Raising Rent: When is the right time?

As a landlord approaching a lease renewal, you will need to make a financial decision — do you increase the monthly rent or keep it the same? Because this is a decision that requires evaluating a lot of different components, it’s important to look at the condition/location of the property, your current tenant pool, and of course, the numbers. Landlords tend to get tunnel vision when it comes to raising rents — they get distracted by the prospect of increasing their cash flow and fail to plan for the negative impacts it may cause. You may inadvertently increase your expenses while trying to increase your cash flow if you do not have a well thought out plan. Here’s why: The tenant you just gave a $50 increase to will yield you only $600 additional gross income that year. Let’s say the tenant cannot or is not willing to pay that and you tell them to move out. Well, they likely won’t pay their last month’s rent because they think you are Mr. Scrooge and any security deposit you had now goes to making you whole for that month. Now you have to plan to turnover the unit. Let’s say it takes two weeks to get quotes and a plan together and then it takes another two weeks to complete the turnover — you are now out one month of rent. Then you have to lease the property. Although it can happen quickly, let’s assume it is realistically 30 days before you find a new tenant and that tenant moves in. You likely lose a month to leasing fees as well. That equates to three months’ worth of lost rent. Unless your rental is $200 a month or less for rent, you already lost the war because you spent more than you made on that increase. No increase would have been more profitable then that turnover and lost rent. I realize this is an exaggeration but it is an intentional illustration to show you how quickly and how deep your pockets may need to be when you think of the cost of the lost tenant.

There are certainly more pieces to the puzzle. Perhaps that unit is under market value by $300 a month or more. Now we are talking! And maybe the unit really just needed a light sprucing up so the cost of the turnover was not exorbitant. Not to mention there are other tenant related things to consider — Is the tenant a problem tenant? Are they habitually late on payments? Do they keep their apartment nice? Do they help you with the little things like making sure all the trash is picked up? There is a lot to think about. The point here is consider all factors.

Here is a short list of what to account for when choosing to increase rent or not increase rent:

• What is market rent and what are you currently renting at now?

• What will the improvements cost to turnover the unit?

• How long will the unit be vacant and what is that cost?

• Do I need to pay leasing fees?

• What is the additional income from the increase and is that financially better or worse than the new income minus the improvements and lost rent?

• Can you get a better quality tenant?

• Can you instead transfer some utility charges over to the tenant that they were not paying before? This may be a better approach.

The list really can go on and on of things to consider but the bottom line is — you have to consider all factors. It’s not as simple as you increase rent and you magically make more money!

If you do need to turnover a unit to get closer to market rate consider these other factors:

• Condition vs. Market Rate: Plan ahead for each unit to make sure you do not over-improve the property. Remember, the improvements for an A-class building and a C-class building will be different, and the market rate for rents will reflect that. Don’t pour money into a building if the people in that neighborhood cannot afford those improvements — it will not get you more rent or closer to your financial goals. Making your building look like an A-class building in a C-class neighborhood is not a smart move. Instead, I suggest you think about amenities and convenience. Having laundry in a building over a granite countertop would be chosen by that single mother — every time!

• Competition: Survey the competition in the area. What are similar units renting at in your area? What do those properties look like? You do not want to be the lowest or the highest — in both rent and quality — in the neighborhood. If a tenant can secure a place with the same quality for less, they will.

• Location: How long will it take to rent this unit? How much demand is there for units that are similar? Consider your vacancy costs. If renting the units takes several months because the demand is low or you are trying to attract A-class tenants, perhaps the lower rent and no vacancy was a better choice.

Here are some Best practices on lease renewals and getting that increase without losing a tenant:

• Stagger your lease renewals: If all of your tenants renew at the same time, this could potentially be a disaster if they all decide to move out. Consider new leases at different intervals so that you can stagger upcoming renewals.

• End leases in Winter, not Spring: Spring is a popular time to move, winter is not. Simply put, a tenant is less likely to move in the winter and might consider your rent increase over moving when there is snow on the ground.

• Provide notice: You must provide notice to increase rent and have your tenant sign an addendum stating this. Month to month leases require a 30 days’ notice. Aside from these laws, it’s a good idea to always keep open communication with your tenants — it breeds respect and understanding that may help you secure more rent in the future!

• Consider an autorenewal clause: I typically have a 5% automatic increase in my lease. I prefer the tenant sees it coming so we discuss it at lease up time. If I decide to increase less, I am the hero. It opens the door to negotiation and you are far more likely to get something versus nothing at lease renewal time.

• Show them you care: Always keep your building in tip-top shape. Tend to their maintenance request or problems timely and they will likely have no issue paying an increase.

other helpful tips:

• You must keep fair housing laws in mind and be cautious of how your actions may be perceived — fair housing is all about treating all people equal. If you are only changing the rental rate for one apartment in a multi-unit, be sure you have documentation to prove why you are increasing rent to prevent any accusations of unfair practices.

• Section 8 Housing rents can be increased. You must give 60 days’ notice before their renewal and it must be approved. Housing renewals may not follow your exact lease terms. Make sure you know when housing is re-evaluating the tenant — this is when the increase has to be requested.

• If you have a quality tenant who pays consistently — ask yourself, “How can I make more money without losing this tenant?” Be creative. It is not always about the dollars. Consider other building related expenses or issues. Would it be more cost effective to have someone watch over something like trash? One trash disposal fine could be hundreds of dollars and eat away at your profit.

I am a big advocate of making sure your units are always maximized at market rates whether it be at lease up time or a series of renewal increases. This is very much a game of strategy and to be successful you have to know all the factors in play. Sometimes you may need to make drastic moves and major improvements and other times baby steps are all that is needed. If you are not an expert in your marketplace or successful at obtaining rental increases each year, make sure you seek expert guidance. Many times, the most profitable buildings are the ones that were just mismanaged by the previous owner and are significantly undervalued in rent. With the right plan in place, any building can generate significant profit. Smart calculated decisions will put you on the path to achieving your financial goals. I wish you success at maximizing your profits, one unit at a time!