Tenants stay longer?

[Monstango_2010]

This is just a thought i had and after a quick browse, couldn't find anything the same.

Has anyone given tenants different payment options in exchange for longer lease? To clarify this i will give an example:

Say the rent for a given property is
A) $170 / week, for a one year contract.
or give them the option of:
B) Paying $165, fixed for a year, then returning to normal after the first year. This would be a 2 or 3 year contract.

Again just a thought, may be helpful when rentals aren't at their best.
Any other thoughts on "enticing" renters to commit to longer contracts

- Eli

[geoffw]

I've just done that on a renewal- proposed rent was $235 pw ($25 rise) for a 6 month renewal- they come back asking for a reduction. We agreed on $230 in return for a 12 month lease. They really like the property and want to stay, and were happy with the smaller rise. I'm happy not to have to pay relet fees after six months.

(They actually asked me if I was thinking of selling- but no way. +ve Cashflow and good growth).

[pjb89]

Hiya

Same here.....I would rather accept a slightly lower rent for a years' lease than run the risk of not renting out the IP for a short time plus having to pay for the reletting cost (1 weeks rent) if the tenant will only sign a 6 months lease. My motto is not to be too greedy.....

Pedro

[Monstango_2010]

Just a thought: (I don't know whether this is offered or is already being used, but...)

Say you are planning to take a $100, 000 for 15 years at 7.5%,
(interest = $66,862, monthly repayment = $927)

or the $100,000 loan for 25 years at 6.5% interest
(interest = $102,562, Monthly repayment = $675)

($100,000 loan art 7.5% for 25 years, interest = $121,697, monthly repayment = $739)

Has anyone had any experience in trying to get lower interest rates with the banks like this?

- Eli

[Kristine..]

Regarding tenants staying longer:

If the ingoing rental is the best the market will meet at the outset of a new tenancy, and assuming the tenants are 'good' in that they maintain the property and pay the rent promptly, I tend not to try and increase the rent until the third or fourth year, and then only slightly.

Any increase would have to cover the cost of one month's vacancy, the preparation required to relet the property, the reletting fees etc, so that would be about $1,000, or approx $20 per week.

If I don't think the property would fetch another $20 per week, then leave the status quo alone. Although rents degrade over time, a bird in the hand is worth two in the bush, So far, I have been blessed with tenants which stay, the longest so far being five years.

However, in the gap between them and the current tenants (entering their third year now) I had to repaint, restore the wiring and add new external lighting, re vinyl and refurbish the kitchen, install a new stove, wash / dryclean the curtains, and do general yard work. Two weeks vacancy plus the cost of reletting and cost and time of refurbishment came to about $5,000.

I have found that vacancies are much more expensive than would appear, so if increasing the rent would unsettle the tenant, I would be prepared to maintain the rent for five or six years, or even longer until they left of their own accord.

Just my tactic, but by showing moderation, I have been rewarded with very few non income producing periods in the nine years as a landlord.

Cheers

Kristine

[Yvonne Bresley]

What Krisine & Geoff W say makes a lot of sense. As a property manager I would like to add another perspective.

I am currently seeing investor who are a little worried by vacancies wanting to offer prospective tenants inducements to stay for long periods like 5 years. They are foffering holidays , white goods etc.

If you are talking about younger tenants for apartments, a longish lease, esp a 5 year lease, is a real put off. Most don't know what they are doing next month let alone in 5 years.
Alsoit is unnecessary to pay out that money as an inducement

I understand why investors may be concerned about vacancies, but unless you have an inner city apartment, if you ask a fair rent most properties in Melbourne are leasing within 1 to 2 weeks.

And if you have a good property you are likley to find you tenant stays for years anyway

[WillG]

You might want to consider the timing of the lease as well.

For example ...
The best time to lease a property (for the landlord) in Canberra is in January/February - Demamd is higher at this time of year. If you are forced to re-let a property in July, it is best to offer a 6 month lease so the lease will end in January the following year.

[asy]

Originally posted by Yvonne Bresley
I am currently seeing investor who are a little worried by vacancies wanting to offer prospective tenants inducements to stay for long periods like 5 years. They are foffering holidays , white goods etc.

Just a note, as I have said in posts before, in Victoria, if you sign a lease for 5 or more years, on ANY kind of property, the lease immediately becomes a commercial lease.

I'm not saying this is a bad thing, just be aware of it so that you can make an informed decision.

(Not sure about other states, but your PM should know)

Yvonne, perhaps you would be kind enough to share with us the pro's and con's of signing such a lease and what affect it has to you when the lease is commercial rather than residential. I was a little surprised that you didn't mention this in your post, but I'm sure you tell all your clients when they sign a 5 year lease. :)

In the interest of learning, would you compare the two leases for us and let us know what the implications are.

asy :D

[Nick 69]

One other technique I have come across is an equity lease...

Not sure of the in's and outs, but the basic idea is this...

If the standard rent was $300p/w, you offer the tennant the option to pay an extra $20p/w (lets guess), they sign the lease for 5yrs (rough number), at the end of the lease they re-carpet and paint the place. In turn you give them 20% of the increase in the properties value over the time they have been there.

You would probably want to factor in CG and decide if you want the place to be +ve or -ve geared, but you would have a tennant for 5 yrs and potentially not have to contribute anything into the mortgage.

[Kevmeister]

The equity lease sounds remarkably similar to a Henry Kaye technique I heard about. I think the problem with these approaches is that unless the property is going to be sold, in which case the final value is absolute, the actual growth amount is somewhat subjective according to valuation. The tenant will want the highest valuation possible to get the most out of their 20% equity growth, and the owner will want the lowest valuation possible to in order to pay out as little as possible. The tenant and owner are opposed from square one. And the same deal happens with the initial [current] valuation.

Sure, the tenant probably doesn't get to choose how the property is valued, but then the whole idea is not particularly transparent or controllable by the tenant so why on earth would they take up such an offer? Seems they'd be open to getting gipped.

Let's not forget that leases are there not just to protect the landlord/owner. They also protect the tenant. And locking yourself and your tenant into a long lease might be good for "security" whilst you hold the property but if you had to sell you may in fact have done yourself a disservice.

A property with 2 or 3 years lease outstanding would only be attractive to investors (aka the DHA phenomenon), the buyer must honor the existing lease, which may at the time represent a poor yield in a hot market, etc.

[simon13]

Has anyone had much experience with the equity lease idea from either the tenant's or landlord's perspective? I have been aware of this idea for some time but have not spoken with anyone involved - would appreciate any comments. Sorry my reply does not directly assist you Eli. Rgds, Simon.

[Mikhaila]

I recon it is a pretty common practice to reduce rent for a longer term lease. This is kind of a common sense to me. You just pay for the peace of mind, similar to fix rate loans really.

I generally share Kristine point of view, however I slightly disagree with her. Tenants incur relocation expenses too. Depending on the tenant, these expenses can be very substantial (300 – 500$ easily). It means if you increase rent by 5$ or even 10$ a week it may be still economical for tenant to stay rather than move out. My point is that it is impractical to wait for five or six years to increase rent. Rent may easily double in this time !

Another point, it is a good idea to clearly communicate to tenant the reason for rent increase. The “good” reasons are – CPI data, comparative rent figures in the same building or similar properties near by.

[Kevmeister]

Originally posted by Mikhaila
... it is impractical to wait for five or six years to increase rent. Rent may easily double in this time ! ...

For rent to double in 6 years time would require compounding increases of 12.25% per annum. Rents are tied to people's capacities to pay them, people's capacity to pay rent is tied to their earnings, and people's earnings, generally, do not increase anywhere near 12.25% per annum.

So I think rents doubling over 6 years is highly unlikely in most situations. Realistic increases might be 3-4% per annum, which means a $200/week rent would be about $250 after 6 years at 4%.

[Mikhaila]

Originally posted by Kevmeister
....people's capacity to pay rent is tied to their earnings, and people's earnings, generally, do not increase anywhere near 12.25% per annum.

So I think rents doubling over 6 years is highly unlikely in most situations. Realistic increases might be 3-4% per annum, which means a $200/week rent would be about $250 after 6 years at 4%. [/B]

Yes I agree, I went certainly over the top with rent doubling in six years. However, wages do grow often at higher rate than 3-4% per annum (see ABS data http://www.abs.gov.au/Ausstats/abs%40.nsf/e8ae5488b598839cca25682000131612/ba84bbb55b643021ca2568a90013934e!OpenDocument ) . Do not forget we live in a low inflation time now. It was not like that 10 years ago. This is not the point really. Whatever the increase 25% or higher it is still substantial and it is still impractical to keep the rent at the same level, unless of course there is a glut of rental properties around in the area.

[Jakk]

Originally posted by Kristine..
Regarding tenants staying longer:

If the ingoing rental is the best the market will meet at the outset of a new tenancy, and assuming the tenants are 'good' in that they maintain the property and pay the rent promptly, I tend not to try and increase the rent until the third or fourth year, and then only slightly.

Cheers

Kristine

G'Day all,
I totally agree on this point, once let, I will not increase rentals on my residential properties.
Of course the minute they move out, I increase the rental to the max that the market can pay for that property.
I hate vacancies but what I hate even more is the one weeks rent I lose as a letting fee that my PM charges.
Mind you I only have 1 residential tenant that has passed the 4 year anniversary and their rental is so low compared to the other flats in the block, that I am really tempted to raise it a little but I will maintain it for a while longer.

Saint Jakk of Landlords

regards

[Jas]

Completely disagree with you guys Jakk and Kristine. I'm running a business, I keep my places at market rent. My tenants don't pay over and don't pay under.

If they like the place, they will pay market rent. If they don't like the place, they won't look after it anyway.

Jas

[Freddy]

Good Discussion !!!! :)

I know we are here to make a $ or 2 but for me it's a pain when a tenant moves out. The house always needs an extra clean up or something painted or repaired that doesn't bother the previous one.

The longest that a tenant has stayed for me is 3 years so the rent stays the same till they move then up it goes.

Less moves = less work for me

[Mikhaila]

Originally posted by Freddy
Less moves = less work for me
That is fair enough approach. It is not well justified though. Have you tried to increase the rent during this 3 years? How do you know that tenant will move out after 5$-10$/w increase?

It looks like people who advocate to keep rent unchanged assume for a tenant that if rent goes up tenant moves out. Have you watched prices in a local super over the last 3 years? Do people stop buying milk or bread if/when prices increase? No they don’t – we cope it in a chin. The same generally applies to rent. Jas is very right by saying “I'm running a business, I keep my places at market rent. My tenants don't pay over and don't pay under.” I say my tenants pay slightly under, just that little bit under to give me a competitive edge.

The place of this discussion is really ironic as Jan Somers in her latest book “More Wealth from Realestate” points that not increasing rent as one of the biggest mistakes… If somebody interested I can quote the page number.

[Monstango_2010]

As a renter (I'm 17, still living with parent(s)), I have moved 3 times in the last 6 years. All the family here has wanted to none of these times. For us (and most tenants) moving is a unrequired hassle. Sure if the rent went up by around 15 - 20 % we would ask for a reduction, but it has never happened.

A second Aunty of mine bought an investment property and imeddiately increased the rent by $25(don't know what the original value was), the tenant not seeing justification in the large increase asked for a reduced rent. They settled on $15 increase, the tenant is still there (this was about a year ago).

Basically only if the tenant is moving to a different area, or is unhappy with the property would they move (this would only be the case when there is not much on the market, and have just been evicted from your last house, as what happened to us.) Negotiation is the key.

Cheers,
Eli

[Monstango_2010]

Amazing!

About a half hour after posting that last post i was informed that we cannot stay in the house we are currently in after the contract has ended as it is being sold!

Cheers,
Eli

[photo guy]

One thing i will be doing is giving my tennents 1 week free rent over the christamas period when it is needed most. Rents will not rise more than a few bucks a year and only when vacantated if they are really good wont rise at all. rather a good tennant paying $10 week less than you could get with a bad or no tennant.

[Kevmeister]

photo guy:

A very noble idea. But for me I'd also be wary of getting "too nice" that could potentially back-fire on you, when the tenant starts thinking they might be able to take advantage of you (eg. let's give him some sob story - how bad can he be - he gave us a free week's rent at Xmas).

[Marge]

Talking about rents, do most investors jazz their IP up as soon as purchased for obtaining maxium/higher market rent or use the following scenerio?

Year lease, market rent.
2nd year offer choice of $10 rental increase p/w plus their choice of
*airconditioner
*pergola
*security screens
*landscaping
or something else that the tenant could suggest to give them a sense of ownership not to leave, and look after the place

or $5 week increase for year lease with no improvements?
These figures should be based on market rent and return on investment for improvements.
What do other people do??
Regards
Marge

[brains]

Just increase the rent at every opportunity:D

[Mikhaila]

Originally posted by Marge
Talking about rents, do most investors jazz their IP up as soon as purchased for obtaining maxium/higher market rent or use the following scenerio?
I usually take the second scenario. It works well for me. Here is the latest example – 12 months lease, closer to the end tenants asked for aircon, two heads split system was installed – 15$ p/w rent increase. All parties were happy signed another 12 months lease as a result . Another example – 12 moths lease to international business students. I was thinking to jazz up a kitchen a bit, but tenants pleaded to leave everything as is and do not rise the rent – rent went up by 5$ p/w, another 12 moths lease. I explained that 5$ was purely CPI related – tenants understood (probably because they are business students :)). I can carry on, but it’s all similar really.
Read about giving a week free rent for Christmas… Well, it is generous and compassionate indeed. I am not sure if it is a good or bad though. What if one Christmas you will not give it, what if they already expect you to do that and spent the money? I reckon, it complicates hell out of simple business relationship, and probably a postcard/chocolate may achieve similar results for fraction of the cost.

[Gill Bates]

Re
Has anyone given tenants different payment options in exchange for longer lease? <snip>

I give tenants discounts, but they have to earn it. I might say , if you stay a year I will give u the first X weeks free ( in the future), if they sign another lease to stay on - instead of reducing the rent . This gives them a definate encouragement to stay on - it protects u against loosing out if the tenants break there agreement and leave early.
<- This has happened to me.

[Brenda Irwin]

Have an interesting tenancy at present.
Recently got PM to increase rent to current market level with new tenant. New tenant was taken away for car stealing. Trouble was, girl friend who had just moved in & didn't know what was happening was devastated. For a month no rent was paid & when PM saw girl friend, she said she'd like to stay on as an official tenant. To her credit, she has paid 5weeks rent in the last month but playing catchup on the higher rent is difficult. PM & I have decided to reduce rent to original amount but still charge new amount till outstanding rent amount is absorbed, then keep rent on new amount. Tenant will not know except for the day the PM informs her the debt is paid & would she like a 12mth lease to lock the new rent in (market rents are rising again already)?
Cheers Brenda ;)