How to Raise Rents and Not Drive Out Your Tenants
One of the inevitable consequences of owning rental income property practically dictates that every landlord, at one time or another, will find it necessary to inform tenants that their rent will be getting raised.
Rent increase is a sensitive subject, however, that greatly impacts real estate owners and tenants alike for their own set of reasons.
The tenant, of course, is not going to be pleased that they will have to pay more to continue occupying the unit for various reasons. Perhaps they can't afford to pay more; or maybe it means having to do away with some simple pleasures or other goods and services. Whatever, a rent increase is never what any tenant wants to hear from their landlord.
Likewise, knowing full well how a rent increase could adversly affect their tenants, rental property owners are confronted with their own fear that otherwise good tenants might decide to move out because of the increase and leave the landlord with unwanted vacancies; which, of course, can be financially devastating for real estate investors who own rental properties consisting of just a few units.
Okay, but real estate investing is a business that totally relies upon rental income and sometimes having to raise rents is the only way to make it profitable – or at least profitable enough. So let me suggest some things that might help minimize the risk of driving out your tenants when rent increases are in order.
1. Avoid Pure Greed
If your only motive is to produce more money from your real estate investment without any rhyme or reason than you clearly run the risk that your tenants will bulk and vacate your building in pursuit of a more "benevolent" landlord. This, of course, can lead to multiple vacancies that can take a real bite out of your cash flow—especially if those units remain vacant over a period of time. So try to harness your greed and opt to raise rents only when the market supports it.
2. Understand Your Market
If your market area is generally saturated with other rentals than you might suffer a huge turnover of tenants due to a high supply-to-demand ratio. If supply is scarce, than the opposite is true and you might not suffer any turnover. The idea is for you to know what the local supply and demand ratios are for your type of complex.
3. Know Your Property
How do your rental property's location, condition and amenities measure up to other rentals in and around the area? Tenants are less willing to endure the stress and cost of relocating over a nominal rent increase when you provide desirable features compared to other properties.
4. Know Your Tenants
How does your property's unit size measure up to tenant needs? For instance, your rent increase could motivate an accountant with several assistants occupying your small office space to relocate to a larger space; or perhaps a single occupant in your two-bedroom unit to set off in search of a one-bedroom unit.
5. Watch Your Competition
If similar-type units are available just around the corner for less rent than you're proposing, chances are good that you'll lose tenants. If your rents are reasonably in line, than probably not.
6. Be Smart
Modest increases given over consistent intervals are more easily understood than irregular ones that surprise and undoubtedly will alienate your tenants.
7. Offer a Trade Off
Perhaps a month-to-month tenant would be willing to sign a lease to get a rent that reflects less of a increase than otherwise proposed. This allows you to bump up your rental income somewhat and at the same time guarantees that you'll have an occupied unit during the term of the lease.
Rule of Thumb
Real estate investors will always run some risk when proposing rent increases because tenant expectations vary, circumstances vary, market conditions vary, and certainly personalities vary. Nonetheless, when the investor does his or her homework and then proposes an increase that has reasonable grounds, chances are good that the fallout will be minimal.
Here's to your real estate investing success.