Should You Raise Rents on Good Tenants?

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?

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?

Here is a great article on why I like single family rentals over multifamily.

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.

  1. 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.
  2. 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.
  3. 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.
  4. 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.

14 thoughts on “Should You Raise Rents on Good Tenants?”

  1. Perfect article Mark. I am in this exact situation. My tenants are awesome and have been renting for 5 years now. I recently had to replace the roof due to water damage and considered raising rent but decided not to as in my opinion, its just not worth it to risk pissing the tenants off and risking them move out. Thank you again for the article. It was exactly what I needed to know!

  2. Good article. I’m also in the No. Colorado market where it is difficult Not to have your investment properties under rented, especially in the last 2 yrs. Lately when I do find properties that meet my criteria that are currently leased I am amazed at the amount of the under rented as compared to the existing market. It seems some rental property investors have such fear of losing a “good” tenant they apparently never increase the rent. Sometimes tenant turnover is an opportunity and not something to be feared, My philosophy is to be relevant to the existing market. Not the highest possible you can get but in the mid -upper point of existing market rents. Property management means delivering results., even for your own properties.

    • Hi Earl, I agree. When I say under rented on my properties they may be $100 or $200 under rent, but not $500 under which some are around here.

  3. Rents in my area have never gone up that much that quickly. Maybe $25-$50 in a year. It is a no brainier if you have good tenants. Problem tenants are another story.

    I have have had more luck with single family rentals than I did when I had 2-family rentals. This past year I am finding that some of my tenants are starting to considering buying their own place. For the past 6-8 years, several of my tenants were previous homeowners that lost their place due to the economy. I had pretty good luck with them, because they seem to have homeowner mentality vs. renter mentality. I had one pay a full years rent up front in cash to show that he would be a good tenant. He is still renting from me today 6 years later.

    Keep the information coming!

    • I have seen the same thing! We had a renter pay a full year upfront as well. Since I am an agent I can also sell those tenants a house which we have done as well.

  4. Mark,

    You are spot on with your analysis. It’s really all a numbers game and doing proper analysis of your numbers makes all of the difference in the world.

    I want to raise rents every year. I think small, incremental increases in rents are easiest for my residents to respond to. That said, I also have a policy where I like to credit my residence for maintaining their residence with me.

    My typical increase is going to be 2-3% per year. Usually $10-20/month. But a renewal by a good resident might have zero increase. And I’ll give them an addendum to their lease that says as much. “Rents for this property are currently at $620/month. Because of your good standing and residency length, your rent will stay at $600/mo”

  5. I raise it but not quite to market, so if they look they will see I am still a deal and they don’t need to deal with the hassles of moving.

    Never had someone move over rent increases so far, it’s always due to other factors like a breakup, getting married, took a job out of state, etc.

  6. Great points Mark!

    I often struggle with the idea of raising the rent on a number of my properties with long term tenants, but after going through all the same points you bring it up, I usually don’t. One month of no rent is significant for only being able to raise rents 1.6% (2015 regulations in my area of investing).

    Keep up the great articles!
    Thomas

  7. I really appreciate your post. I am struggling with raising a tenants rent (about $250 under market). I will follow your suggestion, Mark, and raise it by $50 but communicate well in advance. They are terrific tenants but will certainly understand my increase in operating costs, the current rental market, and the safe, clean, affordable housing they now enjoy.

    • Thanks Kim, At some point you have to raise it. Like you said with increasing values comes higher taxes and other expenses.

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