What You Should Know About Renewing a Rental Lease Agreement
Summary:
When rental agreements near an end, renewing your tenant’s lease may not always be in your best interest. Renewing a lease may save time and money, but it might also block potential profit from desirable renovations or keep potentially undesirable tenants in your property. As the end of the lease approaches, it’s essential to consider pros and cons of renewal before making your decision.
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If you don’t know what you’re doing, deciding whether to renew a tenant’s lease can feel a bit like skiing blindfolded. There’s a chance you’ll be just fine, but it’s more likely you’ll run into unexpected hazards that may hurt your property business.
According to RentCafe, about 60% of tenants renewed leases in , which is down from previous years. RentCafe attributes this drop to a recovering economy and an increase of new units on the rental market.
Having the majority of your tenants want to stay for another year may sound like a win-win situation. However, there are some scenarios when accepting renewal may not always be the best decision. In fact, renewing when you shouldn’t could stifle your potential profits and stick you with potentially undesirable tenants for another year.
When you want to bring new tenants on board, it’s essential to conduct tenant screening through a service like SmartMove®. Similarly, when deciding whether or not to renew a tenant’s lease, it’s important to have all the facts so you can make the best decision.
This article covers what you may need to know about renewing a rental lease agreement. Understanding some of the common considerations for rent renewal can help you see potential dangers more clearly and glide into a more successful future.
The Pros and Cons of Lease Renewal for Landlords
Your tenant’s lease is coming to an end soon and they’ve notified you that they want to stay another year. While you may be tempted to say “yes” right away, it’s important to first understand the pros and cons of this decision.
PROS
- Eliminates the cost of funding a new tenant
- Saves time
- Reduces risk of vacancy
- Reduces risk of wrong tenant move in
- Tenant is already familiar with the lease terms
CONS
- There may be limits to the amount you can raise rent
- You may not have reliable tenants currently on the lease
- Increases the chances of tenant vacancy
Pros of Renewing Your Tenant’s Lease
There are several benefits to renewing your current tenant’s rental agreement. These include:
Eliminates the Cost of Finding a New Tenant
Between deep cleaning, repairs and maintenance, advertising your rental unit, and other work, placing new tenants can get expensive.
According to Apartments.com, the expense of turning over a single vacant unit can be between $1,000 and $5,000. 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 fair market value, but don’t raise it so high that you make the current tenant consider moving, you’ll receive more money each month without shelling out big 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.
Saves Time
Tasks like writing effective rental ads and reviewing rental applications might not cost money, but they sure can eat up hours of your time. Common tasks when finding new tenants include:
- Doing a deep clean (either on your own or with a professional)
- Repairing damage due to normal wear and tear
- Advertising your rental property
- Deciding what questions should be on your rental application
- Reviewing rental applications
- Scheduling viewings
- Conducting tenant screening
- Reviewing and signing the lease with selected tenants
- Arranging move-in and key handover
All of this takes time. Renewing the lease with your current tenants can help you avoid some of the hassle while you keep your cash flow.
Reduces the Risk of Vacancy
With a vacancy, you’re not earning income but you’re still potentially shelling out for things like:
- Your mortgage
- Utilities
- HOA fees
- Upkeep and general maintenance costs
Losing out on rental income is especially significant when you rely on rental income to pay the mortgage. Additionally, vacant properties could also leave the property vulnerable to additional threats from break-ins and/or vandalism. Plus, without someone on-site, problems like a burst pipe might cause extreme damage before being noticed.
Reduces the Risk of Having a Bad Tenant Move-In
Ill-fitting tenants may destroy your property business with property damage, rent nonpayment, and may cause difficulties with neighbors and other tenants. Then, if you have to remove them, the entire eviction process can easily reach $3,500––and take weeks to complete.
While screening may help you find better potential tenants, there are always risks with a new tenant.
If your current tenants are responsible, communicative, take good care of your property, and pay their rent on time each month, it may be worth it to keep them around.
Finally, if you already have a good system going with the current tenant, you may want to consider renewing their lease. For example, your tenants already know the quirks of your property and neighborhood. They’re already familiar with your lease terms, how you manage property maintenance, and any community rules.
On the other hand, if you bring in someone new, there always a learning curve. Fielding new tenant questions can easily eat away at your time.
Cons of Renewing your Tenant’s Lease
Just because something is easy, doesn’t mean it’s the right thing to do. While renewing your current tenant’s lease may have a lot of benefits, it can also be the absolute wrong thing to do in some circumstances.
Here are some reasons that you might not want to renew your tenant’s lease:
You 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, annoyed the neighbors, or broken the rules in the lease agreement, you may not wish to renew their lease. It might make sense to look for a more reliable tenant.
Anytime you bring in new tenants, it’s important to screen them to help avoid problems down the line. Tenant screening should include:
- A solid rental application with high-quality questions for tenants. This may help you weed out potentially ill-fitting tenants before they sign a lease.
- Financial verification, including Income Insights and a credit check with Resident Score, can help provide insight into the a potential tenant’s financial past.
- Employment verification may help you learn more about their job situation, salary, and employment length.
- A criminal background report may help you discover if your potential tenant has any relevant crimes.
- Past eviction checks may let you know if there are eviction-related judgements that may be connected to your rental applicant.
- A Landlord reference check may help you learn exactly how your applicant behaved in previous rental situations.
Pro Tip:
Not all rental applicants have innocent intentions. As you screen candidates, learn how to spot and avoid the most common rental scams. Knowing what to look for can help you avoid expense headaches.
You Can Take the Opportunity to Renovate
Providing some of the top rental property features tenants look for may mean big jumps in potential rental income. There are even several renovations that cost under $1,000 but can mean significant increases in fair market rent value. These include things like:
- Stainless steel appliances
- Adding a kitchen backsplash
- Adding security features
- New windows
- Energy-saving and green features
- Update fixtures like lighting and showerheads
- Upgrading outdoor space to make it more pleasant
However, upgrading a unit can be a hassle when someone is living on the property. Using the time in between tenants to complete renovations may help you raise the rental price of the unit and attract higher paying tenants in the long run.
There May Be Limits to the Amount You Can Increase Rent
When it’s time to renew a lease, you may be tempted to raise the rent as much as you can on current tenants. After all, if it’s easier for them to stay put, they might not mind paying more. However, you should know that some localities may restrict rent increases.
According to legal site NOLO, if your property is in a rent controlled area, you may be limited in the amount you can raise the rent on a current tenant at lease renewal.
Even in areas not governed by rent control laws, if you raise the rent too high, you may risk losing a stable tenant. Before raising the rent on a tenant that you want to keep, you should factor in the money you may save on tenant turnover.
Pro Tip:
Whether you’re starting with new tenants or renewing at a higher price, it’s helpful to know how much to charge for rent on your unit. Pricing your apartment in the sweet spot can mean better success down the line.
How to Renew a Lease with a Tenant
Even when you’re on the same page as your tenant, knowing how to negotiate a lease renewal can be a bit tricky. Based on SmartMove research, here are a few things to consider when it comes to renewal time:
Give yourself plenty of time
It’s best to be proactive. Ask your tenant well 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, if needed.
Offer Incentives or Perks
Offer great tenants perks or incentives for renewal. It could be something like professionally painting an accent wall, a free month of rent, a monthly cleaning service, better appliances, or other perk that encourages them to reapply.
Negotiate New Lease Terms
It can be awkward to discuss rental increases at renewal time, but it’s necessary. Make your tenant aware of the proposed increase and be willing to compromise if there’s pushback.
Use a fair market rent calculator to confirm your proposed price is in line with similar properties and the market. If your price is too high, you may end up chasing out decent tenants, then pricing yourself out of the market.
Also, while rent usually increases at renewal time, it doesn’t have to. You might consider giving a great tenant a break on the rent hike if they take wonderful care of your property. Additionally, if the price isn’t exactly what you want, you could ask for them to sign a longer lease, as well.
Be Willing to Compromise
As you work with your tenant, it’s important to continuously weigh the proposed terms against expenses from potential vacancy, turnover, and a new tenants. For example, a current tenant’s 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.
If you do decide to not renew a lease, be sure to check local and state laws on the matter so that you follow appropriate rules and regulations regarding lease termination, including required notices.
Pro Tip:
If you have great tenants, don’t wait until lease renewal time to convince them to stay longer. Learn how to encourage excellent tenants to stay by planting the seeds of good communication and trust throughout their lease.
Common Questions about Renewing a Lease
Here are some frequently asked questions about renewing leases for landlords:
What if My Tenant Doesn't Want to Renew the Lease
When a lease expires, a tenant may opt to move, renew a lease, or continue to pay rent as a month to month tenant. If you offer a lease renewal agreement is at the tenant’s discretion. If they choose not to renew a lease, they must vacate the property in accordance with the expiring lease.
Can the Landlord or Property Manager Include Changes in a Lease Renewal Agreement
Renewing a lease agreement might require a new contract with specified terms which is signed and dated. If there have been any changes to your rental policy during your tenant’s period of tenancy, renewal may be a good time to update the lease to reflect these changes.
How Long Before the Lease Expiration Should a Renewal Offer Be Sent
This will depend on the terms in the existing lease and applicable law. It’s wise to speak to your tenant well before the lease expiration in order to give yourself enough time to find a new tenant, if needed.
Help Boost Leasing Success with SmartMove
While renewing a lease has many pros and cons, there’s one aspect of renting out property that can only help you: tenant screening. Get fast, affordable financial, criminal, credit, and eviction screening in one place with SmartMove.
SmartMove credit checks help you learn more about your rental applicant’s financial track record, while proprietary Income Insights help you discover if your tenant actually earns what they claimed on the rental application. Included in every SmartMove package, a Resident Score further helps predict evictions 15% better than a traditional credit score alone.
Help place great tenants that you’ll want to keep year after year. A criminal background check scours millions of state and federal records looking for a potential match for your tenant. On top of that, a previous eviction search helps you see if there are any eviction-related court proceedings that may be attached to your applicant.
Created specifically for independent landlords with infrequent screening needs, SmartMove provides data that’s backed by TransUnion, a major credit agency with four decades of data expertise.
With flexible, transparent screening packages, you pay only for the reports you need and only when you need them. There are no sign-up costs, subscriptions, minimums or hidden fees. Simply sign up and start screening immediately.
One destructive tenant can be the snowball that causes an avalanche––and buries your property business forever. Help protect your investment. Carve a smoother path forward with affordable online tenant screening through SmartMove. Know your applicant.
Additional Disclosure:
The information posted to this blog was accurate at the time it was initially published. We do not continue to guarantee the accuracy or completeness of the information provided. The information contained in the TransUnion Rental Screening Services, Inc. blog is provided for educational purposes only and does not constitute legal or financial advice. You should consult your own attorney or financial adviser regarding your particular situation. For complete details of any product mentioned, visit www.transunion.com. This site is governed by the TransUnion Rental Screening Privacy Policy Privacy Notice located at TransUnion Rental Screening Solutions, Inc. Pri
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