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REAL ESTATE Structuring a Lease (Residential)

bosco

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Dec 31, 2007
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I will be sitting down with my attorney next week to draw up a lease for me to use on my first rental property.
Rehab is finally done!:banana:

I am trying to do some homework before hand. This way I can come prepared with the right questions and suggestions and will hopefully walk away with all my bases better covered.

What are some must haves in *your leases*?

Just a few things that come to my mind...
3 day evictions vs 30
rent due on 1st. 4th is late
Deposits (pet rents, security, 1st and last months rent)
How do you cover minor repairs (under 50 bucks)
Do you include appliances (which ones/repairs?)
full years lease amount due (lease amount 12K - 1k per month) vs month to month

What do you think? What am I missing?

Thanks in advance!:notworthy:
 

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Runum

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Great to hear!:banana: Some things I have....No loud noise and no illegal activity. In the future I also want to include a clause about keeping the place, inside and out, picked up. No trash in the yard and no disabled cars. Keeping the utilities paid(so they won't live there without heat and water). Good luck.:cheers:

Greg
 

kwerner

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Bosco - This may be a bit (okay, a lot) more information than you asked for, but I figure since this is your first rental it can't hurt. This is a compilation of an old topic from another forum, but the quality of the information contained is great! Hopefully you can add some of these tidbits into your lease. (Hopefully this lengthy of a post doesn't p*ss off the moderators)

Enjoy!

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Per popular request, I will post some of my current strategies that I use for rental management that bring my target time of 5 mins a month per rental. I'll post some of them as I think of them, and give people an opportunity to digest the ideas.

One of the biggest time wasters in rental management is rent collection. Too much time, and effort is put into what should be the most automatic of functions. My standard rental policy as expressed to every applicant is that the rent is due on the 25th of the month prior to the rental month, and is late after the end of business on the 1st.

There is only one method of payment accepted. I chose the two largest banks in my area, which has over 50 branches in my area, so that from any location in my city, you are less than 5 miles from a branch. Each tenant is required to deposit their rent into a special rent collection account. This account is a deposit only account and is swept into my main account nightly. Each tenant is given a two digit code for their unit. They MUST make their deposit with this code as the cents portion of their deposit. For instance if Spidey' s unit is #33, and his rent is $700 a month, his rent deposit will be $700.33. If Steve O' s unit is #45, and his rent is $995 a month, his deposit will be $995.45. That way it' s very easy to see if everyone has made their rental deposit for the month.

On the 15th of the month prior to the rent being due. Invoices are generated for the rent and mailed out, which include deposit slips for their rental amount. These are mailed out to the tenants each and every month, with marketing material which includes details on any homes I have for sale or rent in the area, and whatever else I happen to be marketing that month.

On the second day of the month, unpaid rents are late. I check deposits versus payments due. If they do not match, a second invoice is created along with a 3 day pay or quit notice. A college kid comes and picks them up by lunch on this day. Total time invested maybe 10 mins. I pay the college kid $10 per name. He delivers all the invoices and 3 day notices. Posting them on front and back door if the tenant is not available.

I' ll get into handling evictions next time. But, the main thing is automate rental colleciton to the best of your abilities. I also use an automatic draft program from MRLandlord.com affiliate, but the name escapes me right now (ClearNow maybe??). The best part of using a system like this, is it' s no hassle for the landlord. My lease states very clearly that I do not accept rental payments directly, they must be made at the bank. I don't know if they try to explain to the bank teller why they don't have the rent on time. But, I don't listen to any stories, or hear any excuses. If it's not there by the end of the 1st day of the month, then it's " out of my hands" , and the invoice and 3 day notice is created. And if my rent isn' t paid by the 4th business day of the month, my eviction is in the hands of the attorney, and I' m looking at 2-3 weeks before they are out. None of this waiting and hoping for something.

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The only trick I have is that I 'discount' rent thats paid on or before the first of the month. For example, on a house that rents for $650 a month the lease will read monthly rent of $685 BUT if you pay on or before the first its only $650. Its seems that people really want that discount and will plan ahead to get it. Of course you and I know its not really a discount but an avoidance of the late fee, but it seems to work. And that $35 is much easier to collect if their late because they think it's just part of the rent and not a late fee. They seem to think that if they didn't get the discount its their fault, but if the landlord charges a late fee he' s a bad guy. Thats about all I have. Maybe I' ve just been lucky

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A pretty decent system that I have used bits and pieces of is Mike Butler's system. You really can increase your cash flow quite a bit. I use bits of it every month, and have increased my rental income.

http://www.wealthbuilding247.com/TenantTracking.htm

I' m not Mike Butler, nor am I in any way involved with him. I just liked his product.

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If you can' t tell, I'm a big fan of systems. I think everything you do should be mapped out from start to finish. So that you could hand it to a high school kid and get them to complete it for you with no input on your part.

Today I'll talk about what happens when a tenant moves out. How do I get it rented as soon as possible. First off, you have to educate your tenant with what is expected of them. I send them out a 5 page letter which gives them checklists of what they need to do to get their security deposit back. I also offer them cash rewards for keeping the place presentable so that I can get it rented. I may or may not do this, depending on the cleanliness of my tenants.

Then I have a full checklist of things I have to do to get the place rent ready. For instance I have the Change Door Locks part. I cycle through door locks and move them from place to place, by the key code. I can keep track of where each door lock has been as long as I have owned it. (Tracked by Quickbooks). I also spend the extra money to use Landlord Locks. Basically all my doors have one master key on my key chain. So that I can get into every single rental that I own with one key. Some of my most trusted contractors have my rental master key as well.

http://www.landlordlocks.com/

I have my current list of contractors in each area, so that I can call them right off the checklist. For instance Nick is my carpet guy. I fax him dimensions and directions to my rental, and the color of the carpet I want. He installs within 3 days, and sends me an invoice. No muss, no fuss.

Make an excel checklist if necessary. But, think of everything you will need to do to get a unit rented and out the door. And follow that list religiously. It' s worth the 2-3 hours you' ll spend putting it together. Before I did this, I screwed up and forgot to change the electric on my unit, and next thing I know, the tenants had used my electricity for 3 months before I caught it. That no longer happens.

The goal is like Michael Gerber suggests (The E-Myth). You want to make it so simple that you could spend 15 minutes training someone, and then they would be able to complete the tasks for you. Systemize the move-out and save yourself time, money and hassle.

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Quote: "One thing that really stands out as an inconvenience is the way you have your tenants deposit their rent. Seems like they would find it a nuisance to have to go to the bank (especially if they don't bank there) once a month to pay the rent. It seems convenient to you, but an inconvenience to your tenants. Being able to get your money should be a win/win situation."

That' s where I believe I differ from many landlords. I don't bother hassling with collecting rent, because I choose to use my time in other ways. If you clearly communicate to your tenants what your expectations are, then there is no reason why you can' t demand anything you like. It is written in my lease that I offer the convenience of 60 locations to pay their rent. I look at it as a convenience. They pay their rent, they get a receipt for their deposit, and everyone is happy. And honestly I don't care if it's a nuisance to them, these are my terms, I'm up front and honest with everyone. If that doesn't work for a tenant, they can feel free to rent from someone else.

And also my local credit union is so user-friendly that it really helps as well. They are able to transfer funds to the payment account with a 3 minute phone call. Or even do it online in about a minute. I tell them about how good the bank is, and get them in contact with a bank representative, and I'd say around 70% of my renters bank with this bank now. But, that' s a benefit of this credit union, they are superior in almost every way to any other bank in town. And once people realize the convenience they are quick to change.

But, the principle is that you train your tenants to behave the way you want them to behave. I don't care if it is counter to every other landlord in your town. But if you treat your tenants firmly and lead them to behave the way you wish, you'll have a much easier time of it. It's a sales job like everything else in this business. If executed well, you' d be surprised at how easy you can make your life. You don't have to manage your rentals like me or anyone else. But, you'll find if you screen well, and train your tenants well, there' s no reason why you have to spend more than 5 minutes a month on any of your units.

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Quote: "Have you ever had any tenants who live out of town 95% of the time? Most of the time these would be people who have jobs training others out of town and they only come home once in a blue moon. How do you handle rent payments from them? Credit Union? Or are you willing to set up something special if need be? As a landlord, I would hate to pass on a good tenant simply because he couldn't pay the way I wanted him to pay..."

I guess I take the opposite approach I hate to have a tenant that makes me work to get paid. That's the way I look at everything. What is the best way to get something done in the least amount of hassle, as quickly as possible.

As far as out of town tenants. I have had some. Like I said most people use the credit union, and you can set up a transfer to anyone else at the credit union in about 2 mins that is recurring. So, it automatically transfers the money every month on the date you specify. But, I've had some tenants who weren' t interested for whatever reason. Then they can get ClearNow to do their transfers, however it' s an extra $10 a month for that. If for whatever reason they want to mail their checks, I also charge a $10 fee for that. And if it's not postmarked by the 1st of the month they do get charged the late fees.

Like I've said, if you' re really clear on what you expect. And present it as company policy. "Ms Tenant, Here are your 4 choices to pay, which would you prefer to use." Then you'll find it's easier than you would expect to get people to comply with your company policies. So to be clear I have a few different rent collection options, and the percent that do this (more or less)
1. Direct deposit. (They go to bank, and deposit into deposit account) 40%
2. Direct Transfer (they transfer from their account to mine). 50%
3. ClearNow (Automated third-party rent collection). 5%
4. Mail Rent. 5%

What I do not offer is me going to get rent, or them coming to me with rent. Nor will I ever, ever, ever again. Although I suppose if I had an office and someone working there, I might entertain them paying the receptionist.

Most of my tenants do not know that I' m the owner. They think I just manage the properties for the owner. I think that's a much better position of negotiation. Now you're not the rich landlord, you' re just a guy/gal doing their job.

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5 Minute a month evictions:

After you do the 3-5-7-10 day first notice and they don' t pay up, then you continue on with the eviction. My preferred method of choice is to hand it off to an attorney. I pay them $100 and they handle everything up to the actual showing up with the sheriff and changing the locks.

My advice would be to call around, go to eviction court find out who is doing evictions in your area and how much they charge. You can do it yourself if you' re religious about sticking to the schedule. But, I find it a better use of my time to spend my effort in other areas.

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Quote: "I attempted to switch one of my bank accounts at Chase, over to a 'deposit only' account. They never heard of this type of account. Are you only using this as such or is this a typical account type offered at credit unions? "

It' s not really a deposit only account. More that I' m the only one who is allowed to withdraw, and I never do. The fact is anyone can deposit any amount of money into anyone' s account. It' s getting it out that' s harder. What I had to talk them into was getting the sweep to happen automatically. In other words, every day at close of business, all the money in that account is transferred into another account. If they won't do this, I suppose you could transfer it manually every night. It doesn't necessarily HAVE to be done this way, but I find it gives me a better feeling of security if no one has any type of access to the account I really use.


Quote: "$100 to handle an eviction!? You must have some cut rate lawyers in your town. My attorney gets $300 / hour, and it's not like he' s some top dog attorney or anything. Just average."

Why should it cost more, and are you sure that's what others are paying? It' s pretty standard paperwork, that just needs to be filed at the correct time. Go to your eviction court, see who is doing all the paperwork there. I guarantee you'll find some service who is cheaper than you might think. And you have to realize this attorney does over 100 evictions every week, and the time involved is pretty minimal, and can really be done by a secretary who can fill in the blanks.

Also I' m in NC, I suppose that everything is cheaper here than in Colorado.

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How I find the best prospective tenants:

First off you have to set the stage. I sometimes have the prior tenant show the property while they are there, but not usually. I like to show vacant houses that are slightly furnished. Over the years, I have picked up numerous pieces of furniture at garage sales and such for really cheap. I will accent the house, putting the finishing touches on the property. I want the house to look GOOD. For less than $1,000 I can reuse over and over all kinds of furniture to make the house look more inviting. Once you've prepared for yourself a bunch of different houses, you'll find yourself going over and over to the same palette of colors. So, most of the furnishings and accent knick-knacks can be used over and over again. For instance I bought some closeout tile from Lowes at $.49/sf which was really good tile. So far, I've used it in half a dozen homes, and have another palette in storage. It has proven to be a base color for these properties, and I can decorate around that base. I have some warehouse space that I use for a few different businesses, where I store these furnishings. However, you might want to rent a cheap storage unit. You can write it off your taxes as an expense.

My experience is that a well decorated rental will fetch approximately 10% more rent. For instance a house that rents for $900 in most normal cases, might fetch $975 or $1,000, just because you haven't left anything to the imagination. You've painted a vivid picture of what living in your rental will look like. Hint - Use live plants often. I like to plant flowers right before I show the property. And have at least 10 plants throughout the house as decorations.

I don't show properties to potential tenants. When the house is prepared to rent, I will post all the information on the property in one of the windows. And I leave all the windows with the blinds/curtains wide open, so you can view most of the house from the outside. That way they can see the property for themselves without me showing it.

I will put an ad in the paper starting on Sunday and running through Sunday. The number in the paper goes to a recorded message which gives brief information and directions to the home. I DO NOT give my personal/office number on the ad nor in the message. They can only get that if they look at the flier through the window.

When they call, I do not schedule a showing at that time. All my showings are done at the same time. I show a property from 4pm-6pm on Sunday afternoon. What I have found is that the light is the best in the early afternoon. You don't want to show a property at noon, as the light is very harsh. But as the day goes on, the light comes in at an angle and is MUCH more flattering on your property. It also sets off the lamps and accent lights that you have put in the house to better use.

I like to drive as much traffic as I can to the house at the same time. So, everyone who is interested comes at the same time. I prepare the house in the morning, and only show up right at 4pm. Actually, I have a lady who I have hired who does it. She gets paid $30 for two and a half hours of work. She gives the guided tours, talks up the house, and takes applications, deposits, and then drops them in the mail drop at my office. She emphasizes the scarcity of the property. From her experience, she knows that my properties always rent out on the one weekend I show it. And that usually there are a few people fighting for the property. The truth is that someone else can talk up your product a lot more than you can, and it doesn' t sound like bragging.

One method I have found useful in driving traffic to the property, and of promoting the scarcity of the property, is to talk to the neighbors. I go around, introduce myself. Tell them we're doing some work on the house to spruce it up, and if they would like to come see it, drop by on Sunday from 4-6pm, as this

Comment: (the post is cut off here)

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Quote: "As my application fee is $45, and my credit checks cost me just $2.30 (I own a buy here/pay here car lot with a direct credit service), I actually make money in the pre-rent process. On one property, I actually got 32 applications, for a grand total of almost $1,500."

Quote: "You don't refund the app. fee (or part of it) if prospective tenant is not selected?"

Have you ever had an application fee returned? And how much should I charge for the work that goes in to select a good tenant. Here are some of the steps I might take to choose a tenant.

1. Credit Check.
2. Call prior landlords
3. Call personal references.
4. Call job/employer
5. Drive by the current rental (assuming it' s detached, not in an apartment complex).
6. Talk to the neighbors of the tenant to see if they have had any problems(always with a grain of salt).
7. Do an eviction check at the county courthouse.
8. Do a criminal background check of all applicants.

So, you're damn skippy that I keep the application fee. Now, granted I might not do any of these things. Or I might do them all. But, I expect to be compensated for that. The application fee is right in line with other application fees in the area. The highest I have seen is $100, but they usually range between $25 and $50. I have never heard of them being refundable.

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I would suggest anyone check with their local laws before they take any advice off a message board. Especially in California. Tenant Landlord laws vary wildly from state to state, and there are some municipalities that have different laws as well.

Perhaps I should add a disclaimer on the bottom of my posts, this is only how I do things, take everything with a grain of salt, and please consult an attorney before using anything that I do.

:banana::banana::banana:
 

Runum

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Great ideas. + speed
 

phlgirl

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Great info, kwerner! Thanks for posting.

One of my goals for the 1st quarter is to implement more automation/systems into our property management functions. There are definitely some ideas here that I will run with...... ++++
 
OP
OP
B

bosco

New Contributor
Dec 31, 2007
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Thanks for all the great info. Waiting to pick up the final draft on Monday. Rep speed + for everyones input. Alot of good info in there.
 

traderjphx

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Aug 30, 2007
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Phoenix, Az
Just a quick note on your evictions item. This is usually dictated by law in your state. Your attorney should address this for you. I bought my lease from an attorney who also invests here in Arizona. Good luck.
 

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