Lease Options That Increase Profitability

June 24, 2019 (Investorideas.com Newswire) One of the greatest challenges of maintaining a strong profit margin on rental property is keeping turnover low and rent coming in on time.

There are a wide variety of ways to structure your leases and incentivize your tenants, but one increasingly popular way to provide choice and transparency is with a tiered lease-option system. Read on for more details.

Freedom and adaptability

One problem some tenants run into with a standard 12-month lease is that life is simply unpredictable. In some cases, they may not want to tell you upfront during their rental application that their company might be closing or switching locations, or that a distant family member has fallen ill.

They may not have any idea what curveball life is about to throw at them. But restrictive leases with hefty buyout clauses can be a deterrent to people who may have to move again in less than 12 months.

Rather than trying to restrict a tenant's mobility to reduce turnover, offering multiple lease options shows that you are flexible and tenant-friendly. Flexible lease options automatically build in the higher cost of frequent turnovers, so that your tenants can retain a degree of control over their living situation.

Keep in mind that in some states and municipalities, there are rules prohibiting short-term rentals. Although the definition of "short-term" may vary from place to place, it is generally less than three months.

Standard lease options typically start at a minimum of six months and increase in six month increments from there. Rent decreases are built into each interval to make the long-term option more attractive while still providing tenants with the freedom to name their lease term.

In many cases, even just the perceived freedom of being able to move when necessary will not only set a tenant at ease, but may justify them paying a higher rental price to hedge against future uncertainty. Plenty of these cases result in tenants still staying 12 months or longer while having paid the six month rental rate and then paying month-to-month afterwards.

This can result in more money in your pocket for the same lease term, or it can result in your ability to recoup some of the loss in turnover costs if your tenant really does move in under 12 months.

Estimates for lease options

The first place to start is knowing precisely how much a single turnover will cost. According to one estimate provided by Property Management Minutes, it might cost $1,800 per turnover for a $650 per month rental.

In breaking this cost down through six-month intervals, you might tack on $250 to $300 for a six month lease option, or offer a 12-month option at the standard $650 rate. You can then offer an 18 or 24-month option at a discounted rate by factoring in the absence of the turnover cost to entice your tenant into signing a longer lease.

Besides that, this kind of lease option automatically flips to a month-to-month agreement at the end of the lease term at a higher rate than the standard 12-month option. This gives your tenant the freedom to pay month-to-month if their situation is still uncertain, or to sign a lease renewal to reduce their monthly costs. This also can help managers of multiple units to stagger turnovers more effectively so that leases aren't all ending at the same time.

Having accurate financial information at your fingertips is a crucial part of determining what your lease options will cost. In addition to property management software, your business can also benefit from several different outsourced accounting services US-based companies offer, so that you can prepare and review profit and loss statements and recent cash flow analysis.

Adding this level of flexibility to your business can help increase your proactivity and profitability. And it can reduce reluctant non-communication that leads to more cost and hassle during an unplanned moveout.

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