How often Should I increase Rents for existing good renters?

Question

I'd love to get info/opinions on whether there is a "standard" amount of time to increase rents in the Bay Area for Single Family Homes.

How do property management companies/landlords handle rent increases for existing renters?

I was previously increasing every 5 years , but think I may need to shorten this amount of time, as I near retirement and could use the income.  I have many long term renters that have been in the homes paying on time, so my question has to do with increasing rents for existing good long term renters.

I don't want to lose good renters. I truly want to help good renters out where/when I can.

What is considered a reasonable amount of time for an increase (would be 10% increase), w/o putting my self in a position of trying to catch up to market rents at some point in the future. Also, considering that new propositions may pass that would limit/restrict future increases.

Look forward to hearing from landlords, investors, previous/current renters and anyone else to help me determine what to do.

Just trying to be smart, considerate and do the right thing all around.

Thanks.

Bill B. · Answer

Your good tenants get rent increases. The other tenants get non-renewals.

This is one of the many ways that PM’s pay for themselves. You were literally paying to play PM by not increasing the rent. Not just working for free, but paying to work.

Imagine ONLY a 5% increase. That’s 2100, 2200, 2300, 2400, and $2,500 for years 2-5 (obviously actually more with increases on the increases. But this easy math.). That means you’re out $1,200, $2,400, $3,600, $4,800 and $6,000. You’ve lost $18,000. Maybe it would be more obvious if you had to write them a check for $300 every month.

PLUS, when you raise their rent from $2,000 to $2,600 in year 5, just to stay on track with losing $18,000 guess what happens. Do they thank you for the $18,000 gift? NO!  They are p!sued off you’re raising the rent 30%.

Drew Sygit · Answer

Dollar amounts make little sense guys - everything should be percentages:)

At a minimum raise rents every 2 years.

Every year is better.

Jake Andronico · Answer

@Anita Z.

Great question. I think increasing in small increments slowly over time makes more sense than waiting multiple years and resetting to the market (assuming you're able to to that in SF).

If you're slowly increasing but still slightly under market, have a better product, or better service (or all 3) and have rental comps to back it up, if they start to ask you can highlight these points.

I hope this helps!

Theresa Harris · Answer

Way more often than every 5 years.  Even if it is a small amount, increase the rents every year with the lease renewal. This is particularly important in areas with rent caps because you can suddenly find yourself well behind market values for rent.

As for how much, that depends on your market and what rents are in the area. 10% is a lot and you may have tenants move as a result.  If instead of increasing it 10% every 5 years, why not 3% every year? Most tenants won't move over an increase of $25-50 (assuming rent is over $1000).

As an example, I've increased the rents on one place the max every year for 4 years allowed by the province (we have rent caps).  Tenants are moving out and we re-rented it...new price which is market value is 25% higher than the rent the old tenants were paying.  Only way I can increase the rent that much (and catch up to market value) is when I have a vacancy.  (And yes I think the current rental market there is crazy expensive.)

Adam Bartomeo · Answer

For good, long-term tenants we normally stay 3% - 8% below market rents. In normal markets we try not to raise rents more than $100 per year but in aggressive markets we have raised 20% - 30% and in declining markets we have had negative increases.

Marcus Auerbach · Answer

As always on these questions, I agree with @Nathan Gesner. Shift your mindset, an increase is not a punishment, you are renewing their lease for another year. If they are not good tenants, the lease does not get renewed.

When we determine the general direction for the year we look at:

- inflation (US)- hourly wage growth (US)- market rent growth (in my case Milwaukee)

We also monitor the market and our competition, we get feedback with every turnover and see what fair market value is. Sometimes people will actually tell us.

We try to be reasonable with new leases: going to the absolute maximum increases the number of less than great tenants and increases future turnover. So it's really a bad deal for $50 or $100 extra you are risking to loose thousands.

Similar with renewals, while we do stick to annual increases, we keep existing leases a little below fair market. I know that in many cases tenants start looking when they get the increase and then realize that it is best to stay.

Anita Z. · Answer

Thanks @Theresa Harris, @Jake Andronico and @Bill B. for the tough love comments :-)

It all makes good sense.

Michele Fischer · Answer

You are getting good advice.

I would say that we evaluate market rent each year but if the increase would be less than $50/month we skip that year.

And we raise rent to the midpoint between current rent and market rent.  This leaves some increase on the table, but also makes it more likely that tenants won't leave over the rent increase.  As they look around, if they do, they will not find a better price and it is easier to stay.

We also make sure we are consistent across tenants each year.  We can't treat good tenants differently or raise some and not others.  We document what we did each cycle and why we did or didn't consistently apply our logic.

And, of course, as much as turnover is a pain, it is a great opportunity to bump up to market rate.

Different landlords have different philosophies, but this is ours.

Kevin Sobilo · Answer

@Anita Z., I think yearly makes the most sense.

1. Most people get a yearly raise. Even retirees get a yearly adjustment to pensions and social security to account compensate for rising prices.

2. A person's budget is usually geared to their income. So, they are often not prepared for large sudden changes. A 10% change all of a sudden to one of their largest monthly bills can be stressful and disruptive to people.

3. Small yearly increases train tenants with what to expect which reduces stress and allows them to plan ahead for lease renewal time.

4. Over the long haul in my market I expect rents to rise in line with inflation which I expect to be in the 1-3% range per year. So, that is where I target my increases. A 2% increase on a $1,000 rental is $20 which I think most anyone can absorb without stress. If need be, I might go up to maybe 5%, but 1-3% is my general goal for increases.

Chad Hale · Answer

@Anita Z.  Great advice above.  For great tenants, typically 2-5%  yearly in San Jose area.  Your expenses (property taxes and insurance) are always going up.  I've seen insurance increases by as much as 60% this year.  Also, you'll eventually have cap ex (big items) to pay for and those costs are only going in one direction, up.  Human psychology is smaller, more often increases are more acceptable than one big increase even though the opposite is true mathematically.  Generally, keeping up with the market (within 5-10%) is good.  The tenants will check the market and then be thankful they are still under and stay.

How often Should I increase Rents for existing good renters?

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