Experienced real estate investors know that the time to prepare for a lease renewal begins the very first day a tenant moves in.
By setting the right expectations up front and keeping the tenant happy and the property well maintained, you’ll increase the odds of a great tenant renewing their lease agreement year after year.
In this article we’ll cover everything there is to know about lease renewals, including the most important things to consider before renewing a lease, and the potential benefits of offering some tenants a short-term lease.
When to Renew the Lease
Timing is everything when renewing a lease. Landlords who wait until the lease expiration date is near run the risk of having a vacant property on their hands. In some cities and states, landlords are not allowed to require a tenant to renew a lease more than 90 days before the termination of the current lease.
Begin by reviewing the terms of the current lease to learn if there are any limitations before asking a tenant to renew the lease. As a rule of thumb, a landlord should contact a tenant 90 days before the lease is due to expire.
The goal is to notify the tenant their lease is coming to an end, and to have the tenant give you a decision about renewing the lease at least 60 days before it expires. This allows time to market the property for rent, thoroughly screen tenant applicants, and sign a lease with a new tenant so that vacancy is kept to a minimum between tenant turnovers.
Things to Consider Before Renewing a Lease
There are several important things to consider before extending a new lease agreement with your existing tenant:1. Is the tenant worth keeping?
Good tenants who take care of your property and pay their rent on time can be worth their weight in gold. Convincing a good tenant to stay is one of the smartest moves a landlord can make, to avoid the cost and expense of finding a new tenant.
On the other hand, you might have accidentally rented to a bad tenant and can’t wait for them to leave. However, be sure to think carefully before you decide not to renew, since looking for a better tenant may take longer than you expect.2. When does the lease expire?
As a rule of thumb, you should contact the tenant about renewing the lease 90 days before the expiration of the current lease. That gives the tenant enough time to consider the offer to renew the lease and the landlord sufficient time to market the property for lease if they decide not to renew.3. Do you want to renew for the same term?
Unless your local landlord-tenant law requires you to renew the lease for the same length of time, you may want to consider renewing for a different term.
For example, if your current 12-month lease expires in the middle of winter when it’s hard to find renters, you may want to offer the tenant a six-month lease that ends in summer rental season. You can promise your existing tenant that you’ll renew the lease for another 12 months after that so that future lease expirations occur during the peak summer rental season.4. Will you raise the rent?
A lease renewal is also the ideal time to make sure your rents are fair and at-market. One good resource for learning if you are charging too little or too much for rent is Rentometer. The service is free to use for basic rent comparables, with paid PRO reports for a more detailed rent analysis.
The Roofstock Cloudhouse calculator is another good tool that helps you analyze how different rents affect the financial performance of a rental property, such as cash flow, gross yield, and cash on cash return. Reviewing metrics like these are also a good way to understand the impact on total returns if you decide to lower the rent to encourage the existing tenant to renew the lease.5. Would you consider renting month-to-month?
If a tenant doesn’t want to renew the lease for another 12 months, you may want to consider renting month-to-month if the tenant is one that you really want to keep. Month-to-month leases can offer benefits to both the landlord and tenant, including more flexibility and possibly a higher rent. But month-to-month leases also carry some risk, since either party can cancel the lease with proper notice, which is normally 30 days.6. How much time will you give the tenant have to respond?
To avoid having the tenant drag their feet on renewing the lease, give them a deadline date to respond before you begin looking for a new tenant. You can always renew the tenant’s lease if they contact you after the deadline to respond. But by giving the tenant a time limit to respond keeps their procrastination from causing a problem for you.
Benefits of Renewing a Long-Term Lease
Turnover in a rental property is costly in more ways than one. In addition to lost income from not having a tenant paying rent, repairs costs can easily run $1,000 or more each time you turn over a tenant. That’s why successful rental property owners do everything they can to keep good tenants renewing a long-term lease year after year:
- Eliminate the time, expense, and headache of finding a new tenant.
- Keep vacancy costs low and gross rental income up to maximize rental property performance.
- Avoid the risk of renting to a bad tenant, which can occur even with the best tenant screening.
- Offers the opportunity to increase the monthly rent while avoiding vacancy and marketing expenses.
- Current tenant understands your rules and you already know the tenant without having to spend time and energy breaking in a new tenant.
When to Let the Tenant Go Month to Month
While long-term leases make cash flow more predictable there may be times when you decide to let the current tenant go month to month:
- Short-term solution for keeping a great tenant.
- Opportunity to raise the rent by charging a month-to-month rent premium.
- Gives the landlord flexibility to take the time to look for a great new tenant without the loss of rental income.
- Either tenant or landlord can terminate the month-to-month lease with proper notice, normally 30 days.
What Happens if the Tenant Doesn’t Sign the Lease Renewal?
There will be times when a tenant simply doesn’t sign the lease renewal but also does not want to leave. The first step is to contact the tenant to learn why the tenant doesn’t renew the lease. For example, the tenant may be waiting to hear back about a job offer and isn’t in the position to commit to another long-term lease.
In many states, the standard residential rental lease has a clause that reverts to a month-to-month lease at the expiration of the long-term lease along with an automatic renewal month by month. A landlord may be able to increase the monthly rent to motivate the tenant to sign the lease renewal.
Month-to-month leases can also be terminated by either party, normally with a 30-day notice. As a landlord, you may not want the risk of leaving the tenant on a month-to-month lease. But what happens if the tenant still doesn’t leave?
Although the odds of this occurring may be low, rental property owners can experience a situation like this from time to time. When this happens, the landlord can initiate a holdover proceeding, which is an eviction not based on unpaid rent.
How to Write a Lease Renewal
A lease renewal agreement is a short document that references and modifies the terms and conditions of the existing rental lease. Standard sections of a written lease renewal include:
- Parties to the lease renewal are each adult tenant and the landlord listed in the original lease.
- Premises address and type of property, such as a single-family rental home, identified in the original lease being renewed.
- Reference to the original lease including starting date, parties to the original lease, and expiration date, noting that the original lease terms and conditions are incorporated into the lease renewal.
- Renewal terms and conditions including the starting and ending date, changes to the rent or tenants, and any modifications to the terms and conditions of the original lease.
- Signatures of all tenants along with the landlord or property manager’s signature if authorized by the management agreement to sign for the landlord.
Sometimes a tenant will ask for an incentive to renew the lease, such as carpet cleaning or replacing an old appliance, especially if the rent is being raised. Landlords should be pragmatic when negotiating a lease renewal, particularly if the maintenance work needs to be done anyway, since it can cost much more to find a new tenant than keep a good current one.
If you do agree to negotiate a lease renewal with the tenant, it’s a good idea to ask for something extra in return. For example, if you agree to what the tenant is asking for, you can offset the cost of any incentives by asking for a longer renewal, such as two years rather than one.
Limits to Rent Increase Amounts
State and local landlord-tenant laws control aspects of the relationship between property owner and renter, including how large a security deposit can be, notice to enter a property occupied by a tenant, and how much – and even if – the rent can be increased.
Some states and municipalities have statutes that govern when and by how much a landlord can raise the rent. The National Multifamily Housing Council (NMHC) has created an interactive map for landlords showing states with rent control and city-specific laws.
The last thing a rental property investor wants to do is accidentally break the law by raising the rent more than allowed. Even when you have a trusted local property manager in place, it’s still a good idea to understand the landlord-tenant laws of the state you own rental property in by reviewing the information that Nolo has compiled.
Strategies for Making Sure Good Tenants Renew
Before we wrap things up, let’s take one last look at some strategies for making sure good tenants that you want to keep renew their lease:
- Set the stage for a lease renewal the very first day the tenants move in and the rules you follow when renewing the lease.
- Keep the property well maintained with preventive maintenance routines and an online system for making maintenance requests.
- Consider working with tenants who have trouble paying the rent on time, such as offering a grace period of late rent or a one-time waiver of late fees for the best tenants.
- Small incentives such as gift cards, a new garden hose, or energy-efficient light bulbs can go a long way toward creating a favorable impression that you’re a landlord who wants the tenant to stay.
- Know the market vacancy rate before you discuss a lease renewal with your tenant, because a higher than normal vacancy level may be a sign that a replacement tenant will take a long time to fine.
- Understand what the market rent of property similar to yours is because it’s a good bet the tenant has already done their own research.
- Be willing to compromise with a good tenant by being prepared to negotiate a lease renewal or even considering a month-to-month lease.
It can cost thousands of dollars to replace a tenant, so savvy landlords do everything they can to encourage great tenants to sign a lease renewal.
Lease renewals save landlords time and money and can help boost the financial performance of rental property with higher yields and stronger cash flow.