Increase Rent by How Much?

Question

I have a suburban Chicago townhouse that has been rented by the same family (good tenants) for nearly two years at $1625/month (I did not increase their rent the second year). The tenant prior was paying in the $1500s. Two years ago $1,625 seemed competitive and even my listing agent thought it might be slightly high. Since then rents have escalated -- in the last six months, ALL (16 total) 3 bed / 2+ bath rentals within that area listed in the MLS rented for $1850 or more with an average rental price of $2,050.

Although I just saw Lawrence Yun, Chief Economist for the National Assoc. of REALTORS, post: "Apartment rents had soared but are calming down back to earthly levels and could even fall by next year as abundant new supplies of multifamily units are under construction."

What would be a reasonable amount to increase the rent this year? I'm thinking $150.

Thank you in advance.

Jon Puente · Answer

Hey Howard,

The only way I am increasing rents is in 2 scenarios -

1) You are not cash flowing or barely cash flowing, and need the money to make repairs and justify extra expenses on the property.

2) You are okay knowing that if you increase the rents, you might lose your tenants and have to go through the hassle of finding new ones (should they decide to move on).

If the answer is yes to any of those questions, then do it.  However, if you have good paying tenants and they maintain the property well for you, then I am not sure its worth it.  Maybe a slight increase to $1700 is okay, but $150 seems to be a lot, especially given the market conditions.  Do not chase a quarter and end up losing a dollar.

Great Question!

Bjorn Ahlblad · Answer

In my view you have to raise rents every year or you end up behind the eight ball. So we raise 3-5% every year. Between tenants we raise whatever it takes.

Nathan Gesner · Answer

Are you going to listen to a pseudo politician or trust what you are seeing right in front of you? He knows nothing about your particular townhouse or even your neighborhood.

$150 increase would bring you to $1775 but you just told us that every house has rented for $1850 or more and $2050 is the average. Why would you continue to short yourself?

Study your market, not a bean counter in Washington. Really get to know the value of your investment in your market. Try to stay within 5% of market rate. One of these days they will enact rent control or other limits and you don't want to be so far behind that you can't catch up.

Billy Daniel · Answer

You have to find the balance between catching up to market rents and risking losing your tenant.  The better the tenant, the smaller your rent increase should be, IMO.  Unless you want them out, a $150/month increase seems pretty steep to me.  $50-$75 seems pretty reasonable if they take care of your property and pay on time.

Eliott Elias · Answer

You don't want to be too far behind with market rents. If you value longevity and want to sacrifice cash flow instead of vacancy I say you raise it as manageable as possible.

Bill B. · Answer

Is $150/mo increase a large increase like some have said? My smallest increase in the last couple years was $200/mo, the highest was $550/mo. It sounds like you are literally paying to be a property manager if you’re collecting $1625/mo and $1950/mo would mean you were charging below average rent. Unless you have a below average property, off it to the current tenants for $1900/mo while showing them the properties you’re telling us about, inflation and general expenses liek property taxes and insurance climbing yearly. If they say no thanks, get a PM that charges 8-10% and charges average rent ($2,000/mo) and you’ll have at least $1800/mo net with zero work. (A $175/mo increase, better than the $150 being considered.)

People, (at least people like me.) get comfortable and hate change. My PM pays for themselves with rent increases I wouldn’t have charged for fear the tenant would move and then I’d have to do work.

The only property I don’t have a PM for I increased their rent $300/mo and they didn’t blink an eye. In fact they said they wee afraid it was going to be more and asked for a 2 year extension. As much as you don’t want change from new tenants they don’t want change from having to take time off rom work to look for a place and move. If you are at or near market, why would they move to pay at or near market somewhere else?

Zeb B. · Answer

I usually raise the rent every year even if it's only a nominal amount. Prices tend to go up over time for most things, not just rent. I send a short letter stating that I'm hoping they are planning to renew their lease, with the new rent amount. On normal years I include a generic statement that rent increases are necessary to keep up with rising property taxes, maintenance costs and inflation.

If you would have raised rent $60 last year and $90 this year, you would not be hitting them with a $150 increase all at once, and you would have collected $720 in extra rent last year.

Renewal rates should be based on the market rent, but I usually set my renewal rates a bit below the market rent. Not many tenants are going to move out if you raise their rent from $1625 to $1775 and a similar new place is going to cost them $1850 or more.

In recent years with inflation and rent prices going up so much, I have raised rent on renewals more than people were used to. I had a tenant question a 10% rent increase. I responded referencing the current inflation rate increasing costs. I also sent them local listings showing that I was giving them a discount relative to the current market rates. They signed the renewal.

I would rather have slightly lower than market rates with less turnover / vacancy, but only to a point. If you don't consistently raise rents in this environment, you will be a few hundred dollars per month below market rates in a few years. Over time that will be thousands of dollars lost.

Theresa Harris · Answer

Have your costs gone up?  What is the tenant pool like?  I agree with others that small, annual increases are best.

Alexa K. · Answer

Just because you can raise rents doesn't necessarily mean that you should.

Mark Ainley · Answer

@Howard Handler Good problems to have...have they committed to wanting to stay already?  if so that provides you leverage/confidence to go to that $150 increase but if they are on the fence you might be cautious.  Once you put the word out there, especially via email/text, be sure to stay on top of it till you settle to ensure they do not get thinking about other options.  You might say $200 for a 2 year lease or $200 for a one year and if you sign right away you will do $150 or $175.

You have the upper hand here and it comes down to your people skills!

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