The lease term is one of the many necessary details you need to include in the contract when you draft your lease agreement. Many property owners consider the duration of their leases since it can be a determining factor when finding tenants, but which is the best option for you?
Long-Term Lease
Long-term rentals don't always use long-term leases, and for many good reasons. Listed below are the benefits, along with the risks that come with long-term leases for your rental property.
Benefits
- You will have a more stable rental income, which is crucial in rental property investing. The consistent income will allow you to scale your real estate portfolio much faster.
- It will be easier to plan financially due to the predictable income over an extended period. You can allot for mortgage payments, renovations, or upgrades, without having to worry about whether you will have tenants who'll pay rent in the long run.
- Your marketing and turnover expenses will be reduced. With a long-term rental agreement, it will be a while before you have to market your rental property again, and that's only if your long-term tenant decides not to renew their lease.
- You'll attract higher-quality tenants. Renters who sign long-term lease agreements usually do it for permanent housing or year-long commitments, so they will try their best to follow the rules and avoid being evicted.
Risks
- You can't increase your rent unless you include a provision in the lease agreement that says otherwise, and long-term tenants tend to frown upon that. If not, then you will have to wait until the lease term ends.
- It might be more challenging to remove a tenant with long-term leases. Instead of simply denying a renewal by the end of the month, you will have to undergo a lengthy eviction process to remove a tenant from your property.
- You will have reduced flexibility. If you ever decide to renovate, occupy for personal use, or sell your investment property, you might have to wait a while before you do so since you have to let the lease terms end first.
- You need to be more vigilant with tenant screening. While you should always do so, there's more pressure for long-term rentals since getting bad tenants might mean that you'll be stuck with them for a longer period.
Short-Term Lease
Benefits
- Short-term rentals provide property owners with opportunities to earn more money by hiking rental rates when needed. With month-to-month lease agreements, you won't have to wait very long to implement a rent increase.
- You'll be able to adjust based on local market trends. For instance, it will be easier to align the end of a short-term lease and increase monthly rent during peak seasons.
- Unlike long-term rentals, a short-term lease agreement allows for active losses. This can be deducted from your property taxes, depending on the extent of your passive income or $25,000.
- Between avoiding eviction proceedings and efficiently arranging renovations, there are a lot of state and local laws you won't have to worry about since you can just wait for a short-term lease to end.
Risks
- Tenants might be more careless with short-term rentals since they don't have to worry about keeping a long-term lease. The same goes for the increased wear and tear due to frequent moving by new tenants.
- Just as there are peak seasons, there are also slow periods with fewer tenants to rent to. A long-term lease secures year-long tenancies, which means you won't have to worry about peak or slow seasons.
- Property owners tend to have more administrative work with short-term rentals. Unless you prevent frequent turnovers that may come with short-term leases, you will have to do more tenant screenings, marketing, turnovers, and other management duties that come with accepting new tenants.
- A short-term rental property may come with additional expenses, including advertising costs, property management fees to lighten your workload, increased repair costs for wear and tear, and more.
Factors to Consider to Make an Informed Decision:
Target Market
Choosing between short-term vs long-term leases can depend on your intended tenants. Families in suburban areas prefer long-term rentals, whereas young professionals in urban locations may opt for short-term rentals.
Risk Tolerance
Residential properties face more risks with short-term leases, but provide more flexibility for landlords. Long-term rentals offer financial stability, but not brief periods of vacancy when you can conduct renovations or use the property for personal stays.
Financial Responsibilities
Calculate mortgage interest and payments, maintenance fees, repair costs, and other expenses that come with property ownership, and determine whether you can survive on the temporary housing short-term rentals tend to have, or go for long-term leases to secure income.
Rental Type
Some property types don't leave many options for you, but real estate, like fully furnished single-family properties, offers opportunities like turning them into vacation rentals or short-term residential rentals.
Future Plans
It will be more difficult to plan upgrades or renovations in a long-term apartment, since a long-term tenant won't be too happy vacating the premises while their lease is still active. With short-term rentals, you can wait for the rental agreement to end and implement changes without legal red tape.
Management Involvement
Managing a rental property is time-consuming, especially with short-term rentals where you have to put in extra work to renew month-to-month leases, collect monthly rent, conduct tenant screening for new tenants, and make repairs to maintain the property's condition. A longer lease leaves little work for property owners.
Can't Choose? You Don't Have To with a Property Manager
Learning the several advantages and disadvantages of short-term vs long-term leases can be overwhelming, since individual circumstances play a huge part in deciding which one is the best option for you. However, you won't have to choose at all— you can simply hire someone to manage your rental business no matter what the lease terms are.
Green Tree Property Management offers stability, efficiency, and expertise to handle operations and improve your cash flow. A professional property manager will be able to balance out the disadvantages that come from both options with vigilant property management.
Be a worry-free landlord and leave it to the experts. Contact us today!
