Short or Long Lease?

Question

Hey BP,

Bottom Line Up Front: I would love your feedback on whether to do a three-year lease or a more traditional lease

Background:

I am in the military and my family and I are moving from Chesapeake, VA to continue my career elsewhere. My wife and I have decent equity in the house and have decided to rent instead of sell. She is a master networker and has already located potential tenants. Based on some initial screening they are about as good as tenants could get—military couple, high ranking officer (Chaplin), no pets, no kids (we did not ask, this it was mentioned by them.) Either way, we still intend to have them complete standard tenant screening as a CYA and to consider Fair Housing Laws.

This will be the first rental my wife and I take on. Long story short, if these tenants or similar situation tenants do not work out, we intend to use paid PMs in the area (standard 10% fee).

In talking with these potential tenants, they will have three years military orders in the area and the military member is planning to retire and move elsewhere after these coming three years. They have previously only rented direct from the owner and have almost always done long leases.

At the current moment, we could likely get $2900 per month in rent (pure cashflow around $150). Based on my understanding of rent increases in the area and the lack of laws I found dealing with how much rent can increase in VA, we could raise the rent around 3-5% reasonably per year ($90-145 per month = $1080 - $1740 per year = $3150-$5220 over a three-year period). In my head, I am not sure that even the potential of increased rent is worth losing out on tenants in place.  My wife and I are not depending on cashflow for this property. The goal is mortgage paydown and a property that allows for a flexible transition from the military in around seven years.

Also, based on when we are putting the property on the market, we would likely do a 14 to 15 month lease to get our house back on track with high volume moving season (on the market in Feb/Mar of 24).

Question: What would you do in our situation; a 36-month lease or a 14 to 15 month lease?

I am sure there is more detail needed for you all to help and more considerations that we have not thought of, I appreciate any assistance in advance! Thanks!

-Logan

Lorien Rollins · Answer

Hi Logan, congrats and great choice (not to sell). I have a SFH in Denver, NC and also decided not to sell, but to rent it out instead. I have an 18 month lease in place with my current tenants, for the same reason. I too am not dependent on the cash flow from the house, however there is potential to increase the rent 18 months from now. They are great tenants and will likely remain, unless they're in a position to buy. I would say sign an 18 month lease, offer the renewal at month 15 (gives the tenant time) and offer another 18 month (gets you to your 36) OR you could put an addendum in the lease that states you'll be reviewing the rent and have the right to increase (they have the right to decline / move out with a 60 day notice) if you wanted. This gives them the 3 year lease that they NEED, and it gives you the opportunity to increase over time with the market.

That's my 'two cents' from NC :)

Artfully,

Lorien

That's my 'two cents' from NC :)

Artfully,

Lorien

Benjamin Carver · Answer

Personally I prefer short term if you have no HOA. Raleigh is pretty chill with str. Find a great cleaner or two and they do most of the day to day management and guests typically treat the home like somebody else's while tenants treat it like their own. And one bad airbnb guest is not near as bad as one bad 12 month tenant that trashes it over a year or you have to evict. PMs take a big chunck of your revenue but bnb guests usually cover most or all of the cleaning costs. Higher upside. But yes, not as consistent and can't use to qualify for a loan. So it definitely has it's drawbacks.

Logan Sierra · Answer

@Lorien Rollins thanks for that perspective! My wife and I both think that the contingency to raise rent is a great option! Best of luck to you and your investments!

Patti Robertson · Answer

Hi there.  Hampton Roads PM here. We always offer to coordinate the lease term with a military member's orders. Be sure to ask for a copy of their orders so you can confirm their Projected Rotation Date.   We just had one apply who had orders to be here only for 6 months, but knew his orders can get him out of a lease.  He was applying for 12 month places because they are cheaper than 6 month rentals.  We only accept military applicant's who's orders show that their intention is they can fulfill a full term lease.  That said, we find that most military members prefer to stick to a one year lease, because of all the horror stories they have heard over the years.  If we are able to get a multi year lease signed, we sometimes include an escalation clause.  It just depends on how the price is now.  If you are at or above market, we would likely leave it set for 2 years and add a bump for year 3.  If you are advertising during the winter, you probably won't be asking top market, so we would escalate annually.

Logan Sierra · Answer

@Kevin Sobilo I had never considered that before: whom will the longer lease benefit. With that in mind, I can definitely see the benefit of essentially have a flexible mindset when it comes to lease lengths and potential contingencies based of 1) needs of the business and 2) needs of the tenet. If we can meet both of those needs then we should be in a good spot! Thanks for the advise and best of luck to you and your investments!

Kevin Sobilo · Answer

@Logan Sierra, if the tenant has a specific reason to want/need a longer lease that is an ideal situation to consider offering that longer lease. Most tenants aren't locked into that longer time-frame like that and leery of committing to a rental for that long.

If you were offering a long term lease to the general tenant pool it would be for your benefit not the tenants. So, you would likely need to offer incentives to get them to agree such as no rent increases. However since this tenant NEEDS 3 years of rental for a specific reason they are more likely to consider a 3 year lease with modest increases.

So, I would offer the 3 year lease to THAT tenant.

If that tenant doesn't work out, I would default back to a 1 year lease. If you want to get to the 14-15 month mark you can always allow the lease to expire as most leases go month-to-month when the initial period ends and then give them notice at the appropriate time.

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