Back and forth on whether to raise rent

Multi-Family and Apartment Investing
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Back and forth on whether to raise rent

Stephen Jones
Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes

BP,

I am struggling on whether or not I should raise rents on about 20-25 units out of my portfolio. Where I'm located (southern state of IL) rents have kind of tapered a bit, and I realize how tough it is out there right now for people, but on the other hand out of these 20 units or so, according to the market, these rents are ready to be bumped. Another reason I am hesitating is because the majority of these tenants are good quality tenants. I'm torn on what to do. Do I raise them now? Do I wait until next year (I believe things will be worse), do I raise them slightly 25-35$? Any advice would be appreciated! Thanks. 

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Sam YinPro Member
Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
3y

@Stephen Jones

I use to struggle with this as well. However, I have evolved to operate this as a business, not a charity. Not to sound like a jerk or immoral LL, but you have to ask yourself, will these tenants be willing to front you money for major repairs? Live in the place if you put off major repairs because you become short on reserves? Is your reserve where it should be...5-10% of equity or 6 to 12 months of mortgage AND operating costs? If you do a stress test on the current gross, will the portfolio withstand a recession that may cause 15 to 20% vacancies?

Based on your post, you have a sizable portfolio that should be able to sustain a few move-out and turn over. I would raise the rents, even if its just 2% to 4%. This keeps tenants mindset right and they know that costs go up for the owner every year. Closer to market rents if they move and you need to rehab.

With that said, if they are very close to market rents already, then you may need to look closer at cutting operating costs vs rent raises... but I would still consider a small rent raise.

For example, this summer I spread out about 50 rent raises, ranging from 3% to 15%. Only one moved out and it was entirely due to the rent raise. They relocated to live on the beach. The rents were not all equally raised either. I had a few inherited tenants that were long term (over 35 years tenancy) they got a 3% bump, on top of SUPER LOW rents. A few newer tenants got 10%+, on top of HIGH rents.

Your costs will go up. If you dont adjust up your income now, it may be too late to catch up later. I plan on another series of rent increases next month or two with the same strategy.

I use to be very empathetic to my tenants and bend over backwards. Sacrifice my sleep, health, family, and well being for the sake of keeping tenants happy. I was too focused on the customer service and not focused on the profit building of the business. Although I feel I had to do that at the beginning, I do not think it was necessary. It was due to mindset and lack of experience on my part.

This is only my opinion. There is no single right way to do it. Every market is unique. I'm still learning and evolving.

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  • Brett Deas
    CO · Member since 2022 · 588 posts · 426 votes
    3y

    Well its good to see you have morals. Most in your situation don't. 

    I think if they are quality tenants than I would raise it slowly. That way they aren't shocked with the crazy increases but you can get your rents to market. 

    2Reply
  • Stephen Jones
    OP
    Rental Property Investor · IL · Member since 2019 · 285 posts · 137 votes
    3y

    @Brett Deas

    Thanks for the feedback man!

    0Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    3y

    I raise rents pretty much every year that way I can do small raises. All my tenants are good. Annual raises are 3-5%. At turnover we make sure the units are  appealing and rents are at market. We have made sure the buildings are in great shape and attractive but nothing is overinproved as that is a waste os money. 

    2Reply
  • Alecia LovelessPro Member
    Member since 2019 · 3k+ posts · 2k+ votes
    3y

    @Stephen Jones I raise mine about 4%. Then to market rent at turnover. I had two move out over the rent increase this year even though one was still $200 under market rent and the other was $350 under market rent.

    After about $2500 In renovation on both, we had to paint and do some flooring, I will get full market rents on both with long term tenants.

    1Reply
  • Jill Addison
    Rental Property Investor · San Diego, CA · Member since 2019 · 48 posts · 40 votes
    3y

    @Stephen Jones seems like the rental market is softening. I bought a house a few months ago and my property manager was aggressive in trying to get me the top of the market rents and it just sat there for 2 months. Finally we reduced the rent until it rented right away. The next two vacancies I had come up I told my property manager to just make sure it was re-leased within two weeks and not even raise the rent. I read somewhere that rent increases will probably not happen for the next 12 to 18 months, and a property manager for a different property in another state advised me to not raise the rents because that's what they were seeing in their market, demand is softening. So I just feel like I'd rather not have vacancies and keep the renters I have at least for a year. On the other hand, I know it's important to keep gradually increasing the rent so you don't fall behind where the market is and it's hard to catch up. That can also be a disservice to your tenants if you fall so far behind where the market rent is that then when they eventually have to move out for some reason, they have sticker shock at what they're going to have to pay somewhere else.

    0Reply
  • Karl B.
    Rental Property Investor · Erie, PA · Member since 2015 · 1k+ posts · 2k+ votes
    3y

    I go by the notion of not raising rents unless a tenant pisses me off.

    I'm selective when it comes to placing a tenant so most of my tenants are solid; they take care of the properties and don't do stupid things that cost me money or headaches. 

    I have tenants I placed four years ago who have not seen higher rents because they pay on time, take care of the place and don't complain. Any request is a legitimate repair. 

    The same goes for a few inherited tenants - I have a few who haven't received a rental increase and one couple has been there paying their original, cheap rent and I've owned that place since 2016.

    I could up rents 15%-20% but I would rather not give them any ideas (to look for another place). 

    If you're considering raising rent, do so on the headache tenants first and see how it goes.

    0Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    3y

    Your costs are going up each year.  Raise the rents by a small amount if your costs haven't increased. Even a small amount adds up and it gets the tenants used to regular increases. Increasing the rent by $25 is unlikely to cause a person to move.  If you did $25 a month on 20 units, that is another $6K a year.

    1Reply
  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    3y

    @Stephen Jones

    I use to struggle with this as well. However, I have evolved to operate this as a business, not a charity. Not to sound like a jerk or immoral LL, but you have to ask yourself, will these tenants be willing to front you money for major repairs? Live in the place if you put off major repairs because you become short on reserves? Is your reserve where it should be...5-10% of equity or 6 to 12 months of mortgage AND operating costs? If you do a stress test on the current gross, will the portfolio withstand a recession that may cause 15 to 20% vacancies?

    Based on your post, you have a sizable portfolio that should be able to sustain a few move-out and turn over. I would raise the rents, even if its just 2% to 4%. This keeps tenants mindset right and they know that costs go up for the owner every year. Closer to market rents if they move and you need to rehab.

    With that said, if they are very close to market rents already, then you may need to look closer at cutting operating costs vs rent raises... but I would still consider a small rent raise.

    For example, this summer I spread out about 50 rent raises, ranging from 3% to 15%. Only one moved out and it was entirely due to the rent raise. They relocated to live on the beach. The rents were not all equally raised either. I had a few inherited tenants that were long term (over 35 years tenancy) they got a 3% bump, on top of SUPER LOW rents. A few newer tenants got 10%+, on top of HIGH rents.

    Your costs will go up. If you dont adjust up your income now, it may be too late to catch up later. I plan on another series of rent increases next month or two with the same strategy.

    I use to be very empathetic to my tenants and bend over backwards. Sacrifice my sleep, health, family, and well being for the sake of keeping tenants happy. I was too focused on the customer service and not focused on the profit building of the business. Although I feel I had to do that at the beginning, I do not think it was necessary. It was due to mindset and lack of experience on my part.

    This is only my opinion. There is no single right way to do it. Every market is unique. I'm still learning and evolving.

    4Reply
  • Greg Miller
    Member since 2023 · 7 posts · 3 votes
    3y

    @Stephen Jones

    I raised rents for what I would consider good long term tenants. I had been telling them for months. Years, they all moved out, I ended up renting the units out for more than my intended increase. I had people begging to get in and I’m in a rural town. Nature of the business.

    2Reply
  • Account Closed
    Rental Property Investor · Indianapolis, IN · Member since 2020 · 562 posts · 554 votes
    3y

    @Stephen Jones for me if they are quality tenants that pay on time and don’t cause drama I would leave the rent the same as long as the units are hitting cash flow projections. Good tenants are hard to find. If you raise the rent $25, that’s $300 for the year. Is it worth $300 to potentially lose a good tenant?

    0Reply
  • Michael SmytheBusiness Member
    Real Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
    3y

    Try to raise every year so tenants expect it.

    If you don't they somehow come to think that increases shouldn't happen.

    Logical Property Management4.9453 Reviews
    WebsiteView Page
    0Reply
  • Gregory SchwartzBusiness Member
    Rental Property Investor · College Station, TX · Member since 2016 · 1k+ posts · 1k+ votes
    3y

    Im in the camp of raise regularly. This is how we did it at the property management company I worked for. 

    1. Determine the market rent. What would this unit rent for with a fresh coat of paint and a good cleaning. 

    2. Determine what a "fair" maximum rent increase would be. For our company it was around $50/month

    3. Send the renewal offer with a new rate up to market rates but not more than a "fair" maximum increase. 

    If a tenant is paying $800 but market rent is $1000 then we increase the rent to $840 . However if a tenant in a similar unit was paying $975 then the renewal rate would be $900.

    Worked for us. We keep great tenants and successfully run a FOR profit company. 

    [email protected]443-812-0357
    Schwartz Realty Group5117 Reviews
    WebsiteView Page
    0Reply
  • Zachary Ware
    Member since 2022 · 405 posts · 455 votes
    3y

    I agree with many others here. Once you purchase the property bring rent to market but after steadily and consistently raise rents (as long as market rent is growing in your property area). This can avoid the loss of good tenants. 

    0Reply
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