In my experience landlords are very reluctant to raise rental rates. Shying away from this unpleasant task is totally understandable; fear of breaking bad news, the time and effort associated with the task, (misplaced) responsibility towards the tenants and uncertainty in the rental market.
Perhaps the biggest fear landlords feel when debating a rental increase are the costs associated when a tenant decides to move as a result.
If you are relying on that rent check every month I can certainly understand how scary the thought of a vacancy can be; make ready fees and new tenant expenses can mount up. However, these expenses should not be a concern if you are running your rental home as a true business. At Gulf Coast Property Management we advise our owners to build up reserves equal to 3 month’s expenses. This way you can deal with any unexpected costs and negotiate renewal rates with confidence.
"But I am a great tenant! I look after the place and pay rent on time" is often the response we hear when we inform tenants of a rent increase. Our reply to this viewpoint is "that is the reason we are allowing you to renew your lease, not a reason why we shouldn’t raise the rent."
If your tenant ever asks that you justify your increase simply explain that as the property owner your costs are increasing; taxes, insurance, as well as maintenance and professional fees are not trending downwards. Why should you be penalized in real terms as a result? You may ask your tenant if their other living costs such as utilities and groceries are immune to inflation.
You may feel that raising the rent does not pay dividends, however as our table demonstrates the cost of not raising rent each year can be significant. Even if we assume a tenant may leave because of the increase (our experience does not back this up) and you will be subjected to additional vacancy and maintenance expenses the results are clear. Even a modest rental increase of only 5% per year will yield an additional 23% in revenue over the course of 8 years. In our $1000 per month rental example this equates to $18K. What $ impact would it have on your property?
Of course, there may be circumstances when it is in your best interests to maintain an existing rental rate and secure the renewal, but you should only do so on your terms and not the tenant’s. Remember why you ventured into investment property ownership in the first place.
It is not by coincidence that the rental rates of self-managing owners are consistently lower than those of professionally managed properties. Some may simply equate this to a self-managing owner discounting his/her rental rates in lieu of fees. But to what end? Even if the net return worked out to be the same surely it would make more sense to employ a professional manager who would essentially manage the property on your behalf – for free!
Hungry for more? Check out the two blogs below or visit our Owner Resource Center here to find answers to all of your questions. Or give us a call at (941) 782-1559, we'd be happy to answer any questions you may have.