How much should I increase my rent?

Question

Hey BP community!

I have an investment property in Cedar Park and it was rented $2000 per month last winter.. My property manager just contacted regarding lease renewal.

When I checked Zillow rent estimate and recent listing, the monthly rent is estimated around $2500. I have a few questions:

1. My lease will expire in the winter. Do we expect the market to drop a lot in the winter (especially with all the tech migration into Austin)?

2. How much should I increase my rent? I do not want rent my house substantially below the market but I am afraid increasing rent too much will drive my tenants away. My property manager is suggesting only $50 increase.

Thanks a lot!-Xingshu

Joe Scaparra · Answer

Listen up, the market has changed from 15 years ago when I got into the rental business.  Back then I was very concerned about a tenant leaving me.  So much so that I was very reluctant to raise rents year over year.   Finally, after large increases in taxes, I got the backbone to start raising rents.

If you are %500 below market you need to make a significant jump in rent with your current renter.  Say $200.  Give them 60 days notice and find out if they are going to renew.  If not, start advertising and showing 30 days out but advertise it with at least a $400 increase.  Your existing tenant will see the jump and they may change their mind and accept the $200 increase.  No problem if not because the market is so hot, I had two of my 19 units turnover here in the Austin MSA a few months ago and I had 50 applications per unit in 3 days.

Lastly, if you want to get back to a summer rental schedule offer your current tenant or your new tenant a 6 month lease or 18 month lease their choice.  You can explain that you want to get to a summer schedule and that is usually no problem.   If you keep your places updated, and clean you will have NO PROBLEM finding good renters.  Cheers.

Ryan Kelly · Answer

@X Sun I just leased one of my single-family homes in south Austin where the previous rent was $2,100 and the new lease was marketed at $2,500. I had multiple-offers in 24 hours. Cedar Park is a hot area and I predict you will do well if the home is in good condition. Look at the market comps and add $100-$200 and see if you get results. If you don't get traction, you can always lower the price after 1 week on market.

Jim P. · Answer

If they're good tenants that you want to keep, I wouldn't increase it more than $50-$100, pretty much regardless of what the market rent is.  It's just not worth raising it to the max and having them not stay as long and then dealing with the hassle of a turn-over, vacancy, tenant search/lease process, and rolling the dice on possibly ending up with a bad tenant.  If they're problem tenants I would raise it to the market rate, or just not renew it.

Really, I would also consider the soft factors like what their job and financial situation is.  If it's a family where I know that extra couple hundred per month means a a much bigger deal to them than it does to me, I would also then be more likely to not raise the rent on them.  I know there are some landlords that use excuses like "it's just business", but if you're dealing with human beings, business relationships don't give you an out to disregard all normal moral obligations.  If you're doing just fine with your finances and they're good tenants and good human beings, I would probably not jack up their rent to the maximum possible just because I can.  That does tend to pay off as well when there's mutual respect and they tend to be more likely to stay longer and treat your property with more respect also.

Jon Kelly · Answer

@X Sun If your unit is up to market standards don't be afraid to bring your rents up with the market.

Brandi T. · Answer

Are they good tenants?  If so, I would probably not increase it the full amount.  I would go somewhere around half and try to get the other half next renewal.  I live in Cedar Park so understand what's going on with the market here....

Theresa Harris · Answer

Look up other rentals on the PMs site and see what they are renting for.  They might be a bit lower than market as they just want to get them rented.  How much does your PM charge for renewals vs new tenant?

If they charge 1 month's rent (which I still find shocking-it should be a flat rate) and it is vacant for a month, you will be out $4500 (lost rent and PM's fee).  You then rent it for a year at $2500, you are about $6000 ahead of where you'd be at the lower rent. Now factor in the vacancy and PM's fee (plus any repairs) and you are up about $1500.

Do the $50/month increase and you are up $600 from the renewal with the current tenant.

So tenant turnover: ~$1500 vs $50 increase with current tenant $600.

Daniel K. · Answer

I'm personally being aggressive about rent increases. If they renew great, if they don't, it's a great excuse to sell off an asset that has appreciated a lot and try to position it into new ones.

How much should I increase my rent?

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