October 24, 2010

How to Raise Rent

Your rent rates should be evaluated and adjusted on an annual basis.   

The Market Determines Fair Value for Rents

Your rents should primarily be based on what the market rates are in your area.   If market rates go up then your rent should go up.   If rentals are not going up in cost then you should not try to raise rents.  

You should not try to raise rents solely based on your own costs.  You may be tempted to raise your rent if your own expenses go up.  But your costs don't really dictate the rent you can charge.   Likewise just because your costs don't go up doesn't mean your rent should stay the same.  

Raise Rent During Vacancies

Raising rent during a vacancy is simple and has no impact to a current renter.   If you have more frequent turnover then it may be simplest to just wait to raise your rents in between renters.  For example if you frequently rent to college students who usually only stay for 9-12 months at a time, then theres no sense in trying to jack up rent for short term tenants.

Gradually Increase Rent Over Time

Rent gets more expensive gradually over time.   If you want to raise rents then you should raise them gradually.    Annual rate increases of 1-5% are much more acceptable to renters than larger less frequent jumps.  If your rent is $1000 then a $25 to $50 increase for a year is something that the renter will find easier to accept and adjust their budget for.   It also doesn't "feel" as bad to them.   If you make the $25 or $50 increases annually then over time the rent will steadily go up.  But from the renters perspective they see a gradual, smooth increase that they can adjust to every year.
Don't make Big Jumps

If you were a renter which would you like it if you rented a place for $600 a month and then your rent jumped by $200 a month?   I certainly wouldn't want to get a $200 or 25% increase in my rent.   What if your rent stayed fixed for $600 for 5 years and then jumped to $800?   Would you still be happy about that $200 increase?   I wouldn't.   On the other hand if your rent went up $50 a year every year to go from $600 to $850 over a 5 year period then that might not upset me as a renter.    Even if your rent has been flat with 0% increases for several years your renters are not going to be happy with a large % increase in one year.   Your renters would have gotten used to the $600 rent level and likely aren't aware of increases in market rates.   If you make a large jump in rent they will not be able to easily accommodate that change and are likely to leave.   Big jumps in rent are a shock to renters and should be avoided.

How Much Do You Like the Tenant?

Some tenants are better than others.   If you have a model tenant that is always on time with their rent, takes good care of the property, plants flowers in the garden, and never causes you any problems then you may want to raise rent slower in order to give them an incentive to stay longer.  Personally I'd take less rent if I could guarantee myself great tenants.   When you do find a great tenant then you should try to hang on to them.   Of course you aren't running a charity so I wouldn't take this idea too far.   Don't let your rent get too far under market.   A little bit under market to help retain a great tenant is OK in my opinion, but too far under market is just throwing money away.

If you have a poor tenant then raising the rent faster might be a better idea.   Look at it this way:   The reason to not raise rent fast is to retain your tenant, but if you don't really care about losing the tenant then you may as well maximize rent.   Of course anytime you lose a tenant you could have a vacancy that you can't fill.    If the tenant is really bad then you should probably just not renew the lease and find someone else anyway.   

Fixing a Big Gap

If for some reason your rent with a current tenant is considerably below market value it can be difficult to bridge that gap without running off your tenant.   Maybe you've neglected raising rents for some reason or maybe you've only lately realized you're under market.   Lets say that your rent is currently $600 and the market is now charging $850.   That $250 difference is a wide gap.   Raising the rent the full $250 up to $850 all at once would be a major shock to the tenant.   I would recommend honestly telling your tenant that the market value is considerably more than the rent so you are going to have to raise their rent substantially.  However I would still keep it a bit under market.   For example I might raise the rent by $165 the first year and then add another $85 increase over the 2nd and/or 3rd year.   That would make the rent would go from $600 to $765 in the first year which is still10% lower than the market.   The tenant won't be thrilled with the increase but they're still getting a good deal with 10% lower rent so they will have good incentive to stay.   Then you can increase the rent again the next year and further close the gap.  

In summary:

Watch the market rent values and keep your rents adjusted based on the market, not your own costs.
Ideally 1-5% annual increases are easier for renters to swallow
Use vacancies as an opportunity to adjust rents
Make gradual increases in smaller amount rather than making large jumps
Tune your rent increases to retain quality renters

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