Should we Raise the rent?

12 Replies

Hey there! Looking for some thoughts on raising the rent. Here is my particular scenario: We have a property in Orange County, Ca. It’s in an extremely desirable, historic area, in an A+ school district. Homes rent in a few days at most in this neighborhood. The house is a 3 br/1 ba Craftsman, with a pool, pool house, and outdoor bath for the pool. The family that rents has been there two years and pays on time, takes excellent care of the house, and are all around good people. They have said they will stay as long as we let them. Right now, the rent covers all the expenses, maintenance, etc, plus we have a nominal cash flow of $75. Two years ago, the rent was just right for the market, but it was on the high end for the tenants. It was our primary residence and we moved due to job relo so we were more concerned about maintaining a place to live in OC if the move didn’t work. We don’t want to sell, and all the other properties we own are longer term, buy and hold situations. Now the home is under market, by $350 at least. I would never raise it that much unless it went vacant, but we were considering nominally raising the rent this third year, maybe $25 or $50. I know the tenants love the house and they want to stay long term (their last rental they were in for 7 years) but I also don’t want to lose great tenants over a few bucks. Thoughts? How do you determine raising the rent?

extremely desirable

Homes rent in a few days

cash flow of $75.

under market, by $350

don’t want to lose great tenants

maybe $25 or $50

Hobby landlord

,

I operate as a professional business, If I can not charge market rent I am not operating a efficient business. If you don't want to raise the rent to market, $50 being a insignificant amount, why bother raising it at all. Your decision to not raise the rent every year to market is a major investment mistake however it is not for others to judge how a hobby landlord chooses to operate there business.

I would start with your goals.  What are you hoping to accomplish with this property?

The current cash flow is not enough to recover long term capital expenditures, like a new roof.      Even if you got the full rent bump, the return on equity can't be good.    You could make a lot more cash flow by selling and investing in other markets where you get strong returns.   So, I'm presuming you are not focused on cash flow.

If your plan is just to hold for long-term appreciation, I would think you would want long-term tenants.  In that case, nominal rent bumps may be ideal for you.

Always raise something each year. Rent should have raised at year 2 as well, particularly in that type of market, but that ship has sailed. I would not have any hesitation about raising. You've not mentioned the monthly rent on this place to get a feel of how much of a % raise this is. If you're renting it for $1000/mo then yeah, $350 is a big bite. If you're renting it for $2500, then I would not hesitate to raise it a higher amount. 

I always raise every year, even if only $10-15 on my $750/mo rentals. Taxes are always going up, insurance, interest rates, etc. If you aren't raising something each year, fast forward a few years and you'll be in a tough spot where you do risk losing a tenant.

Good tenants are hard to find.  That said, letting your rents become too far off from current market can be detrimental as long term, you will have expenses like HVAC, roof, water heater, renovations, etc., and rising rents can offset those costs considerably.  Raising the rent but still being under current market is a viable long-term strategy that I utilize with long-term tenants, and I offer 1-year and 2-year options, so if they are currently paying $1100/month but market rents have increased to $1250, then I offer $1175 for one-year option and $1150 for 2-year renewal, hoping they'll just sign 2-year and I don't have to think for 2 more years.  If they leave, I turn it over and I advertise at current market.  

@Amber Matas I can appreciate your situation as we have some potential long termers too.  The key is to adjust it closer to market rate while still giving the current tenants a feeling of value.

If $350 more would bring it to market, try a rental rate increase of $225-$275.  The Tenants may go look elsewhere, but come to find that they are still getting a deal by staying with you, and while you are discounting slightly, you will get the security of having the good tenant that you like.  So, it is a win-win.

Tenants know the game when it comes to rental rates, and don't think for a second that they don't "shop" rates every year at renewal time to make sure that they are still getting a good deal where they are.

I just had to raise a $995 rate to $1,150 and a $1,225 rate to $1,400.  Both tenants stayed without complaint.

You've def gotta raise it, small raises often add to your cashflow but don't rock the boat.   A big question nobody has failed to mention is the cost of turnover if you raise too much.   If the unit needs nothing then go full boat, if you've got significant repairs then go lighter.  My biggest expense is tenant turns.  You'll lose at least one months rent, plus whatever other costs there are.

@Amber Matas I would raise the rents by $100-150 assuming that the tenants are as great as you say, take excellent care of the place and you haven't raised rents. You will catch up in 4 years (assuming same tenants). 

Historically, your market has exhibited healthy capital appreciation and properties have maintained their values. Since you are not an active landlord, in my opinion, for single family homes, it is better to have excellent long-term tenants who take care of the property. 1 month's vacancy will wipe away any cash flow "savings" for the first year. 

thanks for all the input. This particular home rents for $2700 a month. The $75 is after we have put money away for repairs, paid taxes, etc. As I stated but probably not very clearly, this wasn’t an investment property to begin with. The homes we purchased and own as investment properties we have a very different outlook on. We raise the rent yearly. 

This particular house was our primary residence and we rented it out inItially because we didn’t know if the relo was long term or not. So we weren’t super concerned other than covering the expenses and having good folks who took care of it in case we moved back in a year or two. 

Now  that we know we are settled in our new area, we are looking at it as it’s now an investment property since  we aren’t moving back into it. It just seemed like a big jump for one year to bump it that much. That’s why I thought bringing up to market over two years or so would be easier. If they moved out of course I would list at market. 

I’m not offended at being called a “hobby” landlord, but I am not sure why that was really mentioned. I am not some big time investor. I own three other properties and I run those as a business that all cash flow more than $500 a month and as I acquire more I will run those as a business as well. This isn’t my full time job. We all start some where. 😊

I appreciate all the input and I’m thinking  that the tiered option of one or two years at different rates might be a good way to go. 

Thanks all!

@David K. great point! We inspect the house about twice a year and they have kept it pristine. I’d probably just repaint if they left and we could advertise and have it rented extremely fast in this particular neighborhood. All good points!

You are probably better off selling and taking advantage of the $500k tax free capital gain exclusion for living there 2 of the last 5 years.

If you don’t want to sell it doesn’t make sense not to raise it to market or very close to market. Tenants in SoCal expect rent increases. You can’t be scared to raise the rent otherwise you are imposing rent control on yourself for no reason. Since it is in a solid area it will be easy to re rent to a quality tenant unless you are truly terrible at tenant screening.

Sorry to be harsh. I’d be friendly to you too if you were giving me over $4k a year.

@Amber Matas I refer to any/all landlords that do not maintain market rent as hobby landlords because there primary interest is not making money.

If you know your rent is below market and do not raise it to market every year then making money is not your primary goal in investing in real estate.... correct. A hobby landlord places more value on good long term tenants than making money because they do not have a efficient process in place to minimise the cost of turnovers.  Professional landlords have the cost of turn over built into their vacancy rates and therefore have already budgeted for the cost. Additionally landlords that maintain market rents do not face tenants leaving due to rent increases. The problem you face and the fear of raising the rent too much is a hobby landlords problem.

To be honest you are choosing to losing more cash flow in a month than many investors ever make. That makes you a hobby landlord.

Knowing that rental rate, $25-$50 is definitely too low. I'd go in that $200-$275 range without doubt. A $200 raise is 7.4% 2 years later, or about 3.7% a year in increase, that's not bad at all in a market that sounds like is increasing as much as yours is.

I'd consider doing what Cara said, tell them it's $300 increase if they sign one year but you'll be happy to limit it to a lesser amount if they sign 2 year.

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