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Is Now a Good Time to Raise Rents?

by Dave Van Horn on December 11, 2013 · 25 comments

  
Raise Rents

Whether or not it’s a good time to raise rents may depend on who you’re asking.

From the tenant’s perspective, I’m sure it’s never a good time. But in my neck of the woods, things are starting to change.

For example, three or four years ago, a tenant in my area could negotiate almost anything they wanted. The market was so slow and depressed that negotiating a rent-to-own was even easier. In fact, if you were a tenant with Section 8, it was like having a gold card because vacancies were up and rents were down.

Slowly but surely, the economy, as well as the real estate market, are starting to pick up. In the most recent years, since financing was difficult, not much construction was being done. As a result, there are now a limited number of units available for the influx of potential tenants. This could, in part, be due to the mortgage meltdown, as well as population growth over the past few years.

Now more than ever, it may be the time to think about raising rents.

Things to Consider:

If you’re a landlord, when’s the best time for you to raise rents? For me, from a time of year perspective, it’s right about now. January or February are the best months because in Philadelphia it’s cold, kids are in school, the holidays just ended, and many folks are tight on cash. So it may be difficult for them to come up with the money to move. Granted, this still depends on when someone’s lease is up.

In nicer areas, it’s easier to demand one-year leases with one-year renewals, but that’s much tougher in lower income areas unless your section 8. It may be easier for a section 8 tenant, who’s already used to one-year contract reviews by HUD (Housing and Urban Development), to accept a one-year renewal. In that case, I strongly suggest it. But in most of my low income places, it’s usually a one-year lease and then it goes month-to-month. A one-year renewal doesn’t seem worth it in this case, since it’s rare that the tenant will have any assets to extract from if he/she breaks the lease.

Market conditions are definitely a consideration, but these seem to be improving and to be quite honest, I don’t have any vacancies. Having a lot of units with no empties could be a result of rents being too low. According to the National Association of Realtors, rents throughout the country have continued to rise after increasing 2.4% from January of 2011 to January of 2012. And, the apartment vacancy rate reached its lowest point in over 10 years. Keep in mind that real estate is local, so this is just an average, but it’s still a good sign. It’s a good practice to look at the local market and assess how your rentals compare to other units in your area, as well as how much value you provide. Maybe you can only raise rents on some units but not others, or maybe it’s time for an increase across the board.

Another consideration is how long it’s been since you last raised rents. For me, I have some units where it’s been over three years. Also, how well-maintained are your units, and have you any capital improvement projects recently completed or in the works? Do you handle routine maintenance in a quick and effective manner? What it really comes down to is how satisfied are your current tenants? Would they consider packing up and moving over a modest rental increase? As a former property manager at RE/MAX, in most situations, I don’t believe they will and past experience has proven it.

Final Considerations

From a managerial perspective, it’s good to review your rents on a periodic, in most cases yearly, review. After all, rental income and net cash flow can actually determine how valuable property really is. What you really have to weigh is being fully rented versus the cost of a turnover—the U.S. average is $4047 per Multifamily (Multifamily Insiders – Apartment Turnover Cost Calculator)—versus the opportunity cost of not raising rents. Personally, I’ve come to the decision to raise most of my rents. I believe if you provide value through quick response, routine maintenance, and keeping an overall nice place, it’s justified to occasionally raise rents.

Sample Verbiage in Increase Letter:

Due to an increase in our operating expenses, (Rental Licensing, Maintenance, Debt Service, Taxes, Insurance, Sewer Rent and Rubbish) we will be obliged to increase your monthly rent from $____/month to $____/month. This change is the first increase in _____ years and will go into effect on MM/DD/YYYY.

If these terms and conditions are not acceptable to you, then this letter shall serve as our notice not to renew your current lease. You would then be required to vacate the above premises by MM/DD/YYYY.

Thank you for your cooperation in this matter.

Conclusion

I’ve seen some folks build in rental increases into the lease, or provide incentives for tenants to pay a lower rent number if they pay on time. Personally, I raise rents on a case-by-case basis, after a yearly review. That being said, I’m still a fan of other things, like having a rent repair minimum to cut down on frivolous maintenance calls (although I wouldn’t make them too high), and it can also be smart to utilize home warranties or to do an occasional property inspection just to see what’s going on at the premises.

I’d love to hear about other landlords’ preferences. So, when’s the best time for you to adjust rents? Are there other times during the year that you raise or lower rents?
Photo Credit: michaelgoodin

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{ 25 comments… read them below or add one }

Kimberly H. December 11, 2013 at 10:41 am

Thanks for posting that turnover cost calculator!
We look at what market rents are yearly and adjust accordingly. So far the people who move have other circumstances; buying a home, moving out of state, etc.

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Dave Van Horn December 11, 2013 at 11:20 am

Hi Kimberly, I agree–tenants usually move because of other circumstances other than a rent increase (especially if it’s reasonable and based on the market). It seems you have a good process in place for making adjustments.
Thanks for reading!
Dave

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Alex Craig December 11, 2013 at 12:18 pm

“What a-hole, raise our rent right after Christmas” is what your tenant will be saying. Before I did that, I would make sure that my place was nicer then any other vacancies in the area.

I am the opposite. Maybe it is luck, but since I started buying property (I own 12 as of today), I have never raised a rent and only had a few months of vacancy since 2007. We looked at our months of ownership vs months of vacancy last year and it was something like 428 months of occupancy vs 436 months of ownership over the life of all units owned. Like I said, it is probably luck, but I would rather eat a little rent then suffer a long vacancy.

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Dave Van Horn December 11, 2013 at 2:56 pm

Hi Alex,
It sounds like there’s a long vacancy time in your area. Eating a little rent rather than suffering a long vacancy does make sense in some cases. That’s what I did the last 3-5 years with some of my units.

In the event that rent is being adjusted, I send a notice 30 days in advance of the change in lease terms. And, these adjustments are in consideration of the rent market and the value provided to my units compared to others in my area, as well as the satisfaction level of my tenants. Since I had owned 40 units and managed over a hundred for other folks, I had to have a process in place for turnovers or move outs. I hope your good luck continues, but what I’ve found is that there are some situations that are just beyond our control whether we raise rent or not (for example: divorce, illness, job loss, death, etc.).

Although I do respect your passion and perspective, I just have a few questions about your strategy. In the event that you choose to sell a property or refinance it and have to get an appraised value, are you confident in the rent roll your lender will evaluate? And I’m curious—how do you keep up with inflation?

Best,
Dave

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Garry Goks December 11, 2013 at 12:50 pm

It’s much easier to raise your rent without pushing tenants out if you maintain a good relationship with them. If you always perform any required maintenance and respond to any queries or issues, the tenant is more likely to accept the increase.

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Dave Van Horn December 12, 2013 at 10:06 am

I agree Gary, thanks for sharing!

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Kathy D December 11, 2013 at 2:08 pm

If I have a good tenant I won’t raise the rent.
It’s cheaper to keep my good current tenant instead of the cost to get another one.

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Alex Craig December 11, 2013 at 3:53 pm

Hey Dave, 8 of my 12 are locked into long term financing, so refinancing is not a going to be a issue. The local bank I go through is more concerned about cash flow and overall financials. When the call period comes on those, I am not worried about it, most of them will be paid down anyways. My strategy is to pay down and pay off. I do not pay myself on my rents as I have other income streams. I manage close to 300 properties for other investors and I have seen people move out for a rent raise of $25. I think that is crazy, but I am telling you, I have seen it. I guess if rental income was my only source of income, then I would be concerned more about the loss of income due to inflation. I keep my rental business simple and throw out all the silly 50% rules, 2% rules, 75% rules, etc. I don’t focus on whether or not I am getting 12.2% ROI or 11.4% ROI. Properties with tenants cash flow, properties without tenants do not. A vacant home with a mortgage is a a huge expense and can be stressful. I do not follow gurus b/c a guy in my Real Estate group gave the best advice….”keep it simple.”

BTW, I was not calling you an a-hole, Just thinking a tenant may think that. Sounds like you are running a tight ship.

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Kimberly H. December 11, 2013 at 3:59 pm

This is a bit off topic, but for those of you who manage over 50 rentals…how do you do that logistically? How do you keep track of when a check comes in for a rent for a certain unit that it is the right amount? How do you keep track of when its 60 days from the end of all of your different leases? Do you just have a huge matrix in Quicken? We are increasing our rentals from 5 to 10 and I know keeping track of that stuff is going to be more challenging.

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Tom Sylvester December 12, 2013 at 4:01 am

Kimberly – There are some software suites out there that can help with this (ex. Appfolio, Buildium, etc). The cost range and quality of these can vary, but some people swear by them.

Another option is to create systems (like was mentioned earlier) to help manage that. As an example, we use a lot different tools (see a recent post on this – http://www.biggerpockets.com/renewsblog/2013/11/18/systematize-business-free-google/). We also setup memorized transactions in Quickbooks to help. We also use GQueues to manage our tasks and some of the workflow (i’ll have a blog coming out in the next week or two with more detail on that). The quick example is to setup a recurring task for each property on the first of the month. As we receive rent (either automatic ACH into our bank account or checks in our PO Box), we check off the task for the rent that we received and have a list of people to contact that will get notices.

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Kimberly H. December 13, 2013 at 9:07 am

Thank you so much, Tom!

Dave Van Horn December 12, 2013 at 10:23 am

Hi Kimberly H.
You don’t necessarily need to have a sophisticated system—you just need to have a system. I used to use a ledger, then excel sheets, and then software. Now, my property manager handles it. But, there are sophisticated management systems—Tom had some good suggestions on these. Another software system, which is pretty useful/affordable is Act Pro.
Best,
Dave

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Kimberly H. December 13, 2013 at 9:09 am

Thanks!

Sara Cunningham December 12, 2013 at 2:22 am

I must admit that we haven’t raised the rent on any of our rentals. I tend to agree with some other peoples comments that it is better to keep tenants and have full occupancy, than to risk losing them over $25. People really can be that sensitive. The exception we make is that when a tenant does move out then we raise the rent if the current local market warrants it.

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Dave Van Horn December 12, 2013 at 10:29 am

Hi Sarah,
Thanks for your response. I’ve found that people move for many other reasons other than a rent increase. But, I agree. Especially if my tenant moves out and the current local market warrants it, it may be time to consider adjusting rents.
Best,
Dave

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Tom Sylvester December 12, 2013 at 4:05 am

We don’t use a hard and fast rule for this, but here are some of our guidelines.

Is it the end of the lease? – We generally have year long leases, so we only look to raise rents at the end of the lease. This various depending on when he lease was signed.

Is the rent at the market rate? – We generally are a little above market rate as our units are nicer, but we don’t want to be too far above market rate. With each new lease, we take a look at this. We look at our operating costs as well to determine how much we need to raise the. We try to target and “inconvenience increase”, which is something tenants my complain about, but not enough to prompt them to move.

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Tom Sylvester December 12, 2013 at 4:06 am

Another key factor is to know the vacancy rate and the cost to turnover a property. The compare that to he additional rent coming in with an increase and determine which one make more sense financially (and stress/management wise if you are doing the work). Some people prefer to make a little less if they don’t have to turn a place over.

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Dave Van Horn December 12, 2013 at 11:28 am

Hi Tom,
Thanks for your participation on this thread.
The guidelines you mentioned are on point. And, the inconvenience increase strategy makes sense, especially at this time of year. I agree that vacancy rate and cost of turnover are a major factor—in my local market, the vacancy rates have dramatically changed. There’s definitely a difference, though, between the turnover time & cost of for a house compared to an apartment. The turnover rate is lower for houses, but when they do occur, they cost more and usually take longer to refill. Time of year could play into that as well.

Best,
Dave

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Sharon Tzib December 12, 2013 at 7:21 am

Coincidentally, this article just came out about skyrocketing rents:

http://www.cnbc.com/id/101258649#!

In my 14+ years of being a landlord, I have found that tenants stay in my rentals, on average, about 2-3 years. If they are great tenants, I will not raise the rent on them, as I value having a check come in monthly more than going through a re-lease, and I priced the rental correctly when they moved in anyway. Lease ups cost me a lot of money, since I have a property manager handle that for me. I have to pay the PM their fee, paint and shampoo or replace the carpet, make other small repairs, and then have the house sit vacant typically for at least 30 days before a new tenant moves in. It’s just not worth it to me.

Instead, I let attrition happen naturally and when a tenant inevitably moves out for whatever reason (buying a house, divorce, etc), then I raise the rent for the next tenant. Now, if I ever got lucky and had a tenant stay 5 years or something (never happened, keep hoping one day it will lol), yes, I would definitely consider a rental raise if the market and my expenses warranted it.

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Dave Van Horn December 12, 2013 at 10:49 am

Sharon Tzib,
It sounds like you don’t need a rental increase program if they’re moving every 2-3 years, you’ve already got one built in! LOL. But maybe, to increase retention you could consider offering incentive to tenants by offering them something. Maybe the BiggerPockets audience has some ideas to share on retention. I’ve done incentives like installing a new security system, putting a family room in the basement, paint and carpet, etc. We’ve even given free cable on some of our larger commercial projects.
I hope you reach your 5 year retention goal!
Best,
Dave

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Sharon Tzib December 12, 2013 at 11:19 am

Thanks, Dave! My tenant’s are moving for normal life changes, like buying a house, divorce or losing a job. I’ve never had a situation where offering an incentive would have prevented them from leaving.

I imagine if you are paying for a tenant’s cable or adding on rooms, you definitely would need to raise the rent often to offset the expense of that. I think I’m ok with how I’ve been doing it, but I’m always open to new ideas.

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Dave Tanner December 13, 2013 at 6:13 am

Why I keep rents slightly below market and usually don’t increase until empty…. When starting in real estate I see many ppl saying to budget 10% for vacancy. For me that is nuts! I have 15 units and on average 2 will turnover a year. We are blessed with long term renters in our area. I lose an average of 1 month rent when it turns over (mine don’t stay empty long). 15 units x 12 months= 180 unit months available. I lose 2 unit months, which means my vacancy rates hover around 1%! This makes life easy for me. I know I leave some money on the table on monthly rent, but do I really when you consider all things. For me, having a unit nicer than market, priced slightly below market= a winning combination that results in tenant retention that most would drool for, and tons of GOOD ppl wanting to rent from me for the same reasons (they don’t stay empty long). I am also one of the most responsive to requests in our area. I shy away from increases for these reasons.

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Dave Van Horn December 16, 2013 at 8:01 am

Hi Dave—
It’s great that your current vacancy rate and track record has been spectacular. I’ve had great stretches like that as well, but I’ve also had not so great stretches within the last 25 years. Keep up the good work, but I do still think it’s a good idea to keep some reserves for vacancy, even if it’s just for access to capital. I see your strategy working in a highly competitive leasing environment, to have a comparable unit for less. But, sometimes I think people are afraid of a turnover because they don’t have enough reserves set aside, they don’t have a quick turnover process in place, or they don’t have a waiting list of renters. I’m sure this is not the case, but best of luck!
Thanks for reading!
Dave

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Kimberly H. December 13, 2013 at 9:17 am

Any advice on setting rent on a property coming online in the dead of winter (February)? In our area, year long leases are standard, no month to month. Wondering if when my next rehabbed rental hits the market in February if we should set the rate below market rate and/or offer just a 6 mo lease, or both a 6 month and 1.6 month lease so we can get back on a normal rental cycle…any advice on that? Generally we only over 1 yr only, don’t want extra turnover of shorter leases, don’t want the chance of being stuck with a bad tenant for longer than a year…

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Dave Van Horn December 16, 2013 at 8:06 am

Hi Kimberly H,
Sometimes I will lower rent, but only offer a 6 month lease, as this can draw people in, especially in the dead of winter. There definitely are fewer people looking in February. But, if you do 6 months, you’d be ending your lease at prime moving season. So, I would leave it a year.
One option is to start at market rent or right under market rent. Another strategy is to require a lower security deposit (if they’re qualified with pristine credit), or give them some other incentives to move in (like one month free, or a big screen TV, etc.). This might be cheaper than another empty month.
Best,
Dave

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