Is Now a Good Time to Raise Rents?
Whether or not it’s a good time to raise rents may depend on who you’re asking.
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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.
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.
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?