The recession and the slump in the housing market has created an enormous number of individuals and families with poor or diminished credit, with the majority of these turning to renting a residence due to the unavailability of financing for the purchase of a home. This creates an opportunity for homeowners and real estate investors who choose to rent their properties to take advantage of increasing rental rates. A recent CNBC survey of 25 metropolitan areas found that 24 markets had higher asking rents than a year ago and that 21 markets were reporting double digit percentage increases on average.
With market data showing that there is a large number of displaced homeowners and with asking rents on the rise, it is a good time to enter the home rental market. If you choose to rent out a home, one of the questions you will confront is how to set a proper length for the lease. A lease of not more than six months is generally considered short-term, with any lease of one year or more generally considered long-term.
There are a number of factors to consider when making the choice between a short term or long term lease for your property:
- Local laws: In some states and localities, renting living units on a month to month basis can be considered running a hotel which then requires you to comply with a whole series of related regulations.
- High Turnover: A string of short term tenants may give rise to a whole series of issues, including lower tenant quality, poor neighbor relations because of the transient nature of the tenants, and excessive wear and tear on the living unit.
- Higher Rent: A short term tenant is typically willing to pay a higher rental rate than a long term tenant. This can be extremely attractive, but your increase rent rate needs to take into account the periods of vacancy that often occur between tenants. If repairs or improvements are required between tenants, you should also take into account these higher costs. A long term tenant may pay slightly less per month, but the continuing relationship between you and the tenant and the avoidance of periods of vacancy will generally more than make up any difference that could exist between the rental rates.
- Property value: The value of your property may be negatively affected by a constant turnover in tenants. Some homeowner’s associations may also place restrictions on the term of your rental agreements in order to help mitigate devaluation of the neighboring properties.