How much to increase rent in Denver

Question

Going through my first lease renewal process on two low(ish)-end properties in Lakewood and west Denver, a condo and a townhome. I have the obvious goal: keep what have been fairly good tenants, to avoid turnover and turnover costs...yet cover my costs related to inflation.

What rent increases, as a percentage, have you chosen for your rental properties lately in the Denver metro area? My property management company is suggesting 5% based on their rental analysis of the areas. I see a PM as having a similar goal as me in the lease renewal phase...but 5% feels a little low. Thoughts?

Thanks, Jamie

Drew Sygit · Answer

Why not outline what current rents are, with comparables, and send to tenants asking them what they think a fair increase would be.

You might be surprised how much they are willing to pay, before you have to be the bad guy!

Nathan Gesner · Answer

The fact that you're asking a bunch of strangers on the interwebs doesn't bode well for the skill of your property manager. If you question a 5% raise, the property manager should be able to tell you why that increase is justified. Denver rates are up approximately 20% in 2021, so a 5% increase doesn't keep you close to market.

I would scour the web for comparable properties and see what's out there. Then it's easy to present an increase to your tenant by letting them know you're keeping them 5% below market as a reward for being good renters while ensuring your costs are covered. I believe it's worth staying a little below market to retain an excellent renter, but I don't ever want rents more than 10% below market, and 5% is my preferred target.

Nathan Gesner · Answer

If your PM provided you comps and 5% makes sense, then roll with it. I just thought it sounded low given what the market has done in the past year.

You are correct that low-income tenants often accept a rent increase even when they really can't afford it, because they also can't really afford to move. If the increase is more than 5%, you may want to consider only offering a renewal after they prove it's affordable with updated financial information.

If the increase is higher than 5% or the tenant is less than perfect, you may consider terminating their lease and hiring to a new renter at market rate. I know turnover and vacancy can cost you money, but a 10% increase can typically make up for that quickly.

I've always advocated for staying close to market rate. That is even more important today as cities and states start imposing limits on rent increases. I feel sorry for the people in New Jersey that are 30% below market on their rent but limited to no more than a 4% increase per 12-month period. If their current tenant insists on staying, the Landlord will never catch up on market rates.

I firmly believe we will see more cities/states impose increase limits, and possibly even a national limit some day.

Jamie C. · Answer

These are current tenants so I don't want to price them out, yet, like everyone this last year - my costs are going up - so trying to find that balance. Thanks for your feedback Eliza that helps!

Jamie C. · Answer

Thanks for the reply Nate! My PM discusssed their 5% recommendation when stepping through their rental analysis report with me; it provided comps in the area. I looked (online) at the properties in the report and others in the area and a 20% rent increase seems to put me too high relative to what's out there in that price range (# of bedrooms, location, parking, condition of property, etc.). Not sure if there is more they should be providing?As a novice investor, I may be off on the following but my assumption is - low-end tenants are more elastic (i.e., will renew less often) to rent increases since they have less discretionary income. Even though they're aware prices are going up everywhere, they're usually already at the top of what they can afford. While the market may dictate X% increase, if it's too high the tenant will opt to not renew the lease and instead move to a different place at their existing rent rate, foregoing things like location, amenities or even bedrooms -- because they simply can't afford the rent increase. Though that's somewhat offset because there's also a cost to them to obtain a new place.And there's the not so fun counterpoint perhaps: low-end tenants might be more likely to accept a rent increase they can't afford, intending to default on rent at some point, because they also can't afford to move.But even if low-end tenants are more sensitive to rent increases, there's a market for properties at every price point so it's a matter of me weighing the costs of tenant turnover vs. what I may be able to get rent-wise with a new tenant to cover my rising inflation costs, I'm assuming.Thoughts?

Bruce Woodruff · Answer

Doesn't matter which area. What are going market rents? Raise them to that level as quickly as possible.....

Jamie C. · Answer

That's a great idea - thanks Drew!

Eliza Sparks · Answer

Hi Jamie!My husband and I long term rent a newer townhome in the West Colfax area. It's a 3/4 but technically the third bedroom is pretty small and better suited for an office, although we did have someone using it as a bedroom.

We had our rate set at $3,200 when we started our lease in March 2020. We relisted the property on Zillow/Hotpads at $3,500 and had an overwhelming amount of applicants. We decided to raise the price up to $3,700, and most applicants stayed interested. Are you looking to increase on current tenants or looking for new ones? If they are great tenants and you don't want to deal with the turnover and looking for new people/making repairs etc., I think 5% is reasonable to propose to them.

How much to increase rent in Denver

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