As an investment property owner, renting out your property is one of the best ways to secure a steady income. It can be especially beneficial if you successfully find suitable tenants for occupying your unit in the long run. You also have to focus on your existing tenants and try to retain them for multiple years by urging them to renew their leases. But, getting them to renew their leases can be a challenging task.
Here is the ultimate landlord's guide that encompasses every major topic about lease renewals from what they are, their advantages and disadvantages, and what to consider before offering them to your tenants.
Introduction to Lease Renewals
Lease renewal is a simple process that helps landlords save the hassle of finding a new tenant after their lease with the current tenant expires. If managed properly, this process can benefit both the landlord and the tenant. However, the renewal of a lease depends on various factors, like whether or not the landlord is happy with the tenant and vice versa. Affordability is also another issue that arises during renewals, as most landlords tend to increase the rent during renewals.
Even though it may seem like a good option, renewing a lease has its advantages and drawbacks -
Pros of Lease Renewals
Retaining Good Tenants
If you have found the right tenant for your property and their year-long lease is about to expire, you can easily have them stay for another extended period by renewing their lease. In the rental business, coming across a good tenant can be difficult, and as a landlord, you have to ensure that you do the best you can to retain them.
The retention rate in apartment buildings in Virginia was extremely high during 2021. Class C properties also saw a 61.9% retention in the first quarter of 2021.
Low Turnover Cost
When your current tenant leaves your rental once their lease expires, you have to start the process of renting out your house from scratch. It takes significant monetary funds to ensure that the property is ready for the next tenant, marketing it, and then leasing it to new renters.
The cost of tenant turnover can range from a few hundred to thousands of dollars. The average tenant turnover cost in Virginia is around $2,500. By renewing your existing tenant's lease, you can significantly lower the turnover cost or eliminate it.
Steady Cash Flow
The period after your old tenant has left and you are trying to find a new tenant can be uncertain. During this time, your property remains unoccupied, and you stop getting your monthly rent. If this continues, you will be left without a steady income for a few months every year.
Therefore, you can offer a lease renewal to your tenant before their lease expires and get a regular, uninterrupted cash flow from your rental property.
Reduced Risk of Vacancy
A rental vacancy is every landlord's nightmare, and they are always on the lookout for ways to reduce vacancy significantly. The rental vacancy rate in Virginia was 5.40% as recorded in January 2021.
If you do not want your rental to sit vacant for a few months every year, you can opt for lease renewals. It can be beneficial, especially if you own multiple properties. You can offer renewals to all your tenants and retain them for the long run.
Although there are several advantages of lease renewals, they do have a few drawbacks as well. Let us take a look at these.
Cons of Lease Renewals
Risk of Retaining Irresponsible Tenants
Not all the tenants who occupy your property are going to be good. Some of them can consistently cause issues with you or your neighbors. You may not want such tenants occupying your rental for an extended period. Although it can help reduce vacancies, retaining such tenants can also lead to potential issues of increased frequency and magnitude.
Limits on Renovation
Leases are renewed in an effort to gain long-term renters. However, since your property is going to be occupied all the time, you will not be able to upgrade it or conduct renovation. Eventually, your rental may fall behind compared to other properties in the market. It can also lead to reduced demand for your property.
Excessive Leniency in Rules
While it is essential to develop a good, professional relationship with your tenants, some landlords may start considering the tenants as their friends, which can cause them to lose their objective and become too lenient. For example, you may exempt your favorite tenant from charging late fees or not take their complaints seriously. This can be detrimental for your property and can impact your ROI
Limits on Rent Increase
If you already have a good tenant and want them to continue living in their rental, you can only increase your rent by a marginal percentage. Since Virginia has no limit on the amount of rent that can be increased, many owners use it to their benefit.
However, you may risk losing your tenant if you quote a higher price. Therefore, at times, you may have to suffer a loss by limiting your rent increase significantly to retain a tenant for the long run.
To Whom Should You Offer Lease Renewals?
As a landlord, you have to be careful about who you are offering lease renewal. Here are some specific types of tenants that you can consider -
Tenants Without Complaints
No tenant is worth the hassle of consistently dealing with your neighbors, HOA, and other renters. If your tenant has a habit of rude behavior, it is wise to avoid renewing a lease with such tenants to avoid the potential hassle. You should focus on retaining tenants who have no complaints.
Tenants Who Pay Timely Rent
Ideally, every tenant should pay the rent on time, but many of them fail to do so. If you have such a tenant who pays consistent, on-time rent, and is financially responsible, keep them on board for the long run as it can be good for your business.
Tenants You Have a Strong Relationship With
Communication is a key to any good landlord-tenant relationship. A reliable renter with whom you have a solid relationship and who is respectful and easy to communicate with is ideal for lease renewal.
Steps for Achieving High Renewal Rates
As a landlord, it is important to know that renewals are not your individual decisions. Even though you offer one to your tenant, they can decline the renewal by writing a notice of non-renewal. However, you can still encourage your other interested tenants to renew their leases.
Here are some valuable steps that you can take -
Know When to Ask Your Tenant for Lease Renewal
The landlord is usually required to send a lease renewal notice to the tenant 90 days before the current lease expires. This period gives both parties a substantial period to think about and provides the renter with enough time to send a notice of non-renewal if they are not interested.
Send a Lease Renewal Letter
Once you determine the period for sending a lease renewal notice, you must draft a lease renewal letter. The letter should contain the tenant's name, expiration date of the lease, increased rent amount, and deadline for replying to the letter. It should also include your name as the landlord or the details of your property manager if you have hired one.
Draft a New Lease Agreement
If your tenant agrees to live in your rental and responds positively to your letter, you need to draft a new lease. The lease renewal agreement is necessary for both parties as it discusses everyone's roles in detail. Also, ensure that you check the state laws for inclusions in the lease agreement like specifications of the parties involved, premises, amount of money to be paid in rent, and the term.
Sign the New Lease
Even if you have drafted a lease, it is not legally binding unless you and the tenant sign it. Therefore, you can send it to your tenant to get it reviewed. If any clauses need to be changed, discuss and have them modified. Finally, you can sign it when both parties approve of the agreement.
What to Consider Before Increasing Renewal Rates
The lease renewal process may sound straightforward, but it is not always a clear and simple process. There are several things to consider and work towards increasing renewal rates.
For example, you can lose tenants if you drastically increase rent on your property, and it becomes unaffordable for them. Therefore, you have to consider the affordability of your housing for your tenants as well. You can increase the rent gradually every year and understand how to raise the rent without losing your tenants.
Before offering lease renewal to your tenant, make sure that they are a good fit for your property and your neighbors. If your tenant is even a little troublesome, it can cause you more issues in the future.
Handle Lease Renewals With a Property Manager
Even though the lease renewal process is not very difficult, it can be a hassle if you own multiple properties or if you do not have a lot of time on your hand. You can enlist the help of an experienced property manager who can keep track of all your tenants' leases and look after renewals.
We at Doud Realty Services have always prioritized helping landlords manage their properties efficiently. We provide a wide range of services from maintenance and tenant screenings to lease renewals to our clients in Norfolk, Hampton Roads, and Portsmouth.
For more assistance, contact us at Doud Realty Services.