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:
- 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.
- 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.
- 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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