How Your Lease Can Make You Money

When I first got into property management, my “lease” consisted of a piece of binder paper, saying Mr. Tenant agreed to pay Mr. Landlord so much in rent each month. That was it. No security deposit, no insurance or liability clause, not even a mention of who was expected to pay for utilities. Thank goodness this arrangement was between friends; otherwise it could have easily gone sour. I have since learned that a comprehensive lease is a landlord’s best friend. It protects us from legal trouble, improves relationships with tenants, saves us time, and—perhaps most important—can make us money.

Come again?

I’ll say it again. A comprehensive lease can actually make us money. Once I adopted a professional lease, it was easy to see the difference.

When I first sent my comprehensive lease to applicants, there were a few who tried to negotiate for no security deposit. Once I stood my ground and refused to strike that clause from the lease, they backed off and didn’t follow through on their applications. I avoided potentially problematic tenants because of my lease. For tenants who had no problems with my detailed lease, I’ve noticed a difference in how well they treat the property and how they tend to pay on time. These tenants are not hesitant about paying market rate. One of my current tenants, right after reviewing the lease contract, even mentioned how much she appreciated dealing with a professional landlord.

I could tell I was attracting higher quality tenants—and all because of my professional lease.

Having a detailed lease also helped me make some significant upgrades. I had one set of tenants who—by some unknown means—caused extensive water damage and wood rot to my kitchen cabinets. After researching several quotes, I realized the cost to repair them was going to run nearly as much as the cost to replace them. I used the security deposit to make the replacement and was left with a much nicer kitchen, which enabled me to raise the rent for the next tenant.

A thorough lease allowed me to clearly set expectations beforehand with my tenants so that when the time came, there were no questions or ambiguities.

What is a comprehensive lease?

A comprehensive lease is a written agreement that covers all types of circumstances—foreseen and unforeseen—that you or your tenants may encounter. Unlike basic leases which may only cover the length of the lease and rent payments, a comprehensive lease is a more robust document that ensures you are protected from damage or lawsuits.

What types of clauses are in a comprehensive lease?

There are different sections in a professional lease to ensure you have all your bases covered. We’ll deliver a series of blog posts looking at specifics like security deposits, late fees and grace periods, pet and smoking policies, insurance, and other miscellaneous clauses. Today we’ll discuss security deposits and how the requirements differ by state.

Security deposits

Collecting a sum of money as a security deposit ensures you have funds to cover any damages to the property a tenant may cause. The security deposit is not designed to fix normal wear and tear, but is supposed to go toward specific damages caused by the tenant. The amount charged varies by state, although most landlords charge between one and two months’ rent. If you plan on keeping any part of the security deposit, be prepared to submit a list of itemized deductions.

Requirements by state

Each state has slightly different requirements about how much a landlord can charge for a security deposit, where the deposit must be held, and when it must be returned. Check local county codes for additional limitations or regulations.

Amount a landlord can charge

Many states (including CO, FL, GA, IL NY, OR, TN, TX, UT, WA) have no limit for security deposits. In states like Maine and Maryland, two months’ rent is standard. Massachusetts and Rhode Island cap the limit at one month. Other states’ requirements depend on more specific criteria. In California, landlords can charge two months’ rent for an unfurnished unit or three months’ rent for a furnished unit. Pennsylvania landlords can charge two month’s rent for the first year of the lease, but one month’s rent after that point. In other states, like Nebraska or Hawaii, the deposit can increase if the tenant has a pet.

Holding requirements

Holding requirements are instructions on how the deposit must be stored. In some states (CA, TX, CO) there are no specific holding requirements. In other states, (FL, GA, IL, MA, NY, PA, WA) the deposit must be placed in a trust, escrow, or an interest bearing bank account. While the tenant is entitled to the interest in most cases, in Washington state, the landlord receives the interest. For states where the deposit must be placed in a separate account, most require the landlord to notify the tenant where it is being held, including the name and address of the financial institution. In Florida, Massachusetts, Oregon, and Washington, some kind of receipt must be given to the tenant after receiving the deposit, often including a statement of the condition of the rental unit.

Return date

After a tenant moves out, the landlord has a certain amount of time to return the entire deposit or part of the deposit with an explanation as to why a portion is being kept. States vary with their deadlines. On the lower end, Alaska, Arizona, Hawaii, Nebraska, and Vermont require the deposit to be returned within 14 days. For California, Idaho, Washington, and Wisconsin, it’s 21 days. 30 days is the limit in New Jersey, Pennsylvania, South Carolina, and Texas, while 60 days is standard in Alabama and Arkansas. Other states (FL, IL, KY) have a timeline that depends on whether or not the landlord has taken any deductions.

The importance of a deposit

Although few tenants are actively seeking to damage your rental unit, accidents do happen. If you don’t collect a security deposit or have a section written into your lease about damages, you stand to lose money.

A comprehensive lease protects your investment and gives you peace of mind.

Where do I get a comprehensive lease?

Make sure you’ve got yourself covered. A local lawyer, your state’s association of real estate agents, or using a Tellus lease are all great options to protect your investment.

Next week...

Check back in with us next week to learn more about grace periods and late fees.