Still Gotta Buy Cereal… Lease Renewal Discounting Opportunities
Grocery store prices have really gone up! Whether it’s due to inflation, the war in Ukraine, gas prices, Will Smith punching Chris Rock at the Oscars, or whatever explanation mega-corporations think the public will best swallow, it’s been sort of shocking how much more things cost percentage-wise.
This leads to an issue in my house. My son is a picky eater (following the youthful pattern of his old man, unfortunately…); finding things he is willing to eat is difficult. Fortunately, Honey Nut Cheerios have been on his acceptable list for a while now and are a go-to for at least 1 meal a day. But prices have gone up and substitute store brands don’t pass muster, so we are in a conundrum.
General Mills’ stockholders are pleased as we are forking over a dollar more per box. I’m somewhat positive their actual increased costs are a fraction of that, but “never let a crisis go to waste” has long been part of good business acumen. So we grit our teeth and pay it so the young tyke can survive.
Tenants are in a similar situation now. As their existing leases are coming up for renewal, they are finding that the rental prices offered to extend them are much higher than their current rate. This leads many to quickly try to locate the greener pasture of a cheaper rental home. But these homes are largely non-existent as most landlords have followed suit and raised their rental home prices as well. They find the rent they are currently paying is a huge bargain to what their new rate would be, but, unfortunately, also to what other homes are renting for. What to do?
The old answer would be to take this rental market and shove it! Become a home buyer! Build wealth! Get a fixed rate mortgage so that the monthly costs of the home would never go up! But the only thing harder than the rental market currently is the “for sale” market. Talk to anyone who has tried to buy a house in the past few years. Mission (almost) Impossible- and, if successful, you’re not buying a bargain!
So, again, what to do?
For tenants, it’s a tough situation. I’d recommend being qualified to purchase and then to scour deals for sale and rent; then look to see and apply/make offers on a lot of houses. A less stressful strategy would be to just batten down the hatches and wait things out until there is an inevitable housing market downturn. It’s the “stay put and stay solvent” strategy.
But, as a landlord, what is a good strategy on lease renewals? Landlords are in a good spot in today’s housing environment. I think there is a temptation to raise the rent to or above market rate to maximize cash flow. And then hope the tenant stays (and can afford it).
However, I’d offer a contrarian strategy of not putting existing tenants over a barrel. True, it might be difficult for them to find another place to live so there is an inherent advantage that wouldn’t be exercised. But if they have been good tenants who take care of the house and pay on time, I’d recommend pricing the lease extension rate 5-10% below the prevailing market rate for a vacant rental.
But why?
Several reasons:
1. Fix-up and vacancy costs will probably push the payback period to over a year. If the new tenant leaves after their 1-year lease expires, it’s a lot of activity to produce a loss.
2. When tenants examine the rental market (and they will!), they will see that the renewal terms are a relatively a good deal and will be more inclined to stay.
3. Good tenants are worth their weight in gold! Continual cash flow from good tenants pays down landlord mortgages and reduces wear on homes. And call me soft, but good tenants do deserve some type of positive consideration for keeping their part of the lease. It’s good business.
Higher prices are hitting different groups differently, but people still gotta have somewhere to live and afford cereal too. Housing discounts aren’t as ubiquitous as Cheerios coupons, so use lease renewal discounting as an opportunity to keep good tenants.
Happy Landlording!
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Lease Renewals: Lock in the $2.00 NYC Breakfast!
“If I can make it there, I’ll make it anywhere, It’s up to you, New York, New York…”
“New York, New York” by Frank Sinatra
I remember living in New York City (NYC) when I was first out of college. All of the big buildings, happening things going on, the energy, the lights, so many people… it was amazing to behold. It seemed like everything that was going on in the news was happening right around the corner from my apartment. It was really cool.
But it was really expensive. Everything cost so much, especially compared to college life. After my first week of work, I went out with some colleagues and offered to buy the first round of drinks- big mistake!
“That will be $90.00, sir.”
“No, I’m sorry… There must be some misunderstanding. I only ordered 5 of them and we just got here.”
Weird look. “Um, it’s $90.00 sir.”
(Gulp) There goes this week’s money…
And that was 20 years ago. I hate to see what things cost now.
However, there was one great deal in NYC- the breakfast food trucks. You could get a coffee and a big bagel for $1.00 each. I’d line up every morning before getting on the subway to lock it in before heading to work. When an apple cost $4.00 at the bodega across the street, this was the way to go (maybe not health-wise, but you couldn’t beat the bang for your buck).
I remember one morning being in line behind an obvious tourist who looked like he had just gotten into town. He asked the food truck proprietor how much a cup of coffee was and did a double-take:
“$1.00??? Seriously? I’ve never paid $1.00 in my life for coffee!”
That’s when I knew this guy was about to have the worst vacation of his life.
I feel this way about rental rates in Charlotte. I was recently going through our list of tenants with expiring leases and was struck on how much rental rates had gone up, especially those who were coming off of 2-year leases. Rents have been climbing up for almost a decade, but have become more pronounced in the past two years.
As a landlord, this is great. Higher rents equal more profits. The question becomes how much more rent to ask for when existing leases are near their expiration and it’s time to offer the tenant the lease renewal terms. Is the strategy to ask for market rate (probably 10-20% higher) or keep the increase on the lower end (5-10%)?
Generally-speaking (if it is a good tenant), I’m a proponent of keeping the increase offer on the lower end and trying to keep the tenant in the property. Avoiding all the vacancy costs and keeping the cash coming in is usually the most profitable path, as well as the easiest. I don’t like good tenants looking elsewhere as new ones are not guaranteed to work out as well. However, if the tenant still decides to leave, then all bets are off and the house can be re-marketed at the higher market rate.
If I was a tenant in this scenario (once again, generally-speaking) with an offer of a lower than market rental rate on a lease renewal, I’d also look to stay and try to lock into a 2-year lease. Looking at the competition for rental homes now as well as the higher prices, it should be close to a no-brainer. It’s a win-win for both the tenant and landlord to keep near the status quo.
So while the New York City nightlife and dining choices are enticing, it’s probably best to enjoy the vacation and relish the $2.00 breakfast combo. Good deals in this market are hard to find, so it’s probably best to lock them in without complaint!
Happy Landlording!
Learn MoreLandlords & Lease Renewals: Don’t be Like Spectrum!
First of all, this is not a blog of a Spectrum (formerly Time Warner Cable) hater. I actually don’t have strong feelings either way about them. I was a user of their internet and basic cable and was relatively happy. The service worked decently and the price was reasonable. I put my bill on auto-pay and lived my life.
Then about 6 months ago, I saw a change in my $20.00 basic cable bill (aka the cheapest plan where I get about 10 channels). They started billing me $4.00/digital adapter (I have 2) for some cable boxes they made mandatory for me to use a year or two ago. While $8.00 isn’t life-changing, I brushed up on my middle school math and computed it was a 40% increase. That’s substantial in percentage terms.
Still, changing services is a pain. I could eat a 40% increase ($8 is still $8, no matter how alarmingly you dress it up). I was not pushing the panic button (thank you, hot Charlotte real estate market).
But when that happened, I actually started looking at my Spectrum bill each month. A few months later in the “Spectrum News” section on the front page of it (I didn’t previously know there was a “news” section I could be enjoying each month!), I see the following verbatim:
Your current promotion is ending, but your savings will continue. As a valued customer, we have automatically extended your preferred rate.
(good so far…)
Important Billing Update:
Effective for your next billing statement, pricing will be adjusted for:
- Starter TV Service from $20.00 to $23.89
- Broadcast TV Surcharge from $7.50 to $8.85. This reflects costs incurred from local Broadcast TV stations.
- Digital Adapters from $4.00 to $4.99
Not good.
We’re up roughly another $4.00 on 10-channel TV, not to mention another $5.00 for internet service (not previously affected). I don’t even need to do the percentage math anymore. We’re above a 50% increase in less than 6 months on my lame cable TV plan.
Now, on general principle, I’m trying to leave Spectrum cable TV service due to a large increase which appears to be largely meritless. So I fish out some $10-$20 antennas I bought from Amazon a year or two ago and see if I can make them work. Viola! They work like a charm after I put in a little more effort in this go-round.
I call Spectrum and cancel my starter cable TV service. I won’t lie; it feels good. Injustice was made right! Then they tell me that my internet service is not only going up $5.00 next month, but because it’s not bundled with TV anymore, it is going up another $20.00. Touché Spectrum! I have to have internet service, so they may have won this battle. But I am not a Spectrum cable TV customer any longer.
Unfortunately, now my resolve to rid myself of Spectrum in its entirety has built. I wrack my brain for a solution. Wait! Who was digging up my front lawn 6 months ago to my son’s delight? Google Fiber! They’re boasting $50/month internet service! So my dream of a “Spectrumless” home may become a reality next week.
But… my true thoughts on my mini-“SpectrumGate” are how sad and unnecessary it was. I was fine being a Spectrum customer. I paid my bill every month, they collected the money, and everyone was happy. It just seemed to me that they got greedy were trying to stick it to me.
To be fair, I don’t know Spectrum’s economics. They may be losing money on customers like me and it’s better for them to lose me than to keep me at a lower monthly fee. Fair enough. That’s business.
The purpose of this story is I see landlords use similar tactics on tenants during lease renewals. The tenants pay their rent on time every month and take care of minor repairs on the rental home. But when their lease is up, the landlords try to stick the tenants with a 10%+ increase and additional fees. The tenants feel betrayed and don’t renew their leases on principle. Both parties lose.
We’re in a rising real estate market, I get it. But the grass isn’t always greener on the other side. New tenants don’t always pay the rent on time and take care of the home. Plus the fix-up and other vacancy costs could more than devour any surplus a higher rental rate from a new tenant might offer.
If you have good tenants and are making money, keep any rent increases between lease renewals within reason. There is no reason to endanger the money flow. Most tenants understand that landlord costs go up a little bit every year too.
However, if you are losing money and need to stop the bleeding, I get that too. A rising market could finally bring a new tenant to get bring positive monthly cash flow back into play. Business is business.
Happy Landlording!
Learn MoreCharlotte Section 8 Leases: Should I Renew Them?
“Enjoy Free Rent!”
(Former advertisement to entice landlords to put their houses in the Charlotte Section 8 program)
Q: My Section 8 tenant’s lease is set to expire next month. Should I offer to renew it?
A: Maybe…
As a Charlotte-based property manager and real estate investor, I’m a huge proponent of renewing leases. I think it makes unbelievable financial sense; there is no missed rent from vacancies, no fix-up and holding costs, no management costs for landing new tenants, and it provides the ability to raise rents to stay around market rate. And it also saves everyone a lot of work. Whew!!
It really takes a lot of chronic tenant wrongs for me not to recommend renewing a lease. Besides situations where an owner wants to move into their property or sell it, I can count on one hand the number the tenants I’ve not recommended renewing. If a tenant wants to renew at market price, I’m asking where I should send the new lease. It’s typically a done deal.
So when I was asked the other day whether I’d recommend offering to renew a client’s Section 8 lease, my fingers naturally wandered to the “Y”, “E”, and “S” keys on my laptop. Then they stopped and I felt my stomach cramp up. Can I really recommend this for this property? The issues:
- The rent is not close to market rate even after filling out the moderately arduous Section 8 paperwork for an increase every year. The Section 8 paperwork says we can ask for a maximum 5% increase a year; we’ve only been getting approved at 2% increases ($800.00 rent turns into $816.00- woo-hoo!). And this is after increases were frozen a year or two ago, while private market rents (aka non-Section 8) have been going up by 10-20% for the past few years.
- Annual Section 8 inspections are a hassle and seem to always result in a “fail” for trivial issues. A true example of a recent “fail”: “paint is peeling on the ceiling.” In a non-Section 8 world, if peeling paint on a ceiling was bothering a tenant, they would be told they were free to grab the extra paint can in their garage and touch it up. In a Section 8 world, that is a “landlord responsibility” and a handyman must be sent out or rent payments will go into “abatement”. Abatement is a very bad place to be as no rent comes in and past payments are clawed back (which would never happen in the private sector).
Unfortunately, landlords and property managers have figured out that:
Less Money + More Expenses + Government Regulations/Paperwork = Bad Deal
It’s not just Charlotte. In Austin, Texas, there was a law made (that was later repealed) that required landlords to accept Section 8 tenants. A study the city commissioned said that 90% of Austin landlords would not accept Section 8. Due to the fact that most landlords are investing in real estate to maximize their financial return, this is not surprising.
So as property managers whose job it is to maximize our clients’ ROI, we stopped recommending Section 8 as a source of new tenants several years ago. As discussed, the financial numbers didn’t add up. However, we did allow Section 8 tenants who wanted to stay to continue to renew their leases if they chose to.
But should we continue to recommend allowing renewals? It really comes down to whether the owner wants to expend the funds to fix-up the property and take the hit of vacancy until a new, non-Section 8 tenant comes on board. Some, including me, have continued to renew the Section 8 leases until the tenant decided to not renew and vacate; and then, once vacant, go exclusively to the private market going forward. But if the rent differential continues to grow between Section 8 and market rate rent, the auto-renewal policy will need to be revisited if the Section 8 tenants still want to extend their leases.
It’s tough to disrupt rental continuity and I don’t usually recommend it, but it may ultimately pay to take a closer look at the numbers before rubber-stamping your Section 8 lease renewal!
Brett Furniss is the head property manager of BDF Realty (Charlotte Residential Property Management), the trusted real estate advisor for Charlotte landlords & Home of $100 Flat Fee Property Management. BDF Realty utilizes their innovative Pod System for exceptional customer service in residential property management, home repairs, and home sales for single-family homes, Uptown condos, and town homes in the Charlotte-Metro Area. Contact Us Today!
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