Offering Tenants Incentives Upon Lease Renewal

Differing Opinions

Offering our tenants some incentive upon lease renewal has become a more explored policy in the last few years.  However, landlords sit on both sides of the fence on this policy.  Some landlords who see themselves to be fair, responsible, and kind to their tenants believe that offering an incentive to tenants as a bonus upon renewing the lease is a waste of time and money. Instead, they feel the tenant should appreciate their relationship and be grateful they are not dealing with a nightmare landlord.  They even will go so far as to believe that if the tenant were to move out, it would be an opportunity for them to raise the rent higher.  That certainly can be true in rent-controlled areas, but a view of “take it or leave it” is not uncommon for many landlords.

The other school of thought on incentives in exchange for lease renewals is that landlords will do what they can to retain a good tenant instead of losing income due to a vacancy.  Their issue is the time it takes to flip a unit to get it ready for a new tenant.  Meeting for the pre-move-out inspection, after move-out inspection, dealing with accounting for security deposit returns or losses the security deposit must cover are seen as a pain.  These items do not even consider ALL the other typical maintenance issues: replacing/cleaning carpet, painting the unit, repairing broken blinds, replacing run-down appliances, marketing the property, and then going through all the rigamarole of the application process to place the new tenant.

The adage that time is money runs very true for our family.  We have hectic lives and honestly will do what we can to avoid a vacancy.

Our Reasoning and How We Offer Incentives

It is important to note that our units are in California and fall under the law of AB1482. In 2019 it was enacted as a low-level policy of state-wide rent control.  Because of this, we keep our rental rates just a smidge below market value.  This concept allows us an opportunity when renewals arise to raise the rent using the max percentage for our area.

We do this so that when a renewing tenant shops rental rates, they will see they will have to change their lifestyle to keep the value of the unit we offer with the rental rate they are willing to pay.   They will either be forced to take on a roommate, downgrade the quality of their unit or unit’s immediate location, or move out of the area entirely.  Keeping rental rates slightly below market also works to our benefit should rental rates decline, as seen recently in many major cities.

We created correspondence that allows them two rental options: renew a year’s lease or go on a month-to-month rental agreement.  Additionally, in this email, we advise them of the going rental rates for a similar unit in our area, the average cost of moving, and a list of incentives they can choose from should they renew the lease for a year.  So, unless they have life-changing plans like buying a home, change of a job causing them to move out of the area, or moving in with a significant other and require more space, we are happy to say our renewal rate runs around 75%.

Incentive Ideas

So, this might be where we differ in our point of view.  We have seen many landlords who offer cash incentives to renew the lease.  They will give hefty discounts on one month’s rent, sometimes even an entire month.  Tangible one time offers would be gift cards for stores/restaurants or a big screen TV.  Other offers allow the tenant to get a monthly cash bonus of some kind like paying for a parking space, utilities, or a gym membership.  In general, but especially in rent-controlled areas, you must be careful about offering cash incentives that involve reducing rent.  Check out this article that describes the risk of making that reduction permanent if not provided to all tenants or appropriately written.  http://wassermanstern.com/be-careful-when-offering-lease-incentives-in-a-post-covid-19-down-market/   Even though surveys have found cash incentives are what renewing tenants prefer, we have not gotten to the point of offering them yet.

When providing tenants an incentive upon lease renewal, we will only offer incentives that will improve their unit or the complex community/home somehow.  Here are some items we have offered tenants in the past:

• Replace recessed can lighting with energy-efficient LED lighting
• Change out the ineffective “boobie” flush mount ceiling lights in bedrooms with ceiling fans
• Install new appliances like a refrigerator or washer/dryer unit
• Replace worn carpet
• Paint the interior of the unit
• Re-landscape the front yard or pathways
• New patio furniture or BBQ
• Install new, more durable luxury vinyl flooring in the unit
• Remodel the bathroom
• Change outdated kitchen backsplash
• Cleaning service for a one time deep clean of the unit

These would be improvements we would be making should the tenant choose to move out anyway.  Why not offer the improvement as an incentive to keep the tenant, and it’s a win-win for everyone?

When To Offer Incentives

Who and when you offer incentives is where a landlord must be careful.   It is important to note that incentives should only be offered to tenants who you want to retain.  Maybe those would be tenants who continually pay on time, refrain from calling for every minor maintenance issue (replacing smoke detector batteries or burnt out lightbulbs), and respect and care for your unit.

It is also essential to have a detailed written policy on who qualifies for these incentives.  Getting yourself caught in a discrimination suit will not help your bottom line.  We have it clearly written the tenant must have paid rent over 90% of the time and did not have any unreported maintenance issues found during an inspection that resulted in extreme remediation on our part.  Examples of this would be a leaking washing machine that caused mold behind the appliance, leaking water lines to a faucet that rotted the cabinet base, or a broken window caused by the tenant.

It is imperative you are saving cash reserves for your rental property.  These cash reserves set aside each month are what provides the funds to pay for incentives at renewal or improvements after move-outs.  To learn more about cash reserves, check out our blog: Cash Reserves for Rental Properties, How Much is Enough?

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FREE Tenant Renewal Email Template

Want the EXACT verbiage we use when sending a lease renewal offer?

We include tips on possible incentives to offer, lease rental amounts, as well as month to month renewal rates and what to say to make them think twice about moving out!

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Cover your ass-ets

As with any policy implemented by a rental property owner, the key factor to remember is that you are running a business.  Written policy is key to avoiding potential lawsuits for discrimination.  Landlords can add policies to addendums which the tenant will need to sign, agreeing they understand the terms.  They can also create a written policy and procedure guide and make that available to the tenants.  Notice of this availability should be in the lease.  The tenant will sign that they know it exists and need to ask for a copy should they want to read it.  Larger companies can create a link to the policy on their website for the tenant to access at their convenience.

Where offering bonuses to draw new tenants in has been around awhile, the concept of offering tenants incentives upon lease renewal is relatively new to many landlords.  Our best advice is to think it thoroughly through before implementing.

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Here are some other articles we have written for landlords that you may find helpful as well:

Make It a Family Affair: How Landlords Can Employ Children for Tax Breaks

The Who, What, When, and Why of Residential Vacancy Insurance

Cash Reserves For Rental Properties, How Much Is Enough?

Tips For Taking Great Rental Property Photos

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References:

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