Interesting Conundrum - Thoughts Please!

[Russell Caraotta]

I own a nice 2 family home (3 bedrooms, 1200 sq feet) with good rents in a demand section of Buffalo. My upstairs tenant (currently occupied by him, his long term girlfriend and their 9 yr old daughter) was about to sign our 1 year renewal agreement when he asked me if I would consider a 4 year term as they love the apartment. I like the idea of such security and guaranteed cashflow. He has never had any issues with rent payment on time. I said - "Let me think about how best to structure something like this."

He then asked if I could follow him to the partially finished attic. He inquired if I would be interested in completing the unfinished part to resemble the other section (dry wall, ceiling, insulation). No plumbing would be provided by me. No added electricity. Is it truly a finished 3rd floor - not really - but it will be an upgrade (and increase the resale value of the home). He said he would like to have it available for a couple of his other kids. I envision some framing lumber, drywall, insulation and flooring. So the 3 bedroom apartment can effectively provide sleeping space for at least 2 more people.

I'm curious to hear your thoughts on 1) the structure of an extended lease and 2) The impact of attic modifications on rent. Is it as simple as spreading the cost across X months? My thought is if we do a 4 year lease, I would spread the cost of the upgrade across 24 months to arrive at the new lease payment. In other words, if the cost of the upgrade is $4800, I would divide it by 24 months to arrive at his new monthly lease of $1300 (he currently pays $1100 per month.)

Thanks for your consideration!

Russ

[Kyle J.]

I would not do it.  There is no advantage to the landlord of a lease that long.  It does not guarantee you will not have vacancy, and it certainly does not "guarantee cashflow". 

In reality, tenants can (and do) move whenever they want as they lose jobs, get new jobs, expand or decrease their family size, have a serious illness in the family, or just want to live somewhere else.  And when they do, we can't stop them from breaking the lease and moving.  In fact, in pretty much every state, landlords are required to mitigate their losses and make a reasonable effort to re-rent the unit. 

But you know who can't break the lease?  The landlord.  So for four years, the tenant can leave at anytime they want, but you're stuck with them with no ability to re-assess the market and raise the rent accordingly (even if there's a big spike in market rents).  Doesn't sound like a great deal to me. 

Personally, the longer I am in the business the more I realize shorter leases are more advantageous to landlords.  (I will actually only offer a one year lease initially and then only go month-to-month after that.)  I would never offer longer than a one year lease.  And my month-to-month tenants have been with me, on average, of 5 to 8+ years.  So I must be doing something right. 

Just my two cents.