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The Pros and Cons of a 12 Month Lease

David Cota - Friday, April 30, 2021
Property Management Blog

The Pros and Cons of a 12 Month Lease

Most Portland lease agreements are 12 months long. This is standard throughout the country; tenants and landlords agree to the terms of the rental contract for a full year. At the end of the year, there may be a lease renewal of the same term, the tenants may decide to move out, or perhaps the landlord and the tenant will agree to a month to month situation.

There are a number of benefits to signing a 12 month lease for both owners and tenants. As Portland property managers, we like having the certainty and stability of a year-long lease agreement and another year-long lease renewal.

However, a strong case can also be made for avoiding a standard 12 month lease agreement.

The pros and cons will mean different things to different owners and their tenants. Today, as we talk in depth about the lease renewal process in Portland, we’re looking at the benefits and challenges that come with a one-year lease agreement.

Rental Property Owners and the Benefits of a 12 Month Lease

If you own a rental property in Portland, you know that keeping a good tenant in place can increase your ROI. It provides stable rental income and helps you avoid the costs that come with vacancy and tenant turnover.

Stability is good for a real estate investment portfolio. You can count on a constant and continued income during a full year. This helps you plan, forecast, and make budgeting decisions for the property and your entire portfolio. You’ll know exactly how much income a property will earn you for the rest of the year. This leads to fewer guesses on a monthly and quarterly basis. You know what to expect.

The expenses between tenants can be costly. Vacancy is well-understood as expensive and best avoided. But, there are other costs as well when you have tenant turnover. You’ll need to pay for any maintenance items that might have been deferred or unreported after the last year. You’ll need to take care of general wear and tear before a new tenant moves in. Most properties will require paint, a good cleaning, and cosmetic upgrades and updates. You’ll also have to pay to keep the utilities on and the landscaping up to date. There are security concerns with vacant properties; they can sometimes be a target for people who may break into the home or even begin living there once they gain access.

With a full one-year lease, you won’t have to worry about that for another long period. You and your property manager can focus on continued tenant retention, preventative maintenance, and the steady rental income you’ll continue earning from your existing tenant.

Rental Property Owners and the Challenges of a 12 Month Lease

While a 12 month lease makes sense if you know you’re going to hold your property for a few years more and not make any changes to your investment portfolio, this time period can be prohibitive to an owner who may have other plans for the property.

There are also considerations that need to be made for the tenant you’re working with and the rental amount you can possibly gain.

When you sign a lease renewal that’s a full year in length, it means you cannot increase the rent any more than you’ve already raised it for the renewal period. If the Portland rental market has a sudden shift and you discover that the market price for properties like yours has risen dramatically, you’ll be stuck collecting below market rents until the lease has terminated. This can be difficult to settle for, even if it means stable income for the year.

There’s also the matter of whether or not you like renting the property out to your tenant. For good tenants, a 12 month lease period is a no brainer, but what if you are only tolerating the tenants in your property? If you have a toxic resident or someone who pays late every month, that’s going to be exhausting to deal with for another year. Your options, once the 12 month lease is signed, will be limited.

Benefits and Challenges of a 12 Month Lease for Tenants

The Pros and Cons of a 12 Month LeaseTenants also have to decide whether they’d prefer a 12 month lease agreement or a month to month situation. They have their own set of pros and cons to grapple with.

Typically, tenants like to pay the lowest rent they can. That’s going to be best achieved with the longer lease period. The rent cannot be increased until the end of the lease term, and that provides tenants with an opportunity to do their own budgeting. They’ll know exactly what they’re spending on housing for the next 12 months.

Another benefit is that tenants won’t have to worry about moving for a year. Staying in the same property can be a comfort, especially if it’s a property they enjoy calling home. Moving is expensive, and finding another place to live takes a lot of time and other resources.

On the flip side for tenants, there’s always the fear of missing out on something. Maybe there are better properties out there or perhaps the rental market has become more tenant-friendly and there are better rental values to be found. A 12 month lease also comes with legal responsibilities. Breaking that lease could be costly. What if finances change over the course of the next year and they can no longer afford the rent they are paying?

We have been managing Portland rental properties for a long time, and in general, we believe that a 12 month lease period benefits both landlords and tenants. There are always exceptions to this rule, and you’ll have to explore your own plans for the next year and your own individual finances. As an owner, you’ll need to see what a longer lease term means for your investment goals. As a tenant, you’ll have to decide whether you like your home and your landlord or property manager enough to stay in place for another year.

If you have any questions about lease renewals and the benefits and challenges of a 12 month lease term, please contact us at PropM, Inc.