End of Year One with my first tenant! What now?

Question

Hi All,

I'm coming to the end of year one with my first tenant.  It's gone relatively well with no major issues around late payment or problems with the house.  In fact, we don't talk much at all accept for the occasional text message check-in.  I'd like to keep this tenant, so I'm wondering how to address the following.

- How should I conduct the end of year renewal conversation (it was a 1 year contract)? How far in advance of the maturity date should I start the conversation?

- Should I/how should I approach the topic of a rent increase (@ $1100/mo for a $1600 sqft townhouse, I'm about $100 under top of mrkt my area)? What are the factors in determining/supporting an increase?

- This time around, I'd like go for a multi-year contract, but I'd also like to push the rate up a bit. From the standpoint of rent, does it make more sense to (1) keep the tenant where she is in exchange for signing a 3 year lease, (2) bump her now but cap the rate for 3 years, (3) or go for another 1 year contract with bumps each year in line with the market? With a $100 spread, I'm not sure it make sense to scare off a good tenant, but I'm not sure what the spread will be in three years.

- Lastly, how do you explain rent increases to tenants (not that I feel the need to justify business decisions, but just curious about approaches others use)?

Thanks, all for your guidance!

Marcus Yates

Kevin Harrison · Answer

If this is a good tenant that you want to keep you do not need to be "Top of market". You should be aiming for close to it, but consider that you do not want to scare this person off I would offer them a 1yr contract unless they express that they would like a longer one and maybe only a $50 increase or none at all if you are in line with the market and just not at the "top".

Keeping a good tenant and having no turnover is much cheaper than the extra $100 a month you think you will be getting.

Christine Kankowski · Answer

I like to approach tenants about 45-60 days prior to the end of their lease. This gives them a heads up that their lease is up for renewal.

I schedule a property inspection with them where I check the smoke detectors and get a general idea of how they are caring for the property. I also make sure theyre are no lease violations, such as unauthorized pets, etc.

Regarding a rent increase, I typically do less for a good tenant. I show them the market rates and show that even which an increase, they are a little under the market.

I do give them a slight break for a longer contract, on my own properties. I thank them for being a great tenant and for caring for the property.

Ralph Hunter · Answer

If you decide to increase the rent $100 and your tenant leaves, in just one month you will have lost $1000 and it will take you nearly 11 months to recoup that one month loss. IMO, a good tenant is better than finding a new tenant at a higher rate.

My recommendation is a one year lease at the same rate with a second and third year option. Typically I write leases to increase based on the CPI index produced by the Bureau of Labor Statistics. For example, the September report states that the rent of a primary residence increased from September 2014 3.7%. So that is what I would use to justify an annual rent increase. If they are a good tenant, I tell them about the increase and then freeze the rent. It keeps good tenants.

Jeremy Dolan · Answer

The option to increase rent is rather tricky. Of course this is a business and you would like to make top dollar for your property but consider the reaction of you tenant, as well as their financial income. If the tenants are prompt with their payments and you would like to keep them around consider a short increment of an increase in the 50 dollar range. This will leave both parties satisfied, as opposed to just you.

Max T. · Answer

How does your lease address renewals? That is the most important question. Many people, some with excellent ideas, have chimed in on how theirs does.

You will be stuck with the policy set forth in your lease unless you and the tenant can come to a different agreement in writing.

Most off-the-shelf leases turn into month-to-month agreements, all other terms staying the same, after the initial term has expired. My lease auto renews for a full 12 months if neither party gives written notice of otherwise (60 days prior to start date). I have only raised rent once for a tenant who renewed (it was a big property tax increase year).

John Thedford · Answer

I would increase their rent but try and keep them by asking for only a modest increase. Reality: your costs are going up every year. Taxes, insurance, maintenance, capex...and if you don't make modest increases you are getting less in rent just through inflation. Leaving the rent the same...particularly with a one year or longer time frame, makes no sense. If you have ONE expense that costs $1200....you just lost $100 a month during your new 1 year lease term. You cannot control that, but you can bump it some every year to help cover those unexpected problems as well as cost of living increases we all experience.

Coralyn Loomis · Answer

Personally, I wouldn't increase on them. Tenants are customers... Loyal customers are priceless.

David Thompson · Answer

The goal should be to keep good tenants in place. Stay below top of market.  Explain costs have increased and try to give them an incentive by offering two options. Locking for a 2yr commitment w an increase of say $50 or a 1yr increase of $75. The concept vs the $ increase being most important here.

End of Year One with my first tenant! What now?

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