Lease renewal and rent increase by 5.5%

[Pal Sa]

Bigger Pockets forum, 

Happy Thanksgiving to you all.  My rental home is coming up for lease renewal. Our tenants would have stayed there for a year by then. They have been good. They pay rent on time. I am able to work with them on maintenance requests and other issues. I would like to offer them a lease renewal opportunity. I am interested to have them continue as well. 

I am thinking of increasing the rent by 5.5%. I am in San Francisco Bay area. I looked at the comps now. Similar ones are asking for a minimum of 10% or more than the current rent I am charging. Charging 10% more will actually put me in a cash flow-positive situation but I am wondering if they think it is a steep increase. I can take one step increase at a time. 

What do you think about a 5.5% increase?

[Bjorn Ahlblad]

I personally would not go over that based on what you have described. 

[Greg M.]

Is your unit under rent control? If it is, you're limited to a 2.3% increase this year if you are licensed and 0% if you're not licensed. 

If not, a 5.5% increase, which you say is still under market, seems very fair. However, one thing I'd be very concerned with is being under market in SF with their anti-landlord attitudes. The way they operate, you may never get to market rent again. May want to consider 8% as that is about the rate of inflation. Still slightly below market so they probably wouldn't leave, especially with the added moving costs. 

[Pal Sa]

It is not under any rent control. Looks like 5.5% does not sound unreasonable. Thanks.

[Eliott Elias]

If you charge top market rent you will have a tenant for a few years. If you are under market value you will have a tenant forever. All depends on your goals as a land lord and with this property, the lower the rent the more head ache free you will be 

[Pal Sa]

Thanks. My eventual goal is to get to cash flow positive and then probably stay under the market value from that point on. A 5.5% increase will still be below market value. 

[Dan Heuschele]

Quote from @Pal Sa:

Thanks. My eventual goal is to get to cash flow positive and then probably stay under the market value from that point on. A 5.5% increase will still be below market value. 

 My concern is that in your market you do not know if/when rent control will be enacted.  This could limit your future increases.  In addition, once rent controlled there are few options for getting rid of poor tenants that are abiding by the lease or occasionally breaking the lease but correcting the deficiency.  One of the best ways to get rid of these poor tenants is to raise the rent maximum allowed.  This will only work to encourage the poor tenant to leave if their rent is not already so below market rent that even with maximum rent increase their rent is below market rent.

In addition, below market rent could affect the amount you could sell the property for in the event of a need to exit especially if rent controlled.

Rent control risk is a big reason to keep rents at near market rent.

Good luck

[Nathan Gesner]

Quote from @Pal Sa:

I recommend you not get more than 5% below market. Rent control can be dropped on you at any time and then you will have a difficult time catching up.

Your current renter is good, so offer them a rent increase that keeps them slightly below market. If they choose to leave, bump it to market rates. There are plenty of renters willing to pay you market rates and be good renters.

[Curtis Mears]

@Pal Sa

Personally, I go with a small increase, but I do it every year. I try to keep it around 5%, although I did larger increases the past year as I did no increases in 2020.

[John Morgan]

@Pal Sa

I tell my tenants my cash flow situation if it’s really low like yours. And tell them my expenses have gone way up this year so I need to raise rent $150 more or whatever. They all understand and nobody has ever left me after a rent increase. Most thank me for some reason. Lol. Probably because they know they’re still well under market rent.

[Jay Thomas]

When it comes to rental properties, it's important to make sure that you're not getting a deal too good to be true. While getting a lower rent than market value can seem tempting, it is not worth the risk of suddenly being hit with rent control and having difficulty catching up on past-due payments. Instead, I recommend sticking within 5% of the market rate when negotiating a lease agreement. This way, you can feel confident that your rental income is stable and reliable. Doing your research ahead of time to make sure you are getting a fair deal will help ensure your success as a landlord.