Raising the Rent!

Should you adjust the rent?Absolutely!

If your Real Estate Investing is a business, then it needs to be run like a business. You have income, you have expenses and you have risks.Business 101 teaches you that the closer your expenses come to your income, the higher your chance of failure goes.It also means your rate of return is dropping.

As Real Estate Investors, we need to keep our income on the rise or we get closer to failure.Not only do our Property Taxes and Insurance go up, the eventual price of a new roof, new HVAC system, and even a garbage disposal replacement go up. All of our costs go up.

Therefore, we need to raise our rents a reasonable amount and in reasonable intervals. If we are not getting Market Rents for our rentals, we are throwing money into the paper shredder, never to be seen again.And even on the rare occasion, you must LOWER the rent, if the Market Dictates ( I had to do that once in the last two years, in the Phoenix market ).The Market is the number one indicator.

While there are many excuses for NOT raising the rent, there are also many excuses for failure in the field of Real Estate Investing. Remember, your tenants are NOT your friends (and if you rent to friends, they are not your tenants), they are your customers, just like you are a customer at any Retail Store. No matter how long you have shopped at Wal Mart or The Home Depot, you pay the same price as the person who is making their first visit to the store.

Good tenants are no more ‘golden’ than you are for paying your mortgages on time. Tenants pay their rent so that they don’t get evicted just as you pay your mortgage so you don’t lose the property.A tenant that pays you $1,000 a month, on time, for a house that has a market rent of $1,500 is not golden, they are moochers who are costing you $6,000 a year.

The biggest fear I hear for investors not wanting to raise the rent is that the tenant might move. That’s like a pre-med student saying they quit Med School because one of their patients might die. Tenants will always move and for a plethora of reasons. But I have been a landlord since 1979, seen hundreds of tenants and done hundreds of rent raises and NEVER had one move because I raised the rent. Sure they complain and threaten to leave because they like the “Under Market” rent, but the truth is, they are going to pay the same OR MORE if they move, unless they move DOWN, which most do not want to do.

Therefore, if the Market allows, we should be doing annual rent raises. If you don’t raise the rent with the market, it makes it more difficult to raise it the second year, and even more difficult the third year, and so on. Of course, just as Big Box Retailers have rewards programs to give long time customers small discounts, you can do a “coupon rent raise” for a really good tenant. If you have a good tenant paying $700 for a house that market rents for $750, you can raise it to $725 and tell the tenant that you would usually raise it to $750 but since s/he has been a good tenant, you are only raising it to $725, make it appear you are giving them a break.

So how much should you raise the rent? Ask yourself this question, and be HONEST. If this house were vacant today, how much would I ask for rent from a new tenant?If you are accurate, then that should be your target.I send out annual rent raises on my properties, and many times, the tenant will counter back, almost like a sales negotiation. I don’t have a problem with that, I love to haggle.They argue that they have been there X number of years and I argue that if they moved, I would be getting $XYZ for the property and that they will have to pay $XYZ for a different property if they move.I want to raise it $50, they counter at $25 and we settle at a $40 rent raise. They feel they got a break and I get $480 more a year.

The relationship between you and your tenants must be a professional one. They need to pay the rent on time and you need to be quickly responsive to perform maintenance when there is a problem. If you are a Professional and Quality Service Landlord, then your tenants will understand that you are running a business.