To many tenants, landlording seems like a risk-free way to basically print money, an investment approach with precious few downsides. How wrong that idea is! Veteran and neophyte landlords alike understand just how challenging and problematic a task it can become. Just consider the task of acquiring — and then retaining them. Some landlords swear that signing multi-year leases provides them with the best possible return, but does it really just open them up to more risk?
In this post, we’ll discuss some of the disadvantages of multi-year leases, who multi-year leases really protect (hint: it’s not the landlord), and when long-term leases make sense.
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Rents Falling Behind Market Values
First things first: This post is going to speak in generalities about renting to residential tenants. (Commercial leases operate according to entirely different rules.) Exercise caution when applying them to your specific situation. Different markets, different tenants, and different landlords can always lead to exceptions to the so-called rules.
That being said, one of the most common reasons cited for not signing 2-year leases or longer rental agreements involves falling behind market rents. This is doubtlessly true, and during times when market rents are rapidly rising, landlords can certainly feel the pain. Some fans of long leases will counter by saying that you can build increases into your rental agreement. Also true, but multi-year tenants will rarely tolerate large rent increases and will simply break a lease when confronted with them.
Tenants Can Still Break a Lease; You Cannot
That leads directly into our second reason why long-term leases stink for landlords. Breaking leases is far easier for tenants, and only a few financial disincentives hold them back from violating their rental agreement, such as losing a security deposit, owing several months’ worth of rent, and damaging their credit history. Not so with landlords. If they break a lease, they could face:
- A complaint filed in small-claims court
- A state or federal discrimination lawsuit
- Five- or six-figure monetary damage sums
- A situation where they have to pay the tenant directly to gain control of the property (aka a “cash for keys” arrangement)
None of these options are attractive from the landlord’s point of view, and they highlight an important truth: Multi-year leases do much more to protect a tenant against uncertainty than a landlord.
You Can Get Locked into Undesirable Tenants
One of the potential benefits of long-term leases — namely retaining regularly paying, long-term tenants — can also become its greatest downside. Though many landlords pride themselves on their ability to screen tenants, few can say that they have never let terrible renters into their properties. And like the proverbial plague, a terrible tenant is awfully hard to get rid of once he or she has gained access to the premises. Worse yet, such a tenant can do significant damage to your property, and there’s precious little a landlord can do to remedy it.
Larger Repair and Renovation Costs between Tenants
In addition to direct damage done by bad tenants, long-term renters can cost you plenty through no direct fault of their own. Living in a property inevitably leads to wear and tear, and the longer the time spent, the more necessary repairs and property “refreshers” become. Unfortunately, you often can’t conduct those repairs when tenants are in your properties, and soon enough, deferred maintenance turns into more serious issues. While it’s not often considered a benefit, regular turnover provides opportunity to conduct much needed maintenance on your real estate.
Less Flexibility if You Want to Sell or Reclaim Space
Did you know that raising rent or performing maintenance aren’t the only problems you’ll run into under a long-term lease? If you want to sell your property or take control of a specific part, you’ll still need to honor the lease’s language. Carefully written rental agreements may carve out special provisions that allow you to remove a tenant in these or similar circumstances, but most boilerplate leases don’t. When you want to dispose of your real estate, long-term leases merely tie your hands.
Longer Leases Can Benefit Smaller Operations
So if multi-year leases are such bad deals for landlords, why would you ever choose one? Well, in truth, longer leases can make sense in certain limited circumstances. Landlords with a single property or less economically flexible real estate where raising rent isn’t really an option may benefit from:
- Fewer turnover expenses
- Higher tenant quality
- Stable income
Are you still wondering whether or not a long-term lease makes sense for you? GNP Realty Partners can counsel you regarding your specific situation. We work with numerous landlords who manage properties of all sizes throughout Chicago and the Midwest. Contact us today at (312) 329-8466!