Should I Offer My Tenant a Longer-Term Lease?

Should I Offer My Tenant a Longer-Term Lease?

As a building owner or manager, you have a lot of decisions on your plate. From capital investments to tenant selection, there is never an end to the choices that you make on a daily basis - and for the long-term success of the property. One of the most critical in terms of tenant retention and satisfaction (as well as risk mitigation) is whether or not you should offer a longer-term lease to a tenant. What are the pros and cons?

 

The Pros of a Longer-Term Lease

As you know, keeping a stable tenant in place is incredibly advantageous. You can lower your risk of dealing with vacancies, which can be tremendously costly. You essentially "lock in" a tenant and create stability for yourself (and for them) over the term of the lease.

There are other benefits involved in a longer-term lease as well. If a tenant commits to a 24-month lease (or longer), it is likely they will stay in place and that they will treat the property like it is their own. You're typically less likely to deal with every owner/manager's nightmare: extreme destruction and middle-of-the-night moves. They view the apartment or unit as theirs and care for it accordingly.

Further, it can be less costly to retain a current tenant than it is to attract and screen a new one. Other potential benefits of longer-term leases include:

  • Consistent cash flow.
  • Ability to leverage long-term tenants for better lending terms.
  • Stability in the face of market changes.
  • Ability to plan more strategically in terms of paying off debt and investing in your property and/or other projects.
  • Possibly increasing value (potential buyers like the idea of stable, long-term tenants so they can "hit the ground running").

Regular income is a huge boon for building owners/ managers. But there are some risks to consider when extending longer-term leases.

The Cons of a Longer-Term Lease

An "ideal" situation can head south in a hurry. Possible dangers of a long-term lease include:

Being stuck with the "tenant from hell." A reliable tenant can turn into a nightmare. Whether they've lost their job, or they simply don't care about respecting your property, you can be locked into a situation where you have to deal with a troublesome tenant longer than you'd like.

Maybe they started hoarding or collecting pets. Maybe they sublet their space in defiance of the lease. Maybe they disturb other tenants with loud music or late-night antics. Maybe they're few days late on the rent this month, and a few days later next month.

Any way you slice it, they can erode your profitability and make your property less attractive to other current and prospective tenants.

You may miss out on advantageous market changes. Say that property values and rental rates increase in your area. While stable income is an incredible benefit, you'll miss out on the opportunity to increase your operating income and/or profit margin with long-term tenants. Their rents will remain stable in accordance with their lease. While this is advantageous during stable or down markets, it is a missed chance during boom times and/or in emerging neighborhoods.

To hedge your bets, so to speak, you can add a mid-term rent increase clause to the lease. If you have a great tenant, adding this clause allows you the right to raise the rent (in a fair and reasonable manner, and in accordance to the lease), if the market warrants it.

The question of whether or not you should offer tenants a long-term lease is complex. In many cases, it boils down to the reliability of that particular tenant, weighed against the conditions of the rental market. If you need help making the right decision for your investment/ownership goals, contact the team at Asheville Phoenix Properties. We are happy to assist.

More in this category: « Top 5 Lease Agreement Clauses