Pros and Cons of Raising Rent Annually (or when renewal)

74 Replies

I wish this forum has a search function as I'm pretty sure this topic has been discussed in the past and there are probably plenty of opinions on the matter. Anyways, here we go:

I have two tenants that are up for renewal by the end of the year. I raised their rent consistently yearly for the last 3 years and they've been good tenants. With the current environment, I am hesitant to increase their rent but also seen my expenses continue to rise (property tax, utilities, maintenance cost all went up). 

Some youtube landlords like Graham Stephan advocated that if you have a long term renter that is low maintenance, don't raise their rent to push them out. On the other hand, people like Meet Kevin will say that you should always raise your rent annually no matter what.

I remembered that back in the days when I was a renter when I left college, the apartment complexes in Austin will always have a move-in special (like a month off) to give you a deal but upon renewal, they always jack up the rent by a hefty percentage no matter how good of a renter you are. So for apartment renters, the best way to save money is always threatening to leave and get the next "move-in special". (Apparently, this is also true for getting a raise at work. If you are loyal and quiet, you will almost never gonna get a promotion and raise, unless you jump ship or threatening to jump.) Apartment complexes seem to figure that out so they never actually rewarded loyalty and long term renters with low rate. SFH and small landlord might be a different story since turn over and vacancy eat into your bottom line tremendously.

What's your take on this?

 My county tases increase every year even though I pay them on time, my insurance premium increases every year even though I've been with them for 25 years, my dock fees increase annually and they haven't upgraded the marina in years, plus my dentist has raises his fees and I've been with him 30 years.  What's the problem with raising the rent a little every year? 

All of my rentals are SFH. During normal circumstances, even with good long-term renters, I raise rents annually and I'm not worried about pushing them out because I do so incrementally within the bounds of fair market rents for the respective neighborhoods. As you said, your costs increase every year so if you don't raise your rents accordingly your profits would decrease over time. Tenants are highly unlikely to incur the cost of moving if what you're proposing charging them is what they'd have to pay for a similar house in the same neighborhood at that time.

This is market dependent of course. If you're in an area with high vacancy rates and a lot of available inventory where other landlords are offering move-in incentives as you mentioned your old apartment complex did then you may be better off keeping it flat. But even then, moving a household has a cost and level of effort associated with it and it's a big hassle that most people just don't want to deal with.

All this being said during COVID I'm not raising rents at renewal time.

You have some valid concerns and raising rents is always a balancing act.  In short, it makes good sense to do a moderate increase.  If you’re tenants are reasonable, they’ll have a discussion before opting to leave.  Sometimes tenants will simply outgrow a property and leave, regardless.  We had a great couple that lived in one of our large apartment communities for two years, and then with covid they decided they want to be in a single family home.  Sometimes churn is inevitable.  I always recommend our property managers apply a moderate increase.  If you’re a smaller owner it might be worth a conversation before Just pushing out or publishing a renewal letter.  

@Billy Zhao :

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I can't see anyone moving out due to small increases at renewal, $15 - $25. Small increases help offset the ever increasing cost of property tax and maintenance expenses. Large annual increases of say $50 - $100 in my town, tenant would move. No increase can make up for one month's rental income while it sits empty waiting for a new tenant. 

I am a believer that as costs increase you must increase rent. It may be a $20.00 a month increase per renweal to break even. Nobody expects less.  

No problems everyone can go along. The BIG problems set in when you haven't increased rent in 10 years and it needs a roof. Your cost just increased $140.00 a month and now you want to get that back. Oh wait 2 H2O tanks just went out.... and the property taxes increased by $40.00 a month. Now you are the jerk raising rent by $240 a month. Maybe criminal in your area. Had you done $20 a month per year they would have never felt your pain and you can cover the difference and make it easy for them. 

Raise the price slowly, put it in reserves and improve the property. Maybe siding this year, new parking lot lines, new walkways, windows as needed etc. Keeping the rent the same and not improving the property will make you called a slumlord soon enough. Make the increases improve where they live. 

Just my 2 cents and good luck!

I don't raise rents on existing tenants. Inflation is low so unless rents in the neighborhood are rising noticeably AND the tenant has been there long enough to drag down the return %, I would rather keep the tenant in place. I understand landlords who do the opposite, just not my style.

@Billy Zhao  

If you are at market rent for a particular property type then an increase could prompt a move out.  If the unit requires a make ready and a small vacancy with turnover, what is the lost profit there versus the ability to recapture with a rental increase?   

For example, let's assume a make ready at $2k and a vacancy of 2 weeks which would be quick (3.8% annual vacancy rate).  If rent is $1000/mo, annually that equates to $12000, and weekly $230.  Your hold cost of 2 weeks costs $460 with the make ready of $2000, and let's say 50% month's rent for tenant placement, or $500, if you are utilizing a PM.  Added up is $2960.  If the rent increase is $100 per month, your recapture window is a 29 months.  If the rent bump is only $50 per month that's a 59 month window for recapture, just shy of 5 years.  

For me it is not a question of should I increase or not each year, it is what does the current market rate trends show for rents in my area and respective property type.  

I appreciate your concern for your tenants as human beings- you are one of the good ones, so thank you for setting a good example!

That said this is a business and I don't see an issue with you raising rents, at least to cover your increased expenses. If you choose not to, that's totally fine as well, it's a personal choice. 

That said, every year we sent letters to each of our tenants(that we want to renew- the ones we want to leave get 60 days notice to vacate) 60 days out from renewal giving them two renewal options- a one year lease and a two year lease. Both options include rent increases, but the two year lease is a smaller increase- it's usually about 3 or 5%. Works like a charm and we've never had anyone move out because of a 5% increase and they like the fact that they get to choose.

Best of luck!

@Billy Zhao there is a search function. Use the magnifying glass in the upper-right corner, then filter the results to forum posts and sort by date. It's not as good as it could be, but it works well enough to usually find the subject you're looking for.

I am a big advocate of small, annual increases, and then I implement larger increases during turnover. If you do no increase, the renter can easily get 10% behind market within a few years. In a really hot market, they can easily get 20% below market or more in less than three years.

My lease includes the statement that all tenants are subject to a 3% increase every year. That's just $30 on a $1,000 rental. By announcing it in advance, I reduce my need to think or the tenant's need to worry. 3% is less than what it would cost for them to move. Most tenants leave within 2-3 years and then I can deal with a larger increase.

If the market is stagnant or a tenant is considering leaving, I can always excuse the automatic increase and entice them to stay, but that's a pretty rare event.

@Billy Zhao

Within 60 days of a lease ending, I evaluate the market rent for the area.  If I am at the top I might increase it $10 dollars only.  It’s probably less than 1%.  If the market has changed even a $30 increase is fairly mild 3% or less.  Most of my tenants have been with me for 5 years or better.  Be reasonable.  The market should dictate your increase. 

Look at the market rates, but for this year if you don't want to raise it the max you normally would, simply look at what expenses of yours have increases (prop taxes, sewer, insurance) and pass those expenses on to them.  If you don't increase rents every year, you can quickly have a place that is well below market value, especially if you live in an area where there are caps on rent increases.  The little bits add up over time.

I have had long term tenants at one place with below market rents that have been there 4 years. No vacancy and no headaches. I prefer that over my properties that have turnover. Turnover is vacancy, cost of reletting, make ready and opportunity cost. I prefer no turnover but it happens... I increase the rents but its very low increases. 

We stretch out every investment calculation to a 10-year period. With these calculations, it does not make sense to try to keep a good tenant by keeping the rents low because you lose 10's of thousands of dollars and even when you keep rents low your tenants will move for a various number of reasons, anyway.

We raise our rents every year like clockwork even if we raise it only $10 per month. This sets up your tenants' expectations to get some sort of rent increase every year to keep up with inflation.

We send the same 1-line letter every year.

"To keep up with increased costs we are increasing your current monthly rent from $1500 to $1550 effective on September 1, 2020."

Some of the landlords who have the most serious problems when selling their properties are those who lagged when increasing rents. There are several properties currently for sale in San Pedro California where the properties are under Los Angeles Rent Control. The 1-bedrooms are currently renting for $875 per month and the market rent is $1600 per month. Los Angeles has a maximum annual rent increase of 4%. If you purchase one of those properties it will take you more than 15 years to get the rents up to $1600 and by then the market will probably be at about $2200. Essentially, you can never catch up with the market price for rents when a landlord did not increase the rents enough in the past.

Increase rents and if they move you will often be much better off because every time a tenant moves we increase the rent for the new tenant anywhere from $100 to $500 more than the previous tenant. Suppose, you increase the rent by $200. That is $2400 per year and $24,000 in 10 years. If you have 2 units you just made an additional $48,000. If your property sells based on the Gross Multiplier rule-of-thumb then if you increase your 2 rents by $200 you earned $200 x 2 x 12 x 13 GRM (average) = $62,400 + $48,000 for increased rent = $110,400. If you increase the rents by $30 to $50 every year, after, you will earn something like $300k to $400k.

We rent high quality single family homes in prime areas with good school districts.  One family has been with us 12 years and counting.  Most stay multiple years.  The rents more than cover our carrying costs - in most cases by a substantial amount.  Our only headaches come at turnover times.  We do not regularly raise rents because our tenants tend to treat these homes as their own homes and the stability in payments, I believe, contributes to this attitude.

In the past when we owned several duplexes in Rochester, we once had tenants leave over a $5 rent increase (from $545 to $550).  The turnover bill was quite high and we never recaptured the loss when we sold a couple of years later.  Granted, they were pretty weird people but still . . . you never know what will trigger some people.      

If your tenant moved because of a $5 rent increase then the tenant is a basket case, not the type tenant worth keeping and you should be so lucky they moved.

Contrary to my philosophy and business sense, we had a tenant with two children in one of our best apartments that could have demanded a rent increase of about $400. The tenant was in the apartment for about 18 years and due to their kids college costs they could not keep up with payments for their utilities and their phone, electric and gas was constantly being turned off.

So, me being a fool, I increased their rent every year by only $20 to $30. Then, when both of their children graduated from college one was a pharmacist and the other was a doctor (can't remember) or had some other high-paying job and increased their rent by $150.

I was figuring that since both children were still living in the apartment each child would have to pay only $18 per week. One of the children became so angry over the increase she immediately gave a 30-day notice to move her parents out of the apartment.

The point for this story is that it does not make sense to try to keep tenants by keeping rents low because tenants seldom appreciate a landlord's generosity. They will move when they want and when you don't raise rents you are the loser, anyway.

@Billy Zhao There really isn't a right or wrong answer here. Don't just raise rents for the sake of raising them. Keep them in line with the market and you'll be doing well. 

Raise them even if it is a nominal increase unless your market is stagnant it sets expectations. Otherwise the tenant gets bent out of shape because you are now increasing rent and you never did it before.  If they move over a small increase they were moving anyway.

Thanks for all the comments, I think I will summarize them and come up with a more automatic way of dealing with this. 

The next question is to determine the market rate which can be tricky. There are very few properties that are comparable for rent in the area. The range can be quite wide ($100-$300) as well. 

As a small landlord, each renegotiation is a bit personal since they know me well. This makes the decision-making process a bit harder. 

A lot of bad logic! The rental business is like every other business on this planet where every business tries to make the most profit possible. No sane person who wants to maximize profits will sell products for less than possible. It is obvious there is a curve where sales and profits decrease when prices get too high, but it takes business logic and math calculations to understand where the top of that curve is. 

Put another way. Suppose you are my professional property management company for 10, 20 or more rental units. I would fire and sue you for incompetence if you told me you caused me to lose tens of thousands of dollars in rental income because you feared tenants would move as a result of an increase, or because you did not raise the rents because the tenants paid on time, or you did not raise the rents because the tenants were there a long time and kept the place clean. The only way to maximize profits is to increase rents to what the market will bare and up to the highest part of the curve possible. 

We don't do rent increase projections base on the psychology of of what is happening with our current tenant, today. If we did we would be taking wild guesses and lose tons of money. We do rent projections based on no less than 10 years and this makes the rental business exciting and fun.

Don't think you can see inside tenants' heads so you can determine factors related to increasing profits.

I subscribe to a minority viewpoint on this. 

There's a story - possibly apochryphal - where the writer Kurt Vonnegut was at a party held on a massive Hampton estate owned by a hedge fund guy who kept talking about all of the things he owned.  At some point Vonnegut says "I have something you don't have and never will have."  

"What's that?" asks the hedge fund guy.  

Vonnegut responds: "Enough.'"

Originally posted by @Jack Orthman :

A lot of bad logic! The rental business is like every other business on this planet where every business tries to make the most profit possible. No sane person who wants to maximize profits will sell products for less than possible. It is obvious there is a curve where sales and profits decrease when prices get too high, but it takes business logic and math calculations to understand where the top of that curve is. 

Put another way. Suppose you are my professional property management company for 10, 20 or more rental units. I would fire and sue you for incompetence if you told me you caused me to lose tens of thousands of dollars in rental income because you feared tenants would move as a result of an increase, or because you did not raise the rents because the tenants paid on time, or you did not raise the rents because the tenants were there a long time and kept the place clean. The only way to maximize profits is to increase rents to what the market will bare and up to the highest part of the curve possible. 

We don't do rent increase projections base on the psychology of of what is happening with our current tenant, today. If we did we would be taking wild guesses and lose tons of money. We do rent projections based on no less than 10 years and this makes the rental business exciting and fun.

Don't think you can see inside tenants' heads so you can determine factors related to increasing profits.

I don't disagree with you, however, there are a couple of factors that are more subjective than objective:

1- is it possible that your rent increase that caused more frequent vacancies?

2- is it possible that the rental market is stagnant or even declining (like New York City right now)?

3- what if your current rent level is already higher than most other places near you. There are many mom-and-pop real estate investors who choose not to raise rent for various reasons. You are competing against them and their low rent pull down the market. In my case, my rent is $1,450/mo and barely produce cashflow while there is another unit just came on the market for $1,300. I think the owner simply didn't know how much to charge as I can't imagine how he/she can make profit on $1,300 rent.

 

Id do a minimal increase. I learned going years without a rent change then trying to do a big increase down the line tends to make tenants want to move out and for some reason take offense to the jump. I always give them the option to let me know if the new rate is out of reach and if they say they would rather move, I can offer a discounted but still increased new rate. There will be times though where though the tenants pay on time, you HAVE to get them out so you can do updates and bring the property up to market standards and not leave too much money on the table.

I would never ask a tenant if a rent increase is too high. That puts you in a position that creates an argument. Of course, any rent increase is too high for me. You make your rent increase based on business logic and not base on any of your tenants' personal issues. If I asked my tenants about rent increase I would never be able to increase rents.

As for the answers for the subjective and objectives; you are 100% right and there are many times we cannot increase rents, but the overall business model is to raise rents as much as possible until you reach a point where your tenants will make a sane decision and move, or raise until you cannot find a new tenant.

Before this virus started we rented most apartments before tenants moved out and we increased rents $100 to $200 with no problems. Since this virus started, it is taking us 2 to 3 months to find tenants and we held back from increasing rents by the $100 to $200 we used to increase them after a tenant moved.

I always live by the rules I preach. I've increased rents and had tenants threaten to move. Later, the tenants actually moved and I don't give the situation a 2nd thought with the exception of one apartment unit I wrote about a few weeks ago. I evicted a good-paying tenant last year because he moved a dog into his apartment and he was very rude to my wife every time she approached him. It took me 9 months to find a new tenant and my total loss was about (guessing) $12,000. I shot myself in the foot on that one, but, at least, I have a set of guidelines written in stone that I follow. I don't allow dogs and will evict any tenant the first time they jump in my 92 pound wife's face like they want to get physical.