To raise the rent or not?

Question

We have a single-family home that we rent out to a lovely family. They've lived there two years and have been really great tenants. Recently our house was reassessed and our taxes are going up around $600/year. While we could just absorb the extra taxes and still run a profit, we'd of course rather not and are considering raising the rent by $50/month. The rent for the house is on the lower side for the neighborhood already so even with the increase it's still around the low end of average. But I know our tenants aren't rich and this may be a source of strain on their finances. In general we don't want to be raising the rent and would just keep it the same as long as our costs don't increase but given the increase in taxes, it seems like the time to raise it? Though of course we don't want to lose our awesome tenants. What would you all do?

Mike Dymski · Answer

There are plenty of "great residents" that pay at or near market rent...we don't have to settle for one or the other.

Mason Weiss · Answer

Hey @Nikki Taylor, I would raise the rent at least $50 per month. Although it is difficult to remove the emotion of managing your property, you need to operate as a business. This means when expenses increase, rent will also need to increase. If you are still on the low end of rents in your area, I don't think you would struggle to find a new tenant if your current tenants cannot afford the increase.

David M. · Answer

@Nikki Taylor

It all depends on what sort of landlord you want to be.  I don't raise rents that often... hmmm...

For example, I know one investor where half their properties are self managed.  They wondered why their self managed properties, which they don't really raise rents, have next to no turnover.  Meanwhile, the managed properties are constantly turning over and costing.  Think about it, for want of $50/mo more, the unit turns over and perhaps is empty for a month.  How long will to take at $50/mo more to make back that month...

Just beacuse "inflation" or the market rent is up, doesn't mean that the tenants, or the "people," can pay that much more.  Could you?

Rents have gone up dramatically in the past 5-7 years.  Nothing like the prior 15 years...

I don't really have answer.  Its a judgement call.  Its your investing strategy.  I'm more "old school" and invest for the appreciation.  That being said, its still okay to raise rents.  If you are really on the lower side, its a reason to perhaps "reset" your rent with new tenants and roll the dice on them.  This can be more than just a "cold" business.

Happy to chat.  Good luck.

Henry T. · Answer

No explanations. A simple rent increase document stating the increase, and thanking them for their tenancy. That is all.....btw, odds are your tenant voted for whatever levy caused your property tax increase.

Colleen F. · Answer

@Nikki Taylor if you don't raise and eventually have to how is that going to work. They will be resentful and unable to afford then. Tenants expect rent raises. Be fair and consistent. Give a fair amount of notice.

Nathan Gesner · Answer

Study the market and stay close to market rate. In my market, utilities have gone up over 30% in the last couple of years, taxes went up over 40%, insurance went up, contractors are charging 40 - 50% more than five years ago, etc. At a minimum, you should consider building in a small annual increase to keep up with the consumer price index (CPI) which is generally around 3%.

$50 a month might make sense on a $1,000 rental with an excellent tenant in place. But if rent is higher, and if you started off below market, then you may be hurting yourself.

I recommend you study the market regularly to see what it's doing. Try to stay within 10% of market rate to avoid getting too far behind. $100 below market will cost you $1,200 a year which is two years of taxes, a month of vacancy, some fresh paint, etc. Landlords that charge market rate have funds to better care for their property and their Tenant. If you run lean, you are more likely to skimp on maintenance, struggle during turnovers, etc.

Martin D. · Answer

Hah... this!

In more seriousness, I always write in my contracts that there will be yearly rent increases, and every year I have a conversation with my tenants about whether I do it or not and if so, how much I increase. I tend to be on the more generous side when my tenants are nice and I want to keep them longer. But I think it's important to keep the balance in check. Not raising rents can be seen as a sign of weakness and down the line, could have your tenants feel entitled. You definitely don't want that to happen!

Nathan Miller · Answer

It's better for both you and your tenants to raise it a little each year to accommodate your extra expenses.  By not raising it you are doing both yourself and them a disservice.  If it's already below market rent, you shouldn't lose the tenants and even if you do, it will be very easy to replace them.

Charles Granja · Answer

I raise rents each year, I think you should as well, even if by a smaller amount. You have a good heart. The problem with not raising rents is the impacts of inflation. If each year rents are increasing by 3-5% a year, you will quickly fall behind because of expense growth. If you are in a really cheap market, it matters less, but still, you should increase rents.

To raise the rent or not?

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