What to do at renewal when a reliable tenant sits 190 under market

Question

Here is the renewal math, using a case that comes up constantly. A three bedroom leases in that pocket at about 2,040 today. The sitting tenant is at 1,850, twenty-six months in, pays on the first every single month, and calls before small things become large ones. She replaced two toilet flappers herself and mentioned it afterward. Going to market is 190 a month, 2,280 a year. If she leaves, a realistic turn runs somewhere between 2,200 and 3,400 depending on paint and carpet, plus three to five weeks vacant, plus a leasing fee if anyone else does the showing. That is most of the first year's increase gone, and the replacement is an unknown. The counterargument from operators with more doors is that below-market rent compounds. Two more years flat and the gap is 300, and the increase eventually needed is one nobody accepts, so the turn happens anyway after paying for the delay. Resale matters here too, since a buyer underwrites the lease in place rather than the rent that could have been charged. The split-the-difference version is 1,950 with a note showing where market sits. That keeps the tenant in place and the owner closer to the curve, at a cost of about 90 a month against full market. Rent growth running near 1.3 percent nationally makes a 10 percent catch-up feel aggressive to a tenant reading the same headlines. What do people here actually do at renewal?

nicole_adeyemi · Answer

Holding rents flat on good tenants for years costs less in cash flow than it does at the appraisal and the eventual sale. An underwriter looks at the lease, and a 190 gap capitalizes into real money at any reasonable cap rate. That does not settle what to do this year, but it shows the gap is not free.

raj_mehta14 · Answer

Worth asking directly. If the rent goes to 1,950 now and market keeps moving, does that just set up the same conversation next year with a worse gap? Or is the point that a small increase every year trains a tenant that increases happen, which keeps the eventual jump smaller?

stephen_ok9 · Answer

Vellum, that second thing is most of it. The households that blow up at renewal are the ones who went three years at the same number and then got asked for 300. An annual move, even a small one, is a different conversation than a correction.

Cobalt, the number I'd want before deciding is your actual re-lease time in that pocket right now, not the one from two years ago. Five weeks vacant and 2,900 of turn against 2,280 of annual gain means going to market is a losing trade in year one and a winning one by year three. Whether you're willing to fund years one and two is the whole question.

monica_tran3 · Answer

A tenant who never complains is worth paying for. Running any service business tends to teach that lesson eventually. A move to around 1,950 with a plain explanation of what market actually is tends to land well. People accept increases they understand.

aaron_fitz10 · Answer

Doesn't stating that market is 2,040 invite a tenant to go shop at 2,040 and find something newer? Worth weighing against the alternative of staying quiet and risking a below market renewal that never gets corrected.

carlos_nunez · Answer

Kestrel, she can already see market on her phone in four minutes. Assuming tenants don't know what things rent for stopped being true a long time ago. What she doesn't know is that moving costs her a deposit, a truck, and two days off work, and that's the real reason a below-market renewal holds. Cobalt, both patterns show up often. Full market on a two year tenant tends to cost a turn more often than not. Full market on a four year tenant who is clearly settled tends to go through with a shrug. Length of stay isn't the signal, roots are. Kids in the school, a spouse working nearby, a garden in the yard.

wendy_park48 · Answer

Check the lease language before deciding anything, because some leases specify notice periods for rent changes and month-to-month conversion terms that fire automatically if a date gets missed, and the required notice period for a rent increase is set by state law and in some places by city ordinance. Renewal clauses have a way of doing something an owner didn't expect. Whatever gets sent, send it in writing and keep the copy.

sonia_alvarez · Answer

If a refinance is ever on the table for this house, the lease in place is what the DSCR gets calculated on with most lenders who underwrite that way, so a $190 gap can affect proceeds, and the current approach is worth confirming in writing with whoever is lending. That is generally a good reason to close gaps earlier than instinct wants to.

What to do at renewal when a reliable tenant sits 190 under market

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