I keep a rent escalation clause in my leases. It states that the rent will rise by 3 percent each year, to keep pace with inflation.
When I wrote it, I had every intention of enforcing it. But I never have.
Should you raise the rent annually to keep pace with inflation? Personally, I’m starting to lean towards “no.” Here’s why.
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#1: People Are Emotion-Driven
I used to think that I should definitely increase the rent each year. It’s only logical. Otherwise, every year the tenant is getting cheaper and cheaper rent in “real” dollars.
Unfortunately, people aren’t always logical creatures. Tenants tend to react emotionally to an increase in their rent (and the emotion is always negative!) They argue. They complain. They grumble. And perhaps – just perhaps – they contemplate moving out.
Of course, most people aren’t going to move out as a result of a one-time, $20 monthly rent increase. But if they think that their rent is going to rise each year, there will be a mental burden hanging over their head, incentivizing them to turnover.
#2: Vacancy is Expensive
Yes, I’ll lose a bit of money in “real dollars” as a result of inflation. But that’s nothing compared to even a single month of added vacancy.
Let’s say that one of my units rents for $1,000 per month. An increase of 3 percent adds an extra $30 per month, or $360 per year. But if the unit sits vacant for just two weeks as a result of that rent increase, either as a result of higher turnover or longer duration-between-tenants, I’ve just lost $500, and I’m netting an overall loss on my decision.
#3: Happy Tenants = Happy Landlord
As a general rule, the happier that your tenants are, the easier that your own landlording life will be. If I can keep my tenants happy by providing a nice home, keeping a steady rent, and responding quickly to calls, my tenants are more likely to continue living in my units, refer my other units to their friends, and treat the home well.
Of course, all this being said, I can still understand the case for enforcing an annual rent escalation, and I give kudos to the landlords who can execute this smoothly.
And I certainly think it’s reasonable to adjust rents upward every three to four years to offset inflation, particularly if the neighborhood comps justify the price.
I just don’t plan on raising my tenant’s rents when its time for their lease renewal. And I hope, in turn, that my tenants plan on re-signing on the dotted line.