Locking in the Rent Price

11 Replies

Out of state landlord here.  Great property management in place.  I want to attract quality tenants that stay put.  I don't see rent rates increasing greatly in my area for the foreseeable future.

Any other landlords here experiment with locked rent prices for a pre-set duration?

I was speaking with a seller/landlord of a fourplex earlier this week and he mentioned that a couple of his tenants have been with him for 15+ years.  As I inquired further, he mentioned that he had setup an agreement to never increase rent prices as long as the tenants renewed their lease.  Interesting.

15+ years later, the tenants were renting about 20% under market.  However, these tenants cared for the place as if it was their own, rarely called for issues, when they called, the issues were quickly and easily mitigated.

While I'm not sure I would be willing to lock in rent prices indefinitely, I think a 3-5 year lock would:

1)  Allow me to pull in market/slightly above market rent immediately.

2)  Offer peace of mind to the tenant regarding future rent increases.

3)  Provide incentive for the tenant to stay put.

Being out of state, attracting long term tenants has more value vs squeezing out a couple of % in rent increases.

Feedback appreciated.

We have some long term tenants.  Long term to me means more than 10 years. Two of our tenants have been with us for more than 20 years.  We do not do annual rent increases and we don't do regular rent increases, but we will increase rent when we experience a significant increase in expenses.  

I would not promise anything, but apprise your tenants of your values and your management style and your preference to keep rents reasonable.  Let them know you reward tenants who follow the terms of the rental agreement with stable rent, but if the tenant violates the terms of the rental agreement, extra fines and extra rent raises could result.  

One way to encourage non-performing tenants and rule breakers to move out, is to raise their rent.  Much cheaper and less stressful than going through the eviction process.  Don't give up that option by locking yourself in with a promise.   

Many tenants are experiencing rent hikes now and are seeking places that won't gouge them and won't raise rents every year. You could fill that niche. When you have a good tenant in place, listen to their needs and be flexible enough to accommodate reasonable requests. Keep your properties well maintained and your interactions with tenants respectful and kind. You should do well.

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Their are some landlords who have the philosophy of raising rent at-least by $10 a year just to have some sort of increase. 

1. Because you do not want the tenant to get used to not having increases and then when you do they become upset.

2. Because if expenses go up significantly instead of only having to raise by another $10 because last year you already increased by $10. You have to increase rent by $20 or more. which is more of a drastic increase then gradually.

3. Also if you strategy is to attract long term tenants by having a little below market rent then increasing a little year over year you would still be below market their would be no incentive for tenant to move based on price.

To promote longer-term tenants, after the initial year lease, if they are good tenants and no issues, I offer them the option of a one- or two-year renewal, with the 2-year normally being about $25/month lower than the one-year.   If market rent has not increased at all, I usually offer the one-year at $25 higher per month and 2-year at their current rate.  For one property that seems to turn over each year, the property manager started looking for those who want 2-year leases to start, and that has worked well so far as now it turns over every 2 years instead of 1 and the last 2 vacancies were very brief even with the 2-year condition.    

The one long-term tenant I have (over 15 years) I've created my own problems with now as I've let rents get way too far below market, but I know she cannot afford much more and I do not want to force her out.  Still dealing with that one, but it becomes an issue with long-term if you don't keep on top of market rents.  

Keep in mind that your mortgage requirements may not allow longer than 2- or 3-year leases or it could trigger the due on sale clause.  

Sam J. 

Hi Sam,

I heard a podcast recently that talked about a landlord's approach to increase value for his tenants. He viewed his rentals as a customer service oriented business and thought of many creative ways to service his tenants that nobody ever wanted to leave or people can only move in with references from current tenants. First he offered cash for keys for all the lower quality tenants. He provided free cable internet, organized community bbq's for his multifamily properties, built community gardens to encourage interaction and handpicked his tenants to make sure it will be a pleasant experience for them to live together. In exchange to putting in the extra effort and capital, he had close to 0 vacancies and very little management headaches.

Sorry I just could not find the podcast link but this is an alternative way to get good long term tenants.

Hope that helps.

Nazz

@Eddie T.  In nineteen years of owning and managing residential rental properties, we have never had a problem raising the rent when we needed to, even by a significant amount.  When we raise the rent, we usually accompany it with a property improvement of some kind.  We let our tenants know if rising property taxes or capital expenses is what prompted us to raise rent.  They appreciate this and do understand.  Not one tenant has moved out of our properties because of a rent raise.

@Lynn M. Some landlords prefer leases and some prefer month-to-month contracts for various reasons.  We only do MTM rental agreements.  It gives us the flexibility of raising rents when we need to instead of when the lease allows us to.  If we need to move out a tenant who is performing badly, we can do so within a month.  This helps us save our relationship with the neighbors too, some of which are our good tenants.  Good point about the mortgage companies who might have a say in limiting the duration of leases.  To add to that thought, some states do not allow residential leases that are longer than one year as well.

@Marcia Maynard  , Also, some states (like NC where I have most of my units) charge sales tax now on leases less than 90 days, local and state adding up to over 7% in some cases.  They do say you can apply for a refund if the same tenant stays longer than 90 days, but to not pay the sales tax, you'll have to have an initial lease term greater than 90 days, then I guess you can revert to month-to-month with the same tenant.  Also, for mortgage qualification purposes, most of the lenders we deal with want to see at least 1-year leases on new properties that don't have a Schedule E yet in order to count the income.  

The month-to-month versus yearly is just personal choice unless you have issues like the new law in NC.  I prefer year or longer with 60 days' notice so I have more time to prepare for turnovers.  Also, I'm biased, as when I was a renter I would not look at month-to-month because I didn't want the risk of arbitrary rent raises or paying for moving again, new deposits somewhere else, and just the hassle of having to find another place on short notice.  If I couldn't lock it in, I didn't look at it.  So I like tenants that are looking for more stability like I was over ones that don't care if they may have to move in a month or two.        

@Lynn M.  That is interesting about NC.  Given that situation it would make sense to have at least a 90 day lease at the start.  With our Section 8 tenants, the housing authority requires us to start with a 1 year lease, then we can change to MTM.  We do that.  Occasionally someone asks us if we will do a lease, but when they realize we won't be raising the rent during the first year (never have) and not likely to raise it in year two or three either, they are satisfied.  What works well will certainly vary on location, as the laws vary considerably.  Whether a MTM or a longer lease, in Washington State a residential tenant only needs to give a 20 day notice prior to the start of the next rental period if they want to vacate.  Hasn't been a problem for us, since most tenants will let us know much further in advance if they are considering moving. Thanks for sharing the differences you face and why you do things the way you do. Always good to hear varying perspectives.

One idea for keeping tenants longer term is to give them an incentive to do the right thing by rewarding them for doing so. For example, if you comply with the rental agreement and pay all your payments in full and on time, you will be credited one week of free rent or perhaps one month of free rent for three years in good standing.

Ah a I found the podcast about running your rental units as a customer service oriented business by Al Williamson.

http://louisvillegalsrealestateblog.com/al-williamson-building-wealth-in-inner-city-neighborhoods-podcast-episode