Who Benefits Most from the Length of The Lease?

23 Replies

Is a Lease Term Longer than One Year Really Beneficial?

Hi @Steve Rozenberg

I never do a lease longer than 12 months for a new tenant. Despite everything I do to vastly increase my chances of getting an excellent tenant, sometimes circumstances change. After 1 year, if everything is good, they are taking care of the home and abiding by the lease, I'll renew for 2 years max. I don't like to be locked into anything longer. I hope that helps, if you have any other quesitons, don't hesitate to ask. 

It depends on the market (increasing versus decreasing rents) and the tenant. 

The biggest benefit is usually the decreased vacancy rate. A month of vacancy in most cases wipes out more than a year of rent increases. 

For example, if you could raise the rent by $100/mo in year two, but you have a month of vacancy (due to tenant turnover) on a $1200/mo unit, you'd break even at best. 

It's often better to keep good tenants in place and avoid vacancy than to chase rent increases with turnover. 

That being said, for a brand new tenant who you have no history with, I see little incentive to give them more than a year. However, to keep a great existing tenant in place, it might be worth it.

Hi Meghan, thanks for that. I agree not wanting to have a lease longer then 1 year. What many people do not realize is that as part of your business of owning  a rental property you not only have income but you have expenses. Your expenses are not locked in for 2 years, nor is your potential increased cashflow if the market rent increases. If rents go up and your taxes go up or insurance you can be locked in to something that decreases your income. That is just not a business model I prefer to use

You will have some people on here that will say only the tenant benefits from anything longer than a month. I don't agree with this, but I really don't see the value in an unusually long lease either. Generally all of our leases are a year, but they are always scheduled to end in the summer so they may be less than a year depending on when they signed. 

A good lease, regardless of length, should set down all the terms, conditions and responsibilities of both parties. A lease of reasonable length allows you to have a more controlled system such that vacancies, rehabs and the like can be planned. For example, on a month-to-month, the tenant gives one month notice and they're gone, whether it's the fourth of July or Christmas. On a lease, the tenant is legally obligated to pay rent until the end of the lease, so they will either bargain to end the lease early, break it and leave themselves exposed to possible court-assessed penalties, or stay until the end of the lease, when both parties can plan their next move. 

Those that say a month-to-month lease is best because a tenant can leave any time during a year (or longer) lease really don't make any sense, because they can do the same thing on a month-to-month lease (i.e. just leave the next day), leaving the landlord with no recourse. Whether or not a landlord collects, or tries to collect, on a longer lease that's broken early is not the point - it remains an option, and most tenants (well, at least the quality tenants we rent to) will honor their lease or negotiate a reasonable early out, allowing us to better administer our business. 

We stagger our leases to end at different times of the month. This way we are not having 25 move-outs and make readies all the same day. Staggering them seems to be a good solution for us and the tenant as they do not have to have the house empty and clean all the same time they may be moving into another property. This way they can hand the property back in the condition we expect. And I agree with 

@JD Martin we set the expectations in the beginning with the tenant by having an on-boarding review after they are accepted as tenants so that they know what is expected of us as a management company and also what is expected of them as a tenant. 

@Steve Rozenberg I think it also depends on what type of tenants you are catering to. In some neighborhoods, tenants will need to move and break the lease regardless of 1 year or 2 year. In our C neighborhood, we just do month to month agreements and that works for us.

Our "recourse" is that they don't get a big chunk of their deposit back (like $800) if they don't stay one year.

@Julie Marquez Yes I completely agree with you. We made a conscious business decision to no longer own or manage lower income homes with these types of issues. After years of owning and managing I have a very strong opinion about how and why I failed so often with lower income homes, I have done several posts and videos on this subject. You definitely need to know and understand that business model to be successful. I have chosen not to play in that sandbox anymore becuase of that very reason and the time constraints lower income properties have on my staff time. Yes you are smart for finding a solution that works, just make sure you do not cross any discrimination or fair housing laws while doing that and make sure that is written down in your policy and procedure manual or it can come back on you at some point in the form of litigation.

@Steve Rozenberg It's definitely a different market, glad you have figured out what works best for you. In our state, any lease over 1 year needs to be created / signed off (?) by an attorney. I don't know the details since I've never done one, but I know it requires a little extra effort upfront.

What a great discussion!

@Steve Rozenberg here are a couple questions for you:

1 Is it possible to include into a 2-year lease contract a clause that next year the rent will be increased by X%?

2. Do you prefer to convert to month-to-month after the first year is over and why?

3. Do you consult with the client (property owner) on what they prefer? Of course you know the market better because you specialise in it but have you ever been instructed by your client to sign a very long-term lease?

4. Since you deal with A-class properties, what do tenants prefer? Have they ever asked for a long-term lease?

I try to use a 12 month in most cases. But there are times when I am renting to a new client, that I will extend the lease so that it ends in a summer month. So for example, if I were to start a new lease with someone on December 1st 2017, then I would probably try to get them to sign a 18 month lease, so it would end in May of 2018. I found it is always easier to fill a vacancy during the summer months. Hope this info helps.

@Katrina M. pleasure to meet you. I was just a key note speaking in Brisbane this summer for a PM conference and I am scheduled for 2 events already to speak in 2017 in AUS. Great people and so up to date on property management! We manage many homes for people in other countries and many in AUS

I will do my best to answer below:

1 Is it possible to include into a 2-year lease contract a clause that next year the rent will be increased by X%?

You can write the contract lease anyway you wish, you can have a % bump in there. Challenge is that it is not the norm so you may lose qualified tenants by scaring them off to someone who does not do that. I like to uncomplicate things and keep it simple

2. Do you prefer to convert to month-to-month after the first year is over and why?

No because I want the tied into a contract that obligates them and I want the on a contract that is inline with the current laws and up to date

3. Do you consult with the client (property owner) on what they prefer? Of course you know the market better because you specialise in it but have you ever been instructed by your client to sign a very long-term lease?

We only consult with them if the rent comps go up a certain percentage, other then that we do not. Our philosophy is that they hired us to manage their property because we are the professionals and we do this everyday. I feel it is the same thing a passenger telling an airline pilot which way to go around a thunderstorm. They dont ask the passenger their opinion even if the passenger has flown their whole life, same applies here in my view

4. Since you deal with A-class properties, what do tenants prefer? Have they ever asked for a long-term lease?

Some will and do a long term lease, we will not go over a 2 year contract but if the tenant wants one we will bring that to the owner and help to make the decision with them giving them the pro's and cons of each.

I do one year leases max, but I would love if they stayed forever because turnover is the worst part.

I think the question is rather glass half full or glass half empty.

A written lease is a legal contract and for what ever the term memorializes the agreement between parties, it benefits both and can be equally important for both.

The landlord know's what to expect each month for income and the tenant knows what is expected each month for expenses.

Things change and the term reflects what is the risk factor each is willing to accept in signing the term length.

Lots of reasons for month to month, 6 month, 12 month or longer are out there it's what works for the particular property landlord and what the tenant is willing to agree on, to get the property rented.

During my 19yrs of operation, I've never offered a full year's lease, but always a three month with a default hold over of M2M.  WHY?  IMO, the length of the lease creates legal rights for that period and could result in my necessity to buyout the tenant.  So, I reduce that exposure to the three months where I can issue a Notice of Non-Renewal and find a better tenant it so necessary.

Three months is long enough to see how well the new tenant plays with the existing other (it's a 6-plex) and to show there fidelity to paying on time.

@jeff 

@Jeff B.

Personally I agree with you,, my parents had properties over 50 years, a 5plex, 6plex, and 2 dbl bungalows.. all were month to month. I run it now and all month to month, I guarantee rent rate for 12 months.. and charge redecorating fee if they move out earlier than 6 months of $250.00.  It worked for us as a small business. larger business not as likely to do the same.. 

I screen better than my parents did so my tenants have been great, and makes business sense for me.

Originally posted by @Deanna McCormick :

@jeff 

@Jeff B.

I screen better than my parents did so my tenants have been great, and makes business sense for me.

 :grin: The funny part is, the good ones stay longer than a year anyway!  So I get vacancy control with reduced risk, which the annual lease people were attempt to get.

I only have one property as of now but it is out of state. I have been renting the property for a little over 6 years and have done 3 two year leases with 2 different renters. I do have management in place but being so far away I enjoy the stability of the longer lease. We do have the ability to increase the rent each year built into the agreement.

Originally posted by @Steve Rozenberg :

Is a Lease Term Longer than One Year Really Beneficial?

It depends on the lease itself and how it's drafted (rate, increases, terms, etc). If structured properly, I may benefit investor as it may minimize vacancy and make cash flow stream less risky.

What I have learned is that with good tenants it makes no difference if they are on M2M or term. With bad/not so good tenants it makes a huge difference. They leave whenever they choose, usually without proper notice and you can not get rid of them if you want. A lease does not guarantee anything from a tenant. Landlords that believe they have some sort of protection or guarantee of payment are living in a fantasy world.

Good tenants communicate really well in regards to their intent to stay or go and will generally let you know well in advance when they plan to leave. They have no fear of eviction or termination and therefor have no issues with M2M. 

Bad tenants barley talk to their landlord and will often leave with no notice when on a term lease. When on M2M bad tenants are generally more inclined to tell you a month ahead they are leaving as they do not fear any penalty.

The vast majority of landlords never bother to go after a tenant for damages/lost rent etc. when they break their lease making the protection of a lease useless.

Down side of a term lease is you can not get rid of a bad tenant without evicting, they will break the lease without notification, without notice you usually end up with a minimum 1 month vacancy.

Down side of a M2M ????? Since all I offer is M2M for the past 10 years and I have never had a negative situation as a result of M2M I can not think of any downsides. Upside is tenants are very forthcoming with their plans and as a result I have never had a vacancy unless I plan in renovations.

No upside except false security, plenty of down side, to term lease.

No down side to M2M. 

The idea is that landlords want low vacancy rates.

But, the reality is that problem tenants can take advantage of a year lease or longer, knowing they can get away with more than a month-to-month lease.

I only do month to month leases, and have for years now. Higher vacancy rate, lower pain-in-the-butt rate. I'd prefer a few vacant months than a problem tenant. 

Someone could sound amazing on paper- perfect credit, finances- and be a whiny pain the in the butt. Do you really want to sign a 2-5 year lease with them? WHY?!?!?!? If you have no experience with that tenant yet, you don't know if they'll be a decent tenant or not. I would never, ever even consider doing a 2 year lease. Ever. 

If someone wants a 2-5 year lease upfront, that makes me wonder why. Are they so whiny and such a pain in the butt that they know I won't agree to renew their lease unless I sign upfront? 

Thank you for the detailed reply @Steve Rozenberg .

I can see why you want leases properly documented. 

I liked your website. It has a lot of information and preempts many questions your clients may have. Unfortunately, I did not find a news release about your participation in a conference in Australia. Would be interesting to learn about it and your future events.

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