How to keep great Tenants without squeezing your margins

A little less than a year ago we got the hardest part right.

Like leasing Sherlock Holmes-es we pored over lease applications, ran countless credit checks, background checks, prior eviction checks, cross reference checks, written and verbal rental and employment verifications and found a great Tenant.

Over the course of the year, our predictions came true. The Tenants paid rent on time, took care of the property like it was their own and even went over an above to improve it without costing you a dime.

Captain Obvious shares benefits of lease renewals

Now the lease is nearing it’s end and it’s time to discuss renewal. We would love them to stay for another year and re-up each year going forward till the end of time. The reasons are obvious – If they renew:

  1. Zero vacancy for another year – This means the amount you had budgeted for vacancies in your cashflow analysis flows straight to your bottom line and who doesn’t like a “healthier” bottom line.
  2. Zero make ready for another year – No matter how great Tenants are, when they decide to move out there will be some make ready costs. Locks need to be rekeyed, carpets shampooed, paint touched up, landscaping trimmed, utilities turned on in the meantime etc. If they renew, no make ready is required so another WIN for us.
  3. Zero leasing commission for the year – When existing Tenants renew, we prepare the lease renewal paperwork free of charge – another perk we offer to our clients to thank them for their repeat business. So if they renew, there’s no leasing or renewal commission you need to pay for another year and guess where the budgeted amount for lease commission flows straight down to? Yessir – Bottom Line.

So now that we’ve established that we definitely want them to stay and renew the important question becomes: At what rental rate? Over the lease term several factors have come into play. If the property is in an appreciating market, county authorities probably gave you a higher property tax bill as a present for your birthday. Ditto from the insurance agent. Plus, over the year the market rate for rents in the area has probably risen. So you want to make sure that your profit margin doesn’t shrink by leaving the rent the same while your expenses go up. And at the same time, you don’t want to leave money on the table and significantly underprice your property.

But on the flip side, the great Tenants will probably not like to see their rent increased. And if requested in a careless manner, they can be left feeling like they’re being punished with higher rent.

Tips professionals use to secure lease renewals and rent increases

In order to avoid losing great tenants and/or facing shrinking margins and leaving money on the table we have a process we follow to secure more lease renewals and rent increases. I’d like to share with you some tips that you can use to do the same with your properties.

  • Tip 1: Run a market analysis for lease on the neighborhood – If your tenant is more knowledgeable than you are about market conditions, you’ve already lost the argument. An updated market analysis for lease will give you the backup to support your arguments. In addition, it will give you a clearer picture of what the current market rate is for your property and the competition you face. Bottom line: You need to know your numbers because they represent the alternatives your great Tenants have to jump ship.
  • Tip 2: In an appreciating market, offer a rent increase that’s below full market rent– Think of your offer to renew as a marketing offer and consider the question: Why should the Tenant renew their lease with you? No, your good looks don’t count. Give them a reason, a benefit they wouldn’t get if they moved out and leased another place. Here’s what we normally do: Dear Tenant – After performing a market analysis, the market rent for the property has risen to X. You have been a great Tenant and we appreciate the care you have shown the property. Therefore, we’re prepared to offer you a lease renewal at X-$25-$50. This way it’s a win-win. The Tenants still get below market rent and you get your rent increase and renewal. If they were to move out, they’d likely have to pay market rent and move which we all know is so much fun (not).
  • Tip 3: Discuss the lease renewal in person or over the phone – Negotiations over email are a recipe for disaster. I think it’s pretty safe to assume that anything written in an email is read to the recipient by an angry antagonistic old man. If you are trying to persuade and influence, do it in person or over the phone where the tone of your voice can convey where you’re coming from.
  • Tip 4: Make it much more expensive to go month to month – Texas leases have a provision in them that allows the lease to auto-renew on a month to month basis unless either of the parties gives 30 days notice. In your offer to renew, the price offered for a one year or 6 month extension should be much more attractive than the month to month price. Typically, we do $100-200 more to go month to month.
  • Tip 5: Be a pragmatist but not an appeaser – Lease renewal negotiations aren’t an ego contest. If after reviewing the market analysis, days on market to get a property leased have increased, you may be better off renewing at the same rate. The alternative is to renew at a higher rate but missing out on rent through vacancy which lead to a lower net rent than if you’d just left the rent unchanged. So be a pragmatist and look at the situation through the lens of reason. But don’t be an appeaser and fold just to avoid confrontation. It’s a delicate balance but it can be done.

Comments

  1. Robert Steele says:

    Great article Erion! I think you hit on all the major points.

    I only have one contention and that is about raising the rent $100-200 for month to month. There is a debate in some land lording circles that in fact a month to month lease is preferred over a yearly so it may be the case that the lease comps, or at least some of them, are month to month. If so that huge price premium would be more than enough for them to jump ship.

    The reasoning behind why month to month is better is simply because with a yearly lease you are giving your tenant a free option to possess your property for a year. This is legally binding on you. In return it doesn’t give you the landlord anything other than a good feeling. In fact, it ties your hands. If you want to get the tenant out for some reason other than a breach of lease, you can’t. On the other hand it is very easy for the tenant to walk away and you have very little financial recourse. Have you ever tried getting blood from a stone?

    • Mostly valid points, Robert.

      Except this:

      This is legally binding on you. In return it doesn’t give you the landlord anything other than a good feeling.

      Actually, it’s legally binding on all parties in the lease. Your point about trying to collect from someone with nothing to collect is well taken.
      But if you picked the right tenant to begin with, they would have something to lose. You can file and take out a judgment, report it to credit bureaus and get an eviction on their record.

      The flipside of going month-to-month is that you don’t control when the tenant decides to leave. They could decide to leave in November or December when the market is not favorable for re-leasing and you could see your vacancy creep up.

      So two takeaways: 1) Don’t rent to Tenants with nothing to lose and 2) A lease agreement is better than MTM all else being equal.

      • Robert Steele says:

        True.

        Personally I do yearly leases but still I’ve had many good tenants up and leave when they decide to. They pay a fee that covers the realtor commissions plus make ready and continue to pay rent while I am trying to re-lease it.

        I just don’t agree with the $100-200 month extra for MTM. I know other landlords that do that but I feel uncomfortable with it. One of the reasons being you don’t know if all your comps are yearly or some are MTM.

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