tenant wants to stay for 3 years+, what to do?

Real Estate Agent · Livonia, NY · Member since 2017 · 13 posts · 1 vote

tenant intiially voiced they wanted to stay at least 4 years due to the school district before signing.

we are almost through year one with them, and will need to restructure our lease in a few months. they have been fine tenants.

i was thinking about incentivizing it, but want some expert opinions.

they currently pay 2795 a month, but a total of 2863 with the property mangement fees( pet and "convenience" fees) but we are getting rid of our property mangement company and doing it ourselves. trying to think of the best way to pitch this

so what i was thinking was:

2863 for 3 years ( it would stay flat for 3 years)

2925 for 2 years (flat for 2)

2975 for 1 year

thoughts?

0 Reply

159 views

Most Popular Reply

Alecia LovelessPro Member

Member since 2019 · 3k+ posts · 2k+ votes

@Matthew Sharman I just wouldn’t recommend signing a lease for more than one year. It’s not worth it. Too many things can happen in the market causing rents to skyrocket. Or something could go wrong that you need to get the tenants out. You never know.

I’ve been effectively “incentivizing” tenants in one building to continue renewing their leases in a town where I haven’t been able to find any comps by not raising their rents for 3 years. Two nights ago I FINALLY found my first comp and realized my rents are now $400 under market value and I’m now locked into leases until next November.

I strongly recommend not doing more than a 1 year lease.

5 Reply

See this reply in the discussion

25 Replies

Jump to latestLatest

Sort by

Alecia LovelessPro Member
Member since 2019 · 3k+ posts · 2k+ votes
2y
@Matthew Sharman I just wouldn’t recommend signing a lease for more than one year. It’s not worth it. Too many things can happen in the market causing rents to skyrocket. Or something could go wrong that you need to get the tenants out. You never know.
I’ve been effectively “incentivizing” tenants in one building to continue renewing their leases in a town where I haven’t been able to find any comps by not raising their rents for 3 years. Two nights ago I FINALLY found my first comp and realized my rents are now $400 under market value and I’m now locked into leases until next November.
I strongly recommend not doing more than a 1 year lease.
5 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
2y
What @Alecia Loveless said ^^^^^. Only a one year lease. Life can change so fast, you don't want to be locked in.....One year lease with incentivized options.
0 Reply
Ray Hage
Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 756 votes
2y
I agree with @Alecia Loveless. Absolutely do not do a lease of more than one year.

@Account Closed I would also advise to raise the rent a little each year but not enough to make then upset or run away. If 2795 is the current market rent for a property like this, then you might raise it a little, so by 50-75 each year after the current lease ends to cover cost increases (prop taxes, prop insurance, labor costs, etc). If you are well below market rent, you might want to raise by a little more.
1 Reply
Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
2y
Do a 1 year lease and let them know you are willing to keep them long term if things continue as they have been.
I did a 2 year lease with one set of tenants and it includes annual rent increases.
1 Reply
Account Closed
OP
Real Estate Agent · Livonia, NY · Member since 2017 · 13 posts · 1 vote
2y
Quote from @Alecia Loveless:

@Matthew Sharman I just wouldn’t recommend signing a lease for more than one year. It’s not worth it. Too many things can happen in the market causing rents to skyrocket. Or something could go wrong that you need to get the tenants out. You never know.
I’ve been effectively “incentivizing” tenants in one building to continue renewing their leases in a town where I haven’t been able to find any comps by not raising their rents for 3 years. Two nights ago I FINALLY found my first comp and realized my rents are now $400 under market value and I’m now locked into leases until next November.
I strongly recommend not doing more than a 1 year lease.

great insight. i suppose i was focused on the positives of continuity but didnt consider any potential issues or large market swings. thank you!
1 Reply
Account Closed
OP
Real Estate Agent · Livonia, NY · Member since 2017 · 13 posts · 1 vote
2y
Quote from @Ray Hage:

I agree with @Alecia Loveless. Absolutely do not do a lease of more than one year.

@Account Closed I would also advise to raise the rent a little each year but not enough to make then upset or run away. If 2795 is the current market rent for a property like this, then you might raise it a little, so by 50-75 each year after the current lease ends to cover cost increases (prop taxes, prop insurance, labor costs, etc). If you are well below market rent, you might want to raise by a little more.

thank you ray. do you think me setting their current "rate" at the total amount they have been paying with the property management company is their current rate (2863) or is 2795 their rate?
0 Reply
Account Closed
OP
Real Estate Agent · Livonia, NY · Member since 2017 · 13 posts · 1 vote
2y
Quote from @Bruce Woodruff:

What @Alecia Loveless said ^^^^^. Only a one year lease. Life can change so fast, you don't want to be locked in.....One year lease with incentivized options.

thanks bruce. what would examples of incentivized options be?
0 Reply
Bill B.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2y
Why in the world are you charging less and less for longer terms? You say they are paying $2,795 but if they sign a 1 year lease you’re going to charge $2,975. That’s a 6.4% increase. That means year 2 should be $3,166 and year 3 should be $3,369. That’s an average of $3,170. That should be your 3 year flat rate. Or $,3070 flat rate for 2 years. The advantage of flat rates instead of increases is the tenant becomes used to it, if they leave early you’ve actually collected higher rents, and you have an easy sell for rent increases when you “haven’t increased rent in 3 years.” My offers would be something like this…
1 year $2,000, MTM $2,050, 2 years $2,100, 3 years $2,200 this is the same as 1 year plus a 10% increase to $2,200 second year and another $200 increase to $2,400 in year 3 (only 9% but collected 2 years in advance). And, as mentioned after 3 years you bring up 3 years with no increases and rents closer to $2,400/$2,600/whatever market rent is
You’re literally factoring in deflation of rents. It would be a GiFT to do $2,975 for all 3 years costing yourself 12%. PLEASE hire a PM. You’re trying to lose more income than a PM costs, while doing all the work yourself. Charging $2,863 for 3 years instead of $3,170 means flushing almost $11,000 away. (9.7% of rent collected, get a PM that charges 8% and you will do zero work while collecting $1,870 more in your pocket.)
1 Reply
V.G JasonPro Member
Investor · Member since 2022 · 3k+ posts · 3k+ votes
2y
I thought about this, and not sure if legal so check rules. But a 1 year lease with right of first refusal for following years, but you dictate price & conditions. They are eligible for ROFR only if other conditions are met(i.e paid on time, no damage, non-refundable fee per exercise of it).
That way you'll get them to behave well, can price accordingly, and hopefully keep them around if they are good.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
2y
Quote from @Account Closed:

Quote from @Bruce Woodruff:

What @Alecia Loveless said ^^^^^. Only a one year lease. Life can change so fast, you don't want to be locked in.....One year lease with incentivized options.

thanks bruce. what would examples of incentivized options be?

Ah, y'know..... if the annual yearly inspection shows the place to be in spic n span condition, you only raise the rent 1/2 of inflation....
Anything else you want to add to make sure that they are treating the property the way you want....
0 Reply
Lynn McGeein
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
2y
@Matthew Sharman I routinely offer 2-yr leases once a tenant has proven to be good the first year - maintains the home, not too many “stupid trips” and pays on time. I usually offer $25 less per month for 2-yr than the 1-yr renewal option depending on rent range. Many mortgages have a clause about an issue with locking in anything more than 2-yr terms so I don’t offer more than that. I prefer solid long-term tenants, as turnovers are a pain, especially if you’re self-managing, so worth the slightly lower amount to me.
1 Reply
Michael SmytheBusiness Member
Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
2y
@Account Closed do you know what the #1 detriment to making rentals profitable is (besides nonpayment of rent)?
It's turnover expenses: fixing up a property after tenant moves out and the lost rents due to vacancy.
A landlord really can't afford to turn tenants every year!
Also do the math, each month of vacancy costs an owner 8% of their rental income (1 month / 12 months).
So, tenant stability is key to making money.
Looking at it another way, would you rather lose 2 months of rent every year (turn costs + 1 month of vacancy) or take 5% less monthly rent for a 2-year lease? How about 10% less rent for 3 years of tenant stability?
Which way will you make more long-term money?
Logical Property Management4.9457 Reviews
Website View Page
2 Reply
Account Closed
OP
Real Estate Agent · Livonia, NY · Member since 2017 · 13 posts · 1 vote
2y
Quote from @Michael Smythe:

@Account Closed do you know what the #1 detriment to making rentals profitable is (besides nonpayment of rent)?
It's turnover expenses: fixing up a property after tenant moves out and the lost rents due to vacancy.
A landlord really can't afford to turn tenants every year!
Also do the math, each month of vacancy costs an owner 8% of their rental income (1 month / 12 months).
So, tenant stability is key to making money.
Looking at it another way, would you rather lose 2 months of rent every year (turn costs + 1 month of vacancy) or take 5% less monthly rent for a 2-year lease? How about 10% less rent for 3 years of tenant stability?
Which way will you make more long-term money?

great alternative way to look at it. thats sort of how i was leaning with my logic. like i would rather keep a good tenant for a long time and "lose" some market value but guarntee no vacancy. i figure i could write in a large penalty for cancellation too prior to term ends.
0 Reply
Bruce WoodruffPro Member
Contractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
2y
I agree with @Michael Smythe generally speaking. The exception is poor quality tenants. Then it is worth the turnover expenses to get them out. Remember that money is not everything...stress and a well kept property have great value as well.... :-)
1 Reply
Ray Hage
Investor · Fort Lauderdale, FL · Member since 2020 · 1k+ posts · 756 votes
2y
Quote from @Account Closed:

Quote from @Ray Hage:

I agree with @Alecia Loveless. Absolutely do not do a lease of more than one year.

@Account Closed I would also advise to raise the rent a little each year but not enough to make then upset or run away. If 2795 is the current market rent for a property like this, then you might raise it a little, so by 50-75 each year after the current lease ends to cover cost increases (prop taxes, prop insurance, labor costs, etc). If you are well below market rent, you might want to raise by a little more.

thank you ray. do you think me setting their current "rate" at the total amount they have been paying with the property management company is their current rate (2863) or is 2795 their rate?

The 2863 makes more sense to me as that is what they are currently paying out of pocket even if it is really 2795+68 for property mgmt.
0 Reply
Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
2y
@Account Closed A lot of times people who have concerns and are asking you for longer leases I have found are calmed by the reassurance that the property will continue to be a rental. I wouldn't offer the longer lease. I tell them if it continues to work out, I will offer renewal.
0 Reply
Aaron N.
Punta Gorda, FL · Member since 2013 · 55 posts · 3 votes
2y
I’ve done year leases with verbal intention of longer leases(as one said above as long as no issues). They’ve been my best tenants and have been there 5 years. I would have inc rents but they’re that good of tenants( and they watch my dogs when I go out of town which is priceless). I may lose a few thousand but if your vacant a month it’s a wash and I never worry about the house or if the checks coming. As in verbal intent all my tenants have an end of lease date but I check in w them a month or so prior as they usually want to stay another year or 6 months. When I’m about 2-3 weeks prior to move out I relist. Usually I’m vacant like one day. These are all 400k homes.
0 Reply
Chris Seidler
Investor · Dayton, OH · Member since 2023 · 14 posts · 13 votes
2y
As a tenant earlier in life I needed multi-year leases as I knew my job would keep me in a specific place for 2-3 years.
Escalator clauses are not uncommon in a multi-year lease. Basically have the rent go up $X every year on the anniversary month. You need to decide what "$X" is. You can Keep it Simple and raise the rent by 4% every year (inflation is historically under 3% so you should make out ok), or you can index to CPI, or you can index to something like military BAH or GSA per diem.
The other option is to just do one year leases and renegotiate. If you're looking for high quality tenants ("A") in a larger SFH that don't want to deal with the hassle of moving after a year you may chase some people away. If you're ok with younger less established people, households with less stuff, a smaller home, etc it may be fine.
I would definitely not give a discount for a multi-year lease.
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
2y
I would rent it to them one year at a time. They are obviously welcome to stay and renew each year as long as they are good renters. Sticking to a one-year lease gives you opportunities to inspect, increase rent, update your lease, etc.
I stopped allowing multi-year leases a long time ago because most tenants broke them. I just had a lady move into one of my rentals who claimed she would be there for 2-3 years. She left after two months with just 15 days notice. I have known her as an excellent renter for five years. The truth is, renters can't predict their futures and can bounce at any time for a variety of reasons.
The DIY Landlord Book4.7244 Reviews
Website View Page
0 Reply
Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
2y
@Account Closed People rent so they have the freedom to walk away and they do. You have no reason to lock yourself into a longer lease. A judge won't hold them responsible for a long duration lease it they break it but I would bet they will hold you responsible if you try to break it.
0 Reply
Jay ThomasPro Member
Real Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
2y
Great news – they're considering staying for 4 years and You're gettin' rid of the property management company-That saves you money, which you can use to incentivize them. Offering a flat rent for 3 years at $2,863 is solid, but with the potential rise in market rents, it may lack appeal. A flat rent for 2 years at $2,925 provides a slight increase, yet might not be enough to counter potential market hikes in the third year. Opting for a year-to-year increase allows flexibility but might not align with their initial desire for long-term stability. Here's a suggestion: Consider a hybrid approach. Propose a flat rent for 2 years, slightly higher than their current rate, say $2,895, and include a predetermined annual increase of $2-3%. This offers short-term stability for them and long-term predictability for you. To sweeten the deal, add non-monetary incentives like free carpet cleaning, a waived pet deposit for an extra pet (if comfortable), or a dedicated parking space. Lastly, be transparent about ditching the property management company, emphasizing streamlined communication and potential cost savings for them.

[email protected]832-889-5607
1 Reply
Melanie P.Pro Member
Rental Property Investor · Member since 2023 · 1k+ posts · 922 votes
2y
They're currently paying $2863. What services are included that you won't be providing?
if they want a four year lease and have been fine, give it to them but make it $2900 year 1 plus have annual 3% steps in the lease so $2985 year two, $3,075 year three, $3,165 year four.
I read a lot of alarmist attitudes about long lease terms here. Not sure why. We start tenants on one year but try to get them to renew for two years from them on.
0 Reply
Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
2y
Quote from @Account Closed:

I'm concerned that you got rid of your PM. So many Landlords think they can do things better on their own, only to lose money by making big mistakes.
Multi-year leases are generally bad. Tenants almost never fulfill the entire term, the Landlord gets lazy with keeping an eye on things, rents rarely keep up with the market, etc.
I do leases one year at a time. If they want to stay for 20 years, that means they will need to renew 19 times. It keeps me on schedule with reviews of their payment history, lease compliance, in-person property inspections, rent increases, lease term updates, and more.
With even a modest 3% increase per year, their rent would be $3,054 in the third year, almost $80 a month more than you currently propose. But the housing market is tight and rents are climbing. What if rents in your market increase 8% for three years in a row?
The DIY Landlord Book4.7244 Reviews
Website View Page
1 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.