How do I calculate a lower rate for long contracts? For example, if a house rents for $1000 a month on a one-year lease, how far should I lower it to encourage a two-year or three-year lease? I’m guessing a 5% decrease for each additional year sounds reasonable, making a three year lease $100 cheaper per month, for a savings of $3600 over the three year period. It decreases my cash flow, but it reduces my risk of vacancies, finding new tenants, etc., which is more important to me than cash in hand.
Is this reasonable? Is it too much of a discount? Not enough?
Nate,
I’ve never tried it myself as I don’t want to lock myself into that position. I understand well the intention about reducing vacancies.
Have you considered the opposite route that perhaps a set increase would be attractive as well? Knowing ahead of time that the increases are limited to X amount might work, too.
I don’t think I would have a set number as I would probably negotiate on a case-by-case basis. If your tenants like the place, knowing that there wouldn’t be increases would probably be a selling point.
just some thoughts…
Nate,
I have some limited experience with this tactic and would suggest the following:
-
At minimum, hold the rent flat for the extra years. You probably can get away with small increases provided they seem like a good deal to your tenants. Remember, people expect rents to increase over time so just holding it flat as Tim suggests is a pretty compelling offer.
-
Consider having an early termination clause on your side only after the first year. What happens if something suddenly changes in your personal situation and you need to sell the property? What if a good tenant becomes a lousy tenant and you’re stuck with them for years?
-
Be careful with the length of the lease. I’m not a lawyer but I believe anything 3 years or longer falls under a different set of laws.
I strongly suggest consulting your lawyer before actually doing a multi-year lease to make sure you’re fully protected. Best of luck,
Steve