Landlord rights in regards to Military lease early termination

[Corey M.]

I purchased my 1st investment property from REI Nation last year and a major selling point to me was that the average tenant staying for ~5.5 years. This morning, after ~1.5 years, I was informed my tenant is terminating the lease early, without penalty, because of a military transfer. I looked in the lease agreement and there is no language to support this move. However, there is apparently a federal law allowing for military transfers without penalty. I wish I was aware of this up front, as I would've thought twice about renting to someone who is likely to be relocated during the lease term.

Re-leasing the unit is going to require me to make any necessary repairs and pay one month's rent to the management company for finding a new tenant. In short, this early termination is likely going to wipe out my cash flow for the first year-and-a-half of the lease. It's a huge bummer to have both repair and re-leasing expenses this quickly.

As a landlord, what are my rights here?

- REI is saying the tenant is only responsible for this month's rent, but in my brief googling, it appears they are also responsible for next month's. Is that correct?

- To prevent this in the future, is it within my landlord rights to tell the management company to only lease to a civilian? I want to support the military, but also don't want to lose money on this investment, which will happen if I keep putting in tenants who are likely to get transfers.

I'm sure there are seasoned landlords who knew about this rule, but it had never been brought up to me; I was a little blindsided by the financial hit. Some of it may be recouped by a higher rental fee for a new lease, but it doesn't look like rental prices have increased significantly in the area.

@Chris Clothier, would you mind weighing in?

[Scott Trench]

I think the issue here is with your underwriting. No way should a turnover event every 18 months wipe out your cash flow. That's way too tight. I would model in 5-10% vacancy into your projection model (using the BP Rental property calculator). I don't think I've ever run a report on a rental property that assumes less than 5% vacancy, and usually up it to 10% for good measure. One month of vacancy every 18 months is about 5% vacancy (and 1st months rent paid to a property manager is 1 month rent - so paying this every 18 months is equivalent to a month's vacancy). 

You haven't even had vacancy yet. It's possible your PM company places a tenant right away and you don't have vacancy - just the placement fee, which is standard across most PM companies I've worked with. If that's the case, then you will be towards the "Good" end of normal vacancy.

Next, military communities are notoriously good for landlords, because of the steady flow of tenants, and many servicemen receive Basic Allowance for Housing (BAH) which means that they are highly likely to be good on rent. That's a plus, not a minus, for a rental market in my view. 

Lastly, I'd also be very careful about indicating that you have a problem renting out to folks in the military. We want these people to stick their neck out for us and the free world. We are going to make life harder for enlisted men who are highly likely to pay on time when they get orders for a new duty station or deployment? 

If this deal gets wiped out by this turnover event, then the deal was likely too tight and required nearly perfect conditions to be successful. I'd be stricter about the underwriting requirements, and get more of a buffer on the next one. We need a margin of safety in these deals that can account for these types of events.