Prospective tenant wants 6 year lease

[tgan]

Hello fellow property investors!
I am hoping for some advise.
I currently have a 2 brm unit in nth balwyn vic, inside the balwyn high zone, ready for a new tenant.
Agt has opened it twice, and on both occassions same lady has turned up and wants it because she wants to send her child to balwyn high. No one else has turned up. Market is slow according to agent.
She is asking for a 6yr lease, agent is advising against it.
Personally, I think its a good idea, as long as i have yearly rent adjustments in place, cant see what the big problem will be. At least i have long term security as far as rent is concerned.
What are your thoughts???

Many thanks in advance

 

[luckyone]

Sounds great to me! I think the agent is probably worried that you will fall behind with market rent. But if you have increases built into the agreement, and you're not worried I'd go for it. Of course, you'd want to check her references first.

 

[wylie]

I don't think it is legal to have a residential lease longer than two years (?).

What if you decide to sell the place? You will lose more than half your potential buyers by having such a long lease (or ANY lease).

I'm not sure you can build in a percentage increase, but my understanding is that the lease must state what the increase will be in dollar terms (but happy to be wrong on that one).

So with a six year lease, how can you possibly know what will be happening after the next twelve months. What if rents rise more than you have written in. You will be locked in (if it is even legal to do longer than two years).

So many downsides, not much upside.

If they want to be sure of being near a certain school, offer them a two year lease with a rent increase if you want, after year one. You could also write into the lease they have the option to take it for another year or two, but I don't know how that would stand up, and it still means you may not be free to sell it if they hold you to that but you want them to leave.

... tell 'em they're dreamin'...

 

[Player]

Sounds great to me! I think the agent is probably worried that you will fall behind with market rent. But if you have increases built into the agreement, and you're not worried I'd go for it. Of course, you'd want to check her references first.

In addition to what lucky has mentioned above, be very clear what your intents are for this property for the next six years. Even if you deem it a long term hold, sometimes our own personal circumstances change as investors. What happens if you need to sell?

You will narrow down your buyer audience if they are owner occupiers. Commercial properties (with the right lease and tenant) command a premium when sold with long tenure. Not so sure about resi units.

Just my 0.02

EDIT.........Wylie types with greater haste than me

 

[liverpoolharryk]

I agree with Wylie and your Agent, I would be advising against it as well. So much can happen in a 6 years period that you just cannot forsee. As Wylie said 2 years would be as long as I would offer, if they are happy and working out and you are happy then you can re do new leases at that time....

 

[fisherman]

How does the 6 years lease advantage the owner? Practically speaking, the effect of the tenancy regulations is that it is only a promise by the tenants that can be broken at any time.

I'd say that it gives the tenant rights (and outs) but you none.

 

[Peter_Tersteeg]

Best case I'd offer them a 2 year lease with an increase built in. Make it clear that you intend to hold the property for far longer, but I can't see how a 6 year lease can be to your advantage in any way.

I'm willing to be if she decided to break the lease at year 3 of 6, you'd have no hope of being compensated.

 

[buzzlightyear]

Obviously the tenant needs to be in the area to send her child to Balwyn High and wants to lock in her accommodation for the remaining years that they will go to school. Admirable! Not Chinese or Indian perhaps?!

However, for the reasons stated, this is all downside for you. Your flexibility to sell is materially impacted by this option. I would ask for a standard 12month lease at market rate and have the property manager communicate to say this is a long term investment property hold, and she can stay there for as long as she is able, as you have no intention of selling. If you feel gracious, maybe concede on 2 years with an attractive increase (for you) at the 12 month anniversary.

If you are so inclined, you can have this back story for your agent. Tell them, this is a property that you intend on passing to your children and that they won't be old enough to move in for another 10 years. Your agent can these communicate this to your prospective tenant and appease their concerns.

By the way, if the women has come back twice, she is interested too, so imo, she will be flexible in her demands.

Huh, 6 years. If only you could get them to pay the council, water and owners corp fees, with annual rental increases, she could stay there for 10 years!

 

[Andrew_A]

I've had a request for 5 years previously for one of my properties, declined and just did it on a yearly basis and they moved out after 2 years anyway.

Agree with the sentiment that it's a long time to lock a property away, flexibility is never appreciated until you need it!

 

[tobe]

I had a danish engineer want a 4 year lease, I was initially open to the suggestion, however the agent talked me into 12 months to start with. tenant moved out after 6 months and went back to Denmark.

 

[tgan]

Thanks so much guys for your prompt and good advice. Certainly got me thinking. Buzzlightyear...you are correct about their cultural background. They currently own a house out west and i suspect my unit will be a mon-friday thing since its only around the corner from the school, and maybe go back to the other side on weekends. Eitherway, I dont care....as I said to agent...as long as they pay , dont kick my walls in and arent growing any funny stuff, then i am ok.
So....I will wait until saturdays opening, see how I go, then I think I will offer a 2 year lease with an increase built in at the 1 yr anniversary.
Thanks again all, and I will come back and let you know how i finally go.
Thx

 

[westminster]

Hello fellow property investors!
I am hoping for some advise.
I currently have a 2 brm unit in nth balwyn vic, inside the balwyn high zone, ready for a new tenant.
Agt has opened it twice, and on both occassions same lady has turned up and wants it because she wants to send her child to balwyn high. No one else has turned up. Market is slow according to agent.
She is asking for a 6yr lease, agent is advising against it.
Personally, I think its a good idea, as long as i have yearly rent adjustments in place, cant see what the big problem will be. At least i have long term security as far as rent is concerned.
What are your thoughts???

Many thanks in advance

If they are renting it to get the address for school zone beware those who will then keep that rental agreement stating 6 years so that Child 1 gets a place in 2013 then when they apply for Child 2 for 2015 and need to show proof of address they dig out lease again then for Child 3 in 2017 show proof again.

Meanwhile they scarpered after 6mths or sublease it out to someone else.

It's not a bad thing but like others I would just give 12-24mths and verbal assurance that you intend to keep it long term.

 

[DaveM]

I have had issues with this, sounds like the tenant is buying an address for school catchments.

I rented my former ppor out, chinese tenant rented it to get killara high catchment on a longish lease then sublet it to other without approvals. Was a long painful process to sort out the mess as tenant denied sublet despite plenty of evidence, forced it by selling and tenant broke lease thankfully.

 

[Scott No Mates]

Long term leases are very common in Europe/US, why would you spend $1000's to move in only to relocate 12 months later?

Check the victorian residential tenancies act to confirm whether the residential tenancies act applies to this lease (leases over 3 years in NSW do not fall under the RTA). If it is outside of the RTA, then you can put forward whatever conditions you like eg payment of council/water rates, insurance, maintenance, land tax etc that is, it can be written as a commercial lease effectively and the tenant pays all outgoings - you may need to calculate the current outgoings and decrease the rent accordingly but as the tenant pays all outgoings they pick up the increases (or you can use base year to capture the increases to be reimbursed by the tenant etc - the possibilities are endless). Rent reviews can be structured into the lease eg CPI annually, fixed % or market review every few years.

It would be likely that the property manager wouldn't know what to do when it falls outside of the RTA.


So your only dilemma becomes what are your long term plans for the property?

 

[Lil Skater]

Personally I wouldn't do it for a new tenant.

You don't know if they'll be good tenants, and aside from a breach of tenancy you can't really evict before the 6 year period is up.

To me they're buying the address to be in the catchment zone and may be leaving the property vacant, or be subletting.

For what it's worth, the lease wouldn't fall under the RTA as it's over 5 years. (Vic)

 

[skater]

I'd be getting the Agent to advise that you have no plans to sell the unit and that you would be more than happy for them to stay for six years, however it is standard to do a 6-12 month lease & then at the end of that lease, the Landlord would simply renew it.

 

[Dazz]

We've got a residentail Tenant on a 5 year Lease.

She moved in mid 2004 and completed a 12 month lease, then we popped her on a 2 year lease, then another.

She kept the place well, paid her rent like clockwork, and frankly I got sick and tired of writing renewal notices, signing docs and all that malarkey.

I saw she was very happy living there, the kids were still attending primary school....and more being produced.

We both agreed that a new 5 year Lease would suit us both. In built fixed yearly escalations of 6% p.a.

She's just completing year 3 of the 5 year lease and still ticking along.

As a Tenant, it gives her security of tenure, and due to the laws, as usual, as a Landlord gives me nothing. But then, that's the same with all ressy tenancies.

Long Leases can be good. We had a 5 year 'trial period' though before signing ours up.

 

[DaveM]

Long Leases can be good. We had a 5 year 'trial period' though before signing ours up.

Just dont give them to high maintenance female doctors?

 

[wylie]

We both agreed that a new 5 year Lease would suit us both. In built fixed yearly escalations of 6% p.a.

As a Tenant, it gives her security of tenure, and due to the laws, as usual, as a Landlord gives me nothing. But then, that's the same with all ressy tenancies.

Long Leases can be good.

Absolutely!!! I'd say the arrangement you have described with your five year tenancy gives you considerably more than "nothing".

You are getting annual increases of 6% which is way more than most people would be getting, just for security of tenure for your tenant.

As an example on a house we are just renewing the lease for. Two local agents have told me that a $5 or $10 increase for sitting tenants is generally accepted, but if we bumped it up by 6% to $556 they may stay rather than move, but I think we would lose them. We have been getting $525 for the past year, and are increasing it to $535 for another year. That is close on $100 over the "average" for the suburb already, so I believe we are getting good rent for this place.

I suppose it all depends on the area but if we use your 6% increases our income for the next five years with the tenant who is now paying $525 per week would be -

Year 1 $556 per week
Year 2 $589 per week
Year 3 $625 per week
Year 4 $662 per week
Year 5 $701 per week

There is no way, barring some huge hike in rents, that the house would rise to that level without the 6% built-in rise, and I cannot fathom any tenant signing up for that.

I'd say the tenant is being shafted if we locked them in at 6%. Maybe I should offer it to them?

I'd say Dazz, in this scenario (not knowing the area or the rents you are getting) you are doing way better than the tenant and they are rather silly to be locking in 6% rent increases, but well done.

 

[Ideo]

We've got a residentail Tenant on a 5 year Lease.

She moved in mid 2004 and completed a 12 month lease, then we popped her on a 2 year lease, then another.

She kept the place well, paid her rent like clockwork, and frankly I got sick and tired of writing renewal notices, signing docs and all that malarkey.

I saw she was very happy living there, the kids were still attending primary school....and more being produced.

We both agreed that a new 5 year Lease would suit us both. In built fixed yearly escalations of 6% p.a.

She's just completing year 3 of the 5 year lease and still ticking along.

As a Tenant, it gives her security of tenure, and due to the laws, as usual, as a Landlord gives me nothing. But then, that's the same with all ressy tenancies.

Long Leases can be good. We had a 5 year 'trial period' though before signing ours up.

Yep. Makes sense to me.

Very common throughout Europe to have long leases like that. Makes it easier for both landlord and owner, particularly if they are a good tenant.