The reason I call raising rent a dilemma is because I see many landlords, especially new ones struggling with this decision when a tenant’s lease is coming up for renewal.
There are a few important ways to look at this decision so you can approach it with a rational mind.
The Rent Increase Dilemma
Current Market Rents
This is the first thing to determine. Is the rent at, above or below current market rents for the area?
If it is above, then you may just want to offer renewal at the same rate and lock that tenant in for another year. In that case you don’t have to worry about vacancy and you can hold onto a good tenant.
If rents are at or below market, you most likely want to increase. Especially if rent is below market because if you don’t do it this year, then rent may be even further under market the next year.
Fabricating Your Own Vacancy
The biggest worry for landlords raising rent is a tenant not renewing and a vacancy occurring, which means turnover costs and a possible month worth of rent loss.
Here’s the thing though. If you let rent fall to far below market than you are basically guaranteeing yourself a vacancy down the road.
This is because the only way to get the property back near market rent is to do one of two things.
The first being a large single raise of rent to make up for the past few years without increases. This leads to the likelihood of a tenant vacating as they just saw their rent go up $300 a month in one shot. Even if the price is comparable to other properties, they will feel compelled to look for another place.
The second is us as the landlord deciding not to renew with them so we can spruce it up a little and bring in a new tenant at top dollar.
Either way, you are likely getting a vacancy.
Slow and Steady Wins the Race
We all want to avoid vacancies and keep good tenants. However, this is still a business and we need to make decisions based on the market. If rents are increasing across the board then it makes sense to do incremental increases regularly.
An increase of $50 a month most years is way easier for a tenant to digest the one big raise years later. Plus, $50 isn’t a compelling amount to want to move.
Know The Market
Remember, it is one thing to know what market rents are, but you also need to recognize the market. If the economy is contracting as opposed to growing, then raising rents may not even be an option. Most new landlords have not experienced a weak market, we need to always adjust accordingly.
To learn how to screen for a quality tenant check out the 5 Key to Screening Tenants portion of the ScaredyCatGuide Investing in Rental Properties Videos or Book.