Long-term Leases – Are They Really Worth It? | Real Property Management Professionals

I don’t know about you, but one year seems like an eternity to me as SO much can happen. It’s a big commitment, and I don’t know if I’m ready for a big commitment like that. So, I got curious – are long-term leases really worth it? Let’s explore this together!

Before we go further, let’s define some key concepts:

Long-term leases are leases 12 months or more
Short-term leases are leases less than 12 months

Stability

Short-term leases offer flexibility, long-term leases offer stability. What do we mean by this? Short-term leases allow the renter to move around should a change in their life occur – for example, changing roommates, moving to another city, buying a property, a lifestyle change, or a landlord forcing the tenant to vacate. Long-term leases allow the renter to lock in current rental rates longer and have a stable property to live in – no packing up and moving every couple of months.

Market Fluctuations

Long-term leases allow renters to lock in current rental rates for more than a year without adhering to market fluctuation increases. On the other hand, short-term leases only allow the renter to lock in current rental rates for one year.

Let’s look at this concept differently. Suppose Saskatoon gas prices are fixed at $0.60/L in March 2020 and are expected to rise 10% annually. In March 2020, Person A locks in a long-term agreement for 2 years and Person B locks in a short-term agreement. Person B pays $0.60/L until March 2021 but has more flexibility to move in a shorter time span. However, should Person B remain in Saskatoon past March 2021, they are exposed to the market fluctuations and increased prices. On the other hand, Person A locked in current gas prices at $0.60/L until March 2022 (at least). However, they are geographically tied to Saskatoon for a longer period than if they chose a short-term agreement. Both options offer pros and cons

Tip: To determine which lease term is best for you, assess your long-term goals (greater than one year). Do you plan on changing jobs and moving to another city? Are you living with roommates and are planning to have a space of your own? Are you planning on buying a house in the next year? Maybe a short-term lease is best for you! Are you planning on staying in the same city/location for over one year? Are you looking to lock in lower current rates to save money? Consider a long-term lease!

Landlord/Investor Perspective

Like tenants, long-term leases present both benefits and drawbacks to the investor. There is an opportunity cost associated to the investor for both options, meaning, the forgone benefit that was not chosen by choosing one scenario over the other.

In a long-term lease, should market rates increase, the investor does not have the opportunity to increase rates during the lease period. The associated opportunity cost is the loss of potential income from market rate increases. However, long-term leases present low tenant turnover, which minimizes vacancies and allows investors to maximize their asset for longer than with a short-term lease. Additionally, long-term leases also present stability for the investor and the opportunity to foster a long-lasting and healthy relationship with the tenant.

Are long-term leases really worth it?

Yes. Wouldn’t it be funny if I just left it at that with no further explanation LOL!

But seriously, long-term leases are worth it for financial reasons. They allow tenants to lock in current rates at a discount without fluctuations in market rate increases. They also allow investors to maximize their asset with low vacancy rates. It also creates stability for both the tenant and investor. Win-win.

Although long-term leases are a big commitment, I’d say they are worth it. You know what would be funny? Next time you are signing a long-term lease, think back to this blog and say to yourself “I’m signing this long-term lease because the girl who wrote the blog told me to.” That would make me so happy