Raising Rents: Big Changes or Gradual Increase

This month, some of the properties I own will be going vacant. The process of selecting what rent to ask for them reminded me of something I have been meaning to write about for a while now. Should you raise rents with large, infrequent hikes or gradual increases every year?

Some landlords raise rents when their tenants move out and it is usually a big change. If your tenant has been a "good tenant," then there is a tendency to keep rents steady to avoid rocking the boat, lest your tenant move out. However, this is a mistake.

I think you should open a dialog with your tenants to let them know that taxes, insurance and other expenses have gone up, and while they have been great tenants, you will need to raise the rent... a little. Jeffrey Taylor, also known as Mr. Landlord, talks about raising rents and offering the tenants a chance to tell you if the increase was too much and to suggest what they can afford. If that works for you, great.

For me, increasing rents slightly--what I call a nuisance increase--will keep you from having to raise rents by huge amounts when your tenants eventually move out. For rent to increase a percent or two each year when the lease renews is not usually going to make someone move out UNLESS you have not been keeping the house in great condition and have not been responsive to your tenant to begin with.

Most tenants realize that things go up in price over time and that rents are going to go up. Most tenants would rather have a small increase every year instead of being stuck with a 10% increase every couple of years. If you ease them into it, they can adjust their budgets less painfully. This reminds me of the story about how to boil a frog. Not that I have ever done this, but the story goes, if you throw a frog into a pot of boiling water, it will jump out. If you throw a frog into a pot of room temperature water and then slowly bring it to a boil, that's the end of the frog.

To summarize, small incremental changes in rents will help you keep pace with rents in your market and will help you maintain positive cash flow even as taxes, insurance and maintenance expenses creep up over time - all while still keeping your tenants happy.

Until my next post,

James