5 Things You Need to Know About Lease Renewals and Rent Hikes
Is your tenant's lease about to expire? Here are 5 things you need to consider before raising rent or asking your tenant to sign a new lease
Beyond fueling the cry for universal and affordable healthcare, the pandemic has also brought the conversation about affordable housing and rent control back to the forefront. As millions of Americans struggle to pay their rent on time, many are wondering how they’ll deal with an impending lease renewal and possible rent hike.
A handful of cities and states have rent control measures that keep rents relatively stable for current tenants and limit rent increases for incoming residents. However, the majority of states have no rent control laws, meaning property owners have to decide when and how much to increase rent costs.
Unsure of how lease renewals work or the process for determining rent increases? Keep reading:
What’s a lease renewal? When do they happen?
According to Oklahoma City-based lease specialist Joshua Lout, lease renewals are exactly what they sound like — it provides tenants an opportunity to stay in the unit or home you’re renting to them. The lease renewal is similar to the first lease your tenant signed, except it may include new regulations and rent costs, Lout explained.
Renewals are usually sent 30 to 60 days before the original lease ends, which gives the tenant enough time to negotiate or find a new residence. Property managers also have the option of not extending a lease, especially if the tenant has been consistently late on rent or has taken poor care of a unit.
How do you determine a rent hike?
What’s the best method for determining a rent hike? It depends.
Lout, who primarily works with single-family rental owners, said hikes are based on market conditions and prices of comparative homes with similar amenities and features.
“With what’s going on now, most of our leases are staying the same,” Lout said. “[When we] have rent increases, it goes off the economy, it goes off the market and rentals around it.”
“We have a database that tells us what properties should rent for and what they’re going for,” he added. “If the market is going up, most owners will decide to go up as well.”
A similar process happens for multi-family housing; however, other factors come into play.
Did your tenant rent one of your larger units or one of your smaller units? Have you completed any recent upgrades to appliances, finishes, or any other shared areas? Would you like to roll utility costs into the rent so tenants don’t have to pay separately? All of those factors will determine how much you’ll raise rent costs.
However, property management company Avail warns landlords not to price gouge tenants during lease renewals. Instead of looking to get the highest rent possible, Avail advises landlords to choose a price they know tenants can still reasonably afford while reflecting the value of any upgrades that have been made.
“Your goal as a landlord is to maximize the profit earned from your rental. Maximizing profit, though, doesn’t always mean agreeing to the highest rent price with your tenants,” wrote Avail co-founder Ryan Coon in a blog post. “Your goal should be to increase the rent as much as possible over time without creating tenant turnover (turnover costs time and money).”
Lastly, Coon said lease renewals may be influenced by seasonality and your ability to attract more potential tenants during the prime rental season.
“Just like demand for rental properties is highest in the summer, rental prices tend to be higher in the summer months,” he added. “If you are looking for tenants in the summer, you’ll probably be able to get tenants to agree to a higher rent amount than you would in the winter.”
How do I handle negotiations?
Just like you have the right to raise rents, tenants have the right to negotiate — especially if they’re unsure of their ability to find new housing. Tenants who have a good track record may be more apt to negotiate, while lackluster tenants may want to limit interactions and simply take (or turn down) the new deal you’re offering.
“Your landlord or property manager might not want to disclose it, but they are normally interested in you renewing the lease,” ApartmentList shared in an explainer about lease renewals. “So if you’ve been a good, trustworthy tenant and paid rent on time, you might have leverage when negotiating lease terms and, possibly, rent. You can also try switching from an annual lease to a month-to-month agreement.”
Finding new tenants is expensive (up to $2,500 in marketing, cleaning, etc.), so MySmartMove advises landlords to be open to a counteroffer, especially if the tenant has been diligent with paying rent and unit upkeep.
“If they seem hesitant about renewing, now is a good time to negotiate a deal,” MySmartMove’s blog read. “You can’t offer your tenant an incentive if you don’t know what they want. Ask them what they need in order to stay and see if it sounds reasonable to you.”
To garner a higher price, you may agree to updating appliances or replacing old flooring. If you can’t get them to agree to a higher rent with a six or 12-month lease, MySmartMove and Avail suggest offering a month-to-month lease at the higher price or keeping their rent the same with a longer lease term.
What if I don’t want to renew a tenant’s lease?
If you don’t want to renew a tenant’s lease, you must give them ample notice. California requires at least 90 days, but most landlords agree that at least 60-days notice is enough time for a tenant to find a new place.
According to Landlordology, you must give them a written notice and you have to provide a timeframe for moving out. Some states say landlords don’t have to provide a reason, but you cannot terminate a lease as retaliation or discrimination due to Fair Housing Act rules.
Here’s a sample lease termination notice by Avail:
Dear (Tenant’s Name),
I’m not offering lease renewals at this time. I can’t extend your lease past mm-dd-yyyy (the lease end date). I expect you’ll vacate the unit by this date. If you have questions, let me know.
Is there anything else I should know?
Before you make a final decision on a lease renewal or rent hike, research your state and city’s rent control laws to make sure you’re in compliance. Also, double-check if any of your residents are on Section 8 or receive any public housing assistance. If they are, you may be subject to special rent control, lease renewal, or lease termination procedures.
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