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Should You Sign a Multi-Year Lease on an Apartment?

The Motley Fool logoThe Motley Fool 12/12/2019 Matthew Frankel, CFP
a person cutting a piece of paper: Should You Sign a Multi-Year Lease on an Apartment? © Provided by The Motley Fool Should You Sign a Multi-Year Lease on an Apartment?

The one-year lease is the industry standard when it comes to residential real estate like apartments and other rental homes. However, that isn't necessarily the only option you'll have.

On the lower end, six-month leases aren't too uncommon, and it may even be possible to find a month-to-month lease. And some leases are longer than a year -- many apartment communities offer 18-month or two-year lease terms, and even longer leases aren't unheard of.

In many ways, a multi-year lease is a win-win. The landlord has a tenant in place for a longer period of time, which not only eliminates the hassle of turnover but can be a big money saver. After all, it costs money to clean a property, advertise it, and to vet new tenants. And the tenant gets to lock in their rent for an extended period of time, along with other potential benefits.

However, multi-year leases aren't right for everyone. Here's a rundown of the pros and cons of multi-year leases so you can decide the best approach for you.

Advantages of signing a multi-year lease

Predictable rent -- A multi-year lease can allow you to lock in a specified rent for an extended period of time. This can be an especially valuable benefit in hot real estate markets -- no matter how much market rent goes up during the first year you're living there, the landlord must honor the original agreed-upon rent.

Stability -- It can be nice to not have to worry about moving for a while. This is one of the primary benefits of homeownership for many people, and a multi-year lease can provide a similar advantage to renters.

Discounted rent -- As a landlord myself, I can tell you firsthand that finding new tenants is not fun. In order to minimize turnover, many apartment communities offer discounts to tenants willing to sign longer leases. So not only can you lock in your rent for an extended period, but it might be significantly cheaper than with a one-year lease.

The main disadvantage of signing a multi-year lease

A multi-year lease can have its perks, but if your circumstances change during your lease term, you may find yourself stuck in an undesirable situation. When my wife and I first got married and I needed a car, I chose to lease even though I feel it's financially smarter to buy. The reason? I didn't know if a four-seat compact sedan would meet our needs in another three years.

The same logic applies to multi-year apartment leases. If you have a major life change, such as getting married, having a baby, or a financial situation that makes the apartment unaffordable, a multi-year lease may leave you stuck.

Is it the best move for you?

Here’s the takeaway. A multi-year lease can be great in many cases. After all, who wants to worry about their rent spiking next year, and if you can get a lower monthly rate by committing to a longer lease term, it’s certainly a good thing.

However, a multi-year lease only makes sense if you’re pretty sure that it’s a place you’ll want to live for several years and if you’re virtually certain that your life situation won’t undergo any changes that might require you to move.

One word of caution is that if you do sign a multi-year lease, it’s especially important that you know how you could get out of it. For example, some landlords will let you out of a lease fairly easy in the event of a job transfer. And if you have to break a lease, the penalties for doing so range from a few hundred dollars to several months' rent. The bottom line -- a long-term lease can be smart if your circumstances allow it, but be sure you know exactly what you’re agreeing to first.

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