When should you increase your rent?
Waiting too long to increase the rent on your property can cause you to lose money in more ways than one.
Blogger: Michael Gilbert, co-founder and director, Rent My Estate
The purpose of investing in real estate in the first place is to make money. Increasing the rent will help keep your cash flow steady from month to month and help to increase the value of your property. However, if you increase your rent the wrong way, you may offend your tenants to the point that you will find yourself dealing with a vacant property, and that is not a money maker.
The price of everything goes up, it is a fact of life that your tenants should understand and accept, even if it doesn’t make them completely happy. When they stop for a litre of milk on the way home from work, they will grumble if they find a few pennies tacked onto the price, but they will buy the milk. If the price suddenly jumps by 20%, they may suddenly become lactose intolerant.
“I Don’t do Surprises”
Tenants are not happy with surprises. If your tenants have been living in your property for three years and have never seen a rent increase, a sudden 10% increase is going to put too much of a strain on their budget and force them to consider their options - like moving out.
However, those same tenants would probably be able to cope if they saw the rent increase by 2-4% each year. Since it is a reasonable and consistent increase, they will expect it when they are figuring their household expenses.
Some property owners avoid rent increases out of fear of losing tenants. If your rent increases are consistent and reasonable, this should not be a problem. However, if your tenant finds a better deal they will probably give notice and you will have to deal with the trouble and expense of finding new tenants.
Check the Market First
Before implementing a rent increase, even one which is expected, take some time to see what your local market is doing. If you find a number of properties in your area which are similar to yours but they are renting for less, it may not be a good time to increase your rent.
As a rule of thumb, I try to keep my rent increases slightly below the current rate in my area; not so much that I’m undercutting the market, but enough so that my tenants see that they are getting fair value for money. I find that when tenants get a good deal, they look after the house better and stay longer. This puts more money in my pocket over the long term.
The Rent Increase Cycle
When tenants first move into my property, I like to offer them a one year fixed term lease. I will put a reminder on my calendar to get in contact with the tenants 75 days prior to the end of the fixed term so that I can offer them another lease, with a small rent increase I have decided upon after looking at current rentals on the market.
Once I have started this cycle, the tenants generally expect it. This also gives me a chance to see if the tenants have any plans on moving out well in advance of the lease expiration. If so, I can start preparing to find new tenants nice and early.
Be Prepared to Negotiate
Some tenants will see red at the first mention of a potential rent increase, simply because they’re not used to the idea or genuinely think its unfair. If this happens, I am always prepared to negotiate with good tenants so that we can arrive at a WIN-WIN solution.
To avoid the trouble and expense of finding new tenants, I am usually prepared to offer a two year lease with a smaller increase. I know that I will have consistent rent coming in, and they know that they will not have to worry about a rent increase for at least two years; WIN-WIN.
One Last Tip
Even with a rent increase, tenants are more likely to stay in a property if they feel that the property owner is taking care of them and looking out for their interests. The best way to show this is to be responsive to maintenance issues. So next time you get a call complaining about the hot water, don’t delay, organise a repair today!
Have you tried increasing your rent in smaller amounts and more often, like every 6 months? How did that work for you?
About Michael Gilbert
Michael is the Co-Founder and Director of Rent My Estate, one of Australia’s leading online property management services. With Rent My Estate, property owners can advertise, find tenants and manage their properties without having to use a conventional real estate agent.
Since he started as a real estate agent nine years ago, Michael has been examining the property management process in Australia and finding ways to improve it. His goal is to make property management a simple, stream-lined process with Rent My Estate.
As a nationally licensed real estate agent, Michael relishes the task of helping his clients with all kinds of real estate issues. He blogs regularly at Rent My Estate to share property management tips and strategies which are important but sometimes overlooked by owners.
