Pros and Cons of a Two year Lease?

Question

We have pleasant, reliable, and non-complaining tenants with us for a year now, and we are thinking of extending their lease for two years instead of just one.  The only disadvantage I can see here is that we may have to lock in the rent for two years, so perhaps I can put in a language to increase the rent 5% starting year two.  Is there anything else that we should consider or is it a bad idea to have a two year lease?

Levi T. · Answer

We extend as far as the law will allow us.. 5 years at a times. If your near market and happy with rents, don't worry about getting every increase you can get per year over a small number of years, the turnover cost saving alone is a big win.

We have tenants that have been in the units for 20+ years, they are $100 under market in most cases. We will gladly hand them a multi year lease, as we will get another 5 years of no cost.. when the time comes that we are to far under, we adjust to near market prices, and keep going. If they can't handle it, they can go rent somewhere else if they are lucky to find such pricing, normally they can't... so its a win-win for us. You want to avoid turnover as much as you can in this business, it's not cheep!

Nathan Gesner · Answer

Your biggest expense is turnover. The longer you keep the tenant, the more you save. You will make more money with one tenant for two years at $1000 a month then you would if you had one tenant for a year at $1000 a month and then a new tenant for the second year at $1050 a month.

I am a strong believer in keeping rents at market rate. If they go too far below market you tend to attract lower-class tenants and more problems. The exception to that is a quality tenant for a slightly lower rate and a longer-term because you save much more in turnover expenses.

On the flip side, long-term leases are no guarantee. In my experience, about 50% of the tenants end up terminating within the two-year period and leaving early.

My recommendation is to sign them up for a two-year lease at the current rent rate which provides stability for both parties but include a stiff penalty if they break the lease early.

Andrew Johnson · Answer

@Jackie Sladky I think I have a similar thought process as some of the other posts:  Don't put a good tenant in jeopardy for 5%.  The benefit of a 2 year lease to you is saving turnover costs.  The benefit to the tenant is the rent doesn't get raised.  If you have a good tenant, it's a win-win.  Unit turnover isn't free, at bare minimum you'll have it vacant for 2 weeks doing touch-up, showing the property, processing applications, etc. so that's 4% due to vacancy.  And touch-up paint is going cost something, carpet cleaning is going to cost something, etc.  In short, your best case scenario is a wash in terms of turnover costs vs. a rent raise.  Now there's nothing to say you can't put language in about a rent raise but then you lose the win-win.

Lynn McGeein · Answer

I prefer 2-year leases, while understanding they are not a guarantee.  I actually advertise a slight discount, like $1275/month 1-year; $1250/month 2-year term.   I prefer less turnover, and 2-year leases have worked successfully for me.  I have had more tenants leave early with 1-year leases than 2-year.  And my 2-year lease term is my target rent, anyway, so if they do sign a 1-year instead, I'm making slightly more to help offset the possible 1-year turnover.  I had a unit that turned over each year as it is a neighborhood good for those transitioning to home-ownership.  So I started with the 2-year lease and it helped greatly as since I've started it, the first tenant stayed the full 2 years, and the newer tenants are going on year 3.

Check with your mortgage docs before doing more than 2-year terms as many have a clause in them about no leases over 2 or 3 year terms or it can trigger a due-on-sale clause.

Jackie Sladky · Answer

Thanks everyone for your input and yes, it's very important about type of the tenants.  We have a condo in Atlanta where I have a two year lease with my current tenant.  He is the best ever, but I did increase the rent $100 a month before agreeing.  He takes care of the place better than a PM can.  Here is one example: when the bathroom leaks water down to the unit below, and they complaint, he met them and promised to fix it immediately.  Then he caulked the bathroom himself and tested.  The problem solved and since there was no stain in the unit below, I incurred no cost.  Before this tenant, I had two other successive and excellent tenants staying for a few years with one year lease.  With the job move, both had to break the lease and both worked with me to get it rented.  I selected the potential tenant and they showed the place.   I ended up with having less than a week of vacancy at this condo in the last 10 years.

@Linda D. I didn't think of providing the tenant improvement of property as incentive.  It's another win-win situation, and I will offer this to our current tenants.

Chinmay J. · Answer

Also, to piggyback on my response some newer landlords think that by signing a long term deal if the person wants to break the lease after say 5 months, the tenant will just automatically write them a check for remaining 19 months..LOL. No one is that stupid. At most they are going to get 2-3 months worth of rent, and if it goes to court judge will look at it and award you rent for however long it's reasonable for you to find a new tenant.  Not much of a windfall there.

Chinmay J. · Answer

That defeats the purpose of having 2 yr lease. If I were a tenant the only reason why I would sign 2 yr lease is because it gives me peace of mind that my rent won't go up for at least another 2 yrs. Personally for me, a good tenant is worth more than making additional 5% per month, as 1 month vacancy is about 8% - typical time I would need to find another tenant.

Only time I really want to raise rent is if I want to push them out or if they leave.

Kyle R. · Answer

Don't conflate a signed two year agreement with a guarantee that the tenant will be there for the entirety of the lease. I recently had a tenant default on her lease as she lost her job. She was one of my best tenants, always paid on time and never gave me problems. This coming June she would've been one year into her two year lease.

Linda S. · Answer

@Jackie Sladky,

Personally, I'd never sign a 2-yr lease-- it locks the landlord in!

If they are great tenants, and you want to keep them, offer incentives to improve the place.   Each year  we add a  up to $200 improvement to the property,  and the tenant is the one that tells us what they want.  Tell them you want to continue to improve their homes, and it's tax deductible.

Mike S. · Answer

As stated above, a long term lease only obligates the landlord.  In all practical aspects, a tenant can leave at any time.  Most states require the landlord to do due diligence in finding a replacement tenant if the tenant breaks the lease early.  Judges will often not allow more than one month rent collected on early lease termination, even if you have 11 more months to go on the lease. And, if you find yourself in court and you don't have proof of actively trying to find a replacement, you get nothing and are in possible jeopardy if you kept the deposit.   But, not all tenants know this.  So, there can be some psychological benefit.

Pros and Cons of a Two year Lease?

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