Tenant Retention
Tenant turnover is costly. Tenant turnover of a quality tenant is even more costly and may be avoidable. Many landlords focus their efforts on attracting new tenants to fill a vacancy and allow existing leases to run their course. While not completing ignoring a current tenant, the landlord’s time and attention is directed to new tenant opportunities and potentially higher rents. The tenant with an expiring lease will receive landlord attention but at a date closer to lease termination. Some tenants by that time will have finalized their decision to seek new rental housing and, accordingly, have begun preparations for the move.
Why is tenant retention is so important? Tenant retention can help reduce one of the largest costs in property management – tenant turnover. A vacancy can negatively impact the landlord’s cash flow. Vacated units must inspected, cleaned, and made rent-ready for a new tenant. There are additional costs associated with the filling vacancy process, e.g., advertising, showings, applications, and screenings. Market conditions may further impact cash flow if a landlord must lower rent or offer concessions to stay competitive in the local market. There can be greater benefits to the landlord’s business by retaining the quality tenant who has performed to lease terms and conditions and, accordingly, has contributed to a positive impact on the business bottom line.
Not every tenant is a quality tenant. There are many reasons that leases are not renewed. Some tenants voluntarily choose to move on and some tenants just do not perform at a satisfactory level to warrant a renewal. A landlord must evaluate each tenancy on its own merit for consideration of renewal. Some relationships are better for business if the lease expires and a vacancy is created.
When a landlord performs to his rental standards in the filling vacancy process, he has expended significant resources to find and install a quality tenant. It may follow then, that as a complement to those initial efforts, a landlord should expend equal effort in the retention of that quality tenant. With higher tenant retention, a landlord could experience higher profits.
Well-developed tenant retention strategies can help minimize vacancies and reduce operating expenses.
What are some strategies to retain quality tenants? Generally there are three key factors that influence tenant retention strategies.
- The local market conditions
- The physical condition of the rental unit (maintenance and repair)
- The property management (quality of service)
Local Market Conditions
To stay competitive with area rental communities, a landlord must stay current with the local real estate market. Without that local market knowledge, a landlord has no idea if his business is competitive, can be competitive or clearly in need of a new business plan. A landlord could be losing potential renters from the applicant pool for reasons that could be easily remedied. Market knowledge of supply and demand, demographics, and rental trends are keys in business continuity.
A landlord must periodically review market rents. Renters do comparison shopping for rents in their desired neighborhood. If a landlord’s rents are higher than market rents, the landlord can lose business to his competition. If the landlord’s rents are less than market rents, the landlord could potentially attract a greater number of applicants but may not be able to qualify all applicants to rental standards. Lower rents can mean reduced cash flow and potentially negative consequences to business bottom line. As a general rule, rents are set at levels consistent with the market rent, i.e., the rent for comparable available units in the same area. Knowing the range of market rents also allows a landlord to determine how the current rent should be adjusted when considering lease renewals.
If the market research shows major differences in property amenities, the landlord should evaluate his property amenities to determine if amenities could be added or upgraded in a cost-effective manner. Amenities are usually a drawing point for tenants. It may be that with some changes, even relatively inexpensive ones, new tenants would be attracted to the properties and current residents would be more likely to renew their leases.
Property Condition
During his market research, a landlord must objectively evaluate the physical conditions of his properties as compared with the physical conditions of other landlord properties. A landlord may find that his properties need improvements or renovations to bring his properties to a more competitive market position.
Problems with maintenance and repairs can be a great motivation for tenants to move to another community. Certainly if maintenance issues were not adequately addressed in a timely manner during the tenancy, a tenant is not likely to be receptive to a lease renewal option. Despite having been timely in his rent payments, a good tenant may decide to move on to a better property when his lease expires.
For property values, and attracting and retaining quality tenants, property maintenance, repairs, and capital improvements are top priority in property management. Additionally with regular maintenance and repairs, the working life of property systems and structures can be extended. When vacancies do occur, the time required to return the rental unit to rent-ready condition can be shortened.
Maintaining rental properties to good condition, helping to retain that curb appeal that attracted tenants in the first place, can be an important factor in a tenant’s decision to accept an offer of lease renewal.
Property Management
Quality property management is all important in tenant choices for rental communities. A good property management team invested in customer service can be a significant factor in retaining tenants. Tenant retention depends in large part on the quality of communications between landlord and tenant. This simple strategy, being accessible and responsive to tenant requests, questions, and concerns, can keep tenants satisfied during the current tenancy and increase the likelihood of lease renewal.
Rental practices such as tenant screening have an impact on a tenant’s decision to renew a lease. Good tenants want to stay in good properties. They want to rely on management policies that screen for more good tenants. Tenant retention has been shown to be higher in properties where landlords conduct complete and comprehensive screenings for tenant selection.
Pricing rent fairly in relationship to market rents and property conditions will help tenants in their decision to accept a lease renewal offer. While tenants may understand prevailing market conditions and the fact that everything goes up can be a factor in setting rents, a landlord can increase rents incrementally to ease the burden on existing tenants. Being price-sensitive to the market may make the landlord’s rent structure more appealing to tenants shopping around and making price comparisons. A small increase in rent can be expected, a larger increase in rents can prompt a tenant to move. Discussion of rents and rent increase schedules including lease renewals can take place during the tenant’s move-in orientation. Detailed lease clauses can eliminate surprises at lease expiration notice periods.
Enforcement of rental terms and conditions is another way that landlords can retain quality tenants. If a landlord does not enforce consequences for lease defaults or allows dangerous conditions or illegal activities to occur on the rental property, quality tenants move on.
When properties in the local market are competitive for location, rents and amenities, a determining factor for a tenant to stay or move on may be the property management and its customer service. Tenants who feel their needs are being met, their privacy respected, and the property well maintained (a nice place to live) are more likely to want to renew their leases. The market’s perception of the landlord’s properties can be as important as the property’s physical characteristics and rental policies. Social media comments may influence a potential applicant’s decision in choosing a rental community. The branding of a property as a desirable rental community can be a decisioning factor to many tenants.
A good retention program is a landlord’s good will policy – responsive to tenant needs, open to communication, and appreciative of the tenant’s business.