Signed a 3 Year Lease With My Client but INFLATION is TOO HIGH
Hi Everyone, I signed a 3 year California Real Estate lease with my client last year before the reported inflation numbers and now I'm stuck. It's getting too costly just for regular labor/repairs when all of my handyman are increasing their rates, but yet I'm stuck in a 3 year lease with my client.
Is there anything that I can do?
You should have included an annual rent escalator tied to CPI etc, or signed a shorter lease. So at this point you wait it out.
#1 General Landlording & Rental Properties Contributor
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- Fort Washington, MD
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#1 General Landlording & Rental Properties Contributor
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- Fort Washington, MD
You honor what you agreed to just as you want them to honor what they agreed to. Maybe they will desire to leave on their own and you let them out of the lease but in my opinion you would lose more. You have that many repairs to the point of damaging your business?
#2 Contractors Contributor
- Severna Park, MD
Looks like you will have to tighten your belt .
Quote from @Jeffrey Magenes:
Hi Everyone, I signed a 3 year California Real Estate lease with my client last year before the reported inflation numbers and now I'm stuck. It's getting too costly just for regular labor/repairs when all of my handyman are increasing their rates, but yet I'm stuck in a 3 year lease with my client.
Is there anything that I can do?
You can approach the tenant and appeal to their good nature, if they have such a thing. If you both agree to an increase, then put it in writing. Maybe they are kind and understanding and willing to help defray your increased costs. There's less than 1% chance of that happening, but the worst they can do is say no.
This is why people should avoid leases longer than one year. You have no way of predicting what the market will do, what inflation will look like, what your personal situation will be, or what your tenants situation is. Leases longer than one year should be limited to commercial businesses and should include automatic increases based on the Consumer Price Index or some other measure to offset fluctuations in the market in prevent you from getting too far behind.
#4 General Landlording & Rental Properties Contributor
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#4 General Landlording & Rental Properties Contributor
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Really?! You have a property in Orange County, CA, and the cost of regular labor/repairs is making the numbers no longer work? Perhaps the >15% increase in value since the pandemic can help offset some of the temporary pain?
Suck it up and upon renewal hit him with the the 5%+CPI allowed with a one year lease. If still under market, do the same again the next renewal. Repeat until at market.
I think you need to stick to your word. To be blunt, you messed up, not your tenant. We've all seen the inflation coming for 2 years and have seen it rise. I recently signed a 2 year lease with a tenant with only a $50 increase year 2. They are also a great tenant, so if you have a great tenant, then I would be happy. You may pay more for turnover and you don't know what you would get next. If you are paying too much for repairs, you need to assess your CAPEX.
You could try negotiate a deal, where you get an increase, but you give something in exchange. Unfortunately it's already a long term, so you can't give more time, see if you can figure out something that's of value to your tenant that you can concede. Unfortunately, if the tenant is smart enough, they'll know that they have a good deal, but maybe you can come up with something, now or in the near future.
This one may be a tough lesson but you'll make it and while under market at least it seems like they are paying. Long term leases are a risk to both parties as rates could go either way but a bigger risk to landlords as tenants can always leave. I personally wouldn't ask the tenant for any additional increase as there is almost no likelihood they will say yes and I feel this would set a bad precedent. If they over leveraged on rent and lost their job where they could no longer afford your rates would you voluntarily accept less than the contract out of the kindness of your heart? Your only recourse is really to let them know they can leave if they want and also make sure you up the max amount each renewal but this may be a barrier that is hard to catch up with. What was your reasoning for a 3 year contract as they seem like it would be unattractive in an increasing rate environment.
The rent is only 1/2 of the problem, the other is your capex. Hopefully what you have replaced will last a while so you won't have to pay for these repairs again lowering future capex. Make sure you are keeping track of needs vs. wants and I wouldn't be doing much more than the minimum required. Not every year can be a winner but you will have future years you don't have any that will offset this year.
#5 Multi-Family and Apartment Investing Contributor
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#5 Multi-Family and Apartment Investing Contributor
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I had properties in Silicon Valley for 30 years. They never gave me positive CF until I sold them and then. Party Time!!🥳
#3 Managing Your Property Contributor
How many repairs are you doing? If something breaks from normal wear and tear, than you pay for it, but if the tenant damages it, you bill them for it. If the tenants are simply requesting changes (eg they don't like the colour of the toilet), tell them no.
As others said, if you sign a multiple year lease, make sure it says that you have annual rent increases.
Quote from @Jeffrey Magenes:
Hi Everyone, I signed a 3 year California Real Estate lease with my client last year before the reported inflation numbers and now I'm stuck. It's getting too costly just for regular labor/repairs when all of my handyman are increasing their rates, but yet I'm stuck in a 3 year lease with my client.
Is there anything that I can do?
I did the same thing; however, factored in CPI each year leading in each year it comes new. The lease is setup to trend up each and every year. That is something you need to factor in while in an inflationary market or not.
@Jeffrey Magenes seems like a lot of people nailed it on the head with the escalation clauses based on CPI. Since this is not an option right now now, have you looked at different short-term lending options? Might reduce your debt payment just enough in the short term to allow a little wiggle room for inflation. DM me and we can talk more.
Also, another not so good idea but a temp solution if you are handy. Consider doing some of the work yourself if your time isn't needed elsewhere. Not the greatest idea but will save you some money in a pinch. I would say if your potential earning is higher elsewhere just to work a little longer make some extra money to afford the handyman costs. Also, I have some contacts for handymen in CA if you want to put them all against each other for business. Good luck!
I've never understood why people get hyped about signing a client to a long term lease. Unless that tenant/company is rock solid that you will actually see the $$ if the tenant breaks the lease, they are an illusion that in the majority of the cases protects the TENANT WAY more that the landlord. Companies and tenants break lease all the time and then its up to the landlord to collect that $$ owed and we all know how that goes.
You screwed up and will just have to eat it now...... work on your expenses and that's all you can do. Learn and dont make the same mistake.
Quote from @Matt Devincenzo:
You should have included an annual rent escalator tied to CPI etc, or signed a shorter lease. So at this point you wait it out.
Agreed. Lesson learned. My plan was to sell the property and the reason why I signed a 3 year long term lease so that the potential buyer would see the stable cash flow. Going forward I will do this.
Quote from @Greg M.:
Really?! You have a property in Orange County, CA, and the cost of regular labor/repairs is making the numbers no longer work? Perhaps the >15% increase in value since the pandemic can help offset some of the temporary pain?
Suck it up and upon renewal hit him with the the 5%+CPI allowed with a one year lease. If still under market, do the same again the next renewal. Repeat until at market.
Hahaha. Agreed! However, I'm missing out on 6 figures plus here in potential income. Suck it up is a hard pill to swallow when everything is getting more expensive in the HCOL areas.
Quote from @Theresa Harris:
How many repairs are you doing? If something breaks from normal wear and tear, than you pay for it, but if the tenant damages it, you bill them for it. If the tenants are simply requesting changes (eg they don't like the colour of the toilet), tell them no.
As others said, if you sign a multiple year lease, make sure it says that you have annual rent increases.
Tankless water heaters and HVAC repairs are the most expensive. That, and potential water damages.
Does it cause you actual financial hardship or is it turning out as a bad or less than ideal investment? In the 1st case, try and work something out with the tenants, like others said already, maybe a tactical upgrade agreed with the tenant.
In the second, do as much as you can by yourself, that would save you a ton and possibly put the investment back on track until renewal. At least, get plenty of quotes and shop smart. Then I think you know what to do in the new contract. Remember that inflation was predicted and predictable, but of course, it's tougher to figure out when they'll fall. Maybe you can access your equity before it gets tougher to do so. You can always choose the strategy of being strict about any violation, but it may be borderline unethical, and silly if they're good tenants, so I wouldn't recommend it unless you get real desperate.