Tenant Rent Increase

[Steve Tse]

Hi BP of Boston,

When you consider rent increase, what factors do you base your decision on ? Do you increase the rent by strictly calculating the increases in your insurance, taxes and etc ? or do you try to not go over a certain percentage like 5-6% of your tenant's current rent ?

Thanks

[Bruce Woodruff]

I would simply use a percentage. (Of course make sure it covers your costs). But then the tenant will that every year there is a an  X % increase coming...

[Tim Baldwin]

Several reasons: market rates, cost of operations, risks of the tenant in particular, rental history, turnover potential, loss of rent during turnover period, "hot" or "cold" market, etc. If the lease agreement does not define or limit the rent increase, consider all relevant factors and make a decision. best wishes. 

[Chris Grenzig]

Quote from @Steve Tse:

Hi BP of Boston,

When you consider rent increase, what factors do you base your decision on ? Do you increase the rent by strictly calculating the increases in your insurance, taxes and etc ? or do you try to not go over a certain percentage like 5-6% of your tenant's current rent ?

Thanks

 @Steve Tse we're not in Boston but I'll still chime in. In Florida right now, market rents have mostly stayed flat for 1-2 years, and expenses and insurance have gone up. If I tried to base my renewal on expenses only I would increase above market rents and probably lose my current residents because of that. 

Now most times a resident is under market and this isn't an issue, but I'm just illustrating a point. I would always run a rental survey every year and see what the current market rent is and see what your loss to lease is (market rent minus current rent). Then come up with an increase based off of that. Usually, we keep the renewal to a discount to market rent to incentive people to stay and not incur vacancy and turnover costs, but that discount depends on many factors. 

- How good of a tenant are they?

- How much loss to lease is there? If it's 3% then the discount to market might only be 1-3%, if it's 30% then our discount to market might be 10-20%. 

- Are you okay pushing more and having to re-lease the unit, or would you strongly prefer not to have to do that and give up more on cash flow

- What do you personally feel comfortable increasing the rent for? 

- what do your local laws allow, are there any restrictions

[Steve Tse]

@Chris Grenzig thanks for the advise, could you clarify what you mean by loss to lease ?

" How much loss to lease is there? If it's 3% then the discount to market might only be 1-3%, if it's 30% then our discount to market might be 10-20%. "

[Henry T.]

My props are all houses and self managed. Check the market rates and get there as quickly as you can. If its an exceptional tenant you may want to give them a slight break. I certainly don't owe any favors to someone who is not respectful to the property, their Increases are without a 2nd thought. A garage is worth a lot if others don't offer them. Of course insurance or taxes or maintenance up, rent goes up. In the very early days some of my places were negative, and I expected that. Now its the reverse, their equity is so high, the rents cannot approach their value. I've been getting out.  I make more on interest and dividends  than I do on renting without the stress of tenants. Of course appreciation is gone, but at my age I'm easing out and don't worry about such things.  Its best to keep your increases regular and constant, even if small. Property taxes here are high, so I'm always watching and try to keep up. I used to even include a clip of the newspaper articles when a major levy was passed.   After a tenant called me to scream how important the levy was I stopped doing it, but they get the increase anyway and a thank you for voting. 

[Julie Garner]

Quote from @Henry T.:

 I used to even include a clip of the newspaper articles when a major levy was passed.   After a tenant called me to scream how important the levy was I stopped doing it, but they get the increase anyway and a thank you for voting. 

 This is wonderful.  So many don't understand basic economics.  I wonder where they think the money is going to come from to pay for the endless levies.

[Gregory Schwartz]

A few things to note
- Know the market value of your rental, because I guarantee your tenants do. 
- Your expenses don't mean anything to a tenant. The market dictates the value of your rental. So dont use the "taxes when up" excuse with a tenant
- Raising rent to market rate could prompt a tenant to move to save money. For me, a turnover costs around $2,000. Spread over 12 months, that’s about $160/month. So, if I’m under market by $160, but the tenant will signed the renewal thats a win. I’d rather avoid the turnover and save on out-of-pocket expenses.
- Having a set % and applying that each year is lazy and will result in higher vacancies. See my first point

[Nathan Gesner]

Quote from @Steve Tse:

Rent increases should be based on market rates, not just your expenses.

I recommend investors watch the market regularly, at least once every three months. You can usually find news articles, real estate websites, or government agencies that report annual growth. You should also check Zillow, realtor.com, and other websites to see what houses are renting for, how long they take to rent, etc.

Rent rates have increased significantly in the last five years, sometimes over 15% in one year. If you are only increasing based on your expenses, you are way behind market and losing a lot of money.

If I have an excellent tenant, I do smaller increases, but I still keep them within 5% of the market rate.

[Gregory Schwartz]

@Nathan Gesner I agree 100%. You said it much better than I did

[Kevin Sobilo]

@Steve Tse, A few things to consider:

1. Increases in your operating expenses might motivate you to increase rents, but that doesn't mean you can increase rents!

For example, a large employer may leave a small town eroding their tax base. This causes some people to move away softening demand for housing at the same time the locality needs to increase taxes. So, your expenses (taxes) are going up as a landlord at the same time demand and rents are softening (going down).

2. Market rent is the benchmark, but what is "market rent"???

Many landlords WANT to believe market rent is the HIGHEST rents similar units rent for. So, if the range of rents they see for comps are $1100-1450 they think $1400-1450 is "market rent". However, landlords renting at those prices may be seeing increased vacancy/turnover reducing the actual rent they receive!

Renting for top dollar gets you less rent overall when the tenants turn over yearly and it takes you extra months to fill the vacancy!

My definition of market rent is the price where I can READILY (without delay) find and KEEP a GOOD QUALIFIED tenant. That price might be $1200 instead of $1450, but by being able to secure them faster and keep them longer you actually make more money.

3. My personal goal is to price a little UNDER "market rent" knowing a tenant cannot find a better deal and has no motivation to move unless their life circumstances change.

4. I aim for modest 1-3% yearly increases. Over the long run rents probably increase in this range. If rents increase faster, I MIGHT go up to 5% and I will adjust rents higher whenever there is a turnover.

In addition, just because rents spike doesn't mean your tenant received a comparable bump in pay. Most people see some kind of cost of living raise, and by increasing slow and steady, the rent increases likely correspond well with the rate at which their income is rising. So, your tenant's financial situation remains stable. 

[Corby Goade]

You don't get rent increses based on your expenses, you get rent increases based on what the market will allow. If you try to push to get rents up simpley because your expenses are up, you'll more than pay the price for that in vacancy. 

You have to know your market and understand the laws and market rents for your unit. Your expenses have zero to do with that. 

[Steve Tse]

@Gregory Schwartz I have a unique case here so let me explain. I have a long term tenant that has been renting my condo for the last 18 years. The tenant is good, pays on time and rarely asks for anything. As a landlord, I've great respect this individual and have treated him very well. I have not raised any rent for the first 10 years. Then I realized that the rent was about $700 below market rent and my expenses were getting out of control (taxes, insurance, mortgage, repairs) so for the past 8 years I was slowly increasing the rent every year.  
This brings us to the end of 2024 and with all of the rent hikes, the rent is still $320 bellow market. Compared to other parts of the county, the rental market in Boston is doing well but as everyone knows insurance and taxes are on the rise. 

To make it a win-win situation, I was planning one more 6% rent increase and bridge the rental gap to about $225...
  

[Gregory Schwartz]

@Steve Tse thanks for the background. I think that all sounds very fair and in keeping with how we raise rents. What is the monthly rent? What would it cost to turn the unit / get it rent-ready for a new tenant?

I don't aggressively increase rents if a tenant's current rent is within the turn cost / 12.

For example, if you need to replace flooring, paint, and fix up a few things... your turn cost might be $5-7k.  $6000 / 12 = $500. In this situation, I would likely only increase rent $50-100. If the tenant pushes back I'd feel comfortable with a $20-40 increase.

Not a perfect system but its how we think about it. 

[Chris Grenzig]

Quote from @Steve Tse:

@Chris Grenzig thanks for the advise, could you clarify what you mean by loss to lease ?

" How much loss to lease is there? If it's 3% then the discount to market might only be 1-3%, if it's 30% then our discount to market might be 10-20%. "

 Loss to lease is how much loss you're getting from the current market rent to your current lease. 

If the property was vacant right now and you think it would rent for $1,000 but your lease is $900 than you have $100 loss to lease which is 10% of $1,000. 

Consequently, you could also have to gain to lease which is the opposite, but seen a lot less in residential. 

So if market rent was $1,000 a 3% LTL (loss to lease) would be $970, so on renewal, you might not even touch their rent or maybe you go to $990 or something. 

But if market rent was $1,000 and you had a 30% LTL your lease would be $700, you probably wouldn't also renew to $990 unless you were definitely okay with them potentially moving out and re-leasing. Because you have a $300 delta, you might only renew a $100 more than the current lease since you might feel anything more than that is too big of a jump and you want to keep the current residents. 

We had a 24-unit property where we didn't want everyone to leave at once, but we had rents at $700, we could get $1,000 on the market, and we could get $1,200 if we renovated the unit. So I think we did $150 increases in year 1, $100 in year 2, and $75 in year 3 or something similar to that. We ended up turning over about 75-80% of the units in 3 years and eventually had all the remaining units close to market rents. Market rents I think were up to $1,100 after 3 years for un-renovated and $1,350 for renovated. 

When you have a MF property it's a little bit easier to stagger the increases because you most likely don't want to drop occupancy that low, so when you have 1 unit it's just kind of figuring out what's important to you and than just trying it and seeing what happens. 

[Bud Gaffney]

Great question. I go off comps. Make sure amenities are similar and bed/bath/sq ft count. I use rentometer and it works well for me. Good luck!

[Lien Vuong]

Inflation, cost of utilities (water/sewer), maintenance, and market rental rates. I make an effort to ALWAYS increase my rents, even if its $25-50 so they're in the rhythm of getting increases every year. Depending on the rental income of the building I might increase it more astringently to have healthier financial success (e.g $1200 in 2022 increased to $2100 by EOY 2024). 

Treat each property like a 'business' and make sure you're being regimented on rental increases bc the expenses will only continue to climb. 

[Steve Tse]

@Lien Vuong you can't infinitely continue increasing rent just because your expenses are going up. This will make your property overpriced and you will eventually lose all of the tenants. I try to find out what expenses can be eliminated, decreased or offloaded to the tenant instead of just rely on rent hikes 

[Lien Vuong]

That's your perspective and opinion. I'm not saying that the increases have to be as drastic as the example I shared but you should be in the practice of increases to keep up with costs. 

[Mark Csongradi]

Quote from @Gregory Schwartz:

A few things to note
- Know the market value of your rental, because I guarantee your tenants do. 
- Your expenses don't mean anything to a tenant. The market dictates the value of your rental. So dont use the "taxes when up" excuse with a tenant
- Raising rent to market rate could prompt a tenant to move to save money. For me, a turnover costs around $2,000. Spread over 12 months, that’s about $160/month. So, if I’m under market by $160, but the tenant will signed the renewal thats a win. I’d rather avoid the turnover and save on out-of-pocket expenses.
- Having a set % and applying that each year is lazy and will result in higher vacancies. See my first point

 Very valuable advice here.

[JD Martin]

Raising rent tends to be more of an art than a science. Strict adherence to what you believe are facts can run you into heavy vacancies before you know what happened. Bottom line is you have to have a solid grip on what properties rent for in your market - not only direct comps to what you have but also what's above and below you, because tenants can and will move based on affordability both ways ("downsizing" to save money or "upsizing" because an extra $50/100 gets them a much nicer place).

Once you intimately know what your market is, and what's available, you can compare what you are charging to those figures and adjust accordingly. The "art" part of it comes at minimizing turnover & vacancy while increasing revenue. In a really tight market, you might have leeway of hundreds of dollars before a tenant will even think about moving; conversely, in a loose market, even $50-100 might have a tenant searching for other digs (cheaper or better). One month of vacancy, other than in egregiously under-rent situations, typically wipes out a year or more of additional "market" rent, so you have to plan accordingly. If you have a solid, stable, multi-year tenant, that's paying close to market rate, they may be more valuable than someone paying a few points higher but is likely to move every year.