Should I sign a 4 years lease with tenet?

28 Replies

Tenet's current 1 year lease will complete in Aug 2021, tenant want to stay for 4 more years with reason of child school. so far tenet behavior is good in terms of Paying rent on time, Keeping property clean, Sometimes fixing things by them self and not disturbing other tenet.

Should I sign 4 years lease with rent increase ?
or sign 24 months lease with rent increase ?
or just stick to the yearly lease formate ?

Note: Property location is in North Austin TX area.

Hey @Jignesh Savaliya ! I think it's really a matter of preference, but if it were me I'd continue with a yearly lease and just maintain the option to renew. Just in case circumstances change with your tenant change, you've got an easier out than you would with so much time left on the lease. Just my two cents, but good luck!

@Jignesh Savaliya  

Just do a year lease. If you do a year lease, then they can't see a rent increase 3 years down the road. Make rent increases seem like a small amount every year like if you raise the rent $20-30 a month, like ok who cares. Now if they can see he is raising the rent to $80 a month or more over the course of 4 years, they might be put off. Also pretty long commitment I would recommend just doing a year lease and renew every year. @Kyle Tom is the property manager for Reafco Property management he might have some input on what he does or what he would do in this situation.

What about a 4 year lease, with automatic annual 5% rent increases, with owner having an annual 60-day termination clause?

That way, owner has the opportunity to terminate the lease every year with a 60-day notice or negotiate a higher rent increase.

We find for Class A & most Class B tenants that they will honor their lease term, unless a catestrophic event occurs. Class C & D tenants think nothing of breaking a lease when it suits them.

No. Despite their best intentions, tenant's can't predict their future. In my experience with hundreds of rentals, tenants are about 80% likely to break a multi-year lease early.

You also can't predict rent rates and don't want to get stuck in a four-year agreement with a 5% increase when you may end up with a market that grows in double digits for 2-3 years.

And what if the tenant becomes problematic and you have a difficult time getting them out because they still have three years left on the lease?

Stick with one year at a time. Longer leases have almost no benefit to you.

@Jignesh Savaliya

I’d say it’s personal preference mostly. As long as you are comfortable with keeping them in there that long you don’t have to worry about any turnover. If something does go south with their job or family however you could end up in a sticky situation if they can’t pay or have to move out. I personally would keep it a yearly lease.

@Jignesh Savaliya I am of the mind that a good tenant is worth their weight in gold!  I also follow the rule that if they want to stay and have been a good performing tenant, I reward that by not increasing rents.  I do like the idea @Luke Trovinger provided of keeping it to a year, but with the option to renew at perhaps a max increased amount.  That does provide you certain protections while also keeping the tenant rewarded for continuing to be a fantastic tenant.  Might also be worth having some data about the market rents in the surrounding areas to show her what the value you are bringing is.   

One  year lease.  if you are really jonesing to do something longer 2 year and no more.  That said, my advice is 1 year lease only.  A lot of other comments have talked about the tenant not knowing where they want to be/will be etc in a few years time but that also applies to you.

Very little upside for you to doing a longer lease and potential downside if circumstances in your life change.  1 Year leaves flexibility which is important in this industry.  We have been doing this for 21 years now and the only way we have survived where very few of our competitors have is because of flexibility.  Willing to change with the times. 

I’ve been going a different route on this one.  I used to be very specific I only do term leases but now have let everyone convert to m2m and see no signs of anyone leaving.  As others have said the tenant is going to leave when they want to anyway so the lease only locks you in.  If you are a good landlord and your rents are about at market or I like to be slightly below they will stay the 4 years anyway and if they don’t they wouldn’t have anyway.  COVID has changed the way I think and am looking for as many ways as possible to protect myself and in my state at least we can evict for holdover if they stop paying which is a door I like to leave open.  Peoples circumstances change and while today they may be great who is to say that will last 4 years, a lot can happen in that period of time.  

@Jignesh Savaliya A lease that has accelerated rental amounts per year for the 4 years may work well. Although I would caution you that you really love the tenant make sure they are super and care for the property. Build in factors for inflation and any capital repairs you'll need to make in the next 4 years..

@Jignesh Savaliya . I am in Austin, and the rental market is very hot. It’s okay to do a 4 year lease as long you have the rental escalation clause after every 12 months. AND - you must include that the lease can be terminated with 60 days notice (this is only landlords right) - just in case you have a not so great tenant! You want full control over the lease.

@Jignesh Savaliya No. A 4-year lease protects them, not you. You want no more than a 1-year term with the right to renew. One year is already long enough to wait to determine if rent rates or terms need to change based on the market.

Definitely yearly. You never know what might happen . 4 years is a long time - there is no advantage to doing that.

I would recommend to NOT do that. This basically ties you down, no matter how enticing it may feel. people will move when they are ready to move, with lease or no lease - there is not much you can do. But on the flip side, you cannot make them move while they are in lease, you technically can do but will have to jump through hoops. Now the main point, you can not raise rent unless you out 3-5% rent escalator in your lease. I would say keep renewing lease when it is up for renewal with normal increase to offset your property tax and insurance increase every year. I am changing mine to a month to month lease for most part for flexibility and seeing how it all went with COVID, even though I didn't have non-paying tenants.

@Jignesh Savaliya

I had a similar situation, where my tenant started talking about their 5 year plan based on their kids.

I didn't want to lock myself into someone that long just in case I decided to go a different direction. So, I ended up giving them 3 options: a monthly, a 1 year, and a 2 year option that they could choose from. Each option came with a different price point, and I left the decision up to the tenant. My price points took into account where the rental market was and potentially the increase it would go. My goal was to raise rent to be closer to market rent based on the lower rent they had from the previous owner. They ended up going with the 2 year lease and $100 bump.

I, personally, wouldn't consider a 4 year lease like that, especially in a market like any major Texas city with the rents continually going up. But if you're more inclined for stability over maximizing cash flow then a 4 year lease wouldn't be bad, especially if they're a quality tenant. That would prevent you from doing any major move out updates, or worry about finding another quality tenant which will eat into your profits. You could always have three options similar to a 1 year at $1000, 2 year at $1200, and 4 year at $1400. That could incentivize them to go with the shorter option or if they are absolutely set on 4 years then you're making better cash flow in the early stage of the lease. You know the leverage you have since they are looking for stability based on schooling and potentially the crazy rental market, so they could go that direction. Everyone (tenant and landlord) has their own needs, just make sure you have an out in your lease if things go sideways.

@Jignesh Savaliya Keep to the 1 year lease. While you may think a 4 year lease is “safe” income, you never know when circumstances might change. You also would have less option to increase the rent each year.

As a landlord there in no real benefit to a longer lease. I’ve found a year lease then month to month with a 60 day notice has been a great option. I myself stayed in a rental for 4 years, 3 of them being month to month.

Hi @Jignesh Savaliya , I signed a 3 year contract with a tenant, however I included in the contract 2 important sections:

1. Exit point - I specified an exit point every year, so basically both sides can end the contract with 60 days notice every 12 months. If you ask me, I should have done that a one side exit point that only I can exit the contract.

2. Rate increases - just like any other lease, there's the section that says that rent may increase on contract renewal date, however here I made sure it says that rate will increase every 12 months (at the exit point)

Hope that helps