Although owning rental homes has a well deserved reputation for generating passive income and building wealth, the demands on owners typically increase when the property is vacant. There won’t be any money coming in, and at the same time, owners have to spend money to prepare the property for the market.
You’ll still have to make the payments associated with the mortgage, insurance and taxes, as well as any homeowner association (HOA) fees you pay, along with the time and money you spend searching for new tenants.
An effective way to limit vacancies has been to ask for longer leases. The typical lease length for residential properties is 12 months, while it ranges from 24 to 36 months for commercial properties. Even though longer term leases aren’t the norm for residential properties, some tenants stay for many years.
How Longer Term Leases Save Investors Money
Asking for a longer term lease for residential properties will reduce turnover and increase retention rates. The tenant benefits because there’s security in a longer lease period and you’ll benefit by reducing the expenses that occur because of vacancies, like:
- Maintenance and cleaning. How extensive these expenses are depends on the condition of the unit. If it’s overdue for updating, the costs could be high. New flooring, plumbing fixtures and fresh paint throughout require specialized contractors and labor costs add up faster than materials. Although you’ll be able to reserve some of the deposits the previous tenant paid, it won’t be enough to cover all the improvements you may need to make.Unless yard maintenance is included in a HOA fee, during the lease-up phase, you also have to maintain the yard by watering the landscape, mow the lawn and keep the sidewalks and driveway clean. Unless you do the work, you’ll have to pay someone else.
- Marketing costs. It costs money to show your property, whether you do it yourself or hire someone else.
- Utilities. Besides making the principal and interest payments, you’ll probably want to leave the water and electricity on. Unless it’s a tight rental market, you’ll probably want to cool the house down before showing it during the summer.Anything you can do to get prospective tenants to stay in the property longer helps you rent it. You or your representative can describe the home’s features, what makes it livable and its advantages. If the air inside is intolerably warm, stale, or stuffy, you’ll have a problem overcoming their urge to leave due to the discomfort.
How to Attract Long Term Tenants
When you or your property management company prepares the rental for a new occupant, give some thought to the financial goals you want to achieve. Lay out different spreadsheet scenarios based on lease length, and how long the unit will remain vacant using different retention and rent rates. You may find that renting it for a lower monthly rate over a longer period increases your ROI.
If the bottom line looks better with a longer lease, take the next step by making it attractive to a tenant, as well. You might offer to:
- Reduce the monthly rent over the period of a longer lease;
- Build in an allowance and schedule for select annual improvements; or
- Negotiate with the prospective tenant based on their preferences.
See also How to Avoid High Tenant Turnover
The Bottom Line
Longer leases have worked successfully with the vast majority of commercial properties. They may work well for you and your next tenant, given the many benefits you both have to gain.
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JWB has over 10 years experience managing turnkey rental property investments. We have a consistent approach that delivers steady cash flow from our clients investment properties. Curious what your cash flow could be from one of our rental properties? Try our cash flow calculator or contact us to learn more.