Do you raise rent on good tenants?
Investor · Philadelphia, PA · Member since 2010 · 739 posts · 372 votes
My theory is if a tenant pays on time and takes care of the house, leave the rent alone until they move on and then adjust it for a new tenant.
Have heard so many times from friends where their landlord raises it and they're agitated.
What's your thought?
I see a lot of justifications here about raising rent based on "being a business". So lets talk about some examples of how businesses work.
On a very low level, consider Home Depot. If you go in and buy (1) 2x4, you pay retail price. If you walk up to the contractor desk and order a pallet worth, you get a different price. Selling in volume has a value to HD, enough so that they are willing to accept a price below retail, likely because their cost per piece is lower that way. Are they simply home improvement material hobbyists because they left money on the table?
As an agent - my real estate business - I ask for a certain commission based partially on how easy a client will be to work with. I consider if this is a person who will be calling me twice a day vs someone who will only email me their signed documents, among other things. Those things have a certain value to me, so I am willing to give up a certain amount of my potential income to ensure I get the business and keep a long term, happy client. Repeat business (of good clients) and referrals have a huge value to me. Am I simply a hobbyist because I don't charge everyone the same rate or because I left 0.25% on the table?
In my rental business, I value long term tenants who pay on time, keep their unit maintained, and don't pester me with irrational complaints. I value that because those tenants provide me with low turnover costs, low maintenance costs, and require very little time of my time. Because of each of those reasons, those tenants net me a higher profit on my units, even if I am not grossing the highest income possible. On the flip side, I could charge everyone "retail" rents and get retail, one-off clients (tenants) who will cost me a higher % in comparison to the % increase in income, leaving me with a lower net.
Businesses are about building and maintaining relationships that are beneficial to both parties. Just because you can do something, like raise rents, charge certain fees, have certain rules, doesn't mean you should if it costs you your relationship with a client who brings you a high value. I'm certainly not advocating holding your rent @ $400 when the market is @ $700, but take into account the NET amount you are making on your tenants when deciding if its worth it to trade a 3% rent increase for a possibly broken business relationship with your client.
I ALWAYS reevaluate rents upon move-out - - time to take a litmus test on FMV.
Should I squeeze every nickle of cash-flow or be happy with low-to-nill vacancies?
For me, being a remote landlord, the absence of vacancies is more precious than another $10 bucks, especially when that change creates a defacto risk of a move-out (that which I would rather not face).
I market my rents marginally below FMR to intentionally remove the tenant's motivation to relocate - - it would cost them to move for any reason!
I bought with a cash-flow on day-1 and could tolerate two vacancies before creating red-ink, so it's crazy to be penny-wise and vacancy foolish.
I know there are those here on BP that harp on hobby vs professional business operations, but there's more to the bottom line than just GSI - - consider the opportunity losses created by vacancies.
With the rate property taxes are going up in Austin, we raise rents every year--and explain the increase with market details. We still try to stay just below market rents, and make sure tenants know that. But if you aren't raising rents every year, you're eating into your own profits.
Hobby landlords primarily make business decisions based on fear. Fear of what a tenant may do. They do not raise rent due to fear the tenant may be upset or leave, they do not serve pay or quit notices for fear the tenant may leave or be upset, they do not evict out of fear the tenant may retaliate. Professional landlords do not operate out of fear and will ultimately operate a more efficient and profitable business. Hobby landlords are less concerned about profits and more concerned about having to work.
For the small time operator the fear that a tenant may leave can be a frightening proposition since they are not equipped to replace that tenant efficiently and without a vacancy. Although the likely hood a tenant may decide to leave due to a annual rent increase is very low the fear it may happen impedes their ability to reason that through.
The reality is that if a tenant likes where they are living and rent is at or near market they will not leave to pay the same rent elsewhere.
Hobby landlords do not make their decisions based on profit margins they do so based on what is the least amount of involvement and effort required in operating their business...... They do not want to raise the rent due to the fact that it may result in them having to put effort into finding a new tenant. Their excuse is a vacancy will result that will cost them money. This is due to their desire to avoid hands on involvement that would require them to operate their business efficiently.
Less effort = lower profit margins.
People who are just thinking in terms of cash flow are missing a huge benefit.
Say I have an 8 unit with rents at $700. To keep things simple let's value the building on a 1% basis. So my building is worth $560k.
Now let's say I raise rents to $750, and in doing so I get two months of vacancy and some turnover expenses. It might cost $2000 in lost cashflow. BUT the value of my building is now $600k. I can now refi or sell to capture way more value than I lost in cashflow. Plus I have tenants who are willing and able to pay market rent in the future.
Your reasoning is always part of prime importance to professional investors but over the heads of hobby investors. All properties evaluated by cap rates suffer due to under market rents. This is a good thing for investors looking to buy. We always hear of investors taking advantage of hobby landlords charging below market rents.
As soon as you hear a investor claim they are charging below market rents to retain a good tenant you know your are hearing from a hobby investor that has no clue of the bigger investment picture.
You also need to keep in mind that the rent rate has no impact on a SFH investment since the majority of potential buyers are home owners not investors. SFH hobby investors lose either way.
I really think the " QUESTION" is do you raise rents... if you do you keep up with inflation, if you don't your a charity,,
Does the gas station at the corner care if you drive a beater or a new car?? the gas is priced as the cost that is within the market for the goods.. Ya it makes sense... you either buy gas or walk.. you either raise the rents or become a charity.. or are you a non-profit charity already ??
I give tenants that are loyal, pay on time, a carpet shampoo with lease renewal, refresh paint in a room, but they all get market price increase if I'm increasing rents..
Good tenants get a reasonable bump in rent, and bad tenants get their walking papers.
With the way the market is here, tenants expect a raise in rent. My rates are reasonable and my services/dwellings warrant the monthly rent cost.
I just had tenants renew their lease with a 2% increase, and they were thrilled.
These little $25-$50 annual bumps in rent are rarely a point of contention from my experience, but I'm only invested in one particular region (greater Boston). I can't speak to other markets.
Tenants should expect a rent increase every year. Full stop. Set that expectation with all of your tenants, and have it in your leases.
Inflation is a reality, and it is not going away (even in good times, the target is 2-3%/yr). Your mortgage payments may be fixed, but your taxes and utilities will increase, your maintenance material costs and labor rates for repairs have gone up, and your property is wearing out (appliances, flooring, water heaters, furnaces, roof, etc. all have a lifespan and will eventually need replaced). All of these are expenses that you must cover as the owner, or deferred maintenance will build up and your property will deteriorate. And, if your rents aren't increasing to cover maintenance and increased costs, you are paying yourself less each year for your time and money invested.
I didn't always think this way. I was the nice landlord, who kept increases nominal or let things be to keep good tenants. Over time I found myself with properties with rents hundreds of dollars below market and tenants who were never moving out because their rent was so low. There was limited money left for making improvements. And good tenants don't always stay good tenants. And the lower returns from lower rents meant I was less able to do major improvements or buy another investment.
You decide the maximum monthly dividend return from your investment when you set the rent. The value of any rental property is based on the expected cash flow. Rents are the top-line for your cashflow. The costs are going up each year. If the rents aren't going up more, the value of your investment is going down.
Every year, expect a rent increase.
i will say depends of you current rent and cash flow . For tenants that pay on time and easy to deal i dont or very min i want them never to leave
I will give you a tenant's point of view, as our Land Lady jacked our rent $375/month with our new Oct 2022 lease.
We are livid. She mailed the lease post marked 7 day before she required us to let her know if we would stay or leave. When we got the packet in the mail, we were blind sided by the large increase in rent. She has not done much of an increase in several years. She trapped us into signing the lease as 1) there were no reasonably priced properties to rent & 2) we were not planning on moving this fall, so no money saved, nor household packed.
Her property needs new windows because they leak and we have had major water damage, bathroom vents to be installed & mold removal from said bathrooms. Gave that list to her property manager in March this year & he just smirk at me. We are hearing crickets for these repairs. It took years to stop the hot water leaking in the master bath.
So, we are currently looking for a new place to live and will move as soon as we can afford to.
@Linda Fitzwater answered the question beautifully. If you raise the rent a bit every year, you hopefully won't need to shock the tenant with a huge increase. If the increase still keeps the rent a bit below market there is little incentive for the tenant to move. If rent goes from $1200 to $1275, but the same place down the street is $1350 the only reason to move is an emotional one. I heard Dave Ramsey say one time, you as a landlord did not raise their rent, Mr. Market raised their rent. One thing to keep in mind though, if market rents are $1350 and your tenant has been there for 5 year, your rental may not be in the same condition as the $1350- one down the street. The one down the street may come with brand new carpeting, fresh paint, newer appliances..
My theory is if a tenant pays on time and takes care of the house, leave the rent alone until they move on and then adjust it for a new tenant.
Have heard so many times from friends where their landlord raises it and they're agitated.
What's your thought?
I have read through all the posts to the replies to the original poster. I am not opposed to paying more rent as a *small* increase IF the property is in great shape. Everyone here needs to understand that when a landlord refuses to keep their property repaired and is in violation of Local County Codes, it makes it tempting to find good rental property to move to, AND to report the property to Code Enforcement, which now I am planning on doing. I came out of my retirement and found an excellent job with great people. I plan on working until I have to live in the retirement home. So, now since I am able to afford literally new construction, I am leaving this leaking moldy house. I know for a fact that the required repairs the County will force the landlord to do before they will allow someone to live here will be upwards of $50k.
Let my experience be a warning to everyone here.