Good tenants, but have problems with rent increase

[Linda Roberts]

Rental prices in my area have increased significantly. I'm confident I can rent this apartment for $2,750 or more. The current tenants have been living there for two years, paying $2,450 in rent. I proposed increasing the rent to $2,550 for next year.

They responded that a $100 increase feels high, and while they agree to some extent, they also want to adopt a dog from a shelter. I expressed my concerns—mainly that shelter dogs can require special care, and both tenants work full-time, which might make it difficult to meet the dog's needs. (Is that a fair concern?)

They seemed upset and countered with an offer to pay $2,500. I'm considering accepting this, possibly in exchange for help with gardening or snow removal. Alternatively, I could stick to $2,550, but that might result in unhappy tenants who are still paying below market rent.

What would be the right approach here?

[Emily Koelsch]

This is tricky. For me, I think about the potential costs for me - i.e., if I raise rent and the tenant leaves, what are the turnover costs and vacancy costs. When you think about that, you might decide it's worth the risk or it's not. 

That said, I wouldn't get into a negotiation about it. I'd decide what change you're comfortable with, tell them when it will go into effect, and let them know how long they have to make a decision bout whether or not they want to stay (check your state laws to ensure you give them enough time to make this decision). 

The dog seems like a separate issue. I'd try to think about them separately. 

One tip going forward: for some properties, I include a 3% rent increase every year as party of the lease terms. This is something that doesn't overwhelm tenants, and then it helps to avoid getting too far below market values. Plus, there's no back and forth or confusion about it - tenants know it's coming. 

For these tenants, that'd be around a $75 monthly increase. They would probably be okay with that, and as long as you increase by 3% every year, you'll stay closer to competitive pricing and cover your rising expenses. 

Good luck!