Should I raise rent

Question

I have a rental property with slightly below market rent (around $25). The tenant is one of my best tenants, and I hope they would stay longer. Is it better to keep the rent as it is for one more year and raise the rent later, or should I raise the rent each year by a small amount like $25 to keep up with the market?

Please provide your comments and advice :)

Jesse T. · Answer

I would state that your market increase is $25, but you are only increasing $10 or $15 for their rent because they are a good tenant.  I think you should do increases, but keep them small if things continue to go well.  Try to keep rents within 10% of the market rate - at that point you aren't completely coming out ahead avoiding the vacancy.

Marcia Maynard · Answer

I would not raise the rent on one of my best tenants just because the market rate was rising. I would do so only if my costs had risen significantly. Most of our tenants stay long term. They get rent raises periodically when necessary, but not every year. We try to stay a little under market, which is where you are now.

When you have a very good tenant, give them incentive to stay. Otherwise they might start looking elsewhere. How many years in place is your longest term tenant? How much money do you lose with move-outs - turnover - move-ins? To get $300 more over the course of the year is just not worth it.

Phillip Syrios · Answer

(almost) Always raise rents to keep up with the market, otherwise your property will be have a property $200 below market rents in a few years with no way of raising them on the current resident. I great way to make this not a big deal is to let people moving in know that rents will probably go up a little bit to keep up with the market as well as costs such as taxes and insurance going up. Usually what makes people mad about rents going up is being surprised by it.

Another good thing to do is give them options. Give them a year option at a $20 increase a 6 month option at $40 increase and a MTM lease at a $75 increase.

I often send a letter telling people their options and if they don't want any of them I tell them to give me a call. I usually ask for a little more than I am willing to accept so that if they say the rent price is going up to much I have an amount I am happy to lower it down to. For example if I want a $15 increase I may ask for $25 and then negotiate down to $15 if they think $25 is too much but if they are happy with $25 then they will just sign the lease at the higher amount. This tactic needs to be treated with care as you can get yourself in trouble if you do it wrong.

Marcia Maynard · Answer

@Xin Z.It also depends on your type of property and the characteristics of your market. $25 under market is not a bad place to be to keep a good tenant.

There is a housing crisis in Vancouver right now as there is not enough affordable housing. We buy C properties and turn them into B properties. We rent to low income and fixed income folks. So we don't try to rent top of market. We have 16 units. Our longest term tenant has lived in the same apartment for 26 years. Another tenant for 23 years. Others over 10 and over 5 years. Only about half have been with us less than five years. Annual rent increases could force some tenants to move or double up. When we do rent increases, we do $30 at a time, which equates to $1 a day. We typically lose one month's rent when there is a turnover, plus the time and effort it takes to get the apartment ready to re-rent and advertise. In our market niche, good tenants are harder to find. When we find them, we want to keep them.

If we were renting luxury apartments and homes in the A market to A tenants, as @Elizabeth  Colegrove is doing, the market response would be different.  I still wouldn't want frequent turnover and would give our good tenants incentives to stay, but a rent increase wouldn't impact that kind of tenant as it would ours.

And @Phillip Syrios is right in that you don't want to get so far behind market rent that it would be difficult to catch up. I agree, you want tenants to know up front if you will be doing annual rent increases or periodic increases so they aren't caught off guard. How much and how often. Whether or not you use long term leases, as opposed to month-to-month rental agreements, is another factor. Leases lock the rent in for a longer period. With MTM contracts adjustments can be made whenever the situation warrants.

Bryan N. · Answer

If it's a good tenant who wants to stay don't raise the rent.  Keep the good tenants.

Tanya F. · Answer

Thank you @Steve Babiak, @Sue Kelly

Padmapper.com (just learned about that one) will help us to get a good number of comps for our annual rent survey.  We've been doing a kind of survey, but not rigorously enough and not often enough.  Again, our goal isn't necessarily to be at the top of the market. Good tenants that stay several years are worth a lot.  But we don't want to shortchange ourselves either, and I think over the years we've tended to do that.

Steve Babiak · Answer

That's why you always have to do a "rent survey" whenever you have a renewal coming up, and especially when you have a vacancy come up. With a renewal, tenants don't like huge jumps in rent, but you have to demonstrate your unit is still a good value after the increase. But by under pricing the rent for a brand new tenant, you might run into the tenant moving along if you try to catch up to the market all at once after they have established residency in your unit.

Rents in some Philadelphia neighborhoods have done just that in recent years. And my guess is that this is happening in other cities too.

John Thedford · Answer

$25 is not enough to lose a good tenant over. I would leave it the same. If another year passes and rents are rising then tack on another $25. What would one month vacancy cost you? Probably well over $25. You do stand the chance of replacing them with a very poor tenant and then you will be asking yourself why you ran them off. Keep good tenants happy (within reason).

AJ S. · Answer

It depends on rent amount, generally I wouldn't raise rent if tenant is good, the goal is to keep lifetime tenant :). Vacany and poor tenants ruin your returns not to mention potential damages to the unit.

Account Closed · Answer

@Tanya F. the apt building I managed in Silicon Valley had this happen.  When the market crashed, we had to lower rents and market to a different tenant - we targeted students, which the owner previously avoided.  But, then as you know the market rebounded with a vengeance.

What we did, was we did an annual rent increase, but for existing tenants we still gave them a break that would encourage them to stay.  We actually just had month-to-month agreements, but our tenants knew their rents would not be raised except for once every summer.

New vacancies were advertised just under current market.  And by that, I'd say we ran about $75 under market, but our apts were tiny and bare bones.  What we had going for us was location and a quiet building run by a fantastic manager (grin).

I think it's good to raise rents every year.  Normally, that would only be $25 - $35 dollars for us, until the market went through the roof.  When it did, we would keep their new increased rent at about $100 under market.  They'd squawk, but I knew they'd be hitting Craigslist like mad, which of course I had already done, and knew they would discover it was cheaper to stay.  The owner did have a couple "pet" tenants who had been there forever, and he kept their rents ridiculously low - but he could afford to do that and it was his way of tithing, in a way, I think.  Nice man.  I told him if he'd raise their rent, they'd go find subsidized senior housing, but it was his choice.

To the OP, I'd say to go ahead and raise the rent, but only by around $10.  They will at first think, Oh no!  A rent increase!  But, they'll get to where it says $10, and they'll think - Hey, that's nothing!  And if there's nothing better at that price out there, or willing to go through the hassle and expense of moving over, they'll stay.

I don't know why people think their rents shouldn't go up.  Heck, their cable bill goes up, the electricity goes up, gas goes up, why would they think their rent should stay the same?

Should I raise rent

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