Rent increase - how much do you think is appropriate ?

Question

I am preparing a rent increase letter, and figured that I will increase by 3% (currently $1500/mo).
I know large complexes (especially those run by REITs) usually increase by a round number of $100 on a $1500-1600/mo apartment. That's 6.6% increase. Maybe that is why they see people move so often?..

Curious to know what residential LL's find appropriate (so that the win-win is accomplished - the tenant doesn't get too upset and the LL can keep up with the inflation).
Thanks

Robert Steele · Answer

You may want to select an increment which is psychologically more acceptable to your tenants. The more acceptable numbers are those which are not multiples of 5. $22, for example, is better than $20, and $28 is better than $25. Such figures lead tenants to believe that their increases have been carefully calculated to match actual increases in operation expenses rather than to include still more arbitrary profit for the owner, rounded up, of course, to the nearest $5.

Danny Day · Answer

I'm with Nathan Emmert on this one. I've got a rental property right now I did not intend to rent out. I'm holding to sell once the lease is up. My tenants are 1st class (don't allow shoes in the house, constantly cleaning, etc). I went over there to switch the locks and the house looks / smells brand new. If I can't sell this summer I'm not going to increase their rent. I'd rather have them take care of my property rather than get an extra $50-100 per month. They've never missed a payment and direct straight into my account. Can't ask for much more.....

Robert Steele · Answer

http://www.amazon.com/Landlording-Handymanual-Scrupulous-Landladies-Themselves/dp/0932956335/ref=sr_1_fkmr1_1?ie=UTF8&qid=1329374599&sr=8-1-fkmr1

Bill Mauldin · Answer

My properties all rent for top of the market or above. So I don't feel like I can or should raise rents. My average tennant stays about 3 yrs. However I've got one tenant who has had the same terms for 7 yrs. I think this summer when I put a new front porch on the house there will be a slight raise.

George P. · Answer

i had the same thoughts a few weeks ago. i am at the top of the rental market and was trying to think of a way to increase the rents. currently they pay around $1100-$1175. then i remembered that 10 years ago a buddy lived in the same size house a few streets over and he was paying $1200. rents are very hard to increase with the same tenant living there. i think they'd rather move than pay the extra $25. btw, i hate vacancies (like all of us), so i give them two options: stay at the current lease and sign another year or give them $50 off per month to sign 2-3 year lease. just changing the carpet will eat at least 2 months' profit. listing it is another 2 months. i can't afford that.

Nathan Emmert · Answer

You can also justify the increases. Tell them your property taxes went up XYZ this year... or water/gas/electric etc... Or go on Craigslist and KSL and pull down comparable properties... look here, these ugly pictures and they want $100 more than you're paying me... this one here, ewwww, and $75 more! I'm not looking to gouge you but I need to stay competitive, I'm only raising the rent $40 which as you can see is still a little below market.

Arthur Garcia · Answer

@Robert Steele I really like your advice regarding the dollar increments. Being a renter myself, I would have to agree $22 does look at lot better than $25. I will definitely be using that tip this year!

Bill W. · Answer

Robert, what are you basing this on? Is there evidence to support this or are you guessing based on your personal experience and intuition?

Arthur Garcia · Answer

George, The answer, in my opinion is - it depends on you and your tenants. I'm pretty much in the same boat as Nathan, I write in 3-5% and I either slap them with a 2% increase, have them pick up the gardener bill (if I'm paying for it) or leave them alone, if they are taking really good care of the property. In my market, renters of SFH stay 2-3 years on average. If I decide not to increase my rent, I can always re-adjust the rent back to market value after they move (to keep up with inflation). It is probably different for investors with apartment buildings, but keeping a good tenant happy is worth more than an extra $22 a month. I had a "good tenant" move out last month (I didn't raise the rent for 2 years) and I have literally $25 worth of "make ready" repairs (lock change). They even pressure washed the drive way. Just some food for thought.

Nathan Emmert · Answer

I wrote into my lease that rents are expected to rise 3 - 5% annually just as an FYI to my tenants. Then I can come back at lease renewal and be a good guy with "only" a 2% rent increase. As Tod suggested though, it's really what your market will bear. Are rents really rising in your area, or did your expenses go up? Are you justified in the rental increase or simply doing it because the gurus tell you that you need to every year?