Landlords of Multi-Tenant Homes

Housing costs remain one of the highest monthly expenditures for every American household. If you occupy a home where you have, or are considering renting out rooms to others, you should look at more than the monthly windfall of others supplementing your monthly mortgage — you should consider the potential problems and issues that could impact domicile enjoyment and take proper precautions to protect yourself as well as your tenants.

Essentially when deciding to rent out a room or space in the home you own and occupy makes you a landlord. Whether looking to provide housing for family or friends, lower your monthly financial obligation, or you’re seeking to have an affordable housing arrangement for your college-bound child through a home purchase you need to have a clear picture of the situation you are creating.

Many first-time homeowners have space for additional roommates, and may in fact be depending upon this income to meet their monthly mortgage.  Although many of these roommate arrangements are informal, there are risks that these relationships may change over time, or someone oversteps unspoken boundaries. Property owners should consider taking simple legal steps to protect their investment and to avoid issues among tenants.

For investment properties for college-bound children, parents are looking to defray the formidable housing costs associated with both on-and off-campus housing. Investing in a single-family home, townhome, or condominium may allow options for the property owner’s child to have multiple roommates, further offsetting the housing expense.

Regardless of the reason you are seeking to owner/occupy with additional tenants, any relationship between a landlord and tenant should be established in a written lease agreement. For a multi-tenant situation, it‘s important that the nuances are specified, rather than left to chance or goodwill. With multiple tenants, each tenant should have an exclusive use area, such as a designated bedroom and an “en suite” bathroom. If tenants are sharing areas in a semi-exclusive manner, such as two or more people sharing a bedroom or bathroom, such sharing should be described as undivided, non-exclusive limited percentage rights to use those spaces. Further, common areas, to be shared by all tenants, should be described, such as the kitchen, dining room, living room, yards, patios, garages, etc. If a landlord does not occupy the space or does not reside locally, the landlord may consider designating their child or a property manager as the landlord’s representative to make decisions, enforce the rules and regulations, and pursue any legal actions necessary. Having objective standards for conduct resolves many tenant disputes without animosity because the rules and regulations are clear for all.

Even if the tenants are “friends,” rules and regulations should be set forth that all tenants are bound by, defining items such as overnight (or longer) guest policies, noise agreements including “quiet” hours, sharing arrangements for television or stereo system use, party (and post clean up) policies, alcohol and drug policies, parking agreements, general pick up and clean up rules, and any other matters important to landlord. These rules and regulations allow each tenant to have quiet enjoyment of the space. Breaches of the rules and regulations may allow a short cure period after notice but should include fines for non-compliance and the possibility of lease termination for default.

The written lease agreement should include a specified monthly rental rate, which can vary by person depending on whether they have exclusive use areas, and the size thereof (i.e., the person in the master bedroom may pay more). Property owners can decide whether household expenses such as utilities, internet, cable, yard service, maid service, or minor repair costs, such as clogged drains or toilets, are divided into percentages as “additional rent” or an amount for those expenses is estimated and added to the rent amount by landlord for ease of computation. In connection with the execution of the lease, landlord should collect a security deposit equal to at least one month’s rent. If the tenants are not creditworthy, landlord should require a lease guaranty from the parents or another creditworthy individual.

Landlord should control the length of the lease term and require 60 days’ notice of termination of the lease or its renewal. Landlords can thus control the occupants of the property by failing to renew a particular tenant’s lease or terminating the leases altogether at landlord’s sole discretion based on a decision to sell the property or a change in landlord’s circumstances where sole occupancy is now desired. Landlords can evict each tenant severally under a multi-tenant lease for default (such as failure to pay rent or additional rent or breach of the rules and regulations). Landlord can also rely on the applicable guaranty for recovery.

Landlords who do not occupy any part of the space themselves should consider owning the property as a limited liability entity, such as a limited liability company. This structure protects landlord’s individual assets from claims. In addition, even if the property is held in the name of the individual landlord, general liability and property insurance should be obtained covering the replacement cost of the improvements and a substantial amount for potential claims for property damage, injury, or death. Landlord should also require that each tenant have a renter’s insurance policy that covers their belongings.

The benefits of being a landlord of a multitenant home are significant, but landlords should consult a qualified real estate attorney to guide them in the preparation of the appropriate legal documentation to best protect their interests.

For guidance on protecting your property and for other real estate matters, contact Cassie McGarvey at cmcgarvey@mcgarveypllc.com.