It seems to be a good time to be a landlord. More and more people are choosing to rent rather than become homeowners. It has gone so far that I am even seeing the term “generation rent” now applied to the millennial generation.
More people choosing to rent means increased demand for rental units. This increased demand often translates into increasing rents. Rents have been going up in my part of the world and seem to be in many other parts of the country as evidenced by numerous media reports such as this one.
As landlords in the business of providing housing and making money, this sounds like the perfect storm of more applicants and increased revenue. But should we be so quick to raise rents? Should we raise the rent to the maximum amount possible? Maybe. Maybe not.
Download Your FREE Tenant Screening Guide!
Hey there! Screening tenants can be a tricky business, and this critical step can be the difference between profits and disaster. To help you with your real estate investing journey, feel free to download BiggerPockets’ complimentary Tenant Screening Guide and get the information you need to find great tenants.
4 Things to Consider Prior to Raising Rents
Here are some points to consider before you raise your rent.
1. Make Sure the Rent Increase is Legal.
Some jurisdictions have caps on rent increases or even worse, rent controls. Understand what your local laws are in regard to rent increases.
2. Make Sure Your Rental Contract or Lease Allows It.
You cannot just raise the rent at any time. You must wait until the terms of your current leases expire. Only then upon renewal or releasing may new rental terms, such as an increase in rent, be considered.
3. Remember that Rent Increases will Cause Turnover.
Consider how much turnover you can handle and/or afford. Be aware that turnover is a cashflow killer because of the increased expenses of making a unit rent ready. How long will it take you to recoup your turnover expenses with the increased rental rates?
4.Keeping Rents Slightly Under Market May Result in Less Turnover and Better Tenants.
Tenants often think the grass is greener on the other side of the fence. When a lease is nearing the end of its term, tenants will often go looking around at other properties. Keeping your rents just a bit under market maybe just enough to entice them to stay, thus reducing your turnover and increasing your bottom line.
Finally, let me provide a word of caution. While rents are going up now, builders and others are responding by increasing the supply of rental units to satisfy the demand. Eventually, supply may catch up with demand or even surpass it. Plus who knows, millennials may change their attitude as they age and decide to own rather than rent. What I am trying to say is that rents may not rise for ever. In fact, they might even fall a bit.
Related: Where is the Housing Market Headed?
So be careful when evaluating a property for purchase and do not become too exuberant with your rent projections. Let the housing crash in 2008 serve as a reminder of what can happen.
Be sure to leave your comments below!