Monday, 27 August 2012

Investing in Real Estate: Don't forget to renew the lease

As outlined in my previous post, once you have bought your property and leased it out to your tenants there is nothing much you need to do other than keep track of your finances, the required maintenance and your lease.

This post will cover the last of those points.  Typically properties are leased for either 6 or 12 month periods.  Towards the end of this period you need to renew your lease.  Many landlords and indeed property managers are quite lazy about this and leave it quite a long time.  I confess the first time my lease renewal came up I got onto it straight away but the second time I totally forgot about it (my fault not the property managers).

However it is in your interest to keep on top of this and renew the lease in good time

There are several reasons why keeping on top of this is important for your financial well being.  These include
  1. When you renew the lease you typically are able to raise the rent.
    • This is typically all the lease renewals come back to
    • It is always a balancing process - raise the rent too far and you risk good tenants seeking accommodation elsewhere (and getting no income for a period of time).  Do not raise the rent at all and you are possibly renting your property too cheap and doing a financial disservice to yourself
    • The process is the same as when you were setting the rent - have a look at what the rents are like on similar places around you
      • If rents have gone up a lot then you are probably OK to increase your rent to get it close to the market
      • If landlords are advertising very low rents to try and get people in the door, you probably don't want to be increasing your rent and losing your tenants
  2. A lease locks the tenant in for a specified period of time
    • If they exit the lease early then there are financial penalties for them
    • If you do not renew the lease it typically goes onto a month to month lease basis and they only need to give very short notice to you to move out
    • Having a 6 or 12 month lease is good for the investor because it provides certainty around cash flows
    • Advertising and re-letting a property to new tenants if the old ones move out suddenly because you don't have a lease costs a fair bit of money (especially in terms of lost rent and fees paid to your property manager)
  3. Insurance is typically based on having a lease agreement with your tenant
    • When you renew your insurance contract you normally say that the property is being leased under contract
    • Landlord's protection insurance normally pays you out if your tenants cannot pay the lease or skip out on you.  If you do not have a lease then technically the insurance companies do not have to pay you for very long at all
A good property manager will remind you well in advance of when your lease is coming up for renewal.  They will normally also tell you whether they think you can get an increase in the rent or not.  If your property manager does not do these things I suggest considering finding another one.

Normally I like to weigh up the pros and cons of doing certain actions however when it comes to renewing your lease there are no real downsides.  It is only laziness or complacency that will stop you renewing it.  Make sure that when your property manager reminds you to renew your lease that you give them instructions straight away.

1 comment:

  1. Nice blog! real estate fields are good for investing money. Thanks, I like your blog!

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