I'm in the process of purchasing my first 3-unit property and after doing some calling around, I have come to find out that my home insurance is going to be anywhere from $500-$1,000 more a year that I was anticipating.
The property cash flows even with insurance $1,000 more a year, but my question is:
Should I raise rents (even by $25/month each unit) to make up for this increase in insurance right when I purchase the property? Or just eat the loss and maybe increase rents the following year. I don't want to come off on the wrong foot, but I also don't want to be eating $80-$100/month that I was expecting back to save/re-invest.
Your expenses do not determine rental amounts. Market rents determine rental amounts. Whenever I raise the rent I always tell tenants about more expensive properties in the area and increased rental averages in the local market. I will also mention any improvements or upgrades done and and increased costs such as taxes, insurance, utilities ect.
I would like to add to @Kyle Hipp .
You must do a market survey of the rent to determine the proper rental amount. Check the rents of several apartments in the same area with same amenities. You can base your rent on that "market survey."
You may also do a price survey on insurance policies.
Unfortunately in the landlord business, we get hit with unexpected expenses and price increases. Repairs, taxes, or in this case, insurance. Insurance is a major headache in some states because of limited competition. Also, when a hurricane blows through in Louisiana, for example, I have experienced more than 200% increases from one year to the next on insurance costs.
all 3 units are below market right now. $25 would still put them below market. The landlord before did not have a mortgage on the house, so letting them rent below market worked for her. I will still cash flow, but there is opportunity for more money. Just trying to figure out the best way to approach it.
If the rents are truly below the market for the same type of property (condition, amenities and location) then you should raise the rents to the market rate. Depending on the tenant 25/mo shouldn't rock the boat too much if you desire is to keep them in the unit. The key is what you goal is, I would personally raise the rents because of them being below the market and not because my expenses being higher.