Tell me about your rent increase process...

13 Replies

Hey everyone. What is your rent increase process? Do you do a certain percentage every year? If so, is it a percentage or just an increase by a certain dollar amount across the board? Or do you just do it when you feel like you are way under market? I can't decide what to do. I'm in such a small town area that there really aren't good rent numbers to go by, but there is also a shortage of rental properties.

Thanks!

If they are a good tenant don't go so high as to run them off. You have to balance that with inflation, your increased expenses each year, etc. I usually go up about $25 and that is on properties leased in the $1300/month range. However, our market is changing and rents are flattening so some tenant will be asked to pay a small amount more and others I will keep the same. It is a balancing act:)

I usually do increases at tenant turnover. Most of my tenancies last from 1-3 years. A few have gone longer than that, and I will usually increase them when I get an increase in expenses (like property tax increase).

Balancing act indeed!

I think it is important to always have your finger on the pulse of the market, and where it is trending, while also rewarding long term tenants for staying with you (thus not causing you turnover expenses).

When calcuating an increase of an existing tenant, make it small enough of a bump that the thought of moving over $XX isn't worth it, and also just below what their replacement options would be if they did decide to explore options.  Sometimes this equates to a $25-$50 bump, and sometimes this can even be a $150 bump, if the market dictates it.

You mention that there aren't really market trends or numbers to compare, but put yourself in the Tenant's shoes. If you wanted to go out and find a place comparable to yours, what would your options be? If the answer is NOTHING, then you may have more leverage than you think. ;)

The first thing I want to look to is my costs and  to what degree they have increased.

Property taxes are broken down by square footage of my units/ month.

If there are no other significant increases- then I look to the year over last CPI and the market rents.

Always increase

I don't think of it algorithmically. Setting rent prices is not like setting the price of a consumer good - say milk - where demand is going to be far more inelastic and generally static over time. In other words, the demand for a rental is going to change every single day. You could absorb every piece of data you can which tells you your 2/2 SFH should get $1200/month, but if you happen to list it at the same time as 200 other 2 bedrooms in your city, then it's probably going to sit vacant for a long time without a price drop. However, if you list it at a time where the inventory on the market is extremely low, then you could list it for $1250 and it'll probably still get snatched up immediately. Unfortunately, that's just something you can't predict. It need to be tailored towards the exact time you decide to list the unit. Check the market and price according to the competition.


The good news is that it's way easier to get an increase on a renewal than it is on a vacancy. Less pressure on the owner to deal with incremental vacancy and more pressure on the tenant to take the bird in the hand rather than move again.

When I want to do an increase it's because my rent is now below market or some other cost has gone up. I write the tenant a letter and state what the new rent will be and what date that will be effective. I have month to month leases so I need to make sure that the letter is sent in advance of 30 days so they have proper notice. I may also offer a reason for the increase if it has to do with expenses, but that is not necessary.

I have done $50 rent increases to 2 separate tenants once already and added in payment of the water bill to one tenant. Other than that, the one location that I have had turnover I just added in payment of the water bill as part of what they owe.

I look at the market when the lease is coming up. Or every 6ish months for my month-to-month leases. If it's a good tenant and they're within about $50-$100 of market rent, I don't bother raising the rent. If the gap is getting too large and/or they're a PITA/time-consuming person to deal with (chase rent, bad attitude, etc.), then I'll give at least a 30-day notice of the rent raise. I've always kept it in the $25-$50/month range. My rentals range between $850-$1200/month.

I am in a rent controlled market and for that reason raise the rent annually by the maximum amount allowed. This has been in the 1.8 - 2% range for some time now. Unfortunately due to having many long term tenants they are all under market. 2% is far to low for a landlord to be able to keep up with increasing expenses and stay at full market rents.

In a non rent controlled market I would be raising the rent annually at a minimum by the annual consumer price index. Rent increase should normally be in the 3-4% range assuming you have a turnover every 2-3 years. Any longer and you will very likely be below market. If you have statistics on home appreciation numbers that is another indicator of how much rents should be going up annually in a strong market.

Rent controlled or not it is necessary to raise rents annually to keep up with rising costs. There is no reason for tenants to get a free ride when landlords costs rise annually unless a investor is not prioritising their returns. Not every landlord is in it for the money. Some prefer to prioritise not having to manage their investments and are happy simply not losing money.  

Originally posted by @Jennifer Rysdam :

Hey everyone. What is your rent increase process? Do you do a certain percentage every year? If so, is it a percentage or just an increase by a certain dollar amount across the board? Or do you just do it when you feel like you are way under market? I can't decide what to do. I'm in such a small town area that there really aren't good rent numbers to go by, but there is also a shortage of rental properties.

Thanks!

I do a balancing act of sorts.  I take comparables for the area and then half the difference. So 700 rent and average is 750, then at renewal I’ll do 725.  I explain the situation to them as well about why it’s going up and that as long as they are happy they will stay.  I’ve done 3 rent increases for my units in the last 6 months like this and not a single person moved out. 

We track lots of different things to determine what rent should be.

I keep an excel file of all apartment listings in our area, and update the price as new ads come out.  I have columns for sq footage, $/sq ft calculates automatically, # beds, baths, laundry on site or in unit, parking, A/C, dishwasher, who pays utilities, etc.  Then I can sort by unit size and see what similar apartments are renting for, and I limit it to a very specific area that my typical tenants are looking in.

I keep track of our costs, of course. Taxes, insurance, and utilities go up every year and those costs need to be passed along to the tenants.  If I have made big improvements to the home itself, rents will go up.  

I generally keep our rent increases on pace with inflation.  If the tenant is moving out, the apartment will likely be rented for slightly more, but if we are making improvements before the next tenant moves in then the increased rent will reflect that.

I sent out e mails to all my tenants a couple of weeks ago, letting them know what the new rate would be and asking them to tell me whether they will renew their lease by March 1 (most end in August- we are in a college town).  If they need a little more time, I will give it to them, but this way I can start showing apartments and accepting applications now.  Giving them 2 weeks or so to look around helps- they can see what other apartments are renting for in the area and decide if it is worth moving or not.  Most of my tenants renew, unless they are leaving the area or need a different sized apartment.  In that case, they have first dibs on our other available units.

I put on my best Samuel L Jackson voice, and call up the tenant!

Joking aside, everyone will be all over the map on how they do it, so no hard fast rule. We operate in a larger market, so we can normally just price from there. However look around, check Zillow historical data on properties like yours, use some personal judgement, and inform the tenant. 

If you absolutely don’t want to lose the tenant, keep is very low or don’t raise it at all. 

Originally posted by @Jennifer Rysdam :

Hey everyone. What is your rent increase process? Do you do a certain percentage every year? If so, is it a percentage or just an increase by a certain dollar amount across the board? Or do you just do it when you feel like you are way under market? I can't decide what to do. I'm in such a small town area that there really aren't good rent numbers to go by, but there is also a shortage of rental properties.

Thanks!

Determining market rent in a small town is a conundrum very few big city investors will understand. I use HUD's Fair Market Rent as a guideline, but even that is not very helpful.

We evaluate rents yearly, and every rent is usually increased, anywhere from $10 to $40 per month. [My houses currently rent from $500 to $895.] If taxes or insurance go up more than the average, or if the tenant is less than desirable (but not bad enough to get rid of) they get a higher increase. 

60 days before the lease ends I mail a renewal form which tells the tenant the new rent rate, whether the lease will renew for a year or convert to month-to-month, and provides a place for them to indicate whether they will renew or vacate. They need to sign and return it at least 30 days before the end of their lease. 

The tenants who are month-to-month (about 1/3 of our units) also get 60 days notice of a rent increase, even though MO only requires 30 days. This form is simpler. It just states what the new rent will be and the date it goes into effect. The tenant does not have to sign or return the notice.

I start new tenants with a 2 year lease and the second year has a $25 or so increase.  I like to let them know up front to expect annual increases.  Never had an objection.  It's all about training them on what your expectations are.