Stick It Out or Play the Field? Long Term Vs Short Term Leases

In property management, one of the things we discuss with new clients is their goals. Are they planning on keeping the property long term or are they looking to sell it at the first opportunity? Do they want to move back into it at some point? How much flexibility do they need? What is their…

In property management, one of the things we discuss with new clients is their goals. Are they planning on keeping the property long term or are they looking to sell it at the first opportunity? Do they want to move back into it at some point? How much flexibility do they need? What is their risk tolerance?

We want to make sure that we are enacting strategies that fit what clients are trying to achieve. They are not all in the same life situations.

It's the same thing in the dating world. Some are looking to get hitched. They want to be seriously dating in an exclusive relationship on the way to marriage. They want someone on a long term basis who they will be with through the thick and the thin. This type of dating allows for greater security and a lasting partnership. However, it is a difficult one to leave without very hurt feelings and does not always allow you to see the best that the partner has to offer.

Other people are looking for “fun”. They want to meet as many people as possible and continuously upgrade who they are going out with. This is a strategy that entails a lot of dates, work, and stress. The swinging singles would also argue that it also includes a lot of excuse, the ability to always see the best of the other person, with little actual commitment from their end; when something better comes along (or any other reason, including none at all), it is understood that they are gone.

Leases are the same. Some owners want to have the security of a payment coming in every month. They are willing to sign a multi-year lease for the current market rent, with no rent escalators built in. They want their tenants to be there for a while and be happy. To this end, they often will make home improvements for the tenants. They know they will be holding on to the property long term and are willing to make some sacrifices to keep tenants for the same time period.

Some owners like flexibility and the ability to always get the market rent (or more) for their home. They entertain weekly or monthly leases where they know they can demand a premium for the short lease period. Sometimes there are big events (like the upcoming Democratic National Convention in Charlotte) that they know they could get the equivalent of several months rental payments for rent out for only one week! They also have family and friends that come into town often and they like to have an open place for them to stay.

There are certainly downsides to short term leasing! There are no recurring rental payments guaranteed to come in every month, which is a financial risk. There are many opportunities for the bevy of new tenants that go in and out to damage the place. There are also increased payments to the property manager for fixing up, marketing, and procuring tenants so often. These need to be covered by the excess rent that is hopefully commanded.

Long term versus short term leases is much like the old argument of risk versus reward. Short term leases provide higher highs and lower lows, while long term leases are a moderate investment path that should provide consistent, average returns. The question is what the owners' goals and needs are and this can certainly change many times during the relationship with the property manager.

For most property owners, the long term leases are the most economic option for their investment homes. However, one size does not always fit all and short term leases can provide a nice bump in income!