Rent Increase? Or not? That is the Question

[Victor Hernandez]

Hello BP!

So I'm currently in a duplex doing a house hack. My tenants have been amazing no issues and they always pay on time or early. However they are coming up on the end of the lease in about 2 months. Rents in my area have gone up but not by much. So my question is do I offer them a renewal without raising rents? ( my thought on this is to keep them because I know what kind of tenants they are while keeping them happy) or Raise rents but puts be at risk of losing these great tenants?

To give more content the side I'm currently in I've been renovating ( brand new everything) and once I finish in about 2-3 Months will be for rent for about $400 more than what they are paying now. 

Thank you for any advice or help in advance 

Thanks BiggerPockets!

[Ryan Fox]

@Victor Hernandez- It's always a tough decision.  Don't agonize over it.  If it's their first renewal, keep rents where they are and raise the rent next year.  There's not enough rent differential to risk having a vacancy.  

[Victor Hernandez]

Quote from @Ryan Fox:

@Victor Hernandez- It's always a tough decision.  Don't agonize over it.  If it's their first renewal, keep rents where they are and raise the rent next year.  There's not enough rent differential to risk having a vacancy.  

Thank you I do agree with that also. Id rather know I have someone there. Now to follow that up do I charge another Pet Deposit for the new year?

[Ryan Fox]

@Victor Hernandez- Not unless the pet is causing significant damage.  Another way to structure it is to charge pet rent instead of a pet deposit in the beginning.  It would be a $20 to $30 charge added on to each month instead of a big deposit at the start.

[Theresa Harris]

If you charged a pet deposit, it should be used for any damages after they move out.  If rents haven't gone up, then it is up to you if you want to keep them the same or raise them a bit. Increasing them by a small amount will get the tenant used to rent increases (eg $10 on $500) and is unlikely to cause a vacancy.  I'm going to guess your costs have gone up (insurance, taxes, utilities) and they should be passed on to the tenant.

[Glen Wiley]

It is a good idea to raise rent every year, even if it is a small amount. For example, if you raised rent by $25 a month that is not likely to trigger them moving but it does help control the gap that could develop between your rent and market rates.

Each year you skip widens the gap and makes it harder to close and more likely to trigger a move. $400 is tough to recover in one change without triggering a move.

I have learned the hard way that I really should not skip rent increases every year, even if they are small.

[David Lopez]

Each situation is different. It is best to raise every year to let your tenant know that your cost go up every year. Look at what the rest of the market is. Raise 3 to 5 % every year. I always keep it below the the highest comparable. Make sure your property is in great shape and maybe add some small landscape or new blinds to keep the property fresh.

[Melanie Thomas]

IMO, always raise. Cost of everything continues to go up. Its business.

[Colleen F.]

@Victor Hernandez no one will move over a small raise and it sets the tone that you won't be keeping the rent the same every year. They know what to expect. 

[Ned J.]

Agree with the above.... ALWAYS raise it a little. It sets the precedent that things will go up. If you wait, the next time will be a bigger jump and the shock and risk to losing the tenant will be higher.

It can be a small %..like 2-4% depending on how things have gone with the comps, but it should go up. If you wait, before you know it you will have a BIG gap and then the issue will be even more stressful. Don't kick the can down the road

[Nathan Gesner]

Quote from @Victor Hernandez:

It's important to really know the market. A quick search shows that rents are starting to drop in Raleigh. If that's true, then you may want to hold off on an increase to ensure you don't price yourself out of the market. 

In general, I try to always do a rent increase each year, even if it is only $25. Insurance, taxes, utilities, and maintenance costs are all going up and this helps your tenant remember that houses have to be maintained.

If you renovate one side and rent it for $400 more, then I recommend you renovate the other side and increase rent on that as soon as possible. Having disparity among tenants is more likely to cause problems.

I don't make changes to pet deposits or security deposits. If the dog is doing well, leave it alone.

I will recommend you change your practice. Get rid of the deposit and switch to a monthly rent increase per animal. A $500 deposit has to be refunded. A $50 increase puts $600 extra in your pocket each year.

[Marcus Auerbach]

Systematic rent increases is something investors don't fully understand until their portfolio starts to grow. There are many arguments against annual rent increases, like turn over cost and the time and effort resulting from it - while you are working a W2 job.

Just got some interesting data. 65% of all ladlords in Milwaukee own only 1-2 units. They are not likly to increase rents on an annual basis. But thay only hold 13% of all units. The vast majority of units is (over 60% of all doors) is owned by only 3% of landlords (choke on that Vilfredo Pareto!) and they are very likely to systematically monitor market rents on a monthly basis and adjust accordingly.

The fundamental principle is that if you don't index rent for inflation every year you are essentially giving them a rent reduction. So thats at least 3% in 2024.

(If you are local are doing a survey in the next weeks with our RPA members here in Milwaukee and then publish the results on April 24th on a live call)

[Becca F.]

Great question. I'll be dealing with the above in a couple of months if tenants choose to stay. I didn't raise the rent after the first year as suggested by my property manager, who doesn't raise the rent on his great tenants. On the second lease renewal I raised it 6%, which was $90. The tenant was understanding because of my increasing property taxes, 17%. The rent increase was smaller than the tax increase each month. My property taxes have gone up again for 2024 (Indiana).

I'm surprised by the number of landlords who never raise rents - a few of them that I talked to in San Francisco Bay Area haven't raised the rent in over 15 years. This is on single family homes, which have no rent control.  They  justified it by saying the mortgage was paid off but there are still other expenses. 

I agree with Nathan on doing a monthly pet fee/pet rent instead of a pet deposit, which is refundable. I charged a small dog/cat $35 a month in and a larger dog (e.g. 45 lb or over, Labrador, etc) $45 in 2019. Current tenants don't have pets. 

[David Lopez]

All markets are different but taxes, insurance, and what it cost to maintain a property always goes up!! Minimum 1% to 4% raise each year.

[Adam Bartomeo]

Do not listen to the folks that say "always raise rents" or "we raise by at least $25/yr"... turnover will be your biggest expense AND tenants WILL move over a $25 increase. You have to know your market and exactly what is going on, who your competition is, what they are charging, what they are offering, and how to keep your tenants from moving to them. 

When a tenant turns over you still have your normal expenses - mortgage, taxes, insurance, but you now take on the burden of water and electric. You also lose the income and you have the expenses of getting the property rent ready. Based on some of the answers here, is it worth the risk? If you raise the rent by $25/ mon * 12 = $300/yr. If you are charging $1,500/mon and only have 1 mon of vacancy it would take FIVE YEARS TO MAKE IT UP... Is it really worth the risk?

Know the market, do your math, and calculate the risk.

[Melanie Thomas]

Consider raising the rent. You have the potential to attract equally excellent or even superior tenants, thereby increasing overall revenue. With rising costs in taxes, insurance, and maintenance, it's appropriate to adjust the rent accordingly. Good luck & happy investing! 

[David Lopez]

Do you really think a tenant will go through the whole process & the expense of moving  to save $25.00? Pack and move a whole house, move your kids to a new school, find just as nice place with a backyard for your dog?