Wife doesn't want to increase rents
Rental Property Investor · San Diego, CA · Member since 2018 · 27 posts · 36 votes
Wife doesn't want to increase rents
Most Popular Reply
Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votesI see mostly replies that are not local to CA/San Diego. This implies that they likely do not know the nuances of the local market.
First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.
- In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%). If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
- There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice. This by-passes any claims of retaliation, discrimination, etc. Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
- COVID has identified new risks. in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc. Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors. It was the most stringent in the nation. It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety). Fortunately this regulation expired last month. However, increased risks deserves increased profit to compensate for the increased risks. These anti eviction rules are likely to result in significant rent increases over the next few years.
- Home prices in San Diego rose ~25% county wide in the last year. To have rents increase the same as the property increase would result in a ~25% rent increase. That would be illegal on your units. The rent increases always lag the property increases. However, this is another indicator that rents are going to go up a lot in the near term.
- CPI in the last year was highest in many years. local wages have gone up significantly. skilled tradesmen (especially plumbers) have increased their costs significantly. Material cost similarly have increased significantly. Plywood has risen ~300% since pre-Covid. This implies your expenses are higher than the previous owner paid last year.
- Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly. This implies that regulations could come at any time further limiting rent increases. What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase? If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
- In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason. I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family). Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.
I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.
I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.
As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent. I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.
The rent increase you are considering (3% to 5%) should occur to protect your investment.
Good luck
117 Replies
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
I think your wife is right on track.. if you have a great tenant I leave them alone.. but thats me as well.
- Investor · Memphis, TN · Member since 2016 · 279 posts · 257 votes5y
I have to agree with your wife and @Jay Hinrichs on this one. Good tenants have their own value! Though if they have been paying a 3-5% increase with the previous landlord, they might not even flinch when you continued doing the same because they expect it. You might also time it so the next contract is signed when you do some time of home improvement for them so they can see you will be actively involved in keeping up the property.
- 5yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Originally posted by @Jay Hinrichs:
I think your wife is right on track.. if you have a great tenant I leave them alone.. but thats me as well.
I agree!
- Rental Property Investor · San Diego, CA · Member since 2018 · 27 posts · 36 votes5y
@Sam Wilson I really like the idea of timing the rent increase with home improvements. The unit they are in could use some updating, so maybe that would be a better way of couching it.
- 5yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
I see mostly replies that are not local to CA/San Diego. This implies that they likely do not know the nuances of the local market.
First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.
- In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%). If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
- There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice. This by-passes any claims of retaliation, discrimination, etc. Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
- COVID has identified new risks. in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc. Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors. It was the most stringent in the nation. It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety). Fortunately this regulation expired last month. However, increased risks deserves increased profit to compensate for the increased risks. These anti eviction rules are likely to result in significant rent increases over the next few years.
- Home prices in San Diego rose ~25% county wide in the last year. To have rents increase the same as the property increase would result in a ~25% rent increase. That would be illegal on your units. The rent increases always lag the property increases. However, this is another indicator that rents are going to go up a lot in the near term.
- CPI in the last year was highest in many years. local wages have gone up significantly. skilled tradesmen (especially plumbers) have increased their costs significantly. Material cost similarly have increased significantly. Plywood has risen ~300% since pre-Covid. This implies your expenses are higher than the previous owner paid last year.
- Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly. This implies that regulations could come at any time further limiting rent increases. What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase? If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
- In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason. I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family). Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.
I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.
I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.
As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent. I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.
The rent increase you are considering (3% to 5%) should occur to protect your investment.
Good luck
- 5yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Ask your wife if she wants to run a business or a charity.....its hard to do both.
Having said that, a good tenant is priceless...but I would still build in some opportunity for increase or you'll find yourself doing it all at once when you have to, and that's just not fair to the tenant..... IMO
- Real Estate Broker · Rochester Hills, MI · Member since 2009 · 2k+ posts · 2k+ votes5y
How long have the tenants been in this home and if it is more than a year I assume they are accustomed to having their rents raised. If that is the case I would go against the grain of the advice given here and say you should raise it as they are used to it. If your wife wants to be generous you can be generous in other ways with tenants along the way.
If these tenants are new and you would be the first to raise their rents then you and your wife need to come to terms with what kind of landlords you want to be. Everyone who has commented is right. You are right that taxes, cost of doing business goes up every year. Other posters are right that good tenants are priceless. Turn overs are ROI killers and it can take a long time to recover from a turn over.
How long they have been in place and what they are used to is key information for me in order to provide a clear answer.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
Originally posted by @Dan H.:
I see mostly replies that are not local to CA/San Diego. This implies that they likely do not know the nuances of the local market.
First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.
- In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%). If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
- There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice. This by-passes any claims of retaliation, discrimination, etc. Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
- COVID has identified new risks. in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc. Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors. It was the most stringent in the nation. It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety). Fortunately this regulation expired last month. However, increased risks deserves increased profit to compensate for the increased risks. These anti eviction rules are likely to result in significant rent increases over the next few years.
- Home prices in San Diego rose ~25% county wide in the last year. To have rents increase the same as the property increase would result in a ~25% rent increase. That would be illegal on your units. The rent increases always lag the property increases. However, this is another indicator that rents are going to go up a lot in the near term.
- CPI in the last year was highest in many years. local wages have gone up significantly. skilled tradesmen (especially plumbers) have increased their costs significantly. Material cost similarly have increased significantly. Plywood has risen ~300% since pre-Covid. This implies your expenses are higher than the previous owner paid last year.
- Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly. This implies that regulations could come at any time further limiting rent increases. What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase? If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
- In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason. I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family). Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.
I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.
I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.
As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent. I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.
The rent increase you are considering (3% to 5%) should occur to protect your investment.
Good luck
That's a lot of concrete value, right there, Dan. Thank you for this contribution.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes5y
I've explained my position about this in C-class long-term rentals a number of times here in the forums.
1. Turnover kills potential profit down here in my property class and in my handyman business model or almost any self-managed model similar to it.2. Tenants prefer to have rent raises fully justified to them, well ahead of when they'll be paying the increased rent.
3. If you invest in a privately-held and self-managed residential portfolio of C-class single-family and small multifamily, and you believe you're going to make your money off cash-flow, that is, relentlessly maximizing your take from your tenants, you're already losing sight of what's important in the game. You make your real money when you buy, when you refinance, and when you sell. Your tenants hold your property for you. They are not your customers, they are not your clients. They are your business associates.
4. You have to make real efforts to match tenant profiles to property profiles. Poor matches cost you money. Good matches increase your net value effortlessly.
5. Let someone else have the last ten percent.
- 5yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
Tell her your operating expenses increase every year as does the cost of most things. Having said that ultimately it is your decision. Good tenants are worth keeping. I do increase the rent when my costs increase to cover those and round up a bit as there are other costs.
- 5yColleen F.Pro MemberInvestor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
@Zachary Jensen read what @Dan H. said about California. Explain it to your wife. Also know you are cutting your pay every year if you don't raise their rent. You get a smaller piece of whatever is leftover after expenses. Explain below market rent is misleading your tenant. You aren't doing them a favor by leading them to believe they can afford something above their budget. One day they have to leave you.
The worst thing you can do is no increase. You should have a minimal increase regardless because that helps sustain the expectations of increases. I never had a tenant leave over a $20 or $25 increase that wasn't leaving anyway. They have to be able to find a rental at less then yours to leave. Most tenants who leave over increases in that situation leave for a smaller place and you get more rent then you were asking from them anyway. Besides in California every increase you don't make you lock yourself in to less money down the road and your wife wants to retire someday doesn't she?
- Warsaw, IN · Member since 2017 · 229 posts · 270 votes5y
@Zachary Jensen if you dont raise rents a few percentage points, you will find yourself substantially under market over time.
It’s not a greed thing, but you’re likely going to sacrifice the capex savings rate with the increases your not realizing, and then replace a roof or do foundation work years from now at higher costs-dipping in to your pocket for the repair.
That’s not a horrible thing for a house hack, since it’s your living space too, but over a handful of properties over a decade or two, you’re turning a positive return into a neutral or negative return, which is not how successful businesses are ran.
- Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes5y
I would just explain what rent control is. Let her read the rules for rent control.
Run some numbers for her to better understand how much you loose when you decide to raise the rent and can not because of the cap put in place by rent control.
Show her some graphs of the price of housing cost (to buy a new house) increase over years from 2011 to 2021, and the cost of insurance for that house you bought from 2011 to 2021 and lastly the rent level increased at the max level allowed by rent control from 2011 to 2021 ( you will have to work backwards to get the rent numbers) and let her see how much the housing cost increased compared to the rent increase allowed now by rent control. Same for the taxes vs rent.
Help her to understand that your loss of rent is lost forever, you can not make it up another year.
Help her to understand that the rent increase is controlled and will not be as much as the increase in market rent, the increase in property taxes or the increase in housing costs.
And this advice is really only for those rent controlled areas, not investments in other states where some grace may be much better.
- Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes5y
@Zachary Jensen Always raise the rent especially if market rents are higher than your rent and your expenses go up. Everyone else does, some leases state they will each year. But you can raise $20-25 or so. Keeping your tenant below market is a good idea. So is maintaining the expectation that rents go up each year. IMO
- Rental Property Investor · Beavercreek OH · Member since 2018 · 422 posts · 970 votes5y
Originally posted by @Zachary Jensen:
I'm just about to close on my first rental property (house-hacking a duplex in a small town outside of San Diego, CA). The previous Landlord raised rents 3-5% every year on this property, so it is currently rented for market rent to some great tenants who have taken good care of the place. My wife is a wonderful person and very generous. As a result, she doesn't want to continue increasing the rents on a yearly basis. I could really use some help making the case for the importance of yearly rent increases. I understand that property taxes increase on a yearly basis and that any maintenance costs also go up on a yearly basis. What are some of the other reasons for maintaining regular annual rent increases?
Zachary,
Usually @Jay Hinrichs and I agree on about everything RE related. However today, I'm with you.
It is imperative to raise rental rates (in an increasing rent environment) annually. Small yearly increases are expected by the tenant and almost always accepted without question. Kind of like the frog in boiling water. Put him right in there he's going to be upset. Start out at room temperature and turn up the heat slowly, he's not going to notice.
The worst mistake I made as a novice landlord was to think "Oh my tenants are great", I don't want to scare them away with yearly increases. After a few years experience I realized I expected all my tenants to be great. After all, I lease them a great product.
The surest way to lose a tenant is to wait 5 or more years, realize you are way under market, and hit them with a 10 or 15 percent increase all at once. IMHO.
Gary
- New to Real Estate · Jackson, MS · Member since 2021 · 5 posts · 5 votes5y
If you don't raise rents, you can find yourself behind in a few years. It's nice keeping rent the same to help tenants feel better, but you also have to keep in mind the rate of inflation. I would just say, evaluate your market and the supply of tenants and run the numbers. Every other investor I've talked to up to this point tells me that success is in the numbers
- Rental Property Investor · Perry Hall, MD · Member since 2016 · 588 posts · 600 votes5y
As long as you're not exceeding market rents, tenants will not leave due to an annual increase. Why would they? They'd end up paying "market rent" in their next place as well after the expense and hassle of moving. I won't cover other points as others have already done so plenty.
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes5y
I have never done annual increases. Once I get very good tenants that take care of my stuff, it benefits me in the long run to keep them happy.
- Vacaville, CA · Member since 2019 · 218 posts · 140 votes5y
@Zachary Jensen
We do annual rent increases of about 3%. This keeps them close to market value (a little under). This is a business. Most people that rent are not surprised to have annual increases. We try to do nice little things for our tenants throughout the year to let them know we appreciate them. One thing we do is send them a Christmas card with a gift card for a nice dinner for the family.
- Rental Property Investor · River Falls, WI · Member since 2021 · 13 posts · 4 votes5y
@Zachary Jensen I think just inflation in general. 20-year average inflation rate is 2.32% so I'd at the very least automatically increase rents at a rate of 2-3% per year. That'll essentially cover the increased cost in maintenance, insurance, etc. Then I'd figure in any property tax increases and add .25-.5pts approximately to cover that. That puts you in the low end of that 3-5% range to essentially just break even from any external economical factors increasing your expenses.
- Rental Property Investor · River Falls, WI · Member since 2021 · 13 posts · 4 votes5y
@Brandon J Schmidt so I'd just pitch it too your wife as it a 2.5-3% raise being the most fair for all parties. I think raising them 5% each year may be a bit greedy unless you're in a very hot rental market and market rates are outpacing you noticeably.
- Real Estate Agent · San DIego · Member since 2019 · 177 posts · 185 votes5y
I'm in San Diego County also. The County rent control rules are different than SD city. That's worth checking so you know what overlays apply.
There's a huge shortage of rental housing countywide, so rents have really jumped in the past year or so as the vacancies come on the market. Between the market rate increases and long term tenancies, you might not have an opportunity to adjust the rent as the unit turns. A client of mine just increased the rent by $350 a month on a vacant 2 bedroom SFH this month. That's $4200 a year! If you have a very long term tenant and don't creep up, then you'll end up too far under market, like my client did.
In Southern California, rents are so high and COL is so much, that it's wise to creep up a little year by year just to keep up with the cost of living. I think that $50 or so a year is expected, and would be considered by most tenants to be a small increase. I'd also consider the type of housing- a 5 bedroom executive home and a studio granny flat are going to have different, minimal baseline increases.
- Rental Property Investor · River Falls, WI · Member since 2021 · 13 posts · 4 votes5y
@Mark Cruse why not increase rents with inflation and property tax increases to keep your bottom line from decreasing? Your yearly ROI would be worse and worse each year and may impact the ability to maintain the property when you face a large CapEx. Depending on how hot the market is you're in, you'd also be essentially devaluing your property in comparison to market comps.
I'm curious to hear your thoughts!
- Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes5y
@Brandon Schmidt I increase depending on the situation. Most of my properties are class D and many of the areas I operate in do not have the same level of inflation in terms of rent increases. Preventing turnover is more cost effective than nearly everything in this business, in addition to being a good landlord providing a good service. My increases may come every 2 to 3 years on average. In terms of keeping up with the inflation rates, my mortgage never changes and so many of my tenants live unstable lives who just need a break in life sometimes. If they are very good tenants and treat the place well and we have mutual respect, I have no problem in keeping a good thing going where we both benefit. In relation to harming my bottom line, I have been at this for a very long time managing my own so I pretty much know what I´m doing. My yearly ROI will be really devastated If my struggling tenants cant meet yearly increases because their lives dont increase yearly. Some will attempt to leave for greener pastures. Also, some of my locations are very challenging to fill with qualified tenants that will do right and take care of the property. To those asking why should he listen to the wife, I personally feel it´s honorable and respectful to at the very least consider the perspectives of your life partner who is directly connected to the generational wealth. In addition, it´s intelligent in my book to not believe I know it all. I love hearing alternative perspectives.
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