Potential Tenant Wants To Sign A 3 Year Lease. Should I Do It?
I have a property w/ a mort. pmt. of $836/mo (incl. tax & ins.) I have set the rent at $1,250.00/mo. I have a family that wants to move in and sign a 3 year lease. They want the rent to be held at $1,250.00 for the three years in return for their long term commitment. I have heard that you should not sign anything more that a 1-year lease, so that you can have the option to increase the rent. On the other hand, the thought of no vacancies for three years is very enticing. Am I making a mistake to take the 3-year deal with no rent increase?
personally i would take it assuming they have good credit/references, etc. one vacant month over the next 3 years will wipe out most if not all additional income you could realize with rental incomes.
is it a straight rental or is it a lease/option? If it is a straight rental I might do it. Guaranteed tenant? Rent covers my expenses? Don't have to paint, have the carpet cleaned, etc. for 3 years?
What is the worst thing that can happen? They move out? Then you have their deposit and now you can raise the rent for the new tenant. Meanwhile, they are paying for your house to appreciate for 3 years.
Let see, quick math says your house is approx $120k and after 3 years it will be worth approx $140k right? So they move out at the end of three years and you either re-rent or sell for current market and pocket 20k.
One thing they might not object to is a small increase each year just to cover your takes on the place.
Best,
Ryno
Thats what I was thinking. I am checking credit now. Thanks!
Thanks Ryno. It's a sraight rental. I'm looking for long term appreciation. It kinda seems a little greedy to worry about not getting rent increases when I have pos cash flow for 3 years. I just wanted to be sure I wasn't missing something.
Thanks
I personally would go for it. Why chance a potentially sure thing? 400+ above your mortgage, and they are a family, so they should take decent care of the place. Heck, that sounds like cherry. If anyone, THEY are taking the huge risk, because they are on the hook for more than (36x 1250) 40k in rent if they default, break the lease, or whatever.
You could adjust each year for the rate of inflation. A so-called "rent escalation clause" of 2-3%.
I have a tenant on a two year lease. When the lease was about to expire this past September, I offered the tenant a one year renewal at $X and a two year renewal at $X+$25.
The tenant took the two year lease, and I got about the same total rent that I would have received with normal increases in a year to year lease.
I agree with Ryno-n-AZ
You may also consider dropping your expenses rather than raising their rent (isn't it the same to you?)
Have them take care of any problem that is less than $100 to repair ($100 deductible per month per say) and they take care of the yard.
That way you have lower expenses and no headaches (practically) and you're making them happy by giving them what they want.
Thanks everyone for the great advice!
I'd go for it, with a few clauses. 1. you can buy him out should you want to sell. 2. have a clause that late rent can allow you to cancel. 3. that you can ammend the rental agreement to include further "do not's" should neighbors complain. 4. breaking the rental agreement terms cancels the lease. get a nice deposit, say 2-3k. If he can afford only 2k, let him add 100 per month for 10 months.
[addsig]
I'd definitely have a "buy-out" clause in case you do want to sell.
3 years, no rehab and no searching for tenants? Heck of a deal in my book, and well worth the offset in rent.
Depends on if your taxes and insurance don't go up dramatically.
I would not lock my rent becuase of these issues. Our property values went up so dramically in our county our taxes really went up and the insurance co got on the band wagon and raised all the costs. In the first year of a purchase on one of these new purchases hurt and hurt bad. You can protest but they just say "we understand your position but the taxes will not change" blah blah !!bunch of jerks!!.........
While the tax value will decrease as a rental we got chomped at the onset and the insurance costs will probably go up from here as they do every year anyway.
We still have cash flow but will have to raise the rents each year to keep up with our costs.
But if you have enough margin and add some if not all the above clause you ma be on a great thing.
So run your numbers carefully unless you dont mind a possible neg cash flow.
[ Edited by Dreamin on Date 12/23/2003 ]
okay people...I'm sorry, but I have to say it. It would be a very good idea (if it's not already there) to put in your contract that once a year, every six months, or whatever...that THEY clean the carpet, paint the walls, things like that. Especially if they have kids. I have seen the clean-ups after the lengthy lease is up. It could get ugly.
Just a thought,
Steena
[addsig]