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Rental property rent raises
Old 03-07-2005, 12:29 AM   #1
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Rental property rent raises

I have 2 single-family rental homes in the Seattle, WA area. I have owned both for over 20 years. Being the "softy" that I am, I do not raise rents very often - only about once every 4 to 6 years. Because of this, I have a very low turnover of tenants. (One rental has had the same tenants for the last 15 years, and the other rental has had the same tenant for the last 10 years. )

Although I like the low turnover, I need to start raising the rents as I am way "undermarket"; I also retired last year at the age of 50 and do not feel as "generous" as I used to be when I was still earning income from a job. However, I will probably still remain a little "undermarket" as I like the low turnover and hate it when I have to advertise, check credit reports and references, and worry about the house being vacant (i.e. no rent coming in) while looking for another tenant.

My question is for both landlords and renters: How often is the rent raised, and at what percentage? A friend said that I should be able to raise the rent at least the rate of inflation on a yearly basis. I realize each area of the country and individual neighborhoods differ in supply/demand/desirability, all of which will affect the price of rents and rent increases. But, in general, it would be interesting to hear what others are doing or experiencing in this respect. Thank you.

(FYI: I am not a slumlord; I promptly take care of anything in need of repair or replacement and maintain both homes in good condition. )

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Re: Rental property rent raises
Old 03-07-2005, 06:00 AM   #2
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Re: Rental property rent raises

I can respond from a renter's perspective and what I have learned from my brother who also owns rental property. I can say that I usually faced a raise in rents after a one year lease was up. However, from my brother's perspective it all depends on the tenants. He had a great long-term tenant that really took good care of the property and paid rent on time so he was reluctant to raise rates on him. He will typically fix the house up a little and raise rates when someone leaves. Again I would say it all depends on the tenant. If you will you are charging too little maybe you should try to explain to tenants that you are going to raise rents a little but promise them you will still be very competitive. Renters will not really mind a small increase. Extra $25 a month is nothing to get crazy about and then just slowly push it up. Besides the Seattle area is pricey and as long as they don't have the option of buying a house or renting at a much lower rate you should keep the turnover low. Hope that helps but again I am not expert but I did stay at a Holidy Inn Express.
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Re: Rental property rent raises
Old 03-07-2005, 07:12 AM   #3
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Re: Rental property rent raises

I try to keep rents around 90% of market or so (assuming the tenant is "good") but when I raise rents I usually offer the tenant a stability option in the form of a new lease. Say I need to go up a hundred bucks; I'll show the tenant the option to lock that rate in for the next year rather than potentially face another increase.

I take good care of my tenants but it's not a charity; I think the ideal price point is when it'll cost them more to move than the move is worth.

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Re: Rental property rent raises
Old 03-07-2005, 07:23 AM   #4
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Re: Rental property rent raises

Are you a landlord or a non-profit charity?

Raise the rent every time the lease is up for renewal.

If tenants want no rent increases for four years then they need to sign a four-year lease!
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Re: Rental property rent raises
Old 03-07-2005, 09:54 AM   #5
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Re: Rental property rent raises

I have a 2 fam owner occupied house.
My previous tenant of many years left when her lease was up and she bought a co-op. Good move on her part. Had she stayed, I was going to raise her rent by 5% because it was way understated. Since she left, I was able to raise the rent by close to a wopping 25%. My tenant just renewed the lease for another 2 years and I did not increase the rent. This tenant pays their rent either early or on time, takes care of his place better then I do mine. You can't be too greedy.
Unless your rental is 10% under the going market rate, it doesn't pay to raise the rent and risk losing an excellent tenant as it will cost you more preparing the apartment and possible lose 1 or more months rent.

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Value vs growth?
Old 03-07-2005, 10:54 AM   #6
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Value vs growth?

I say again, business or charity? If it's a business then it should be run like one.

C'mon, guys, the #1 failure of small-business owners & consultants is a reluctance to charge what we're worth. Are our tenants better at being tenants than we are at being landlords?

If you're a crappy landlord then don't raise the rent-- the tenants would bail on you in a heartbeat. If you're an average landlord then they'd weigh your rent increase against their hassle of finding a new place and their moving expenses. But if you're a GREAT landlord then they should pay more for quality service. If they're not willing to pay market rent or better for the privilege of your landlording then there are other tenants out there who will. Do you want to run a franchise of Yugos, Chevvies, or Bentleys?

If your money was invested in a dividend-paying stock instead of real estate, would you be happy if its dividend didn't rise? If you're not raising a tenant's rent, then all your profit on this "stock" is locked up until you sell the property for the cap gains (if any). IOW you're waiting for the property to appreciate and for you to be interested in selling. One big difference is that rental property is subject to cap gains at the 28% rate, and that INCLUDES depreciation recapture.

Sure, you could wait until a tenant moves on and then raise the rent to market, but that's not a choice-- that's an ultimatum at their initiative.

Look at the cost-based benefits of a rent increase-- a conservative risk is 1-2 month's rent plus advertising & credit checks. (You could include cleaning & painting but hey, that's what security/cleaning deposits are for.) If a year's lease at a higher rent gives more income than the cost of finding a new tenant, then it's worth raising the rent.

If it's worth raising the rent, then sell the idea! If you're a good landlord, then tell the tenant how good you are, why the rental is worth more than last year, and why you're entitled to more money. Maybe they want more services or improvements, and a rent increase could be part of the package. If you're reluctant to risk losing the tenant, then ask for a longer lease commitment. Or you might decide to go after a different type of tenant (yuppies instead of starving students, families vice roomates, etc), and your current tenant is going to have to pay for the higher rent or move out.

Take a look at how professional property-management companies or residential-rental REITs run their businesses. Every landlord should survey rental prices every year and communicate their research findings to their tenants. Every year a tenant should be happy to pay a small rent increase-- even in a down market-- to avoid the hassle & expense of moving. Every landlord should be raising the rent at the expiration of every lease to maintain or improve their cash-on-cash returns.

I believe it was Nickerson who points out that static rents actually reduce the property value because a new buyer won't see the ROI unless they raise their rents. Buyers would rather pay a premium to take over a rental business at market rents with tenants willing to pay rent increases. And those static rents hurt a landlord in the long run because they eventually attract a lower-priced class of tenant who can't afford to pay the market and who can't afford to (or doesn't care to or don't know how to) take care of their tenant responsibilities.

Each party to the rental agreement should be willing to negotiate costs & profits at its renewal, or else one of you needs to exit the business!

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Re: Rental property rent raises
Old 03-07-2005, 12:07 PM   #7
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Re: Rental property rent raises

Nords,
In my area, to get a new tenant, it could set me back $2K to $3k so I would need a major increase just to break even.

It wasn't a total give away. The rent always included the cooking gas since there is no separate meter for it but I did get the tenant to now pay me a fixed amount per month which I will increase moderately next year.

MJ
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Re: Rental property rent raises
Old 03-07-2005, 01:09 PM   #8
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Re: Rental property rent raises

One thing to remember is that for every vacant month in a unit/property, you lose 8% of your revenue. We guage increases carefully if it is a tenant we want to keep, but that does not mean we avoid them. Generally we look for a minimum COL adjustment, but this vaires depending on the area, property type, competition, expense increases (esp. taxes), etc.

We see this issue all the time when we are buying a property. The prior landlord didn't raise the rents for years, and yes he has stable tenants, but the properties won't cash flow for the sales price they want. (We have this issue on a 6 plex we are looking at currently.)

One thing that we often do on a new property is look for other areas you can increase fees on other than rent. For example: we bought a property last year that hadn't had a rent increase in many years. (8 Plex). None of the tenants had signed leases, so you risk losing several tenants at once. The building included: Water, trash & sewer in the base rent (No separate meters for water). When we initially met with several tenants, they of course threatened to move if we significantly increased rents. We decided instead to offer them a 2 yr lease with a modest increase (4%), or a 1 year lease with a 10% increase in the rents. : we added nominal monthly charges per unit for trash, water, & sewer rather than including them in the rent. The result was 5 signed 2 year leases, 2 signed 1 year leases, One moved out and resulted in a one month vacancy.

We received the increased income we needed and the tenants only perceived the percentage increase, they never figured out that the extra charges we added were actually also a rent increase. (Plus we bill them separately for the services, due on the 15th of the month, versus rent which is due on the first.)

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Re: Rental property rent raises
Old 03-07-2005, 01:44 PM   #9
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Re: Rental property rent raises

thebaccus hit the nail on the head. The number one reason to keep your rates at or near the going rate is rental income vs. total cost of sales.


In other words if you wanted or needed to sell; who would buy an income property with crappy income? Keep the rates at or near the market!


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Re: Rental property rent raises
Old 03-07-2005, 01:46 PM   #10
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Re: Rental property rent raises

Quote:
thebaccus hit the nail on the head. The number one reason to keep your rates at or near the going rate is rental income vs. total cost of sales.


In other words if you wanted or needed to sell; who would buy an income property with crappy income? Keep the rates at or near the market!

If you want or need a primer on Landlord101 check out www.landlord.com


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Re: Rental property rent raises
Old 03-08-2005, 11:06 AM   #11
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Re: Rental property rent raises

As a landlord, I would approach the determination from a cost approach. I know what my mortgage is. I know what my insurance is. I know what taxes are, and how much they will grow (2% per year). Maintenance and repair are somewhat unknowns, so I plug in a slightly overstated number for that.

Now I have a "cost" basis on which to base my rent. Frankly, I don't care what the "market" rate is, since I know how much my cost is. Then, I determine the profit level I want to go for. In this case, I'd say 10-15%....starting with the higher number.

If maintenance, taxes, insurance, and other costs increase to the point when my profit is below 10%, then I'd adjust the rent up to where I'm a little over 15% again.

Actually, my profit is over the amount listed, since my house is getting paid for by someone else, and it's going up in value.

So I say, to heck with the market!! I know, it's not what most people do.
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Re: Rental property rent raises
Old 03-08-2005, 01:38 PM   #12
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Re: Rental property rent raises

Quote:
As a landlord, I would approach the determination from a cost approach. I know what my mortgage is. I know what my insurance is. I know what taxes are, and how much they will grow (2% per year). Maintenance and repair are somewhat unknowns, so I plug in a slightly overstated number for that.

Now I have a "cost" basis on which to base my rent. Frankly, I don't care what the "market" rate is, since I know how much my cost is. Then, I determine the profit level I want to go for. In this case, I'd say 10-15%....starting with the higher number.

If maintenance, taxes, insurance, and other costs increase to the point when my profit is below 10%, then I'd adjust the rent up to where I'm a little over 15% again.

Actually, my profit is over the amount listed, since my house is getting paid for by someone else, and it's going up in value.

So I say, to heck with the market!! I know, it's not what most people do.

MM

We are saying the same thing, me in general, you specifically. All those costs you stated are set by the market. If your viewpoint is that someone else is paying for your house..enjoy it. You sound like an organized landlord who knows the market rates.

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Re: Rental property rent raises
Old 03-09-2005, 05:48 AM   #13
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Re: Rental property rent raises

If we have good tenants we generally don't raise the rent every year. In this area (outskirts of a university town) most tenants don't stay longer than 2 years anyway.

When we do raise, we use the cost approach that Mountain Mike talks about.
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