There are many reasons why raising the rent every year is the best thing for you and your property. Unfortunately, for whatever reason, owners are often hesitant to raise the rent especially for those who are "good tenants". There are three significant reasons why raising the rent is a great idea.
1. Inflation, cost of living and taxes. Inflation is a rise in the price level of an economy over a period of time. The inflation rate increases generally about 2.5% a year. Sometimes less sometimes more. Taxes also go about usually around the same rate as inflation. If the rent is continually the same, that is more money out of your pocket.
2. Appraisal, selling or refinancing. Investment properties often rely on the capitalization rate which is net operating income and current market value. The cap rate is lower when rents are undervalued. If you are selling your property, the rents should be in line with the market otherwise buyers would have to either raise the rent or get new tenants. Even if you are not interested in selling, with the mortgage rates being so low, refinancing is a viable option. Your home will not be worth as much if the rents are low.
3. Cost of maintenance, improvements and neighborhood modifications. As inflation rises, the cost of labor and supplies also go up. Over time, wear and tear will happen and you will need to replace or upgrade. This can be absorbed by having the rents be at market rate.
Oftentimes owners are tied to the fear of losing a good tenant or that the tenant will move out. Moving is expensive. Tenants usually need three months of rent to move and this doesn't include the expense of renting a truck etc. Not to mention, more than likely the tenant is moving into a place that is just as expensive or more expensive then where they are now. Allow your property manager to negotiate on your behalf. You can always finagle a lower rental raise but you close the door completely when you do not increase the rent at all. Not to mention tenants generally expect to receive a rent increase between 3-5% a year. The key is to communicate, explain, sympathize and ultimately you can also compare the rents in the area.
Yes, there are always exceptions to every rule. Maybe your property had a lot of maintenance issues or the entire economy is down. Having the mindset to increase the rent every year is the best way to protect your investment while still keeping quality tenants in your property. It's all in the execution which is one of the main reasons to have a property management company take care of these details on your behalf. Now at the next lease renewal, are you going to raise the rent?
Elisha Heebner is the Assistant Director of Rental Services and property manager of Del Val Realty and Property Management. Elisha specializes in property management as many homeowners today need a competent, caring person to handle these affairs for them. Professionally, it is her duty to provide services to her clients with integrity, competence, and confidentiality.