Raise Rents?
Real Estate Investor · Harrisburg, PA · Member since 2008 · 716 posts · 41 votes
When you have a relatively good tenant that pays on time, do you raise the rent?
This question prompted from this comment made on another thread:
i am sure you will get all sides of the coin on this one.. but it really comes down to economics to me. what is the rent in the area? and would others be willing to rent the unit if the current tennant moves out when you raise the rent?
99% of my tenants are "good" tenants, and with VERY few exceptions, they all get an increase every year. The exceptions are those that are in properties where they are already significantly over market (as a result of poor timing...on their part!)
At the bottom end of the rent scale, they may only get a $10 - $35 dollar per month increase, and the mid range $50 - $150.
The other 1% simply don't get offered a renewal.
I try to keep my rents at market level for comparable rentals in the area. The case that was quoted above wasn't a situation of normal rent increasing it was a case where I bought a property and the woman was paying 50% market rent and when I took over i raised her to 75% market rent and told her in 6 months I was going to raise her rent again to get her to 90%. She has lived there for almost 30 years (keeps her apt immaculate) and when I went to raise it the second time she asked if I could keep her rent at the same level because she would be moving out soon to go to an assisted living building that was being built in the area but she didn't know when she would be able to move it at which time I told her that I would be waiting for her written notification to vacate and that I would be raising her rent in 3 months had I not received it.
So after that experience I have now decided to not hand deliver rent increases. They will get mailed from now on.
This is what I was getting at dafly...
We call them 'inherited tenants', meaning we bought the building and they came with it. We did not receive their application and choose to let them rent.
We do not have a hard & fast rule, but tend to operate the same way each time by default. In most cases we find the rents to be under market value for inherited tenants (never 50% as dafly explained, though), so we are almost always talking about the need to raise them. We are generally in a situation where we need to allow the current lease to expire, so we are rarely having to make rash decisions with no experience with the new inherited tenant. When one of these tenants is a 'good tenant' which, more often than not, means they are little old ladies or men we do not raise them - OR - we raise them much less.
Here is why...
A successful full time investor in our area (who is involved with two of the REI clubs that we are members) argues that by keeping his rents down (by this we mean 80%-90% of market value) he minimizes turn-over, saving more money in the long run.
He would say: look at vacancy costs, repairs, cleaning, advertising, opportunity costs, etc. He would further argue, that a good landlord will 'update' a thing or two between tenants costing anywhere from a few bucks to a few thousand. However, if the original tenant stays, these costs are not incurred. Now, all that said, if everyone would take his approach we would collectively depress the market.
We take a middle of the road approach. Often, we do increase rents to market value (in fact, we are much better at this then many of the other local landlords), but for our best tenants we try to hold the line as much as possible. We will always pass along increased taxes, water fees, trash, etc.
I just started out looking for a turn over rate of 2.54 years per tenant. I got that number from my "Landlording" (by Leigh Robinson.) book. In that book they say if your turn over rate is shorter than this then the turnovers are costing you too much and if they're longer than this then your rents are to low and you are throwing money away.
However when I get a good tenant I will gladly keep them a little bit below market just to keep them. From my properties and when I am looking at properties to buy it seems to me that once people hit the 3 year mark they tend to be a more permanent type tenant because they start accumulating so much stuff that it makes moving painful just to save $15 per month. That being said if I have a tenant that I don't care for their house keeping skills (or some other issue) I'll raise their rent a bit more to try and push them out (and also to offset having to replace carpets and other things if they stay).
-Michael
This is my one weakness - raising rents on tenants. I just don't like to do it. I'll admit it's for emotional reasons and my one thing about landlording I get emotionally invovled in but I know I will "get over it" in time. I guess the only reason could be if I invest into property improvements that benefit the tenant - i.e. energy efficiency in appliances, windows, etc.....
Good qualified tenants are really hard to come by in my area. If I have a good tenant, I don't want them to even think about moving.
I raise rents between tenants. The tenant starts at full market rate that's what they pay until they leave.
Rents don't go up much here, and turnovers can be really expensive. It doesn't make sense to me to have a tenant move out over a $25 rent increase and then have the place vacant for 60 days and need a couple of thousand in renovations.
I never have any 20 year tenants, and if they stay that long, the landlord would have to raise the rent ocassionally to adjust for inflation.
Rents here finally went up enough to notice, but now they are going back down, due to all the new houses that aren't selling so they are being put into the rental pool. I just keep hoping my tenants are happy where they are and don't open the paper to se what else they could get for the same rent.
Heathen, to add another negative on not raising the rents: Having under market rents on an apartment complex (commercial property), you are decreasing the value of it. The value is based on the cap rate calculated from the NOI. Increasing the rents to market would increase the NOI, thus increasing the value.
Tim, get rid of the emotions in this business. It can and will produce mistakes and failures. As quoted from The God Father - "It's not personal, stricltly business"
Yes, absolutely. I would raise their rent some each year regardless but would always go back and run the numbers (inflation, mortgage note, water bill, taxes, security light, maintenance, etc.) and make sure the numbers work to positive cash flow.
the last thing you want to do is to not raise the rent for 3 years and then get a bump up on your water bill or taxes and then have to raise the rent all in one shot.
easier to do it gradually over the years keeping pace with inflation and expenses.
Brad McLeod
Not possible. I love this business too much. To get rid of all emotion would eliminate the passion that pushes me to higher returns and further excellence in this business. There are times when certain emotions serve us greatly. I simply have one emotion I need to eliminate from a process. That simply comes with e-mything my position as landlord. It's an easy fix.
Tim, would you please wire me $500? I could really use it and you seem willing to give it away to keep everyone happy. (kidding)
If you're not willing to charge market rents for your property it can only mean that you don't believe in the value of what you've got to offer. Would you go to a job interview and when they offer $80,000/yr say, "Oh, no, that's just too much. Please only pay me $60,000?" Then you're being inconsistent. If you want to give money away, perhaps give it to the Children's Hospital, or cancer research, or a homeless guy. They need it much more than a tenant who's trying to score a bargain.
It's okay to ask people to pay for the value you deliver. It's not about being nice or being good. I give lots of money away each year but I give it to causes that make a difference and help people who need help.
It's not the east coast out here. I've lived on the east coast. I know the market. I'm buying houses for cheaper than your yearly property taxes. My money is currently being made on acquiring the property, and by charging slightly undermarket rent I've been getting units rented faster by about 1 month on average. I've calculated out the cost of a vacant unit and it would take 20 months of market rent vs. my rent to recover the loss of 1 month of vacancy. Given that the majority of tenancy is 1 year, I really do not have to focus on getting market rent. Not yet anyway. Maybe in 5 years when the market turns I'll have to.