Nuisance rent raises.. are they worth it??

Question

Hi guys, I am new to the landlording thing. I have 7 units now and they've all been very successful. almost no vacancy. I read hear and in books about how you should always raise the rent each year. I tend to agree because of inflation.

However if you have very good tenants, and you are already basically charging market price for the rent, I think you may annoy your tenants over time to actually find a new cheaper rental.

Curious what the thoughts are on this, do you ALWAYS raise your rent by 1-3%, or are some of you just keeping it the same on your quality tenants that you have very little problems with ?

Joe Ebanks · Answer

@Tom Shallcross yes i understand that but it does not take into account the loss to NOI because of increased vacancy rate, which is certainly a risk. they are 7 seperate houses. I do think if you have great tenants with no problems, and you are already charging market price for rent, you can push it too far potentially.

increasing your rent even 2% a year I think after a few years you can be charging more than market price for your rental and you're risking a higher turnover rate. It depends on how desirable your rental unit truly is vs whats available on the market.

I just feel like I may annoy one tenant whose likely not to move if I do not mess with him. I refinanced a home and my monthly total costs are about 870$. hes paying 1330 now, started at 1300. and theres actually not many other rentals in the area to compare it vs. Its a pretty nice house and most rentals are in a lower class around here. But I guess 20-30$ a year probably wont cause him to get up and move, and will make a difference in my cashflow.

And the other homes I have, Im already getting a very fair rent. In my opinion, some are even higher than I would expect to get... so Im leaning towards just leaving them alone or maybe just raising it 1, or 2% maximum.

@Chris Grenzig yes, i am thinking more along these lines but came here for more opinions and play devils advocate. Certainly minimal headaches is huge especially the more units you own, and are self managing.

Chris Grenzig · Answer

@Joe Ebanks It all depends on what your end goal is. If you want to cash flow as you are, like your tenants, and want minimal headaches, either don't increase or do it much less. If you want to push the value, and NOI you may want to look at increasing rents. That being said, you should look at what the market is and what you think it will cost you to turn the unit and calculate whether that is worth it for you. If there's little to no increase in rents and it will cost more than you would make, I would lean towards less rental increase.

Tom Shallcross · Answer

@Joe Ebanks - I like the options outlined in this blog that gives the tenant control to choose an option:  https://www.biggerpockets.com/renewsblog/raise-the...  By giving them options, you can play with locking in time vs obtaining a higher rent.

Also, you mentioned 7 units, if you have a 5+ unit, then raising rents becomes even more important as it will directly effect your NOI and be divided by the CAP Rate.  Adding $25/door on a 5 unit doesn't sound like much, but on a 5% CAP rate you just added 30k in property value

(5 units *25 = $125/m which equates to $1500/yr divided by .05 = $30000).  Now that 30k is on the table, that $25/door is a big deal.

Nathan Gesner · Answer

I implemented a mandatory increase of 3% every year. It's easy for the tenant to accept and never high enough to justify them moving. The tenant knows in advance so there's no surprise. The owner knows they're getting an increase to keep up with the increased costs of taxes, insurance, etc.

Example:

Year 1 rent is $1,000

Year 2 rent is $1,030 ($360 increase)

Year 3 rent is $1,061 ($372 increase)

Year 4 rent is $1,093 ($384 increase)

Year 5 rent is $1,126 ($396 increase)

These annual increases don't produce much income for the owner ($1,512 spread over the last four years) but it helps them stay up with inflation. If the tenant stayed for ten years, it would result in a 30% increase in rent which is much better than leaving them at $1,000 a month and getting way behind the curve.

Thomas S. · Answer

I have raised my tenants rents annually every year without exception. To my knowledge I have never had a tenant leave for that reason. I have 30 plus tenants so it would be a considerable financial loss to not increase rents annually. Hobby landlords with 1 or 2 tenants have different priorities than simply making a profit.

Costs of living rises every year. Tenants generally expect rent increases every year. I do not want to fall behind market rents, I want to contribute to setting market rents and I do not want to turn my business into a charity by supplementing tenants rent. By not raising rents annually a investor is losing income. I do not understand that approach to business.

What happens when a tenant stays too long. When you fall too far behind the market and a tenant will not leave how do you get back to market. If you are put into a position of having to sell how much do you lose on the value of your property when you are below market.  If you do not have a crystal ball it is wisest to get your tenants acustom to annual rent increases.

Russell Brazil · Answer

I never raise the rents on existing tenants. Every year I always think its not worth the headache. But then on my properties that Ive had tennants in for years upon years, I end up with rents far below market which kind of stinks.

Mary M. · Answer

I give my tenants options: sign a lease and get one price. MTM gets a slighlY higher price. I also give tenants several months to decide.

Of course I also have a tenant who reminds me to raise his rent each year :)

Tom Shallcross · Answer

@Joe Ebanks - yes if the margins are that high and he/she is a good tenant it's probably best not to rock the boat.  I'd give him the multiple options so you can either walk away with more security (longer duration) or slightly more rent income.  Maybe keep him at 1330 if he agrees to a 2 year lease or offer him a one year lease at 1360.  Both seem fair and the he can avoid the rent increase for two straight years if he agrees to lock in.  You get security of no turnover and he gets a solid deal and peace of mind of knowing his next 24 rent payments will be locked in.

This makes it an either/or discussion opposed to your option vs other market options.

Nuisance rent raises.. are they worth it??

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