In a best-case scenario, your tenants will renew their leases from year to year.
As you know, this isn’t always the case. Tenants often shop around while reassessing their budgets and goals. Some tenants might even want to negotiate their lease before deciding to stick around.
It might seem counterintuitive to compromise on rent when a new tenant would likely pay the original price. However, consider the other costs involved in turning over a unit.
Not only do you need to make repairs and clean the unit, but you’ll also have to update the listing, find a new tenant, and thoroughly screen the tenants. Keep in mind that during the few months it will take to accomplish all this, you won’t be receiving regular rent payments.
Often, negotiating with your current tenant is less expensive than replacing them. But how should you ensure you don’t accept an unfair deal?
Here are some steps and tips for negotiating a lease renewal.
Do Market Research
The first step to negotiating a renewal is to assess your current price. Is your current rent price in line with similar rental businesses in your area? If not, your tenant has little incentive to accept the renewal on your terms.
Instead, decide on a fair market rent price that you can justify by comparing it with others in your town. If your tenant asks for a significantly lower rent price than is typical for your area, you can explain why it isn’t plausible with concrete evidence that they won’t find a lower price anywhere else.
You should also research other aspects of the lease your tenants might want to negotiate. For instance, if a tenant wants certain renovations or amenities, find out whether your competitors offer these upgrades. If so, adding these can help you stay competitive with your tenant’s other options.
Assess Tenant Turnover KPIs
When was the last time you checked your KPIs? If you aren’t regularly checking your performance data, remember that free rental property management software makes these metrics straightforward to access and interpret. You can find metrics like your occupancy and vacancy rates as well as your average tenant turnover on your software platform.
Your tenant turnover KPI is especially important as it can help you decide whether it’s truly in your best interests to negotiate with a tenant.
For instance, if you have a relatively high turnover at the time of the potential lease renewal, it’s probably worth it to negotiate and maintain a steady stream of income. However, negotiating may be less critical if you only have a few short-term vacancies.
Before you proceed with negotiating, establish hard boundaries for which concessions you are willing and able to make. For instance, you might set two limits on rent: the maximum discount you’d like to offer and the maximum you are financially able to. Depending on what your tenant wants, you can hopefully land on a number less than or between these boundaries.
You might also set boundaries for other lease negotiations. For example, you might decide that you can reasonably accommodate certain upgrades but not others. It might be useful to put a monetary limit on these adjustments as well.
Communicate these boundaries with your tenant respectfully and professionally. Let them know the best you can do for them while still maintaining an understanding tone.
Sometimes, a small incentive is all a tenant needs to renew their lease. Renewal incentives can be extremely effective when offered early, preferably before a tenant has time to find alternative housing.
For instance, you could offer discounted rent, additional upgrades, or even a small cash prize or giveaway.
These incentives might be useful during negotiation too. If you can’t offer a significant discount on rent, other incentives might convince your tenant to renew.
Excel at Lease Negotiation
The best way to approach a lease negotiation is by being informed. Have your financial calculations worked out beforehand so you can come in with knowledge about how every possible outcome will impact your business. Supported by your market research, KPIs, limitations and boundaries, and potential incentives, you will excel at negotiating with your tenants.