personal taxes in the state realized (out of state property location) AND the state you reside in. This varies and is again, why you should research if an LLC is best for your rental property.
Does an Umbrella Policy Give the Same Liability Coverage?
Bottom line, no. Having an umbrella insurance policy does add coverage to the existing standard policy and cushions the protection but, still has its limits. If the lawsuit exceeds the amount of both the standard and the umbrella policies, then your personal assets are at risk.
Most umbrella policies do not exceed the value of the asset being covered. Let’s say your rental property is worth $350,000. Your personal policy has coverage for $500,000 and the judgement against you is $1 million dollars. If you have an umbrella policy of $350,000 then your personal assets are at risk for $150,000. If you do not have the cash on hand or the equity in your personal home, you likely will have to sell one of your assets to cover the additional amount owed.
Holding the property in an LLC may result in the same outcome, however, your personal assets wouldn’t be at risk or considered as part of the lawsuit.
Additionally, personal insurance policies contain exclusions that may leave a rental property owner unprotected and exposed to significant risks. Even with an umbrella policy in place, these exclusions may create a situation where the lawsuit exceeds the amount of the umbrella policy, again, leaving personal assets at risk. For more information on this, please read our blog: Make Sure Your Rental Property has Proper Insurance.
Final Thoughts
This is all a lot of information to digest. Do we hold our properties in an LLC? Yes. Our personal assets are too great to chance losing in a legal battle from a tenant or guest of one of our rentals. Should you? If The Pro’s and Con’s of Holding Your Rental in an LLC listed above do not clearly identify that answer, have a conversation with your CPA and/or lawyer. They know your risk best and can define liability, the expense, the process, and the benefits (or not) for your specific situation.
You got this landlords!
Please leave us a comment letting us know what you think of our blogs! Questions? Contact us at Stacie@YourLandlordResource.com OR Kevin@YourLandlordResource.com.
Check out our other blogs to guide you on your self-management journey as a landlord:
Why Landlord Inspections Are Essential
The What and Why of Move-In/Move-Out Inspections For Rental Properties
How Landlords Can Help Tenants Stay Cool In A Heatwave
Meet Stacie & Kevin, Your Landlord Resource
Let’s be social! Follow us on Instagram, Facebook, Twitter, or Pinterest!
Looking for a community of DIY landlords you can ask questions and bounce ideas off? Join the Your Landlord Resource Facebook Group, a discussion group for support, tips, and guidance to help create successful landlord-tenant relationships.
It’s hard to imagine a rental property owner who does not do beginning and final walkthrough inspections, but you’d be surprised how many do not care to take the time to do these tasks. Maybe they are unaware of how these walkthroughs create positive tenant relationships and cover their business when trying to keep a security deposit. The following paragraphs will explain move-in/move-out inspections for your rental property and why they are essential to your real estate investment business.
Move-In Inspections
Let’s assume that you, as a landlord, have gotten your unit all prettied up for the new tenant. Fresh paint, new carpets, all the doors, cabinets, appliances, and electrical and plumbing are in good working order, plus the whole place has been cleaned top to bottom. Finally, it’s ready for the tenant to move in and take possession.
At this point, it doesn’t seem like there would be much to inspect. Not so much for the landlord. Where the move-in inspection would appear to be more for the tenant’s sake, it benefits both parties. Walkthroughs help landlords track damages and wear and tear throughout a tenancy. They also help tenants by allowing them to notate damage found upon move-in. For instance, a dent in the dishwasher door.
However, before the tenant moves in, the landlord should go around the unit and check all the plumbing, electrical, smoke detectors, appliances, windows & blinds, door locks, etc., to ensure they all work correctly. Take photos of EVERY corner of the unit so that the tenant can’t come back and say there was a dent in the dishwasher if there wasn’t.
Tip: Do not do video walk-throughs. They are rarely admissible in small claims court should a legal battle ensue.
If possible, we like to do the walkthrough with the tenant on move-in day. For example, we have them sign off that the stovetop turns on, the hot water works, the windows/blinds open easily (in case of fire), the smoke detectors beep, the door locks lock, and the cabinet door hinges are tight and close properly, etc.
If meeting them in person is not an option, then the tenant should be allowed 10-14 days to live in the unit and have ample time to experience “all the things” before signing off. Then, have a form on the counter ready for them to complete, a stamped addressed envelope, and a notation of the date it needs to be completed and returned.
The move-in walkthrough is for the tenant to notate if there is a hole in the window screen, a stain on the carpet, or a loose bathroom towel bar. Why is this important? When you do your periodic inspection and find the kitchen cabinet door in the hall closet with the hinges missing, you can rightfully charge them to repair it if they do not do it themselves before move-out. You have proof that there was nothing wrong when they moved in, and if you did the walkthrough with them, they would have signed the form agreeing to the acceptable condition of the property. Are you seeing how move-in/move-out inspections for rental properties are important?
It’s sad to say, but there are few cases where a landlord will win a “he said/she said” case. A landlord must have proof, and the move-in walkthrough starts with that. It shows the tenant you run your rental property business professionally. It shows that you respect your property and expect the tenant to do the same. A tenant is less likely to challenge a landlord if they know they have signed off on the condition of a property.
What’s Wear and Tear?
Wear and tear are tough to define, and the level of acceptable damage varies by state. As we have stated in nearly every blog, know your local and state laws regarding rental property and landlord-tenant relationships. Acceptable wear and tear would happen regardless of who lives in a space. For example, minor stains on carpets, scuffs on walls, and a scratched appliance constitute normal wear and tear whereas broken light fixtures, pet stains on flooring or chips and cracks in countertops would be not.
But things happen, and if your kitchen cabinets are on their way out and you are just trying to get through one more tenancy with them, then be reasonable. If the window screens haven’t been repaired or replaced in many years, you’ll have difficulty charging the tenant for replacement if they are frayed.
As Apartments.com has posted on their website:
“If you are struggling to spot the difference between normal wear
and tear and property damage; Merriam-Webster defines normal
wear and tear as “normal depreciation. Meaning that if someone
lives in a rental, it will appear lived in by the time they move out.
To paraphrase Georgia law, landlords cannot fix up their rental
property at the cost of the tenant. You must return the tenant’s
security deposit if there is no property damage beyond normal
wear and tear.”
Move-Out Inspections
This walkthrough may be a requirement and depends on which state your rental is located within. For example, a landlord must offer a pre move-out inspection within two weeks of the tenant’s stated move-out date in California. The purpose of this inspection is to show the tenant ALL the issues that the landlord would take a deduction off of the tenant’s security deposit. Now, I imagine you can see why the move-in/move-out inspection for rental properties is essential to your real estate investment business.
This inspection allows the tenant to repair or replace any issues found by the landlord. For instance, if the landlord has it noted in the lease that the tenant is only allowed four holes per wall, not to be larger than ¼” and during the walkthrough, finds the tenant has a display of 6 snowboards bolted to the wall. The tenant can repair the wall (or hire someone to do so) before they vacate. However, should an unauthorized pet chew and shred the carpet, then the tenant must pay to replace the carpet. Then, during the final walkthrough on move out day or soon thereafter, the landlord can verify all the items noted were repaired. If not, the time and materials needed to complete each task can be deducted from the security deposit.
What We Do
Telling them what needs to be remedied to receive the full deposit back includes being specific about cleaning the unit. For example, we show our tenants (and send a reminder email) that the kitchen cabinets need to be wiped down inside and out, remove the shelves and drawers when cleaning the refrigerator, and wipe down and clean the windows and blinds with a list of other items.
Be as detailed as possible. We also include the amount per item to be deducted from the security deposit should they NOT clean it. For instance, the items usually add up to around a $450 fee should they choose not to clean. Of course, we also send them the name of our cleaning company in case they want to hire them. These notices are a chance to have the tenant return the unit to you in as good of condition it was received at move-in; Thus, lessening your turnover time.
BONUS!
To assist our readers, click here to access a move-in/move-out inspection form to use in your rental property business. It’s best used for up to a 3-bedroom, 2-bathroom unit and includes a separate laundry room and garage. It has signature links for both move-in and move-out by the tenant and the landlord. Always send a photocopy of the form to the tenant after they sign.
These walkthrough inspections are essential to both the landlord and the tenant. It begins the landlord-tenant relationship openly and honestly. The tenant knows the landlord cares enough to ensure the unit is in good order when they take possession. Likewise, the landlord is kept in check should any issues arise.
Please leave us a comment letting us know what you think of our blogs! Questions? Contact us at Stacie@YourLandlordResource.com OR Kevin@YourLandlordResource.com.
Check out our other blogs to guide you on your self-management journey as a landlord:
Why Landlord Inspections Are Essential
Who is Responsible for Which Repairs at Your Rental Property
As spring ends, temperatures begin to rise throughout the states. Laws regarding temperature minimums for rental properties have long been in place, and new regulations for maximum temps during warmer months are now on the table in many states. In other words, you must provide a method for tenants to stay warm in the winter, and soon you may be required to provide air conditioning to your rental properties to cool the inside temperatures during the summer months. Here’s some information on how landlords can help tenants stay cool during a heatwave that you may be better off managing now and not waiting until it gets too hot to handle.
In our neck of the woods of California, the temps near our rental properties are rising, so we reach out to prepare our tenants for the multi-day 109* heatwave that is sure to occur in the coming months.
Regardless of timing, the tips and suggestions below can be used any time during summer for any home (not just for rentals).
How to cope with sweltering weather:
Air Conditioner Tips
For air conditioning units, it is essential to know the greatest AC unit will cool your home about 20 degrees less than the current temperature outside. When the outside temperature is 90 degrees or higher, it is best not to turn up or lower the temp too low as it puts your air conditioner in an uphill fight trying to cool down your unit. Set your thermostat between 75-78 degrees (or higher) and try to cope with a bit of heat. Read below for air conditioning maintenance tips.
When to Open, When to Close Windows and Blinds
Keep blinds closed in all rooms to create an extra layer to keep the heat out. Then, in the late evening, when the weather cools to around the same temp the air conditioner is set at, turn off your AC. Next, open the blinds and windows and, if present, use the breeze outside to cool the rooms. This method works best with cross ventilation, where you have windows opened on both sides of the home so the air can flow through and out of the unit.
Install and turn on ceiling fans to cool the tenants
The circulating air will help by drying perspiration and making one feel cooler. One can tolerate the thermostat setting a little higher when you feel cooler. This is a nice, low cost way to keep tenants cool during a heatwave.
Appliance Use
Do not use appliances OR, if one must, do so early in the day or later at night. The heat from operating an oven, dishwasher, or washer and dryer will significantly contribute to the discomfort in the home.
Maintenance Tip
Replace air filters. The cleaner the filter, the easier the air will circulate through the unit. It also keeps the air conditioning unit itself running better. It won’t have to work as hard and decreases the chance of failure when the filter is clear of dust, etc.
Stay Healthy
Stay hydrated and be aware. Symptoms of heat exhaustion are:
- Feeling faint or dizzy
- Excessive sweating
- Cool, pale, clammy skin
- Muscle cramps
Treat these symptoms by drinking water and cooling your body with a fan or AC or by placing an ice/gel pack on the back of your neck.
Heat Stroke symptoms are more serious such as:
- Throbbing headache
- No sweating
- Red, hot, dry skin
- Rapid, strong pulse
- Loss of consciousness
Experiencing any of these symptoms, one should call 9-1-1 or seek medical attention right away.
Helping your tenants stay cool during a heatwave is good customer service and in your best interest to help them maintain the unit and their health. The more they spend on running the AC each month, the harder it is for them to make rent.
Maintenance Tips for Air Conditioning Units
If your units include window air conditioners, you can increase efficiency by ensuring the seal between the window and the air conditioner is not leaking. Over time moisture can damage the seal, causing it to leak.
Make sure nothing is blocking the unit’s air flow like bushes or fallen leaves (this applies to a full home/independent unit).
If your unit contains a filter, advise your tenant to clean or replace it for increased airflow.
For single-family homes, closing off unused areas (and air vents) during the hottest part of the day will help concentrate the cool air and make the home more enjoyable and efficient.
Ensure maintenance on your air conditioning units is done each spring to maintain maximum efficiency. Hire a specialist to check the unit for refrigerant, evaluate the condensing unit, check the ductwork for leaks, and general age and efficiency of the unit. Air conditioners are like cars; the older they are, the less efficient they become, and sometimes they just need to be replaced.
For homes near the seashore, the salt can corrode the aluminum coils causing the unit to fail when needed most. If you’ve ever tried to contact an air conditioning tech to service a failed unit during a heatwave, then you know you will likely be waiting days, if not weeks, for that maintenance call to arrive.
Want to email these tips to your tenants?
Below we have included the verbiage used when we email our tenants. All our units have central AC, so our email content may differ, but feel free to use ours as a template and personalize it where needed. It’s a nice added touch to let your tenants know you care and that you are interested in keeping them cool during a heatwave.
Click the link below to access a FREE PDF copy of the email we send to our tenants at the beginning of each summer season.
Coping With Heat Wave Email Template
We hope these tips have helped you create a way to communicate with your tenant in a caring manner.
Wishing you all cooler days ahead with zero maintenance calls for air conditioning units!
Please leave us a comment letting us know what you think of our blogs! Questions? Contact us at Stacie@YourLandlordResource.com OR Kevin@YourLandlordResource.com.
Check out our other blogs to guide you on your self-management journey as a landlord:
Why Landlord Inspections Are Essential
Who is Responsible for Which Repairs at Your Rental Property
We are here to tell you that there is no right or wrong way to approach this; there is only YOUR way. Do what is best for you and your rental property business. Of course, this can differ depending on the type of property. We will discuss the pros and cons to help you decide who is responsible for which repairs at your rental property.
Repairs and Maintenance
Depending on a few factors, the responsibility for repairs and maintenance (R&M) can vary. For instance, a single-family home or duplex likely has different needs than a 4-plex. Often R&M on single-family homes is left to the tenant. For example, maintaining landscaping and replacing air filters often fall to the tenant’s responsibility, while for a multi-unit, it would be that of the owner.
How you write your lease is also a factor. Many states have laws stating who is responsible for what, so if using state-approved leases, it may already note who needs to take care of what on a rental property. For example, heating, electrical, and plumbing are prime areas where states require the landlord to ensure these areas are functioning, maintained, and repaired timely.
Common Repairs and Maintenance and Who Is Typically Responsible
Changing light bulbs are typically the responsibility of the tenant. However, if you have installed retrofitted LED recessed cans, that may not be so simple for the tenant to replace. Brands differ by light output and color. The cost commonly associated with replacing a light bulb is much less expensive than a recessed retrofit. This task would need to be explicitly stated within the lease to define its responsibility depending on the type of lighting product installed.
Landscaping
Often in single-family homes, the property owner will place the responsibility of keeping up landscaping on the tenant. They can mow the lawn, trim trees, and keep the garden bed full of flowers themselves or hire someone to handle that at their own expense. The owner often cares for duplexes’ front yard(s), and the tenants tend to their back yards. For larger multifamily, the owner typically is responsible for all areas, including along pathways.
Appliances
Refrigerator/Oven/Range
Many states require that a landlord provide a refrigerator and an oven/range at a minimum, so repairs generally fall to the owner. The one exception might be if the fridge comes with an automatic ice maker or water dispenser. Those accessories are not considered necessary, and often, landlords will pass responsibility for repair to the tenant. If you do not want to cover unnecessary add-ons like ice makers, do yourself a favor and add an addendum to your lease defining precisely what is covered.
Dishwasher/Microwave
Appliances such as dishwashers and microwaves are not a necessity and can fall to either the tenant or the landlord, depending on the lease’s details. If not expressed one way or the other, a good landlord should take care of the repair or replacement, especially if they are built-in units. If a previous tenant leaves behind their microwave, and you don’t mind leaving it there for the next tenant to use, add an addendum stating that it is there for their use. Additionally, should the unit fail, the tenant is responsible for replacement if they want to replace it. That new unit would become theirs to take once the lease is over.
Garbage Disposal
Garbage disposals are a big issue when they stop working. If the tenant has done something to cause the disposal to break or jam, then it would fall to the tenant to pay for the repair or replacement. Think artichoke leaves, bottle caps, utensils, and plastic from takeout containers that the blades can’t break down. In each rental unit, we provide a garbage disposal wrench for the tenant to use if the disposal becomes jammed. In addition, we send them this video to have the tenant attempt to resolve the issue themselves before we send our contractor or repairman out.
Often, garbage disposals will rust at the bottom and start leaking. Many contribute this issue to age, but this happens because the disposal is not being put to use often enough! When one rinses dishes, the small tidbits of food, be it a few grains of rice or small pieces of meat or pasta, fall into the cavity of the disposal and sit there. They do not break down and eventually turn to mush, which builds up and keeps the unit wet, and that moisture causes it to rust through and leak under the kitchen sink. So, where technically it would seem this is the tenant’s responsibility, it would fall to the property owner because there is NO WAY you will be able to prove they did or did not run the disposal with every use.
One more tip:
When you or a tenant run the garbage disposal, use cold water, not hot. This is because the hot water makes the disposal motor hotter, causing it to burn out faster. Whereas cold water cools the motor, allowing it to not overheat with every use, thus extending its lifespan.
Smoke and carbon detectors
This one is rather simple. Units = landlord, batteries = tenant. However, we change out our units every five years. The ten-year life units tend to last around 7-8 years, so as preventative maintenance, we replace them at five years to avoid issues. Here are the units we prefer to use: insert photo and link
HVAC
Heating is the responsibility of the landlord. Often states have mandated that a landlord must provide a heat source for the tenant. However, air conditioning is not considered a necessity in many areas and can often fall to the tenant for repair, especially the window-mounted ones. One way to keep the heating and (central AC) units running efficiently is to change the air filters twice a year.
Whose responsibility is this? Usually, the tenant should be changing the filters unless there is no access to the unit. For instance, the heaters are all located in the basement of our multifamily units. This is our private area where we keep our supplies; we do not permit tenants access. For units with central heat and air, often the filter is located in the ceiling or wall inside of the rental unit, aka the air return, making it easy for the tenant to replace it.
Repairs and maintenance fall to the landlord. As heaters already are, AC units are quickly becoming deemed an essential feature for rental properties. For maintenance, we service both every other year. Typically we check heaters in the fall and the AC units in the spring. This task ensures the HVAC units should work fine once the temps cool or heat up, depending on the season.
Ceiling fans
So many landlords call us crazy for providing ceiling fans! Our properties are rated level B to C+, and we find the tenants we place are relatively responsible. We like ceiling fans because it helps our tenants with their electric bill during extreme temperatures. Circulating the air allows the heater and AC units not to work as often. This amenity is often quite appreciated for the low cost of providing it.
Because we install the unit and electricity is involved, landlords should handle all maintenance and repairs. Ensure the lease notes that if damage occurs from misuse, the tenant will have to cover all expenses incurred.
Tip: If not already installed and you want to hang a ceiling fan, make sure you or your contractor install a fan brace or bracket where the old junction box was. This reinforcement ensures the fan (often heavier than a light fixture) will be more stable, and there is a low chance of falling.
Washing Machine/Dryer
Washers and dryers are other amenities not considered essential but are ones tenants seek after. We go by this rule: The landlord should provide repairs and maintenance if the washer and dryer are built into the wall. For instance, in our multifamily, we took the linen closet out and installed built in, stackable washer/dryer units in each unit. Because we deem these OUR washers and dryers, we will maintain and repair them. If there were coin-operated or multiple units available in a common area, that is the landlord’s responsibility.
Many landlords will require the tenant to repair and maintain them for non-built-in units, like ones located side by side in the mud, utility, or laundry room of a single-family home. In this case, the washer and dryer should be considered available for your use, but if they fail, it is up to the tenant to repair or replace them on their own. Of course, when they move out, they would take the units with them if they chose to. The landlord provides the hookups but not the units in this situation. Don’t assume this is the norm. Make sure you notate this on an addendum to the lease.
Garage door openers
You do not see automatic garage door openers in rental properties that often. Many landlords will only supply a manual roll-up door for safety reasons. However, if the landlord provides automatic doors, they are considered a built-in amenity; that responsibility generally falls to the landlord unless otherwise stated in the lease.
Plumbing/Septic
Plumbing issues are where being VERY specific on your lease is essential. Sometimes plumbing backs up due to old pipes collapsing or tree roots penetrating the lines, not allowing sewage to pass through. Of course, these issues, along with dripping faucets, water leaks under sinks, or running toilets, all fall into the landlord’s responsibility.
Clogged toilets from flushing paper towels, baby wipes, toys, kitty litter (YEP!), feminine hygiene products, etc., fall to the tenant ONLY IF THE LEASE SPECIFICALLY STATES such items cannot flush down a toilet.
Clogged water drains due to long hair, grease, lint from laundry, etc., are hard to prove and should fall to the landlord.
Septic systems come with specific instructions and should be included as an addendum to the lease stating who is responsible for maintenance and repairs.
Electrical
For the most part, you will find that the worst problems you should see are breakers and GFI plugs that keep popping. Inspect what they service to make sure they are not overloaded. These two items go out from time to time and need replacement. For the most part, any electrical issue should be inspected and remedied by a professional. There is just too much risk of fire hazards to DIY it.
Gutters and downspouts
These areas come down to the type of rental property you own. For example, you can require single-family and duplex tenants to maintain and clean their gutters each year. Still, you must also understand you are asking someone who possibly lacks the experience to climb a ladder and do maintenance on YOUR property. Should they fall and get injured, it could cost you way more than if you just went out and did it yourself or hired someone.
For multifamily, tri-plex, and up, it is the responsibility of the landlord to clean gutters and make sure the downspouts are clear of debris.
Roof
100% the responsibility of the property owner. Have the roof checked every five years or so by a professional. They can give you an idea of how much life is left. This timeline will help you determine your capital expenditure funds to make sure you are covered when the time comes.
Window screens/coverings
In California, by law, landlords must provide window coverings. Often window blinds are the best choice as they are simple to clean and do not infringe on a tenant’s décor. Regardless, replacement falls to the tenant if window coverings or screens become damaged due to misuse. If the cord on the blinds breaks or the screen rips because it is old and deteriorated, the landlord should be responsible for remedying those issues.
Painting the unit
We are not a fan of allowing tenants to paint their units. We completely understand people want to personalize their space. However, if they paint the wall a dark color, drop paint on the floors, or don’t tape off trim well, you are looking at a mess to clean up when they move out. Can you demand they paint it back to the original color at move-out? You sure can, but if they don’t use proper primer or do a messy job painting, you’re stuck making it all right again.
Painting the unit or one room of the rental unit is one of the items we offer as an incentive with a lease renewal. We generally offer this to those who have been residents for several years, and the unit needs some sprucing up.
Please read our blog for more information on offering incentives to tenants upon lease renewal.
Allowing Tenants to Make Repairs or Do Maintenance
Our policy is not to allow tenants to make repairs or do maintenance on our behalf in exchange for rent discounts. However, we will consider granting permission to a tenant who specializes in a trade, but only if they invoice us and we pay them directly for their time.
You see, deducting a tenant’s expense from your rental amount lowers your rental income. Yes, it reduces your income, but your actual rental rate is off if you decide you want to sell the property. Should you desire to take out a loan or HELOC, your income is inaccurate. Maybe you do this once or twice, but perhaps you own several complexes in a town, and you give a 50% discount on rent to a landscaper to maintain all of the properties each month. That deduction is a big hit to the bottom line.
Additionally, if you allow a tenant to fix something and, down the line, the problem reoccurs, or you find out the quality of workmanship did not match the discount given, you have no recourse.
You can, however, allow the tenant to pay someone to have repairs done and then deduct that invoice amount from the rent AS LONG AS there is an invoice to accompany that deduction. This invoice allows you to deduct the repair as an expense. Also, the work completed comes with a warranty. If there is a problem three months after the tenant moved out, YOU have recourse with that repair person.
Furnished units
Unless otherwise noted, if you provide a furnished unit, you are responsible for the repair or replacement should such furniture fail. For instance, the pulls on a dresser keep falling off, and they can’t get the drawer to open easily. That’s on the landlord. If they have children that bounce up and down on the bed and the bed collapses, then the repair or replacement expense falls to the tenant.
It is common sense, BUT the landlord still needs to explicitly state in an addendum that “damage due to negligence, overuse, or carelessness is cause for repair at the tenant’s expense.” If not, any of the above items become a he said/she said situation, and you’ll have to prove you told them or that they should have known.
Wear and Tear Defined
Normal wear and tear is the expected decline in the condition of a property due to normal everyday use. It is deterioration that occurs in the course of living in a property. The cause does not happen by abuse or neglect.
Normal wear and tear might include minor stains on carpet, scrapes or dings on hardwood floors, dirty grout, or carpet fading due to sunlight.
Wear and tear can be defined further as deterioration that one can reasonably expect to occur. For example, it is normal for some scuffs in the paint after a tenant moves out of the unit.
Damage is not naturally occurring. Instead, it is harm that affects the property’s value, usefulness, or normal function. Tenants can commit damage on purpose or through neglect.
Damage could be carpets destroyed by a pet, a hole in a door, broken cabinet doors, or a cracked window.
The bottom line is if, as a landlord, you provide anything of convenience or necessity to your tenant, and that product needs repair or maintenance, it falls to you to repair and maintain it. UNLESS you specifically state where the responsibility lies within the verbiage of your lease. So, ask yourself, when was the last time you reviewed your lease? It may be time for an update.
Please leave us a comment letting us know what you think of our blogs! Questions? Contact us at Stacie@YourLandlordResource.com OR Kevin@YourLandlordResource.com.
Check out our other blogs to guide you on your self-management journey as a landlord:
Beyond the FICO Score, How to Read an Applicants Credit Report
What’s the Best Time of Year to Market Your Rental Property
Why Landlord Inspections Are Essential
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For some landlords, this is a sensitive subject. For others, it’s a no-brainer. Below you will find why it’s OK to raise rents and how often we do so, why to keep rents slightly below market rate, and the exact wording we use when communicating a rental increase to our tenants. You’ll find yourself feeling more secure by following these tips on why and how to raise rents without sacrificing tenants.
How Often Should Rent Increases Occur?
If you have tenants who have signed a lease for one year or more, you should increase the rent with every lease renewal OR write annual increases into a long-term lease. Why? The longer you go without raising rent, the harder it is to do any increase that makes a difference on your bottom line. For month-to-month renters, aim to raise rents at least once a year. Even monthly rental agreements have an end date (or should), so do an increase at the end of that contract period when you offer the renewal.
Additionally, smaller increases each year are easier for the tenant to stomach over one colossal jump in rent after a long period of time. Consistent incremental increases prepare the tenant to expect their rent to go up with each lease renewal. If they do not know any different, your chance of them exiting diminishes greatly whereas, if their rent remains the same for several years and then BAM! You slap a $400 raise in rent, leaving the tenant scrambling to decide if they can or want to afford that new payment each month. Psychologically, you might have guilty feelings for not doing any increases for several years and then being “selfish” enough to demand one out of nowhere. Get over that. You’ll be happy you did. Here’s what happened to us:
We fell victim to this guilt and are still paying for it to this day.
We have a tenant in a two-bedroom apartment who’s perfect (and still is). He pays rent on time, handles most issues on his own, addresses and reports issues promptly when we need to manage them, and is a great neighbor to all the other tenants in the building. He has been a tenant for over nine years, and we had only given him minor increases ($25-$40) each year.
Here’s how that came to bite us in the butt: In 2020, the state of California passed a low-level law of rent control called AB1482. This law states landlords of multifamily units not newly constructed in the last 15 years cannot increase rent more than 5% + CPI (or 10%) twice annually(overall increase cannot exceed 10% in a twelve month period). In addition, California landlords cannot evict unless there is just cause like a severe lease violation or a family member were to move into the unit.
Because rents had significantly increased in our area, our rate for that one unit was nearly $350 below the market rate. Luckily, we are on top of the rents in all other units. However, we did begin raising rents annually and will continue to do so (with lease renewals) for the maximum allowed to get closer to the market rate.
Why does this story matter?
Even if you live in a pro-landlord state and rent control may never be an issue, having rents severely behind market rate can kill your bottom line in the event of lost rent on other units. What if you have a long eviction process and go months without earning rent on one rental? Can your other rental properties make up the difference and keep you afloat? What if you have a severe flood from a broken water line or fire damage to several units? Oh, you have Cap Ex savings? Great! But those funds only go so far. The pandemic is a perfect example!
It’s disturbing to look back now and realize how much money we had lost those last five years by not giving proper increases. Those funds could have made a difference when all the appliances decided to start going out at the same time around June 2020. Had we learned how to raise rent without sacrificing that tenant, we would be in a much better financial position right now.
Times are changing, and so are property and income taxes, insurance rates, and laws/ordinances around owning rental properties. By staying on top of rental increases for all your units, you can cushion your bottom line and have the confidence to cover any increased cost of living and unexpected additional expenses that come your way.
Final Thoughts On Why Increasing Rents Is A Good Thing For Tenants
Should you be very financially secure on your property, you can use the funds to add or improve upgrades. A few years ago, we had a very plain back patio behind our multi-family complex. One season we added some new patio furniture so the tenants had private outdoor space to sit alone or with others. Once we saw that the space was being used, we decided to add lighting so the space could be enjoyed at night. The next year we added a dining table and chairs. This addition was very helpful during the pandemic as the tenants had outdoor space to work at. Finally, last year we added an electric grill (no fire hazard since no flames). The tenants use this grill more than anything else! You see, tenants likely won’t see their increases as a problem when you are improving their living experience by adding amenities.
Why We Keep Rents Just Below Market Rate
When we determine the rent for either a renewal or when marketing to a vacant unit, we generally keep our rates around 3% below the market rate. Our reasoning is twofold:
- When we renew a lease, we know that our tenants are likely to search the area to see if they can find a better place for similar rent. They likely will not be able to. We know that our units are clean, well taken care of, and offer amenities many other rentals in our area do not. Other apartments or homes are much older and do not offer an in-unit washer and dryer or central air conditioning. Brand new units which do have better amenities charge hundreds if not thousands more than we do. So, by keeping our rates competitive, it lowers the chance of a tenant moving out.
- What if you need to sell your rental property? Having rents way below the market rate can severely affect your sales price. Investors who want turnkey properties will pass on your building because making the numbers work will be too much effort for them. Those who are willing to do the work likely submit a lowball offer to your sales price. We see this as a significant issue in many rent-controlled areas. We will see a 4-plex that comes up a third to 50% less than all the others around it and wonder what’s wrong with it? Oh, the rental rates are the same as those from 1995!
How We Address Our Tenants When Renewing A Lease (and Raising Rent)
Sixty days before each lease renewal, we will email either offering to renew their lease under specific terms or not renew their lease and state why (usually unit refurbishment or lease violations). It’s rare when we do not renew a lease.
For renewals, the email will read like this:
Hi “tenant name”,
We are contacting you today to let you know your lease is expiring in 60 days. However, we are happy to renew your lease under these terms:
Renew one year lease $xxxx
Switch to a month to month rental agreement: $xxxx (usually slightly higher rate)
The comps in the area for an x bed and x bath unit (which include an in-unit washer/dryer and central AC) come in between $xxxx and $xxxx.
We tend to keep our rents just slightly below the market rate to remain competitive.
Where rent increases are disappointing, we must stay ahead of increasing costs like insurance and property taxes as business owners.
Be assured that we are consistently evaluating how we can use these increases to maintain the unit and offer better amenities to improve your living experience.
Moving can be costly and time-consuming, so please consider that when contemplating our increase.
We enjoy having you as a tenant and hope that you decide to stay.
If not, please give us the required 30-day notice by (date).
Fondly,
Your Landlord
As you can see, we keep it short and professional. We acknowledge we’d like the tenant to stay and do not show any emotion. Remind them of amenities they have (and may have trouble finding in other units in the area), so they remember to look for those when searching for comps. We also make sure to note what a hassle it is to move. They will need to weigh the trouble of coming up with another security deposit before receiving yours back, the time to pack and move all their belongings, clean your unit, and return it to the shape it was delivered to them in. Often, for the increased rent per month, it is not worth it.
If you really want to entice them to stay, check out our blog post Offering Tenants Incentives Upon Lease Renewal.
A Landlords Mindset
If you’re a landlord with an attitude of:
- “I prefer my tenants leave me alone.”
OR
- “I choose not to renew my leases, rather just let them fall into a month-to-month rental agreement and hope for the best.”
You need to change your way of thinking or stop being a self-managing landlord. Landlords need to manage their rentals with a proactive mindset. Those were days when a 2-page lease that stated the rental rate, when it was due, and where to send it sufficed. However, with laws and ordinances changing often, it is essential to ensure your lease is clear, concise, and updated with every renewal.
Need a state specific lease? Check out EZ Landlord Forms for all your lease and landlord forms needs! For a limited time, use our special code for 15% OFF YOUR FIRST FORM OR A LIFETIME SUBSCRIPTION! This includes their lifetime forms offer! Enter code: STACIE15 at checkout.
Additional Thoughts
While having non-bothersome tenants is a dream, consider if you will, they may just be throwing a bucket under the sink to avoid calling you about a leak, fearsome their rent will go up. My aunt used to try to fix everything herself because her belief was “if I have as little interaction with the landlord as possible, they will not increase my rent.” Back in 1980, she was right!
Nowadays, THAT tenant who does repairs on their own and the landlord who does not inspect semi-annually is just a disaster waiting to happen. Unless that tenant is an appliance repair person or has adequate knowledge to repair plumbing, request they leave it to the professionals. Let them know upon move-in that you WANT them to notify you about issues that occur. This demand shows them you are a responsible landlord who cares about your unit and their living experience. Also, advise them of their responsibilities to handle on their own like burnt-out light bulbs, batteries in smoke detectors, etc. If you do not want to do these tasks, question if being a self-managing landlord is for you. You may be better off hiring a property manager. Click here to download our 6-Page Periodic Inspection Checklist for a single family home.
Consider This…
A 5% increase per unit over 5 years can mean additional thousands of dollars in your pocket each year. Let’s say you have 5 units renting at $1,000 per month. If you raise each unit 5% that’s an additional $50 per unit, or $250 per month. Now take that out a year and you just earned an additional $3,000. If you continued to add that same 5% increase without adding any new properties, after 5 years you will have earned roughly $48,000 additional income. That 5% continues to compound year after year. We are talking real money here!
One thing that landlords need to remember is, if you are a responsible and respectable landlord who takes the necessary time to select great tenants, they will likely stay with you until they have a significant change in their life. In our experience, most tenants move out due to job relocation, moving in with a significant other (and need more space), or buying their own home. Good tenants will find value in your unit if you run your rental property business properly. You will rarely have an issue with a tenant if you are firm but fair and kind while providing a positive living experience for them.
We hope you find this guide on how to raise rents without sacrificing a good tenant helpful in your landlord journey. We started Your Landlord Resource for this reason!
Check out our other blogs to guide you on your self-management journey as a landlord:
A Landlord’s Guide To Fire Safety In Rental Properties
Landlord Inspections are Essential
Security Deposits: 5 Tips Landlords Should Know
Marketing Your Rental Property, Get to Know the Neighborhood
Tips for Taking Great Rental Property Photos
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Many years ago, I would run credit reports on applicants and only pay attention to their FICO scores. We stated in our criteria that applicants must have a credit score of 725 or higher to apply for one of our rentals. If the credit report popped up with that number or higher, I would move them to the “continue with background check” pile. Little did I know that I was setting our company up for problems by not investigating further into their financial background and evaluating what else was on an applicants credit report. Knowing now how to read an applicant’s credit report, I know it’s way more than just a FICO score. Read below for the items we pay closer attention to.
With the pandemic over and most moratoriums have expired, it is more important than ever to be thorough with your rental applicant background checks.
We are proponents of education, and much of the information provided in this blog is from a refresher webinar hosted by The American Apartment Association. If you are not familiar with them, check them out. They have a lot of free information that we find very helpful, even as veteran landlords.