Everything You Need to Know About Leasing
December 5, 2022
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A Guide To Leasing Rentals
As a landlord, you’re already well aware of the importance of leases.
They protect you from things that can (and sometimes will) go wrong during tenants’ time at your property.
Understanding the different kinds of leases, the best ways to set up leases, and how to handle a variety of situations involving leasing is critical to your success as a property manager.
Whether it’s renewing a lease, understanding the nuances of different types of leases, or essential lease terms, this article will help you build a foundational knowledge base on leasing.
This way, you can move forward confident in your ability to create well-made leases that benefit you and future tenants.
Let’s start by looking at the standard residential lease structures: Fixed-term leases, periodic leases, and subleases.
Fixed-term leases are the most common type of residential lease structure. These leases are a specific length of time – usually six months, a year, or a multi year lease —and they hold a tenant accountable for the entirety of that time.
One of the key advantages of fixed-term leasing is that you get monthly rent payments for a known number of months. This provides reliable income for you.
On the other hand, fixed-term leases don’t allow you to change the lease terms for the whole rental period. This could cause issues if circumstances change or you forget to input vital rules in the original lease.
Periodic leases are also known as month-to-month leases. You or your tenants can terminate these agreements at any time. It’s important with periodic leases to ensure that you explicitly list what is required for proper notice to vacate.
Flexibility is the main advantage regarding periodic leases. It’s easier to have tenants vacate your property whenever you want and to enact changes to leases.
The downside is that tenants can leave when they want, and turnover could be a consistent issue for you. This lack of stability makes many landlords wary of this type of lease.
We also have subleases as an alternative lease structure. A sublease agreement is when the tenant who signed the lease has a new tenant reside in the property. They’re a bit unique because your tenant is technically the one leasing the property.
Most landlords allow subletting as long as it’s reasonable (if state law permits it). The option to sublease should always be in the original lease agreement.
One of the major benefits of allowing subleases is that you make your property more attractive to people who may need flexibility (such as college students). The original tenant is responsible for finding someone to take over their lease. So, it won’t negatively impact you because you still collect rent either way.
Of course, the downside to subleases is that you have to figure out how to screen new tenants. Just because your original tenant finds someone to sublet the property, there isn’t a guarantee that the new tenant will take care of your asset.
Lastly, we would be remiss if we didn’t mention inherited leases. Most properties already have tenants with current lease agreements when you invest in them. Therefore, they have a right to stay at the property until those lease terms expire. This means that even though you’re a new landlord, their current lease is still legitimate until the expiration date.
When it comes to commercial leasing, there are three main types of commercial property leases: Net leases, gross and modified gross leases, and percentage leases.
Net leases are the most common of commercial leases. They put the majority of the responsibility on tenants. Normally, landlords will charge a smaller base rent while tenants take care of utilities and most of the remaining costs. Net leases have four sub-types:
- Single net leases (N leases) mean tenants are responsible for rent, utilities, and a portion of the building’s property tax. The proportion of total space being rented determines the specific amount.
- Double net leases (NN leases) are the same as N leases, just with insurance. These costs are usually also determined based on the share of total space occupied by tenants.
- Tripe net leases (NNN leases) add common area maintenance (CAM) costs to the tenants’ responsibilities. CAM expenses relate to shared spaces and features (i.e., elevators, sidewalks, and restrooms). CAM items are negotiable, though, so these could vary based on the agreement. This kind of lease is typically used with large, single-occupant spaces, so it requires tenants with high credit worthiness.
- Absolute net leases basically void landlords of any responsibility. The leases above still hold landlords accountable for structural damage and repairs. Absolute net leases are almost exclusively seen with long-term tenants with outstanding credit.
Gross and modified gross leases favor tenants compared to Net leases. Gross leases require one agreed-upon sum that covers the rent payment. You then use what you’ve collected to take care of all the building’s expenses like utilities and taxes.
Modified gross leases balance things out a bit more. The single lump sum for rent is still required, but you won’t have to cover all major expenses. Most modified gross leases hold tenants responsible for janitorial or electrical costs. These leases are typically used for multi-tenant commercial buildings, while full-service gross leases are typically used for single-tenant spaces.
Retail properties typically come with percentage leases. Percentage leases require tenants to pay a base rent plus a percentage of their monthly or annual revenue. Due to this additional percentage, base rent is usually reduced more than any other kind of commercial lease. Additionally, a “breakpoint” might be negotiated, marking the sales total at which percentage payments start.
This kind of lease has advantages for you and your tenants. The tenant doesn’t have to concern themselves with nearly as many costs compared to other lease types, and you have more incentive to keep the property in good shape.
When dealing with commercial leases, you’ll also have to account for commercial rental fees, such as CAM charges and find a way to incorporate these into any leases.
Individual Versus Joint Leases
Another way leases are differentiated is individual leases versus joint leases. These are two common methods landlords utilize depending on priorities.
Individual leases are rental agreements wherein two or more people living in the same property take responsibility for their specific rooms and common areas. Each tenant pays rent directly to the landlord. Individual liability is the cornerstone of these leases. But it’s worth noting that many landlords still hold all parties responsible for common area damages. This is because figuring out who is responsible for, let’s say, damage to the living room can be tricky.
Joint leases are rental agreements wherein two or more tenants rent a whole property as a single unit. All tenants are held equally responsible for private rooms and common areas. The critical piece here is the inclusion of the joint and several liability clause, which makes every person accountable jointly and separately for the whole property.
Individual leases and joint leases come with different advantages. Joint leases provide greater stability and security because you don’t have to deal with tenants individually, and everyone has more incentive to keep each other in line. Individual leases allow you to charge more because liability isn’t spread out between a group, and you can hold people individually accountable for their spaces.
Both have their disadvantages as well, though. With joint leases, you have to negotiate with groups, and changes to the lease have to be accepted by everyone. Individual leases often have more disadvantages, however, because you’re at greater risk when dealing with different individuals. You may have to deal with people skipping town, paying rent late, different rent payment methods, etc.
At the end of the day, figuring out what makes the most sense for you is the way to go. Once you understand the pros and cons of each kind of lease, you can decide what will benefit you and your tenants the most.
Essential Lease Terms
Now that we’ve covered the different lease types, let’s dig into some key elements and overlooked lease terms you should include in your leases:
- Parties Involved. Your lease agreement should list everyone who will live on your property. Every tenant over 18 should sign the lease agreement. If you don’t get everyone to sign, they cannot be held accountable for the terms.
- Property Address. Include the entire address of your property in the lease. Don’t forget the street name, unit number, city, and state. Highlight any added space the tenant will have access to (i.e., a parking spot).
- Lease Term. Specify the start and end date of the lease term and the rules of notice.
- Rent Due. Detail the exact rent amount and when it’s due. Note any grace periods and late fees that may be charged. And include the forms of payment that you accept (avoid cash, if possible).
- Acceptance. A physical or digital signature is necessary for the agreement to become legally binding.
- Security Deposit and Other Fees. Security deposits are an essential layer of protection for you. List the exact amount of money for your security deposit and situations that would permit you to take money from it. Be sure to detail how and when you will return the deposit upon the tenant leaving. And, if there are other fees like move-in fees, state whether these are refundable or not. (If you’re leasing a commercial space, commercial security deposits will differ quite a bit.)
- Maintenance and Utilities. Specify the responsibilities of yourself and tenants regarding maintenance and utilities. Your lease should explicitly state which bills tenants need to pay and which ones you will cover. You also need to include the liability of everyone regarding any repairs, damages and home improvement projects like painting.
- Entering the Premises. Clearly state when and why you would show up at the property. And specify what kind of notice you would need to give beforehand.
- Pets. Do you want to allow pets on your property? Be extremely clear in your lease about your policy. If you do accept pets, make sure to include items like breeds and sizes you will allow. Also, be sure to list pet deposits or fees.
- Early Termination. Be sure to have a clause that details what happens if anyone violates the lease terms.
- Subletting Rules. You can enter murky legal waters if you don’t land on a specific sublease policy. A section on your expectations and rules regarding subletting is always a good idea.
- Renter’s Insurance. You should consider requiring renter’s insurance. It’s a good way to account for liability and protect your most valuable asset: Your property.
Another potentially important lease term is requiring a lease guarantor. In certain situations, it’s a good idea. A lease guarantor is someone who agrees to take on the financial responsibility of a lease if the original renter can no longer meet the agreement. You should always weigh the positives and negatives of requiring a guarantor, but it should always be something you consider.
When creating your lease agreement, be sure to incorporate plain language as it will help clearly communicate your rental property rules and regulations, saving your tenants the headache of deciphering unnecessarily complex wording.
What happens if you set up your lease perfectly, but now you need to alter lease terms mid-term? You should make an effort to meet your tenants halfway, negotiate peacefully and maintain an excellent landlord-tenant relationship. It’s important to remember to make it official. Whatever method you choose to alter your lease agreement, putting everything in writing will protect you, your tenant and your business.
So, what about the nuts and bolts of leases? Traditionally, leasing required paperwork and pens. It was a long process, whether you emailed it to the tenant or set up time to meet in person. And it required a handwritten signature. Online leases changed the game.
Tools like property management software make it simple to do everything for the lease process online. Tenants can review the agreement at their convenience and sign quickly once they’re ready.
Online leases offer several benefits. They save valuable time and money. You don’t have to meet in person with tenants to secure a signature. You don’t need paper copies of leases. You can fill vacancies faster because you don’t have to worry about coordinating schedules. It’s a win-win for everyone.
The record-keeping aspect is also a big advantage of online leases. No more losing papers in drawers or spending copious amounts of time trying to find where you left that lease. When everything’s on the Cloud, it’s just a few button clicks away. And it’s very secure because of encryption and audit trails.
Online leases make addendums and changes easier than ever before. Lease renewals are no longer a headache. You can easily edit term dates, rental fees, add tenants to an existing lease and anything else efficiently. Most property management software tools have templates that allow you to change elements easily.
A common myth about online leasing is that you need technical expertise. This isn’t the case. Competition over the years in online document signing software has made it so that the process is now very intuitive. Most providers enable you to upload leases and drag and drop fields as necessary. In other words, you won’t need to code or do any fancy footwork to set up your leases.
It’s also important to keep in mind that tenants are more tech-savvy than they’ve ever been. Millennials and Generation Z look for innovation in all areas of life. And giving people access to leases no matter where they are is appealing. You don’t have to chase tenants for signatures or worry if you’ll be able to meet up by certain deadlines. No one has an excuse to delay signing leases anymore. It’s a nice bonus for any landlord.
Another nice aspect of online leases is that they’re environmentally friendly. The amount of paper needed for leases multiples quickly, with most leases being more than 20 pages. Online leasing means you don’t have to make tons of paper copies. Instead, everything is online.
Alas, we know what you’re thinking: But isn’t online leasing going to be more costly? The answer: Not at all! With free software like Innago, you have unlimited digital signatures, unlimited templates, unlimited storage, mobile signing, and direct integration with screening services. So, you’ll ultimately save money and time with online leasing.
Online Leases: The Process
So, now you know the advantages of online leasing, let’s look at the actual lease signing process. Once again, it’s fairly simple, but worth explaining.
It all starts with uploading your lease. Once you place a lease online, you won’t have to recreate anything from scratch. Documents can be uploaded right from your laptop or cloud-based (think OneDrive, Google Drive, etc.) storage.
Next, you need to assign roles to define who’s signing the lease. For example, there would be four roles for three tenants (you’ll be the “landlord” role). You can also set up a specific signing order during this part of the process to have more organization.
After assigning roles, you need to identify key elements like the text box, checkbox, and date fields in your lease. These can be completed electronically by you and the tenants once you organize them.
Data validation may also be useful in your lease fields. This ensures that the relevant criteria for each specific field is met. For instance, if you choose an email validation, the information in that box won’t be accepted unless it matches an email format.
After identifying key elements, it’s time to share your lease online. Save your document one last time (continuous saving is your best friend), and then the lease is ready for sharing. Tenants will receive a link to sign the lease via email.
One of the worst parts of being a landlord is late fees. However, they’re a necessary part of the business and something you’ll want to include on your lease agreements.
Different states have varying laws regarding late fees. It’s critical to understand the relevant regulations for any state you have properties in. Many states have regulations related to residential rent regarding when and if you can charge late fees, the highest amount you can charge, and if you need to give tenants a grace period beforehand.
The average late fee is about five percent or less of monthly rent payments. If rent is extremely late, this fee often goes up to around 10%. Always meet with a lawyer to ensure you’re staying within the law.
How should you structure late fees? There are three main options:
- As a percentage of monthly rent. This is the most common method. Anything over five percent is typically too high, but figuring out the average late fees in your location is key.
- As a one-time flat fee. This is much less common than number one but may make sense for you. It could be a dollar amount or a percentage of rent.
- As a daily flat fee. This also could be a dollar amount or percentage of rent.
Regardless of whether you charge late fees, you must think about setting a limit on the total amount a tenant can accrue. This makes it clear when you will start to move toward evictions if late fees aren’t paid.
Property management software is the best way to collect late fees in most cases. Traditional methods of tracking tenants down are tedious and frustrating. With property management software, you can set reminders and let the software do the work. The software can even add automatic late fees and send out automatic reminders to keep tenants in the loop. That way, you don’t have to be the bad guy.
Getting Rid of Tenants Who Won’t Leave
Before we wrap up this article, we need to talk about a topic that isn’t fun for anyone. Getting rid of tenants who refuse to leave your property once their lease is over isn’t an extremely common situation, but it does happen.
And, no matter how you got here, it’s probably time to go through the process of removing the tenant. If you can bring yourself to deal with the somewhat bitter taste, paying off the tenant can be a quick (while less than ideal) solution. On the other hand, an eviction may be necessary. Whatever you choose to do, make the decision with a calm, rational understanding of your situation. And always meet with legal counsel if you feel unsure of anything.
Leasing is an integral part of the rental business. You won’t get very far if you don’t have a thorough understanding of this topic. You need to know how to set leases up and protect yourself from harmful liabilities.
Leases are a fail-safe and an invaluable way to set expectations immediately. You want tenants to know what they’re getting into, and you want to have a clear set of rules guiding your relationships. This will prevent a lot of misunderstandings and bad situations. More importantly, it will help your relationship with your tenants thrive.