The Real Estate Investing Authority™

How To Decide When To Raise The Rent As A Landlord.

Should I Raise My Tenants Rent?

 

The decision to raise a tenant’s rent is one that must be considered carefully. All too often we see homeowners decide recklessly to jack up a tenant’s rent without putting much thought into. See, for you, as the homeowner, it’s very easy to say I want $100 more per month, however, for the tenant, the feeling is quite the opposite. What we see with rent raises are that often times tenants will move out, stop paying altogether (and go through an eviction), submit a slew of maintenance requests out of frustration, and even bad mouth you to the other tenants. Now any of those aforementioned items will cost money, and typically, a lot of it. So, you need to consider what the potential outcomes would cost versus the amount you are deciding to raise the tenant’s rent to. Let’s look at it in a simple example.

 

Cost Of Eviction Or Turnover

 

So let’s say that you decide to raise your tenant’s rent $100 starting next month. That’s a yearly increase of $1200 in revenue for you. However, let’s also say that once the tenant receives their rent raise notice they stop paying rent altogether out of frustration as they don’t believe their apartment is worth that much (this happens often!). So, now you are not collecting rent, and you have to hire an attorney to process an eviction. The average cost of an eviction nationwide is about $1000. After the eviction occurs the tenant then gets another month to move out and another month of you not collecting any money! From there, you now have a turnover on your hands. The average turnover includes painting, flooring, debris removal, and cleaning. The price is usually in the thousands. So, to recap here you can see that the potential to collection $1200 more a year turned out to cost thousands. To learn more about turnover costs visit Homewyse and punch in your zip code for location specific pricing.

 

 

Now, I don’t want you to think that this situation happens all the time, because in some instances the tenant will in fact stay at the apartment, but now, they are ticked off and may submit a slew of maintenance requests. Maintenance is important to ensure your property is safe and sound, but it can also get out of hand very quickly; especially if plumbers and electricians have to get involved. So, once again that $1200 yearly revenue increase can quickly get washed away with just a couple work orders.

 

Incentive For Tenants To Move. 

 

You also must consider the fact that tenants do talk to other tenants in the building. So, you can count on them all to know who’s rent got raised to what. This can invoke fear in the other tenants as they think they might be next on your list. This has also caused tenants to move out. Once again, because they are in fear of the unknown on what may happen to their situation. In addition, unhappy tenants will let other tenants know about their frustration. So, imagine you just placed new tenants in your building, and the tenants you rose rent on just told them how bad and shady of a landlord you are! That’s not good for business, and likely will decrease the duration of their tenancy!

 

Long Term Tenancy Is The Goal, Without Giving Up Value Vs Alternatives. 

 

The bottom line on this topic are that rent raises sound warm and fuzzy to you as the homeowner, but they come with a great deal of potential negative outcomes. It’s imperative that you consider all of these outcomes when making your decision whether to raise rent or not. One important thing to note here is that there are some situations where properties are purchased and the existing rents are just way too low. For example, here in Rhode Island we purchased a 4 family building and the existing tenants were paying just $600 for a one bed apartment with utilities included. The market calls for that unit to be worth about $1000/month. So, what we did is split the difference in good faith. The tenant received a rent raise notice stating $800 will be their new monthly rent as to align closer to current market conditions. We have found that this type of phrasing is most effective because it removes you as the property owner out of the equation and simply informs the tenant of what the market is calling for based upon the amenities offered. Finally, on that example, we only had to provide the tenant a full month’s notice for this rent raise, however, in good faith we gave the tenant a 2 month notice. This is another tip of good advice that you can implement to further soften the potential blow!

 

To learn more about how to raise your tenants rent in Rhode Island please visit the landlord tenant handbook.

 

We would love to hear your feedback on this topic, and also, talk about any stories you encountered raising your tenant’s rent!

 

 

Gregory Rice is the Vice President of franchise sales for Nexus Property Management™.  

Nexus Property Management™ is a National Property Management Franchise that manages all types of rental property from single family homes or condos to large apartment buildings and complexes.

 

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