3 Ways to Renew Your Lease

Great tenants who want to renew their lease are a landlord’s dream. I find that the most burdensome process of both being a landlord and self-managing from a distance is the tenant installation phase.

For me, this is the part that is the most demanding in time. From advertising, to showings (and all the no-shows) to qualifying (including those who get through the whole process and change their mind) and finally doing the move in and move out. It’s true that my long-term tenants have more wear and tear, yet great tenants who stay year after year are still my absolute favorite type of tenant.

The one mistake I have seen other landlord’s learn the hard way is when they keep an awful tenant simply to not have to replace them with a new tenant. Murphy’s Law pretty much guarantees that tenant turnover will never be at a great time. Yet, it is worth it in the long run to end problem tenants even if that means giving notice of non-renewal.

Personally, I have found and seen that problem tenants do not tend to get better. The problem and likelihood of damage to your property gets higher the longer they are on your property, along with the costs of turnover.

Does it make sense to raise the rent on an existing tenant?

Every landlord has their own opinion on whether or not they will raise rent on a good tenant. Personally, I will always raise the rent during renewal times. I discuss the long answer in Why a Rent Increase is a Good Thing and talk about the value of raising rent during a tenancy.

The short answer is your expenses, while delayed during a long term tenancy, are not eliminated. You will still need to update and repair the home when they move out. If you don’t keep the house at fair market value (one of our houses increased 19% in three years) you not only won’t have the same returns, you are jeopardizing your business by not having a large pool of funds to compete with those that are keeping their business at fair market value. Also, you are reducing the possibility you will stick with this investment marathon long term due to the lack of monetary incentive to continue. If you aren’t making a profit why would you continue?

How to Renew Your Lease:

1. Automatic Renewals 
There are some states that allow automatic renewals. In those areas sometimes the rent is automatically increased 2-3% unless either party provides notice in a prescribed time period.

Pros:

• Less hassle: Lease renews automatically. If a lease increase is inputted then you don’t have to worry about the increase.
• No need to calculate market rental rate: If you have an automatic increase it is automatically prescribed.

Cons:

• Higher burden for termination: You must remember to give notice in the correct time period if you wish to terminate the lease.
• Loss over control: Less control because everything is automatic.
• Upset tenants: Some tenants might be upset if it automatically renewed without notice and they are stuck in the lease longer. This would also be exasperating if the rent was automatically increased without notice.
• Tenant might leave over rent increase: If the rent becomes much higher than the surrounding areas you might have tenants move out over the lease increase.
• Loss of potential rent: If you only increase your rent 3% and your area jumped 15% you could see a huge loss in rent potential.
• Harder to update the lease: The lease automatically renews so it would be harder to add any of the provisions that are described in How to create a lease in one evening.

Notification Procedure:
Personally, I don’t offer the first option so I cannot provide a timeline. For the next two strategies, I notify my tenant 90 days in advance. I do my best to provide the notification 90 days out as a courtesy. It is only a courtesy because I am not required to notify the tenant of renewal and a month-to-month increase of $300 per month that occurs if the lease is not renewed.

I clearly outline this in the lease and review it when the tenant originally signs the lease. I only mention this in case life happens or a tenant tries to be difficult laying the blame for notification, me, the landlord.

2. One Page Renewal
This is perfect if you don’t have an automatic lease renewal and you want to maintain everything but the lease term or market rate. It’s a simple one page document that everyone signs.

Strategy:

I will offer a two year lease at twice the increase of a one year lease. So say I was going to raise the rent $50 I would raise it $100 for a only a one year lease and $50 for a two year lease. This encourages my tenants to sign a multi-year lease. While I have not had as many issues of people not fulfilling their longer term leases they signed on renewal, I still always make sure I have the break-lease clause in my lease just in case.

Pros:

• Touch base with the tenant: You touch base with the tenant and there are no surprises both about the increase and it’s a great way to keep in touch.
• Simple document: A simple and easy one page document, no extra burden and easy to do.

Cons:

• Reminding the tenant: When you bring something to the attention of your tenant it is possible that it reminds them to take the incentive to start looking for a different place instead of renewing the lease.

3. Entire New Lease
I use this option if I have made some huge changes to my lease and I want to update the lease.

Pros:

• Time to make a stronger lease – This would be the the perfect time to add a deductible, break-lease clause, etc.

Cons:

• Strong lease could scare tenants off – Your tenant could decide they are unwilling to sign such a lease.

How do you renew your lease? Did I miss anything?