Any residential real estate investor knows that finding a reliable tenant is often the most challenging aspect of generating passive income from a piece of property. Once you’ve signed a trusted, compatible tenant that pays their rent on-time, keeping them in your property is a priority.
Every time that a tenant moves out of your property, you’re losing rental income that could otherwise be collecting. When tenants move out, you have to pay to deep-clean and repair the unit, as well as losing income for every day that the unit sits vacant. Even if finding another tenant won’t be a challenge in your market, it’s important to remember that you may not enjoy the same type of productive, amicable relationship you have with your current tenants.
Nevertheless, it may become necessary for you to raise the rent on a good tenant. Rising property taxes, maintenance expenses and market conditions may mean you’re no longer able to make a profit renting out your property at its current rate. Determining when it’s appropriate to raise rents, and by how much, often requires extensive research and forethought.
When to raise the rent
Determining if it’s an appropriate time to raise the rent of one of your units is a challenging endeavor. Here are a few steps to follow to help you decide if you need to raise the rents at your investment property.
Firstly, you’ll need to determine the market value of your rental units. Consider the cost of similarly sized and finished units in your building’s neighborhood, and even on its block. It’s important to ensure your rental rates are comparable to—if not lower than—the market average. There are also software tools you can use to help determine current market value. If your rental rates are significantly lower than others in the area, it may be time to raise them.
Before raising the rent, you’ll also need to sit down and analyze whether you really need to in order to continue generating passive income off of your investment property. There’s a strong likelihood that your own expenses, like your tax burden, insurance premiums and more, have become more significant since you last signed a lease agreement with your tenants. If this is the case, your current rental rates may no longer be profitable.
Finally, it’s important to consider the tenant and the relationship you enjoy with them. If the tenant always pays their monthly rent on-time, and if they require minimal time from you or your management team, you may want to consider other options before raising the rent. Tenant turnover is expensive, and losing a good tenant is always an undesirable outcome.
How to raise the rent
If, after analyzing your expenses, market trends and considering your relationship with the tenant in question, you feel it’s necessary to levy a rent increase, you should go about it very carefully. Navigating a rent increase with tact and caution will help you maintain your relationship with the tenant, and reduce the likelihood of upsetting them.
The first and most important thing to pay attention to before raising rents is your local housing laws and regulations. Many municipal housing authorities impose strict rules on how often landlords can raise local rents, and by how much. Additionally, there are often legally binding guidelines dictating how much notice is necessary before a rent increase is levied. It’s important to have a comprehensive knowledge of local regulations in your area before sending off rent increase notices.
Next, you’ll have to calculate the amount of the rent increase. This will be determined primarily by local laws, but also by the growth of your financial burden as an owner. Raising the rent by 5 to 10 percent is typical.
You should send off rent increase notices at least 90 days in advance of the date that the increase goes into effect. This will provide tenants with plenty of time to decide whether or not they’re going to stay at your building. Offering options to tenants – like a lower rate increase if they agree to sign a longer-term lease – could help you improve your tenant retention.
Raise rent with caution
Following these guidelines when thinking about raising rent, or when levying rent increases on your tenants, will allow you to maintain strong, professional relationships and help you hold on to good renters. Remember that in the long-run, making it easier for good residents to maintain residence in your investment building is more important, and ultimately more fiscally rewarding, than elevating your profit margins in the short-term.