How Long Term Leases Add Value to Your Investment Property

How Long Term Leases Add Value to Your Investment Property

I bought my first property, a 5-unit apartment building, in 2004 in an inner-city section of Philadelphia. I joined a local landlord association to learn from others. Several people there told me that they only did month-to-month leases with their rentals. I asked why. They told me that it’s easy to get someone out if the tenant is not a fit, as you could simply terminate the lease. I saw their point, yet I wondered why someone would go through the trouble of selecting a tenant only to be so quick to get rid of them. Didn’t they vet people well and then bet on those people to be great tenants over the long run? I likewise wondered why a landlord would want a tenant to have the ability to terminate the lease in 30 days. Wouldn’t you want a tenant to be secured for at least a year, if not more?

Later, when refinancing that property and some others, I found out that mortgage lenders prefer to see long-term leases in place. The leases needed to be at least for one year. In many cases, the lender could count the income from the long-term lease toward my debt-to-income ratio, thus improving my borrowing capacity. When a month-to-month lease was involved, the lender could not factor in the rental income at all. That made borrowing money harder.

I know a commercial rental property owner who swears by handshake deals in lieu of leases. They have no written leases in place, not even written month-to-month agreements. I told them that they are free to manage their property as they choose, yet I added that they have devalued their property in the eyes of lenders and most potential buyers. That landlord has, in my observation, a lot of tenant turnover and vacancy losses. I believe many business owners would want long-term commercial leases in place with their landlord because there is a high cost to moving a business and a value to customers knowing that you’re in the same place. Even if a business relocates a few blocks away, they could lose upwards of 20 percent of their customers. Buyers of commercial property, knowing that finding new tenants can be difficult, will pay much more if there are long-term written leases in place with established businesses.

If you are engaging in short-term or overnight rentals (like with Airbnb or Vrbo), most lenders will need to see two consecutive years of tax returns showing the income before they will count it toward your debt-to-income ratio. Short-term rentals can be highly lucrative in some popular locations. I know of some houses that are being sold as a business. In other words, these houses are being sold above the fair market value of the real estate because the houses (with the furniture and decor) are being sold based upon the past revenue history.

There are times when a buyer of a rental property prefers month-to-month leases. That situation occurs when the buyer wants to get the tenant(s) out shortly after buying the property. If the buyer feels that the rent is too low (and the new tenant can’t or won’t pay a higher rent), or if the buyer wants a vacant house to renovate, or if the buyer wants to move in, then having a month-to-month lease is appealing to them.

My wife and I rarely sell any of our real estate. In fact, we’ve only sold one property, a duplex. I owned it for 17 years, yet we decided to sell because it was 700 miles outside of our target market. One of the units had just become vacant. We didn’t receive any offers on the duplex with only one rented unit. (The other unit had a two-year lease in place.) We decided to rent the vacant unit with a one-year lease, and the same week we received a full price offer. For most investors, having long-term leases in place is what they want. Renting that vacant unit on a one-year lease was the tipping point to demonstrating value to the eventual buyer.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to

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