Raising Rents

by Mr. Cheap

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My tenants are coming off of the end of their first year’s lease, and happily they’re going to stay. Landlords always have strong opinions on the subject of rent increases (and rent decreases – most are dangerously, stupidly opposed to them).

One school of thought is that property is an investment, and in order to maximize the investment you need to always be charging the maximum rent. John T. Reed discusses this in “How to Manage Residential Property for Maximum Cash Flow and Resale Value” and makes a very good case that you should always be charging the maximum possible rent. For multi-unit properties, his view is that if you have less than a 5% vacancy rate you’re leaving money on the table. His points include the ideas that:

  • Current tenants can become problem tenants as easily as new tenants could
  • New tenants might be LESS troublesome then current tenants, there are a lot of good people out there in the world, there’s no reason why they’ll be worse then what you currently have
  • Getting top rental dollar is necessary for justifying a high property value
  • If you aren’t raising rents and moving in new tenants often you’ll have no idea what the market rate actual *IS*

The counter-argument is simply that good tenants are gold and you shouldn’t give them a reason to leave. One place I was living raised my rent from $650 to $700 and I promptly gave notice (there were a bunch of reasons I wanted to move, this was just “the straw that broke the camels back”). The place sat empty for 2 months until they could find another tenant (losing them $1300 – it’d take over two years at the increased rental price to make up for this loss). Once a landlord is covering his expenses, PITA factors (“pain in the ass”) become more annoying and it becomes easier to accept less money if people don’t bug you.

So what did Mr. Cheap do? I left my tenants’ rent as it was. I promised them when they moved in that if they didn’t call me for minor issues (such as changing light-bulbs), I wouldn’t raise their rent. I’ve been delighted with them as tenants (no bounced checks, no problems). I like to joke with my father that the hardest part of renting out my condo is walking to the bank to cash the check each month. So even though my condo fees have gone up, and inflation means I’m earning less each month from their rent, I don’t need potential aggravation from new tenants while I’m applying for my PhD (if I raised my rent and the current tenants moved out).

Hey, what can I say? I’m Mr. Cheap, not Mr. Greedy!

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{ 6 comments… read them below or add one }

1 Four Pillars

Sounds like you made a good choice! (not that I know anything about it!).

Mike

2 MillionDollarJourney

Yes, I do the same thing for my tenants. If they are long term tenants, rents will remain the same for as long as they stay.

3 squawkfox

I am a renter. I’ve lived in the same suite for 5 years without a rent increase. I suppose my landlady keeps my rent “as is” cause I am awesome (smile). Perhaps this is a good business decision for her given her mortgage is paid-off, and she would just rather have good dependable tenants than risk her suite sitting empty for top dollar tenants. Either way, I’m happy to keep her place stunning while paying my normal rent. Ohh, and she replaced all the windows in my suite too…which I found rather nice of her. Now I pay even less in heating costs.

4 Mr. Cheap

Squawkfox: Sounds good! I’d love if my tenants were paying the costs that tend to increase (like you do heat), then they’d already be covering the increasing costs and I wouldn’t have any need to raise their rent.

Sadly, I couldn’t really trust any tenant to pay my property taxes and condo fees, so I’ll have to roll these into the rent (and eventually increase it when the Toronto market allows).

5 Slim

No rent increases for positive cash flow properties with good tenants in areas where rent is stable.

Rent increases for marginal PCF, marginal tenants or where rentals are desirable.

But only if it’s something significant (rents are around $1300 for a small duplex here, LOTS of free cash flow, so no need to ‘rock the boat’). And our other property it’s $2300 (cha ching) for a 2 bedroom appt.

6 Michelle

I hate how housing can be used as a way for some company to get rich. I am not about to live in a dump to afford housing either. In this recession I think landlords need to lower rents and keep them reasonable.
Rents really need to be based off of 30% of a person’s income. This to me seems like a great forumala because the people who make more money will pay more in rent to make up for those who pay less.
I am in a situation again; as I am every year where my rent will go up and I will have to move. I have decided I wanted to get a 2 bedroom so I have the flexiblity of a room mate later if needed. Unforunatley even most decent one bedrooms are over my price range. I am freaking out.
I may have to pay $600/month for a one bedroom apartment in missouri.
Don’t landlords every think of full time college students who are over 21? Full time college students can’t live in low income apartments. There is a very absurd IRS tax law that does not allow full time college students to get into affordable housing.
This makes me so sick when my rent burden increases every year yet I am making the same. I pay out 70% of my income to rent. Why does this happen in the USA without co-signer I would be a homeless. It is not like I am asking for a million dollars just a decent affordable place to live.

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