If you feel like everything related to your rental properties is getting more expensive, you’re not alone. According to the Bureau of Labor Statistics, the consumer price index was up 8.5% in March, 2022 and reached a new all-time high. Meanwhile, the Federal Reserve recently hiked interest rates for the first time in years, putting a squeeze on adjustable-rate mortgage holders.
While all this has been going on, your tenants have been paying the same rent. But if their lease is up for renewal, you have an opportunity to raise the rent and make sure your tenants are paying their fair share. If you’re unsure where to start, this article will walk you through everything you need to know about applying a rent increase.
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1. What is a Lease Renewal?
A lease renewal is a formal agreement between you and your tenant to “renew” their lease at the end of the term. You can either sign a new agreement or agree to amend the existing one with the new rent and end date. Whichever form it takes, your lease renewal will most likely lock-in the tenancy for another full year.
If you and your tenant don’t sign a renewal, the expiring lease should specify what happens next. The most common provision is that you or your tenant may give the other party notice to vacate, failing which the lease is presumed to be extended on a month-to-month basis.
2. When Should you Discuss Lease Renewals with Tenants?
The time to discuss a lease renewal with your tenants is a few weeks before your earliest deadline. For example, you may be required by law or your lease agreement to give your tenant 30 days’ notice before ending the tenancy or raising the rent. If that’s the case, you will want to start the discussion about two months before the end of the lease to give yourself enough time to take action if you’re unable to agree.
Starting the conversation earlier might also help you start finding a new tenant if your existing renter doesn’t plan to stay. While they may only have to give you 30 days’ written notice, they may tell you sooner if you ask.
3. What are the Benefits and Drawbacks of a Lease Renewal?
Lease renewals have some pros and cons.
Benefits of lease renewals
- Avoid the expense of turning over the rental unit and the risk of vacancy
- Reasonably expect your tenant to stay for an entire year
- Earn more money by raising the rent
- Make other changes to the lease agreement as you see fit
Drawbacks of lease renewals
- Tenants may ask for concessions in exchange for signing a new lease
- You will be locked into the lease for a full year
- Local rent control laws may limit the amount you can raise the rent when renewing
- Raising the rent too much may cause a turnover
4. How do I Apply a Rent Increase at Renewal?
There are a few ways to apply a rent increase at renewal:
1. Sign an agreement to extend the existing lease
Perhaps the simplest way of renewing the lease is to draft an agreement stating that you and your tenant have mutually agreed to modify the existing lease. The agreement should state that all the terms of the lease will remain the same with the exception of the new end date, the new rent, and any other changes to take effect.
2. Sign a new lease
If you don’t want to extend the existing lease, the next-best option is to draft and sign a completely new lease stating the new start and end dates and rent. Be aware that signing a new lease isn’t an excellent way to sidestep rent control laws; if your unit is rent-controlled, you’ll still be limited to the prescribed increase.
3. Serve the tenant notice
If the lease converts to month-to-month when it expires, you may only have to notify your tenant in writing that you’re increasing their rent. Your written notice should state the new amount of the rent, the date it comes into force, and your signature.
Be aware of local laws and regulations when applying a rent increase, as you could be penalized for not following proper procedures. Be sure to give enough notice that your tenant can elect to move out if they don’t want to pay the increased rent.
5. What do I Include in a Lease Renewal?
A lease renewal is a contract like any other. At a minimum, your lease renewal should include:
1. List the names and addresses of all parties to the agreement
2. Outline key details about the original lease and intentions of the renewal (legal practitioners know this preamble as “recitals”):
- Original lease sign date
- Original lease expiration date
- The fact you and the tenant both wish to continue the tenancy
3. List the amendments to the lease:
- The new start and end date
- The new amount of rent
- Any other amendments you wish to make
4. Optionally, list any necessary clarifications to reduce ambiguity surrounding the agreement:
- Specify what happens to any deposits you hold
- Reaffirm that you and the tenant may mutually agree to make any other changes you like
- Reiterate any clauses of the lease that are particularly important
6. How Can I Create a Lease Renewal?
A lease renewal is a contract like any other. While your renewal can be verbal or informal, it’s best to get it in writing. If you prefer to do it yourself, there are many online resources with free document templates that are a good starting place. Have your real estate lawyer draft the renewal agreement for the best results.
The bottom line
To stay ahead of rising costs, make raising the rent a part of your property management routine. Be sure to give your tenants enough notice and protect your interests by agreeing to the renewal in writing.
When renewing a lease, increase the rent by signing a new lease or amending the existing one. If an annual lease renewal isn't possible, or where local laws require it, you can instead raise the rent by giving your tenant notice in writing.
When renewing a lease, raise the rent to market value unless your city has rent control laws in place. If that's the case, raise the rent by the maximum amount permitted. Be careful not to raise the rent too high, or you risk your tenant moving out.
Whenever possible, it's better to renew the lease on a yearly basis rather than month-to-month. With a month-to-month lease, your tenant can give notice and move out at any time. Ask your tenant to sign an annual renewal and commit to a full year to reduce your risk and administrative burden.