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Lease Renewals: The Art of Negotiating

Chris Claflin - Tuesday, November 24, 2020

This episode of the Investment Property Geeks of Charlotte is all about lease renewals and tenant negotiations. There are many reasons this conversation is important. One of the most expensive things that can happen in a rental business or with an investment property is turnover. 

Damage can occur during move out, which of course costs money to fix. Large furniture, appliances, moving things up and down stairs and all kinds of scenarios can cause unintended damage that are just collateral realities of a move out.

During turnover, landlords will encounter the regular challenges of wear and tear. Dirty marks or shadowing on the walls, soiled carpets, fixture issues and all kinds of repairable conditions arise during move out. 

We’ve talked before about how “like attracts like.” The condition of a property at move-in sets expectations and precedents for how it is maintained. This means that the landlord or investment property owner has to address all issues when the last tenant moves out.

Even with long-term tenants and long periods between turnover, preventative maintenance is part of the job. Click here to listen to our episode on preventive maintenance and get insight into the issues you should be looking for or taking care of on a regular basis.

We get asked all of the time about the average lease duration. In some cities or states it’s around 24 months. People move in and out for different reasons. Some are just looking for a temporary spot and others are lifelong renters. Depending on the trends in your area, turnover may be more or less frequent.

In addition to the physical cost of turnover itself is the cost of vacancy. As a property owner, vacancy represents lost income. Without a qualified, paying tenant, income is being lost.

Another reason that many property owners don’t think of is insurance. An estimated 45-60 days after vacancy, elements of the insurance policy will no longer cover what is happening in the home. That represents an enormous liability that no property owner wants to face. While that’s rare, it’s something to know about and be prepared for.

With those initial considerations in mind, we have a background for understanding the vital importance of lease renewals.

Tips for Landing Lease Renewals With Desirable Tenants

There are a few expert tips we want to offer up as you look toward regularly renewed leases. This is the goal for every investment property owner. You achieve it by activating some of the following items:

  1. Treat your tenants well. Tenants who enjoy their life in your home, who are well-treated and taken care of, are much more likely to renew their lease. Simple as that. Address issues promptly, communicate effectively and operate in a way that the tenant has reasonable faith in you as a property owner.

  2. Begin with renewals in mind. If you’ve properly screened tenants and prepared the property for move in, you have every opportunity to plan for an ongoing lease. The first impression you set and then the ongoing care you provide will be important to obtain the re-up.

  3. Do regular property walk-throughs and maintenance. It’s important that you want to know whether or not a tenant should be offered a lease renewal. Property managers may get complacent and just renew reflexively. It’s important to know what’s going on in the property and fully understand the condition of the home before you offer the renewal.

Lease Renewal Offers

If you have decided with certainty that you want to offer a lease renewal, be sure that it follows the format stipulated in the lease. It may need to be written, on paper or maybe it can be digital. It just needs to align with whatever is prescribed on the original lease agreement. Some leases have clauses about the delivery method, adequate notice and other terms. 

Lease Renewal Research

When it comes to lease renewals, you need to do your research. We hear a lot of speculative approaches to this, including how much the property owner is paying on mortgage and home improvements to justify rate increases. Lease renewal terms and rate increases shouldn’t be subjective. Here are some better metrics to use to gauge a price bump:

  1. How much time will it take to lease again? We typically only have two-three weeks of vacancy between tenants. If it takes a lot longer than that, a high price may be a deterrent to renters.

  2. How many showings, inquiries and applications did you get the last time? The traffic you got on the property may indicate whether or not it is updated enough or that it shows worse than it does in the photos. If showings don’t result in applications, you need to reassess the state of the property and the price point.

  3. Look at comps in the zip code. Knowing rent stats in your area can help you price right. A good resource is from Zillow (you can Google, “Zillow data” or “Zillow research.”) This will provide mostly accurate data about rent by zip code. Because most legitimate properties are posted on this platform, there’s some great data to learn from.

  4. Look at what neighboring properties are renting for. Don’t just look for bedrooms and bathrooms but include comparable amenities like granite v. formica, upgrades/features, etc.

Recommended Resources For Assessment:

If you go to Sunnon.com and click on “Get My Free Quote,” you can input your address and get a PDF report that estimates your property’s ideal rent with a confidence percentage score. If that percentage is in the 90s or so, that number is reliably close to the fair market rent. If it’s lower than that, there may be insufficient data. Property managers can help you get to this number.

MLS: if you can access this or find someone with access, you’ll get active property numbers.

Zillow: this free resource will give you info that can pull data from both active and inactive properties.

There are other online resources that can help you out with this.

The numbers related to rate increases need to be objectively justified based on factors like the ones listed above. This is what you present to the tenant. It’s harder to provide objections to a well-researched number.

A rent increase is simply inflation. 

Why Increase Rent

There are several reasons a rent increase could and should happen.

  1. Demand in the area for that property has increased.

  2. The area has gotten more trendy or is being revitalized.

  3. Work or employment opportunities have increased in the area.

  4. There is an uptick in relocation to the area.

  5. Supply has decreased.

  6. Inflation.

Owning a hard asset, like real estate, means that the rent you get for your property keeps up with inflation. Cash devalues. Hard assets keep pace with inflation. 

When Not to Increase Rent

Every so often, you will want to present your fair market numbers to a tenant and then offer them a rent price below those numbers. This can be a powerful way to treat your tenants well and reward them for taking good care of your place and paying on time. It’s important to make it clear that you could list the rental for the fair market price but aren’t doing so just for them. This breeds goodwill and can keep good tenants in your investment property for longer.

While this is an “every so often” or “once in a while” idea, don’t fall into the trap of never raising the rent. Even great tenants, if they stay for a long time, will need increased rent to keep pace with inflation. You’re leaving money on the table if you don’t incrementally increase rent. It also sets a bad precedent. If you go a couple of years without raising rent, as soon as you do, people will become upset and move out. 

Many people make poor financial choices and don’t budget well. If you have to bump up rent by $75, that may be a huge deal to people. Imagine if you haven’t done that for three years in a row, not only are you leaving a lot of money on the table, but your tenant will get sticker shock and may move out. You can actually help your tenant budget by phasing in rent increases over time.

Additional Incentives

Sometimes, instead of rent discounts, you may want to add incentives to improve the home. These are small and have the added benefit of improving the value of your home. This includes things like adding ceiling fans, getting new appliances or doing cosmetic changes or upgrades.

Chris cites an example where an elderly woman who had rented for 15 years was raving over the vent fan over the stovetop. The landlord let the woman choose a high-end vent fan. Three  years later, she was relaying to Chris about how wonderful this was and how much she enjoyed it. The point is: little gestures can go a long way and help seal the deal for rent increases and lease renewals.

Timeline for Presenting Rent Increases and Lease Renewals

Every property management company or property owner may have a different timeline. Typically, we recommend getting as far ahead of this process as possible. This means looking at rent increases as early as 45-90 days before the lease is up. Our system is automated. Around day 75, the tenant will get a courtesy notice about their expiring lease. A couple of weeks after that, we’ll remind them that a lease renewal is coming. Finally, they’ll receive the actual lease renewal offer with a reminder that, though they can go month-to-month, it will be much more expensive.

It’s up to you how lenient you want to be. Our leases state 60 days but if the tenant drug their feet and it’s day 30 and they want to renew, we may allow it. It’s in the owner’s best interest to renew the lease. Use common sense as you carry out a timeline.

What if the Tenant Doesn’t Want to Renew?

Sometimes things come up, tenants get frustrated, people relocate or move out. It may be possible to find alternatives. You can point blank ask the tenant why they’re not renewing and what their ideal timing is for moving. Signing three, four, six month extensions may be a better option. Sometimes people are buying a house or building a house and just need a bridge lease. If the lease extension ends in a season that’s far less favorable to rent in, you may charge based on that potential increased vacancy.

Ending a Lease

Tenants will start a lease on any day in the course of the month. However, scrupulous property managers may want to think through the specific day or week they end a lease. For instance, if a lease ends on a Friday, there’s your weekend. That may be favorable or not. If you estimate how much vacancy costs you per day, a whole wasted weekend may be expensive. Strategic planning can offset these costs.

Summer is a better time to rent a property. If a lease is going to end in April, do a 13-month or 14-month extension instead of 12. These decisions begin with the end in mind.

Listen to Investment Property Geeks of Charlotte

We are here to help. As expert property owners and property managers ourselves, our advice is based on a lot of experience and know-how. You can already see the immense effort that goes into timing this right so you maximize your income and minimize the headache of owning your own rental property.

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