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How to Raise Rents: The Nuisance Rental Increase
Every landlord is faced with the question: should I raise rent? And if so, by how much and how often? I like to employ what we call a nuisance increase.
If you raise rent by too much, you run the risk of the tenant moving out. An increase of $50-$100 or more will probably get your tenant thinking about another place to call home. Now, if for some reason you haven't raised rent in many years and your current market rent really is $150 above what you now charge, you have two options.
First, you can raise rent by the full amount, explaining to your tenant that it's the going rate and they will have to pay that amount elsewhere for a comparable dwelling. However, there is still a good chance that they will move out because they're probably not prepared to take such a large hit to their budget.
The other alternative is
Follow up:
to begin using the nuisance increase strategy by raising their rent every year when their lease renews by about $20-$25 until you reach current market rent. This amount usually won't make a tenant move out – it should feel like a minor nuisance to them, but it's easier for them to pay $20 more per month then go through the hassle of finding a new place and moving all of their stuff.
Ideally, you should be employing the nuisance increase strategy from the beginning with all of your properties. But, there is an upper limit to what you can charge for a certain property. You don't want to price your unit out of the current rental market; stop increasing the rent before you reach this point. Instead, reevaluate every year and only increase the rent when prices go up again.
The nuisance increase works well because tenants can understand that your costs to maintain the property go up over time. Every year, you usually see a little bump in your property taxes and insurance, and over time repair costs go up as well. Tenants are okay with this. They usually aren't okay with you blindsiding them with a huge rental hike.
Until my next post,
James
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1 comment
UINT FOR THE LAST YEAR. OF COURSE THEY ARE ON A FIXED INCOME. THE MARKET RENT FOR SIMILAR UNITS IN THIS AREA ARE $600 PER MONTH. HOWEVER, THEIR RENT IS ONLY $530. I HAVE UPDATED WINDOWS AND TILE THRU OUT UNIT. WHAT IS THE BEST WAY TO INCREASE THEIR RENT TO THE MARKET WITHOUT THEM LEAVING. MY
SUGGEST: WHAT IF I INCREASE ONLY
$35 FIRST YEAR AND $35 SECOND YEAR?
James replies:
Herein is the problem with not increasing rents slowly over time. The best way to do this, in my opinion, is to raise it slowly each year and not run into this problem. Now that it has happened you can do one of two things:
1. Raise rents as you suggested and risk having them leave.
2. Raise rents small and commit to keep raising it small amounts each year until it does get to where it should be (and then keep raising it a small amount).
Why not approach your tenant and explain the situation and see what they can afford. Tell them that rent really should be $600, but that you like them and want to them to stay. How much could they afford and continue to stay?
Sincerely,
James
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