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Deciding On Your Rental Policies

October 3, 2022

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How To Decide On Your Rental Policies

No two landlords are the same. 

Nor should all leases be identical. Rental policies vary depending on the state, locality, property type, funds, landlords’ preferences, and other factors. 

How you rent and operate your properties is partially dictated by law, but many rules are largely up to you. How do you know which policies are best? 

Many policies are motivated by safety or health concerns (e.g., procedures for reporting mold, changing locks, etc.). Others are designed to preserve the environment (e.g., restrictions on water waste), protect you financially or legally (e.g., pet policies, security deposits), or ensure your tenants’ assets (e.g., requiring renter’s insurance).  

The policies you include in your rental agreement contract should be jointly dependent on these priorities, your legal responsibilities, and your preferences—what makes the most sense for your location and circumstances. 

In this article, we break down common rental policies and your best options regarding them. 

Security Deposits 

Security deposits are a standard element of a lease agreement. They guarantee access to funds in case of tenant damage or unpaid bills. 

Your security deposit policy should be detailed in your lease agreement and explained to each new renter. There are several decisions to make: the deposit amount, when you’ll return it, and what warrants not returning it. 

State Laws 

Security deposit policies are largely determined by state law. You must follow state statutes and incorporate them into your policies. 

Twenty-eight states have set maximums for security deposits, typically 1 to 2 months’ rent. The remaining states have no set maximums, but cities and localities might.  

Landlords in at least five states (New York, Illinois, Ohio, Massachusetts, and North Dakota) are required to store security deposits in an interest-bearing account, usually at 5% interest. This interest must be returned to the tenant with the rest of the security deposit upon move-out. 

Additionally, all states dictate when landlords must return security deposits. The timeframes range from 14 to 60 days after lease termination. During this time, you may review the vacated units for property damage that justifies deposit withholdings. Some states require you to provide an itemized list of withholdings to tenants with the remaining deposit. 

The faster you can return security deposits, the better—but take enough time (if allotted by your state) to fully evaluate the condition of the unit.  

Late Fees and Grace Periods 

Late fees and grace periods are also key policies in any rental agreement. 

Both are generally smart to establish and enforce. Late rental fees communicate that your rent due date isn’t a suggestion. The threat of a fee, especially one automatically charged by your property management software, is all most tenants need to pay on time. 

Grace periods are another important part of your rent policy. Many renters get paid on the first of the month, which is when rent is typically due. Funds may also take several days to transfer between bank accounts. It’s best to give your tenants a few days’ grace to accommodate these circumstances before enforcing any late fees. 

State Laws 

Like security deposits, late fees and grace periods are also regulated by state laws. At least 22 states have mandatory minimum grace periods, ranging from three to 15 days.  

Likewise, 31 states have passed late fee limits, which can be a flat dollar limit, a percentage of monthly rent, or a combination. Many states do not specify a limit but require that late fees are “reasonable.” A reasonable late fee is usually around 5% to 20% of the rent.  

Refer to your state’s law code for more details about late fees and grace periods. 

Utilities 

Which utilities should you include in the rent? 

Either you or your tenants will have to shoulder responsibility for gas, electric, water, sewer, trash, recycling, internet, and cable. 

There are several benefits to including utilities in your rent. First, you can charge a premium for them, thereby increasing revenue. Utilities are also tax deductible as regular operating expenses for property owners. Your tenants will no doubt appreciate included utilities as well, as they’ll only have one bill to pay. 

Despite these advantages, you may resent that utilities like gas and electricity become your responsibility to set up and maintain in every unit. Providers often have variable rates and may increase their prices at any time. You also can’t control whether your tenants choose to conserve resources or rack up your bills. Finally, the extra cost of utilities will increase your rates, which may deter prospective renters. 

Many landlords choose to provide some utilities (e.g., gas, water, trash) and leave the rest to their tenants (e.g., electricity, internet, cable). 

Your decision ultimately depends on which responsibilities you’re prepared to take on and which you’re comfortable entrusting to your tenants. 

Pets 

A recent survey by Apartments.com found that 90% of renters own pets. Despite this overwhelming majority, pet owners often struggle to find pet-friendly rentals. 

There are several reasons for this deficiency. The most cited reason is property damage—pets can scratch, chew, and otherwise damage your units’ flooring and appliances. They can also disturb other tenants or create unpleasant odors. 

Despite these concerns, allowing pets is often a lucrative choice. Pet owners make up a substantial portion of the renter population and are rarely willing to leave their pets behind. Pet-friendly rental policies will attract many more applicants to your properties. And the scarcity of pet-friendly properties makes pet-owning tenants more likely to renew their leases. 

Pet Rent, Pet Fees, and Pet Deposits 

Another lease term to consider is your rental pet policy. Should renters have to pay more to own pets? 

Pet fees are single, nonrefundable fees (typically $50 to $500) that cover potential damage costs. A pet fee could be a flat rate or could change depending on the type, size, or number of pets. 

Pet deposits are similar to pet fees except refundable, like security deposits. Your tenant pays a fee (around $100 to $600) at move-in. You keep the funds until the end of their tenancy, at which you’ll assess let damages and losses (stains, odors, scratches, flea infestations, etc.). You then use the pet deposit to repair these damages. If there are no problems, the tenant receives the full deposit back. 

Pet rent is a monthly fee (typically $10 to $60) your tenant pays along with their own rent. It can cover property damage as well as general wear and tear, and it is not refundable. 

Landlords often prefer the nonrefundable options (pet fees and rent). This way, you can use the funds to cover damages you might find later, after move-out. However, renters will choose a rental with refundable fees over one with nonrefundable fees.  

Pet rent, fees, and deposits are all regulated by state laws. Be sure you know which laws apply before finalizing your pet policy. 

Service Animals and ESAs 

It’s never legal to charge pet rent, fees, or deposits for service animals or emotional support animals (ESAs). Fair housing laws (namely the Fair Housing Act and Americans with Disabilities Act) establish assistance animals as “reasonable accommodations” you must make for tenants who request it. As assistance animals are not pets, you cannot charge their owners any additional fees or rent. 

Smoking 

Many landlords have “no smoking” rental policies, and for good reason. 

Smoking can lead to yellow discoloration and unpleasant odors as tar and nicotine build up on ceilings and walls. This “thirdhand” smoke can negatively affect the health of current and future tenants.  

Smoke can also cause build-up in air filters, damaging HVAC units and requiring costly repairs. 

If you allow smoking in your rentals, establish clear guidelines for where smoking is permitted and how you’ll remedy potential damage. 

Subleasing 

Subleasing occurs when your tenant re-rents your property to a third-party tenant who lives in the unit and pays rent to cover all or part of the original tenant’s lease contract.   

In a short-term subleasing agreement, the original tenant leaves the unit temporarily (e.g., for a study abroad program or work assignment). In a permanent subleasing agreement, the subtenant lives in the unit for the remainder of the term. 

Subleasing is attractive to some landlords because it reduces vacancies. If a tenant can’t fulfill their part of the lease agreement, they can find a replacement to fill the unit in their absence. Subleasing also shifts the responsibility and liability onto the tenant rather than you. 

However, most landlords are wary of subletting. For one, you might not know who is living in your unit. An unknown, unreliable tenant increases the risk of damage, legal entanglements, or both tenants’ evictions.  

If you choose to allow subleasing, we recommend taking the following precautions: 

  • Require your consent to sublet 
  • Run a full tenant screening on the subtenant (credit, criminal, eviction, and income checks) 
  • Retain final say on all subtenants 
  • Outline the logistics of subletting in your rental agreement 
  • Require renter’s insurance to minimize the risk of damage 
  • Require subtenants to pay rent to you so that your original tenant can’t profit 

Renter’s Insurance 

Renter’s insurance is a popular policy for tenants and their sub-lessees alike. We recommend requiring your tenants to purchase renter’s insurance at or before move-in.  

Your landlord insurance will cover building damages in case of a storm or break-in, but it won’t cover your tenants’ belongings. Tenant personal property is covered separately by renter’s insurance.  

Requiring renter’s insurance also means less hassle for you. Your tenants’ renter’s insurance will kick in before yours does, making it less likely that you’ll need to interact with your own insurance company. 

Tenant Modifications 

What about tenant modifications? Should you allow your tenants to make changes to their units, such as painting, making repairs, or installing technology? 

Although you should want your renters to make their units feel like home, it’s generally best to limit which modifications tenants can make. 

Unfortunately, tenants can’t always be trusted to do a job right. A botched painting job or attempted bathroom repair may end up costing more for both parties, as you’ll likely have to draw from the security deposit to repair the damage. 

Additionally, tenant modifications to light fixtures, security systems, or appliances may interfere with utility cost breakdowns, especially if these are shared between roommates or neighbors. 

If you decide to allow modifications, have your tenants ask permission before doing so. This way, you’ll retain the power to oversee or veto any changes. 

You might also require your tenants to return the property to its original condition upon move-out. Often, this rule will discourage tenants from making too many modifications that would be difficult to reverse. 

One exception to this advice is repair and remedy or repair and deduct laws in certain states. If you refuse to “repair or remedy” a condition that threatens a tenant’s health or safety, they have the right in some states to make the repair themselves and deduct the cost from the rent. Even if you allow certain tenant modifications, it’s best to take responsibility for all repairs and maintenance. 

Conclusion 

Deciding on your rental policies is part of the tedious process of writing a lease. Many new landlords learn which policies are best by trial and error. If a policy isn’t working, you can always alter it with an addendum or amendment or wait until the next leasing cycle. 

Your attention to the minutiae of rental policies reduces risk of all kinds in your rental business. By considering each of the policies listed above, you can build a strong, lasting lease agreement. 

Next, you’ll need to figure out how to manage your rental.

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