Leases Beyond 12 Months: What Are the Financial Benefits?

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Anyone who has looked for an apartment over the past few months, or any tenant who has opened an email from the landlord containing the rental renewal agreement, likely has experienced sticker shock.

According to a June report from real estate site Redfin, the average monthly rent in the United States topped $2,000 for the first time ever in May, rising 15% year over year to reach $2,002. In four metro areas — Austin, Texas; Nashville, Tenn.; Seattle and Cincinnati — rents increased by at least 32% over the past year. Austin topped out at a whopping 48% gain in that time frame.

With rising mortgage interest rates, it doesn’t appear rents will drop anytime soon. Higher interest means lower affordability for houses, keeping renters in the market and competition for apartments and rental homes high.

But there is a strategy you could consider to lock in your monthly rental rate anywhere you live, but especially in a city with red-hot rents: a lease longer than 12 months.

The Standard Lease

A typical lease runs for one year. It is an agreement between you, as the tenant, and the property owner or the company that manages it.

The lease spells out the rules that govern your use of the property and contains valuable information. It starts by listing the names of the tenants responsible for paying the rent — especially important if you have a roommate — the length of the lease, the security deposit, options to renew and how much notice you’ll need to give if you decide to move when the lease is over. It outlines a description of the property, which maintenance responsibilities are yours and which belong to the landlord, and areas you have use of, such as a garage or a backyard shed.

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And, of course, it includes the monthly rent, the date it is due and any fees for late payments.

An Extended Lease: The Tenant

You might be moving to an area sight unseen for school or to a part of town that’s unfamiliar to you. Or you might sense a pending job change and, since your career isn’t suited for a work-from-home setup, you might have to move. If you are one of these renters, you probably should stick to just a one-year lease to have maximum flexibility.

But, if you’re established and committed to an area, you live in a quirkily cute apartment you’d hate to leave, or you have a child who is thriving in the best school in town, you’re a great candidate for a lease that’s longer than 12 months.

A longer lease gives tenants security — both financial and practical. On the financial side, the rent you’ll pay for the duration of the lease is spelled out. You won’t have any surprises about a big increase at the one-year mark of your tenancy. And you’ll know you’re locked into your living space for longer than 12 months. If your landlord decides to sell your rental house, the new owner legally must agree to the lease terms until its expiration.

If the rent already is below the average for your area, you’ll have a great deal if you sign for longer than a year at a locked-in rate. Another financial bonus to a longer-term lease? You won’t have to pay moving costs.

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“You have the peace of mind knowing where you will be living for a long period of time when signing a long-term lease,” said Bill Samuel, a full-time real estate investor at Blue Ladder Development in the Chicago area. “You will know exactly how much your rent will cost you for the entire term of your lease, and you will be able to potentially lock in a rental rate and avoid having to worry about a sharp increase in your living cost.

“Landlords who issue long-term leases tend to have more strict screening requirements, which means your neighbors will have been thoroughly screened if you live in a rental community.”

Still, Samuel recognized the potential downside.

“You are legally required to honor the terms of the lease that you signed; so, if you have to leave before your term is up, then you will be required to pay the extra months until the lease is complete.”

An Extended Lease: The Landlord

Why would a property owner want to lock in a tenant without the ability to raise the rent after a year? Because a rental unit with a consistent source of income is a landlord’s dream.

Plus, every time a unit changes hands, the landlord bears costs, at a minimum, of hiring a cleaning crew or sprucing it up from wear and tear. Property owners often pay to change locks between tenants and bear other smaller expenses.

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Having a long-term tenant also means landlords won’t have to perform more expensive tasks, such as repainting, very often.

“Long-term leases, especially those with over 12 months of the contract are excellent because of their consistency. A two-year lease would mean access to steady cash flow for the time period,” said Zach Tetley, co-founder of Nexus Homebuyers in Tennessee. “This is a great way to avoid the hassle of renewals every few months.”

If your life circumstances are stable and you know you will continue to be a renter for at least a few years, you could wind up with more money in your pocket if you sign a longer-term lease. While landlords might miss out on the ability to raise your rent after 12 months, the payoff is knowing there won’t be an empty unit to fill.

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