Any pitfalls with a 5 year lease?

Question

We have tenants that are coming up to finishing their 2nd year with us. So far we’ve had a great experience with them, and they love the house, neighborhood and service we provide.

We’re replacing the shower/tub combo in the master bath to a walk-in to make it easier for them to get in and out. After letting them know that we’ve decided to give them the walk-in shower that they asked us for, they brought up committing to a 5-year lease.

What are some pitfalls to keep in mind with long lease agreements?

So far on my list:

1. We cannot raise the rent. (We likely wouldn’t raise rent anyway since we’re cash-flowing and would like to hold onto these guys for as long as possible)

Ryan B. · Answer

On my multi-year leases, I specify that there will be rent increases each year... Usually $25/month more in the second year, another $25 in the third year, and then it coasts there, but each side can decline to renew after the third by giving 90 day notice. Thus, I'm getting my rent increases.. and if the rent is out of whack with market at the end of the term, either can opt out to renegotiate.

If you'd ever want to sell the property, a 5-year lease would clearly encumber such a sale.

That said, if you likely wouldn't increase rent anyway and you want to keep them as long as possible, go for it.

If you'd ever want to sell the property, a 5-year lease would clearly encumber such a sale.

That said, if you likely wouldn't increase rent anyway and you want to keep them as long as possible, go for it.

Bill B. · Answer

I’ve done a 7 year and a 5 year with a 5 year option. Both worked out well. Like you I didn’t budget rent increases in the 7 year and only $100/mo increase in the 5 + 5 but what I wanted and got was 1) no vacancies for 10 years and no turn over costs. If I had 4 or 5  two year leases I would have had a week or two vacancy 3 or 4 times plus some new carpet, some paint, maybe new appliances. I literally replaced one garbage disposal, a garage door opener, and a microwave in 17 years of rent. If they move out I’ll make the place like new for next tenant or sale as appreciation has been insane.

Mark H. Porter · Answer

You have got to have a built-in increase simply to cover inflation.  Do you really want to lessen your income by not covering 5 years of inflation?  It's a guarantee that any of the utilities, property taxes, or building insurance that you pay for will go up every year.

If you are going to lock in the price, lock it in for no more than 2 years.  After that, state a minimum of 5% (3% to cover inflation (highest in 9 years) and another 2% for your profit)

Cody L. · Answer

I realize I have a more libertarian mindset but I can’t even imagine why this wouldn’t be legal?

how could the government justify using its monopoly on force to stop two people from signing a contract between them for the rental of a property?

Kyle J. · Answer

The longer you're a landlord the more you'll realize that longer leases benefit the tenant, not the landlord.  And a 5 year lease is crazy (in my opinion).

That usually means 5 years of no rent increases.  Your costs to own the property will go up (taxes, insurance, maintenance, etc).  Why wouldn't you want raise the rent to off set that?

Also, I know landlords think longer leases help avoid vacancies, but I don't care what anyone says, leases do not prevent tenants from moving.  Life happens and tenants lose their jobs, they break up, get divorced, have kids and need bigger places, can't afford the current place, or whatever....and then they just move.  It happens, and you can't stop them.

On top of that, in almost every state you can't even hold them responsible for the balance of the lease when they do move because the law says you have to make a reasonable attempt to re-rent the property to mitigate your losses.  And as soon as you do, the tenant is off the hook.

And hopefully you never want/need to sell the place while that lease is in effect because not many buyers are going to want to inherit that lease.  So you'll either have trouble selling the property or take a serious haircut on the price from a landlord buyer who knows they won't be able to raise the rent for the next few years.

Personally, I would never offer longer than a 1 year lease.  You're just putting all the control in the hands of the tenant when you do.

Joseph Cacciapaglia · Answer

I think everyone above gave most of the arguments against doing it. If you decide to go forward anyway, you could always put in the lease that the tenant is responsible to reimburse you, as additional rent, for any increase in insurance or taxes over that period of time. This may seem more reasonable than arbitrary $25 rent bumps each year, but essentially covers you in a similar way. I've done several deals like this with commercial leases, but haven't ever applied the strategy to a residential property. It might just be easier to do a set bump, and explain that this is the purpose.

Roma Montifar · Answer

@Mark H. Porter thank you for pointing this out looks like I will have to crunch some numbers.

My argument against this would be comparing loss of income due to inflation against turnover costs and possible month or two in lost rent payments while we find an equivalent or better tenant.

These guys are also very low-maintenance and take very good care of the home.

Roma Montifar · Answer

Ended offering two options to the tenant:

1 year lease with $100 increase to catch up with market rates that went up significantly since last year. $25 min increases once its time to renew the lease again going forward.

Or

2 year lease with $50 increase the first year and another $50 the second. $25 min going forward.

They chose option 2

Cody L. · Answer

Not going to argue that

CJ M. · Answer

@Cody L.

No idea, but there are dumber laws out there that get reinforced...

Any pitfalls with a 5 year lease?

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