Offering a lease renewal is one way to ensure that your investment property generates a steady stream of income. However, it’s not always the ideal option. In this article, we’ll take a look at the pros and cons of lease renewals, as well as provide a step-by-step guide on renewing your renter’s lease.
Definition of a Lease Renewal
A lease renewal extends the length of the tenant’s original lease. It allows the tenant to continue living in the rental property as long as the specified conditions are met. It is usually offered three months before the end of the current lease.
Advantages of Offering a Lease Renewal
You might be wondering why offering a lease renewal is better than looking for new tenants. Let’s look at the benefits of renewing your renter’s lease:
#1 Retains responsible tenants
Have you found the perfect tenant? If so, you’ll want them to stay for as long as possible. Ask any property manager, and they’ll tell you how tedious the tenant screening process can be. So, whenever you can, it’s best to retain tenants than risk renting out your property to a stranger.
#2 Zero turnover cost
The average cost for tenant turnover is $2,500 — that’s more than one month’s worth of rent! When looking for new tenants, landlords are faced with a lot of expenses, including marketing, cleaning, tenant screening, showings, maintenance, and much more.
#3 Saves time and money
Looking for new tenants can be time-consuming and complicated, especially if you don’t have the help of a property manager. A lease renewal relieves you of this hassle. You don’t have to spend time showing your vacant units, screening applicants, and so on.
#4 Provides a steady stream of income
If your tenant moves out, you will lose money– this can be a bummer if your investment property is your primary source of income. Offering a lease agreement is one way of preventing vacancies. Your tenant will be “locked” into their lease, which means you’ll have a steady stream of income for another year.
#5 Builds a better landlord-tenant relationship
While you don’t have to be best friends with your tenants, it doesn’t hurt to work toward building better relationships with them. Long-term tenants are more likely to respect your rules, so you’ll have a lot to gain by offering them a lease renewal.
Disadvantages of Offering a Lease Renewal
Although offering a lease renewal seems like the “smarter” choice, there are circumstances where you should consider not renewing your tenant’s lease. Here are some of the disadvantages of offering a lease renewal:
#1 No chance to repair and renovate
If your rental property needs serious repairs, you might want to put off offering a lease renewal. The best time to repair or renovate your unit is when it’s unoccupied. If your improvements increase your property’s value, you might be able to charge a higher rent when it’s back on the market.
#2 Risk of retaining irresponsible tenants
If you’re dealing with bad tenants (e.g. paying rent late, destroying property, arguing with neighbors), it might be better to let them go. You may be tempted to renew their lease to avoid vacancies, but in most cases, problematic tenants aren’t worth the trouble.
#3 Risk of leniency
Don’t get too comfortable with your tenants. If your long-term tenants become your friends, you’ll likely become too lenient. Eventually, the rules won’t apply to certain residents because they’ll pull the friend card.
How to Offer Lease Renewal
Offering a lease renewal is as simple as asking your tenant if they want to renew their lease. However, while it is a simple process, there is a proper (and professional) way of doing it. Here’s how to offer a lease renewal:
#1 Know when to offer a lease renewal notice
The notice period should be offered as early as ninety days before the current lease expires. This gives the tenant enough time to think about the offer before the sixty-day “notice of non-renewal” period starts. Should the tenant not renew their lease, they should inform you at least sixty days before they move out.
However, if you have a short-term rental (e.g. month-to-month lease), your tenant should inform you thirty days in advance.
#2 Send the tenant a lease renewal letter
A lease renewal notice includes the following information:
- The end-date of the current contract
- The length of the new lease
- The rate/rental price of the new lease
- The landlord’s contact information
It’s worth mentioning that while you don’t have to increase the rent, changing the cost may be beneficial to you, considering current market conditions. Check out our rent increase guide to learn more.
#3 Draft the new lease agreement
Are there new policies in place? Are there changes in the cost of rent or utilities? You should draft a new lease agreement even if the only different thing is the length of the lease. If you’ve hired a property management company, they probably have an in-house attorney who can help you with this.
#4 Sign the new lease
Send the new lease agreement to your tenant. Once they’ve signed it, they should send it back to you so that you can sign it, as well. As a rule of thumb, you should never send them a signed lease agreement. Your tenant should always be the one to sign it first.
Why Your Tenant Might Not Renew
Even if your rent is reasonably priced, your tenant might not renew their lease for a variety of reasons. They could be looking for a change of scenery, such as moving from the city to the suburbs. They could also be dealing with lifestyle changes, such as marriage, a career shift, and so on.
As a landlord, you should understand your tenant’s situation. Remember that they don’t need to explain why they’re not renewing their lease agreement. If they ask you for a recommendation down the line, be the “bigger person” by not harboring hard feelings.
If you have to find a replacement renter, don’t worry. A South Florida property management company will be able to help you find responsible tenants that fit your rental property.
A lease renewal is an important process that you should learn about. Offering to extend your tenant’s lease can be beneficial, especially if you’ve found the perfect tenant. Lease renewals let you save time and money, and ultimately reduce the risk of renting out your property to bad tenants.
If you’re looking for someone to handle the lease renewal process, look no further than Luxury Property Care. With the help of our property managers, the renewal process will be much easier. Our team will also implement tenant retention strategies to ensure that your tenants will continue to renew each year.