Landlord Pro – When should you raise rents?

Good morning,

Welcome to the first Landlord Pro newsletter featuring Mary from Rentals to Freedom! Mary – handing you the wheel:

Landlords are apprehensive about raising rents on tenants, especially good ones, for a few reasons. We worry about the costs of turnover, replacing great tenants with poor ones, and dealing with vacancies.

However, there are situations when raising rents is both practical and necessary. Part of running a real estate business is knowing when to keep rents the same and when the time is right to raise them.

3 situations when raising rents make sense

1.) Increase in business costs

To run a profitable business, landlords need to pay attention to their yearly costs and changes in the macro-environment. In an inflationary period, the cost of everything goes up; That goes for insurance, utilities, taxes, and services.

If you rely heavily on cash flow, the rising costs are going to eat away at your earnings at an alarming rate. Raising rents may be necessary to offset the rising operational expenses.

2.) Increase in market rent

I don’t typically advise people to raise rents every year. Tenants, typically good ones, don’t like to feel like their rent is being raised on them every single year. On average, market rents increase at 3.3% year-over-year, which on an apartment that charges $1,000 per month that’s $33 – definitely not worth losing a great tenant over.

However, over time & in periods of high inflation (such as now), the gap between current rent and market rent becomes quite large – at that point, rents should be increased.

I recently increased the rent on tenants in my first rental property because the gap had gotten so large. They were paying $1200 a month. When market rent was $1300-$1400, I didn’t even consider raising the rent. But now the market rent is at $1700 and the $500 rent gap makes a huge yearly difference.

3.) Buying a new rental with inherited tenants

Every time you purchase a new rental property, you should consider raising rents for a few reasons:

  1. Often, you’re buying from a landlord who has had the property awhile and the current rents are pretty far under market. You will need to raise rents to increase the cash flow and ROI of the property.
  2. Whenever ownership changes hands, tenants expect rent increases. They may be willing to work with the new landlord, especially if you raise rents a reasonable amount.
  3. You often will take care of some deferred maintenance issues right after you buy. Tenants are happy that issues are being taken care of and understand that an improved living environment may mean an increase in rents. We put in a new fence on a property and tenants were happy to pay a $200 a month rent increase because they were getting something they had wanted for a few years.

In Conclusion

Once you decide to raise the rent, how do you tell a tenant you’re raising prices without losing them?

My next post will talk about some strategies to use in order to order to raise rents “the right way” without losing your good tenants.

More from Mary

See you on Friday

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