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The Lease Renewal Process & Rent Increases

Todd Ortscheid - Monday, June 11, 2018

Hi, Todd Ortscheid here with GTL Real Estate. I wanted to talk this week about the lease renewal process and how we determine what the new monthly rent will be when we do a lease renewal. We have a pretty regimented process for how we do this. We recommend that any landlord do the same. If you're managing your properties yourself, if you don't have a property manager, we still recommend that you follow a similar process to this. You won't have all of the same information available to you that a real estate brokage would. For instance, we have access to the multiple listing service, the MLS. You won't have that, so you won't have quite the information resources that we do, which is one of the reasons we recommend that you do have a property manager, but if you do intend to manage your property yourself, you can still try to get as much information as possible from publicly available sources on the internet to try to follow a similar process. We would recommend that you do that. 

The bottom line is that when you set your rent it should not just be a gut feeling as to what that rent should be. Or it shouldn't just be a set amount that you increase every year all the time no matter what. It should be calculated based on market conditions. And there's a few reasons for that, that we'll go over in a few minutes. But the first thing I want to go over is the actual process that we go through.

So the first thing we do is about three months prior to the tenant's lease expiring we start sending them reminders that their lease is coming up for renewal, because our leases say that two full months prior to the lease expiring the tenant's required to give notice if they don't want to renew. So we make sure we send them reminders of that. We send a 90 day reminder and we send a 75 day reminder, so the tenant gets plenty of notice so they don't forget. 

Next step is once we get to past that 60 days notice where we know that the tenant is staying, our leasing agent who is responsible for that property will go through and start doing a market analysis. So what they're looking at is properties close by. And it varies, what close by means based on what kind of property it is, how far outside of the city it is, that sort of thing. But generally you're trying to find houses within about a half mile that have rented out within the last six to 12 months that are similar in size and the number of bedrooms and bathrooms. Those sorts of things. 

We're looking for those similar houses and we're seeing what they have rented for. We want to make sure that we're always sticking to that fair market rent. And that's very important, which we'll go over here in a second. So they do that analysis and they determine what that rent will be. So let's say the tenant's rent this year was $1000 a month. And the real estate agent determines that the fair market rent right now is $1050. So it's gone up by $50 over the past year.

So what we would do, is we would increase the rent to that $1050. Now let's say for example the fair market rent was calculated at $1125. Our policy is that we cap the increase at 10% per year. The reason we do that is because tenants are more likely to vacate the property if the rent increase is that high. So we don't want to do that because that gets more expensive for the owner than just doing a slightly lower rent increase, because a vacancy is almost always the most expensive thing for the landlord because you have to pay a leasing fee, you've got a period of vacancy, and you got to do repairs. So vacancies always are very expensive. So our goal is always to try to get a renewal if we can. It's better to do a renewal at $1075 a month, for example, than it would be at $1125 if that extra $50 is going to make the tenant leave. So we cap our increases at 10% per year.

So basically if the market analysis that the real estate agent does comes in at 10% or less, then that's what we set the rent at in the new lease. If it comes outs at higher than a 10% increase, then we just set it at a 10% increase that year and we write the lease up and send it to tenant at that level.

Now when we send those reminders to the tenant when we start getting close to their expiration date, those 90 and 75 day reminders, we always tell the tenant their rent could increase up to 10% and to base their decision on that. So the tenant is already aware that their rent is going to be increasing so that they're not caught by surprise and they know how much it can be for when they make that decision as to whether they want to stay or not. Nobody's caught by surprise. Everything is fair to everybody and it makes for a very smooth process that's unlikely to result in a tenant leaving just because they weren't happy with the renewal process or the rent increase. That's a very little likelihood, which is good for the landlord because it makes sure your property stays occupied. 

We send out that lease renewal about five to six weeks prior to the lease expiring. There's plenty of time for the tenant to get that signed before their current lease expires. We send them emails, letters in the actual mail, phone calls, and text messages. We do pretty much everything to remind the tenant to get that signed. So usually they sign it pretty quickly after we send it out. Usually we've got the renewal back before 30 days prior to the existing lease expiring, and you've got that locked in pretty quickly. Now that's not always true. Sometimes tenants, there are some tenants that want to wait until the last minute, but it's very rare that we see that. And you also have a backstop. 

If your tenant is on one of our lease agreements, our lease says that if the tenant doesn't sign the renewal then when they get to the end of their lease, it continues on a month to month basis at a 15% rent increase. So the importance of that is it's a higher increase than they would get if they sign their lease renewal so it's encouraging them to sign a renewal to get them locked in for another year. So we're actively discouraging those month to month leases that are not in your best interest, but at the same time if the tenant doesn't sign the lease, you still have an existing lease agreement with a month to month provision built in with an increase. So the landlord is better off or protected either way. So we've got that locked in on the lease. Which ever way it goes, we've got protections for you, the landlord.

So what's the reason we do this process? Why do we make sure we follow this regimented way of doing rent increases? The reason for that is fair housing issues. We want to make sure that every tenant is treated equally. Everybody's treated just the same as every other tenant that we rent to. And that makes sure that nobody can say that we're discriminating, that we're showing favoritism, that we're treating anybody differently than anybody else. And that protects us and it also protects you as the landlord, because if someone were to claim a fair housing or a discrimination suit, then you'll actually be the first person named on that lawsuit, not just us. 

So it's important that we protect you from that. And using this kind of process sees to it that no one can credibly claim that the rent increase they received was not based on fair market conditions. So that's why we follow that process. That's why we recommend that everybody follow a similar process when setting your lease renewal increases. So make sure you set that down on paper so you have something to show in case there was some sort of discrimination claim. Have a written policy like we do and that's the best way to protect yourself from any sort of problems in the fair housing or discrimination arena. 

If you have any questions, feel free to send us an email at support@gtlrealestate.com. And of course if you don't have a property management company and you want to hire a company that's going to follow this kind of regimented process give us a call to talk to us about managing your property. Our number is 678-648-1244 and we'll be happy to talk to you about that. Thanks.

GTL Real Estate
120 Village Circle
Senoia, 30276

(678) 648-1244

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