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You are here: Home / Blog / When Should You Raise the Rent on Your Rental Property?

When Should You Raise the Rent on Your Rental Property?

August 22, 2017 by Jason

when_should_you_raise_the_rent_investment_property

Rental properties aren’t cheap to operate. They come with costs — and many of those costs are variables. Taxes rise, maintenance costs increase, and insurance rates climb.

So when do you get to raise the rent to help cover your expenses?

Contractually, you can’t raise rent during the term of the lease. And you can’t have a rent increase just because it’s been a while since your price went up. This isn’t like asking for a raise. You can’t say, “It’s been two years. Time to raise rent!”

Raising rent requires more than just serving a rental increase letter. Your tenants can leave, and it's hard to replace them if you’ve raised your price too high. Instead, you need the numbers to back it up. Rent increase depends on the market. So, before you hike up your rates, make sure it’s profitable to do so.

Will You Really Make More Money?

Rent should only be raised when the market permits an increase. And you have to make sure the increase is high enough to bring profit in the long run.

Key Takeway:

Most of the time, five percent is the magic number. If you can’t increase your rent at least five percent, don’t do it. You won’t make enough for it to be worth your costs.

The rent increase has to cover realtor commissions and holding costs for the next term if the current tenant doesn’t renew. Plus, you’ll need to factor in the repairs and updates necessary for a new tenant.

Let’s say you’re collecting $2,000 in rent and want to raise it $50 per month. You’ll only make $600 more in the next year, but it will cost you at least $1,000 in commissions, repairs, and holding costs to fill the vacancy.

If you raise rent higher than market value, not only will your current tenant leave, but a new one will be hard to find. Then you’ll end up with the costs of finding a new tenant, but will likely return to your original rental rate to fill the vacancy. If the market doesn’t allow for at least a five-percent increase, you hurt yourself.

Telling Tenants About a Rent Increase

Sometimes an increase in rent makes sense. And it’s not based on your taxes, maintenance, or insurance costs increasing. It’s based on the market. If market rental rates have increased to the point you can raise rent more than five percent, there’s a right way to approach it.

The key? Be prepared to show the data of why higher rent is based on the market average — not your personal finances. No one cares that your taxes or premiums went up. Tenants assume if you own a rental property, you’re rich. So when you start with, “My costs have gone up…”, they immediately tune you out.

Instead, show them what you could collect in rent, then set your rate a little lower. Say, “I’m raising rent because if I put it on the market now, I could get $200 more a month. But I like you and want you to stay, so I’m only raising it $100.”

Related Post: How to Increase Rent While Keeping Your Tenants Happy

How a Property Manager Helps You Raise Rent

Using a property manager makes a rent increase a little less overwhelming. Just because we approach someone with an increase, doesn’t mean they’ll take it. But it also doesn’t mean you should never raise rent for fear of losing the tenant.

At LEAP, we have the resources to determine the realistic market comps. Public information is at least six months behind. Plus, it’s hard to get an accurate number from these resources. Anyone can submit numbers, so the information isn’t reliable. But we use the most accurate comps based on MLS and other professional resources to get you the highest amount without losing your tenants.

We start with a conversation. If you want to keep your current tenant, we can gauge their responses. And when we approach them with a higher rate and think they’re serious about moving out, we can back off. But if they go for it, you just got a rent increase without dealing with tenant turnover.

Often, DIY landlords fear losing their tenants and the hassle of finding a new one. One of our clients hadn’t raised her rent in nine years for that very reason. But when she started working with LEAP, we brought her $700 more a month just based on comps. She’s a pretty happy customer.

Filed Under: Blog, Property Management Tagged With: Average rent, Keeping tenants happy, Landlord mistakes, Property management, Raising rent

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