Room For Rent

Two Year Leases: Do they help or hurt?

Here at Pear Tree Property, we offer a $25 a month discount to new residents if they sign a two year lease. If the resident leaves before the lease is up, then that $25 a month is added to their account balance when we get a judgement.  It sounds like a simple win-win scenario – the resident pays less and we have a lower turnover.

How does it pan out in practice?  Does providing an incentive to sign a two year lease make sense?  This post is letting out a bit of my inner stats geek, but I hope you find it interesting.

Buildium Reporting Fun

First things first, get the data.  We use a system called Buildium for all of our property management and accounting.  It’s got a lot of nice features: it’s easy to update, has a nice user interface, and is entirely web based so our investors can check up on us whenever they want.

When it comes to reporting, Buildium is a bit of a let down.  To take a first pass at today’s problem all I really want is to see all of our leases, when they were supposed to end, and when the tenant actually moved out.  Simple right?  Negative Ghost Rider.

Without going into too much detail, I had to pull raw event history and then write a python script to parse out the relevant lease transactions.  This “give me somewhat useful lease information” script is just the most recent in my growing arsenal of scripts to work around short comings in Buildium’s reporting.  (feel free to drop me a line if you want the script).

That said, my background probably predisposes me to want to access data in a format that the less geeky user couldn’t care less about, so I shouldn’t knock Buildium too hard.  It was actually sort nice to have a call back to my finance days.

First Results

OK, moving on…  I’ve got my data, now what?

The first thing I did was chuck the leases that are still active.  Using this approach yielded the following high level numbers:

Two Year Lease vs 1 year without current leases

Those numbers are, quite frankly, scary.  Only 14% of two year leases are fulfilled?  Huh?

Turns out these numbers come from my crappy methodology.  Here’s why: let’s say a we only have two residents, both signed on August 1, 2012.  Today is July 6th, 2013.  Let’s also say we had to evict one of the residents on October 1, 2012.  Since I’m throwing out all current leases, our above table would show none of the leases “fulfilled” and 60 as the “Average Days As Tenant.”  This effect is more pronounced for two year leases.

It’s even worse considering we’re always buying more homes and so have proportionally more current leases than former leases.

This is what stats folks like to call a selection bias.

Actual Results

So how do we get around this selection bias?  Honestly, I’ve no fricking clue.  If you’ve got a recommendation, drop me a comment.  What I can do is go to the other extreme and include all current leases.  Unfortunately, doing this makes our “Average number of days” useless (if we just signed a lease it would bring down the average).

Here are the high level numbers after some crunching:

Two year lease versus one year with current leases

Conclusion on Two Year Lease Incentives

What can we conclude?  I can safely say we don’t have much data.  Interestingly enough, it’s pretty hard to come draw a conclusions without enough data.

That said, I’ll make some general observations.  In the second table, the “percent fulfilled or current” is roughly the same for one and two year leases.  Even with a huge bias in the first table, the “average days as tenant” is still higher for a two year lease.  I don’t think we’re shooting ourselves in the foot by offering a slight discount to sign a two year lease.

Keeping it family friendly

Keeping it family friendly

The close reader will note that what we’re calling the “percent filled or current” is actually the inverse of our eviction rate, which would be 31%!  That’s worrying.

It’s not all doom and gloom.  Our occupancy is always above 90%, which means our property manager, Suzy, is doing a good job getting new residents.  Also, our eviction rate is steadily improving.  If we restrict our sample to leases starting in 2011 or later, it’s 27%.  If we look at only 2012 and beyond, it’s 22%.

Feed Kenny Feedback!

This is my first blog post digging into the statistics and exposing some of our internal data.  Please let me know what you think.  Do you want more stuff like this?  Did your eyes gloss over?  Are you not even reading this sentence because you saw the word statistics and closed your browser?

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During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Keep up to date with everything he's doing on twitter!

Latest posts by Kenny Estes (see all)

7 thoughts on “Two Year Leases: Do they help or hurt?

  1. Matt Donnelly

    Hi Kenny. Matt from Buildium here. First, thanks for being a Buildium customer and saying some nice things about our product. Second, I’m sorry to hear about your reporting woes. I’d like to hear more about those workarounds you have and get your suggestions for making our reporting better. Please drop me a line at matt.donnelly@buildium.com when you have a second, copying Saro, our VP of Product Management (saro@buildium.com). We’ll have a look at what you’re doing and be in touch.

    Reply
    1. Kenny Estes Post author

      Hey Matt. Thanks for the response. I’ve always been impressed by your prompt customer service. I’ll drop you an email with my script and an explanation of what I was trying to do.

      Reply
  2. Colin

    Interesting. I typically don’t offer 2 year leases on apartments especially given that in the areas that I own, rents are generally increasing. The exception that I make to a standard 1 year lease is the lease that gets signed from October to March when it is typically harder to fill a unit – when I enter into a lease in these months, I’ll give a discount for the tenant to rent for about a year and a half so that (assuming the tenant doesn’t vacate early) I’ll get the unit back in May/June, when it is typically easier to fill a unit. Once you get more data, I’d be curious if what you find justifies the type of discount I offer.

    Reply
    1. Kenny Estes Post author

      Thanks for the comment Colin.

      I’m sure I’ll do follow up blogs on this topic from time to time.

      This analysis was just for South Bend. I also rent to students in a college town in Missouri. There it’s incredibly seasonal and we give incentives to make sure our leases end in the summer. Same concept.

      Thanks for reading and don’t forget to subscribe for updates!

      Cheers,

      Kenny

      Reply
  3. Cliff

    Sorry to give life to an old thread. Your % fulfilled I think has very little to do with whether you sign 1 or 2 year leases and has more to do with tenant selection. Unless you have a different screening process for 1 and 2 year leases, you will be just as likely to put a bad tenant in a 1 year lease as a 2 year lease. (And possibly it may even skew a little to the 2 year because a tenant that doesn’t care about getting evicted being on a 1 year lease may just take the 2 year to save 25 bucks.) I personally think the better way to look at it would be in terms of returns. How much does it cost you to turnover a unit? If that number is greater than the $600 of lowered (and possible rent increase in year 2 ) then it makes more sense to do a 2 year lease.

    I think it makes sense to do 2 year leases if you have high turnover costs or if the unit that you are filling has been a problematic unit to fill historically. (But that problem may have to do more with the condition of the building) I don’t think generalizing the data provides very much insight into deciding whether or not 2 year leases are effective due to all the inputs that would actually be required.

    Good luck from a fellow trader from Chicago.

    Reply
    1. Kenny Estes Post author

      Thanks for the comment Cliff.

      I agree turnover should be a strong consideration. I was assuming the turnover cost was the same regardless of length of lease and trying to figure out if the time a tenant stayed had anything to do with the length of the lease. What I found was a bit surprising, there is no clear advantage to 2 year leases. In an of itself that might be an indication it’s not worth it, but there’s just not large enough sample sizeto be sure.

      What company you trade for?

      Cheers,

      Kenny

      Reply
  4. steve

    Thanks for posting your content .. I have used buildium for 5 years now.. and desperately waiting for the API’s to open up. I am just getting into computer programming..and would appreciate looking at the script you used.. partly for my programming education and for toying around with buildium. Thank you!

    Reply

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