Most property managers just sit around and wait until it’s time to renew before asking their tenants if they would like to—at a higher rent the tenant didn’t see coming. Others put in a sneaky clause that automatically renews the lease for a year if the tenant doesn’t actively opt-out within 30 days of their lease expiring.
As you might expect, this clause can lead to some very upset tenants. (And perhaps upset landlords, as you might accidentally renew a lease at under-market rent.) These clauses are weasely and bound to justifiably anger your tenants—who are your customers, after all.
And what’s the point? To trap someone in a lease who will now hate you? They will probably just try to sublease it. You may save a little vacancy time but it’s not worth it in terms of the emotional hassle and reputational dings you will likely take.
That tenant won’t be leasing from you in the future, nor will they be sending any referrals your way. Don’t use those clauses.
Contact Your Tenants Before the Initial Lease
What you should do, however, is to actively pursue the lease renewal. And the time to begin is when you sign the lease at the very beginning. This is where you should set the expectation of a rent increase in 12 months’ time.
For the most part, tenants are not angry about rent increases. They get angry when their expectations aren’t met. (This is true for just about everyone regarding just about everything.) So let them know their rent will likely go up in a year. Blame it on inflation or the Fed if you must.
During the Lease
Then, during the lease, make sure to provide quality maintenance and answer their concerns and questions promptly as they come up. I have heard of other property management companies trying to actively engage their residents on social media or with various mailers or whatnot. Some offer coupons. The HOA at the condominium complex I live in had a monthly barbeque for all the owners.
We have tossed around the idea of offering a small reward for residents who pay their rent on time each month for 12 consecutive months or putting every resident we have who pays their rent on time into a raffle to win some prize, but we haven’t pulled the trigger on any of that.
While I think that stuff is fine, it’s all extra fluff and not particularly important. Other than good maintenance, which is essential!
Near End of Lease
For good residents—the ones who pay on time and don’t cause a bunch of hassle—we start our renewal pitch at about the six-month mark. At that point, we offer them a “locked-in rent price” if they renew early. For example, we will offer an increase of only $25 or something like that. We always try to increase the rent some, even if it’s just $10, so residents don’t lose the expectation of rental increases each year. We may try again at nine months in, as well.
Then, a couple of weeks before their lease is 30 days from expiring (i.e., the point they are supposed to renew by), we reach out again with as many options as we can to fit their needs. This includes a two-year option for good residents, which locks in the rent for a second year (perhaps with only a small increase) or a month-to-month option.
We don’t generally like month to month and do not offer it up front; it’s harder to raise rent and there’s less stability with month-to-month leases. But upon renewal, we do offer it—but at a price. We demand a premium of about $100 extra per month on an apartment unit and $150 on a house.
It’s important to reach out and ask tenants about their plans and try to convince them to stay if possible. We have even had residents who were planning to move because they thought they had to after their lease ended. “No, no, no! We want you to stay!”
If they are leaving, that doesn’t mean you should just forget about them. Perhaps they really enjoyed their stay but a job transfer out of town requires a move, or perhaps they are buying a house. If so, this would be a good time to ask for a Google or Facebook review. Most of the time, only angry tenants leave reviews, so property management companies get hammered unless they actively request good reviews from satisfied residents.
You can also ask if it’s OK to show their unit to prospective tenants while they live there to shorten the length of vacancy. Or you can offer a small payment for vacating early. We offer $10 a day for each day they’re out before the end of their lease. This allows us to get a jump on the turnover and reduce the amount of time the property is vacant.
Just remember that if you do something like this, you have to refund the prorated amount of their monthly rent if you lease the unit to another party while their lease is still in place. You cannot lease the property to two separate groups at the same time—even if one has physically moved out.
And if the resident does say they are leaving, that doesn’t mean to give up. Don’t be a pest, but ask again if they have changed their mind. Or maybe even throw in an incentive.
How To Offer Lease Renewal Incentives To Tenants
Incentives can be a great way to get people to stay. The king of this approach is Jeffrey Taylor, or Mr. Landlord, as he likes to be called.
Taylor is probably the most creative mind in property management today and has brought many of the concepts of the hospitality industry to property management. For example, from his great book The Landlord’s Survival Guide:
“When residents move in to one of my properties, I welcome them into my 3-Star Resident program. It doesn’t cost them anything and they get perks by being a part of it. Their ‘anniversary’ becomes a time of celebration. Every year, I give them a choice of property upgrades (costing between $25 and $75 each) for paying rent on time. Some landlords wonder why I reward people for doing what they’re supposed to do anyway. I regard my tenants as business partners and vital members of my success team; giving rewards helps our relationship work. It also encourages them to stay longer than one year. To avoid vacancies, I’m glad to give a property upgrade that costs $75 or less. Too many times, landlords try to be cheap and step over dollars to save nickels. This isn’t rocket science; I’ve proven that people stay longer when I offer upgrades!”
These upgrades are upgrades to the property, as well, so it’s a win-win for both you and your resident. Taylor’s “3-Star Program” also offers a rebate on the deposit of $100 a month or so on each “anniversary” if they renew. After six years or so, the entire deposit is refunded to the resident. Taylor claims the average length of stay for a tenant nationwide is about two and a half years. For him, it’s six.
For us, it’s about four. But we’re catching up, Mr. Landlord!
It’s rather simple. More lease renewals equal less vacancy. Less vacancy equals great profitability. Greater tenants profitability is good.
Thus, actively and wisely pursuing lease renewals is a key component of property management. Don’t just lie back and see what happens. The proactive approach is the way to make lease renewals, as well as property management and real estate investment in general, work best.
Contact RPM Central Valley
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