Long term (1-10 years) rental agreements

[Zach Malhiot]

Hi, what are the pitfalls of leasing a rental for over a year term?  I want to set up a structure with a renter for multiple years with a steady rent that can only increase with the increase of property taxes.

I think this tactic could be a good way to purchase houses from people that no longer want the hassle of owning their own house but do not want to move.  

Thanks Zach 

[Nathan Gesner]

Originally posted by @Zach Malhiot:

Hi, what are the pitfalls of leasing a rental for over a year term?  I want to set up a structure with a renter for multiple years with a steady rent that can only increase with the increase of property taxes.

First, I'm not a fan of long-term leases because most people can't plan past one year. I used to allow 2-year leases until about 80% of my renters broke their lease and left early. 

Second, if taxes increase 3% per year, that's about a 25% increase after ten years. Your market could easily double in ten years, leaving you 75% behind market value. Not good.

I use one-year leases with a planned 3% increase every year, but I can always bump it higher if the market is jumping because it's just a one-year agreement. I don't recommend you lock yourself into anything longer.

Commercial rentals use long-term leases but businesses tend to stay put longer and they're usually responsible for taxes, insurance, and a lot of the maintenance costs (triple net lease or NNN) and they have built-in escalation of rent, which hedges against market increases.