What's an appropriate amount to raise rent?

Question

Question for those of us who own units in the city:

I'm a first time landlord and nearing the 1 year renewal date for my tenants.

I was curious about the community and opinions on what an appropriate rent increase is / what others have done in the past.

Have you seen success with giving a single "take-it-or-leave-it" number? Is it better to start high and negotiate down? Do you just go for 5% and call it a day?

I've used the BP rent calculator and it doesn't seem like there's much in the way of updated rental rates for my area yet, so I'm flying blind (and I'm nearing a 60 day lease renewal period so I have to make a decision soon).

Details: Units are located in Humboldt Park/ Ukrainian village

Unit conditions are average, but the kitchens need updating.

Current rent is $1350 / unit.

Each unit is 2 beds 1 bath.

Thanks in advance!

Nathan Gesner · Answer

I believe in ripping the Band-Aid right off. Raising rents in small increments over a period of time just means you will continue to lose money for a while, there's an increase in confusion ("I thought the next increase was in July!"), your Tenant is likely to despise you no matter what, and, in the end, they may get to a point where they can't afford the rent and they'll stop paying anyway.

If they are less than 15% below market, give them 30 days notice of an increase. Check local laws because some places require more notice and some have limits on how much you can raise.

If rent is 15% or more below market, then I recommend you move out the current renter, spruce the place up, and rent it at market rate to a new renter that you've selected and put under your lease.

What if they are a really good renter? First, make sure you are 100% certain they are really good. They always pay on time or early. They always communicate well. You've inspected the home more than once and it's always perfect. They have no lease violations. In those cases, I may keep the rent 5% below market as a reward or enticement to keep them around. But if they aren't perfect, I'm not giving them any breaks.

Do not trust computer algorithms like Zillow estimates or Rentometer. Those are OK for getting a general idea of a market, but they are not accurate for specific rentals. They can't determine the quality of kitchen cabinets, the layout of the home, the view out the living room window, the condition of the neighbor's yard, and other factors that can increase or decrease what a home will rent for. Watch sites like Zillow, apartments.com, realtor.com, facebook marketplace, and other sites and watch what comparable homes are renting for. Consider posing as a renter and looking at some of them in person. It takes a little work, but it's so much better. Even after you place a renter, continue checking the market once a month to stay on top of what the market is doing so your analysis is easier next time.

Henry T. · Answer

Whatever is necessary to keep that rental at market rate. If they are exceptional, you can reward them by being 5% under market. No conversations. Send the proper notice, you're the boss.

Bill B. · Answer

5% per year over the last 2-3 years would out you 20-30% under market in many places. And then if you get really “lucky” they pass a rent cap while you’re 20-30% under market. That means you get to be under market for life. Maybe it only costs you $50-$100,000 if you’re in a cheap market.

But, if you’re going to do that you should be buying every property in your market. Overpaying $50k to buy a property I certainly better than losing money every single month for the rest of the property’s life.

You might want to hire, or at least interview a couple PM’s. You might find they charge so much more rent that they pay for themselves. If they’re only charging 8% you could easily be 10% under market and you’re paying to be your own PM.

This is especially true if you were serious with your comment about “starting high and negotiating down”. That should never happen unless you’re just guessing what rent should be.

Bjorn Ahlblad · Answer

Enter the address into rentometer.com it has been very accurate in my experience. If I want to keep the tenant I do 5% every year. Check to see if there are rent controls in your area.

Account Closed · Answer

Depends entirely on what the market rents are compared to what you're getting. You could just set a number, say 3-5%, but it's better to be more accurate. Try and some run local rental comps. Another consideration is how quality your tenant is, as having a reliable tenant that always pays on time is valuable.

Sam Yin · Answer

Don't be shy about raising rents. This is a business and you need to remain profitable AND build reserves.

Bill made very good points. In fact, I been there. My fault. Never again. Just bump to market rents or what ever the area laws allow.  The quicker the better.

I'm in SoCal with statewide rent control area. I have been doing 10% mostly to get them up. But there have been a few occasions that I do 15% and 20% at a time recently to catch up. I could have done more. But I had some pitty for these long time tenants.  Most had been there over 20 years and some well over 30 years.  The past manager was too kind.

AND before any know it all gets on to post about state wide 10% rent cap... slow your roll. Read the fine print on the legislation.  Devil is in the details.

Ryan Denman · Answer

Hi @Sudhanshu Saraswat,

First consider if the tenants are of high quality.  Do they keep the unit clean and well maintained?  Do they communicate well?  Have they caused problems at this unit or with the neighbors?  How happy are the tenants with how you have managed the property?

Then take a look at what your costs for maintaining the unit were for the past year.  Did taxes and insurance go up?  Did you put more maintenance into the property than expected?  Add up those costs and find out what additional rent per month you would need to cover them.

Finally take a look at the market rents.  Does your unit exceed the market rent with the maintenance, taxes and insurance (MTI) increase?  If so, raising the rent may cause your tenants to move out and you would incur 2-3 weeks vacancy and other turnover costs.  If the MTI increase still puts your rent at well below market value then you could consider increasing it more.

A great approach to take with good tenants would be to have a conversation with them when lease renewal time comes and show them the additional costs you have for managing the property and ask them what rent increase seems reasonable to them.

Theresa Harris · Answer

What is market rent for the place?

What's an appropriate amount to raise rent?

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