Raise Rent Annually?

Question

In today's Episode of the BiggerPockets Money Podcast (BiggerPockets Money Show 230) we talk to Lisa about raising rents on existing tenants.

Do you raise rents annually, and potentially lose a great tenant or do you keep rent the same, potentially losing out on additional income?

Nathan Gesner · Answer

My lease states there will be a "minimum 3% rent increase" each year. We want it stated in advance so the Tenant can be prepared for it. We typically raise 3%, which is a very small amount and not enough to justify moving costs. It's also good for my staff because they don't have to give it much thought.

Jerry Lucker · Answer

The cost of owning and maintaining a property goes up every year. You have to keep pace. If you don't you'll be making less and less money on your investment. You will have to raise the rent eventually. The longer you wait the bigger shock it will be to the tenant.

John Daniels · Answer

I like @Nathan G.’s concept of building an automatic increase into the lease, which helps keep pace with the market, creates an automated process, and is discussed with the tenant upfront. Sounds like a great process to add to my tool box!

Dan Trembulak · Answer

I suggest you look at your cost to operate, at the end of each year and at lease renewal time. Taxes and insurance in my area increase about 3% each year so I typically increase it by that amount FOR A GOOD TENANT WHO PAYS ONTIME. It's also an opportunity to find a better long term tenant so if I'm not happy with the tenants I increase it more, and I hope they don't renew. I've found the key to property management starts in qualifying the tenant before you let them move in. Once you experience having 5 rentals who pay on time and take care of the property like it's their home you'll appreciate the rental experience at a whole new level. Happy Investing.

Aaron Von · Answer

It's written in my tenant lease to increase rents by 2% of the base rent per year (I don't feel it's fair to compound the increase of previous years). I chose 2% because it's been the average rate of inflation over the last 5 years, and it's not enough to scare off a good tenant.

Davartay Miller · Answer

One of the most challenging decisions an owner/property manager must face is whether to raise the rent on a good resident. It's a fine line an owner/property manager must walk between increasing rent to keep up with market value and others, and ensure a solid level of profit, while at the same time keeping a good resident happy. The resident can not be the last thought in the equation. However, this doesn't mean you cannot raise rent on a good paying resident but good advise would be to pick your battles –wisely. This should be a case-by-case situation. I see where owners come from when they are wanting to increase. Look I get it. Cashflow is important and the additional income is too. Personally – I don't automatically increase rent annually if the same tenant is in the property, and if they are good tenants in all the important ways - caring for the property and paying their rent on time etc. However, Changes in mortgage rates, insurances and maintenance costs are driving factors in having that conversation – if necessary.

David Lam · Answer

I didn't this year because I wanted to retain tenants who have been paying on time in the Bay area even during COVID. But I'm definitely going to incorporate the increase into future leases now. I just got notified that there are some issues and I'm a bit stressed about financials now.

On the one hand, I'm grateful that my landlord in college didn't raise rent often on me at all as a starving student. Now in the real world, there are property taxes and bills that go up annually and need to be paid. As much as I don't want to be "that" landlord, I need to set this expectation upfront though and be a bit more firm about it.

Kristofer Kretsch · Answer

I'm really glad to see the discussion taking place; I had been pondering this same question and it's great to see the perspectives.  In the last several months I bought a 3 family investment property.  Rents are well below market and I've been trying to establish the precedent of good landlording, prior to raising rents.  The previous owner had a different philosophy on landlording, nothing horrible, but the quality of workmanship in the units was probably a C in a B+ neighborhood.  So I'm trying to improve the property and raise rents, and thinking a lot about the right way to go about it.

Karla Simmons · Answer

We raise about 3% annually. I take a look at the market in my area before I do it to make sure 3% is a good rate. Most tenants expect an annual rent increase. Take care of the property and treat them right and it has never been a problem for us.

Aaron Von · Answer

I can’t believe some of you are increasing rents by 5%! To me, that’s just asking for churn. Replacing a tenant is super costly. You have sometimes new paint, new carpet, advertising/screening, and the liability of a new human. Not worth it to me, personally. Would appreciate hearing the strategy behind such a large increase.

Raise Rent Annually?

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