Do you adjust deposits etc...when you raise rent?

Question

For the landlords who do an annual lease renewal, if you raise rent, do you adjust the other numbers with it if originally those numbers were calculated from monthly rent amount?

As an example, let's say rent was $950/month and on renewal it will be raised to $1050/month.

Original security deposit was $950.

Original last month rent was $950.

Original nominal daily rate was $32/day (used when prorating is necessary).

Original early termination and liquidation damages was $1900 (2X monthly rent).

Do you bump all these to the new rate and collect from the tenant an additional $200?

I didn't do it in the past,  but I had a 5 year tenant who's rent was up to $975 a month but the security deposit and last month's rent was still at $680.  Besides it was difficult for me to remember all these numbers without looking up the leases.  It seems a lot simpler to keep everything a multiple of the monthly rent and if the rent goes up they all go up.

But the tenants don't care for it.

Thoughts?

Ronald Perich · Answer

@Sam Leon, I would not touch any of the original amounts. They made a security deposit at a rate you deemed was sufficient enough to cover damages at the time. If they are renewing, you have eliminated one turnover cost (time and/or PM fees). That in-and-of-itself is a cost savings.

If anything, you should consider giving your resident a small gift during a re-lease, especially if you are raising the rents. Something as simple as sun-blocking blinds for the bedrooms or usb-enabled electric outlets. It's a small cost, but it shows them you appreciate their continued residency and it is an improvement to the rental.

In fact, I know of some owners who will give a portion of the deposit back every time the person re-leases with them.

One thing you should do, however, is ensure that you keep a good accounting of how much is on deposit. And that amount should be prominently written on the new lease they sign with you.

To Your Investing Success,

Ron

Ronald Perich · Answer

Forgive me if it sounded like you shouldn't raise rent to match market or to make up for increased costs. That's not what I meant to say. I meant to say don't raise the deposit amount when you raise the rents.

Colleen F. · Answer

Two things we do is list the security deposit on the front page of the lease and give the prorata as 1/30 0f the rent. we don't do last month.

Sam Leon · Answer

Deanna yes the interest calculation can be complicated.  However we have an option of using actual interest or a flat 5%.  If all the different tenant accounts are separated the actual interest is what the bank says and I don't worry about how they calculate it.

Sam Leon · Answer

Marcia thank you.  As far as making the security deposit equal to one month's rent, that is already worded that way in my standard lease, there is no getting away from it perception wise.  In fact if I tell the applicants to move in requires 3X rent.  First mo th's rent, last month's rent and security deposit.  There are many clauses in my lease that refers to "how many times rent rate".  For example, the standard state early termination addendum is based on a liquidation damage of two month's rent and I adjust that when I raise rent.  I also calculate a daily rent rate from the monthly rent...and the lease has a provision for that.  So a rent of $1200 I calculate a $40 per day rate.  Last year when I tented the building for termites everyone had to be out for 3 days.  That is the rate I used to reimburse them for the non-use for 3 days plus some gifts for the inconvenience.  I do understand why tenant might think the SD can be used for damages they caused in mid lease term, or to use it as a last month's rent.  I think by charging a last month's rent in advance I have that covered.  Your point of keeping the last month's rent at it's original amount and eat the difference is interesting, as far as I know other landlords in my areas are requiring the last month's rent gap to be paid although some kept the SD the same.  Are other landlords here keeping the last month's rent depressed on rent raises?

Sam Leon · Answer

@Ronald Perich, I do give tenants small gifts.  Sometimes a movie card or a Starbucks card over the holiday, sometimes with fixture upgrades and most of all being super responsive and attentive.  So I believe giving tenants some perks and what to do about rent raises are mutually exclusive.  I am in a very sort after area and finding a tenant is not an issue, so I always raise rent on every renewal.  A good tenant I really want to keep I raise $25 without exception.  One could argue that this is not even worth the paper work it costs to do especially on a monthly rate of $1200 - $2000 range, but I really don't want to build expectation and if you have a good tenant and you don't raise rent for say 4 years and you are still charging $1250 and your competition are now charging $1550 it becomes VERY HARD to sit down with no rent raises after so many years to have to raise $300 rent because you are now so far off, or have to try to catch up with an incremental raise of say $50 or $75 and knowing you will never catch up.  So I do a rent raise no matter what, better tenants I raise my minimum and tenants I am on the fence about I raise to market rate.

Llewelyn A. · Answer

I think every Market is different.

In NYC, Laws are very favorable to the tenants. Under normal circumstances, eviction could take 3 months.

BUT, the Vacancy rates are incredibly low, around 3%. That generates a huge demand for rentals and it's typical that I do not have a vacancy upon re-renting.

For the record, I currently own 6 multi-Family buildings, each building is around 3 or 4 Units. Each Unit will have 2 to 4 tenants residing as roommates.

I have been a Landlord for 20 years.

All of my tenants pay the increases to match their Security Deposits to their current rents. No Exceptions.

I also have a policy that every rent must get some sort of increase, even in a bad year. I have had tenants where the Market Rents had move up hugely (say 15%) in a given year. One tenant who had moved in last year complained about a 3% increase and gave all kinds of excuses like the Apt wasn't worth it, etc. When I told him to make a decision in a month but look for a competitive deal, he signed without any issues and renews even at 5% or higher rental increases.

BUT that is NYC. Every Market is different.

Deanna McCormick · Answer

I wouldn't touch a change in security deposit, you'd have to compute interest change of amounts in the years you collected.. UGH.

As for renewals we offered a clean your carpet, or freshly paint 1 room with our renewals and our tenants loved it, some took advantage of it and the others didn't but it kept our carpets in better condition.

It is recommended prior to offering renewal that a walk thru is done, so your sure you want them to stay.

Marcia Maynard · Answer

No. It would be very difficult and not worth upsetting the tenant. Keep it simple.

Whatever you accepted as "last month's rent" at the time of the original contract will be considered sufficient to cover the last month, whenever that occurs in the future, regardless of the increased unit value. Courts will side with the tenant on that. Consider it their reward for being a good long-term tenant.

Understand tenant mentality. If you make the security deposit equal to one month's rent, many tenants will think they can use the security deposit for rent at some point or another. Be very clear in your contract that the security deposit remains in a trust account until the tenant vacates the property and has returned possession to you. When this occurs, then transfer the funds from the trust account to your operating funds account. Use the security deposit to mitigate the cost of missing items, damages, extra cleaning, unpaid utilities, unpaid fees, unpaid rent. Refund to the tenant all monies due to them.

Keep accurate records. I agree with @Ronald Perich, good accounting is paramount and transparency is key.

George P. · Answer

no. too much effort for nothing. we have raised lots of rents and just did that once. never again!

Do you adjust deposits etc...when you raise rent?

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