Why Landlords Can’t Afford Not to Raise the Rent

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Landlords should always raise the rent.

The rent should be raised every year. Real estate investors shouldn’t be stumped on the question to lift the rent each year. There are too many reasons that you can’t afford not to do it.

To begin with, you must cover your own expenses. Your costs will almost invariably go up every single year. Your property taxes go up, cost of insurance goes up, your employees and assistants need raises, your own office rent gets increased, new iPhones and laptops cost more money. If you don’t raise the rent, you’ll soon be in a negative cash flow situation. If you have a mortgage on the property, that can lead you to foreclosure.

buyers-market

Related: 13 Proactive Ways to Increase Rent & Add Value to Your Rental Property

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Train Your Tenants to Expect it

It’s far easier to keep tenants trained to anticipate rental rate increases every year, too. If you ever had a regular job during or right out of school, you might have found it easy to get a 25 cent raise at annual performance reviews. But go to your boss and ask for a $5 raise per hour from $10 to $15 dollars, and they might just replace you on the spot. If tenants know they’ll have to pay a little more on renewal, they can plan for it. There won’t need to be any negotiations or issues. But if you go a couple years and then need to dramatically raise the rent, the odds are that you’ll lose them. That’s true even if it is a fair rate. It just doesn’t feel good.

According to the U.S. Census Bureau, rents have gone up nationally every decade, with the exception of the 1940s, when they dropped by an average of around $25. More recently, some areas have seen market rents going up as much as 50%. So watch your local laws, but a modest 10% annual increase, or 8% if you can afford it, is pretty generous.

Otherwise, you could be dealing with high turnover rates and high vacancy rates. That will get expensive very quickly.

tenant-funnel

Related: Rent Increase: Why You SHOULD Raise Rates on Your Tenants Sooner Than Later

Make Sure Rent Raises Are a Part of Your Strategy

A sound strategy from the beginning will help avoid issues. Avoid renting scared or keeping your property under rented. Be sure to check out the market rents in the neighborhood. You might be both surprised at how cheap some are — and how expensive some are.

As a real estate investor, inflation is your friend. Even though your expenses may go up, income will typically rise along with them. Your property value almost always rises in line with inflation, too.

You must treat this as a business and not let current tenants dictate what rent should be. There may be times to make some form of compromise or to be compassionate when a truly great and loyal tenant has a minor setback. Even in these cases, you may choose to still raise the rent, then allow them a temporary discount. But don’t sabotage your property by failing to raise rent.

Landlords: Do you raise your rent each and every year? Why or why not?

Let me know your thoughts with a comment!

About Author

Sterling White

Sterling White started in the real estate industry at a early age back in 2009. The company he co-founded Holdfolio is a real estate crowdfunding platform based in the Indianapolis market. Before founding Holdfolio Sterling and partner Jacob Blackett were involved in the purchasing and selling of 100+ single family homes nationwide. In his free-time he trains for a World Record

47 Comments

    • Adam Christopher

      All real estate is local, so it depends. When they are talking about a yearly $25 rent increase, it seems as though they are talking 1-2% at the bare minimum. This will still keep many of your tenants happy. I made the mistake of not raising the rent for 3 years and left a lot of money on the table. I rented a 4 bed/2 bath house for $1,450/month. Market rent was probably around $1,500/month. I like to be a little under market and be picky with tenants. The rent went up quite a bit over the next 3 years and I didn’t bother to pay attention. Fast forward 3 years, at the market rent was about $2,000/month and I was charging $1,450. I asked for $1,900/month on the next lease and easily got it. I could have raised the rent by $100/year and still been way under market value. By not raising it by $100/year for 3 years, I lost out on $7,200 that I will never have a chance of getting back.

      You can still have loyalty with small rent increases. A very small rent increase is way better than no rent increase.

  1. Fabio A Becker

    I believe his article stated 8-10% a year. The past five years the city I live in has seen pretty high tax increases. In this situation, I can understand the concept of treating it as a business and raising rents (as long as reasonable) to maintain the same cashflow.

  2. I disagree. If you are close to market rates, say within $100-$150 per month, and you have a tenant who pays on time and takes care of the home, it is not worth it to possibly upset your tenant, or even lose them. If the difference in rent is equal to one full month per year, you are not gaining anything but a turnover headache. If I can keep a tenant for 3 years, that is two turnovers and vacancies I dont have to deal with.

      • $100 or $50 may depend on your market. The point remains, if you are not gaining more than one months rent per year with your increase, then you should really consider whether it is worth the potential turnover.

        Sure, it sounds great to say “train your tenants to expect an increase”, or “you are leaving money on the table”, etc. If you dig a bit deeper into the numbers, you may find reasons to only raise rent between tenants, or maybe on a three year schedule.

        The fact is, insurance and taxes do not always go up every year. I have had them go down on occasion, or stay flat, sometimes for several consecutive years. When taxes went down a few years back, did everyone intentionally lower the rent? I’m guessing not…

    • I agree with you Steve. I would rather have a longer term tenant at market rent or slightly less who is a good tenant and not raise the rent in order to keep him/her. Average turnover for me is at least $3,000 – $4,000. Cheaper to keep the tenant!

  3. John Teachout

    I have not had a situation where a rent increase was imposed on an existing tenant. One was behind in payments and had more than a year of late fees piled up. I worked out a deal with the tenant for a 2 year contract at a higher rate that would pay it off by the end of the contract. I will likely give this tenant a small increase at the end of the term since they’re used to paying a higher amount now anyway. I have two other properties that are still in the first contract period. One is a two year contract and the other is a one year.
    I do agree that smaller and more frequent increases are better than delaying until a large one is necessary. I’m trying to avoid turnover so for me, less rent and less turnover is a better solution than more rent but an empty house that needs to be filled.

    • Andrea Shields

      While I do believe in rent increase, I still think you have to look at your market. I am in Fort Myers FL where we have seen astronomical increases and the real estate market is doing well. What I do to prepare for a rent increase is if a tenant has paid ontime, taken good care of the home, I will contact tenant, or sometimes they contact me, regarding resigning a lease for an additional year. At that point i do a walk thru of the property, ask tenant if everything is going well, is there anything that we can make better. Tenants like that they have an input, after all they are the ones living there. So if there are any updates, repairs that I can do that will make tenant happy then I will do it. 30 days before lease is due to be signed, I will either call or email tenant explain that I am creating his new lease, that I would like to add $50, I ask if he is comfortable with this. I don’t make demands, I don’t tell them, I ask. The one thin you don’t want to do is increase, tenant cannot pay and then leaves. Tenant was is happy that he has a say, he is ok with the increase. I have had tenants that I have done this and again based on the market I maybe able to increase every year and I always try to keep it a bit under what everyone else is renting for, even if its by $25 less. Works everytime. One tenant I proposed a $50 increase, she explained that she just had a new baby and that $50 would be a hardship but that she could do $25. I agreed, because I know that I can still make that tenant happy and I was able to resign the lease. Its $50 under current market but i did not have to advertise, clean and screen a new tenant. Works everytime.

  4. Christy Greene

    Although, I am not a landlord yet, I am learning from listening to podcasts, reading books and asking many people about real estate, it seems it depends on where your property is located.

    I have heard a real estate investor say that in some of his properties, a $25 increase in rent will cause a tenant to move out. I used to live in Irvine, Orange County, California , where a $100 rent increase a month was to be expected. I did not move. I stayed in the rental for almost 7 years!

    I have also learned from a podcast that the way one investor incentivizes his tenants to stay is to offer them a smaller increase if they signed for a longer lease. If they only signed for 6 months or a year, they increased the rate.

    I learned that Landlords are very creative to retain their tenants , and others on the podcast , chose not raise their rents for years.

    I had a deal for a duplex in Arlington, Texas which I walked away from because there was so many repairs that needed to be done and the seller was not going to repair anything. I have to keep looking but I learned that creativity works to keep the overturning of tenants low.

    • Sellers do not usually want to repair anything; they just want to unload the property. However, your might have been able to get the seller to reduce the purchase price by the amount of the repairs IF the purchase price was based on a faulty understanding of the house condition before the home inspection was completed.

    • Sterling White

      Thank you for your input, Christy.

      Interesting to hear you walked away from that deal due to repairs. As Katie stated sellers usually just want the property gone versus trying to make repairs. Maybe they didn’t have capital to fix the repairs and that led them to selling.

      You can use the property’s need for repairs as leverage in negotiating the purchase price. How motivated is the seller?

    • Steve Moody

      Christy, I was about to post the same thing about SoCal. I grew up there and my parents rented my entire childhood. When I moved out I expected annual rent increases. Also lets remember that moving out is financially, and physically, hard on tenants too. There’s always a chance that you’re not getting 100% of your sec. deposit back, and will have to come up with a higher deposit for your next place (as rents went up everywhere annually), add in the cost of a moving truck and the hassle, it’s usually better to stay as long as you like the place and the increase isn’t outrageous. I’m in Portland now, and I assume the culture is the same here, but I’ll have to ask around before I buy an investment here.

      I can see this being different in other locations though, if your property is in an area where rents stay pretty much the same and there’s a lot of competition it’s probably better to keep the tenant and raise rents when they actually do move (or once every 2-3 years).

  5. In my town, too many landlords buy properties they know cannot cash flow, and then foist that bad decision onto tenants with high rents “to cover their costs.” A broker told me just the other day, “the model for this town is betting on appreciation.” Landlords get away with burdening their tenants from the get-go because our vacancy rate is only 0.5%. Therefore, my town has an epidemic of barely livable shacks renting for obscenely high rents. I am buying one of those shacks right now. It is going to cost $100,000 to get it into decent shape, and I will NOT raise the rent on the great tenants I am inheriting. I figure I am just catching up on decades of deferred maintenance. I’ll raise the rent a little in January 2018 or 2019. This house will break even the first year, and then it will begin to cash flow.

  6. This is one of the most commonly discussed topics among landlords.
    Professional landlords raise rents to keep pace with the local market.
    Nobody can logically protest a rent increase when the rent is still a little below the market.
    My loyal tenants are rewarded with rent slightly below the market, 5% range, whereby new tenants pay top market rates. My properties are well maintained and professionally and timely serviced, this is only possible with fair compensation. Tenants are also told that increases will be annually but not more frequently than that.
    Lately I have attached a copy of Zillow’s estimate of rent to demonstrate that the increase could be a lot more, (I have been thanked for my fairness for doing this!). I am not aware of any time a reasonable rent increase resulted in a vacancy. Why would someone move the home they enjoy when the rent is only 95% of the current market…. so they can incur the high cost, stress and aggravation to pay more somewhere else…?

    When considering whether to increase rent and by how much, Just ask yourself why you are in this business.
    And where would you like to take your next vacation Switzerland or the local campground?

  7. Scott Weaner

    I have 9 units. If I increase rent by $15/month, that comes to $1600/year, or $16,000 over 10 years. It would be unusual for a tenant to move over that small of an increase.

    Additionally, if we increase the rents, we actually CREATE the market rent. We cannot “leave points on the field!”

    • Depends on the point of view. William Nickerson said the way to figure market rent is to analyze your tenant demographics. If the typical tenant in your market is making, say, $15/hour, then 1/4 to 1/3 of their monthly income is a fair market rent. More than that and your tenant becomes cost-burdened. Also, if you are raising rents by, say, 10% but their wages are stagnant, you will create cost-burdened tenants. The landlord’s job is not necessarily to take as much money out of the tenants pocket as possible.

      Landlords in my town where studios are $1000, but the median tenant wage is about $15/hour have made it impossible for a tenant to rent even a studio without a roommate. That’s ridiculous. When someone points this out (often in the local newspaper forum), landlords stupidly respond that if the tenant is paying their rent, then obviously they afforded it.

  8. Thoriso Mashego

    I agree. I have 10% increases placed in my standard contracts. The tenant moves out because of other reasons but it is typically around the time of renewals and I see landlords see that and incorrectly assume that it is because they increased the rent.

    If the tenant is good, they will ask for leniency and I will agree. If not the rent will increase move out or pay up. The next tenant will be begging to be in within 2 months.

    If you are cashflowing well, because you raise rents and have beautiful properties you won’t struggle to raise rents. If you do then there is something wrong with your target demographic, your property or your tactics.

    Fix the problem, raise the rents and grow your business. Stop feeling guilty about success.

    This is what people struggle with. Misplaced guilt. I have charitable activities, but I keep charity far away from my income as much as possible. I don’t mix the two and my tenants do not get mixed messages.

  9. Kevin Harrison

    I like to use a hybrid of raising rent and not. I also own in a market with a large transient population (military and grad students). I will always raise rent in between tenants if the market calls for it but I usually will only raise the rent on a current tenant renewal if the tenant has been there 2 years at the same rate. Obviously this can change if the market undergoes a drastic change.

    This gives you 2 benefits. 1) if the tenant wants to stay a second year you seem like a nice guy for not raising rent on them and 2) when you do raise rent you can always point out that you did not raise rent last year but no its been 2 years and its really only fair to everyone.

  10. Denziel Maynard

    Well, I can thank the landlord that arbitrarily raised my rent after just one year with no problems or contact from me except for me paying on time each month. To show my appreciation, I did not renew and went and bought my first HOUSE! Was cheaper than paying rent with the same requirements at the time. Know your market. Just a thought.

  11. Will F.

    I try to raise each year with whatever market rents are. i usually keep it a little under market rents for retention.
    I also notice the more you raise the more active you must management, as tenants are more likely to complain when you raise. This should be OK because active management keeps your real property in good shape and limits costly capital improvements.

  12. Uyenchi Ho

    We live in San Jose, CA, and we raise the rent with every lease renewal – whether it’s every 6 months or every year. We have the same tenants for the past 6 years, and we raise about $100/year. When it’s every year, we do it in increments to help the tenants (so $50 the first 6 months and an additional $50 the last 6 months.) This upcoming lease renewal will be the first time we are raising the rent by $200 without doing the incremental increases because our tenant has a bf moving in with her. This consistent relatively minor increases seem to work out for both the tenants and us.

    We will also close on the purchase of a duplex in about a week, and the current tenants have been living there for 20 years. Both units are currently rented at 20% under market rate, so we plan to set rent at the market rate for both units. We shall see if both tenants will stay or we will have to find new tenants.

  13. Raise the rents every time the lease renews if the market will support it. For good tenants I usually stay under market rates by $50 which works out about 2-3%. Even if you charge at market most tenants are not going to want to bother with the cost and hassle of moving.
    Always check out the competition before a rent increase. But keep your comparison to within the school area if your tenants have kids and for the school they go to. This is another strong incentive for the tenants to stay put.

    I used to get some blow back from the tenants until I started attaching comps.

  14. Sarah Adams

    I have 7 houses and a 4-unit apartment building in middle TN (commuting distance to Nashville) and the rents here are going crazy! Over the 13 years we’ve been renting, we’ve gotten a lot better at qualifying tenants, and we’ve ended up with several that are improvements to the property. They are timely with rent, neat, and communicative, and they make small repairs themselves. I have a really hard time raising rent more than $25/year with these guys. One of my houses could easily be rented for $950, and I’m so far away from getting that. We just raised it from $750 to $775. The tenants are awesome but live on one income and are very price-sensitive. If we continue to raise every year, we’ll lose them. It’s a tough call for me. We really like these people. Is the hassle of turnover and the sting of being “mean” landlords (the tenants will never understand our point of view) worth another $2100/year? I need to decide whether or not I’m going to run this thing like a business…

  15. Jerome Kaidor

    It really depends on the market. I have a building in Hayward CA. The market here in the SF Bay Area has appreciated far faster than my ability to do rent increases. High tech has chased all the fair to middling folks out of the peninsula, and is putting pressure on all the East Bay cities.

    Hayward has rent control set at 5% per year, maximum. I am reasonably guaranteed a 5% increase every year for the next decade.

    I also own an apartment complex in Fresno CA. Things are quite different out there. To maintain full occupancy I keep my rents a little under market and try to give them excellent service. Our secret weapon out there is Air Conditioning. Every single apartment has working central AC. I spend something like $10K a year in AC repairs. Worth every penny.

    • John Adams

      My leases are for one year, with an automatic one-year extension at each anniversary — unless either tenant or landlord provide 60 days notice to not renew. The lease stipulates that the rent goes up by 4% each year (at the time of the renewal), rounded to the nearest dollar.

      This automatic 4% increase has a couple of effects.

      1. It provides an incentive to sign a longer lease. The tenant can “lock-in” the same rent. I just had a tenant sign for 3 years. Yes, I’ll miss the automatic increase — but I will save by having zero turnover. I also let a tenant sign a multi-year extension (again, locking-in a rate) when an anniversary comes up. I always take multi-year deals; turnover is more expensive than you think — that new tenant is going to want everything to be “perfect”.

      2. It sets an expectation that rent will go up. I can always choose to let the rent stay the same if the tenant makes a good case for it. For example, s/he might be content with something that another tenant might demand needs upgrading. Or make their own repairs of minor stuff. Etc.

  16. Zach Moore

    Solid post! Good point about keeping your rent increases consistent, although the numbers were a bit high in my opinion. As some of the other comments pointed out, keeping loyal tenants at lower rent can still pay off in the long run.This article inspired me to post an opinion on rent increases as well, and I’d be curious to hear everyone’s thoughts on it. https://blog.livechalet.com/the-path-of-lease-resistance-a56f870a0985#.6e1dg1ex5

    Overall, it’s important to increase rent consistently and let your tenant know why you have to do it. It’s also important to keep tenants happy and loyal, since a current tenant paying lower rent can still be better than the vacancy costs if your rent increases result in turnover. Once again, good post, and thanks for sharing!

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