To increase rent or not to increase rent

[Justin Sandall]

We are nearing the end of our first year lease on a SFR and trying to decide whether or not to increase the rent for the coming year. I've read that you typically increase ~3% annually but we are hesitant as we are near the higher end (but still wiggle room) of rents for our area and have had a great tenant who we don't want to lose. How do you guys decide whether or not to increase rent?

[Nate Garrett]

It is a common misperception that rents almost always go up. In the aggregate (US overall), that tends to be true. However, all real estate is local and local markets tend to fluctuate more than the aggregate data based on local economic conditions.

Take the Tulsa, Oklahoma market for example. Here is some rental data from 2005-2013.

Source: http://www.deptofnumbers.com/rent/oklahoma/tulsa/

Number of years where rent increased from previous year: 5

Number of years where rent declined from previous year: 3

Say you began a lease in 2006 that expired in 2007. You, being the enterprising landlord, have an automatic rent increase of $25 / month in your lease because you want the tenant to get used to those automatic rent increases.

There's only one problem: your rent is now $45 / month higher than comparable properties. Goodbye, on-time tenant. Hello, vacancy.

Automatic rent increases are a bad idea. 

If your local market rises significantly, raise the rent appropriately and show the tenant evidence of the market increase, demonstrating that you are treating them fairly.