Lease renewals make you money.
You want to hold onto your tenants in order to avoid those expensive turnover and vacancy costs that can come when one tenant moves out and you have to prepare for the next tenant to move in. You can spend months looking for the right tenant and renovating your property. That’s a lot of lost income. A lot of out-of-pocket expenses.
Tenant retention is vital for landlords because it establishes some stability for your property, it doesn’t disrupt your cash flow, and it tells you that you’re providing a pleasant home and an excellent rental experience for your tenants.
Let’s talk about why lease renewals are worth your effort, and how you can ensure you’re likely to retain your best residents.
Lease Renewals: The Benefits
Why does a good tenant retention plan matter? Because it ultimately leads to lease renewals.
And, why do lease renewals matter?
Here are some of the benefits and the reasons that renewing a lease with your tenant is so vital.
- Better income – short term and long term
Most importantly, a lease renewal helps you earn more money. If you have a tenant moving out at the end of your lease term, you’re going to have a vacancy period. Possibly, the vacancy will only be a week or two if the property is in good condition and it’s move-in ready and you already have a new tenant lined up.
More likely, however, the vacancy period will be at least a month. That’s a lot of lost rent.
Not only do you have the vacancy costs, you also have the turnover costs. You’ll need to repaint, spruce up the floors, make any cosmetic updates that are due to normal wear and tear, and fix any damage. You might use this opportunity to make some updates and improvements. That work will cost you money, too, and while it’s good for the value of your property, being without a tenant means you don’t have any rental income to support what you spend.
- Predictable income for the length of the new lease
Another benefit to your annual lease renewal is that you know what your rental income will be for another set period. Renewing the lease ensures that your rental income is constant and gives you a sense of stability. Without a lease agreement renewal or with a month-to-month situation, tenants may suddenly decide to relocate, leaving you with an empty property.
- Rental increases are normal and expected
Annual lease renewals present an opportunity to increase rent as necessary. A lease agreement renewal is the only way to legally implement a rent increase as per the contract signed during the initial lease period. When increasing rent, it is essential to follow any rent control guidelines that impact your property. You also want to be transparent and considerate to your tenants.
Be smart and strategic when it comes to setting the rental amount for the new lease period. Most tenants expect that their rent will go up. But, you don’t want to push it so high that you give your residents a good reason to look around at other potential homes.
- Renewals allow you to connect with your tenant
There needs to be a lot of communication up to and during you lease renewal. This is a great opportunity to connect with your resident. This is an annual conversation you know you’ll be having. Your tenants can expect it, too. Consistent communication is vital in building and maintaining good relationships with your tenants. With open conversations and responsive communication, your tenants will be more likely to report any issues in a timely manner. Additionally, you’ll be able to keep your tenants up-to-date with any changes or improvements being made to the property or any new rules that need to be implemented. Communication is a crucial part of maintaining a good landlord and tenant relationship, and the annual lease renewal period is a good opportunity for enhancing your communication with residents.
Lease Renewals: The Process
Now that we understand the reasons that lease renewals are so vital, how should you go about them so you can be sure your tenant is likely to stay in place?
- Preparation and timing
Start the renewal process by examining your current lease. Hopefully, you’ve implemented some kind of timer or automated notification that reminds you a lease is scheduled to end in a few months.
Your lease must indicate how much notice a tenant needs to give before vacating or renewing the lease. We recommend at least a 60-day requirement. Some leases will require 30 days, but that’s not always enough time for you or for the tenant. With a 60-day notice period, you can extend a lease renewal offer to your tenant two months before the end of the lease agreement. If they do plan to move out, you’ll get the notification in writing at that time.
- Consider incentives
Lease renewals are so important that we advise you to offer incentives when necessary to help tenants decide to stay. Perhaps they have asked for a new appliance to replace something that is getting old and not functioning as well. Maybe they want to install a video doorbell. Listen to what they need in order to continue having a great rental experience, and be willing to work with them. Especially if it means locking in a lease renewal.
- Offer the lease renewal to tenants
Send a letter to your tenants offering them a new lease for another one-year period (or longer). You can also offer a shorter term if you would rather or they request it. Usually a lease for less than a year will have a higher monthly rental rate, but they might be planning to leave the area in a few months or buy a property over the course of the next year.
Offer the renewal and ask them to make a decision and sign the lease by a specific date.
When your tenants decide they want to renew, you’ll have to create a new lease agreement. That renewed lease agreement will reflect new start and end dates as well as a new rental amount. There may be new clauses or terms that need to be included in the new lease agreement. Prepare to point those out and discuss them with your tenants.
If you’re renting out a home in an HOA or community association, you’ll need to research whether there’s additional renewal paperwork required by the association.
- Conduct a walk-through inspection
The renewal period is a good opportunity to conduct a walk-through inspection of your property. Before you renew with your tenants, take a look at the home, noting any maintenance issues that might need attention. You want to avoid deferred and unreported repair issues.
Once you have the lease signed and approved by all parties, keep it in your documented files and make a note for next year, when the lease is set to renew. You’ll start the process again.
Month to Month Rental Agreements vs. Long Term Lease Renewals
Does the lease renewal have to come with a fixed term?
Most initial lease agreements are for a fixed term, usually 12 months, but sometimes 6 months or 18 months. What if the tenant wants to stay in place, but they don’t want to commit to another full year? You’ll have to decide whether you’re willing to continue renting to them without a fixed lease in place.
You might encounter a tenant who would prefer to continue leasing their home, but on a month to month basis instead of for a full year. This allows for greater flexibility, and it’s especially valuable for tenants who know they will only be living in the property for a short period of time. Perhaps they have plans to relocate in the next few months or their goal is to buy a home before the end of the next year.
This type of situation is not ideal for owners because it brings a bit of uncertainty to the investment experience and what you earn. You won’t know when the home will be vacant again, and it can feel rushed when that tenant does provide notice and you suddenly need to find a new tenant. If the tenant vacates during a particularly slow period in the local California rental market, it can be even more difficult to get the property rented quickly at a good price.
But, you may be willing to consider it. If so, make sure that there’s a written agreement that reflects the terms and the new rent.
We invest a lot of time and resources into good tenant experiences and excellent communication with the goal of holding onto our best tenants for longer. Tenant turnover is bad for your property and your bottom line. If you need some help retaining tenants and renewing leases, we’d be happy to offer you some additional advice. Please don’t hesitate to contact us at Real Property Management Choice.
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