So, you decided to break into the San Diego real estate market and become a rental property owner. Congratulations! You have taken your first step into an entirely new world of wealth building and management. However, by purchasing a rental property you plan on leasing does not automatically mean that you are ready to find some potential residents and start leasing. You need to carefully consider your neighborhood, who you want to rent to, and the terms that you should include in your leasing contract.
For example, who you rent to (which is partially driven by the neighborhood in which your investment property is in) drives the terms that you should include in your leasing contract. For example, if you own property around the University of San Diego, University of California, San Diego, or San Diego State University, then you may want to draft leases that closely follow the school year, i.e. a few weeks before and after the end of the term.
If you own property in La Jolla, you will probably need to include a “noise” provision that warns you, residents, to reduce quiet down late at night. If you're leasing rental real estate in Ocean or Pacific Beach, you probably want terms limiting the number of tenants. If you lease in El Cajon, Chula Vista, Mira Mesa or one of the other outlying neighborhoods, you will probably need to include some sort of pet policy – you are likely going to lease to families with children and pets.
Basics of the Lease
The lease forms the basis of your entire agreement with your tenants. Each of you respective rights is defined by the “four corners” of the lease. Therefore, the lease agreement must be carefully drafted to (1) allow you to identify one another as the real parties to the agreement (2) define payment terms (3) the rules for living in your residential property and (4) identify who is responsible for repairs and maintenance.
The identifying terms are the clauses that identify the parties and the specific real estate property. If a dispute arises, you need to be able to substantiate who you are as the property owner, the specific residential property in question, and the tenants involved.
You should include:
- Your full name;
- The tenant’s full name; and
- The address and description of the property.
Payment terms define how much you receive in rent, on what payment schedule, late fees, (if applicable) and security deposits. These terms are crucial because they form the basis of most property owner-tenant disputes.
Don’t take anything for granted, never assume the tenants know you are on a monthly payment schedule, spell everything out.
- The lease rate
- Payment schedule (usually monthly)
- To whom rent is paid (is it to you or a company?)
- Late fees and returned check fees
- The nature of the security deposit
Security deposits are responsible for a substantial number of lawsuits because rental property owners and tenants disagree about the purpose of the security deposit and how it can be debited for the residential property expenses. This is one of the more complex lease terms and one area in which a property management company is very helpful. You need to outline what (1) what expenses you will debit the security deposit against (2) how you will debit it and (3) that the resident is entitled to whatever is left.
Being specific on your payment terms and security deposits means having regular rental income, which is the easiest way to establish wealth. It ensures that your tenants are crystal clear on the rules of your San Diego rental property.
The residential terms outline how the resident may use your property. For instance, you may want to include:
- A pet policy
- Maximum number of residents
- Smoking policy
- Who is responsible for utilities (i.e. gas, water, electric, trash, etc.)
- Quiet hours
- How the tenant may use common areas
Each of these policies is difficult to unpack and largely depends on the unique features of your property, what you want to do with your San Diego area rental property. Regardless of which of these policies you adopt, you need to carefully consider how the policy will impact your investment property and what you want to do about that impact.
Maintenance and Upkeep Terms
Another contentious area concerns maintenance and who is responsible for what. Again, this largely depends on your specific property. If you have a yard, do you want the resident to take responsibility for it? Will you replace burned out light bulbs, provide plumbing services, and other “maintenance” issues?
Many leases divide up maintenance responsibilities between the tenants and property manager. Keep in mind, if you do promise to repair, you need to include specific timeframes on when the resident can expect the repairs to be completed. By working with a San Diego property management company, your tenants can rely on a team of skilled property managers to ensure that the residential property they're leasing is expertly maintained with little hassle to you as a property owner and for them as clients.
Finally, you need to clarify when and how you can enter a property to inspect it. Site inspections are a crucial aspect of renting however, California imposes strong tenant protections. California generally considers rental units separate homes which mean you cannot unilaterally enter. You need to clarify with your tenant when you may enter, under what conditions, and for what purpose.
If you're looking for a San Diego property management company to help maintain your investment property, Property Advantage can help you. Our management service helps provide expert property management to clients all over the San Diego area including Pacific Beach and North San Diego County.