Rental Property Investor · San Jose, CA · Member since 2018 · 152 posts · 159 votes
I want to hear the good experiences and bad on this one. Do you really win in the long run by lowering rent for a longer lease, or should you stick to the script of 12mo leases?
What are your thoughts on this?
Maybe you should consider locking in the current rate for a longer lease instead of a lower rent. Most people would be happy to know the rate won't go up for an extended period of time if they sign a longer-tern lease.
Maybe you should consider locking in the current rate for a longer lease instead of a lower rent. Most people would be happy to know the rate won't go up for an extended period of time if they sign a longer-tern lease.
The longest lease I go with is 1yr I would be wary of any tenant asking anything longer than that. For all new tenants, I go with 3 months. I don't know the tenant and they don't know me. I am trying to figure out if everything I screen in the beginning is correct. Just in case something is wrong I have an out. I usually market my rentals under the market by $75-100 depending on the location. This allows me to have a larger pool of applicants to screen. But back to your question, I don't discount for a longer lease.
What I have considered doing with tenets that I would like to stay is to offer them a renewal bonus if they express that they’re leaving at the end of their lease. Turnovers generally speaking cost you at least one months worth of rent
I would lock them in for a year then renew leases yearly. This gives you the opportunity to inspect the property yearly and make sure you have good paying tenants. I would never lower the rent for a longer lease. You can always do improvements to the property to keep the tenant happy towards the end of the contract to encourage them to stay.
There is no good reason to do this. The tenant could take the lower rent and then leave early anyway. I wouldn't want to incentivize a tenant to lie about how long they wanna stay.
Also, there are many landlords that feel that longer term leases only give the tenant more power. Why would you wanna give them more for less money? This does not compute.
I would not lower the rent for a longer lease. Tenants will leave whenever they want to, regardless of the term of the lease. And in most states you can’t even hold them responsible for the balance of lease when they do leave early. You have to mitigate the loss and try to find a new tenant. So, in the end, all you’re really doing by giving them a lower rent for a longer term lease is guaranteeing yourself less rent.
Why? Tenants break leases all the time so all you are really doing is guaranteeing you will lose money. A lease length has absolutely nothing to do with how long a tenant stays. Life dictates their actions not leases.
There are a few reasons to lower your rent below market.
1) you buy into the false theory that setting rent below market retains tenants.
2) you have no confidence in your business skills/you have no business skills.
3) you have no idea what your market rents are
4) you are a desperate landlord
5) you are a hobby landlord and profits are not important
6) you prefer to attract lower quality tenants.
I charge full market rent and only use M2M leases. I have done so for 10 years and never had a issue.
I prefer 12 month then month to month, or renew for 12 month after lease expires if you know is a good tenant.
I do offer shorter terms (6 month lease) but I bump the rent by 10%, but check with your local state laws to make sure there is no conflict. If at the end is a good tenant and he/she wants to renew for 12 month, then I would agree lowering the rent vs the shorter term (the 10% back to them).
If you rent for 18 or 24 months at a lower rent (by how much? I assume you are looking to avoid vacancy costs and all stuff related to turnovers), then is a risky move if tenants is somewhat a troublemaker.
Why? Tenants break leases all the time so all you are really doing is guaranteeing you will lose money. A lease length has absolutely nothing to do with how long a tenant stays. Life dictates their actions not leases.
There are a few reasons to lower your rent below market.
1) you buy into the false theory that setting rent below market retains tenants.
2) you have no confidence in your business skills/you have no business skills.
3) you have no idea what your market rents are
4) you are a desperate landlord
5) you are a hobby landlord and profits are not important
6) you prefer to attract lower quality tenants.
I charge full market rent and only use M2M leases. I have done so for 10 years and never had a issue.
On his defense, there are a lot of reasons why a Landlord wants to lower the rent. You just pointed out very good reasons (assuming is a good market) for a Landlord without knowledge or experience. I have done it and it has worked just fine. I have avoid vacancy and cost associated with it, but with a plan to recoup if tenant decide to stay and after the 12 month lease expires.
Depends. What is the current rental market climate (will you have a high or low vacancy rate)? What is the profitable rent range for you (& is it attainable in the current market)? How good is the tenant?
For good tenants who meet the three basic requirements of desirability (1. Pay rent on time, every time 2. Keeps property clean & safe (non-destructive) & 3. Doesn't disturb other tenants/neighbors (no parties, legal issues, neighborhood drama, etc.) - I would bend over backwards to keep them happy, and give them a discount (as long as I am still profitable).
@Jess White. Don't know who said this but very appropriate - "Good decisions come from experience, and experience comes from bad decisions."
I've lived those words. So my advice is unless you are experiencing difficult leasing the place, hold firm to the advertised price for year one, and if necessary offer a slight reduction in price for year two. First 2-year price reduction I agreed to, the couple split up about the 10th month, and of course, neither could afford on their own, so both moved out and left us holding the bag. Lesson Learned!
@Jess White You should do what is best for you. Many people on BP will absolutely say take no prisoners!! Bull. Now, I personally do not sign leases longer than 1 year on a new tenant. When I was renting I asked for a 2 year lease at a $50 discount per month. Last summer I let current tenants sign a 2 year lease for a "discount". In quotes because I did raise their rent, but I didn't raise it as much as planned. They are fantastic tenants that I never hear a peep from. How much is that worth to you? $25 a month? $40? That's for you to decide, or to not decide.
Sure, people can break their lease any time they want. But unlike what some say here, people will consider twice before they break a lease with 6 months remaining over 1 month remaining. It's simply true. And since I just had a unit open for two months in the middle of a brutal winter, I will never go MTM on my leases. If they're getting a divorce, they'll break their lease and not think about it, probably. If they are just yearning for a different place, then they aren't breaking leases left and right. They sure don't do that here (I have B class properties).
Another thing you could consider, if you really like your tenants. Offer two different rent rates for the two years. You lock them into two years, but you tell them "less of a rent increase" in year 2. Again, it's your business, you do what works for you. $25-50 a month shouldn't be a make or break in your business, and I'll take $300 less a year in rent if I never have any vacancies (theoretically).
@Kyle J. But, you actually can hold them responsible for losses you incur, if you cannot find tenants immediately. And I find no problem with state laws that state you must attempt to mitigate your losses. I don't think double dipping should be legal. What you're possibly guaranteeing yourself is a tenant that you know pays on time, is reliable, keeps your place nice, and the possibility of zero vacancy. 1 month vacancy in any 2 year period is twice the loss than my $25-30 discount for a reliable tenant.
I'm just saying, to you and others; an open mind and willingness to look at different situations works much better for my business than being black and white and refusing to look at options.
@Jess White lease makes no difference in how long a tenant stays. Tenants will move if it suits their needs and they break leases to do it. Lease protects the tenant, not the landlord. I recommend 1 years lease and renew for 1 years each time if they are good tenants. If they are not good tenants then you can end lease or raise rent.
Half the time when tenants are asking for longer than 1 years leases, it is to cover up some other bad factors.
@Kyle J. What you're possibly guaranteeing yourself is a tenant that you know pays on time, is reliable, keeps your place nice, and the possibility of zero vacancy.
Sorry but a longer lease doesn't guarantee any of those things.
We all aim for a tenant that does those things. However, the reality is, at the time of lease signing, you don't really know. So if you sign a longer lease and the tenant ends up not paying on time, or not being reliable, or not keeping your place nice - you're stuck with that tenant for a longer period of time (and at a lower rate too if you gave them a discount for signing a longer term lease).
That's why others on here are saying that the advantage of a longer lease really is the tenant's, not the landlord's.
@Kyle J. Well....I did say "possibly guaranteeing" and "Possibility of zero vacancy". And my earlier answer to the OP said I wouldn't do it for the first lease with a tenant, but only for tenants with a great history with you (but my earlier response to you did not actually say that). As we all know, there is no guarantee you'll ever find a single tenant or ever make a single dollar. But I don't think people should be afraid of examining other options, especially depending on where you live. Renting a place in December in California is probably a whole lot easier than renting out a unit in Iowa.
MTM works for many people, in different regions. I would 100% argue against it where I live. A long term lease could work out well for both parties. I advised the OP to see what his needs are. I would never go longer than 2 years, however. I've read on BP of 3-5 year leases. That seems unlikely somebody will stay the entire 5 years.
Need to take the market into consideration too. When I lived in an Avalon owned apartment in SF a few years ago, leases longer than 1 year were actually more expensive for the tenant.
Longer leases - no benefit or value in doing this either
I’m failing to understand where this strategy offers any benefit to help investors ???? Look ,You want the highest rent you can get and with the shortest lease possible bro . A lease is for the tenant not the landlord . The tenant will leave whenever they feel like it regardless of terms
The biggest problem with the belief that lowering rent or charging below market rent is a benefit is that there is no quantitative evidence to support the theory. Lacking evidence to support a advantage there is no reason to do it. It amounts to nothing more than a gift.
I something can not be proven I find it very difficult to believe.
Tenant leaving any time they choose to - I think this depends on the demographics you rent to. If a renter absolutely must leave due to a family situation, health, work relocation, etc., and they can't do anything about it, it's one thing. I don't think an A/B class property tenant would leave, because they just feel like it. They know that you will go after them to re-coup any of your losses - why would they jeopardize their credit like that? (again, depends on who you are renting to, and usually correlates with their income level, whether they care or not for their credit). Further, in some states even if the tenant left in the middle of the night and abandoned the property, you have to file for an eviction. Even if the eviction will not go through, the filing will still remain on their history and make it very difficult for them to rent in the future.
I want to hear the good experiences and bad on this one. Do you really win in the long run by lowering rent for a longer lease, or should you stick to the script of 12mo leases?
What are your thoughts on this?
I've done this - did not lower the rent below market per se, but agreed to sign a longer lease with no rent increases. This was in southern California, a market with lower cash flow but strong appreciation (I see you're in San Jose, so pretty similar). Since the mortgage and property taxes eat up a LOT of the rent in a market of this type, even one month of vacancy can set you back more than a steady rent increase might have made up for. Assuming you have a good tenant, strong credit profile and income (as the tenant in my case did), this can be a great idea.
If you're investing in a high cash flow market (think places like Cleveland or St. Louis) vacancy may be less damaging in that your mortgage and property tax expenses, relative to rent, are considerably lower, so maybe you can gamble more on rent increases and afford a bit more vacancy. Still, reducing vacancy as much as possible was something I learned from a mentor, and it's proved quite valuable thus far.
@Jess White I'm with the majority here, no leases longer than one year. Tenants break leases whenever they want.
What I might consider depending on the property, location, strength of tenant application is offer a known rent increase for year two. Think of it like an option.
Have you asked the tenants "why" they want a long term lease? Perhaps there is a way to address their needs/wants while not giving up control and cash?