Rent increase or Not. Which is the smarter decision?
Investor · TX · Member since 2015 · 62 posts · 23 votes
I've rented to over 1,000 tenants, and I tell all of them the same thing when they're signing the lease... If you're a good tenant, I'll never raise the rent no matter how long you rent from me. If you can get a good tenant that pays on time and takes care of your place.. for me, that's worth more than getting 2-3% more from an average or below average tenant. Plus, good tenants usually have friends that are also good tenants and I get a lot of tenants through word of mouth. I might be making a little less on rent, but I'm saving a lot more on repairs/damages and vacancy/re-renting costs. Once a tenant moves out, I'll increase the rent to market rent for the next tenant.
Hello Rhea: that is the ago old question. Part of the answer depends on your market. The other part lies with your expenses. I believe MOST landlord subscribe to raising the rent for each new cycle. If you raise it 3%-4% every time that probably is not enough to run off a good tenant but helps protect you against unplanned expenses, insurance cost increases, tax increases, etc. Are your rents at or near market? Do you want to retain the tenant? I always have a slight increase. Failure to keep your rents near market will result in you needing to increase them drastically down the road. I am processing an application on Monday. The lady is currently paying $1340 where she is and they are increasing the rent to $1650. This is not just an emotional shock, but can catch a tenant off guard and unable to handle that size of an increase. In SW Florida rents have been skyrocketing. We see some landlord asking astronomical rents and other raising rents over 20% when leases expire. If you lost a quality tenant and it sits vacant for a month consider how much you lose in that scenario. The other unknown is losing a quality tenant and potentially get a less than desirable one.
At each year mark, I evaluate what I think market rent is for each unit. I keep tabs on Craigslist, have good data on surrounding properties, and a form to make calculating market rent and documenting comps easy. I make sure I am doing a gut check that the amounts I am calculating are what I would list the property at if it came empty tomorrow.
Once I know the gap between market and actual rent, I normally divide that by two and raise rent by that amount, unless it is too small to bother with.
To me it is the best of both worlds. You are rewarding long term tenants, they cannot find a comparable unit for the same price if they start looking around. But you are also making progress on rent, so you won't get to a point where there is a big gap, which helps cash flow and your ability to sell the property easier when the time come.
@Rhea Jackson, my opinion deals more with the tenant than the money, unless it is rented for far under market value. If you have good tenants who pay on time and take care of the property I would imagine you want to retain them. Will a 1 or 2% increase make a big financial difference to you, likely not. Will losing a good tenant and having a one month vacancy make a financial difference, yes it will. With that in mind, my opinion is to re-evaluate market rents each year about two month before lease expiration. If the difference in market value and current rent make it a no-brainier decision than have a discussion with your tenant and explain that you are raising the rent to meet the market. If they are good tenants they will understand. They may not like it but they will get it. This will pay dividends moving forward.
i have struggled with this and i appreciate the thread. I have never raised my rents, and i know i am well below market. Last year we gave each of our tenants a $50 off for Christmas break on their rent. I guess im that guy that feels like i need to "woo" them and make sure i keep them happy. This is making me think im being a "chump" for not keeping up with market.
Does anybody care to share the "conversation" they have or the method of delivering the news?
@Leland - awesome suggestions.
@Leland Barrow - another option is to offer your tenants some sort of improvement to the property at renewal, instead of a $100 gift card - especially when raising the rent. This benefits both you and your property. If it is a long-term tenant, maybe you offer a deep carpet cleaning, adding a storm door, even a garage door opener if there is not one already.
Andy
I've rented to over 1,000 tenants, and I tell all of them the same thing when they're signing the lease... If you're a good tenant, I'll never raise the rent no matter how long you rent from me. If you can get a good tenant that pays on time and takes care of your place.. for me, that's worth more than getting 2-3% more from an average or below average tenant. Plus, good tenants usually have friends that are also good tenants and I get a lot of tenants through word of mouth. I might be making a little less on rent, but I'm saving a lot more on repairs/damages and vacancy/re-renting costs. Once a tenant moves out, I'll increase the rent to market rent for the next tenant.
@Leland - awesome suggestions.
@Kurt Gardner I'm struggling with the increase thing, also, but I think I'm a bit further along in the process. I just sent out rent increases and it makes my stomach hurt. Stupid, I know. This is the second round of increases for most of these people, the first being about a year ago. For all of them, this increase was the same or less than last time.
For low income seniors I raised rents about 3% or $25. Less than $1 a day. This still makes them well below the rate of new move-ins but the new move-ins are getting upgraded apartments.
For the houses it was less than 3%. Last year I did increases of $100. This year $50. I prefer to just send out a notice and not give them a heads up but because I was dealing with some issues for 2 of the houses I let them know what to expect. No apologies from me, just letting them know that the increase was coming. By the way, these are all long term tenants and I decided to give everyone a 60 day notice instead of the 30 day.
The largest increase was 4% for a small condo that is still well below market rate.
We are in southern California where rents are skyrocketing. I can't believe how much some of these places are going for.
I have decided to do yearly increases because it is just so much easier than doing big increases every few years.
I know for sure that I'm undercharging on rent. I just haven't bothered with it because they're good tenants and I don't want to be bothered with the work and lost income that comes with a vacancy.
Having said that, I know that I'm in the wrong position here. This is the attitude, (and predicament), that I've created for myself by being far too complacent with my rental. If I was doing things the right way, then I'd have my ducks in a row so that I can treat my rental business as just that; a business. And its true, you don't want to needlessly run off excellent, long-standing tenants because you want to squeeze an extra dime out of the place. However, you don't want to let yourself get run-over, either. For me, taxes and insurance have done nothing but increase over the years, but I've just absorbed the cost because I don't want the extra headaches. If I maintained that attitude towards being a landlord, then I'm sure I'd never be as successful as I could be owning multiple units, which is my goal.
My advice to you would be to do what I'm doing right now. Run a comparison of rental houses and apartments in your area. Especially for the houses, watch to see how long they stay advertised before they are rented. Get a feel for how long you might have to deal with a vacancy while looking for new tenants. Thats because the worst case scenario is that your tenants will pull the plug. (Unlikely, but possible). If you find that an increase is legitimate, and you've considered your vacancy costs and can get through them without creating too much of a hardship, then by all means do it.
Another thing I plan on doing is letting them know ahead of time. If the lease is going to expire in a few months, let them know whats in store. Be precise with the new figure, too. This way, the both of you can plan accordingly. Ask them point blank, "Will the increase cause you to look elsewhere?" If they say yes, then you can get a jump on marketing the home so as to limit the vacancy as much as possible.
Also, its not a bad idea to talk with future tenants about the possibility of rent increases. (Another thing I plan on doing from here on out). This way, they know what they're getting into. If they aren't going to be able to weather a $25-50 increase in a year, then chances are they won't go to the trouble of signing the lease and moving in, knowing that they're just going to be moving out soon. Plus, if they go a year without an increase, they'll feel like they've dodged a bullet and will be more likely to stay when an increase does finally come their way. Good luck!
Just do a yearly increase, so it's business as usual. Normally, applicants will ask if you plan on raising the rents. I always told them that we do a market analysis every year, and then normally do raise the rents around August each year, and normally the rents are only raised around $35/year.
So, right up front they are prepared for an annual rent increase. And if it's business as usual every year, then there shouldn't be any angst.
This usually still kept rents below market (SF Bay Area). But, when we had vacancies, we'd get new tenants in at market rate.
I'm completely against giving tenants gifts or rent credits for staying. They are already getting a deal from you, if they are paying less than market - and you haven't kicked them out. Does your mortgage lender give you $100 off your mortgage if you paid your mortgage on time every month? You are running a business. You don't have to reward your tenants for doing what they're supposed to do. Just like they don't have to give you an extra $100 for doing what you're supposed to do. They are not your children getting A's on their report cards or something like that.
@Leland Barrow You are right on the money. When I took over management of the property in Silicon Valley, the previous owner/manager had the policy that he never raised rents as long as the tenant was there.
Well, there were a few tenants who had been there since the 1980's. I took over in 2006. These tenants were paying rents of around $275 per month in Silicon Valley, where the going rents were around $700 when I took over.
One tenant in particular, was on SSI. She hadn't bothered looking into subsidized senior housing because subsidized senior housing was more expensive!
Subsidizing your tenants for life is insane.
Most landlords never really think of it through the tenants perspective. Tenants think of landlords as extremely wealthy individuals that have tons of properties. When the tenant receives the rent increase, if they were a good tenant, they think, wow, I've been an awesome tenant, paid rent on time, never caused any problems and in return this GREEDY landlord has to nickel and dime me and raise my rent $20-$30 per month because he doesn't have enough money already. Don't fool yourselves.... these tenants are calling other places once they get your rent increase. I get a lot of tenants this way and I tell them upfront... I won't raise your rent if your a good tenant. And it's not business as usual to raise rents every year and if you think the tenants are buying that speech, you're wrong. Just like when you receive an increase year after year with your insurance, lawn care, phone bill, etc and they tell you it's "just business"... do you say ok and continue to pay it, or do you shop around and switch because you're irritated at them for constantly raising their rates?
I've been a landlord for 24 years and I'm still in business without having to constantly raise rents on my good tenants. I have A LOT of tenants, they all know my name and I normally get 1-2 referrals a week from these good tenants. The bottom line is that I'm giving up $20-$30 per month in rent during a renewal of lease, but in return, I'm keeping better tenants, plus my marketing/advertising costs are less due to the referrals, my vacancy costs (lost rent when trying to find a new tenant, which could be 1-2 month of no rental income) are less, my turnover costs when tenants move out (painting, cleaning, advertising, showing of apts, utility bills) are less .... so when you factor in everything, I actually net more money per unit than a landlord that raises their rent on their good tenants....if you want to be a good landlord, figure out ways to differentiate yourself, just don't follow the pack because everyone else does it.
I've heard Dave Ramsey says always raise the rents, falling behind just a little is the same as being empty 1 month out of the year. I tend to go with the "yes, but.."
I'm a part time REI, so I have to do my turn work around my day job. This means that for my apartments I tend to push the price up regularly because I can afford the time to do the turns and get it back on the market as well as do upgrades and fix deferred maintenance from the prior owner. I don't push the price up to full market for current tenants because it'd be quite a shock to them and I don't have the time to turn an excessive number of units at once.
For my big single family home I let it languish below market. The tenant is great, pays like clockwork and doesn't have many maintenance calls and keeps the yard looking great. It might cost me a months rent not having it at market but that's better than a months rent vacant, another months worth of rent for paint and carpet, 2 weeks vacation to do all of it and then get a new renter who probably can't live up to the current guys standards.
Tenants expect rent increases. If you do not raise the rent or do not raise it to market annually you only hurt yourself and your tenant will likely never say thank you.
If you are not at market the only reason would be because you are providing a substandard unit. Tenants are willing to pay what a unit is worth, that being market, if it is worth market rent. If you do not then you are simply giving money away because you do not understand the business or because you are soft hearted
Tenants are not soft hearted so you are only doing it to make yourself feel better.
I just had a family move out after 8 and a half years. They started at $950 a month and were paying $1100 when they left. They were great and never bothered me over little issues. When they left the place looked like the day they moved in (real close anyway). Market rent when they left was probably $1200 or $1250 but never had a day of vacancy.
Providing housing for seniors on a fixed income and those on disability is a noble cause. They need affordable housing. However, make that your business model. File as a non-profit, draw a salary, and specialize in housing that has a sliding scale. I bet you can even get some of the larger investors to donate homes that they cant sell or don't want to bother trying to sell for tax breaks.
There is big money in non-profits ask the CEOs of Unicef, Red Cross, United Way, Wounded Warriors, and Goodwill who all have salaries between 300k and 1.3 million. I prefer to make my money honestly but who am I to judge.
You can provide housing for low-income people - and still get market rents. Just rent to Section 8, or become a tax property LITHC, I think is the acronym - low income tax housing credit, where you offer subsidized housing to the low income tenants - and different government agencies pay the difference - so you're collecting market rent.
Sure, offer low income housing. But, you don't have to subsidize the tenants yourself.
@Steve Potash I'll be the first to admit that I'm not very good at this land lording business. Really struggling with all the day to day decisions that I must make. My husband was very much like you. Rarely raised rents and when he did it was usually because of increased expenses. For example, The city where our senior complex is located upgraded their sewage plant and increased the water/sewer rates by about $80 per unit. He increases the rents by $30 per unit. He was not good at maintenance though and I guess some will say you get what you pay for and our rents were low. We have many long term tenants and the rents were not raised. When I took a more active role in the business I was not happy with this model. It didn't help that the newspaper ran a front page story about increasing apartment rents in our county and our little town was the lowest in the county and we were bringing the average way down.
If we were talking about $20-30 below market I could handle that. That wasn't the case. Our typical difference between existing and new move-in is in the $100+ range.
I am also motivated by not wanting to be a slumlord (anymore). LOL
You mention "good tenants". I just had a conversation with a tenant who drives me absolutely bonkers with their constant requests for upgrades. In trying to justify another of his desires, he said he was a "great tenant". I'm afraid my reaction was not as professional as it should have been. True, they pay rent on time each and every month. But they are truly PITA tenants and this is confirmed by every tradesperson that must deal with them on my dime.
I would be curious as to what constitutes a good tenant and on the other side, what constitutes a good landlord. Just like you, Steve, my husband always had lots of referrals from current tenants and the same tenants would rent from him multiple times. I'm not sure I will have that same legacy.
@Steve Potash I'll be the first to admit that I'm not very good at this land lording business. Really struggling with all the day to day decisions that I must make. My husband was very much like you. Rarely raised rents and when he did it was usually because of increased expenses. For example, The city where our senior complex is located upgraded their sewage plant and increased the water/sewer rates by about $80 per unit. He increases the rents by $30 per unit. He was not good at maintenance though and I guess some will say you get what you pay for and our rents were low. We have many long term tenants and the rents were not raised. When I took a more active role in the business I was not happy with this model. It didn't help that the newspaper ran a front page story about increasing apartment rents in our county and our little town was the lowest in the county and we were bringing the average way down.
If we were talking about $20-30 below market I could handle that. That wasn't the case. Our typical difference between existing and new move-in is in the $100+ range.
I am also motivated by not wanting to be a slumlord (anymore). LOL
You mention "good tenants". I just had a conversation with a tenant who drives me absolutely bonkers with their constant requests for upgrades. In trying to justify another of his desires, he said he was a "great tenant". I'm afraid my reaction was not as professional as it should have been. True, they pay rent on time each and every month. But they are truly PITA tenants and this is confirmed by every tradesperson that must deal with them on my dime.
I would be curious as to what constitutes a good tenant and on the other side, what constitutes a good landlord. Just like you, Steve, my husband always had lots of referrals from current tenants and the same tenants would rent from him multiple times. I'm not sure I will have that same legacy.
But do you want the tenants they are referring? Sure, they're referring their pals to live in the place where the landlord never raises the rent.
The answer to a tenant asking for an upgrade: "That upgrade is not budgeted until the rents go up to $________. If you would like to start paying that amount of rent, I'd be happy to do the upgrade now."
The best descriptions of a good landlord and good tenant can be found in the state landlord-tenant book for your state. If you just google your state and "landlord tenant handbook," you can usually find one. In it, it will list landlord responsibilities and tenant responsibilities. Meet those responsibilities and you are "good."
What it usually boils down to is you providing a place that is habitable, and not entering the property constantly (quiet enjoyment) so that they can't enjoy their unit in peace. Fixing things within a reasonable amount of time.
It's a business relationship. You have a product, they are the customer. Neither side needs to continue the business agreement, after the initial contract expires.
For me, a "good" tenant is not just a tenant who pays the rent on time. They are also respectful of me and my time. They don't bug their neighbors. They don't park taking up two parking spaces. They don't sneak in pets. They don't complain constantly about things that are not reasonable complaints. They don't ask for upgrades without expecting to pay more rent.
I think you're going to do great and you're right to think your husband's model was not a profitable one.
@Rhea Jackson, my husband and I have typically raised rents with each turnover. Like many here, we were of the mindset that rent increases during a tenancy would drive our good tenants away. However, the reality is this: Your taxes, utilities, insurance, materials, and maintenance costs will continue to increase. To keep a profit you have to counter those costs. This is true even when you have no debt service and you own your properties outright. Tenants do not leave when those increases are reasonable and predictable, simply because 1) it costs them more to move and 2) for tenants,there is risk that comes with a new landlord - For example, will the landlord offering the cheaper rent be responsive to emergency repairs?
If you have established value and quality in your rental, price becomes less important. An annual increase of $15-30 per month will not cause a good tenant to move, but deferred maintenance, harassment to quiet enjoyment, and exorbitant rent increases will.
I hope this helps and good luck!