Rent Increases

41 Replies

Hi Everyone, 

I would like to increase rent but have a tenant that is telling my property manager that they are on fixed income and cannot afford higher rent.  The unit is rented under market value and I am only asking for small increase from $800/mo to $830.  

This tenant has been in the property for only one year and has been a good tenant and takes care of the place fairly well.  I dont want to be in a situation where they always push back and will need to get rent increase overtime.  The property taxes and expenses are on the rise.

What should I do?  I dont feel like my PM is helping me here...should I ask for their assistance?  What specifically should I tell the PM?  I think they simply forward my email stating that the increase was due to higher taxes and maintenance expenses.  

Robert M., Real Estate Agent in GA (#345938)

This is a 3.75% increase, a little high given the 2015 increase permitted in my rent controlled environment is 1.6% which is indexed to inflation. How much are you planning on increasing it in subsequent years?

My suggestion is small regular increases rather than going for a time with no increases and then catching up all at once. If you condition the tenant to accept small, regular increases then this is easier for the tenant to stomach. The tenant moved in recently and so is likely not below market. I would think this through. One month of vacancy would take 27 months of $30 increases to recover. Could you make do with 2% ($16)? What is the actual rise in your expenses? Worth thinking about.

Look to the bright side:

If you have a GREAT tenant who's never been a problem, always paid and didn't call the PM to change a light bulb, then pass onto the $30 and keep the great tenant. Annual increases are not really the bible and must be done. 

If tenant moves out while you prep the property and advertise it, 1 mo vacancy will wipe your $30/mo rent increase for next 26 months. Is it worth it?

IF you think you can rent the unit for significantly higher market rent even before tenant moves out (meaning you have a signed new app before current tenant's last day) then go for it. You can prep the property in 1 weekend after vacated and new tenant moves in.

How much did your property taxes increase on a monthly basis?  For a good tenant that might be enough of an increase.  Social security only increased 1.7% this year.

Maybe let them locking in the smaller increased rate for a couple years if they sign a 2 year lease.

Until your tenant gets 15%+ below market, the lack of vacancies is probably worth the lower rent.

Can you barter with something else ?

Say the tenant purchases renters insurance - which is a GREAT first line of defense for you and anything that can happen to the property and shows you that they did. You let go of the increase. This will not make an impact on your bottom line - only an impact on your safety.

Just a thought.

Tapan

Thanks everyone for the insights...very helpful.  My biggest concern is that if I let the tenant dictate what I charge then I will never get an increase with this tenant.  I will always get the fixed income response.  

I think I may respond with a smaller increase and/or say that in 6 months the rent will absolutely increase.  If they do not accept, then they will have to find another place.  My property is in good shape and I dont think they can find the same quality for the price.  

Which should I do, smaller now ($20, 2.5% increase) or the delayed increase?  Maybe a smaller delayed increase?

I dont want to lose the tenant but also have to be able to raise rents eventually.

Robert M., Real Estate Agent in GA (#345938)

I tend to do real small increases yearly, like $10.  I will raise the rent, say $20, then attach a 'loyal renter discount' which gives them $10 off for paying on time, in full. It also thanks them for being a good resident.  I also guarantee no raises until next year, even if they are month to month.  If my raises aren't keeping up with expense increases, I recapture rent increases I don't pass on to my current good tenants when  I re-rent another apt.   The new people are at full market rent, helping reduce the cost of other tenants that have been there longer.  The problem comes when nobody leaves.  Oh wait, that's not such a problem after all!

Here is the positive about the tenant objecting to the $30/month increase.  The tenant likely plans on staying long-term.

A smaller increase is probably the best bet for this year.  Next year I would try one of couple of approaches:

1. "increase" the rent by the market increase, but then discount it for "long-term tenant discount" assuming the rent payments are timely

2. try a full market increase - but offer an improvement equal to 1/2 of the annual increase

I would aim for the net increase to match the tenant's cost of living rate increase if possible.

Lol! I just have to laugh when people say "fixed income".  Yeah, some are physically incapable of working. In my opinion they should be in some sort of assisted living facility that can help them. 

Everyone is on fixed income of some sort. All of us investors are on fixed income if we decided to do nothing and just collect the rent checks that come in, then that is all we get to work with. 

Ok enough of me not being empathetic. 

Assuming this is not an elderly person. Can you tell me that they couldn't mow the neighbors yard a few times a month to make up that difference in rent? Maybe they could sell some stick on nails online( sorry my gf just started this and made a few hundred bucks in 1 week). All I am trying to say here is that just because they say they are on a fixed income I would like to know a little of the specifics before I would start messing with the rent. 

Heck, if it is a duplex or similar, offer them a little lower rent to take care of the lawn and snow on the property. You would be farther ahead, as long as they are doing it. 

Believe me I agree with most of the rest of the comments prior of not such a big rent increase so soon, but I can see your point. Just don't let it backfire in your face by getting greedy.

The tenant is more than capable of working...but on some sort of disability or social security program.  Young family (40's) 2 small kids..probably if they get a job they loose their benefits...most likely.  

They do take pretty good care of the home.  I think I should tell them I will reduce the increase to $15 if they sign a 2 year lease and let them decide.  

If they opt to leave, I can start marketing until the lease expires...Good plan?

Robert M., Real Estate Agent in GA (#345938)

Like others have said, what is the reason for the rent increase?  Just to increase rent?  Or do you have an actual cost increase driving the rent increase? If you just raising rent for the sake of raising rent with no real justification for it, you have to consider what the value is in having a good on-time paying tenant versus the cost of vacancy.

If your increase is because you think you can get substantially more money for the place because area rents have jumped, you again come back to what is a good, on-time paying tenant worth to you?  A new tenant paying $1000/month but is always late or doesn't pay, forces eviction, tears the place up during that time, could end up costing you a lot more than you $800 "fixed income" good tenant.

It is always about the numbers, risk versus reward.

Hey @Aaron Junck , I love nail decals, I probably contributed to your g/f's income ;)

You could market until the lease expires, but what if they leave immediately?  

For better or worse, I want my residents to get ahead in life, just as they are helping me.  I like to increase rent for the 2nd year but then offer a 'discount' if the rent is paid or mailed by the 1st: as in the rent must be postmarked or deposited BY the 1st.  If it is mailed or deposited on the 1st or afterward, they don't get the discount.  The 'discount' is usually the same amount as the rent increase. 

I feel this allows the tenants to get used to the idea of a rent increase while not feeling the pain so long as they pay by the 1st of the month.  

@Robert M.   I think it would be helpful to get a little more detail regarding your situation. Firstly did you buy the property recently and then get the tenant or did the person come with the property? You stated that you are under market rents, but it is not clear how far under market. Is your market a renters or landlords market? Meaning are there lots of vacancies in your area? As a final question, is your unit at market quality?

I believe your issue is that you are under market pricing and that you are rightly concerned about falling farther behind market prices.  However, your PM does not seem to be helping you catch up to market rents.

First thing I would do is find a new PM. A good PM should know the prices in the area and put a plan together to get you to that level. Their job is to protect you from exactly this type of dilemma. 

If your market is strong then there should be no problem in increasing rates over a short period of time to get you to a good income level.  However, if the quality of your unit is below market or there are not that many renters in your area, then you might want to take a more conservative approach.

Aggressive rent increases, to get you to market rents can work. I did it over the past 18 months in my market. The tenant was paying $850/month, now they are paying $1475 and I still plan to go up. I have not done any updates to this particular unit. I just made it very clear at the time of purchase that we would move to market prices over 24 months. I should be more clear, my PM told the tenants for me. I do not interact with the tenants for exactly the reason you are facing. Units that I did renovate went from $850 to $1700 within the same time period.

I had other tenants tell the PM they could not afford the increase. They did move out, but they BOUGHT a place of their own with the money they saved from the last owner. The takeaway should be that this is a business, and you have to run it as such. Get a new PM who will act as a true firewall and also implement your goals and strategies. That person should be active in giving you advice and raising flags if they think your plans do not meet the market conditions.

Good luck and let us know how this turns out!

-Arlen

I tell ALL of my tenants, at lease signing, to expect rent increases yearly. Then, if an owner decides not to increase, I look like the good guy. From my personal experience, expenses seem to go up the longer a tenant is in there. My annual increase on my own investments is 3-5%, but I have gone as high as 10%.

If the increase is $25 per month more and the tenant balks, I explain it as "We're talking about an increase of $300 per year. Let me ask you, can you move for less than $300?"

Even if they are fixed income  SSI they got a 1.7%   increase.  You could say look I am raising it this much meeting them at a point you are still comfortable with providing you are within market rent.  You wind up keeping them but letting them know you are not going to absorb the costs for them. Either they leave because they want no increase and they can find a cheaper place or they stay knowing you are going to routinely increase the rent as your costs go up.  You deliver the message my costs go up, yours go up and they get temporary lesser increase. You can chalk the difference in amount up to a vacancy avoided.  If they dig in for no increase I think no matter how good they are you know that you would lose them sooner then later.

@Robert M.  

If they are good tenants, maintain the place, and always pay on time, why rock the boat for $360 a year?  Enjoy the stability and quiet tenants.  If it's that big of deal then don't fight them on the increase and instead refuse to renew the lease.  If I have dream tenants who never call unless something is broken, always pay on time, keep the place clean, and are just great tenants I won't raise the rent.  Heck, I might even lower it to retain them.  

I guess I would suggest that you have to make the call as to whether the increase is going to force the tenant to leave or not. If you think it would, then I'd avoid doing it for now as the turnover cost is going to more than eat up that $30 a month increase you're going to get from a new tenant.

That being said. The other question is valid as well. Does the tenant dictate whether you can raise rents or not? You know the answer to that one.

If you feel the rent is currently under market, then there's nothing wrong with raising it.

To me, if they've been there a year and have paid on time, I'd probably pass on the increase.  

If you really think you're under market though and want that bump, then maybe a compromise. Raise it $20 but tell her you dropped the increase "only for her".  Then she'll feel that you're more than likely to work with her in the future and this may make it less likely she'll start looking. And you get at least some kind of bump in the rent.

A couple of things I'd add.  One. Rents in the US are shooting up. So while they may only be going up in canada 1.8% or in the US even based on some cost of inflation, the rental prices here in most states are not rent controlled. Rents are rising MUCH faster than inflation so the reality of the market is that a 3 or 4% increase is not unjustified. 

One other thing,. Just because a tenant says they are on a fixed income and can't afford it - doesn't actually mean they're on a fixed income and/or can't afford it. It could very well be that they are simply crying poormouth in the hopes of avoiding the increase. I hear it from tenants all the time - "I figured it couldn't hurt to ask".

Yea. But some of the things they ask for are obnoxious so actually it can. :-)

But they're right about one thing. You definitely won't get something if you don't ask and thats what she may be doing in this case.

Again, I think this is one of those judgement calls that you're going to have to make. Do you really think the money is that tight for her that a $30 increase is going to push her over the edge where she has to move out? If so, then its worth taking a step back. If not, I might either go with the $30 raise or do $20 and make her feel like she won a discount to maintain some good will.

Get another PM...they should be working with and for you.  Also, check out rents in the area on www.rentometer.com    Advertise a little higher than what you actually will take and see if you get any responses.  If you get a lot, then the rent is still too low.  If you don't get any responses, then adjust rent until just the right number of people respond.  You just need one person who is qualified.   In your ad, be sure to put qualifications you desire, i.e. non-smoking, good rental history, good credit score, pets OK, etc.  That way there are no surprises.  :0) And finally, but most important, screen, screen, screen all tenants!! Good luck!

I tend to raise rents on a regular basis. I will look at the market rents in the area for comparable properties with similar amenities and basically show them that I believe even with he rent increase they will come out ahead for what they recommend getting. My properties are in good shape and I am very responsive to any needs. I have plan for updates and improvements and share that with tenants and excuse it. I will also show the percentage increase of the rent rise along with property tax or utility cost changes. 

I like to give tenants options. Then you are not dictating their life but rather they are choosing from options you give then. You might lower rent by $25/m but have them pay for sewer and water going forward giving them control of their savings. You might have another option where he rent rises by $15/m for the first 6 months of the lease and an additional $15/m starting on the 7th month. Point being, accomplish your goals in variety of ways and then give the tenant ownership of the decision.

I know it is different for all but for me it is better to keep a good tenant longer than to raise the rent by 30 a month.  It's not worth it for me to try to find another tenant for a couple hundred dollars.  I just extended a six month lease for great tenants instead of raising rates. (I am also managing long-distance so it really is easier for me just to have people stay then work on finding other new tenants who may or may not be as good as the ones that are currently in there.)

I'm horrible about raising rents. In fact, I never raise rents on existing tenants just when a unit turns over or I do some sort of upgrade for an existing tenant. I have 2 older tenants that have been in apts since 1996-1998.

I probably have lower collection loss and vacancy than most landlords in my area though. My rent roll is nearly $15k/month and I was only short $200 on collections in December and that was caught up this month. People pay me.

We like to 'train' our tenants to expect some type of an increase each year. We send a letter that basically thanks them for being a good tenant, tells them we would love for them to stay and sign a lease renewal and the new rate of $X. We say we are doing our best to keep this increase moderate, but our taxes and insurance expenses have increased.

No reasonable tenant is going to move over $30 per month.  

We are in a unique time where rents are increasing dramatically and it won't last forever, so take advantage of it while you can!

Marc Cunningham, Real Estate Agent in CO (#EA-4000-6743)

Appreciate everyone thoughtful response.  I am going to offer a smaller increase of $15/mo for a 2 year lease and $20 for a 1 year lease.  If hey leave ...ok.  Allows me to potentially raise rent and think about my PM situation...another can of worms

Robert M., Real Estate Agent in GA (#345938)

@Robert M.   don't let your ego drive your business. Look at the numbers. What do you achieve exactley when you raise the rent by $15? Just to prove a point? I would save that for a day when it matters - choose your battles, you don't have to fight this one.

What again is your turnover cost? A month of vacancy, cleaning up and maybe some minor repairs, your time to deal with fining a new tenant or hoping that your PM makes a good choice?

I would go so far to say that rent increases are a game for appartment complexes. Turnover is already a given, so there is no harm as long as you can re-fill units quickly. And if you get 24 units x $15 that's $4320 a year or $43.200 in property value. Really interesting if you manage 120 units...

My recommendation, do the math and let the numbers guide you.