Image of an empty apartment with signs of wear and tear.

What Is Normal Wear and Tear?

Updated January 1, 1 . AmFam Team

Getting a clear understanding of how your rental has depreciated over the life of your tenant’s lease can be tricky. Take a look at our go-to tips to see the ways normal wear and tear differs from excessive damage in this helpful guide.

As your tenant’s rental agreement comes to a close, and you’ve already received news of their intent to vacate the property, it’s time to schedule an inspection of the rental. If you’re new to being a landlord, figuring out exactly what is considered normal wear and tear can be a tricky question to answer. In addition to navigating landlord-tenant laws, you need to take into consideration a number of other factors — where some may result in fines if tenant damage is significant enough. Review these important tips to get a solid understanding of what’s considered normal wear and tear and what might qualify as excessive damage.

Manage Problem Tenants Carefully

In addition to always staying level-headed when dealing with difficult tenants, express your concerns in ways that are defined in the lease agreement. By pointing to clauses and sections of your lease, your tenant may be more willing to work with you because they agreed to these terms when they signed on.

What’s the Definition of Normal Wear and Tear?

Normal wear and tear is damage that naturally occurs in a rental property due to aging and regular use. Properties degrade over time. When a renter lives in a property, the space is expected to depreciate a bit. The polish on hardwood floors will erode along trafficked pathways across the unit and the paint around light switches can expect to be discolored.

The job of a landlord or property management company is to compare the condition of the space — relative to the state it was in before your tenant occupied — and figure out if the damage you uncover is in line with how the space is expected to depreciate. Distinguishing the difference while performing your move-out inspection requires a trained eye.

Help put your tenant at ease when reviewing the property condition as they move in. Walk them through the space with your printed inspection report and discuss the state of your property so you both agree on items of concern and preexisting issues.

How to Document the Condition of the Property Before Your Tenant Occupies

One of the best ways to protect your real estate investment is to get a property inspection app. For a small fee, apps like zInspector and InspectionManager allow you to manage before-and-after photos and notate the photos. These are bundled into a report you can print out or send via email to your tenant and really help to keep your business organized. Here are a few points to consider when performing your pre-occupancy inspection:

Walk through the property completely. It may seem unnecessary to take photographs in storage areas or unfinished basement areas, but you’ll be glad you did if you find damage there later on.

Document existing damage and other issues. Photograph and notate problems that are present before your new tenant takes occupancy and clearly state in the pre-occupancy inspection report that this damage is not the incoming tenant’s responsibility.

Offer a chance for the incoming tenant to review and amend. Once you’ve delivered the inspection report to the tenant, allow them time to rebut and add items to the list that you may have missed. This step helps to empower the tenant to explore the condition of the space and tells them that you care about their findings as well.

Install security cameras in public areas. In addition to adding a level of protection to your investment, they also offer a unique opportunity for landlords to uncover property damage as it occurs. If your tenant’s claiming someone broke into your space, but your security camera footage clearly shows them busting through a back door, you’ll have the proof you need to charge them for the repair.

Photograph floors, ceilings and windows carefully. Consider looking at these photos in two years. Are you going to be able to distinguish one panel of living room windows from another? Bring a handheld white board and dry erase marker along and write down details on the position of the images, being sure the photo captures this information.

Photograph the interior of your appliances. From the fridge to the dryer, snap a few shots of each appliance inside and out. It’s also a good idea to jot down if the appliance is in proper working order. By documenting before your tenant occupies the rental unit, you’ll have an important catalog of images and notes for comparison purposes that you can use after inspecting the property, but prior to your tenant’s exit.

What’s the Difference Between Damage and Normal Wear and Tear?

It’s best to check in with your real estate attorney and learn about how state, federal and local codes impact the actions you can legally take against a tenant when damage is an issue. Here are a few tips for helping you make the important call when reviewing a space for damage before your tenant’s lease is up. If money’s going to be deducted from the security deposit, be sure your lawyer’s in agreement with your findings.

Recognize the difference between expected and excessive damage. Damage caused by normal wear is typically the landlord’s responsibility. Small nail holes in the wall would be considered normal. Water damage on the wall that results from the repeated overwatering of hanging plants would be considered excessive damage.

Review the condition of the space before occupancy. The key to reviewing normal wear and tear is take into account the age of your rental, the preexisting condition of your space and amount of time that’s transpired since the last inspection. Those factors are the key to determining if damage occurred. If wear was already present, and it’s a bit worse, it’s likely normal. But doors that no longer close because the hinges are bent may likely be the product of tenant damage.

How to Build Exit-Condition Expectations Into Your Lease Agreement

Have your attorney help you craft a few clauses that discuss the condition you expect the property to be in upon your tenant’s exit. Ideally, you should expect that the tenant leave the property in a cleaned-and-ready state for the next tenant.

Discuss how the security deposit will be returned or used. Be sure you mention that any excessive tenant damage will be repaired using funds from the security deposit before delivering back the remainder.

Specify that the space is to be returned clean. Although you’re responsible for generally cleaning the place up after a tenant exits, if it’s excessively dirty you may be able to charge for the difference paid to return the space to a move-in ready state.

Site specific examples of certain “tipping points.” The carpet may be worn, but if a stain in the middle of the master bedroom’s carpeting won’t come out, you will charge the tenant for the costs to replace it. Likewise, small chips and holes in the paint are expected, but if holes in the wall exceed an eighth of an inch, you’ll be charging the tenant for repairing and repainting in order to get the condition of the property back to its original state.

Don’t get beat up with small cost items. Mention that the tenant’s expected to maintain light fixtures, change lightbulbs and return the space with faucet screens and shower heads installed. Because each one of these items require time and materials, small cost items can add up quickly. Document items that require replacement and charge for time and materials accordingly.

How to Attract Great Tenants With Amenities and Credit Checks

Avoid difficult situations by filtering out tenants with poor credit or a checkered past by advertising that criminal background and credit checks will be performed on all applicants. By charging a fee for these services, you may find well-qualified candidates are flooding your inbox, hoping to rent your space. They’re more likely to treat your place well and care for your investment as their own. Today's tenants are likewise looking for modern day conveniences like USB-ready outlets and stainless steel appliances in the kitchen. Ads that focus on perks like these get attention.

Insure Your Rental Carefully

Because the unexpected can happen to more than just the cosmetics of your rental, it’s important to be sure your investment is protected from weather, theft or other covered events. Reach out to your American Family Insurance agent (Opens in a new tab) and schedule an insurance review to verify that you’ve got the right coverage for your rental. Our agents are trained to help you easily understand how your coverage is protecting your real estate and you’ll find the peace of mind to focus more clearly on your thriving business.

Related Articles

  • Man sipping coffee taking a break from work to recharge.
    Man sipping coffee taking a break from work to recharge.
    Avoiding Burnout as a Small Business Owner

    It’s natural to anticipate pursuing all of the goals you have for your business. But, instead of readying yourself and your company to ramp up, consider taking a pause. A good break can help you reset, start looking towards the future and help you avoid burnout.

  • Image of an apartment complex in early autumn.
    Image of an apartment complex in early autumn.
    When Should You Invest In Rental Property?

    As a landlord, you know that an investment property has great potential. When everything goes according to plan, it can be an exceptional source of income. But seeing a consistent return on investment means you’ve got to keep a close eye on the numbers before you close on a property.

    Although there’s a fair amount of risk involved in making a purchase, you can lean on a few key rules, formulas and indicators to help guide your decision. Next time, when you’re wondering “Should you invest in this rental property?” refer to these important purchasing tips to help make the right choice — and quickly rule out real estate that may not be worth the investment.

    Start with the “One Percent Rule”

    Answer a simple question: Will your monthly rent for the space equal at least one percent of the purchase price? If your answer is yes, then your place may be able to turn a profit in the years ahead. Congrats, you’re off to a good start. Be sure that the rental’s priced competitively for spaces of similar design. Here are few other factors to consider:

    Understand the formula

    If the total purchase price of the property is $200,000, rent should be no less than $2,000 per month or one percent of the total cost. Likewise, a $600,000 purchase price for a multi-unit rental property should meet or exceed $6,000 per month in total monthly rent earnings.

    Get the purchase price right

    When factoring in the purchase price, remember to include closing costs, property taxes and insurance. One way to better estimate these costs is to use an online closing costs calculator which can approximate appraisal fees, home inspection fees, application fees, prepaid interest among a host of other out-of-pocket expenses that can up your purchase price, sometimes by thousands.

    Factor in repair costs now

    Because real estate investing as a landlord requires the space to be “habitable” upon tenant occupancy, you may need to make certain repairs or upgrades before renting the property. As a result, you’ll want to add the total cost of these repairs into the purchase price.

    Consider the “Class” of the Neighborhood

    Neighborhood classifications help buyers understand the potential return on investment in a given area. If you’re new to being a landlord, you’ve got to pay close attention to what the neighborhood’s telling you.

    One good way to check out an area — specifically if it’s an investment that requires some traveling — is to use Google map’s street view. Is trash left out on the front lawn? Do neighbors maintain their property? What can the cars parked on the street tell you about the demographic? Here are details on the four distinct neighborhood classes real estate agents use to classify a region:

    Class A neighborhoods

    High income neighborhoods, combined with a home that is move-in ready will usually get an A class rating. Because homes are expensive in these neighborhoods, and their higher than average tax burden, real estate investors usually won’t buy a home there because the one percent rule fails the test. Tenants in these areas tend to be very reliable, high-quality renters.

    Class B neighborhoods

    Typically populated by those earning a moderate-to-high income, B class neighborhoods are frequently considered a good investment for landlords and fertile ground for tenants seeking rentals. Purchasing “as is” properties that can be cheaply updated and rented above the one percent factor is typically possible here with minimal risk. These areas will usually experience increased turnover and vacancy rates.

    Class C neighborhoods

    Because the risk is a little higher in neighborhoods that land in the C class category, the opportunity to see a high rate of return on fixer-upper places is good if you buy a For Sale by Owner property, or one not listed on the MLS (multi-listing service for real estate sales). Populated with blue collar workers with relatively low-to-average income, C class areas typically have higher crime rates and under-performing schools. Landlords should expect less-than-optimal tenants and periods of vacancy.

    Class D neighborhoods

    Areas riddled with crime, properties damaged upon a tenant’s exit and high costs for property upkeep can be anticipated in D class neighborhoods. Buyers usually consider these types of purchases high risk. It should be noted that many property management companies are reluctant to accept properties to service in these areas because the risks associated with the area. Investors tend to seek properties in more stable neighborhoods.

    Use the Capitalization Rate as a Predictor of Value

    Another key way of understanding the rate of return on an investment is the capitalization rate or “cap rate” for short.

    What is a cap rate?

    A cap rate determines a profit ratio that a property can generate. It’s best used as a quick way to compare investment opportunities to determine which one is the better value. Start by dividing the total of one year’s rent by the current market value of the home which should include costs and upgrades required to get the space habitable — you can’t rent the place if it’s not livable, right? The resulting percentage is your cap rate. The higher the rate, the better your annual profit margin.

    How to Calculate the Cap Rate for an Investment Property

    Although the cap rate’s a useful tool to quickly analyze the relative value of comparable real estate opportunities, it’s used as a rough guide to qualify properties for consideration, given the state of today’s current market climate. First, estimate your property’s overall purchase price:

    Figure the acquisition value

    Simply put, this is the total purchase price. It should include all upgrade costs, closing costs, taxes, business insurance, fees, points, etc. Let’s assume a property you’re considering has a total purchase value of $200,000.

    Calculate one year’s rent

    If you’re collecting $2,000 per month, you’ll have twelve payments at the end of the year, or $24,000. This figure is your gross annual income.

    Account for half a month’s vacancy

    Because turnover typically requires some painting and repairs, it’s fair to consider that half a percent (two weeks’ worth of rent) of your total annual income will be deducted to cover the mortgage payments. Assume that your new tenant will cover the remaining pro-rated rent for the other half of that month. Once the vacancy amount is deducted, the result is your gross operating income.

    • Gross annual rental income: $24,000
    • Less the cost of vacancy: -$1,000
    • Gross operating income: $23,000

    Factor in operational costs

    These costs will include money required to keep the property habitable, like paying for trash collection, making repairs, fees from property management, and landlord insurance. Let’s put that cost under fifty percent of the gross operating income, or $9,300. Some years it will be more, some less.

    • Gross operating income: $23,000
    • Less operating costs: $9,300
    • Net operating income (NOI): $13,700

    Divide the NOI by the total value of the property:

        $13,700 
    ---------------------  =  0.0685 or 6.85 % - That's your cap rate.
       $200,000 

    The capitalization rate for this investment is 6.85 percent annually. If another property under consideration returns a higher cap rate like 8.23 percent for instance, you may want to explore opportunity with the higher annual yield in order to maximize your profit potential.

    What is considered a good cap rate?

    Generally, a cap rate between 8% and 12% is considered good. However, an optimal cap rate is really going to depend on several factors including location, risk and current rental income. For example, in high-demand like big cities, a cap rate of 4% may be considered good.

    Reach Out to Your Agent Today

    With so many different ways to look at profitability when determining where to invest in rental property, it’s important you do your homework before you decide to buy. And while you’re making that big decision, remember to contact your American Family Insurance agent and discuss your upcoming purchase. When it comes time to close the deal, you’ll have peace of mind that your property’s insured carefully.

    This article is for informational purposes only and includes information widely available through different sources.

  • Person at desk using internet of things to reduce business costs.
    Person at desk using internet of things to reduce business costs.
    Reduced Business Costs & the Internet of Things

    You may have heard the term “Internet of Things” (also known as IOT) buzzing around a lot lately. Catchphrases such as predictive maintenance, retrofitted sensors, and reactive technologies are humming through newsfeeds and making many entrepreneurs curious. But, is it all hype or is there measurable business value in investing in the IOT?

    “The Internet of Things is going to be a big thing for small business,” says Tim Reid, a network systems engineer and consultant for private industry and government. Referring to the concept of billions of objects being connected to the Internet, Reid points out that smaller firms will be able to cut costs and become more competitive thanks to the new technology.

    While the IOT is not a new concept, it is evolving and becoming more relevant in our everyday lives and the way small businesses get ahead.

    A study by logistics service provider DHL and IT firm Cisco predicts that the IOT will save businesses $1.2 trillion in productivity costs alone.

    Are you ready to be one of those businesses? Here are some ways that the IOT can improve your company’s bottom line.

    Inventory management. You can keep track of costly inventory – even with it being in a remote location such as a warehouse. With inventory sensors on small items or large products, businesses can reorder stock as it runs low.

    Safety compliance. “There are many local, state and federal regulations, but small businesses often don’t have the funds to hire compliance teams internally,” says Reid. IOT allows small businesses to use sensors to measure air quality, temperature, and other conditions that may be governed.

    Potential revenue stream. “The big thing about the Internet of Things is that it can be a model for recurring revenue every month,” says Reid. For example, a small business can put sensors on a product that it installs and “offer to monitor it for customers for a monthly fee.”

    Security. For years, video surveillance has utilized physical tape that could be removed or damaged. With the IOT, videos are connected to the Internet and can be viewed remotely. “Business owners can track access to their building based on fingerprints and badges. This is inexpensive and easy to implement,” says Reid. Many people are choosing security systems for protection for their small business. From the alarm system to fire, smoke, window and door sensors, you’ll gain peace of mind knowing you’re proactively protecting your business.

    Wages and labor savings. If your business monitors or repairs products for customers, the IOT can be revolutionary. Traditionally, companies send out a person to repair a product or resolve an issue on site, which can be costly. With the IOT, data can be sent from the product directly to your company’s computer. You can troubleshoot, rule out problems and make decisions without leaving your office.

    Energy management. Gone are the days of the maintenance staff going from room to room and building to building to adjust the thermostat. “It is now connected to sensors that can be controlled remotely,” says Reid. Businesses can save on energy costs by powering down when parts of their facilities are not being used. Nest thermostat is a popular smart device for energy efficiency that can be controlled from your phone no matter how far your business takes you.

    “As small businesses continue to look for ways to reduce costs and gain agility, the Internet of Things can potentially level the playing field,” Reid says. “If you pay attention, small businesses can get ahead of larger ones.”

  • Image of a vacant commercial strip mall property and parking lot.
    Image of a vacant commercial strip mall and parking lot.
    14 Tips for Securing Vacant Commercial Property

    If you’re a business owner or a commercial real estate landlord, staying in business can be a difficult sometimes. There are a lot of reasons why a commercial operation might need to close for an extended period. And in today’s challenging times, some of those reasons are simply out of your control. If your business has been forced to shut down in response to the COVID-19 pandemic, you may be wondering how to keep your property safe while you’re away.

    Protecting your vacant commercial property is all about securing the perimeter. And by installing a smart security system, you can get real-time data on the condition of your business property, whether it’s occupied or not. We’ve put together some tips to help reduce the threat of serious damage to your commercial property if you’ve found yourself temporarily unable to run your business.