Admit it. You think it’s time for a rent increase. There’s nothing wrong with a real estate investor wanting to increase his/her rental income, within reason, of course. In fact, many argue that you have to do so, just to stay in the real estate game.
Why should I increase the rent?
More money… duh!
This is should be self-explanatory. Raising the rent means higher income. It’s simple math. Not only does a rent increase mean more quarters in your piggy bank, it also increases the property’s value. Two birds with one stone.
Keep up with increasing expenses
On a more serious note, increasing rent also comes as necessity in order to avoid negative cash flow. Some expenses (that you can calculate here), like property tax and insurance, increase over time. If you’re employing anyone to help manage the property, you will need to raise their salary from time to time as well. We also cannot forget about upticks in market value. These factors combined can lead to a negative cash flow if the rent remains as it is.
Great, so now you’re on board with increasing your rent. But don’t be so hasty. Like many other things in the real estate investing business, a rent increase comes with its pros and cons. Yup, even trying to earn more money could have cons. So, before you go and add some extra 0’s to your tenant’s rent (just kidding), think carefully whether you should follow through with the rent increase.
Things to consider before increasing rent
What’s your goal with the property?
Depending on your goals, a rent increase may not always be ideal. If you are a full-time investor who wants higher yields, then a rent increase would seem rational. On the other hand, if you’re a part-time investor with a demanding main job, increasing rent could tire you out. A rent increase increases the chance of vacancies, something part-time investors may not want to deal with. The degrees of management and potential tenant turnover are also factors that are impacted by real estate goals. Properly set up your goals, and consider a rent increase in relation to them.
How’s the market doing?
Remember, your property does not exist in a vacuum. The market will always be there to impact your property. Being aware of nearby properties is also key. An efficient way to do this is to use Mashvisor’s rental comps. You could also speak with tenants and investors of nearby properties. By getting information on comparable properties, you will get an idea of where your rent price stands. If a property is identical in every possible way to another, it does not warrant a rent increase. Assess the market and nearby properties to see if a rent increase is possible and appropriate.
Don’t want to break the law
Laws differ from city to city, so it’s vital that you make sure that a possible rent increase is legal for your property. Generally speaking, the law will focus on three things when it comes to rent increases. The first, and most obvious, is by how much the rent will be increased. Most cities will set a maximum increase percentage between 3-10%. Laws are also concerned with how much notice time a tenant receives before the rent increase. This time period is usually 30 days, 60 days, 90 days, or any time in between. How the notice is delivered to the tenant is also a matter of legal concern. Could you inform the tenant in person, email, or by pigeon? That will also be dictated by your city’s laws.
Another key factor is the relationship you have with your tenant. Are you and the tenant buddy-buddy? Or is there an issue between you two? A good tenant is one you should really try to keep. A friendly tenant may be more open to the idea of a rent increase. If the tenant can’t afford the extra rent, he/she could decide to move out, which leads us to the next point.
If the tenant decides to leave the property, it will become vacant. Vacancies and turnover could cost you a decent amount of cash. Add that to the fact that bringing in a new tenant will cost money too.
Is it worth it financially?
Keeping these factors in mind, should you increase the rent? The answer will differ for others based on the particular situation, but generally, if raising rent will eventually cost more in the long run (through vacancy and turnover), it might not be a good idea.
How to raise rent
When it’s time to sign the lease, present your tenant with three options. Each lease option is a different period of time, with longer times leading to cheaper rent per month. For instance, a one-month lease would have the highest rent, a three-month lease would have a lower rent, and a six-month lease would have an even lower rent. Although the rent decreases the longer the lease is, you would actually be saving and earning more due to lower turnover and vacancies.
Keep your tenants used to it
Long-term tenants, who are most likely good tenants, should get used to an annual rent increase. They would be more amiable to this instead of a sudden rent increase after living in the property for a long time without such. The amount of increase, as previously mentioned, will largely be dictated by laws, but this strategy is definitely a helpful one.
Add new amenities
Adding new amenities, especially ones a tenant requests, is another great method to boost the rent. Anything from a new TV to new furniture will justify a rent increase.
When to increase rent
End of lease term
You can’t just barge into your tenant’s rental and enforce a rent increase. The tenant must be notified in advance, and the increase is finalized in a new lease, or a renewed one. This also goes without saying, but be courteous when discussing the rent increase with the tenant.
As mentioned before, an annual rent increase is a great way for tenants to expect increases and to keep your expenses and cash flow in check. The increase should not be overboard; an unreasonable percentage will likely deter tenants.
For more on tips with rent pricing and the whole renting experience, check out Mashvisor.