Only Offering Two Year Leases

13 Replies

Hi BP! I’m considering switching my 3 SFR rentals over to strictly 2 year leases as turnover costs are cutting dramatically into my returns. So far I’ve yet to have any tenant stay longer than one year. All 3 properties are in the southeast and are 3 and 4 bedroom homes in good areas. Do you use two year leases? Do you find it difficult to find tenants if you don’t offer a 1 year lease? Thank you in advance! Jordan
Originally posted by @Jordan Little :
Hi BP!

I'm considering switching my 3 SFR rentals over to strictly 2 year leases as turnover costs are cutting dramatically into my returns. So far I've yet to have any tenant stay longer than one year. All 3 properties are in the southeast and are 3 and 4 bedroom homes in good areas.

Do you use two year leases? Do you find it difficult to find tenants if you don’t offer a 1 year lease?

Thank you in advance!

Jordan

 Have you got any feedback as to why people leave at the end of one year? If they leave house in good condition to get their deposit back then you should be able to show house at 30 day notice and have someone move in days after they move out and nearly eliminate any vacancy.

Are your rates too high?

Do they not like the neighborhood, location or neighbors?

Are the utilities too high?

I would find out why people are not staying and fix that first and then look at the lease duration.

I have a good many rentals and I have people staying for 5 years or longer.

I would suggest split testing your next vacancies. See how long it takes to get a tenant who will do 2 year vs 1 year.

Your lease terms are up for negotiations, but ultimately the local customary terms (what is common in your market) are going to be pretty close to where u end up settling at.

Blair Poelman, Broker in Utah (#9299425)

@Jordan Little This is a very broad question man but the answer is it all depends. Have you asked any of your previous tenants why they are leaving? Many times they leave over very small things they don't like that can be easily fixed or taken care of. Two year leases are great for the owner(you) but this isn't so appealing to possible tenants. Many tenants from my experience fear the thought of being locked in for two years at a place they may not like. What if they want to move? What if they don't like it? I don't mean to be negative but you have to put yourself in your tenants shoes. Their has to be a reason they aren't staying for very long and turn over is killing you. If what you claim is true you should have no problem getting tenants in place there in Cali! I have seen others I know offer two year leases and at the end of year one offer to do some small updates like new ceiling fans, curtains or landscaping. This is very attractive to young families and will entice them to sign for longer! Tenant screening is also a very big factor. Make sure you are screening properly and truly feel comfortable with the tenants. It is much better to be patient for the right tenant then to just throw one in your property because of the fear of turnover costs. Since we don't know everything about your situation I would recommend just sitting down and writing out all the pro's and con's of your property compared to others. Take all the emotions out of this and then tie that will the tenants you had previously and why they left. You surely are a smart guy because you have a decent sized SFR portfolio in a very expensive market so I'm sure you will figure it out. Good luck!

I only offer 2-year leases to new tenants.  I have a rental increase in the second year and offer an annual lease thereafter and it's never had been a problem.  This lets them know upfront to expect annual increases.

Thanks for the replies!

I’ve lost three tenants because they purchased homes, one moved for work, and another moved out of state. I’m feeling like it’s just luck of the draw thus far. I almost wonder if my properties are in too good of areas, because people can afford to rent can afford to purchase their own homes.

The properties are in South Carolina and North Carolina. I just live in California. I think I’m going to experiment with only offering a two year lease on the home that is currently vacant. I could then re-sign for one year at a time if they would like.

In my experience, about 80% of two-year leases are broken early so I only offer one-year leases. Every market is different so nobody can give you the answer. I like the idea of trying it on one unit to see how each one performs and then go with the better. But that could take years to determine.

@Jordan Little Interesting question. I've played around with different lease term lengths. My experience is that the results are situational to the tenant circumstances more than anything else. 12 month leases are by far the most common in NC. However, it doesn't always make sense...I've done 6 month leases, and 2 year and 3 year leases....all were dependent on the tenant situation. The 6 month leases have a higher monthly rate than the 12 month lease, because there are very few landlords offering that window of a lease, and because there's a cost of turnover/transition as you mentioned. What I find with 6 month leases is that the tenants all stay longer....they wanted the flexibility when they arrived. Perhaps you can offer the tenant different lease lengths and offer at different rates....see what the market says.

Adam Schneider

We only do 2yr leases on our nicest A class homes.  That tends to be the only tenant who will stay to term.

Also, being in Ohio (winters) we will offer oddball leases to get the future leasing period back on track to always be leased in spring/summer.

Right now (Feb) we are doing many 15-18mo leases so when they do vacate we're leasing back up in May-Sep.

Some people like 1yr leases so they aren't stuck with a "problem/annoying" tenant as long and have the chance to cancel at 1yr vs being stuck with them 2yrs.  

It all depends on your market, the class of your properties, etc.

Bryan Blankenship, Contractor in KY (#RM52286152) and OH (#HIC0006061)

As a follow-up, I did manage to get the property leased for a two-year period. It sat for several weeks and I did have to lower the list price once, but it’s no longer vacant! Moving forward I am going to try this strategy again with a property I am closing on today.

Using a 2 year lease will not lengthen a tenants stay and will normally result in them having to brake their lease, usually with no notice, which will increase your turn over costs not reduce them. 

A two year lease, any term lease, does not determined how long a tenant stays. 

I use only M2M leases, have full control over my properties and find that tenants are much more forth coming with their future plans knowing they are not going to be forced to break a lease when their life plans change. 

Term leases serve no purpose beyond allowing your tennat full control over your property.

When I was doing rentals, '80s through 2001 I started requiring a minimum of two year leases and it reduced my turnover vacancies, increasing my return, and getting me a better class of tenant. I wasn't getting shabby tenants by and large because my places were all in nice suburban Houston neighborhoods, but 4 of them were in a bit more down market subdivisions than the others. 

My places always showed well, had high efficiency A/C (important in a place where you're cooling the house 8 months a year) solar reflective screens, extra attic insulation, garage door openers, etc. By and large I could get $40-$60 more a month than neighboring properties and anyone who balked when I told them two years was not going to be a stable enough person for me.

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What @Frank Adams is saying falls right along in line with my thought processes on this. My properties are all in A and B class neighborhoods, and I try to keep them as neat as a pin. I’m thinking folks that are going to end up renting from me are going to be somewhat more conscientious than the average tenant. Or at least I hope so!

I was a tenant through college and actually requested a two year lease from my landlord, as I knew I wasn’t going to be moving and I wanted to lock in my rental rate for as long as I could. This being said, if I were to have encountered a situation in which I had to move, I would have made my best effort to work something out with my landlord. Does everyone cross their t’s and dot their i’s? No way, but I do my very best to rent to good people.

Thomas, what kinds of neighborhoods do you focus on, out of curiosity? I also wonder whether this is a regional thing.

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