This is the third in an ongoing series of landlording tips that have been learned (the hard way), borrowed, discovered, and outright stolen along the way of our journey in real estate investing and specifically, landlording and property management. We hope that seeing these tips can help a few landlords each day work smarter and not harder, and to take advantage of sometimes hidden or unknown ways to improve your bottom line.
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Hope these help some of you with good ides to include in your landlording tool box!
Remember, It’s not about the Journey, It’s about the Destination
You may not have been there before, but eventually you will, and sooner rather than later if you own multiple properties. Scenario:
Tenant’s out for the day, or away for an extended period. Electrical malfunction results in the fridge circuit going down, and by the time the tenant returns, all their food has gone bad. It could even be that the fridge went on the fritz, and by the time you could get another one over there or get it repaired, all the food has gone bad.
And they want YOU to pay for it all.
Oh, and by the way, they just went shopping.
Oh, yeah, and all those groceries rang up around $300.
If you haven’t clearly defined in your lease who bears responsibility for food spoilages as a result of legitimate equipment failure, then you are leaving the fridge door open for all kinds of claims of iceboxes full of shrimp and caviar that will be demanded to be reimbursed for spoilage from your tenants.
There are a few ways to insure that when a tenant comes a knockin’ for money for food loss, your budget won’t take a rockin’.
A few years ago, we built into our leases language that stated very clearly that failure of appliances was commonplace and unexpected, and tenants should be prepared to relocate food from refridgerators in the event of equipment failure. Another thing we did was to inform them that loss or damage of ANYTHING in their unit was to be covered under an appropriate renter’s insurance policy. We even pointed them to several insurance company’s in their move-in package so that they couldn’t claim later they couldn’t find anyone that sold those policies. Now, we have even gone the route of requiring rental insurance policies for certain properties (mainly newly renovated ones), and mandated that we be added as an additional insured until their move-out, but that is a topic for another post.
Any type clause in a lease designed to (justifiably) deflect liability for food spoilage back to the tenant as a result of food loss is known as a ‘Lobster Clause’, as a joking reference that whenever such claims are made, suddenly the spoilage consisted of $15/pound Maine Lobster, instead of what it actually is, like, say TV Dinners and Chicken Thighs.
I recently read a post on an investment group site that I’m on, where a landlord takes it one further, making the appliances on move-in all as-is. Here is how his Lobster Clause reads:
Although there may be appliances in the unit, their availability is not included in the rent. If TENANT wishes to use the appliances, they agree to assume all responsibility for care and maintenance. If TENANT wishes to use their own appliances, they may request that those in the unit be removed or stored.
An argument could be made that this clause may degrade your ability to attract a renter as a result of the possibility of having to buy new appliances at some course in their lease, but in that most renters treat appliances about as well as you or I treat rental cars, it certainly could be a substantial cost saver over time as appliances break. Only drawback is the moveout where the tenant bought their own appliances and takes them with them, and now you are forced to show without appliances, or offer to buy theirs. It still pushes an expense down the road a bit, though.
I hope that this discussion is yet another tool you can put into your lease to prevent drama in your landlording experience, and more importantly, hits to your cash flow.
REMEMBER, IT’s NOT ABOUT THE JOURNEY, IT’s ABOUT THE DESTINATION
Ever get sick of your tenants being late? Have tenants that somehow just want to let late fees somehow slide into oblivion and just pay the normal rent even if they are late? Want to make your regular payers feel special when they don’t pay late?
Here’s a new concept for your lease toolbox. Give people breaks for paying on time, instead of penalties for paying late.
Hold on, I’m going to lose a ton of money that way, right?? Not exactly. I didn’t say you had to give a rent discount off your current price. What if you raised your rent 10% or $100 and then agreed to give that back to the tenants when they pay on time? This way the rent is set at a certain amount, and if not paid on time they pay the listed (or as I like to call it ‘default’) rent. But…..if you are paying on time, you get rewarded by being able to pay a lower amount! Which of these do you think a tenant will be more responsive to and feel a greater obligation to pay on time: the creation of a late fee, or the loss of a rent discount? And even if they say they would rather lose out on the rent discount if they need to pay late, they still feel compelled to pay the un discounted rent, whereas many tenants will just pay the overdue rent, and leave you to harass them for the late fees.
Is this crafty? Sure. But I’ll be a monkey’s uncle if it doesn’t work. And you can go even further with it and create an even larger disincentive to pay late by having both the rent discount disappear AND a late fee apply for late payments. Perhaps you stagger those so that there is an early (discounted) payment window (before the 5th), a ‘standard’ payment window (the 5th to the 10th), and a late period (after that), where the late fee now kicks in. This gives the tenant another window of, “Well I’m late but not too late” to pay. But if in fact they have actually paid the forfeited discount, you get more rent, and they don’t feel bad about being late, or decide that they don’t deserve to pay a late fee and just let it sit on your books, until you decide to do something about it.
This stands up strong in court as well. In the past, we had charged a $100 admin fee on top of late charges as a consideration for having to file eviction paperwork on someone, both in fees and hassle. But this amount was typically tossed out by the judge in court. But if the rent includes that $100 amount already, and the tenant hasn’t paid it, it is hard for anyone to argue that if the tenant agreed to those terms, and it’s what the lease spells out, that they wouldn’t be responsible for those charges.
Obviously, not every state is the same, and any landlord thinking of implanting this technique in their locality should check their applicable landlord tenant law, or consult their attorney.
YOU ARE ONE STEP CLOSER TO THE DESTINATION.
About the author: Jeff Sullivan has been buying, holding and selling investment property for over ten years. He currently has over 40 units in his private portfolio and consults others on doing the same through his Real Estate Investment Consultancy, Equity Momentum Investments. He can be reached at firstname.lastname@example.org.