If you have recently acquired a multifamily property, or if you are thinking of investing in one, there are many things to consider when it comes to truly maximizing your profit potential. While both short-term and long-term lease options have their advantages, they each have their own drawbacks, too. Here’s what you should know before you make any kind of commitment.
Long-Term Lease Options
In today’s housing market, any lease that is for a 12-month or longer period is considered a long-term lease. This is arguably the most common type of lease in both residential and commercial settings, and it comes with a variety of advantages and disadvantages.
The biggest advantage associated with a long-term lease is that it provides a more predictable income. When a tenant signs such a lease, he or she agrees to pay the stated rent amount each month for the next 12 months or more – and he or she is contractually obligated to do so. You will know exactly how much cash you can expect to receive each month for the foreseeable future, which makes everything from planning future investments to budgeting for repair and maintenance costs simpler. Furthermore, because there is less tenant turnover, you can save money on administrative fees.
The primary disadvantage associated with a long-term lease is the limitation that applies to raising the rent. Your tenant agrees to pay a specific amount of money each month for a specific amount of time, which means that you cannot raise the rent during that timeframe, even if rents skyrocket in your local area. It’s also important to note that long-term leases can make it more difficult to spot potential maintenance issues, which can lead to added costs. Finally, with a longer lease, it’s imperative that you carefully screen potential tenants to ensure that they will care for the property and pay the rent on time.
Short Term Lease Options
In some situations, short-term leasing may be the better idea not only for you but also for your potential tenants. Any lease period of less than one year is considered short-term, and these leases are especially popular among individuals who only need to rent a property for a short time.
For you, the property owner, the biggest advantage associated with a short-term lease is the potential for much higher income than with long-term leasing. You will be able to adjust the rent for your property with a great deal of flexibility so that it better reflects current market conditions. Furthermore, it is far easier to maintain a property that is leased on a short-term basis, and if you are considering selling your multifamily property, a short-term lease can help you continue to generate income while you are weighing your options.
With short-term leases, it is possible to generate anywhere from two to three times more income than with a long-term lease, but it is risky. In some markets, finding tenants who are looking for short-term leases can be difficult, which means that your property might sit vacant between tenants and eat into that potential income. You will also need to pay the utilities during the time that the property is vacant, which can diminish income even further. The operating expenses associated with shorter leases are also higher since most short-term rentals are fully furnished and maintained in order to appeal to the right types of tenants.
While short-term and long-term lease agreements both come with their own unique advantages, they have some inherent disadvantages, too. It is up to the individual property owner to determine whether to offer short leases, long leases, or a mixed bag depending on the current tenant’s needs. There is no right or wrong choice; it’s all about fulfilling a market need in a way that helps you build upon your initial investment.