Lease Renewals: 5 Important Questions to Consider

According to the U.S. Census Bureau report, roughly 11 percent of American renters moved in 2016. That means 89% of renters didn’t move. If you’re like most landlords, you’re probably wondering why it seems like you’re constantly trying to find new tenants, given these statistics. When you consider that the average landlord spends over 40 hours and thousands of dollars to onboard a new tenant, it makes sense to focus on keeping the ones you have.

Here are the five most important questions to consider when it comes to improving your lease renewal rates.

1. What is the Best Way to Manage Renewals?

Renewals should be done on a home-by-home basis. Assess everything related to the tenant and the property before issuing – say - a ten percent increase across the board. You should consider how long the tenant has lived in the property, how many maintenance or repair work orders have been submitted, how many times they’ve been late with their rental payment and the cost of getting the rental ready if the tenant decided to leave.

All of these factors should be examined case by case and over the period of time that the renter has been in the property. For long-term renters, record the rental amount when they moved in, how much rent they’re paying now, and then comp the home against the market to see where they stand. Has the market moved up or down? Are they paying fair market price? And then determine based on these factors a new recommended rent.

2. When Should You Have a Lease Renewed by?

At Haven Homes, we begin the renewal process 90 days prior to lease expiration. Let’s say we're in the month of April. At the front end of the month, we identify the leases that will expire at the end of June. Then, we reach out to those tenants to begin the renewal process for those leases. We're always managing our renewal queue 90 days out, not what's taking place in the current month or the following month. We want to be well ahead of the process and so should you.

There are two reasons for using a 90-day lead time. One, you don't want to get behind when it reaches the month of renewal. And two, for those tenants you want to keep, 90 days gives you ample time to have a discussion if there’s a rent increase and they push back. You don’t want them to start looking for another place without time to convince them otherwise.

When do you need a decision in order to have enough time to get the rental unit ready and market it? You should shoot for at least 45 days prior to lease expiration so you have time to make pre-marketing decisions and find a new tenant. Thirty days is the drop-dead date. You should include a 30-day notice to vacate as a part of your lease agreement.

3. What is the Best Way to Initiate the Conversation?

We draft a lease renewal letter and send it out to our tenants 90 days in advance. Then within three to five business days of sending out the letter, we follow up with a phone call to begin the lease renewal discussion.

We ask them if they have received our letter. If they haven’t, we give them the heads up that their lease renewal letter will be coming soon, so they should keep an eye out for it. If they have received it, then we start the conversation. That’s why the 90 days is so important. It allows us to reach out in advance so we can have some control over the message and how it's received on the resident side.

4. How do You Manage Rent Increases?

There are many factors to consider when it comes to rent increases. Rent increases shouldn’t be applied uniformly across all properties and/or neighborhoods. Instead, increases should be considered on a tenant-by-tenant and home-by-home basis. Some scenarios that come into play when determining when to increase and by how much, include circumstances such as:

• State laws (not federal laws) mandate when and how much you can increase rent. For example, in California anything over a ten percent rent increase must be accompanied by a 60-day notice. Legislation varies state by state, so make sure you check the rental laws in your state.
• If a tenant's been renting for a year and the market has improved so that your rental unit is now undervalued by $100 a month, should you increase the rent? Will the $100. increase be worth it if the tenant decides to vacate? Maybe yes. Maybe no. In these cases, you need to determine how much it would cost to get the unit ready again. If there’s a hefty cost of $1000 or more to get the unit ready, it’s probably not worth it. But if the property is immaculate and there are more renters than there are available units, it might be the right time to say your goodbyes to the old tenant and get a higher paying one.

5. What Other Factors Should You Consider?

Should you consider a month-to-month lease if the tenant decides not to renew? At Haven Homes, we discourage going that route. We charge a premium for month-to-month rentals so tenants are incentivized to renew their lease versus vacating.

Many mom-and-pop operators fall into the renting month-to-month trap for various reasons. Sometimes, it’s nothing more than a lack of initiative and for others they want more flexibility when it comes time to evict. But for us at Haven Homes, we’ve learned that most tenants that don't mind living month-to-month aren’t the type of renters we want for the majority of homes we own and manage.

Professional institutional asset managers are judged by the return clients get on the terms of their leases. We don’t just let everything go to month-to-month. If we did, our clients wouldn’t think we were very adept at our jobs. What we hope that non-institutional real estate investors take away from this blog is that “month-to-month” is the junior varsity team’s way of playing the game, not the varsity’s way.