Why Raising the Rent Annually Is Non-Negotiable & How to do it
The day I closed on my first rental property I had one of the worst performing apartment buildings in Southern California. Drug dealers, roaches and low rents. Quickly I turned it around and enjoyed the results for two years. But it wasn’t until a vacancy popped recently that I realized I’d left my building to fall behind market rents, costing me cash flow and reserve funds.
When you have tenants in place, paying every month on time it is a very tough proposition to consider raising the rent. The fear is that they will ask you to repair items or even worse move out. A one month vacancy from a tenant leaving as you likely know, would kill that extra cash flow you intended to collect by raising the rent. This is true, if you don’t do it properly. Lets look at some of the best practices to help pull this off without any issues, while ensuring your property stays in good working order.
Establish Market Rents
First things first, you need to establish what is the market rent for your rental property. If you are within $50 it might not be worth the effort to raise the rent. Unless you are comfortable with the risk of a vacancy. This doesn’t mean you should avoid performing an annual detailed walk through inspection to handle all safety concerns and deferred maintenance. What is a $50 repair today can quickly run thousands of dollars if ignored.
In most cases we’re looking at a situation where the tenants have been in place much longer than a year and if that is the case the odds are that the rent is below market rents. It is important to establish a base line, what are comparable properties renting for? The first thing a tenant will do when they get a notice of rent increase is look for a new place. If your increase is right in line or just below current market rents and your rental is in good working order, there is no reason to deal with the hassle of moving and your risk of a vacancy is low.
Resources to Establish Market Rents
www.Craigslist.com – Personal favorite
What Are Your Fixed Costs?
What do you pay every month on your rental property? Each year the cost for services such as property management, lawn care, pest control and utilities are likely to go up. There is one fixed cost that is guaranteed to go up each year and that is property taxes. This alone means you are certain to earn less income on your rental each year when rents stay flat. This is a very important area to focus on, knowing what your property will cost you each month regardless of maintenance and repairs. If you consider your rental an asset then it should be a performing asset that is a benefit to your pocketbook.
How many rentals are there currently available in your market? When I first purchased my apartment building there was an oversupply of two bedroom apartments in my area. It hurt rental values and made for low rents. Two years later as I reevaluated my market I noticed none of these larger complexes had vacancies and rents had increased 10-15% because of low supply. Things can change fast and you don’t want to miss out.
If there is a low supply of available properties in the area it is another reason to feel comfortable bringing your property up to market rents. There is no reason to undercharge for any service and this can add up to thousands over the course of a year, let alone multiple years. You should know your market well to have the confidence to move forward with your pricing decisions.
Do You Have a Property Manager and Should You Trust Them?
You’d be hard pressed to find a property manager that supports you raising the rents. This means more work for them for only 10% of the gain. Also, should the tenant in fact move out they now have a lot of work on their hands to replace the tenant.
If you look at it purely from a financial standpoint, a property manager doesn’t stand to benefit a great deal from raising the rents and it guarantees more work. This is the most obvious reason why I constantly see properties with under market rents and a property manager not saying a word to the owner.
At a minimum it would be wise to evaluate the market rents yourself once a year to ensure your property is at or near them and discuss options with your property manager. This is often a conversion they are more than willing to have, but they aren’t bringing it up first.
How to Deliver the News
Depending on how below market rents your property is will decide on how you should handle this process. Most importantly you must follow your states laws to properly communicate this in a legal and compliant method. Once you have established that, you can add your personal touch to ensure that the tenants are treated with the respect they deserve
With my apartment building I had two units that were about 30-40% under market and this was a lower income area. Due to the issues with drugs and pests I decided to not do a thing until the property was in perfect shape and the criminal element had been removed. Once that happened to decided to give the tenants more time than legally required to bring the rent up to market conditions.
The reason I chose to do that was because it was a low income area and I thought giving the tenants 90 days instead of 60 would allow them to better prepare their budget for the additional living expenses. Also, it was out of respect for them and to show that although I was asking for higher rents, they were getting more time than I was required. A little give and take can be helpful in allowing people to feel they are being treated with respect and that is an important thing to always give to good tenants.
The irony behind this was that they all said they had been expecting an increase and were prepared for it. I had gone above and beyond and had tenants who felt I’d been fair and they accepted the increase with no issues.
Don’t Feel Bad
This is one of the most important rules to remember. If you are providing a clean and safe property to rent you shouldn’t ever feel bad asking for market rents. This is a business and no landlord should ever need to justify charging fair rent. Be sure to always treat your tenants with respect, communicate clearly with them, be firm and take a genuine interest in their living a happy and prosperous life at your property and you will rarely run into any confrontations.
I hope you find this helpful, if you ever have any questions don’t hesitate to reach out to me personally! – Tim