Hello, I have a rental in CA with current rent of $2,350 which I have not increased for 3yrs. I have good tenants, they are very helpful and takes good care of my house. For this reason, I decided not to raise my rent but since I have not raised the rent for 3yrs I feel that it's time to raise a little especially with many recent fixes. There is no cash flow in this property so anything additional is coming out of my pocket. There isn't a whole lot of rentals in this area but rents go from $2,300 to $2600 for comparable properties. Every year my tenants tells me they would leave due to kids school situation but staying put. I was thinking of raising $100 but hesitant to do so. Would $75 be more appropriate? Thank you,
@Sharon B. If your long game is to hold, then generally speaking, I feel like a good tenant is worth more than a half to full month's rent. In other words, it's not worth risking losing a great tenant to gain $900 to $1,200 per year in your case.
If your strategy is to sell, then set the rent to a price you'd be willing to continue to hold at--but maybe wait until February or March, when the spring market comes on. If you're tenants leave because of the rent increase, great, sell the house.
I don't know if I am reading this correctly. The property is operating at a loss & the tenant is "soft threatening" you every renewal? I can't speak to that. I also can't speak to not increasing rents 3 years in a row.
For my units I use the (to be phased out on vacancy) rental control ordinance in my town as a guide. That sets a floor or 1.5% or the annual CPI of my area- whichever is higher plus any increase in property taxes. An increase of $25-35 is fine by me. I like this because it is less of an arbitrary number if a tenant were to raise an issue and I always know I could get a bit more at market if they decided it was too much. This does not include any capital improvements.
You have a great annual CPI for LA 2.8% as of last month. If you had maintained this strategy for the last 3 years (2015: 1.4%, 2016: 1.1%) your tenant would have seen nominal increases in his rent all tied to a fixed formula and you would now be poised to increase his rent from roughly $2410 to $2475. You would have $300/yr more than what you are after now and you would not have shell shocked your tenant later.
These are much smaller numbers which a tenant can absorb over 3 years rather than a 1 time 4.25% hike. It is modest but you would have had:
2015: $360/yr more income
2016: $300/yr more income
2017: $780/yr more income
Instead you wish to hike it immediately to $1200/year a gain of $240 less (plus the yearly value of $) And in the tenants mind it is arbitrary and personal.
With that being said I would increase it to market, but thereafter establish a formula that you adhere to. Tenants always have the capacity to impress us with a good deed or good maintenance or maybe just not being complainers- You thank them by renewing their lease, not giving them a rent reduction.
As the CPI demonstrates- every year that we do not increase our rents we are effectively giving our tenants a rent reduction, to the point that your unit is operating at a loss. Or put a more flattering way, you are operating a charity without the accolades.
Best of luck!
Thank you so much for the valuable information. This is my first home and first rental. I'm doing everything in the book wrong and learning the expensive way. I'm hoping to turn this around. Thank you :-)
If you were operating as a business your rent would now be a minimum of $2476, probably closer to $2600.
$2500 would be more than fair but not likely to make any difference of significance to your bottom line. In light of the fact that you are OK operating with negative cash flow there is no point in risking losing a tenant in your market unless you are prepared to set the new rent at the top of your market.
My feeling is you are not interested in making money as opposed to having a quiet tenant that does not require you to have any management responsibilities.
Begs the question as to why you are bothering to risk raising your rent.
@Thomas S. Since I'm so new to real estate, I had no idea what I need to do as a landlord. I do have a day job that helps support any sudden expense I come across with the property. I'm actually torn between keeping and selling this property now that property price has came up a bit. I feel that I have to start raising the rent at some point or else I'd be way below market and as @Patrick M. puts it, doing lot more charity work. Worse case, if tenant do decides to move out, I may just move in and rent out the rooms. I'm learning a whole lot from just this discussion alone. Thanks so much for your post!
@Patrick M. Thank you so much for the valuable information about using CPI to calculate rent increase. I will use this formula from now on. You mentioned capital improvements, would this be similar to an upgrade rather than fixing AC or replacing water heater etc? Done both this year... if you had capital improvements how would that be calculated? Just replaced new facet to what tenant liked (old one was leaking), fixed bathroom wall with brand new tile walls and shower. My first rental property has been a money pit but thankfully I was able to support it. Because I bought it wrong, not knowing what I was getting into, I'm paying the price for valuable education. Perhaps, I'll make different mistakes moving forward :-D
@Sharon B. I put a lot of weight on tenants who have proven to be low maintenance. I would definitely opt for less-than-market rent for ease of management.
Having said that, I would be concerned of the tenants continuing to say they plan to move at the end of the year. That would not give me a lot of confidence that they will continue to be long-term tenants.
How confident are you on your market rent projection? I would try and do more comparative analysis to pinpoint what fair market rent is. This will help determine how much "wiggle room" you have. Is you rental $50 under market or $500?
I think setting a precedent is important as well. Setting a pattern of manageable/reasonable rental increases will help set expectations. If they prove to be good tenants, you can always increase less than market increases.
@Larry T. Thanks for your tips Larry, it's good to see different perspectives. I was in line with your thinking to make the tenant happy and keep them as they don't give me any trouble and they manage the property like their own. But recently I've been debating to sell or to hold for the long run. it's in a developing area in the best location of the worst town so it's been hard to make this decision.
@Sharon B. Sounds like you've received some solid (albeit expensive) education. I'm sure you'll be able to leverage that in the future. Feel free to shoot me a message if you have any questions. I'm a newbie myself but I'm familiar with the Pasadena area.
@Sharon B. for my figures the only capital improvements pass on would be ones that directly benefited the residents as a whole: making a parking area, renovating the basement for storage, etc. The rest I would consider maintenance and upkeep regardless of how I claimed them tax-wise (i.e. faucet= maintenance expense, new roof= capital improvement).
I would definitely want to pin down my market rent. I had a mentor to help me at times before I felt comfortable- If you lack this I would suggest contacting a realtor and giving them your business if they can get a higher rent. I am usually very much against this...
I don't know your market- but over the last 3 years where I am, on a whole rents have increased quite a bit. To have had no increase in rent for 3 years and still be at market is surprising for me. That is why I suggest the realtor.
I also don't understand the "don't worry about it if they are nice people, continue to lose money" mentality of some others. It sounds like you are a very conscientious landlord and maintaining and upgrading your property. You deserve to be paid. You are not a charity...
(just had to make sure that url was not www.smallerpockets.)
It is important that you have an accurate market rent forecast for your property- contact a realtor.
@Patrick M. Thanks so much for your solid advice. I will reach out to friend of mine who is an agent.