Referral Fee and 3 year lease, are these comon?

Question

I’ve been reading “Landlording on AutoPilot”and given that I am an injured Vet(wheelchair bound) , learning I can handle everything pertaining to the business with my technology is amazing…. My questions are; Is there people really willing to sign a 3 year lease on single fam rentals? and lastly, When moving out a tenant does Incentivizing referrals really produce viable tenant/reduce turnover …… please help, Our single family is almost done and I’m worried about being the best i can be for the business. Tips on a book or personal testimony are greatly appreciated..

Thank BP fam

Thank BP fam

Nathan Gesner · Answer

Jake, that's ridiculous. Brandon Turner had around 60 rentals and a very successful podcast when he started writing. He now has thousands of units and still writes books. Matt Faircloth, Chris Clothier, Gary Keller, Robert Kiyosaki, Scott Trench, Steve Wozniak, Mark Cuban, Richard Branson...need I go on? Successful people are capable of running businesses and writing books, mastering languages, mentoring others, volunteering for charities, and many other tasks not directly associated with their business.

@Cedrick Givens be careful with leases longer than a year. I manage 400 rentals and used to allow two-year leases until I watched over 80% of them cancel early. The fact is, renters can't predict where they'll be in two years. Many of them offered to sign a two-year hoping it would give them an advantage over other applicants. Longer leases are also more likely to put you behind on market rates. If you signed a three-year lease in 2019 for $1,000 a month, then you would probably be 25 - 30% behind market rates by 2022.

Gregg Cohen · Answer

I'm always surprised that more folks in the BP community don't see the advantage of long-term leases.  For our clients and my own personal rental properties, there's no question that signing a 2-3 year lease with a resident results in a win for the property owner and a win for resident.

When a property turns over, it costs the average property owner $5k-$6k in vacancy cost, maintenance costs, and a new tenant placement fee.  The reason most rental property investors are not successful and end up out of the investing game is because they work with property managers who only sign month-to-month or one-year leases and investor incurs this cost every year or so.  However, if you sign 2-3 year leases and focus on a strong lease renewal strategy, your average duration of resident stay might be 3, 4 or 7+ years like REI Nation and @Chris Clothier.Just look at the numbers:

All-in cost of prop turn: $6k per turn (vacancy costs, repairs costs, tenant placement fees)

Potential rent escalation per year: $600 - $1,200 (typical for most cash flow markets)

Would you incur a $6k expense every year to potentially make $600 - $1,200?  Of course not.

*And here's the kicker...we STILL get these rent escalations during the 2-3 year leases so I fail to the see the downside here.

I'm with @Chris Clothier.  The way to win in rental property investing is buying and holding for a full market cycle (10-20 years.)  You need consistent income from rents to help you stay in the game that long so you can maximize your 5 profit centers.  Long-term leases are the foundation of why our clients are achieving consistent passive income.

Daniel Correia · Answer

@Gregg Cohen I love what you guys do out there at JWB I am a huge fan! Keep up the good work.

I actually prefer the 2+ year lease agreements on my personal rentals, I try to keep the residents in the property for as long as possible - my advice is to just make sure you include an % increase escalation clause per year.

Colleen F. · Answer

@Cedrick Givens   I disagree on multiple year leases.   Residents will stay a long time even on 1 year leases but when they leave, they leave pretty quickly.   If they are buying a house or relocating for work they aren't waiting for their 2 or 3 year lease to end so it is no guarantee.   I just had two tenants sign for a year in May and they both broke their leases.   They were renters for 6 and 3 years respectively. Besides you need to evaluate the language in your lease on an ongoing basis so yearly renewal you can do it. I am surprized now as I am filling a unit now and saying I want to do month to month  because of the current environment none of the prospects so far seem to be concerned about that.  I usually do annual leases.

Chris Clothier · Answer

Thanks for the shout-out Nathan.

Cedric, where are you located?  Is the house local to where you're at?  There are two very different ways to go about being a hands-on, active landlord.  One treats your renter like a short-term tenant that are a dime-a-dozen and can be turned over at a moments notice.  You can view them with mistrust and let that be your demeanor.  The flip side of that is to treat renters as long-term residents and take that approach.  The words tenant and resident mean the same thing but can be used to build a very different relationship.  If you decide to refer to your renters as residents and take a professional approach as a landlord, make sure you are prepared to hold both the resident and yourself accountable.  Do exactly as you say and act professional every step of the way. Don't meet at the house or the local coffee shop to sign a lease.  If you have a local closing attorney or title company with a conference room, ask if you can rent it for your closing.  Make sure you use a professional lease and not one copied off the internet.  Make sure it applies to your local area.

As for multi-year leases, we've used two-year only leases for the past decade.  Today, our average length of occupancy is over 6 years.  We have step-up rents written into the lease and 98% of all lease extensions have rents increases.  Where you're located will absolutely factor into whether you use multi-year leases, but we manage over 7,000 properties through the southeast and have collected over 97% of billed rents through covid.  We are not having major issues with residents paying rents.  The biggest reason why is that we have highly renovated homes and we treat them with respect - as long-term residents.  For three year leases, @Gregg Cohen is the expert at longer than 2-year leases.  His company in Jacksonville, FL manages several thousand single-family homes and I think more than 30% of their leases each month are 3-year leases.  They are also successful at keeping properties occupied long-term with rental increases.

Make sure you reach out to local landlords and feel free to send me a message here on BP if you have other questions.  Keep reading.  Keep reading.  Keep Reading.  Learn as much as you can about rental real estate and do your best to connect with other investors.  Most are happy to encourage and share what works for them.  Best of luck as you get going.

Nathan Gesner · Answer

Deleted because it's not worth my time.

Gregg Cohen · Answer

Account Closed - I appreciate your perspective.  It seems like you had a great experience with the recent property that turned over and I'm happy it worked out for you.  I've owned and managed rental properties for 10+ years and I could also share dozens, probably hundreds, of examples with 0 days on market and $0 maintenance costs of the turn.

The $5k-$6k average cost per turnover comes from a data set of managing over 4,100 properties in Jacksonville, FL for 10+ years.  It includes the opportunity cost of lost rents, the average repair costs to put the house back into great rental shape and the subsequent tenant placement fees that you will incur if you work with a property manager.

Too many investors have rosy-colored glasses when they get into rental property investing and then they end up frustrated with the lack of consistent, positive cash flow.  I take a different approach with our clients.  Prepare for the worst and hope for the best.

Lynnette E. · Answer

I would never do a lease longer than a year.  I do a year lease then go month to month.  If they really want to break the lease and leave, they will and you are obligated to quickly re-rent the unit and only charge them for the vacant lost time.  In theory they are responsible for the rent until it is re rented, but how much time does that take if they did not trash the place?  A few days to a week?

That also allows you to let them go earlier.  After a year you know if they are going to pay on time, keep the place clean, complain about everything, beat their co-tenant, leaving holes in your walls and so forth.  Sometimes at the 6 month timeframe I find myself looking forward to trading them in. One tenant had 3 months in and 3 notices for not allowed pets, rabbits, pit bull puppies, etc. all found there when other tenants of the apartment complained.  Same ones 2 late notices in that 3 months, two late night calls "I kicked him out, do I have to let him back in?  What if the police told him to leave, does he have to pay rent too? oh I forgave him, we are working it out, can you fix the hole in the living room and hall? OH I threw out the fire alarms they do not work right they go off when I cook, every time."    I'd hate to have to put up with some tenants for 3 years...their games get old.

I would not consider paying for referrals unless you are in a rental saturated market where units sit unrented for months on end, and even then, you should sell and invest elsewhere.

I get calls weekly asking at random if I have a unit to rent.  When someone hears that I will have a vacant unit they tell their friends to call me.  I often do not even advertise my units.  And when I do, I get enough applicants to find a decent one pretty quickly.

Bjorn Ahlblad · Answer

@Cedrick Givens last 5-6 years we have done MTM leases this keeps tenants respectful. Book I like is Managing Rental Properties by Brandon Turner he runs Podcasts on here too. All the best!

Gregg Cohen · Answer

@Daniel Correia Thanks for the support!  Yes, rent escalations are huge and can be accomplished within a 2-3 year lease.

Referral Fee and 3 year lease, are these comon?

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