My tenants’ lease is expiring soon. They have been good tenants but I think I can get a higher rent if I go to a new tenant. Is a renewal tenant really better for business?
The decision to retain a tenant or to allow lease expiration is not always an easy decision particularly when the current tenant has been a good tenant.
If you have analyzed market rents, you must have a rent amount in mind that you find acceptable for your business operations and are fairly confident that your applicant pool could support that amount. If these tenants are the good tenants that you would want to keep, why not make your renewal offer to them contingent on accepting the new rent amount (market rent). If they are agreeable or you can reach an acceptable compromise with them, you have avoided a perhaps unnecessary vacancy and its costs.
Keeping a current tenant by renewing the lease can simplify property management. Doing so is often not cost effective – landlords should do the calculations regarding the total cost of preparing the the vacant unit for a new tenant, including the potential longer vacancy period due to the higher rent; what that means regarding the increased rent needed from a new tenant who may not stay more than the initial lease term; and whether the rental market currently supports such a higher rent. Renewing a lease avoids the time consuming process of finding and qualifying a new tenant, and eliminates the costs of cleaning and updating a vacant unit.
Keep in mind that a move-out is costly for tenants as well. If the new rent is reasonable, tenants usually want to stay rather starting over with a new property and a new landlord.
However, while the option of offering lease renewal to the current tenants could make rental operations a little easier, there are several issues associated with a lease renewal that should be considered before you offer renewal or decide to market to a new tenant.
While your current tenants may have paid rent on time, been a good neighbor, and otherwise adhered to rental rules, you should conduct a property inspection to determine that the rental unit is being properly maintained by the tenants and their housekeeping is at an acceptable standard before offering a lease renewal. If the tenants have not fulfilled their maintenance responsibilities and the unit is not in good condition, you would not want to renew the lease and allow future potential damage to the property.
Many fixed term lease agreements are for a term of one year. A tenant who qualified under your rental standards a year ago may have had a change in his ability to meet your current qualification criteria. While many landlords require a tenant to requalify to current standards for a renewal of lease, you may be familiar with your tenants’ situation and confident that your tenants will continue to meet their rental obligations. You should always evaluate the potential financial risk of any tenant while being knowledgeable of applicable state or local laws regarding the use of credit reports in screenings. As a general consideration, if tenant screening is legally permissible, a credit rescreening of the tenants could be compared to the tenants’ credit screening at application. If there is significant difference in income to debt ratios, you may want to consider a renewal with conditions, e.g., an increase in the security deposit.
A lease renewal decision may be influenced by local area market conditions and the market position of your property. Starting over with a new tenant may allow for increased rents but there is potential for financial risk from applicants with unknown rental histories. With a lease renewal you at least have a rental history record to support your decision.
There may be other reasons that despite being good tenants you may not want to retain them as tenants. You still need to do market analysis to determine how to best market your property to attract new tenants.