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Rent Increase Question
What is the typical annual increase in rent? I have a single family house that has no mortgage. I've been renting to the same family (elderly couple and their adult daughter) for the last 3 years with no increase. Why no increase...rent has been paid on time every month with exception of two times within the 3 years and I guess I'm nice :). Lease is to be renewed in the next 2 months and I am definitely increasing rent this year due to increasing property taxes and insurance. Just curious as to the typical annual increases.
@Teawanda Wells - Welcome to BP. Congrats on owning a property mortgage free.
While you want to try and always do an annual rent increase to make sure you stay with the market rents, keeping a good tenant is important.
I typically try to keep rent increases in the 3-5% range. If you start to get higher than that, folks might have trouble adjusting (a lot of folks are paycheck to paycheck), or they might feel its not justified and start looking around for some place new.
Thanks Andrew for responding!
If you want to maximize and hoan in your rent increase look at comps in the area and raise it to just undercut them, with varying levels of aggressiveness depending on if you care to keep your tennant or how much it is to jump up to market value.
If you don't care to squeeze out an extra $25-75 a month, or don't care to do the research, I'd just increase it by about 2-2.5% annually, as while it's a bit less than inflation wages also do not follow inflation, and what's more important (imo) is keeping a tennant and nobody is going to move out over such a small increase.
Personally I'd scan over comps quickly if it was my only rental, get a general idea, then bump rent in the next lease by about 50-75% the difference in my rental rate and the comps and explain why I'm doing so (inflation/rising prices/taxes/insurance), then do the 2-2.5% target annually. In terms of if the property is renting above $1400-1800/mo I'd target 3-5% as such individuals are generally more settled and appreciation in the property is usually greater and thus the monthly cashflow often increases quicker.
First off, you don't owe your tenants an explanation of why you are raising rent, and it is often better to not get into it.
Second off, we have never had a tenant balk at rent increases, even when we weren't consistent about having them annually.
We want to balance rewarding good tenants with keeping up with market rent. Keeping rents up helps our bottom line AND makes it easier to sell if that ever needs to happen. We figure out what the gap between current and market rent and raise rent by 50% of that. So if rent is $750 but everything else similar is now renting for $850, we would raise rent by $50. We are making progress on closing the gap and tenants will not find something at a comparable price to move to.
I believe 3% is fair. But the market needs to be considered first if you want to keep your tenant happy.
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It depends on how far below market you are. I recommend never letting your rental get more than 10% below market because it gets really hard to catch up. Also, the longer the tenant stays there the more of a relationship you develop and the harder it is to treat it like a business.
I also don't recommend staggered increases ($25 a month for six months or $25 every three months) or giving them six months warning. 60 days is plenty of time for them to accept it or move on.
Thank you all for all the input and great advice!
Annually I run the area comp's to determine market rent, I then apply a 3-5% increase but make sure it doesn't not exceed market rate. This is done every year, it should not be dictated by your expense increase.
I am a softy I guess. I set rents to market whenever I have a turnover and try to avoid increases while I have a tenant. This does begin to be an issue after four or five years though. If I do increase during a tenancy, it is usually $25 or so.
#2 General Landlording & Rental Properties Contributor
Research your market. Since they have been there 3 years and seem happy you can easily charge market rent or higher if you gave annual rent increases. Trying to raise the rent after no increases for 3 years is going to cause resentment. Regardless of the amount they may want to leave.
If you are far below market it would be to your advantage to increase it to full market. Stay or go you will come out ahead either way.
Hi, wanted to give a follow-up post. I increased rent 8% (still just under market rent). Tenants happily signed new lease. Thanks for all your input.
May I ask if you find it fair, to increase the rent of tentants, after the owner changed.
I just bought my first property, and i would like to keep the tenants inside, as they told me, he always pays rent in time.
I am planning to increase the rent for about 17% or would that be to much? He's living inside the apartment for about 4 years now and would extend for at least another 3 year contract.
Thanks
Angela, I am in a similar situation as yours and I know the current tenant in the property I am to close on is well under the market rate of over 25%. Any one that could provide some more insight on this would be greatly appreciated!
Originally posted by @Angela Both:
May I ask if you find it fair, to increase the rent of tentants, after the owner changed.
I just bought my first property, and i would like to keep the tenants inside, as they told me, he always pays rent in time.
I am planning to increase the rent for about 17% or would that be to much? He's living inside the apartment for about 4 years now and would extend for at least another 3 year contract.
Thanks
Move away from % and look at the dollar amount, no one pays for anything w/ %. If you're trying to close the gap of 17% (whatever the dollar amount is) why not just do 6% each year over the year period.......vs 17% and then nothing for 3 years.
A long lease only protects the tenant, not you the landlord. If they break a 3 year lease 2 months in you're not getting the rest of those 34 months...
Originally posted by @Varun Narayanan:
Angela, I am in a similar situation as yours and I know the current tenant in the property I am to close on is well under the market rate of over 25%. Any one that could provide some more insight on this would be greatly appreciated!
What's the current lease? If we're talking say market rent of 800, you're losing out 200/mo (or 2400 per lease). Bump it up 50 per year and you'd close that gap and maybe keep the tenant (if they're long term). If they're short term, bump it up maybe 100 each year and you'll either have a vacancy that you can fill at market rate or market rate paying tenant.
But word of caution, turnover is not free more so if they've been there for ever. New flooring/paint can eat up that 2400 pretty fast and depending on the length of their stay it could just be wear and tear.
Hi Matt, yes the market rent is currently 500 - 575 USD for a 1 BR and the current lease shows the tenants payments to be $400. The Tenant has been there for the last 13 years and it is certainly my intent to keep them. Thats why I was looking for advice on some ideas on how to balance fairness to the tenant and for the business. Appreciate your input!
Originally posted by @Varun Narayanan:
Hi Matt, yes the market rent is currently 500 - 575 USD for a 1 BR and the current lease shows the tenants payments to be $400. The Tenant has been there for the last 13 years and it is certainly my intent to keep them. Thats why I was looking for advice on some ideas on how to balance fairness to the tenant and for the business. Appreciate your input!
Highly doubt they're going anywhere, 25/mo and you'd probably close the gap while keeping tenant. It'd also get them used to the change slowly, if you bumped it say 50 bucks they'd probably leave or have trouble paying. Again, 50 dollars isn't a lot per say, but when you're paying 400 mo in rent it's likely every dollar counts.
#2 General Landlording & Rental Properties Contributor
If you are operating as a business you always keep rents at market to insure you maintain the value of your investment and operate at maximum return. If on the other hand you are only investing as a hobby then it makes no difference what you charge for rent. Assuming your only priority in evaluating your investment is whether your tenants pay on time there is absolutely no reason to raise their rents if you still have any amount of positive cash flow.
As a business you maintain market rents by applying a annual rent increase. If you are investing as a hobby your rental amount is secondary to keeping your tenants happy. Do not raise your rents until a tenant turn over occurs or your cash flow declines to zero.