Tenants come to the end of their lease agreements all the time, especially if you have a complex that has a ton of units. A complex with more than a few dozen units are going to have several of them come up each and every month.
You are going to want a plan in place for how to handle each one individually, as some you will probably want to stay on as tenants, and others you may wish to leave. Either way, you will need to know when and how to do this.
Many times, signing an extension to the tenant’s existing lease is the commonsense thing to do. However, there are other times where it may not be worth it to keep on with that particular tenant.
Turnover costs can be prohibitive though, but that shouldn’t necessarily mean that you keep a tenant that would best be served somewhere else.
Let’s walk through some of the key things you need to weigh when deciding whether or not to extend the lease of a tenant, how to approach the tenant with the contract extension, and how to broach the topic of a price increase if the situation warrants it.
High Turnover Costs
Turnover costs are going to be the single biggest financial concern to the landlord or manager when they are trying to determine whether or not to extend a lease agreement or not.
As you know, once someone moves out of an apartment, it isn’t as easy as just slipping a new person into their unit the next day. Most times there are a plethora of things that need to be done, and not only do they cost money out of pocket, but they also cost time……. which as we will show you, IS money.
The following costs are estimated for a $1,000 a month rental:
- Money Lost Due To A Vacant Apartment $2,000
- Cleaning Costs $300-$500
- Repairs $200
- Advertising Costs to Relist $100
- Property Manager(If Used) $100
As you can see, Turnover costs can be incredibly prohibitive. Even if the property is virtually ready to go and all you need to do is put a few hundred dollars into a good deep clean of the apartment, you are looking at time spent, which is the time that you aren’t receiving rental income.
For an apartment that goes for $1,000, that means that every day you have your apartment left vacant, you are not realizing $33 dollars per day. That may not seem like a lot of money, but you start adding up every day that you leave the apartment vacant and you are seriously cutting into the margins you operate on.
With our example, we have an apartment bringing in $1,000 per month or $12,000 per year. Typical costs, insurance, taxes, repairs, and maintenance equate for a full 50% or more of this income. This means that you are clearing no more than $6,000 on that unit per year.
If the apartment is vacant for 2 months, your profit is down to just $4,000 for the entire year, and this is not including any of the repair and cleaning costs. Simply painting the unit, making one or two small fixes, and cleaning the carpets can run you $1,000. Now you are down to $3,000.
Half of your profit for the year is gone simply because the tenant decided to move somewhere else. And this isn’t even considering if appliances need to be replaced or there are major repairs that need to be done in the unit.
If the carpet has been damaged and needs to be replaced, you could easily be looking at generating no income for the entire year just because the apartment turned over.
Even if you can flip the apartment relatively quickly, the best-case scenario is still going to take you several weeks to get someone new into the apartment and assuming that rent.
If you have several units that are vacant, then you are looking at multiplying that lost income several times over. With the $1,000 a month example, with multiple units vacant, you are literally losing hundreds of dollars PER DAY by not having someone occupying them.
Finally, on top of that, the landlord is going to be responsible for keeping the electrical, gas, and water on and running until a new tenant can be found; this is a cost that the apartment complex is going to have to eat.
As you can see, the turnover costs can be incredibly prohibitive to just move a tenant out at the end of their lease. In fact, most times, it is to the landlord’s benefit that they extend the lease for an extended time if possible.
But what if the tenant isn’t a good tenant? Are there situations where it would be better for the landlord not to renew the lease?
Reasons You Would Choose Not To Renew A Tenant’s Lease
There are a few situations where renewing the lease is not in the best interest of the landlord.
The first situation would be if the tenants are just poor tenants. Do they cause the complex a lot of problems? Are they always whining about something and calling the maintenance guy every other day for problems they themselves create? Do they bother their neighbors with their behavior to no end? Are there other reasons why keeping them on may not be such a good idea?
If these factors describe the tenant, then it could be to the landlord’s benefit not to renew the lease. Remember, it is the job of the landlord, in running the business, to keep as many units occupied for as long as possible. This means keeping people happy.
Not just the tenant currently renting the apartment, but also their neighbors, the manager, and the rest of the apartment complex community as a whole.
If these tenants are placing in jeopardy the longevity of other tenants, then the risk of keeping those tenants is higher than simply looking for new, better-suited clients for the complex.
Secondly, you want to look at how much they are paying in rent. If their current rent is below the market average, both for comparable units around the area and at similar apartments at your own complex, then keeping those tenants, even if they have been amazing tenants, can be similar to having your apartment vacant for a couple of months.
For example, you have tenants that have rented with you for several years now. When they moved in, the rent for their apartment was $800 a month. Now, you rent out the same apartment at your complex for $1,000 a month. Should you keep these tenants?
Well, if they keep their lease or are just on a month-to-month lease at this point, let’s look at the math. You are not realizing $200 a month that you would be gaining if you simply rented the apartment out to someone new. $200 x 12 months = $2,400 per year. This is the same as having the apartment sit vacant for two and a half months!!
So, does this mean that you should ask historically good tenants to leave?
How and When To Negotiate A Lease Extension
As mentioned before, if you are running an apartment complex, chances are you are going to have many, many units. The large number of units ensures that you are constantly going to be having lease agreements come up for renewal every month.
It is best to start the negotiation for a lease extension or an outright renewal of the lease somewhere between 60-90 days of the end of the agreement.
This gives the tenant time to decide on what they want to do and gives time for the apartment complex to talk with the tenant that isn’t a last-minute venture, which can be overly stressful and bad for both the manager and the tenant.
Most tenants aren’t even going to think about moving until it gets within a month or a month and a half before their lease is up.
The best way to start communications is to send out a letter notifying the tenant that their lease is going to be up in 60-90 days and ask them to contact you about what your intentions are at the end of the term.
Something as simple as this would work as a good form letter:
Dear Tenant,
Your lease is due to expire on mm-dd-yyyy, and we would like to talk to you about extending your lease. Management would like to offer you the terms of extending your lease at $X.XX per month for a term of X months. If you are unsure about extending your lease for this amount of time, we would also like to offer you a month-to-month lease at a rate of $X.XX per month ongoing.
If you have any questions, please call the manager at the office at xxx-xxx-xxxx, or stop by at any time. We would love to answer any questions you may have and talk to you about continuing your stay with us at the complex.
Sincerely,
Management
This notification allows the tenant to easily see where they stand with you as the landlord. If the tenant is not worth renewing, obviously the letter is going to read differently. But if you want to keep the tenant on, this is the perfect way to open up negotiations for an extended lease.
If you don’t wish to renew your lease with the tenant for whatever reason, give them the exact same courtesy you would with someone you want to extend a lease by giving them a letter saying you are sorry but you are unable to extend their lease past the end day.
This gives them time to figure out a different situation, and you can avoid them occupying the unit longer than their lease.
The extension letter also allows you a good place to start if you must increase the price of the lease. If you are needing to increase the price of the lease from $800 a month to $1,000 a month the letter is a good, formal, non-intrusive way to broach the topic of a price increase.
The tenant is then able to call and ask questions about why their price is being increased and you can have that conversation with them at that time.
Additionally, most apartment complexes have a month-to-month lease option. However, because of the uncertainty in the term of the tenant staying or leaving, usually, this month-to-month price is higher by 10%-20% than it would be if they signed a longer termed contract.
Talking To Your Tenant About A Price Increase
The prices for everything rise. This doesn’t apply just for tenants, but for the owner of the complex too. They are purchasing supplies and labor in the same market as everyone else.
If they do not charge enough money to cover costs, then they are unable to provide housing units for all the families living in their apartments.
Ensuring that the price is competitive is the best approach a manager can take when dealing with price. Make sure that no matter what, good tenant or poor, that you are charging them what comparable apartments are going for both in the surrounding area and at your apartment complex itself.
This is going to assure that you get the highest quality tenant for your unit, and you can provide the best service for maintenance and repairs possible.
No doubt, when a price increase is laid out to a tenant, they are going to question why. You need to be able to justify why you are raising the rent. Is it because of the increased costs the complex is seeing? Is it because the rental market in the area is commanding those prices? Is it because you upgraded and renovated the facility to increase its value to the tenants?
Whatever the reason, simply spell it out for them.
The best way to do this is by putting this in the lease agreement at the very beginning. This way, they know that if they sign a lease for 1 year only, that at the end of that term, the lease is probably going to increase in price. If they sign the lease for 2 years, they can lock in a lower price for a longer amount of time.
Having this in the lease from the very beginning allows you to be upfront and transparent with your tenant from the get-go.
Now, if we go back to those tenants who have been really good tenants, but are only paying $800 a month when identical units at your own facility are going for $1,000, what do you do?
The answer is: Negotiate With Them.
The tenant is going to question why if they are such as good tenant that you would want to raise the price on them. Be willing to negotiate. Splitting the difference can be a good method of coming to terms with a price increase.
If they are willing to pay $900 a month and go into another year’s contract, or even two years, then you need to view that deal as receiving $1,200 more in income per year, and retaining a very stable, solid tenant.
The stability of income is an incredibly important factor.
Additionally, be willing to negotiate even further with them on price if they are willing to sign a lease for a longer period of time. If you have high certainty that you are going to receive $875 a month for the next 2 years, it may be worth more to you as a landlord than trying to flip an apartment with all the costs involved with that for $125 a month more.
If you don’t offer some favorable terms for them like that, you may shoot yourself in the foot trying to realize $100 a month more for a single year, when if they move out, you have just guaranteed yourself over $2,000 of expenses.
So finding the middle ground where it works for the both of you is in both of your self-interests.
Finally, be willing to offer them more amenities. Better parking, another spot, or perhaps even a garage if they are willing to stay and agree to a small price increase in the unit. Or maybe, you will promise to paint their apartment, or fix some of the fixtures or appliances that may not be working right.
Usually, there is always something that can be negotiated to make the deal right for both you as a landlord and the tenant as a renter.
Signing the Lease Extension
Regardless of the terms, you end up settling on, you will need to sign a new lease with the tenant.
If this comes in the form of a brand-new lease, then draw that up and have them come in and sign it. The agreement is no good for either party if it is not put down on paper and signed by both.
Also, you will need to put in the new lease any and all new terms that you negotiated on with the tenant.
For a month-to-month lease, make sure you include the provision that both management or the tenant can end the lease at any time if given a 30-day notice.
This provision allows the tenant, who isn’t willing to do a year lease, to give at least a month’s warning to the complex, and allows the complex to terminate the lease if the rental market is such that they can easily rent out the unit to someone else for significantly more money.
If you have tenants who are not the best communicators, or who simply do not respond to your queries for a lease extension, feel free to send them back the letter every few weeks.
Make sure to include when the time gets close that if no new lease is signed that they will automatically go on a month-to-month lease with the subsequent price increase automatically charged to them. This can oftentimes be incentive enough for the tenant to come in.
As you can see, many times, it is in the best interest of both the landlord and the tenant themselves to continue in whatever current arrangement is in place.
The costs for apartment turnover can be incredibly prohibitive for the owner, and as each day goes by that the apartment doesn’t have a tenant in it, that means more unrealized income the owner could be receiving.
Also, with lower turnover comes lower flipping costs when the tenant moves out. If a tenant stays, you can avoid all of the cleaning and repair costs you would have to do to get the apartment ready for someone new to move in.
And these out of pocket costs can mean the difference between operating with a positive profit margin and being in the red for the year.
The best way to avoid turnover is to first and foremost make sure your tenants are happy. This means all of your tenants. Identify those tenants you want to keep, and graciously let go of those that are not a good fit for your complex.
And make sure that communication stays strong. This means sending them a lease renewal notification at least 60-90 days before their actual lease is expiring. This is going to give the tenant plenty of time to consider their situation, what a new lease would look like to them in their lives, and give them plenty of time to negotiate the terms and conditions of any extension.
Remember, even if you do need to raise the price, you also need to keep your tenants happy and in residence with you.
Be open to negotiating, and weigh the cost of having them stay for a longer time at a slightly lower price with that of having them leave, and shoulder you with cleaning, repair, and holding costs until the unit can be rented out again. Most times, the most beneficial decision an owner can make is to avoid high turnover.
