Landlords - rule of thumb for increasing rent?

[Bongleur]

Tenant's lease is coming up. Property manager suggesting a $50 bump on $2490. So about 2%. On a house in the DC area, on 1/4 acre, neighborhood built c1955, nice brick.


What's the current rule of thumb on rent as a % of gross income?


What questions should I be asking the PM ? --
-- if empty times have decreased since last lease signing
-- to check tenants financials to see what their number look like
-- how have rents been changing in the neighborood & vicinity

 

[knucklehead 61]

our insane governor just made Oregon the first state in the union with statewide rent control limiting a raise in rent to once a year & 7% over the consumer price index, which was 3.9% at the last report, thereby allowing us to raise our rents a total of 10.9% per year, which I have done to nearly all my 29 properties.
I don't see a need to know what the rent as a % of gross income is as it is not useful information.
if your rental is in a tight rental market, like nearly all of Oregon is, you are leaving money on the table if you don't keep up with market rents. you need to know what your competitors are charging for their units & keep in line.

 

[SheitlQueen]

our insane governor just made Oregon the first state in the union with statewide rent control limiting a raise in rent to once a year & 7% over the consumer price index, which was 3.9% at the last report, thereby allowing us to raise our rents a total of 10.9% per year, which I have done to nearly all my 29 properties.
I don't see a need to know what the rent as a % of gross income is as it is not useful information.
if your rental is in a tight rental market, like nearly all of Oregon is, you are leaving money on the table if you don't keep up with market rents. you need to know what your competitors are charging for their units & keep in line.

I've got rental property in Oregon too. Before the law was signed, I was reluctant to raise rents and only did so when I felt I had to. Now I'm going to be raising them every year because of this idiotic limit.

 

[Bongleur]

I'd like to know if the tenant can afford more rent, according the generally accepted metrics.


Are you getting 10.9% on low-income or middle income properties?



Kiplinger's is saying inflation for housing will be 3.1% this year, vs 2.2 general:
*********

https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html
*********

 

[Bongleur]

Where did you get 3.1% for the CPI?


Kiplinger's pdf:
2017 242.839 243.603 243.801 244.524 244.733 244.955 244.786 245.519 246.819 246.663 246.669 246.524 2.1%
*****
2018 247.867 248.991 249.554 250.546 251.588 251.989 252.006 252.146 252.439 252.885 252.038 251.233 1.9%
*****
2019 251.712 252.776

 

[Sunset]

OP - you should look up some similar properties and see what the rent is in the same neighborhood.

How long have you been renting this place.

I would say you should raise the rent by whatever inflation is in general, unless you find you are already dirt cheap.

Without any other information the 2% is OK, after all , moving is a hassle so the tenants are not going to move over $50 more per month

 

[calmloki]

Yup. unintended consequences. I just did a nominal rent increase last year on existing tenants and when talking with some real estate agents about selling was kicking myself - sale price is largely based on rent charged - duh. I have some identical apartments that are wildly different in rent because I was a nice guy and didn't jack up the rent on existing tenants to track market.

 

[Bongleur]

Starting to try to find data on the net...

Kiplinger's is saying cost of housing will go up 3.1% this year:
https://www.kiplinger.com/article/business/T019-C000-S010-inflation-rate-forecast.html

The CPI went up 2.1% in 2017 and 1.9% in 2019.
So I'm already in the hole by 4%.

For a 1 year lease, seems like I ought to ask for 7.1%
And 10% for a 2 year lease.
Agent suggested 2%. I need to see her CMA. This company manages lots of properties, so I hope they are good at maximizing profit for me.

According to Trulia, the median rent is $933 per bedroom in the area. So I'm getting only 80% of median. I need to find out why the PM only got that much. Could it be that the 4th bedroom is nowadays considered too small to be counted

https://www.trulia.com/real_estate


NEWS ARTICLE Mar 31, 2018
the median sales price for a home in the first quarter of 2018 was $520,000. Compared to a year ago, the median home price grew 19 percent...

 

[Another Reader]

I'm guessing the OP does not have a lot of units and hasn't been a landlord for a long time. Before you decide to raise your tenants to full market rent for a pristine unit, ask yourself how much is the cost of a tenant turnover. If you will have to paint, carpet, upgrade your fixtures, etc. to get "market" rent when your tenant moves, you may lose money on the turnover. Plus there is the vacancy loss during the turnover to consider.

I like to keep good tenants, so I don't squeeze every last dollar out of the rent. My experience has been that this approach costs me less over the long run. I bought the units either a long time ago or during the 2009-2012 meltdown, so I'm not struggling to pay mortgages.

Also, what the CPI is doing or what properties sell for is largely irrelevant. What your current renters and their potential replacements can afford to pay and what your competition charges are the relevant metrics. Median rent per bedroom is only marginally useful. In my market, four bedroom houses do not command much of a premium over three bedroom houses and are more likely to attract roommate situations than families. My little two bedroom in a desirable area is one of the easiest properties to rent and has the highest rent per square foot and bedroom because it is affordable to a young couple or a divorced mom with a kid or two that want to live in the neighborhood and school district.

Property management companies like to do what is easiest for them. Turnover is a hassle and costs them revenue. There may be a bias toward lower increases, but they do have a point. Turnovers cost you revenue as well.

 

[dd564]

I usually start looking for rental houses available a few months prior to mine becoming available (to see what the competition is at price wise). Then when I post, I post the price on the high side, and slowly drop it every X number of days.

I've found at a certain point you go from almost no one looking / people flaking out, to people beating down your door fighting over it.

I tend to keep my tenants for longer periods. I usually tell them at signing (and in the lease) that the price will increase X percent after the lease is done. When the lease is getting close to ending, I offer them another long term lease usually with a financial incentive to re-sign for a longer period. (2 years vs 1). As "Another Reader" has said, I find it better to have the house without vacancy and without the need to turn it over, so my tenants are usually getting property at a good rate when they stay longer and they know it.

My tenants tend to find me relatable, and open, and I respond quickly to their needs when something isn't working properly. For me I sleep better at night "knowing" my tenants so if I can keep them for a longer period, it helps me manage more properties easier.

I know at the rates that they are renting, I'm doing okay, and trying to squeeze the additional cash isn't worth my time right now considering I'm self managing and I work full time and I have young kids. I prefer to have solid, lower maintenance tenants if I can who don't move frequently.

 

[Winemaker]

I don't raise my rents on a schedule; however the rule of thumb I use is to raise them enough that it costs less than a moving van and crew.

 

[ASung90s]

On the flip side, keeping a good tenant over long periods of time can be costly.

I rent out a house which was the family residence a while back before the family dispersed. The lease had been passed between friends-of-tenants for nearly 10 years. It was a nearly zero-hassle experience and the tenants did some useful improvements in return for me providing materials. Then one of them decided it was okay to have his girlfriend move in without informing me, and just suggested I add her to the lease.

They were kicked out at the end of the lease, and when I called in a realtor... turns out I could have gotten a LOT more in rent.

Turnover isn't always a bad thing, especially if you've had the same tenants there a long time. Instead of always raising rent by a certain percentage/dollar amount, you should probably get a rental agent to come by and give an assessment every 4-5 years if the unit hasn't been on the market.

 

[Starsky]

Too many variables to answer your questions accurately. I usually raise the rents between tenants more often than I do for existing tenants, to motivate them to stay longer.

Unless my rent is well below market, it's usually much cheaper to renew a tenant than it is to get a new one - especially with property management. They get a finder's fee for a new tenant, and I need to pay turnover costs for paint, flooring, etc. I usually won't raise the rent on a first renewal, but will consider it at subsequent renewals if the market demands it. Of course, some markets are very hot and it's easier to do. Mine is more stable and I can raise the rent (maybe) every 3-5 years. And if there's a tenant I want to leave, rent increases can be very useful...

 

[Teacher Terry]

When we had rentals we only raised the rent when people moved out. Here where we live now rents are going up 8% a year.

 

[OldShooter]

... -- how have rents been changing in the neighborhood & vicinity

This is the only question. The market doesn't care about your finances and you aren't entitled to any particular percentage of prospective tenants' income.

When you buy a steak in the grocery store do you ask how the farmer is doing financially? Do you calculate the cost as a percentage of your income to decide whether to buy or not? I don't think so.

When I had rentals, I kept a spreadsheet that tracked advertised rents for similar buildings in my neighborhoods. I updated every month or two so I could see trends. You can also get macro city-wide vacancy rate numbers, but those are apples, potatoes, and eggs all stirred together so I never considered them to be primary to my decisions.

Another, more tedious, method is to advertise a rate and see what kind of traffic you get. No traffic = rate too high. Adequate number of desirable applicants = rate about right. Buried in applicants = rate too low.

After all this, as others have said, you need to consider the value of retaining good tenants and the value of attracting new, good, tenants.

I would not rely very much on the property manager for opinions. He/she has essentially no financial stake in the decision and is not likely to work very hard to come up with good numbers.

 

[NgineER]

I use rentometer to check rates in my area, I then price at a price that I deem to be $50-150 over what I think it should be. After a week or so I drop the price by $50 and see what response I’m getting.
For tenants staying I try to increase rent each year, but do it at a level that won’t make them move out. 4-5%.

 

[calmloki]

We used to subscribe to the turnover costs money, keep a good tenant with low constant rents idea. We ended up with a number of units with long term tenants and a problem: rents had jumped up and our comparable new rents were 15-20% higher than the old rents. I started raising rents once/year, and some of the longer term tenants felt very picked upon - even though their new rent was lower than the rent I was getting for new rentals. Pointing out that they would have paid much more had I raised the rent by a couple percent every year of their tenancy didn't help. Experience shows me that a regular *modest* rent increase every year becomes expected and more acceptable.

EDIT: *modest* - slow and steady wins the race - seems familiar..

 

[38Chevy454]

Think of it this way, $50 month increase vs $2490 means if you lose a month's rent with tenant changeover, it will take approx 50 months to recoup that lost month. Of course the new tenant you might get more than $50/month increase, which could shorten the payback. You may also incur additional costs fixing up the house for a new tenant which is additional cost and payback calculation.



My philosophy when I had rental properties was to keep rent stable with a good tenant, as the payback for the lost month on changeover was not worth the potential risk of a bad tenant.


It is wise for you to investigate and determine what fair rent for your house should be. If you are below that, then an increase is justified. The trick is to get that increase and keep a good tenant at the same time.

 

[ASung90s]

Another question is when are leases extended?

Now that my rental property is back at market value without long-term tenants, I require the tenant to commit to an extension 3 months ahead of time. If they won't, then the rental goes on the market. With sufficient lead time, it's unlikely you'd have a month's vacancy.

 

[Looking4Ward]

Allow me to give you a renter's perspective.....

I signed a lease on this home last year after it had been on the market for three months in a very desirable area. The flooring and fixtures are dated and it has virtually no back yard. Strict no pets policy in an area populated by dog lovers. The owner wanted $2950 a month, I offered $2550, we settled at $2700.

Upon move in it was discovered that both A/C systems (two story home) needed to be replaced. I helped the owner obtain bids. A toilet leak was discovered before it caused major damage and revealed the water pressure to the home was extremely high and required a pressure regulator at the street.

There have been several smaller items that needed attention that I offered my own labor to repair or install (microwave, a couple of ceiling fans, weatherstripping, etc). The owner would order from Home Depot with delivery and I would take care of it. This home was filthy when I moved in and is in much cleaner and better kept shape now that I've been in it for almost 10 months.

My lease payments have always been made at least one week before due date.

My lease comes up for renewal in a couple of months. I still feel like I'm paying a bit of a premium for more house than I need. I feel like the owner should provide some sort of incentive for me to renew the lease for another year at the same or maybe even lower rate AND offer one month free for signing since that would be his minimal cost for finding a new tenant.

I will move if he proposes otherwise.

 

[steelyman]

Allow me to give you a renter's perspective.....

That sounds like a common and unfortunate situation where the landlord doesn’t adequately inspect the property during vacancies and address outstanding issues, preferring to get it back on the market and resuming income flow ASAP.

It’s then up to the tenant to discover problems, try to convince the landlord to fix and also be inconvenienced while any repairs are made. Reimbursements for tenant-fixed problems aren’t a given.

It’s just the way it often is and the scales are mostly tipped in the landlord’s favor. Bad/lazy property managers add to the problem.

 

[Looking4Ward]

That sounds like a common and unfortunate situation where the landlord doesn’t adequately inspect the property during vacancies and address outstanding issues, preferring to get it back on the market and resuming income flow ASAP.

It’s then up to the tenant to discover problems, try to convince the landlord to fix and also be inconvenienced while any repairs are made. Reimbursements for tenant-fixed problems aren’t a given.

It’s just the way it often is and the scales are mostly tipped in the landlord’s favor. Bad/lazy property managers add to the problem.

In his defense he's new at this. Moved from California to Austin and bought this property with the intention of renting it out several months before I moved in. His first hit after closing was dealing with a rodent infestation issue in the attic. Paid big bucks to have that eradicated but they were also the primary cause of both A/C systems failing, something that wasn't really discovered until after I moved in.

I don't expect compensation for any repairs I volunteer to perform, I consider it renter's equity to some extent - building on my reputation as a renter he would want to keep.

But as I said before, this home is priced at the upper tier in terms of per SF and has several negative points against it when compared to similar close properties. So I would move if he even suggests raising the rate at all.

I suppose my point is the more desirable the renter the more willing they may be to move and find a better deal when faced with a rent increase.

 

[Sunset]

We used to subscribe to the turnover costs money, keep a good tenant with low constant rents idea. We ended up with a number of units with long term tenants and a problem: rents had jumped up and our comparable new rents were 15-20% higher than the old rents. I started raising rents once/year, and some of the longer term tenants felt very picked upon - even though their new rent was lower than the rent I was getting for new rentals. Pointing out that they would have paid much more had I raised the rent by a couple percent every year of their tenancy didn't help. Experience shows me that a regular *modest* rent increase every year becomes expected and more acceptable.

EDIT: *modest* - slow and steady wins the race - seems familiar..

+1
I raise the rent each year, but less than allowed in a rent controlled area. I do this as some costs increase more than the rent increase, so skipping a rent increase is really getting less rent going forward for repairs/insurance/taxes/etc.

 

[Bongleur]

Seems to me a tenant should expect several % a year. The PM suggesting 2% after 2 years seems ridiculous to me.



Turnover is costly but this is also the time when I can change property managers. Had a second flood because the first HVAC repair was faulty, and the PM is not fighting to get my money refunded for the cleanup. This is what I pay them 9% to do! I need to examine the contract & figure out how much dropping them would cost, & if they would continue to get a % of the current tenant's rent.



Available housing is way down since speculators bought last year, anticipating the Amazon HQ. OTOH that probably means more rentals until the Amazon people actually start moving to the area. I need to find out where this house stands between "affordable" and "luxury." There is near zero "affordable" in the region. But the area's median household income is $93,400.



This is the end of a 2 year lease on May31. These tenants have been a pain in the ass -- seems they think they are in an apartment & don't have to DO anything. Complained about HVAC being too cold downstairs; had to spend money to figure out they were not changing the damper in the main vent from winter to summer. (OTOH the PM seems not to have passed on the written instructions I created, for seasonal things like pouring vinegar into the HVAC condensate line to keep it clear -- the company assigned me a different PM). They got a mold kit & complained that it tested positive; that cost me a grand. Complained that a vinyl accordian door dating to 1955 didn't close perfectly. That cost me several hundred bucks, but the PM should have reminded them "as is." The only maintenance they've done is to volunteer to spread mulch in the flower beds -- if I paid for the mulch.


They are 3 individuals, I think 2 are a pair. Two individually "almost" qualified for the current rent at 30% income. So they can afford to pay more, if in fact the market value of the house is more.


I allow pets.


Rentometer.com is useful. What else do I get that might be actionable if I pay for the premium service?:
Results based on 27, 4-bedroom rentals seen within 12 months in a 3.00 mile radius
Average $2,859 ±2%
Median $2,950
80% $2,300–$3,300
60% $2,500–$3,200

Results based on 30, 3-bedroom rentals seen within 12 months in a 0.75 mile radius
Average $1,972 ±5%
Median $1,900
80% $1,170–$2,863
60% $1,657–$2,475


Looking around for a landlord's association in the area to get data.

 

[Bongleur]

[SIZE=+1]https://www.zillow.com/rental-manager
[/SIZE]

[SIZE=+1]Has anyone "claimed" their property on Zillow? Wondering what downsides there are.[/SIZE]