How Often and How Much Should You Raise the Rent?
This is one of the thorniest questions in the landlord business. One camp says to raise it regularly and to the maximum that the neighborhood will bear, and if they move out, then find a new tenant. Another perspective is that turnovers are expensive and time-consuming. A turnover is when a tenant leaves and you must find a new one. That can involve a month or two without a rent-paying tenant, as well as the expense of repainting, repairing blinds, replacing carpet, deep cleaning or more. So, for good tenants, that approach says to keep rental increases to zero or an absolute minimum.
The cost of a turnover will run between $1,000 and $5,000, according to Apartments.com. Other publications put it at closer to $4,000, including repairs, renovations and lost rent due to the vacancy (estimating about 1 month). In soft rental markets, an apartment can easily be vacant two to three months. A vacant apartment means less income!
The best approach is what meets your particular situation. If you’re an experienced landlord with multiple apartments for cash flow and have painters, cleaners, and repairmen on standby, you can afford to be more aggressive, particularly in a tight market. On the other hand, if you’re a small landlord and are doing those repairs yourself, you might not want to bother trying to bump the rent $100 or $200 a month. If the rent is $1,500 a month, and it takes you 60 days to get a new tenant in there, that’s $3,000 in lost rent, before you include the cost of repairs and refreshing the unit. It can take over a year to make up the lost rent! In my neighborhood, vacancies have been growing for 3 years (partly due to a lot of new construction) and rents have softened. Landlords have dropped their asking rents and are lowering the income coverage requirements from 3x to 2x. It is not the time to be aggressive about increases.
I’ve found that tenants who have been in an apartment for several years have left normal wear and tear that requires patching some holes, a deep cleaning, a carpet cleaning, and touch-up painting. Often blinds need to be replaced and sometimes appliances like stoves, toaster ovens, microwaves, etc. It can add up. This usually means multiple trips to Home Depot. It is time-consuming, and time is money.
Another factor is the quality of the tenant. Does the tenant pay on time? Are they cooperative when you need to get a contractor into the apartment? Do they take good care of the apartment? Are they keeping the apartment clean? Do they put the trash neatly in the bins? Are their pets well-behaved? Do they get on well with other tenants? And so on. If the tenant is a genuine problem, you might want to raise the rent to make it worth your while or encourage them to leave.
And how about you? It’s a two-way street after all. Are you being a good landlord or a lousy landlord? Are you paying attention to your property or neglecting it? Are you keeping the grounds in good shape? If you have a property manager, is he/she being attentive – and have you personally checked up on them? I work hard to keep good tenants. If they have an issue, I get over the building right away, or send a plumber or serviceman immediately. I listen to their concerns. I give them a $100 gift card on their rental anniversary if they pay the rent on time. Occasionally I make some improvements in the building - fresh paint in the lobby. A little landscaping. I consider it an investment in my income source.
On the flip side, lousy landlords antagonize tenants and end up with higher repair costs because the tenants take it out on the unit. Keep your ego in check when it comes to working with tenants.
There are legal issues for rent increases too. How often and how much can you raise the rent? Some cities limit rent increases to once per year, even for tenants with month-to-month leases or no leases. Some properties are rent-controlled and the increase is fixed by the city, you can add a monthly amount for actual capital improvements (often amortized/recouped over ten to twenty years for things like window replacement or water heater replacement - check your city codes).
My rule of thumb and my strong suggestion after three decades in the business - if the tenant keeps the place in good shape, and pays the rent on time - don’t raise the rent except as genuinely needed. Every few years you may need to bump it a little to keep up with property tax and insurance increases, but otherwise, I suggest you leave it alone. Good tenants are hard to find. Bad tenants add stress to your life. Another way to look at it is this: what’s the value to you of having good tenants in a building you spent $500,000 or a million dollars to buy? Some landlords even prefer to leave the rent at 10% below market price. They prefer little or no turnover and stable properties. Rent that is slightly below market price encourages tenants to stay.
This brings up one other point - even good tenants need to have their apartments inspected at least a couple of times a year. I make it a point to look at each apartment regularly, by appointment, or, if I am in the building for a service call with a contractor (plumber, electrician), I may knock on a door or text them and see if they need anything - and if I can take a quick look at the apartment, maybe check for leaks. Or offer to change the HVAC filter. Being proactive is best. When the tenants know you care, and are looking to keep the building in good shape for everyone’s benefit, they are more attentive.
By Craig Aberle, SeniorLandlord.com