Long-Term or Shorter-Termed Leases, What’s Better For Your Rental Property?

Landlords tend to have firm opinions on this subject!  However, not all rentals are alike.  When deciding if they want to manage long-term vs shorter termed leases, these are some factors Landlords need to consider:

• Rental Housing Type: single-family homes vs. multi-family units.
• Location: Downtown living is much different than living in the burbs.
• Financial Outlook: Is this rental a long-term hold?
• Time to Manage: Another 9-5 job, age, and team dependability are factors.

Let’s take a deeper look into each of the above points.

Rental Housing Type

The Single Family House

Single-family homes seem to be a common first step for entering the real estate investment market.  The upside to owning a single-family home is that when renters move in, they are likely to stay put until they save enough for a home of their own or need to move out of the area.  The idea of having a garage for the hot-rod and a yard for the kids and dog to run around in is appealing.  As landlords, you can also usually require a longer lease upon entry, typically two years.  Note: if you select this option, do yourself a favor and build an automatic rent increase of at least 5% (or max rent control allows) after the first year.

The downside is that once you sign them into a long-term lease, it is challenging to get them out.  Now, this will depend on if your rental is in a tenant-friendly state, how well you vetted their application, and how detailed your lease is.  Let’s look at the following scenario:

Tina the Tenant

This tenant applies to rent your single-family rental.  Tina makes plenty of money to cover the rent, has a concrete reason for wanting to live in your neighborhood, has excellent credit, and positive previous landlord referrals.   You don’t even mind that she says she has a sweet little chihuahua.   It should be a slam dunk, so you approve her application for a two-year lease because you are anxious to get the income flowing in.

You decide not to check her social media profiles out or speak with her personal references.

You go in for the six-month inspection and find she has three large dogs, and Tina’s now homeless sister and her two small children have moved in without consulting you.

Most standard leases do include a clause about unauthorized roommates.  However, many do not include a specific addendum pertaining to pets.  This addendum is where you detail how many, size, breed, and a line stating you must “vet the pet” should the pet come into their lives after the lease has started.  It is also where you would include specifics regarding increases in rent for any pet.  Tip: create a separate addendum for an additional security deposit.  If you specifically state the security deposit is due to the pet, you can only use those funds towards damage created by the pet.  Simply call it an “additional deposit” to cover yourself for ANY damage caused by the pet or by the tenant.

Now, let’s touch on the homeless sister living there.  If your unit resides in a city or state with rent control, you may have difficulty convincing a judge that the homeless family that moved in with your tenant must go.  Eighteen months is a long time to wait not to renew their lease.  If you do not have any issue with the additional tenants, have the sister fill out an application and see if she qualifies to rent from you.  I presume you’ll have your answer quickly.  Should the sister not qualify, serve Tina with a 3-day notice to cure or quit, the first step in eviction.  This way, if Tina’s sister (or the three large dogs) has not moved out of the property within three days, you can proceed with the eviction process.

If you happen to own a rental in a “landlord friendly” state, you should have no issue with removing Tina, her pets, and her sister from the rental.  However, keep in mind you will have to move forward with the eviction process, which is very time-consuming and expensive.  Hence, do the necessary background checks when vetting an applicant!

Multi-Housing Units

When we entered the investment property world, we skipped over the single-family home and went straight into a 6-Plex.   Regardless of whether you own a triplex, quad, or higher, typically, “apartment” style of living tends to be shorter-lived—duplexes with a garage and yard yield similar results to single-family homes.

Often, for our apartments, we will require a one-year lease.  We have seen much higher requests for shorter termed leases in recent years, usually for around six months.  We find that those who stay for one year and find they are happy living in our units will tend to renew (at a higher rate) and stay for an average of three years.

Some landlords prefer to offer month-to-month, so they are not stuck with the tenant if it does not work out.  We would recommend those landlords review their application processing procedure.  If you are getting that many bad tenants, there’s a good chance your acceptance criteria should be stricter, and you should consider vetting the applicants better.    We all want to get our units filled quickly, but the additional week it takes to process the application properly can mean the difference between having to flip the unit again in 6 months or three years.

Check out our FREE 10-page guide: How To Place Your Ideal Tenant for tips from setting policies and criteria through handing over the keys.

Six Month Stan

Stan has split from his wife and needs a place to live while working through the divorce.  He asks for a month-to-month lease because he’s not sure if he is staying in the area.  His application is top-notch, and Stan passes all background checks.  The landlord decides to rent the unit quickly, so there are no lags in income, and he approves Stan’s application.  Sixty days later, Stan puts in his 30-day notice stating he and his wife are getting back together.   The landlord is happy for Stan but bummed about him leaving.  But, hey, you win some, you lose some, right?

Stan waves the right to a pre-move-out inspection which allows the landlord to show him damage that needs to be remedied to receive his security deposit back in full.   After Stan moves out, the landlord goes by to inspect the property.  He finds many of the walls have scuffs from furniture Stan moved, there is a coffee stain on the bedroom carpet, the porcelain kitchen sink has a chip from Stan dropping a pot in it, and the bathroom door has a huge hole in it from an angry outburst on Stan’s part.  Obviously, Stan is not getting his security deposit returned.  But 90 days ago, this unit was pristine with fresh paint, new carpet, and expertly cleaned.  Before the landlord can clean and rent the unit, it needs a paint job, and several appointments are required to repair and replace items.

Along with the application process, this process results in one month’s lost rent.  Will that landlord accept another month-to-month lease?  We wouldn’t!

Location

Downtown Living

The location of your unit is a HUGE factor in whether people want to live there long term or not.  Downtown living can be great if you like walking to nightlife and living near your work.  However, it can also mean coping with homeless people trying to live under the stairs, digging through the garbage, and using your hose to shower.  Generally, parking and noise are factors as well.  For these reasons, we tend to see a higher turnover in our city units than those located in the suburbs.   Note: one should consider if the home or units are under rent control.  There may be less turnover in these circumstances because tenants often stay several years, keeping the rent way under market rate.

Suburbia

Living in the suburbs is generally quieter, and there is more open space to enjoy.  Where public transportation is not necessarily easy to use, cars are usually required to live away from city life.   One could assume that families would prefer to live where there’s a yard for the kiddos to play independently.  When children are involved, families tend to move less often.  It’s a lot of work to move a whole household, and parents often will consider the social and educational changes that can arise from moving a child to a new neighborhood and school system.

Distance to Owner

“Location” also means factoring in the property’s proximity to the landlord’s primary residence and their ability to manage it themselves.  For example, we have a single-family rental that is a 3-hour drive one way.  Lately, we have questioned if spending 6 hours on the road in a day is the best use of our time.

What State Is The Property Located In?

Lastly, whether the property is in a landlord or a tenant-friendly state makes a HUGE difference to lease terms.   Those in a landlord-friendly environment tend to be able to accept longer terms knowing they can likely get out of the lease should the tenant violate lease terms.

Not so with tenant-friendly or rent-controlled areas.  Being in California, therefore we stick to one-year leases with a policy to “review and renew” annually.  Even with a one-year lease, it is tough to remove them once a tenant is in without going through the eviction process.   Which again, is no guarantee.  Many landlords have turned to the “cash for keys” concept.  They prefer to give a large payoff upfront over a long, expensive, unguaranteed ride through eviction.

Financial Outlook

Many assume more income is always better, but we have several clients where this is not the case.   A few of our current clients would prefer to get less rent per month in exchange for a longer lease and not have to deal with the hassles of flipping a rental each year.

Old School Oscar

Oscar paid $28,000 for his rental back in the ’70s.  That home is now worth over 2 million.  It has no debt, has had very few updates, and Oscar gets around $4500 a month in rent.  He could easily get $5500 if he remodeled the small kitchen and replaced a few windows, but he rather not.  I mean, who needs an extra $12,000 a year?!  Apparently, not Oscar.

He was advised he could receive much more than the $3200 he’d been receiving, leaving him surprised and skeptical.  He equates higher rent with a tenant who will want more for that money.  So, he keeps rent well below market rate, and the tenant thinks they are getting a steal (they are).  Oscar prefers the mom-and-pop way of managing his rental.  He does not do inspections, ever.  Oscar does not raise the rent, nor does he does renew the lease once it has expired. He allows the tenants to do repairs and trusts they are changing air filters and smoke detector batteries themselves.  Oscar’s tenants tend to stay 2-3 years (some five years +), and at turnover, he personally performs whatever maintenance is needed to ready it for the next tenant, even if it takes three months to complete.

This is a true story.  “Oscar” is a landlord who only uses our tenant placement services and handles all maintenance and repairs on his own.  The one thing he does correctly is hire a professional to place his tenants.

If rental property owners are interested in scaling their portfolio quickly, how long they hold the rental will play into their decision to select long-term or short-term leases.  This subject is discussed more below.

Time to Manage

How long a landlord plans to hold a property also contributes to a landlord’s decision to choose short-term or long-term leases.  If they plan to hold the property for a few years with plans to sell and use appreciation to scale up in units, they might not want a long-term tenant in a single-family home.  Then the new buyer, likely not purchasing to use as a rental property, will have to buy out the current tenant so they can move in.  The same goes with multi-family.  Many investors who purchase them do not want to inherit old tenants and prefer to place their own.  Most landlords want to charge their own rates and use their criteria and policies.  This example is one where a one-year lease would be best.

Time

If I had to pick one factor in why people prefer long over short-term leases, it would be, so they do not spend time dealing with flipping a unit.  Securing themselves for at least two years is a HUGE factor.   These are usually long-time investors (old school mentality) who do not necessarily need to increase income and do not want to sell the property and pay capital gains taxes.  So, they get a tenant in for two years and walk away until they need to repair something.

Another issue would be those who do not live near their units.  Our 6-plex is nearly 2 hours away.  There is no such thing as hopping over to do a quick repair.  Planning is crucial.  We need to be very proactive with maintenance and inspections for this property.   We will not even consider a lease shorter than one year because if the person does not renew, that’s a lot of time and effort on our part to flip the unit for the next tenant.  Time is money.  If we do our job vetting the tenant well, we can usually get over a year out of each tenant.  Having a solid lease in place makes a huge difference on flip time.  Our lease describes the penalties incurred should the unit not be returned to us the way it was received.

Lastly, possibly the landlord is new to the rental property world, and operating their rental is a side hustle to their 9-5 job.   ALL the factors above could apply to this landlord!  Are they house hacking?  Where is the property located?  How quickly do they plan to scale?

Which to Choose…

The bottom line is there is no better option which we could recommend.  The best option is the one that suits YOUR needs and works best for your situation.  At the very least, we hope we have given you information to assist you in making your decision on whether a short-term or long-term lease is better for your rental property.

Check out our other blogs to guide you on your self-management journey as a landlord:

How To Improve Tenant Relations

How The California Deck and Balcony Law Affects Your Property

10 Tips for DIY Landlords

Security Deposits: 5 Tips Landlords Should Know

Cash Reserves for Rental Properties, How Much is Enough?

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