I keep a rent escalation clause in my leases. It states that the rent will rise by 3 percent each year, to keep pace with inflation.<\/p>\n
When I wrote it, I had every intention of enforcing it. But I never have.<\/p>\n
Should you raise the rent annually to keep pace with inflation? Personally, I\u2019m starting to lean towards \u201cno.\u201d Here\u2019s why.<\/p>\n
I used to think that I should definitely increase the rent each year. It\u2019s only logical. Otherwise, every year the tenant is getting cheaper and cheaper rent in \u201creal\u201d dollars.<\/p>\n
Unfortunately, people aren\u2019t always logical creatures. Tenants tend to react emotionally to an increase in their rent (and the emotion is always negative!) They argue. They complain. They grumble. And perhaps \u2013 just perhaps \u2013 they contemplate moving out.<\/p>\n
Of course, most people aren\u2019t going to move out as a result of a one-time, $20 monthly rent increase. But if they think that their rent is going to rise each year, there will be a mental burden hanging over their head, incentivizing them to turnover.<\/p>\n
Yes, I\u2019ll lose a bit of money in \u201creal dollars\u201d as a result of inflation. But that\u2019s nothing compared to even a single month of added vacancy.<\/p>\n
Let\u2019s say that one of my units rents for $1,000 per month. An increase of 3 percent adds an extra $30 per month, or $360 per year. But if the unit sits vacant for just two weeks as a result of that rent increase, either as a result of higher turnover or longer duration-between-tenants, I\u2019ve just lost $500, and I\u2019m netting an overall loss on my decision.<\/p>\n