How do you handle Lease Renewal?

Question

The lease at my SFR will be up in May and this will be the first time renewing.  I thought it would be pretty simple, but then I started thinking about it more and came up with so many questions.  Are there certain laws or procedures I need to follow?  I have checked the laws in Massachussetts but didn't see anything specific.  Do I mail a copy of the new lease, ahead of time so the tenent can review, or do I go review it with them in person.  If I increase the rent, do I collect the difference in security deposit and last month's rent?  Also, what is an average rent increase after the first year?  I have done a little market research and I believe the market could justify an additional $25, but is that too much or too little?  How will the tenent take it?  Should I plan on explaining the reasons for the increase (there are more than just the market)?  I would like this tenent to stay, but I feel there needs to be an adjustment in the rent.  Lots of questions bouncing around in my head, sorry for the long post, but I would appreciate any feedback.  Thanks so much!

Travis Beehler · Answer

A little side note for you.  Me personally, if the tenant has paid their rent in full and on time every month, I VERY RARELY raise the rent on them.  It's nice to have a solid tenant, and unless I'm hit with a higher bit of taxes or insurance, I tend to leave them alone chugging along happily making the mortgage, insurance, taxes, property manager, and a few bucks a month in my pocket.

Jered Sturm · Answer

I tried to do the renewal thing for a 3 years with my 20 units and I found that when I brought up renewal some tenants would begin to look for other places to live. I then decided to see If I signed a 12 month lease initially that transfers to a month to month, what would happen. Tenants that are not told to do anything do nothing, and they stay. Through the power of tenant procrastination my turnover went down.  Now Im not talking D class tenants here either. I have working class tenants most with college degrees working salary jobs and 700 credit scores. But just by not giving them a reason to look they just don't.

Dick Rosen · Answer

I don't know anything about Mass and I'm lead to believe that Mass is an extremely tenant friendly state so I would be sure to check the Landlord/Tenant Laws for your state. That said I can tell you what I do in MN and in AZ. I have a 1 page Lease Renewal Offer with 3 options to choose from. The options are always another year, 6 months, or month to month. But I may vary that a little bit if I don't like where the resulting lease would end. Next is the rent, my rule of thumb is 3% increase for 12 moths, 5% increase for 6 months and 10% increase for month to month. Again I will vary this a little bit if I want to keep them. If I want to keep them and I'm fairly close to market rent. I won't increase at all for 12 months but still increase for 6 or month to month. Once this offer comes back to me with an option selected and signed, I just attach it to the existing lease as an extension, which is all spelled out in this 1 page offer.

Hope that helps

Aly W. · Answer

Most of our rental properties are condos, and the association requires an updated lease each year. Tenants need to give 60 days notice if they're not renewing, but I usually ask prior to the 60 days if they're planning to renew, and then have them sign the new lease.

I don't go over it again, but if they verbally agree to a rent increase, it's in there.

I like to have a current lease for our SFRs, because future financing with lenders sometimes requires seeing all the current leases.

Dawn Brenengen · Answer

@Jered Sturm I stumbled across this realization myself about two years ago. I stopped requiring annual renewals, and my average length of tenancy went up. The power of inertia!

Colleen F. · Answer

60 days in advance I send a letter thanking them for being a tenant and outlining any increase and the justification in a general sense, costs on x and y have increased with checkboxes on the bottom including one for will not renew.  I let them know returning the letter will serve as official termination notice if they choose.  If a tenant has made a specific inquiry sometimes I will include that information.  For example tenants who have said I want to go month to month I will address that question saying we don't do that. I also say that we have evaluated rents which we do.  THe reason for doing it 60 days in advance is they get 30 days to think the increase over before they give notice.  In RI the elderly and disabled I believed are required 60 days notice of a rent increase but I try to treat everyone fairly so I do it for everyone.  Even with no increase we still send a note with the renewal ahead of time so they know.

If I am pretty sure they will renew I send copies of the lease, if I have doubts or are pretty sure they won't renew I don't include the lease.

Max T. · Answer

Unless I am changing some of the terms, like raising the rent (which I rarely ever do to tenants who want to stay) I don't say anything. My 1 year leases have a clause that says 60 days notice is required by either party to terminate/change, and if that doesn't happen, the lease renews for another 12 months.

If the tenants do want to move but don't give me proper notice, I usually will let them if we agree to a specific move out date, such as 3/4 of the way through the next month, although I will still charge for the full month. They agree to that in exchange for me letting them out early. Kind of a win-win because then I get a free week to make-ready without losing any income.

Dawn Anastasi · Answer

I do MTM (month to month) leases right off the bat, so there's no annual lease renewal per se.  The lease gets updated periodically if there are new law changes that affect the lease or if the rent increases.

Kimberly H. · Answer

We don't collect more security deposit to match the new rent; but we’ve never had any superlong term tenants (longest is 3 yrs) and rents here in the area are not going up super-fast either, if we are renewing a tenant that means we have already seen how they take care of the home, and we don’t renew if there have been any issues with them paying the rent.

We consider the following when determining rent increases: what market rate is, changes in expenses, inflation, and the tenant (are they a little higher maintenance tenant?).We usually will at least do a $5/month increase since there is always some inflation in costs, and the tenants are used to some sort of increase that way. If we do something small, we put it in terms of % since people are used to things like 10% off sales so when we say, “the rent is increasing 1.5% to $XXX” it sounds really small. We never say why we are increasing the rent because we don’t want to establish a pattern of justifying our actions. We always do it in writing. To date no one has complained or moved out because of it; move-outs occur due to other factors such as job relos and such, or if they don’t work out and we are not renewing.

We almost renewed to someone who had actually lost their job prior since they moved-in the year prior. When we caught wind of that (had a couple that broke up, each claimed that they were the one paying the rent and the other was jobless, one of them wanted to stay), we asked for 1 month of paystubs and she shortly “changed her mind” on renewing and the couple moved out (fortunately they got along well enough to still live together until the lease ended). The tenants who moved in after said car repo guys and P.I.’s were stopping by looking for the one we almost rented to since she hadn’t been paying any bills. Dodged a bullet there…since then, we require some sort of verification of income to renew from all of our tenants like a copy of 1 mo. of paystubs.

Justin R. · Answer

Great questions.  You're smart to think it through.

I include an item in all my leases that says, essentially: "If this lease is extended at the end of it's term, rental increases will be limited to no more than 4% per year and vary with the rate of inflation as published on <website>."

The idea, which has been generally successful, is that they know I won't hit them with a 10% rental increase, which makes them happy.  And, they know to expect a small yearly rental increase along the lines of inflation.  In the case of good tenants I'm happy with, everything goes as expected.

On the chance that it's a bad tenant I want to get rid of, either party has the right to terminate the lease at the end of the term.  Within the constraints of California tenant law, I can choose to end the lease, require a new one, increase the rent, or whatever else needs to be done to equitably part ways.

From a business perspective I bake long-term 1.5% yearly rental increases into my financials, so I treat rental increases as an expected and prudent step.  It's all about how to set expectations with tenants so they're comfortable with it.

How do you handle Lease Renewal?

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