Author Topic: Why would I raise the rent?  (Read 7706 times)

Nords

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Why would I raise the rent?
« on: May 05, 2013, 12:09:44 AM »
How do you battle-scarred veteran landlords raise the rent in a rising market with flat expenses?

Spouse and I own a rental property that we're keeping for a decade or two, maybe the rest of my life.  Single-level 4BR/2BA single-family home in a good neighborhood.  It has a number of advantages for our long-term family age-in-place plan.  It's almost problem-free, although every six weeks I'll still whine & snivel about spending a couple hours on the yardwork & maintenance. 

It's in a good location for tenants, with three military bases inside a 15-mile radius.  I think we've had a total of six weeks' vacancy over the last 12+ years, never had a bad tenant, never had a major material issue.  Frankly, tenants seem pretty fungible in this market so we're confident that we can turn the place around in a couple weeks.

The current tenants have been there for four years and are probably good for three more.  (I'm writing this post as though they're reading over my shoulder.)  They went one year on the contract and are now month-to-month at the same rent as 2009.  They tend to be pilers (not stowed for sea) so they'll have quite the hassle of moving to a new place.  They have aging parents on the Mainland, though, so when their kids finish (local) college then they may be on their way in 2016 or 2017.  They're aware that we're financially independent-- they read "The Military Guide" and surprised me by showing up at one of my seminars. 

Oahu real estate ties up way too much capital, so our cash-on-cash return is about 4.8%.  More importantly, I don't have any better place to put the cash.  If the tenants offered to buy the place at market price then there would be serious prolonged discussions around Hale Nords because we have no compelling need to sell.

While we were visiting an open house last week, we took a look at rents in our neighborhood and discovered that we're under market by at least 10%.  It's moved that fast since last fall.  It would be financially straightforward to raise the rent by 3% because I think the tenants would pay up instead of moving.  We might even get away with another 3% boost in 2014.  The first rent raise would get us up to 5% cash-on-cash return and the second to 5.3%.  However the sales market is heating up again so I don't see the return getting much higher.

Back to the question:  how do I justify boosting the rent?  Our expenses are not going up, and our taxes are not going up.  We could plow the extra income into renovations but the tenants don't really care for the disruption.  The only "issue", and admittedly it's a snivel too, is that the house is rented below market and could churn out even more income.  My reflex is to try to optimize the finances by raising the rent (good engineering!) but even as a business manager I still feel that I'm taking advantage of tenants.  I'm not taking unfair advantage, but that's how it feels.

This is probably not a new problem, although it may not need a solution.  Am I overlooking a justification for raising the rent?  What logic or boilerplate have you used to raise your rents in a fast-moving market?

nktokyo

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Re: Why would I raise the rent?
« Reply #1 on: May 05, 2013, 05:07:05 AM »
When I raise the rent I simply say it's what the market is. When rents drop I have to lower my price and it goes both ways.

If you like the tenant you could (after validating your assumption of what the rent should be thoroughly) say that standard rent has gone up 10% so you're going to increase them 5% per year for the next two years - with a chance of further increases.

Worst case scenario is you got it wrong, they leave and after a month you have to accept the current rent again. Thats not so bad.

limeandpepper

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Re: Why would I raise the rent?
« Reply #2 on: May 05, 2013, 05:22:44 AM »
Other than the "market rate" justification, there's also the "increase in consumer price index / inflation" reasoning.

My landlord increases my rent every couple of years, and so far, it's still a decent deal for what I'm getting in return - a reasonable apartment in a nice suburb. I'm fine with that.

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Re: Why would I raise the rent?
« Reply #3 on: May 05, 2013, 05:40:21 AM »
If there is a big jump in market rent, I don't raise a long term, good tenant's rent by the entire percentage.  A month's vacancy and the turnover costs that I risk by doing that are just not worth it.  What I would do in this situation is to use the rent increase to get them on a lease.  I would sit down with them and explain how much rents have gone up.  I would tell them how much you appreciate them being good tenants and offer to raise the rent three percent if they sign a year's lease.  Then explain because of the uncertainty of a month to month tenancy, you will raise the rent 5 percent if they stay on that basis.

Unless there is rent control in Hawaii, you are making a business decision here.  If these tenants move, you will have turnover costs (tenants moving in at market rent have higher expectations) and you may have a short vacancy while you do the work and find what you hope will be an equally good tenant.  Keeping them at a slightly below market rent incentivizes the current tenants to stay and appreciate you being a fair and reasonable landlord.

Over the years, I have found that the people that raise rents to market every time they have a chance have higher vacancy and higher turnover costs.  They also tend to have more adversatial relationships with their tenants.  I try to maximize profit with an even cash flow and tenants that are relatively satisfied and have less incentive to move. 

arebelspy

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Re: Why would I raise the rent?
« Reply #4 on: May 05, 2013, 07:52:31 AM »
Even if your expenses have been flat (property taxes the same as in 2009?), that doesn't mean they will continue to be.

Due to inflation, the cost of maintenance has risen, so when you next have to fix an issue, the parts and labor will be more.  Since you put money aside for that, if rents are below market you could justify it as you need to put more aside for deferred maintenance due to inflation.  (That's more for if you're looking for a way to justify it to yourself because you feel bad raising the rents on them when you haven't had increased expenses, I don't know that I'd use that logic to explain to a renter.)

That being said, I agree with AR, and I probably wouldn't raise the rents two years in a row just for that reason.  Despite the fact that the tenants seem fungible, the next set could be a pain in the rear, so it's worth keeping them happy, IMO.
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Johnny Aloha

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Re: Why would I raise the rent?
« Reply #5 on: May 05, 2013, 01:15:19 PM »
My cash on cash return is in the same neighborhood as yours.  One side of the duplex is about $1000/month under market value.  But the tenant does all house and yard maintenance, always pays on time, and never calls me for anything. 

I've decided that is a good setup for us now.

Blindsquirrel

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Re: Why would I raise the rent?
« Reply #6 on: May 05, 2013, 08:50:36 PM »
  Kinda up to you, the no hassle from tenants/no turn over costs/ no phone calls ever has a great value in my mind. That equals no rent increase unless you want to deal with new tenants and cleaning the place up. Me? I do not want to do jack as I have a full time job.  What I did this year for all tenants unless I loved them was send them a letter explaining the 3.8% Affordable care act tax hike on net rents. I told them I was not raising the rent but I would serve as a tax collector for the government. The ones I love, I did not raise the rent and chose to eat the 4% hit in favor of no hassle/turn over expenses. I  will tell them I ate it for the time being because I like them.

Nords

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Re: Why would I raise the rent?
« Reply #7 on: May 05, 2013, 10:59:37 PM »
Thanks, everyone, those weren't facepunches but I definitely needed a kick to the head.

We visited another open house today, and it was pathetic.  Crappy remodel, abused by tenants, some of tenant's personal items still on the closet shelves, poor maintenance, the owners & listing agent couldn't even bother to clean it up properly before the open house.  Two story 4BR/3BA, tiny yard, bad drainage, neighbors within spitting distance on all sides, dirty inside & out, 15-year-old stained carpeting, ancient vertical blinds, filthy windows, bad sheet vinyl in the bathrooms, a cigarette smoker in one bedroom that drove you away with your eyes & nose smarting.  The realtors didn't even know why the owner was selling but they encouraged us to get our offer in "tonight!"

20 years ago I would've been eagerly rubbing my hands and considering how much we'd earn from our sweat equity.  Looking at it today just made me tired.

$700K.  What's even more pathetic is that they'll probably get their asking price.  Considering the neighborhood & schools, there might even be competitive bidding.

But that walkthrough started a good discussion, and now we're ready to raise the rent.

"Dear (tenants),
     We've enjoyed having you as tenants for the last four years!  We were surprised to realize this week that you've been in the house longer than any of our other renters.
     Although the markets have been flat for the last few years, we've noticed an abrupt change in the last six months.  There are fewer listings and prices are soaring, which means higher property taxes are on the way.  We also expect higher federal taxes on landlords this year.
     We've reluctantly concluded that we need to raise the rent.  If you'd like to continue renting month-to-month then we're increasing it by $(5%) effective 1 July.  If you'd like to sign a one-year lease then we'll raise the rent by $(3%) and re-assess the market next year.  If you decide to sign a lease then we've included the form for your signatures.  Thanks,"

I don't feel like Snidely Whiplash after all.  And spouse noted that it's probably time to paint most of the exterior.

Even if your expenses have been flat (property taxes the same as in 2009?), that doesn't mean they will continue to be.
I had to look that up.  To my surprise, this year's tax bill is still a few dollars lower than 2009.  It looks like in 2009 the assessor was about two years behind the market (no surprise there), and is still lagging.  I bet the assessment catches up fast now, though.  I thought the market was up 10% in the last six months, but the open house we saw today is pricing more like 20%.

Adventine

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Re: Why would I raise the rent?
« Reply #8 on: May 06, 2013, 12:04:17 AM »
Nords, as a tenant, I'd be very charmed (and only slightly dismayed) to get a letter like that from my landlord.

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Re: Why would I raise the rent?
« Reply #9 on: May 13, 2013, 07:39:05 PM »
Good call on raising the rent and offering the discount for a full year and very well delivered!  I'm in an absurdly accelerating rental market and I've raised rents the past two years (just 3% per year).  When I deliver the news, I've told my tenants to check Craigslist or that I would gladly supply MLS rental comps.  Both times they didn't even blink and thought the raise was perfectly fair (due to the crazy rental market).  If they ask for a decrease in a couple years and the market swings the other way I would be happy to run the numbers and decrease if it is warranted.  Having good tenants definitely has a value, but it sounds like you would win either way (locked up tenant or increased rent).

Nords

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Re: Why would I raise the rent?
« Reply #10 on: May 13, 2013, 08:13:18 PM »
Good call on raising the rent and offering the discount for a full year and very well delivered!  Having good tenants definitely has a value, but it sounds like you would win either way (locked up tenant or increased rent).
Last week we wrote up the paperwork (cover letter with their choices, modification to current lease, and a new lease) and dropped it off in the mailbox.

They're visiting family on the Mainland ("Have you seen our tenants?") so we e-mailed the news, but no response yet.  I'm hoping to hear by the end of the month, but the worst case is that we raise the rent in August instead of in July.

A landlord friend owns a condo near Pacific Command HQ that's quite popular with military.  Their current tenants gave notice for June, but a couple days later said that his relief at PACOM would like to move in when they move out.  So he's not only turning over his job but his lodging, and our friend was able to boost the rent by 5% for a two-year lease.  Vacancy = zero.  The current tenants are so neat that we're not even sure the carpets need to be cleaned... we might get away with window washing, a good dusting, and a few dabs of paint.  We're going to enjoy these good times for as long as they last!

leaderscorp

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Re: Why would I raise the rent?
« Reply #11 on: May 14, 2013, 09:43:15 PM »
If I am renting and the rent was up suddenly for certain percentage, I would pick up my phone and call a mortgage broker to help me find a decent house to live in.

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Re: Why would I raise the rent?
« Reply #12 on: May 15, 2013, 07:37:32 AM »
You don't need to give a reason to raise the rent.  When I was a tenant, if the rent went up, it went up.  I either stayed or moved.  I didn't spend any time thinking about why the rent went up.  I guess I just assumed it went up because the landlord thought they could get more for the apartment.  That said, your letter sounds good.

tryan

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Re: Why would I raise the rent?
« Reply #13 on: May 15, 2013, 07:41:31 AM »
Nords,

As you know ... rents are NOT tied to home prices.  Wages are more the driver ... what's the competition renting for?  A quick look in the paper or CL will tell you if you're below market.

Hate to see you loose a 4 year tenant to a house up the street renting for a hundred less ... just say'n.

Hope this helps!

grantmeaname

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Re: Why would I raise the rent?
« Reply #14 on: May 15, 2013, 07:57:29 AM »
If I am renting and the rent was up suddenly for certain percentage, I would pick up my phone and call a mortgage broker to help me find a decent house to live in.
You live in a magical world without inflation?

Nords

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Re: Why would I raise the rent?
« Reply #15 on: May 15, 2013, 10:13:07 AM »
If I am renting and the rent was up suddenly for certain percentage, I would pick up my phone and call a mortgage broker to help me find a decent house to live in.
Maybe that's why we haven't heard from them yet!

As I've said, market rents are up.  The military's national rental-property-finding site, AHRN.com, lets landlords (military or civilian) put their property on the market but spouse also has a renter account (from her Reserve duty days) that lets her compare properties and rents.  There's even another home with our floorplan a few doors away that's also a rental, and we stay in touch with that landlord.

If rents were going up yet home ownership prices were going down, well, yeah, we might be reluctant to mess with that.  But the event that caused us to start checking out market rents was the open house of a truly crappy place and seller's realtors with an attitude of "I don't care, I have five offers already and I'm planning the tactics for our bidding war."  Yee-haw.

We first rented this place out from 1994-97 and again from 2000-present.  (Depending on how you classify the five years when my parents-in-law were also renting it from us.)  It's nice to have "just one" rental property whose characteristics you know very very well.
« Last Edit: May 15, 2013, 10:19:17 AM by Nords »

leaderscorp

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Re: Why would I raise the rent?
« Reply #16 on: May 16, 2013, 12:07:44 AM »
If I am renting and the rent was up suddenly for certain percentage, I would pick up my phone and call a mortgage broker to help me find a decent house to live in.
You live in a magical world without inflation?

It is not what you are thinking. My point here is that if the rent will constantly rise, then owning a house through mortgage is a better option.

arebelspy

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Re: Why would I raise the rent?
« Reply #17 on: May 16, 2013, 07:17:50 AM »
If I am renting and the rent was up suddenly for certain percentage, I would pick up my phone and call a mortgage broker to help me find a decent house to live in.
You live in a magical world without inflation?

It is not what you are thinking. My point here is that if the rent will constantly rise, then owning a house through mortgage is a better option.

Most renters don't think in those terms, or can't own for various reasons.  I'm not worried about all my renters suddenly becoming owners (and, if they wanted to, I'll owner finance and sell it to em!)
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Nords

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Re: Why would I raise the rent?
« Reply #18 on: May 16, 2013, 09:16:28 AM »
Most renters don't think in those terms, or can't own for various reasons.  I'm not worried about all my renters suddenly becoming owners (and, if they wanted to, I'll owner finance and sell it to em!)
My spouse and I moved 19 times during our military careers.  The last move was nearly 13 years ago, and this is the longest I've ever lived at one address in my entire life. 

Today the sight of a packing box makes me feel like bazooka puking.  I doubt that I could get through a rational analysis of why it would make fiscal sense to change our address again, no matter how much money we could save.

I suspect that most tenants are the same way.

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Re: Why would I raise the rent?
« Reply #19 on: May 16, 2013, 10:43:22 AM »
Nords,

I agree with your course of action.  Especially given that your renters were on a month to month (mostly to their benefit not yours) it only makes sense.  The fact that you offered less of an increase for a new annual lease is a great call.

We are renting a house in Northern VA and our original lease included a 1% rent increase each year.  Works for us.

Nords

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Re: Why would I raise the rent?
« Reply #20 on: May 19, 2013, 09:06:48 PM »
Just got their response-- they're signing the one-year lease. 

They're hoping to stay for two more years, but that's balancing Hawaii in-state college tuition rates versus an aging mother on the Mainland. 

Self-employed-swami

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Re: Why would I raise the rent?
« Reply #21 on: May 19, 2013, 10:01:48 PM »
I'm glad they got back to you.  I imagine they were just trying to decide if they wanted to stay month to month, or resign the year.

DH and I lived in an apartment that was $800/month rent, when all other, smaller apartments around us were going for $1100-1200.  We actually moved in about 6 months after rents sky-rocketed, and couldn't sign the lease fast enough.  The building mainly had seniors, and quiet younger couples (no kids building).  When our lease was up, we were sure that they would finally figure out how far behind market rent they were.  When we were done our one year lease, the landlord knocked on our door, to deliver the bad news... Rent was increasing... (I held my breath, because DH and I had discussed just how much of a rent increase we would be able to eat, before moving became the more economical option)... It was going up to $825.

They liked having low turn over, they didn't want to lose good tenants.  And they were able to rent out the unused parking stalls for $300/month for unheated, and $400 for the heated underground parkade.  The senior sisters down the hall from us, had lived in their respective apartments for 15 years, across the hall from each other. 

We only moved, because we bought.