Matt’s Multi-family Tips | May 2024 | Shorter Lease Terms

Each month, Matt shares a tip or piece of advice that you can implement at your property that month to maximize your multi-family property and investment. This month, Matt looks at why shorter lease terms can help you fight inflation.

Inflation is here and getting worse.

Over the past few months, news headlines have pointed to easing inflation rates and economic improvements across the US. But, anyone that lives in Hawaii knows that Hawaii is different. It’s different for its natural beauty, its people and the aloha spirit, and… its economy. Being on (several) islands, Hawaii is isolated from the mainland US and as a result isn’t always connected to mainland trends.

As such, while those national averages and headlines are great, we need to look at Hawaii specifically, to understand what’s going on and what factors are impacting your property.

I was struck by a recent news report on Hawaii News Now that found a loaf of Loves Bread on sale on Kauai for more than $13. Unfortunately, this increase is indicative of broader inflation trends across Hawaii. While our inflation rate for the past few years has been several percentage points lower than the national average, since November 2023 that trend has reversed, and Hawaii is seeing prices increase at a faster pace than the national average:

^{Source: Consumer Price Index, Honolulu Area — March 2024 : Western Information Office : U.S. Bureau of Labor Statistics (bls.gov), 12-month percentage change, Consumer Price Index, selected categories (bls.gov)}

With prices increasing, as an owner of a multi-family property, if you have long-term leases in place, the value of the rent you are collecting decreases in value each month, and as a result, so can your property.

A smart strategy is to encourage tenants to be on month-to-month leases or a maximum of 6-month lease terms, so you can adjust rents sooner, and as needed.

While this runs a small risk of increased turnover, modest increases (even a few dollars) at the end of a lease term will help you keep up with inflation and avoid deflating your asset.