One of the inevitable
consequences of owning rental income property is that from time to time the
landlord finds it necessary to inform tenants that their rent will be getting
raised.
The issue is not a
slam-dunk. Rent increase is a sensitive subject 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. 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 tenants want to hear.
As a result, knowing
full well how a rent increase could affect their tenants, property owners are
confronted with their own fears and concerns surrounding the financial aspects
of the decision.
The primary fear
being, of course, that otherwise good tenants might decide to move out and
leave the landlord with increased vacancies. Although this might be manageable
for properties having many units, an increased vacancy rate for properties
consisting of just a few units can be financially devastating to real estate
investors.
Fair enough.
Real estate
investors, nonetheless, are running an investment 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.
Okay, so let us
suggest some things for you to consider when rent increases are in order that
might help minimize the risk of driving out your tenants.
•
Avoid pure greed. If all you want is to produce more money from your investment
without rhyme or reason than the other suggestions might not be relative and
you may have to simply take your chances.
•
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.
•
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.
•
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
a single occupant in your two-bedroom unit to set off in search of a
one-bedroom unit.
•
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.
•
Be smart. Modest increases given over consistent intervals are more
easily understood than irregular ones that surprise and undoubtedly will
alienate your tenants.
•
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.
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