Do you include a regular rent increase in your lease?
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
The DIY Landlord Book4.7248 Reviews
Do you include a regular rent increase in your lease?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ voteshonestly i have never raised the rent.. if the tenant is really great ( which we strive for) I would rather leave them alone then have a turn over.. And I have seen tenants of clients of mine leave when they tried to raise the rent by 20 bucks..
So probably not the best .. but for me its OK when they leave then I can adjust up if need be.. So i take the path of least resistance and if they whine and need it lowered a bit and they again have been model citizens i would be inclined to do that as well before I have to deal with a turn over.
So probably not the best .. but for me its OK when they leave then I can adjust up if need be.. So i take the path of least resistance and if they whine and need it lowered a bit and they again have been model citizens i would be inclined to do that as well before I have to deal with a turn over.
46 Replies
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ voteshonestly i have never raised the rent.. if the tenant is really great ( which we strive for) I would rather leave them alone then have a turn over.. And I have seen tenants of clients of mine leave when they tried to raise the rent by 20 bucks..
So probably not the best .. but for me its OK when they leave then I can adjust up if need be.. So i take the path of least resistance and if they whine and need it lowered a bit and they again have been model citizens i would be inclined to do that as well before I have to deal with a turn over. - Investor · Midwest · Member since 2019 · 335 posts · 226 votes5y
We usually raise rents every 18-24 months. When we lease we are usually at the top of the market which allows us to wait for the increases.
- Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes5y
@Nathan G.
I do not. After a year they automatically go month to month. I play each one depending on their situation and how they are as tenants. Usually only raise $25/month. I didn’t do any increase this time around as my tenants haven’t been late or missed $1 since covid started.
- Real Estate Agent · Sandwich, MA · Member since 2014 · 974 posts · 636 votes5y
@Nathan G.
We don’t write it into the lease, either. I completely understand why you do, but we have focused on lower turnover and offering good value to get great tenants that want to stay.
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes5y
For years I chose not to raise rent if the tenant was a model tenant. Then I looked at rent comps and realized I was so far under a reasonable fair rental amount, and how much I'd lost. No wonder the tenant stayed so long! I now raise rent $25 annually.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
@Matthew McNeil that's exactly what happened to me. In the last ten years rent rates have increased dramatically, sometimes over 10% in one year. If you don't have regularly scheduled increases, it's easy to get behind the market.
@Mason Hickman what happens if the tenant stays for more than three years? They will likely be 10% below market or more, and you'll have to hit them with a large increase to get caught up and that will definitely cause problems. I looked at the Sandwich market and see your rents have increased about 20% in ten years so failing to keep up could cost you tens of thousands with just one rental.
My tenants move in knowing there will be a 3% increase at renewal. With 400 rentals, I only get a couple tenants each year that complain about the increase but none of them have ever moved out because it's so small that they can't justify the moving costs and they know they may not find anything comparable. If the market is slow and they are a really good tenant, we can waive the increase for that particular year, which earns us some bonus points, and then we can increase them the second year.
The DIY Landlord Book4.7248 Reviews - 5yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
@Nathan Gesner This is a perfect question to throw out there to the community. There is a property that I have had for seven years, and this example ties right into your question for some context.
The same lady has been in the property for the seven years which has been great, and we have slowly raised the rent, and back in 2017 she wanted to sign a three years lease, so we put into the lease a $40.00 a month increase each year (by end of year three an extra $120 a month). The lease was due in May 2020, and prior to May 2020 we said you have been a great tenant (she has been great) we will not raise your rent at all this next year. For full context, as of now we are approximately 15% under market rent as we sit today (new lease will be signed May 2021 and we have not still have not signed the new one yet due to it being February).
Last year once the lease was signed, about three weeks to a month after that the back unit had a major leak in the bathroom for approximately 3-5 hours (this unit is a combine rent to this tenant and their family for front and back units). We were contacted by the tenant once they found out, insurance was involved the total out of pocket expenses on that was $12,500 (insurance did not cover all items needing to be fixed), a couple months later the water service line had to be replaced $2,800, around the same time two smaller items needed to be fixed $350, the rains came shortly after $3,300 for a roof replacement on a portion of the property, the chimney needed work as well due to weather $900 and some other weather knocked a tree down in the front yard $350. We had reserves for all these items to be fixed, replaced, and repaired.
The moral of our situation is that in retrospect we would have placed another small rent increase into the lease to recoup some of the expenses of the things needed last year. We are grateful to have the reserves for all of these things and more; however, if we would have increased the rent last year we would only be about 7%-10% under market that we could make up on this next lease signing and not be 15% below normal. Like I have heard on podcasts from guests, the rental(s) should be run like a business, and that is what rental increases provide to the owner. These rent increases provide that business the gross revenue and net profits for the business being ran.
The McKernan Group4.954 Reviews - 5yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I somehow got way under market rent on all my properties. I’ve kept some tenants at the same rate for a few years. I will start raising rent just a little bit each time for all my tenants so I’m not all of a sudden $300/month below market rent.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
@Peter Mckernan 15% below market adds up quickly. If market rent is $1,000 a month, 15% below market would be $150 per month or $1,800 per year. Keeping her at market levels would put a nice dent in those expenses you've incurred!
I know a lot of Landlords that keep rents low, thinking it will keep their tenants happy. What usually happens is they lose out on tens of thousands over the years, the tenant takes advantage of the Landlord, and then the tenant leaves owing unpaid rent, utilities, and a lot of damages because they know the Landlord is a pushover and won't do anything about it. Most of my investors make more money after paying my fees than they were making when they managed on their own.
The DIY Landlord Book4.7248 Reviews - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes5y
I play it by ear. Most units seem to turn every 2-4 years and I just do a market reset at that time. Occasionally I go up if someone is staying put and they are getting out of whack. I get the argument about leaving money on the table but I also like what I call lazy landlording, and part of that is eliminating turnover whenever possible.
I don't leave the rent where it is because I care about making the tenant happy one way or the other. I know tenants will leave whenever they need to for any reason - I've had some real bizarre move-out stories - I do it because it suits me.
This is not just the rental industry either. Plenty of industries don't raise their prices unless absolutely necessary because of competition, maintaining market dominance, etc. Very few business build in automatic price increases - you respond to the market and to your own needs. If rents are stagnant but my RE Taxes go up I'm going to raise rents. If rents are exploding but my costs haven't changed I probably won't.
One other thing: I see people talking about being way under market as if there's some sort of market police that are going to come around and issue you a citation. Of course I know what my market rent levels are, but I set my rent prices at the level *I* need them to be relative to the market. If I have a property making $500/month cash flow, and I feel it is fair, I couldn't care less if the market says I "should" be getting $600/month for that property.
Skyline Properties - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
There aren't any "market police" but there is a value to your product based on market demand. Coca-Cola could sell a can of pop for 40 cents and still turn a profit, so why don't they? Because they want to generate a profit! Maybe your goal is to earn $10,000 a year or an 8% return on your investment and anything about that makes you feel greedy. Different strokes for different folks.
There's another issue people should consider. When you rent something below market, you get below-market renters. If you have a house that could rent for $1000 a month but you put someone in there for $750, there's a very good chance you'll end up with a renter that can only afford $750 and they'll treat your rental like it's only worth $750. Too many Landlords have this idea that renters will appreciate the low rent, behave better, handle their own maintenance, stay longer, etc. I have dozens and dozens of real-world examples to show the exact opposite is true and the "below market" tenant ended up costing the Landlord thousands. In some cases, they've lost over $20,000 on a single renter. My own father-in-law followed this philosophy and his last renter cost him $17,000 in renovations and another $3,000 in lost rent which finally motivated him to turn his rentals over to me for management.
The DIY Landlord Book4.7248 Reviews - Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
@Nathan Gesner when we first started in the business I told tenants, "if you pay rent on time and take care of the property, we will not raise rent." I thought it would encourage long term tenants, people would pay on time and take care of the property. We abandoned that "no rent increase" policy years ago for three reasons:
1. People move when life circumstances change. Job relocation, larger family or buying a home are the three main reasons. Paying a few extra dollars a month has no effect on people moving.
2. Costs increase. A 30 year fixed mortgage is only fixed on the principal and interest portion. Taxes and insurance go up, forcing your payment to increase. That means "no rent increase" means you are making less money every year.
3. Screening is how you make sure tenants pay on time and take care of the property. Someone with bad money habits will pay late regardless of incentives. Someone with good money habits will pay on time, even if you offer no incentive.
I only have one tenant left on the old "no increase program" and her rent is hundreds under fair market at this point. I have considered raising her rent, but I am a man of my word.
I am actually a fan of smaller annual increases versus larger increases less often. Smaller increases are easier to adjust to and they are cumulative. You are better off financially to increase it $30 a year then to increase $90 every three years.
Annual rent increases really add up, especially when you have scale on properties. If you have ten properties and increase them each $50, that is $500 a month. Double that to 20 properties and it is $1000 a month. That is enough money for a car payment or even to acquire another property.
I like your approach of including a flat % it in the lease. The tenant has a full year to prepare for the increase. There is no "surprise" rent increase. The 3% is very reasonable and basically paces inflation, so it is easy to understand.
- Rental Property Investor · Winston Salem, NC · Member since 2018 · 102 posts · 66 votes5y
@Nathan G.
I have been doing something I think I’ll share that seems to make a lot of sense to me. When I have a tenant depart and new tenant about to come in, I want to make sure I do the due diligence to find out what is the fair market rent for my property versus my competitors and I can do that on different various sites by looking at homes that have been recently available and are available now and just like anybody else create my own rental comps and price my house accordingly. To encourage my tenants to sign a long lease I offer them the opportunity to lock in rent for the full length of that lease at the current rent. I save on turnover costs and they save on rent. That could save tenants a ton of money. A few years ago I did one with a four year lease and by the time the tenant moved out, they were $350 under market but on the other hand I had no turnover in that house for four years and had a great tenant and that was the deal. I reset the house at market rental pricing and that house now rents to a new tenant at market pricing. If’s tenants lease ends, I start my rental market pricing due diligence 60 days ahead of move out and if they would like to stay I offer market pricing using the same due diligence. That’s the same due diligence they will do if they choose to consider moving. So, we should be on the same rental pricing page. My taxes seem to go up regularly. My insurance goes up regularly and while I take great care of the properties there are repairs every now and then and I get no notice of the expense. This plan seems to keep me in the middle of a fair game and my tenants seem good with it.
Wishing you health and good luck.
- 5yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ votes
@Nathan Gesner great points and yes it adds up very quick to reduce the amount of income coming in each month, we are capped in California of raising too, much; however, we are going to get back some of the gap this May and increase it again next May as well.
It's a watch your money mindset and system, and those that do not raise rents lose out on more profitable rentals and businesses.
The McKernan Group4.954 Reviews - Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes5y
Originally posted by @Nathan Gesner:
There aren't any "market police" but there is a value to your product based on market demand. Coca-Cola could sell a can of pop for 40 cents and still turn a profit, so why don't they? Because they want to generate a profit! Maybe your goal is to earn $10,000 a year or an 8% return on your investment and anything about that makes you feel greedy. Different strokes for different folks.
There's another issue people should consider. When you rent something below market, you get below-market renters. If you have a house that could rent for $1000 a month but you put someone in there for $750, there's a very good chance you'll end up with a renter that can only afford $750 and they'll treat your rental like it's only worth $750. Too many Landlords have this idea that renters will appreciate the low rent, behave better, handle their own maintenance, stay longer, etc. I have dozens and dozens of real-world examples to show the exact opposite is true and the "below market" tenant ended up costing the Landlord thousands. In some cases, they've lost over $20,000 on a single renter. My own father-in-law followed this philosophy and his last renter cost him $17,000 in renovations and another $3,000 in lost rent which finally motivated him to turn his rentals over to me for management.
That's true if you are marketing something at below market rates. But that's not what we are talking about here - what we are talking about are tenants - ones that I assume have met and passed all criteria to become tenants, and were not given their walking papers at the end of their lease - maintaining a unit at a price similar to that at which they rented in the first place. I have never had a renter that left - for whatever reason, and usually it has been to buy their own house - treat my property any differently than how I thought they would treat it when I rented to them in the first place.
I don't begrudge anyone for making a profit. I think if someone wants to build regular rent increases into their leases, that's their prerogative and more power to them. I don't do it and I don't feel bad for not doing it and I don't see it as "losing money" for not doing it because running a business is not only about making every single dollar turn another dollar. If it were, there wouldn't be any corporate donations to charity, just as one example. Businesses do things *all the time* that are about building their brand, and I see this as just one more part of building my brand. I have ridiculously low turnover and I rent a good number of my vacancies that I do get from referrals. My turnover costs are virtually nothing and I cannot remember the last time I had a unit vacant for more than 2 weeks. Do my tenants stay because they are paying below-market rent? No, because the rent is just one part of the equation. When they rented the unit it was at market rates, because I have nice places and I don't mind charging for them. If they've been there 3 years, yes they may be potentially "below market". If they are good tenants - and they must be, or else I would have thrown them out at lease end - then their rent being a little "below market" is just one more part of the equation why they stayed 4 or 5 years instead of 2. I try not to let anyone get too far out of whack because that's not fair to me either, so we do have rent increases - we just don't build it in as a matter of concept.
For my business, I want to make it more painful for my customers to do business with my competitors than it is to do business with me. Last year when the virus hit Comcast gave me all kinds of "free" bandwidth because of the virus. Why? I didn't need it and I'm sure it cost them money. They did it for PR. It was a chance to look like a decent company instead of one that was going to rake you over the coals now that you were home and really needed more of the product.
What do your property owners do in a case where market rates decrease? Do they have an automatic de-escalator clause that lowers the rent for tenants to market rates? Do they continue raising rents 3% in a declining market?
Skyline Properties - Investor · Akron, OH · Member since 2016 · 2k+ posts · 4k+ votes5y
No. We fix up our properties to be the nicest in the neighborhood and price at the very top of the neighborhood market on turnovers. Currently we are raising the rents in our properties when property taxes are reassessed (every 3 years). I inherited a group of tenants with automatic rent raises but it was (not surprisingly) VERY unpopular. While rent increases are never popular, being able to point to a price increase to us, I think, takes the sting out a little bit. We also don't have rent control or capped increases to worry about here.
- 5yBenjamin AakerPro MemberRental Property Investor · Brandon, SD · Member since 2015 · 1k+ posts · 1k+ votes
Your expenses will go up every year. It's natural. A tenant should expect small rent increases yearly. Why not build this into the lease? I have done so. I state that the rent will increase at the landlord's discretion 3-5% each year. It goes month-to-month you say? Sure, the rent could go to whatever you say it is at that point, but having it in the original lease give you an easy reference to remind the tenant. I don't like keeping the rent flat because at some point you will have this tenant you love but the expenses are going up and you need to raise the rent and when you try to do this on year three it's like you just told the tenant the sky is green. I know this from experience. If they expect a small increase every year, it's no big deal for either of you. The 3-5 range is so that you can make it a nice round number.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
If the market is slow, we waive the scheduled increase for that year. That keeps the tenant in place and earns us some good will.
The DIY Landlord Book4.7248 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Richard Weinberg:
A few years ago I did one with a four year lease and by the time the tenant moved out, they were $350 under market but on the other hand I had no turnover in that house for four years and had a great tenant and that was the deal.
Let's do the math. After four years they were $350 behind on rent. That's a missed increase of $87.50 per year.
Year 1: $87.50 x 12 = $1,050
Year 2: $175 x 12 = $2,100
Year 3: $262.50 x 12 = $3,150
Year 4: $350 x 12 = $4,200
Total losses after four years: $10,500
On a $1,500 rental that's equivalent to seven months of vacancy! Staying current with market rates and dealing with a month of turnover would have cost you far less and you'd probably have enough leftover to handle a painting or some new flooring.
The DIY Landlord Book4.7248 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes5y
Originally posted by @Jill F.:
No. We fix up our properties to be the nicest in the neighborhood and price at the very top of the neighborhood market on turnovers. Currently we are raising the rents in our properties when property taxes are reassessed (every 3 years). I inherited a group of tenants with automatic rent raises but it was (not surprisingly) VERY unpopular. While rent increases are never popular, being able to point to a price increase to us, I think, takes the sting out a little bit. We also don't have rent control or capped increases to worry about here.
I manage 400 rentals with automatic increases and literally get no more than a few complaints each year. I encourage them to shop around for something comparable (there's rarely anything available) and then ask them to consider the cost of moving. It doesn't take long for them to realize a $32 monthly increase is the far better option. Most people appreciate knowing what the increase will be in advance and that it's small enough to easily swallow.
The DIY Landlord Book4.7248 Reviews - Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes5y
I'd put it into your leases as a matter of policy - but if tenants are exceptional you might be incentivized to give them a break. I'd say treat it as a case by case basis in a somewhat retroactive manner.
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes5y
This is an interesting question!
For the smaller assets (residential): I rarely raise rents especially if the tenant is good.
For the largest assets (commercial): We normally do upon renewals.
It's a double edge sword because if you keep the rents too low then you are not with the market AND if you raise too high then you may lose tenants. Balance is key!
- 5yTracy StreichPro MemberReal Estate Broker · Tulsa- OKC Oklahoma · Member since 2017 · 868 posts · 801 votes
@Nathan Gesner We have the same in our lease. It says a "minimum of 3%" I completely agree that you MUST raise the rent and stay up the market. What if you want to sell and an suddenly find yourself $200 below market. This effects your sales price.
I think the argument of keeping the tenant is not valid. 3% of $1000 is 30 bucks. The vast majority will not move for this amount. It will cost way more in time effort and actual $$$ to move. They have to come up with New Deposit and deposits for Utilities. This could easily by a few $1000 dollars.
Based on this I checked our numbers. In last 4 months 48 renewals sent out. 47 renewed. 1 did not. All had a rent increase
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Richard Weinberg:
@Nathan G.
I have been doing something I think I’ll share that seems to make a lot of sense to me. When I have a tenant depart and new tenant about to come in, I want to make sure I do the due diligence to find out what is the fair market rent for my property versus my competitors and I can do that on different various sites by looking at homes that have been recently available and are available now and just like anybody else create my own rental comps and price my house accordingly. To encourage my tenants to sign a long lease I offer them the opportunity to lock in rent for the full length of that lease at the current rent. I save on turnover costs and they save on rent. That could save tenants a ton of money. A few years ago I did one with a four year lease and by the time the tenant moved out, they were $350 under market but on the other hand I had no turnover in that house for four years and had a great tenant and that was the deal. I reset the house at market rental pricing and that house now rents to a new tenant at market pricing. If’s tenants lease ends, I start my rental market pricing due diligence 60 days ahead of move out and if they would like to stay I offer market pricing using the same due diligence. That’s the same due diligence they will do if they choose to consider moving. So, we should be on the same rental pricing page. My taxes seem to go up regularly. My insurance goes up regularly and while I take great care of the properties there are repairs every now and then and I get no notice of the expense. This plan seems to keep me in the middle of a fair game and my tenants seem good with it.
Wishing you health and good luck.
You are assuming that tenant would not have stayed four years with rent increases. I think you are assuming your long leases reduce vacancy, but in reality your tenant would have stayed regardless. Rent increases only make tenants move if there are better options for less money. I have two questions for you:
1. Where could they have gone that was a better deal? Even if you had raised it $200, you were $150 under market, why would they have left? Also keep in mind moving costs and hassle. Even if your rents had kept pace with market, moving costs money to a tenant.
2. They did leave, which proves that money is not the reason people stay or leave a property. Who would leave a property that was $350 under market?
I have had tenants stay in a property ten years on a month-to-month basis. I have also had people break leases six months in. Lease terms are not the main reason someone chooses to stay or leave. They move when life changes occur. Job relocation, family size or needs change or they choose to buy a house. Rent has no effect on these things.
I think you are leaving lots of money on the table. If you are loosing $350 a month on a property, that is $4200 per year. I am not sure how much a turn over costs you, but my average is less than this. Run the math and make sure you are doing what is best for your business.
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