I always used to be curious when I heard about lease renewal programs. What’s the point?
It seems like every tenant I would talk to about renewing their lease would either move out or just say they would prefer not to renew. Asking for a renewal increased turnover and vacancy.
My philosophy was, “Maybe if I don’t talk to the tenant, they will forget who I am and that they are renting. They will live here forever!” I quickly learned a very hard lesson.
Tenant turnover will destroy your bottom line.
So why are owners of large properties and property managers so emphatic about lease renewal programs?
I dove deeper, and the answer — what I needed to do — quickly became crystal clear. If I made renewals part of our culture from lease signing all the way to the rental end date, residents would come to accept and even appreciate the renewal process.
Was I right?
This one change in management process reduced the number of expired leases to almost zero. Our company now maintains an average occupancy rate of 98 percent. Reducing the number of expired leases reduced turnover and vacancy rates by 1-2 percent. Top-line improvement positioned the property to meet more aggressive financial goals.
The purpose of this article is to show the benefits of a lease renewal program and to show how to evaluate an existing lease renewal program.
A closer look at the benefits of a lease renewal program:
When you systematically approach residents as their lease is about to expire, they typically sign the renewal. They don’t want to move. Of course, this is assuming the management system has provided great service, so they have no reason to move. Research shows quality resident services equals higher renewal rates.
Increased occupancy rate
Vacancy expenses decrease.
Every market has a “hot season” and a “not-so-hot-season” to rent properties. When it’s “hot season” rentals are filled before they’re vacant, but during the off-season, vacancy days usually increase. A renewal program allows management to target the lease end date to coordinate with the “hot season.” By doing this, you create a system where tenants are moving out right when others are looking to rent. Reduced vacancies, increased revenue and a portfolio of happy owners. Note: A month-to-month lease takes away the ability to target a lease end date.
Planning for turnover
Now that you have a controlled lease end date, management can plan for increased turnover rate during those times. For example, if most leases are ending between April and July, management can increase staffing. During the seasons with less lease end dates, staffing can be reduced. Efficient staffing reduces turnover during high-traffic periods and reduces payroll expense during low-traffic seasons. The lease renewal program controls traffic more predictably.
Now, whether you are ready to rush out and begin your renewal program, or if the benefits are old news for you, you will want to know how to make your lease renewal program excellent.
The next step: Figure out how to use the best renewal program available and continually improve it.
These simple KPIs can give management the feedback needed to assess and improve a renewal program.
Divide expired leases by total leases. Lower is better. If there are 100 units and 30 are expired, the expiration rate is 30 percent. The target for lease expiration should be zero.
What percentage of people are renewing their lease? Higher is better. If you sign 100 leases and 50 of the residents renew, the renewal rate is 50 percent. A good target is 75 percent, but each property should be considered individually. Property type, student housing, location and market conditions will impact renewal rate dramatically.
Measure the difference between what the rental property would rent for today (market rate) versus the current rent. A lower percentage means a better-performing property, though markets that have substantial rent fluctuations will see an increase in this ratio.
You don’t need to be a professional to plan and execute a profitable lease renewal program. Everyone can use the same research and KPIs to improve their portfolio, even if it is a single-unit portfolio.
Big dog property: 100 units with average rent of $800 (annual potential rent $960,000).
Through reviewing KPIs and adjustments to their renewal program, big dog property increases occupancy by 2 percent. This improves revenue by $19,200 (0.02 x $960,000).
Small fry property: Four units with an average rent of $800 (annual potential rent $38,400).
Small fry property begins a lease renewal program. Although existing residents resisted the change, the overall vacancy decreased 2 percent. This improved revenue by $768 (0.02 x $38,400).
It can be intimidating to see the $19,200 from the big dog. But the takeaway is that even though the small fry saw an increase of only $64 per month, the practical improvement in performance leads to the same increase in return on investment. Developing these habits on the fourplex or single-family home will substantially impact long-term performance and returns.
A successful renewal program is just as important for a single-family portfolio as it is for a multiplex.
A quality renewal program not only provides benefit in the form of a healthier profit/loss statement, it also improves the feeling of community and long-term retention, which leads to a longer-performing asset.
Use the KPIs to determine what small changes you can make to your renewal program to increase efficiency and performance. This will lead to a long-term increase in returns and will be much more likely to meet more aggressive financial goals.