Every landlord is faced with the question: should I raise rent? And if so, by how much and how often? I like to employ what we call a nuisance increase.
If you raise rent by too much, you run the risk of the tenant moving out. An increase of $50-$100 or more will probably get your tenant thinking about another place to call home. Now, if for some reason you haven’t raised rent in many years and your current market rent really is $150 above what you now charge, you have two options.
First, you can raise rent by the full amount, explaining to your tenant that it’s the going rate and they will have to pay that amount elsewhere for a comparable dwelling. However, there is still a good chance that they will move out because they’re probably not prepared to take such a large hit to their budget.
The other alternative is to begin using the nuisance increase strategy by raising their rent every year when their lease renews by about $20-$25 until you reach current market rent. This amount usually won’t make a tenant move out… it should feel like a minor nuisance to them, but it’s easier for them to pay $20 more per month then go through the hassle of finding a new place and moving all of their stuff.
Ideally, you should be employing the nuisance increase strategy from the beginning with all of your properties. But, there is an upper limit to what you can charge for a certain property. You don’t want to price your unit out of the current rental market; stop increasing the rent before you reach this point. Instead, reevaluate every year and only increase the rent when prices go up again.
The nuisance increase works well because tenants can understand that your costs to maintain the property go up over time. Every year, you usually see a little bump in your property taxes and insurance, and over time repair costs go up as well. Tenants are okay with this. They usually aren’t okay with you blindsiding them with a huge rental hike.
Until my next post,
James
P.S. For more information on great property management tips and strategies please listen to our audio training programs on property management that are included free with the Real Estate Investor Bronze Membership.
This month, some of the properties I own will be going vacant. The process of selecting what rent to ask for them reminded me of something I have been meaning to write about for a while now. Should you raise rents with large, infrequent hikes or gradual increases every year?
Some landlords raise rents when their tenants move out and it is usually a big change. If your tenant has been a “good tenant,” then there is a tendency to keep rents steady to avoid rocking the boat, lest your tenant move out. However, this is a mistake.
I think you should open a dialog with your tenants to let them know that taxes, insurance and other expenses have gone up, and while they have been great tenants, you will need to raise the rent… a little. Jeffrey Taylor, also known as Mr. Landlord, talks about raising rents and offering the tenants a chance to tell you if the increase was too much and to suggest what they can afford. If that works for you, great.
For me, increasing rents slightly–what I call a nuisance increase–will keep you from having to raise rents by huge amounts when your tenants eventually move out. For rent to increase a percent or two each year when the lease renews is not usually going to make someone move out UNLESS you have not been keeping the house in great condition and have not been responsive to your tenant to begin with.
Most tenants realize that things go up in price over time and that rents are going to go up. Most tenants would rather have a small increase every year instead of being stuck with a 10% increase every couple of years. If you ease them into it, they can adjust their budgets less painfully. This reminds me of the story about how to boil a frog. Not that I have ever done this, but the story goes, if you throw a frog into a pot of boiling water, it will jump out. If you throw a frog into a pot of room temperature water and then slowly bring it to a boil, that’s the end of the frog.
To summarize, small incremental changes in rents will help you keep pace with rents in your market and will help you maintain positive cash flow even as taxes, insurance and maintenance expenses creep up over time – all while still keeping your tenants happy.
Until my next post,
James
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