To increase rent or not to increase rent

23 Replies

We are nearing the end of our first year lease on a SFR and trying to decide whether or not to increase the rent for the coming year.

I've read that you typically increase ~3% annually but we are hesitant as we are near the higher end (but still wiggle room) of rents for our area and have had a great tenant who we don't want to lose.

How do you guys decide whether or not to increase rent?

Hi Justin,

It's a tough call.  How easy would it be to get a new tenant at the increased price?  How long would you have between tenants?

I typically raise my rent a little between tenants- trying to stay a little below the average since it is easier to rent and I feel that is where the quality of our units are- though we are improving our properties.  I like to encourage the good tenants to stay so I usually offer to keep the rent the same if that amount is working well for us.  I have one that stayed the same last year that I plan to increase this year whether they renew or not.  

As many others say, your tenant expects you to raise the rent, so weigh that against the time and possible vacancy you will have if your tenant doesn't want to pay the higher rate.

Kelly

I've had mixed experience with this. Last year I raised the rent for 2 tenants - one after their first year, one after their 2nd year. 

This year I raised the rent for 2 other tenants, one who had been there 1 year and the other had been there 3 years with no increase. All were fine with the increases.

I explained briefly that the property taxes, insurance, and maintenance fees had all gone up, and I had done my best to keep the increase to a minimum. $25 for one tenant who was close to market rent, and $50 for another that was actually $100 below market. 

Several years ago when I tried to raise the rent for 2 other tenants, both decided to move, but their family size had also increased. 

I think it's easier for a tenant to accept a $25 or $50 increase if it means having to move a family. It's more effort to find a new home when children are involved, as schools and other amenities play into the picture - as well as the costs of moving and the fact that rents are often comparable in good areas.

@Justin Sandall ...Case by Case and Property by Property...Some properties taker longer to rent, so I'm careful about increases.  However, I try to price properties right on the front end..

Aww, the age old landlord dilemma. I don't want to reiterate what @Kelly N. said as it is excellent advice.

I usually don't raise rents on my excellent tenants unless they have been there for a long time, and the rents are far under the market norm. Generally I raise at turnover, since incurring a vacancy over a $25-50 rental increase seems counter-productive.

Sharon Tzib, Real Estate Agent in TX (#653488)
832-745-8657

Whether or not to raise rents depends on the market and whether you are happy with your tenant and should have nothing to do with a rule of thumb yearly increase.

Tenant turnover is one of the highest costs to a landlord. If you are happy with your tenant the goal is to earn the most rent without charging so much the tenant decides to move elsewhere. If your new tenant is a bad one, you can easily lose what you earn in extra rent.

I would not suggest an increase unless the market rent in your area has gone up significantly in the past year –If so, I would suggest increasing rent less than the market area increase since you are already on the high-end (I'm assuming this is because you have a property better than average) and you wish to keep your tenant.

I'm a property manager and investor in the Denver area and this is how I manage my rentals. 

For my college kids, I also threaten rent increases as incentives to renew in a timely manner- sign the lease by XX date or the new rent is XX.  This works well when I have a few students living together trying to decide what to do :)

I always raise the rent every year. Even by a little but always raise unless something crazy happens either in the market or the apartment. Even $10 is nothing to most tenants but $120 pays someone to shovel the snow all winter.

Originally posted by @Justin Sandall :

We are nearing the end of our first year lease on a SFR and trying to decide whether or not to increase the rent for the coming year.

I've read that you typically increase ~3% annually but we are hesitant as we are near the higher end (but still wiggle room) of rents for our area and have had a great tenant who we don't want to lose.

How do you guys decide whether or not to increase rent?

You should always increase the rents in a normal market.

It doesn't have to be alot, but get your tenants used to it. Much better to raise a $500 a month rent to $510, at $1000 a month rent to $1040, a $2000 a month rent to $2070, each year than try to get a big bump 3 or 4 years later.

You can also give them an A/B scenario.

After the 1st year we will congratulate them for being such a good tenant and offer them a 1 year lease at old rent plus $50. or a 2 year lease at old rent plus $25.

But each lease renewal the rent always goes up something. Normal people expect rent increases, everything goes up.

The TWO biggest things that ensure a buy and hold investor a brighter financial future is knowing that over the long term your mortgage on the property will stay the same but the rent you bring in will go up.

Always weigh the additional revenue from an increase with the cost of a potential vacancy month.

If the tenant is good I will often forego the rental increase until they choose to move on their own, or unless my expenses go up significantly (increase property taxes, water usage, trash collection fee, etc...)

I like to keep them happy if they keep me happy :)

For those of you who say you always raise the rent, what do you do when rents go down in your market?

Tenants aren't ignorant, and they do shop....

I think you should look at your historical cash flow over the course of your ownership. Is it meeting your expectations? Have expenses increased? If you are happy with it, I might not take the risk of losing a good tenant, but if your margin is shrinking to the point where you question the investment, you've got no choice but to raise rent.

Originally posted by @Nate Garrett :

For those of you who say you always raise the rent, what do you do when rents go down in your market?

Tenants aren't ignorant, and they do shop....

 Why would you raise the rents in a down market?

Justin,

IMHO, good tenants are worth protecting. They're like gold.  Typically, they take great care of your property, don't ask for much, pay their rent on time EVERY month, etc. If you have good ones, don't risk losing them by trying to extract a couple more bucks per month. With 15 years of landlord experience, I personally find that keeping the rents low DOES decrease turnover, the overall amount of time my properties are vacant, which in the end, makes me a lot more money.

@Justin Sandall it's not a item for discussion. It's written into my lease. They know it's coming and know how much it is. I set it at 2.5% which is far less than market has been here. My lease also automatically renews so as long as neither of us (me or tenant) says anything it's all on auto pilot. 

To @Nate Garrett 's point, if rent is truly decreasing then I would head it off at the pass by telling them we were not going to raise rent at the lease renewal. 

BTW if you watch average rents in your area you will see that rents rarely go down and if they do it's typically very little. Usually the place it hits landlords' pocktetbooks is in higher vacancy rates. 

I'd send them a gift basket with a $50 HD gift card and thank them for being a good tenant.

I have a tenant that refer their friends to me and I have great tenant that needs to downsize and I'm trying to fine her a home she can afford.

Turnover is expensive, time consuming and a waste of time.

Good Luck

Originally posted by @Sharon Tzib :

I usually don't raise rents on my excellent tenants unless they have been there for a long time, and the rents are far under the market norm. Generally I raise at turnover, since incurring a vacancy over a $25-50 rental increase seems counter-productive.

 That's what I do, and why I do it.  I don't want to risk losing a good tenant over $25 a month.

Glad we have properties where we do and the kinds that we do. Seems like more than a few people are very nervous and have very tenuous holds on their renters, very nervous to do anything that might upset the status quo.

I can't even begin to fathom the conditions that would make me send a gift card to a tenant. Seems a bit like a case of Stockholm syndrome setting in.

Increasing rent up by $50-100  is going to influence people to move. If you make  small increases each year, they expect it. I figure if they move for a  $10-20 (< 2%)  increase on  rent they were moving anyway. I do an analysis of market and go from there.  Even section 8 raised their rents here this year so I outlined the rationale for the increase to my questioning tenants and we will see what happens.  Those I don't increase are at market already.   I just this year increased and instituted a credit for electronic payment.  Not sure what the outcome will be but I want  them all to switch to electronic so $10 of the increase is credited if they go electronic. It is just to make the rent more predictable as mailing takes so long. I wanted a to offer a carrot for the switch. 

@Justin Sandall

If you have a great tenant who is happy, why bother testing the waters?  Tenants hate rent increases, even if they are used to it.  Tenants, especially great ones are even better when there is no increase.  

It is a common misperception that rents almost always go up. In the aggregate (US overall), that tends to be true. However, all real estate is local and local markets tend to fluctuate more than the aggregate data based on local economic conditions.

Take the Tulsa, Oklahoma market for example. Here is some rental data from 2005-2013.

Source: http://www.deptofnumbers.com/rent/oklahoma/tulsa/

Number of years where rent increased from previous year: 5

Number of years where rent declined from previous year: 3

Say you began a lease in 2006 that expired in 2007. You, being the enterprising landlord, have an automatic rent increase of $25 / month in your lease because you want the tenant to get used to those automatic rent increases.

There's only one problem: your rent is now $45 / month higher than comparable properties. Goodbye, on-time tenant. Hello, vacancy.

Automatic rent increases are a bad idea. 

If your local market rises significantly, raise the rent appropriately and show the tenant evidence of the market increase, demonstrating that you are treating them fairly.

Everyone,

Thanks for the awesome replies! Both sides of the coin are represented well here. It will make for a good discussion with the other partners. Thanks again!

will the area your rental is in support an increase in rent?

If you are making a profit and you have a good tenant don't raise the rent as this could cost you a lot as if they move out and you only have a one month vacancy how long will it take to get that lost months rent back.

Keep the renter happy and your company stays successful and profitable.

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