Rent increase or Not. Which is the smarter decision?
Investor · TX · Member since 2015 · 62 posts · 23 votes
I've rented to over 1,000 tenants, and I tell all of them the same thing when they're signing the lease... If you're a good tenant, I'll never raise the rent no matter how long you rent from me. If you can get a good tenant that pays on time and takes care of your place.. for me, that's worth more than getting 2-3% more from an average or below average tenant. Plus, good tenants usually have friends that are also good tenants and I get a lot of tenants through word of mouth. I might be making a little less on rent, but I'm saving a lot more on repairs/damages and vacancy/re-renting costs. Once a tenant moves out, I'll increase the rent to market rent for the next tenant.
Hi Christine,
For me, what makes a great landlord - I try to treat my tenants how I would like to be treated if I was a tenant and I take great pride in my properties. All of my properties are either brand new or completely renovated in the last 3 years and have stainless steel appliances, granite, wood floors, brand name faucets and everything is color coordinated and matches. Plus, I'm in the best locations. Before someone moves in, I do an extensive walkthrough as if it was a custom house and have everything fixed, no matter how small, and have it professionally cleaned before they move in to minimize repairs during their tenancy. I give them my cell phone to call if there are any issues and I always return their call that day and try to get any issues fixed asap. Whenever there are issues, I try and be as fair as possible. I'm always looking for deals that can save my tenants money... for example, a special on cable/internet. I also ask them on a regular basis if there are any problems with the apt or if they have suggestions on how I can improve my apts or service. I normally have zero vacancies. Self called Gurus and books might disagree with my approach, but to be honest, I have more hands on experience than the majority of them and the only reason they're coaching or writing is because they're not profitable being landlords and need to subsidize their income. As for my tenants, I can screen a tenant in one minute over the phone and I'm completely upfront with what I expect from them... no parties, to pay their rent on time, to take care of my property and not to disturb other tenants. I usually have less damage than the majority of my competitors. You're below average or even average tenant will take advantage of you, but your better quality tenants usually won't. Sometimes if I'm on the fence regarding renting to a tenant, I'll drive by where they currently live... if they're living in a run down place or if there's garbage, etc outside, that's an indication of how they live and will treat your property. Another technique is looking at their car... if it's full of junk inside or on it's last legs, odds are there will be problems. Hope this helps.
Monitor market rents and vacancy rates then react accordingly. If you're at the top of rents in a high vacancy market, don't increase. If you're near the bottom or middle in a low vacancy market, increase the rents. Typically, tenants will explore their options and then realize we're still offering a better deal, especially when you factor in moving, application fees, move-in fees, etc.
Hi Christine,
For me, what makes a great landlord - I try to treat my tenants how I would like to be treated if I was a tenant and I take great pride in my properties. All of my properties are either brand new or completely renovated in the last 3 years and have stainless steel appliances, granite, wood floors, brand name faucets and everything is color coordinated and matches. Plus, I'm in the best locations. Before someone moves in, I do an extensive walkthrough as if it was a custom house and have everything fixed, no matter how small, and have it professionally cleaned before they move in to minimize repairs during their tenancy. I give them my cell phone to call if there are any issues and I always return their call that day and try to get any issues fixed asap. Whenever there are issues, I try and be as fair as possible. I'm always looking for deals that can save my tenants money... for example, a special on cable/internet. I also ask them on a regular basis if there are any problems with the apt or if they have suggestions on how I can improve my apts or service. I normally have zero vacancies. Self called Gurus and books might disagree with my approach, but to be honest, I have more hands on experience than the majority of them and the only reason they're coaching or writing is because they're not profitable being landlords and need to subsidize their income. As for my tenants, I can screen a tenant in one minute over the phone and I'm completely upfront with what I expect from them... no parties, to pay their rent on time, to take care of my property and not to disturb other tenants. I usually have less damage than the majority of my competitors. You're below average or even average tenant will take advantage of you, but your better quality tenants usually won't. Sometimes if I'm on the fence regarding renting to a tenant, I'll drive by where they currently live... if they're living in a run down place or if there's garbage, etc outside, that's an indication of how they live and will treat your property. Another technique is looking at their car... if it's full of junk inside or on it's last legs, odds are there will be problems. Hope this helps.
With a property/tenant class such as you described, could you provide a typical acquisition cost of the property, monthly rents and expenses? Thanks.
I own 5ea condos and my strategy is to be on the lower end of the price range for my property size/type. I am able to turn units with absolutely minimal vacancy and get the best quality (credit score/income/rental history) tenants. I'd rather have that then trying to get another $25-$50/month and it taking a month or more to find the the next tenant, which may not have the best credit and income numbers. Nonetheless, I do raise rents and as numerous posters have indicated, the tenants do their research and they know if you're charging less than market. So to keep the good tenants (remember - they are your customers), raise the rent by less then the market increase (e.g. only raise $75 of the $100 market increase) and explain this to the tenant. They will appreciate the discount to market. If this is not enough though, I will often go to greater concessions to keep a good tenant. Turning units is expensive, both in maintenance and vacancy, even if only empty a week.
The only thing I hate more than vacancy is evictions!
@Andrey Y. I'm in the process of building a new 28 unit apt building. Tenants are moving into the building in 2 weeks, so I'm a bit swamped, but I quickly looked at my expenses for the past 2 years. My expenses compared to my gross rental income ranged between 17.5 - 22.5%. I didn't include debt service, management fee (since I self manage) or a salary for myself in my expense numbers, but I did include my actual expenses with self management (phone, computer, etc). I'm at 100% occupancy, but I reduced my income by a 4% vacancy rate. My new building is already 100% pre-leased and will probably run closer to the 22.5% expense ratio because property taxes on a new building will be more plus we're required to have a monitored fire alarm system. I don't have all of the costs for the new building, but it will end up being close to the cost of buying and renovating a property on a per unit basis. Hope this helps...
Most landlords never really think of it through the tenants perspective. Tenants think of landlords as extremely wealthy individuals that have tons of properties. When the tenant receives the rent increase, if they were a good tenant, they think, wow, I've been an awesome tenant, paid rent on time, never caused any problems and in return this GREEDY landlord has to nickel and dime me and raise my rent $20-$30 per month because he doesn't have enough money already. Don't fool yourselves.... these tenants are calling other places once they get your rent increase. I get a lot of tenants this way and I tell them upfront... I won't raise your rent if your a good tenant. And it's not business as usual to raise rents every year and if you think the tenants are buying that speech, you're wrong. Just like when you receive an increase year after year with your insurance, lawn care, phone bill, etc and they tell you it's "just business"... do you say ok and continue to pay it, or do you shop around and switch because you're irritated at them for constantly raising their rates?
I've been a landlord for 24 years and I'm still in business without having to constantly raise rents on my good tenants. I have A LOT of tenants, they all know my name and I normally get 1-2 referrals a week from these good tenants. The bottom line is that I'm giving up $20-$30 per month in rent during a renewal of lease, but in return, I'm keeping better tenants, plus my marketing/advertising costs are less due to the referrals, my vacancy costs (lost rent when trying to find a new tenant, which could be 1-2 month of no rental income) are less, my turnover costs when tenants move out (painting, cleaning, advertising, showing of apts, utility bills) are less .... so when you factor in everything, I actually net more money per unit than a landlord that raises their rent on their good tenants....if you want to be a good landlord, figure out ways to differentiate yourself, just don't follow the pack because everyone else does it.
You are spot on that vacancy includes more than just lost rent. People like to pick on mom and pop operators, but as a part time job, vacancy is my biggest money drain. There are always things that need to be fixed or updated and I cannot charge the tenant for most of it. The worst part is that I don't have time. Also, my business is not large enough to have economies of scale.
I know that an increase will not force someone to move, but it encourages them to shop around. If you are confident when they go shopping that your property is the best deal, then I guess the increase won't hurt. I am conservative in taking that risk, partly because half the tenants I get complain about their old landlord jacking the rent every year.