14 Dec Should I Raise the Rent on a Good Tenant?
Good tenants aren’t easy to find. Finding good tenants requires effort, knowledge, experience and not to mention, a lot of time. So when you have one, you want to do all you can to hang onto them.
But what should you do when the local market requires you to raise the rent? Maybe, the cost of living has gone up. Or, the property requires a large amount of upkeep to maintain it. Or perhaps, the property and income taxes have increased.
When any of these happen, should you go ahead and raise the rent and risk losing a good tenant? Or, should you keep the tenant and take home a lower profit margin?
This is a question that many landlords often find asking themselves, especially when the time comes to renew a lease.
Needless to say, rent increase is a risky prospect for landlords. Opting not to raise it, on one hand, can mean leaving money on the table. Raising rent, on the other hand, can leave your tenants scurrying for a new place to call home.
So in this article, we examine 3 questions that landlords should ask themselves when determining whether or not to increase the rent.
Question #1: What is your rental’s market value?
Determining the market value of your rental property can help you determine the rent amount to charge.
If you haven’t increased the rent in a while, it’s likely you are undercharging. Now, there are various ways to learn the market value. They are as follows:
1. Do-it-yourself comparables
This takes time, but not money. You’ll need to look at ten or more similar rental properties in the area your property is located. You may limit your analysis to homes within the same block or may expand to a couple of miles.
The first step in conducting the exercise is first analyzing your home. Ideally, look at what features your house includes such as the following:
- Subjective features such as views, design, and style.
- Location, including proximity to major roads, marketplaces, and schools.
- A comprehensive list of amenities and features such as a fireplace and a swimming pool.
- Construction age
- Number of floors
- Land area
- Number of bathrooms and bedrooms
- Square footage
Next, use websites like Redfin and Zillow to help you find the rental rates of comparative local rental listings.
2. Online rent estimate tools
You could also check the prevailing rent price in your area by using online rent estimate tools. One such tool you can use is Zillow Rental Manager.
It’ll help you get a rent estimate based on specific details about your property including livable square footage, number of baths and number of bedrooms. Other useful online tools include My Rent Rates and Rentometer.
3. Property managers
A good property manager can help you determine what rent you should charge for your rental. Unlike the two options above, this one doesn’t come cheap. You may have to part with a one month’s rent.
Question #2: Is the rent I’m charging now profitable?
Here, you will need to determine your total expenses of managing your rental. For example, property maintenance, insurance premiums, HOA dues, utility costs, and property taxes.
Always form the habit of checking for these before renewing a lease.
You may also need to ask yourself the following questions:
- What is your monthly mortgage?
- Is there any costly maintenance or repairs expected soon?
- Are any costs expected to go up?
- What were your costs for the rental the previous year?
Add up all these expenses and then subtract the amount from the rent you are charging. Is the rent amount still profitable? If not, then it’s a clear indicator that you need to hike up your rent.
Question #3: Can I increase the rent on my tenant without the risk of losing them?
If you do it carefully and skillfully, it’s entirely possible that they will stick around even after a rent increase. To make the process as painless as possible, follow the following rules:
- Keep the rent increase competitive. Ideally, keep it lower than comparables say, by $100. And, make sure to inform your tenant about this when notifying them of the new rent amount.
This is because, naturally, they may start searching around to see whether they can get a good deal elsewhere. By keeping your rent low, your renter may recognize that they are still benefiting and thus continue staying.
- Communicate kindly and be honest. Kind, honest, clear and professional communication will go a long way in reducing potential conflict with a tenant over the rent raise.
Written communication works best. In fact, local law may require it. When providing written communication, make sure you:
- Leave no room for negotiation or argument. Relay the information as concisely as possible.
- Cover all the necessary information. Don’t leave any room for confusion over the rent raise and when they will begin paying it.
- Decide when to raise the rent. Your lease agreement or state law, in most cases, will dictate both when and how to increase the rent. So check your lease agreement and your state laws.
In California, for example, landlords must give their renters at least 30 days’ advance notice if the rent increase is 10% (or less). Generally speaking, the more notice the better.
Therefore, reach out to your tenant as early as possible. If they are on a one year lease, reach out to them ninety days before their lease expires. This may help them adjust their budget accordingly as they prepare for the raise.
Also, if possible, offer them an incentive to renew their lease early. For example, offer them a three percent raise if they do it two months prior to the lease ending, and let them know that it’ll jump to five percent if they wait until it expires.
Being a landlord involves being a bit of everything. From maintenance to accounting to marketing and everything in between. But, even more importantly, this involves good customer service. This is especially true if you need to increase your rental property’s rent.