Guest Column: Investment property leases should protect homeowners' interests

Many investors are purchasing single-family homes at reduced prices because of the economic slowdown.

While these investments present opportunities to make a profit when the market turns around, some buyers may be thinking of retaining the property to produce income. It's important to keep in mind several factors when renting an investment property.

First, rental properties should be held in an entity. The homeowner will, of course, have to have insurance on the structure, while the tenants should be responsible for insuring the home's contents. But in order to limit the homeowner's exposure, it is advisable to hold the property in an entity. Note that rental properties are usually best held in a limited liability company.

Housing investors also need to determine how their properties will be leased and managed. There are management companies that will find tenants and manage the property on the owner's behalf. Those homeowners who prefer to handle their own leasing and management will need to check out prospective tenants. The most common method is to procure or have the prospects provide copies of their credit reports. Get references and call them, and/or conduct an inexpensive background check on prospective tenants. All of these services are available online.

To determine the fair market rental of the property, look at rental prices of similar houses in the same area, read newspaper listings and consult with rental professionals. Once price has been determined, the property owner will need to provide a rental agreement, or lease, for the tenant to sign. All parties of legal age who will be living in the house should be required to sign, and all tenants should be made jointly and severally liable for rent payment.

Within the lease, there are several factors to consider.

• Rent payment. Rent is usually due on the first of the month, and if paid late, a late fee should be assessed. It is customary to allow a short grace period, such as three to five days, before the fee is imposed.

• Number of residents. The lease should name all the people who will live in the house and state that no one else may reside there without the owner's written permission. Property owners don't want to rent to one person and later find four others living in the home.

• Commercial activities. Prohibit commercial activities on the property. Restrict the number of vehicles that may be parked on the premises and state where they are to be parked. Prohibit parking of commercial and recreational vehicles, boats and equipment.

• Pets. If pets are allowed, the lease should say exactly what pet will be living there to avoid a litter of cats or puppies on the premises or a house with four dogs.

• Utilities. Make tenants prove that the utilities are in their own names before allowing them to take possession of the premises. It is surprising how often a landlord finds out, sometimes months later, that the utilities were never placed in tenants' names.

These are just some of the issues landlords should address to lease residential property.

Carefully checking out prospective tenants and developing a clear and precise lease will minimize problems.Stephen F. Aton is a Springfield attorney practicing corporate law and estate planning.