Back and forth on whether to raise rent

[Stephen Jones]

BP,

I am struggling on whether or not I should raise rents on about 20-25 units out of my portfolio. Where I'm located (southern state of IL) rents have kind of tapered a bit, and I realize how tough it is out there right now for people, but on the other hand out of these 20 units or so, according to the market, these rents are ready to be bumped. Another reason I am hesitating is because the majority of these tenants are good quality tenants. I'm torn on what to do. Do I raise them now? Do I wait until next year (I believe things will be worse), do I raise them slightly 25-35$? Any advice would be appreciated! Thanks. 

[Sam Yin]

@Stephen Jones

I use to struggle with this as well. However, I have evolved to operate this as a business, not a charity. Not to sound like a jerk or immoral LL, but you have to ask yourself, will these tenants be willing to front you money for major repairs? Live in the place if you put off major repairs because you become short on reserves? Is your reserve where it should be...5-10% of equity or 6 to 12 months of mortgage AND operating costs? If you do a stress test on the current gross, will the portfolio withstand a recession that may cause 15 to 20% vacancies?

Based on your post, you have a sizable portfolio that should be able to sustain a few move-out and turn over. I would raise the rents, even if its just 2% to 4%. This keeps tenants mindset right and they know that costs go up for the owner every year. Closer to market rents if they move and you need to rehab.

With that said, if they are very close to market rents already, then you may need to look closer at cutting operating costs vs rent raises... but I would still consider a small rent raise.

For example, this summer I spread out about 50 rent raises, ranging from 3% to 15%. Only one moved out and it was entirely due to the rent raise. They relocated to live on the beach. The rents were not all equally raised either. I had a few inherited tenants that were long term (over 35 years tenancy) they got a 3% bump, on top of SUPER LOW rents. A few newer tenants got 10%+, on top of HIGH rents.

Your costs will go up. If you dont adjust up your income now, it may be too late to catch up later. I plan on another series of rent increases next month or two with the same strategy.

I use to be very empathetic to my tenants and bend over backwards. Sacrifice my sleep, health, family, and well being for the sake of keeping tenants happy. I was too focused on the customer service and not focused on the profit building of the business. Although I feel I had to do that at the beginning, I do not think it was necessary. It was due to mindset and lack of experience on my part.

This is only my opinion. There is no single right way to do it. Every market is unique. I'm still learning and evolving.