is 6 months lease too short?

Question

Do you guys insist on a one-year lease or longer? Is six months too short?

Frank Adams · Answer

I found that many of my problemw went away when I went from a one year to a TWO YEAR LEASE.

1. When showing a place to a prospective tenant you want eveything to look A-OK. Many tenants will cause a room or two to need paint touch up in 6 months. Plus there will be sheetrock to touch up when you pull out the 16d nails that they use to hang their kids crayon art.

2. Carpet that looks really good when it's being lived on will often look tatty in an empty room. Then you'll try cleaning it, which seldom works well.

3. Anytime a place is empty many landlords tend to catch up on deferred maintenance, this is a bad idea as it costs you in forgone rent. The more vacancies the more rent lost.

4. This should be number 1. If a person is not stable enough to stay for 2 years they're not stable enough to be my tenant. I found when I went to 2 year leases I got better tenants and they tended to stay an average of 5 years. Five years of no vacancies and taking care of a few items (bathroom floors, etc) while NOT LOSING rent is a great deal for the owner.

all cash

Frank Adams · Answer

Well I guess I could've kept many of my Houston rentals for a longer term as they were steady payers. They could've provided a good income stream as long as the neighborhoods held up. One problem with Houston is the relative ease with which a new developer can throw up new houses, thereby devaluing (actually more holding steady) the existing inventory.

Two of the reasons we sold our Houston stock was we were getting older and had much less interest in doing work and the fact that we didn't want to stay in Houston long term.

I keep watching some neighborhoods where we used to own, and still have friends. The following are the year we sold, the price then and the probable FMV today. Then the rent we were receiving and the yearly total for taxes and insurance.

Sold in '99-$75K, FMV $90K. $900 rent, $3K T&I

Sold in '99-$72K, FMV $86K, $800 rent, $3K T&I

Sold in '96-$80K, FMV $100K, $900 rent, $3500 T&I

Sold in '00-$118K, just resold-$118K, 1,000 rent, $4K T&I

Sold in '97-$75K, FMV $90K, $850 rent, $3k T&I

Sold in '96-$72K, FMV $90K, $775 rent, $2800 T&I

Sold in '98-$115K, $1050 rent, $3900 T&I. Foreclosed and resold '01 $135K,  FMV today $135K

Our current house we acquired (VIA 1031 exchange) for $186K in Oct. '01. Rented until '03 for an average of $1200 month. Current T&I $5K. After putting $10K into the kitchen and another $4K into other miscellaneous updates we just listed it for $257K.

That's about 4%/year appreciation. On a place that as a rental would only cash flow at the point that T&I eats up 34% of your GROSS rents. Rents in this area are about the same now as in '01.

all cash

You can see that the price appreciation is less than inflation.

Frank Adams · Answer

Perhaps, but I'm not the one that'll have to decide to move (never cheap) or stay and pay an increase next year! So the tenant benefits from knowing that their rent is not increasing after a year.

all cash

Joshua Dorkin · Answer

In terms of rent, then, are you charging the same for 2 years as you would have for a 1 year?

Scott Weaner · Answer

Cash, thanks for clarifying.  However, if all things were entirely equal, I would think a 2 year lease would benefit the landlord more than the tenant, hence a slightly lower rent.

Frank Adams · Answer

NO! In fact I always charged HIGHER than average rents, (note, I no longer have rentals but I'd still do it this way). My houses always showed better, better amenities (grog door openers in neighborhoods where they weren't "standard"), cleaner etc, than the competition.

I would have people call me and ask the rent, when I answered I would often here, "the guy down the street is $30/month cheaper". I would always answer, "that's true, but here's why mine is worth more".

1. No holes in sheetrock or dog poop on carpet-I always "shopped" my competition.

2. Extra insulation in attic and "solar reflective" screens no all south and west facing windows. I'll even show you my power bills.

3. Automatic set-back thermostat (generally both tenants worked, no sense in cooling a place while no one is there.

4. Ceramic tile in the kitchen and baths.

5. Etc, etc, etc.

6. Best of all with me you get the stability of a TWO YEAR LEASE. No worry about your rent increasing!

all cash

Scott Weaner · Answer

Cash,  do you typically charge a lower rent when going to a 2 year lease?

Account Closed · Answer

Great detail All Cash. Thanks for taking the time to share it.

John Corey

Account Closed · Answer

Great post All Cash.

As you also sell with seller financing any sense of the portfolio mix? The number of rentals vs. the number of times you sell but take back a note?

Is there any way to tell when it makes more sense to hold as a rental vs to sell on seller financing? I tend to look at the rental income vs. value of the property.

John Corey

Account Closed · Answer

Some markets are very seasonal so people landlords prefer to have leases that get through the winter.

In other markets a month to month rental agreement is preferred. No guarantee that the tenant will stay any minimum amount of time and easy for the landlord to move problem tenants along. You can use the pricing to motivate tenants to stay as long as they likely would have stayed if you had them on a lease.

John Corey

is 6 months lease too short?

Most Popular Reply