When you decide to purchase an investment property, you as the owner have a lot of decisions to make. One of the most important being how long of a lease term you should offer your tenant. 6, 9, 12, 15 or even 24 month leases are all available options, but which one is best? Choosing to offer a longer term lease comes with its own set of pros and cons.
The most obvious benefit of choosing a longer term lease is that you as the landlord lower your vacancy risk. With a longer lease, you lock a tenant in
and significantly decrease your chances of vacancy or turnover. When you lock a resident into a 24 month lease for example, chances are good that the
resident will stay in your property for two years. What landlord doesn’t want the security of a long term signed lease? This has been very true for
property management clients with homes in Arvada and Broomfield; two very strong rental markets.
However, the longer lease presents a couple of risks to the landlord too. The first being that you lock in a rental rate for a longer period of time. If you own rental property in Colorado for example, you might be leaving money on the table by locking a resident into a long term lease since rents have been appreciating at a steady rate in the Denver metro market; especially in outlier cities like Commerce City.
Another risk associated with longer term leases is that it becomes much harder for you as the landlord to get rid of ‘bad’ tenants. This doesn’t necessarily mean you are locked in with a tenant who is breaking the law or the terms of your lease agreement, but more so means you are locked in with a less than ideal tenant. With a shorter lease, you have the option to issue a non-renewal at the expiration of their lease and pursue better-suited tenants for your property.
Two important considerations to factor in when deciding on the lease terms you will allow for your rental property are:
- Current time of year
Make sure to weigh the current time of year with the prime leasing season in your market. In Colorado, the spring and summer months are best for leasing. People tend to move more often in the warmer months than in the colder, winter months. This translates into landlords being able to charge higher rental rates in the peak seasons. You should plan to have your leases expire in these peak months. When leasing in these months, we recommend 12 month leases to ensure the lease expires again in the most optimal leasing times.
- Mid-term rent increase clause
If you find a great tenant and decide to offer a longer term lease agreement, we recommend you add a mid-term rent increase clause into your lease. Put simply, this means at the middle of your lease, you as the landlord have the right to raise the rent. The amount should be fair and clearly stated in the lease.
If you have questions about choosing how to best time your leasing strategy or need advice for renewals, give us a call. Our team is happy to help. 303-255-1990