Most lease agreements usually only last for six months to a year, but tenants have the option to renew to remain in the rental unit. A landlord can renew their lease and even charge for a lease renewal fee. Most property management companies do the same, but why is that the case?
Why You Should Charge a Lease Renewal Fee
Drafting a lease agreement for tenants requires time and effort to make sure that it’s comprehensive enough to avoid potential issues in the future. Here are some of the things that a lease renewal fee can cover:
Administrative Costs
Renewing a lease involves administrative tasks that can be considered billable, which is why most property managers charge for it. Some of the responsibilities include reviewing the lease, updating tenant information, processing payments, and various services.
Lease Preparation
Aside from the standard tasks landlords or property managers have to do, the preparation of the lease itself is a time-consuming process, especially if there are revisions to be made due to certain market conditions or changes to the rental property itself.
Increase in Rental Rates
Shifts in the real estate market may call for an increase in monthly rent or new rules for leases in your rental properties. To create an air-tight agreement, legal consultation may be needed to account for state and local laws for rental rates like rent control, which means extra costs.
How Much Should You Charge for a New Lease Agreement?
There are plenty of factors to consider before you charge a lease renewal fee such as fee structures and current rental rates.
Types of Lease Renewal Fees
- Flat Fee Lease Renewal: Property managers or landlords can charge a flat fee for the process, which is a one-time fee for the tenant. It usually costs around $250 to $500, depending on the tasks needed to be done to complete the lease agreement.
- Percentage-Based Renewal Fee: Instead of a fixed rate, the lease renewal fee can be charged based on a percentage of one month's rent. It can go between 25% and 75% of the month's rent, which can also factor in the monthly property management fee.
Upgrades to the Unit or Property
If you renovated or upgraded the rental property prior to lease renewals, you may charge an additional renewal fee since it is technically a better unit than what the tenant previously rented. While a flat rate is more appropriate for this reason, you can still charge based on a percentage of the rent.
Potential for Tenant Turnover
You shouldn't expect tenants to be happy when landlords charge a lease renewal fee. While you might need it to shoulder certain costs, you should also consider whether tenants would be willing to pay the amount of the fees. The more vacant units you have, the more money you could lose. This should be taken into consideration when setting your price, don’t be overzealous. The real profits you stand to make are in the tenant’s continued residency.
Market Competition
You're likely not the only rental business in your area, and your competitors might be charging lower lease renewal fees if they are charging at all. This puts you at a disadvantage and might discourage tenants from lease renewal.
You might benefit from hiring a property management company since they will have unique insights into the current market, which will help you make an informed decision when you charge a lease renewal fee.
Management Fees
Lease renewal fees might depend on property management companies and their own lease renewal fee structure. You can ask to reduce how much a property manager charges for renewal fees, or you can shoulder a percentage of the cost to assist your current tenants with the fees.
A small deduction to your rental income and a monthly management fee might be better than losing a tenant. Good property management can sometimes mean making small sacrifices for better ROI in the long run.
How to Encourage Tenants to Renew Their Lease
Your existing tenants might be more inclined to pay lease renewal fees when your rental property is worth staying for. Here are some ways to make them feel renewing will be worth it:
Great Property Management Service
A tenant will likely stay on your rental property when they appreciate how the landlord responds to maintenance or repair requests. This can be achieved through either doing a well enough job on your own or hiring a property management company like CRM Properties that can tend to all the tenants' needs.
Enhance Amenities
Upgrade or add to the existing amenities on your property to make it more appealing to current and new tenants. It will make your rental worth the lease renewal fee and might even attract a new tenant.
Hold Off on Potential Rent Increases
If a tenant is near the end of the lease term, you might want to hold off on a rent increase. A lease renewal fee can deter them from staying due to both additional and increased costs. Losing a tenant will be more detrimental to a stable rental income.
Explain Why You Charge a Lease Renewal Fee
Good property management companies tend to be transparent with their fee structures as it helps tenants understand what they're paying for. You can provide a breakdown of all the costs that fall under lease renewal so the tenant understands what the fee entails.
Offer Flexible Lease Terms
You can consider lease options such as monthly or yearly lease renewals, since others may prefer to pay smaller amounts especially when it's a percentage-based fee according to rent amount. The tenant likely renews their lease if it's on their preferred terms.
Why Hiring a Property Management Company is Beneficial to Landlords
CRM Properties can provide you with real estate market insights as well as legal knowledge for creating new lease agreements. With a property management company at your side, you can draft a new lease that covers every base by the law.
We have advanced tools and technologies that can help you make decisions based on facts and statistics like our ROI Calculator, and you can earn passive income as we maximize your property's value for additional revenue. Schedule a consultation and we can help you master your investments.