Raising Rents

[ltsddd]

I would like to hear from the landlords on this forum on your thoughts about raising rents. After 5+ years without increasing rents, I finally raised it by about 5% last year. Even with the increase I am still renting them out for about 20% ($500) below market based on what I see on craigslist. When I raised the rents last year, some tenants just quietly accepted it and some voiced their displeasure (which I found annoying and encouraged them to not sign the renewal, but they knew better).

The question is, should I raise rents again this year? By how much? All of the tenants have been great.

[(former)FormerSanDiegan]

I think it depends on the type of units you are renting out and your normal rate of turnover.
Large complexes for example, typically raise rent every year. In times like today, I would guess 2-3% (rents have likely increased faster than this, but you should give a discount to avoid excessive turnover (and cost).

If you have a small number of units and correspondingly less turnover (or no turnover), the math might be different. I rent out a SFH and rarely increase the rent during tenancy, especially if the tenant is low-maintenance. This is because I miss 100% of my rent if someone moves. If you have 10 units and 2 people move that’s only a 20% hit for the turnover period (plus maintenance, paingint carpet, etc).

If you think you are below market, I would go ahead and do an across the board 3% increase. Most won;t move, but if you are lucky maybe one will. Get your tenants conditioned to annual increases, just like the large complexes do. I wouldn’t try to raise to market instantaneously. But if you are lucky one or two will move upon the rate increase and you can capture some upside for that unit.

[EconProf]

Why should you set rents $500 below their fair market value? Are your tenants more deserving of charity than, say, the Salvation Army?
If you are sure of that $500 number, and can document it, why not raise your rent to $100 under market? Some tenants may move out of spite, but that is fundamentally irrational, since they will incur moving costs plus likely pay more in rent.
To ease the shock, you might give tenants a three-months advance warning (assuming they are now renting month-to-month). This also gives them time to verify that your new rents are still under market levels.
You might also advise new tenants that your policy is to raise rents annually, but keep them slightly under market. That way you never get so far behind.

[ltsddd]

These rentals are 70’s east mira mesa 4/2 tract homes. The current rents are from $1900 to $2050. Similar homes (there aren’t many) are listed on CL for at least $500 more per month.

The tenants are all blue-collar kind of folks and the way I have looked at it is that they need an extra $$ more than I do (I know that’s a no-no way to think as a landlord/business). Ultimately, it’s a problem that I created by failing to raise rents for so many years and thus the big gap.

Thanks for the feedback. I wasn’t thinking of raising rents this year, was about to send out the renewals before posting here, but I think I will raise it by a small amount of $50/mo every year here on out.

[Coronita]

[quote=ltsdd]These rentals are 70’s east mira mesa 4/2 tract homes. The current rents are from $1900 to $2050. Similar homes (there aren’t many) are listed on CL for at least $500 more per month.

The tenants are all blue-collar kind of folks and the way I have looked at it is that they need an extra $$ more than I do (I know that’s a no-no way to think as a landlord/business). Ultimately, it’s a problem that I created by failing to raise rents for so many years and thus the big gap.

Thanks for the feedback. I wasn’t thinking of raising rents this year, was about to send out the renewals before posting here, but I think I will raise it by a small amount of $50/mo every year here on out.[/quote]

Here’s my take on this….If you’re going to raise rents, you might as well raise it by a bigger amount say $200/month versus $50.

Regardless of whether you raise rents by $50 or $200, tenants aren’t going to be happy either way. They are going to be mad, they are going to want to move..even the ones that don’t outwardly complain… (imagine if you were in their shoes, you would probably react the same way). So since the amount of hassle/complaining you’re going to hear and have to bear is going to be roughly the same regardless of whether it’s $50 or $200, so you might as well raise it by a bigger amount anyway.

That way, you have a lot more room for negotiation. For example, say you raise rents by $200/month….They will most likely be unhappy, and you can remind them it’s still $300 below market….And they might still be unhappy…Then you can say, well even though at +$200/month, it’s still a great deal, I’ll give you a break and only raise it by $100/month since you’ve been such a good tenant and as long as you promise to continue being a good tenant…..And you can give them a sob story about how your operating costs are going up. Your property tax is going up, etc,etc,etc.

Leave the table making them feel they won something, even though fundamentally you still come out ahead…(Damn, I’ve been car shopping way too long…)

[flyer]

With our SFH’s and multi-family units, we pretty much conform to the going rates (or slightly lower) in the various areas at any given time, and we let our tenants know these increases or, unlikely, decreases will be evaluated on an annual or other basis (depending on the original terms) from the beginning, so there are no surprises going forward.

[Balboa]

[quote=ltsdd]
The tenants are all blue-collar kind of folks and the way I have looked at it is that they need an extra $$ more than I do (I know that’s a no-no way to think as a landlord/business). [/quote]

Systemic rejection of that “no no way” by white collar folks has done a tremendous amount of damage in the world, not least to blue collar folks. That you are thinking about this carefully suggests you’ll find a good balance for yourself and your tenants.

That said, if your interest is maximizing the value of the property, you should follow and disclose a policy of rental rates that follow the market. I advise against saying this is to “cover the increased cost of living,” though. My last landlord gave that line and I found it wildly insulting. Dude, *you* are increasing the cost of living! At double the inflation rate for housing! Every year! And my heater is busted!

Be honest and tell them you want a boat. 🙂

[FlyerInHi]

The 1970s Mira Mesa houses can be remodeled to be Eichler-ish houses and rented to tech employees who lived in Bay Area and are familiar with those types of houses. With an eye to good design, you can charge more than market, but you have to spend some money to get there.

[livinincali]

If you raise rent enough to get a long term tenant to move you’re probably looking at 2 to 3 years before you break even at the higher rent value. It’s almost certain that you’re going to go at least a month without collecting rent and you’re also looking at some deferred maintenance costs (carpet, paint, old appliances, etc). Ideally you want the tenant to stay but pay a higher rent value. It’s really tough to say what too much is in that scenario. Certainly as you approach true market rent the tenants are more and more likely to look at what’s available. If they find something shiny and new for roughly the same price they might elect to leave.

[TeCKis300]

If you’re truly $500, your tenants are probably wondering why you aren’t raising rents.

No reason you shouldn’t raise the rent. Also, be ready to support your position to help them understand that you are not taking advantage of them, and that your price is still more than fair.

You property taxes, insurance, etc…aren’t getting any cheaper either.

[pluto]

I would not tempt him that much to raise rents. Considering that he is charging 2K and could get 2.5K. At 2.5 the renter could afford an average home here and no longer become a renter. At those prices its difficult to raise quickly because the renter that could afford the rent can also afford to buy or rent somewhere else. Its best to check and compare amenities and services first with other places and raise accordingly for those. On the other hand finding good tenants may be worth giving a slight discount. Its good advice to have in the lease that the should expect rent to rise annually but is limited by something and to give a good lead time on when the rent will be raised 3-6 months seems good enough for most.

[sdsurfer]

You could always raise the rents to just a hair below the market rate, but offer a 2 year lease in exchange for the renewal. Play with the terms a bit so it’s a win win, but when you say “again” I wonder if you might want to give it a little time before you do.

If you feel like doing them a favor for some reason or the properties need a lot of work maybe you raise the rents, but spend a couple bucks on items that need attention so the tenants see something from the increase. I know I’ve been in situations in the past where new carpet might have encouraged me to stay a bit longer even if the rent went up a little.

From a vacancy standpoint I’d say whatever you do you might want to do it in the early summer if possible when more people are out looking in case you lose a tenant. We always have better luck finding tenants quickly in the summer.

[Escoguy]

I was a few hundred below market on two SFHs last year.

Tenants had been there 3 years and decided to buy.

Was able to go up about $350 on average on each.

Needed to spend $3000 on one and about $6000 on other to get everything perfect. But expect tenants to stay longer.

Long story short, if you’re undercharging rent, you’re probably also deferring maintenance and other normal upgrades. It’s best to get closer to the market and also do what is necessary to keep the property in top shape. San Diego is more and more a premium market (even at the low end).

With new tenants paying more, more demands were made but overall the situation is much better.

Keep in mind, rents could go down in a few years if many go away for reasons yet to be seen. Not likely but possible.

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