Wife doesn't want to increase rents

[Zachary Jensen]

I'm just about to close on my first rental property (house-hacking a duplex in a small town outside of San Diego, CA).  The previous Landlord raised rents 3-5% every year on this property, so it is currently rented for market rent to some great tenants who have taken good care of the place.  My wife is a wonderful person and very generous.  As a result, she doesn't want to continue increasing the rents on a yearly basis.  I could really use some help making the case for the importance of yearly rent increases.  I understand that property taxes increase on a yearly basis and that any maintenance costs also go up on a yearly basis.  What are some of the other reasons for maintaining regular annual rent increases?

[Dan H.]

I see mostly replies that are not local to CA/San Diego.  This implies that they likely do not know the nuances of the local market.

First I value good tenants and let my good tenants get slightly below market rent, but you asked to justify the opposite which is very easy to do.

• In CA, duplexes are rent controlled state wide (5% + CPI, capped at 10%).  If your rents get below market rent, it may never be possible to get the rent to market rate with the existing tenants.
• There is no better way to get rid of an undesired rent than to raise the rent above market rent and have them give you notice.  This by-passes any claims of retaliation, discrimination, etc.  Prior to rent control, this is how I got rid of every tenant that I wanted to get rid of that was current on their rent.
• COVID has identified new risks.  in particular regulations that in effect result in not being able to get bad tenants out of your unit for lease violations (except as related to health and safety), non-payment, etc.  Look up the anti eviction moratorium that was passed by the San Diego County Board of Supervisors.  It was the most stringent in the nation.  It allowed tenants to break any part of lease, not pay, do damage to the unit and you could not evict (only eviction exception was for health and safety).  Fortunately this regulation expired last month.  However, increased risks deserves increased profit to compensate for the increased risks.  These anti eviction rules are likely to result in significant rent increases over the next few years. 
• Home prices in San Diego rose ~25% county wide in the last year.  To have rents increase the same as the property increase would result in a ~25% rent increase.  That would be illegal on your units.  The rent increases always lag the property increases.  However, this is another indicator that rents are going to go up a lot in the near term.
• CPI in the last year was highest in many years.  local wages have gone up significantly.  skilled tradesmen (especially plumbers) have increased their costs significantly.  Material cost similarly have increased significantly.  Plywood has risen ~300% since pre-Covid.   This implies your expenses are higher than the previous owner paid last year.
• Political climate and the COVID anti eviction rules indicate that politicians are significantly more tenant friendly than LL friendly.  This implies that regulations could come at any time further limiting rent increases.  What would you do if there was a rule passed indicating that even at tenant turnover you were limited in the rent increase?  If you have a below market rent for a good tenant, but have to place a new tenant that inherits the rent base of the existing tenant then you are supplementing a new tenant of unknown quality.
• In part due to rent control, reduced rents even on non-commercial MF (4 units and less) does affect the value of the property if you need to exit for any reason.  I recognize the appraisal will be set based on comps, but what a buyer will pay will take into account the current rents because of the difficulty in raising the rents (cash for keys, rehab extensive enough tenant cannot occupy, move in immediate family).  Buying a multiplex with reduced rents will affect new buyer's cash flow/profit and is sure to be reflected in the price the RE sells for.

I gave out 6 maximum allowed rent increases this year having never given that size rent increase previously. Only one tenant gave notice and with the max increase she was still over $500/month below market rent. My point is I expect rents to rise a lot more than the 3% to 5% you are considering due to the increased cost of RE, the newly identified risks associated with providing residential housing, the high CPI and associated wage increases, etc.

I suspect if you raised the rent only 3% to 5%, your tenant may feel fortunate.  

As indicated, I let my best tenants get a bit below market rent, but you should not let them get significantly below market rent.  I have tenants that I could give max allowed rent increase and they would still be below market rent and it is not easy to catch back up with the market rent.

The rent increase you are considering (3% to 5%) should occur to protect your investment.

 Good luck