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.
Stick with a one year lease max. You can put in writing if you want that if a tenant stays in good standing and property is well maintained you will reward the 2nd year lease by lowering monthly rent as an incentive, depending on tenant and area. Having a "higher" rent and larger deposits will automatically wean out tenants who cannot afford your rental. You don't want to lower your standard and risk allowing someone to enter your rental and not afford to keep up with costs And result in higher turnover.
Having to offer lower rent incentives means you either have a questionable tenant base, a weak market or the landlord does not know their market.
If you have a weak market or low quality tenant base offering lower rents as any form of a incentive means your rent is too high to begin with. Tenants do not move as long as their rent is at market and rent increases are consistent with that market. Why would they if they like it where they are. If they don't like it there then the rent is not the problem it is the property. Rent supplements will not change that fact.
Again there is zero proof to show that rent supplements impacts how long tenants stay. Landlords want to believe that it reduces turnover to make themselves feel better about losing money. This is common in the small investor market where ROI is not their primary concern. Their goal is to not have to do any management therefor anything they believe will reduce their responsibilities, even if not proven, will be adopted. When they have a good tennat that stayes a long time they gredit their inititaves as being th ereason. Dream on.
@Jess White I do this occasionally with good tenants that have already been in place for at least a year. I’m typically at higher ends of my market for rent anyway and keeping a good tenant is well worth $25+ a month in order to avoid turnover. Apparently this is a minority opinion and process but it can work quite nicely with the right tenants. Good luck....
Stupid question but...... Do you have any evidence to show that your tenant would stay if they did not want to live there just to save $25/month in rent. If they did want to stay do you believe they would move if they did not get a $25 discount.
What you should be doing at lease renewal is ask if they intend to renew and if not you then offer the $25 to convince them to renew. That would be a much smarter business approach to rent discounts.
Back when I worked in residential property management, we locked in our leases for variable monthly periods. We essentially created a lease matrix where ALL leases went MTM during the summer months. Given that this was the busiest time of the year, it gave the management leverage to increase rents; since, if the tenant moved, we could typically turn the unit and re-rent it quickly.
The workload was a little crazy during those summer months but it helped to keep down our vacancy and push the rental rates on the property.
In answer to your question, I would never lower rent for a longer lease. I doubt it will work to your advantage. Also, I would never sign a lease longer than 1 year. I follow these rules because I like to keep built-in flexibility to my process so I can easily issue rent increases and other rent term changes.
@Frank Wong - I like your idea of a short term lease to establish a "get to know you" period. As you stated, hopefully the tenant that met all your screening requirements is a REAL winner but sometimes they aren't. A good short term lease allows you the flexibility to remove them if there are issues.
@Jess White In general I would agree with what everyone has said about the lack of upside on lowering rent for an extended lease. However, there is one scenario where it may have an upside to the investor, and is what I did in order to secure my second deal.
In the summer of 2017 I wasn't actually looking for a new property, yet alone a good deal. I was barely two years into starting my own consulting firm at the time (self-employed). While I had planned to purchase something after the new year (around March 18), I had thought I should wait until after I filed my taxes for 2017. This would allow the bank to use 2016 & 2017 returns to average income, instead of my 2015 returns which was the first year I had been in business for myself.
June, 2017 I was driving through a nice neighborhood in town, and noticed a coming soon sign on a very run down house. After doing a little research that night realized this could be a very good deal. Only problem I saw was the timing was not "perfect". I figured I might as well make an offer with a financing contingency and see if we could make this work.
The numbers were close, but since they couldn't use 2017 income yet, the debit to income ratio fell outside their approval window. In reviewing the paperwork, I saw that they were giving me credit for monthly rent on my first property. It just so happened that my first property was going to be available at the end of July 2017. I called my lender and asked if during my screening process I could find a tenant for the first property that would sign a two year lease, would they reconfigure my debt to income ratio. The bank agreed and with the two year lease the numbers worked for them.
I probably won't make it a habit of offering multi-year leases, but in this case the benefit outweighed the risk of loosing a small rent increase in year two.
@Jess White i think many landlords do bot raise rents on long term tenants who are also good tenants...report problems etc. longer leases mayor may not pan out and you may want them gone if they are oroblematic. Besides, not having to move is a great benefit of a longer lease, worth plenty to mostbusy people.
Purely numerically, you are lengthening the time you receive sub par rent. Also, in a tenant-friendly legal environment a longer lease in net terms brings protections to the tenant and liabilities to you.
So no, unless a longer lease was a legitimate benefit in your market legally and/or operationally, thus wanting to pay for it with lower rent.