Owning an investment property can bring financial freedom, but there are also plenty of decisions to make. As a rental provider, it makes sense to have a strategy in place and, for many, that plan includes deciding whether to offer your renter a new fixed term agreement or keep them on a month-by-month (also known as a periodic) tenancy. Fixing a tenancy for a pre-determined period allows you to “set and forget” your investment to a certain extent, offering you peace of mind while growing your investment.
Why a fixed term tenancy can be beneficial
Cath Stubbings, Director of Property Management at Kay & Burton, says there are a multitude of reasons why offering your renter a fixed term agreement works in your favour, especially in an ever-changing property landscape.
Security of tenure
Fixed term leases provide security and certainty for the rental provider as the renter has an agreement to stay at the home for the set period – whether it’s six, 12, 18 or 24 months. This means they cannot give notice to vacate during the term of the lease, giving you confidence around that portion of your income. A fixed term lease also allows you to budget for any expected (or unexpected) expenses during the length of the lease.
Avoiding vacancy
A vacant property can significantly impact the financial return you achieve on your investment. When a tenant vacates a property, many owners understandably experience anxiety around finding a new tenant and the time it will take to find one. Every day a home sits empty, is a day it’s not receiving rent, which can become a strain on meeting financial commitments.
More cost-effective
Fixed term lease guards you against fluctuations in market vacancy rates and downturns. If a renter breaks the contract, which occasionally happens, they’re obliged to contribute to the letting fees associated with finding a replacement.
Better protection
Not every landlord protection policy covers losses if a renter is on a month-to-month lease. Check your policy to make sure you’re covered if you intend to roll your rental agreement onto a periodic tenancy. In some instances, banks and financial institutions require fixed term tenancies to include the investment property income in their assessment of a client’s overall position.
Care of property
Having a high turnover of renters can sometimes lead to more wear and tear. Most of the unintentional damages are related to the removalists, even with good quality tenants. Additionally, a fixed long-term renter is more likely to care for your investment as if it’s their own home.
Time management
Determining the length of a tenancy agreement is a powerful tool for an investor. A fixed term can be 12, 13 or 14 months for example, and set to end at a buoyant time in the rental market such as December or February. Preventing vacancy around Christmas and New Year, or during the quieter winter months, can also be achieved by having a fixed term tenancy end date set outside of these times.
What rental providers need to know
In the past, a rental provider could give 90 days’ notice to end any fixed term agreement without citing a reason. Legislation changes now mean this can only happen 90 days before the end of the first fixed term. After this initial period, a rental provider must have a valid reason to issue a notice to vacate, such as selling, renovating or moving into the property. If you are planning to sell or move into your property, then a month-by-month tenancy might give you some flexibility to issue the notice to vacate at any time rather than waiting for the end of the lease term.
Additionally, a rental provider can only increase the rent every 12 months, compared to every six months previously. In the past, there were some advantages of having a renter on a periodic lease as it allowed for more frequent rent increases. Now that a rent rise can only be made every 12 months, there is no real advantage to keeping a renter on a periodic agreement.
Currently, conditions are good for investors and rental values are holding up well. My advice for rental providers is to issue a rent increase if the market allows for it in your suburb and for your style of home, while simultaneously offering a 12-month fixed term agreement to your renter.