In Colorado we have seen a huge increase in house prices and a huge increase in rents for investment properties. I have owned rental properties since 2010 and many of my 14 rentals have seen the rents increase significantly the last few years. When tenants move out it is easy to raise the rents for new tenants moving in, but when you have long-term tenants should you raise the rent on them when market rents increase? If you do raise the rents, should you raise them to market level or less to make sure you keep your long-term tenants?
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How important is it that you keep your long-term tenants?
All of my rental properties are single family homes, except for one duplex I own. I love single family homes as rental properties for many reasons, but one huge advantage is the tenants tend to stay longer than on multifamily rentals. On about half of my rentals I have tenants that have been there longer than one year. I know some of my rentals are rented below market level.
Although many of my rentals are under-rented I do not raise the rent on my tenants as soon as it is time to renew their lease. I think one of the hardest parts of owning rental properties is finding great tenants who pay on time. If you have great tenants who pay on time and take care of a property you want to keep them. The question is how much rent do you sacrifice to keep good tenants?
How do you determine what market rents are?
Before you worry about if you should raise the rent on your rental properties you need to know if they are under-rented. I wrote an article here that describes how to determine the market rent using Craigslist and other sources. In my area rents have increased a lot in the last four years. I rented my first rental property for $1,050 back in 2011 and it is rented for $1,300 now, but I could probably get even higher rent at this time. Houses that were renting for $1,300 a month a year or two ago are now renting for $1,500 a month this year. A great website to use for determining market rents is RentRange, which I did a review on here.
How much are you losing if your houses are under-rented?
If you have houses that are under-rented $100, $200 or $300 a month, how much are you actually losing? You are not losing all of that money, because you might lose some tenants if you raise the rent on them. When you lose tenants it will take time and some money to rent a property again. How much you lose when you have to find a new tenant will depend on if you use a property manager, how long it takes to rent properties in your area, how much you spend on advertising and if you have to make any repairs to a house after the current tenants move out.
- If your house rents for $1,300 a month and it takes one month to rent it out you lost $1,300.
- If you manage that house yourself you have to spend hours on finding tenants and marketing. If your time is worth $50 an hour than you are losing a couple hundred dollars.
- If you use a property manager they may charge a leasing fee.
- If your tenants move out and leave the home a mess, you can deduct money from their deposit, but that creates more hassle and takes more time.
While you may make a couple thousand dollars more a year by raising the rent, if you lose the tenant you might not make anymore money than if you kept them. But, if you keep the tenant than you are ahead of the game.
To avoid tenant problems proper screening is vitally important and we now use SmartMove for credit and background checks.
How do you raise the rents on tenants and get them to stay in the property?
There are a lot of risks involved with raising the rent on tenants. If you have a good tenant and they leave, you may not get such a good tenant the next time. If they don’t pay their rent on time or cause other problems than the tenant could negate any monetary gain you were hoping for. However, if you have tenants for an extended period of time, you cannot leave their rent well below the market forever.
When you raise rents there are a few things you can do to try to keep the tenants in place.
- Do not raise the rents the most you possibly can. If the market will allow rents to be $300 higher than raise rents $150 or $200. Many tenants live paycheck to paycheck and cannot afford huge increases.
- Use data like RentRange or other sources to show what market rents are and that you are not screwing the tenants over, but actually giving them a break.
- Give the tenants plenty of warning and talk with them about your plans. You don’t want to spring something on them at the last-minute and piss them off.
- In some cases it may not be worth raising rents or you might want to try raising them in small increments like $50.
Am I raising rents on any of my tenants?
I have been lucky that many of my houses that were grossly under-rented had tenants move out on their own. I have raised rents slightly on a couple of properties and both times the tenants stayed. The houses are still below market rent, but I think the benefits of keeping good tenants outweighs the extra money I could be getting. If I have bad tenants who are a continuous pain, I have no problem raising the rent on them.
For more information on how to buy the best rentals, which will make the most money, check out my book: Build a Rental Property Empire: The no-nonsense book on finding deals, financing the right way, and managing wisely. The book is 374 pages long, comes in paperback or as an eBook and is an Amazon best seller.