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How to Raise Rents

 

How to raise rents involves understanding the right time and conditions.

When should you raise the rent?

Landlords often ask this question. But, most know that raising rents incurs risks. Tenant turnovers and increased time and money spent looking for new tenants while the properties remain vacant causes fear.

Yet, no one size fits all type of answers for this question exists. However, by assessing your investment priorities, studying the local market, and understanding your relationship with your tenants may provide the answer.

 

How to Raise Rent with Expiring Leases

 

The time to consider raising the rent appears just before the current lease expires.

 

The Local Market Determines Value

 

What if the local economy shows signs of weakness? Or, you see a “For Rent” sign on a nearby house where the owner seeks a higher rent than yours?

Your options include raising the rent while risk losing your tenants; or maintaining the rent and missing out on income growth. What do you do?

Studying the local market provides information essential for your decision.

Try Googling: “should I raise my rent?” where online real estate forums provide quick answers to the question. However, you may find answers with too many opinions.

Some write, “Raise the Rent”. Others advise, “Leave them as they are”. Understandably, you feel puzzled and confused.

Remember, the clock keeps ticking towards the lease expiring.

What more can you do?

Focusing on the local market rate to determine whether to raise rents shouldn’t be your primary focus. Consider other factors before taking action.

 

The Crossroads of Life

 

Arriving at any crossroad in your life, whether personal or investing, requires stopping and reflecting on your goals and objectives.

The key to making sound investment decisions requires calculating the risks of raising rents leading to losing quality tenants due to emotional decisions. Or, raising rents to meet your goals.

 

Your Goal for Raising Rents

 

First, never frame raising the rent as an “either-or dilemma”.

Avoid making bad decisions based on emotions. Evaluating alternatives leads to making good decisions. You must evaluate the costs and risks before deciding.

Thus, you must rephrase the question to:

“What’s my priorities about this property?”

This creates alternative situations leading to better decisions by weighing the tradeoffs of each situation.

 

Your Priorities

 

What are your priorities?

Do they include some or all these priorities?

  • Greatest profits
  • Cut personal involvements
  • Maintain low vacancy rates
  • Decrease tenant turnovers
  • Stabilize cash flows

 Your priorities list may include other motivations about your investments.

Brainstorm and think about your true priorities.

  • Will maximizing profits lead to higher vacancy rates?
  • Will tenant stability cut your time looking for new tenants?
  • If you can handle the potential risk of turnover and extra time to maximize profits, then do it.

 

Look at a Lease as an Anchor

 

The original lease agreement probably involved negotiations. Agreement on the rent doesn’t end there. It closed one chapter while opening the door for future negotiations about the rent.

The original rent is a “reference point”.

Real estate experts consider the original rental price as an “anchoring effect” on future negotiations. People are emotion driven. Many value fairness in business dealings.

If your tenants perceive rent increases as unreasonable, they will walk. 

 

Consider Your Relationship with Your Tenants

 

Consider your current relationship with your tenant. A great tenant compels landlords to leave the rent at the current level. Ask yourself:

Will increasing the rent raise the risk of a good tenant walking away?

Will it be worth the trouble of finding another good tenant?

 

What Makes a Great Tenant?

 

Real estate experts point to the following indicators of a great tenant:

  • Always pays the rent on time;
  • Maintains the exterior and interior of the property;
  • Neighbors and other tenants never complain about noise or property upkeep; and
  • The tenant updates you about issues and problems with the property.

           

Tenant Reactions to Rent Increases

 

How a tenant reacts to rent increases often depends on the current market conditions.

Take San Francisco with high rents for many years. Tenants expect higher rents when their leases expire.

On the other hand, markets with affordable rents leave tenants expecting rent increases around 10% acceptable.

Yet, other markets encourage tenants to walk immediately.

However, tenants with families do not want to disrupt their children’s lives by transferring them to new schools. Saying goodbye to neighborhood friends and looking for new shopping locations and transportation solutions disrupt any family. If the rental increase seems justified, tenants may choose to remain and pay the higher rent to avoid family disruption.

 

How to Raise Rents 2

 

Raising Rents Hidden Costs

 

Before raising rents, consider the costs of your decision.

Carefully research the market conditions of similar properties on the same street and the neighborhood. Presenting this information to your current tenants lessens the impression of being greedy.

Re-renting because a good tenant left due to rent increase escalates costs and your time along with a loss of income from vacancies. Is it worth it?

 

Potential Costs of Re-Renting

 

Consider the extra costs involved with re-renting like:

  • Turnaround Costs;
  • One-Month vacancy;
  • Advertising;
  • Real estate commission of one month’s rent;
  • Finder’s fee for non-broker locating new tenant;
  • Attorney’s fee for new lease agreement; and
  • Total Costs (add all the above).

 

Will the yearly gain of raising the rent pay for all the costs of re-renting?

If not, don’t raise the rent.

 

Tenant’s Current Earnings

 

Consider your tenant’s current earnings compared to when the lease began.

Ask yourself:

  • Can your tenant afford to pay the rent increase?
  • Maybe your tenant lost his or her job?
  • Or, your tenant took a pay cut to avoid a layoff?

Better yet, your tenant got a hefty raise in a new position.

Use a lease coverage ratio measuring the tenant’s gross monthly income to pay the current rent. Rule of thumb requires the tenant to earn three times one month’s rent.

Does your rent increase cause your tenant to fall below the rent coverage ratio?

 

Evaluate the Local Economy

 

No matter how good your property looks, market conditions determine fair value rent.

Understand the local economy to know the current market rates. Factors affecting local economy include:

  • Unemployment rate for the area;
  • Average vacancy rate for the area; and
  • Length of time listed properties remain vacant.

 Use the following sources of information:

 

Finding Comparable Local Rentals

 

Analyze the current market rents for comparable properties.

Forget about your desired returns or gut feelings. Market forces determine fair rental prices.

While MLS data helps regarding rental prices; you need more information than neighborhood location, number of bedrooms/bathrooms, square footage, etc. You need to do the following:

Speak to locals. They know the history of neighborhoods including how much specific properties rented for.

Walk around the neighborhood. See the condition of homes and apartment buildings with your own eyes. Answer “for rent” ads and preview similar properties. This helps determine market conditions.

Speak with other investors. Learn about market rents by expanding your network of other investors. You might find investors willing to sell their properties to you.

Speak with property managers. Ask about the going rental rates in the area. 

 

Use Online Resources to Determine Market Rents

 

Bear in mind, reviewing online sources to determine market rents includes aspirational rental prices and not the final ones. However, they help you to know about asking prices. Try these online sources:

 

Know the California Laws about Rental Increases

 

The State of California publishes a legal guide regarding rental increases and the law.

The guide explains various advance notice time requirements for different tenancy situations. It also explains that raising rent because your tenant filed a complaint against you or for any retaliatory reason is illegal.     

 

Conclusion

 

How to raise rents involves different things.

Make your decision based on the following:

  • Your goals;
  • Tenant relationships;
  • Vacancy costs;
  • Health of the local economy;
  • Market conditions;
  • Comparable properties; and
  • California and local rental increase laws.

 Consider a Property Management Company such as ourselves when thinking about raising rents.

We can help you with following many of the suggestions here to determine whether to raise rents. We also help with taking the stress of land lording off your mind by doing everything a good landlord does at a reasonable price.

Contact Us to learn more about our property management services.

Steven Rich, MBA – Guest Blogger

 

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