When the end of a lease is on the horizon, you have a decision to make. If the current tenant wishes to stay longer, you can opt to renew the lease or find another tenant. Finding a new tenant can be a time-consuming and costly process that involves marketing the property, sorting through applications, showing the unit, and screening potential renters. The longer it takes to find a new tenant, the more expensive the process becomes.
If you’re wondering whether or not to renew a current lease, check out our list of pros and cons and our tips on how to handle a lease renewal negotiation.
Reasons to renew a lease
The Balance outlines a few reasons for renewing a lease, and the first two involve time and money. If a tenant chooses to stay with you, you can save the time you would have to spend searching for a replacement and then getting the apartment ready for a new tenant.
Eliminated the cost of finding a new tenant
The expense of turning over each vacant unit averages around $1,750 a month. This is before you even take into consideration your own personal time (or that of your property manager’s), which could be better spent on other endeavors.
If you increase the rent to keep up with market value, but don’t raise it so high that you make the current renter consider moving, you’ll receive more money each month without shelling out bucks to find a new tenant. You also won’t need to give the property a major overhaul, unless you agree to during lease negotiations.
Not only do you secure your cash flow and save money when you renew a lease, but you save time as well. Consider all the steps to finding a new tenant: advertising the property, sorting through applications, meeting with prospective tenants, and thoroughly screening them. Renewing a lease can be a much simpler process.
Reduces the risk of vacancy
With a vacancy, you’re not earning income but you’re still potentially shelling out for a mortgage, utilities, and other expenses. Lost rent is especially significant when you rely on rental income to pay the mortgage. According to BiggerPockets, vacancy can leave a property exposed to potential break-ins and vandalism.
Reduces the risk of having a bad tenant move in
Even with a thorough screening process, there’s always some uncertainty with a new tenant. If the tenant is responsible and pays their rent on time, it’s to your advantage to keep them around.
The tenant is unfamiliar
Finally, you already have systems in place with the current tenant. For example, you are accustomed to how they pay each month and they know how to get in touch with you regarding maintenance issues. There’s always a learning curve with someone new.
Reasons not to renew a lease
May not have reliable tenants in the first place
Finding a new tenant can cost you time and money, but so can chasing down rent. If your tenant has been late with rent on numerous occasions or broken the rules in the lease agreement, you may not wish to renew their lease. In this type of situation, it might make sense to look for a more reliable tenant.
Can take the opportunity to renovate
Upgrading a unit can be a hassle when someone is living on the property, but our article on rental property features tenants look for shows that strategic upgrades such as installing stainless steel appliances can add more value to your unit. Using the time in between tenants to complete renovations can help you raise the rental price of the unit and attract higher paying renters in the long run.
There may be limits to the amount you can raise
According to Realtor, rent-controlled areas have local statutes governing how often and how high a landlord can raise rent.
Even in areas not governed by rent control laws, if you raise the rent too high, you risk losing a stable tenant. Before raising the rent on a tenant that you want to keep, you should factor in the money you’ll save on tenant turnover.
How to renew a lease
Rentalutions points out that some states require you to follow guidelines about renewal timeframes. In general, you should be proactive with renewals. Ask your tenant 90 days in advance whether they wish to renew the lease. This could get them thinking about renewal ahead of time so you potentially have advanced notice of their intentions. Then you have more time to get the ball rolling on advertising and searching for a new tenant.
According to RentPrep, you should create a new lease with appropriate changes to the rent and lease terms as appropriate. You can update the renewal to anything you agree on with your tenant, be it six months or two years.
How to handle a lease renewal negotiation
If your tenant is requesting optional updates or changes, Rentalutions suggests weighing the cost of turnover against the cost of their request. For example, a request to repaint the apartment might seem reasonable given the expenses associated with finding a new tenant. You might even find that you would need to update your property in order to rent it, so you’re still saving money.
When it comes to negotiating, your best bet is to do your research first. Knowing the fair market rent for similar properties in your area will give you a good idea whether or not you need to adjust your rent price. If the rent is too high, you may lose a good tenant to some place that is more affordable. Do you have a reliable tenant that pays rent on time? You may want to encourage them to sign a longer lease at a reduced rate. In the end, you’ll need to weigh the risks and costs of tenant turnover and decide if you are willing to make concessions to keep a good tenant longer.
If you do decide to not renew a lease, be sure to check your local and state housing laws on the matter so that you follow appropriate rules and regulations regarding lease termination, including required notices.
There are often pros and cons to both sides when considering whether or not to renew a lease. Keeping courteous tenants longer not only saves you time and money, but it also gives you the peace of mind that comes with having someone familiar in your rental unit. However, if you currently have an undesirable tenant, it may be worth the time and money to consider turning over your rental unit.
If you decide to turnover your rental unit, a thorough screening process can greatly increase the chances of you getting a higher quality tenant with a longer average tenure. TransUnion SmartMove helps you make smarter leasing decisions with full credit reports, tenant background check reports and eviction check reports, from a source you can trust. You also receive a ResidentScore, built specifically to look at lease outcomes, and a leasing recommendation.