Annual Lease Renewals/Increases for Great Tenants

[Jared Smith]

All, what is your opinion on rent increase amounts for great tenants?

Thanks!

Jared

[Joe Splitrock]

@Michael K Gallagher I agree with keeping good tenants happy, but you also don't want to reduce your net income every year. Keeping rent the same is a decrease in net income. Reducing it $50 or $100 is even worse. I say that because costs increase every year. At a minimum your insurance and taxes are going up, but your CAPEX is also increasing. CAPEX is the ongoing expense to maintain a property. Even if your property is fully renovated, every major component is getting one year closer to replacement. CAPEX is happening every day, you just don't realize the cost every day. A CAPEX fund is simply budgeting for those expense. For example a water heater has a 10 year life. Say you spent $900 on that water heater in 2018. When that water heater is replaced in 2028, it may cost $1200. Do some quick math and budgeting to replace that water heater will cost you $10 per month over the next 120 months. Every major item in that property, including appliances, paint and flooring will all need to be replaced in the future. If you rent that property $50, $100 or more under market value for the next 5, 10 or 15 yeas, you are starving your business of reserves. It is even more dangerous in the current inflationary period because some goods are increasing 10-20%.

I use a similar method of offering options, but our month-to-month option increases rent $100 per month over our year lease option. Our year lease increases it a more moderate amount, but it always keeps up with increases on taxes and insurance. I still find people that choose the $100+ increase option for flexibility. Sometimes they choose that option because they were planning to move (usually buying a house). Rent is usually not a factor in people choosing to move out of a property, as long as your rent is within fair market. 

Think about it another way. If you pay your bills on time, does any company actually reduce your bill? If your cell phone provider increased your bill, would you drop their service (assuming all other carriers cost the same or more)? Why would you if you liked the service and it was still less expensive than others? 

You are actually the first landlord I have heard suggest a decrease in rent after the first year, which tells me this is very uncommon. All the more reason not to do it, because tenants are expecting an INCREASE not a decrease. They would be happy if you just didn't raise it. 

Obviously I don't know your market or your properties. If there is heavy competition, it may be necessary to discount. It is all market dependent. I just had a tenant give notice after a year and rerented to the new tenant for $300 more, which was a 20% increase but well inline with fair market value. All I am saying is don't sell yourself or your business short. Ask for what you are worth and nothing less. Don't fear loosing good tenants if you are a good landlord. That has value too, so don't sell yourself short.