Maximize Rental Income By Handling Lease Renewals Correctly

It’s no surprise that residents want low rents and property owners would prefer higher rents. At RL, we strive to find the sweet spot. Listing your property at an appropriate market rent to attract qualified, good tenants is our priority upon leasing. See our video for more information on how we determine the listing price. What happens after a tenant has lived at the property for a year or more and you want to raise the rent?

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There are a few ways to approach a rent increase that will increase the chance of success:

  1. Give plenty of notice (written) of the rent increase to the residents.

  2. Provide justification for the rent increase.

  3. Share details about the market rate in the area of the type of property they are renting

  4. Provide a great experience for the resident over the past year of living there:

    • Polite and professional communication

    • Clean and safe property

    • Responding promptly to maintenance requests and completing them if they are reasonable

  5. Ask for a modest increase, in the form of a percentage (typically 2 to 5%)

At RL, upon lease signing, we offer an “Automatic Renewal Increase.” The lease states:

This lease shall automatically renew for an additional 12 months, unless LESSOR or LESSEE has provided thirty days written notice indicating otherwise. Please note that this renewal applies jointly to all LESSEE’s herein. At each renewal, the monthly rent shall automatically increase by 2.5%. If LESSEE provides written notice at least 30 days in advance and chooses to not renew for another year and revert to month-to-month status, rent shall increase by 5.0%. This automatic renewal shall occur a maximum of 2 times, or until an automatic renewal would generate a term of over 3 years. At such time, automatic renewals and increases will cease, and the tenancy term shall revert to month-to-month status. At least thirty days prior to planned move-out date, written notice to vacate must be received by LESSOR to end month-to-month tenancy.

So following our guidelines above, we are giving plenty of notice and offering a modest increase. In our experience, presenting a renewal rate in numeric form (eg: “Your base rent for this lease is $900. A 2.5% increase is $22.50 so for the second year there will be a base rent of $922.50”) right up front when they sign the initial lease is fair and transparent. Everyone is on the same page from day 1! We also remind the resident in writing approximately two months prior to the end of the initial lease term that the Automatic Renewal Increase is coming up. At this time, occasionally a resident will ask for justification or information on market rate. We’re happy to provide and the numbers will confirm that a 2.5% increase is reasonable in the Columbus market.

You might be thinking, “But what if I already have a tenant in the property, and their rent is very under market rate? Am I stuck forever!?” This scenario is a little trickier, but our systems help us get the rent back on track. The key on the time frame here is whether or not the tenant is “month-to-month” or on a “current lease”.

Month-to-Month

Great news, we can pursue a rent increase! Our best practices show it is typically in the property owner’s best interest to wait a couple months after you hire us to manage the property to pursue the rent increase. The management transition can make some residents feel uneasy as they are experiencing some changes (where/how they pay the rent, learning how to submit maintenance requests, etc.) RL quickly establishes good faith with the tenants as we have friendly staff, timely responses and repairs, and can automate many of their interactions with us giving them peace of mind. After this management transition, usually about two to three months, we can send the residents written notice of a rent increase. State law requires it be a “30 Day Notice” and we can offer our updated lease terms, as well. Our standard lease is clear and easy to read so tenants can see the value in their experience with RL thus far and the updated, concise contract reinforces this transparency. Our experience shows that a long term month-to-month resident is inclined to sign a one-year lease with a modest increase for the security that it offers.

Current Fixed Lease term (eg: one year)

The short version of this answer is that we are legally required to wait until the end of the current lease. The existing tenant’s lease must be honored, even if it was signed prior to you owning the property. Essentially, the lease “goes with” the property. Similar to the resident’s experience above, RL works diligently to build a relationship with the new tenant upon the management transition. Our extremely high lease renewal rate (71.4% in 2017) is evidence of the systems we have built over time to attract and retain high-quality tenants. We prefer to give more than 30-days notice of the upcoming renewal , giving the tenant plenty of time to prepare for the rent increase. Sometimes there are unauthorized persons (adults living at the unit that are not named on the lease) or pets (pet rent not being enforced, lease says no pets, etc.) also living at the property. We advise pursuing a rent increase or enforcing pet rent upon the renewal; not both. Enforcing too many increases at once such as base rent, pet rent, renter’s insurance, and late fees can result in turnover. Our dedicated team can provide insight on what to enforce first and foremost catered to your specific situation with an under-market rent.

-Molly Harris, Property Manager