Many single family rental owners, especially if they have “good” renters, do not regularly raise their rents. Some fear the hassle and cost of turn-over if the residents move or might want to avoid an unpleasant conversation. However, periodic rent increases are an important factor for successful real estate investing. Your operating costs are surely rising every year, and if you don’t increase rents to keep up, your income will be going down. Since gross rent is a key component in the CAP rate calculation for the value of investment properties, you’ll also be negatively affecting your ability to refinance or sell the property. Plus, since single family renters typically stay at a property for several years, your opportunities to raise rent on turn-over is much less than on multi-family properties. Consequently, it is a good business practice to implement a reasonable rent increase annually.
Drivers Behind Rent Increases
There are a number of reasons why raising your rental rates each year is reasonable, and while maybe not welcomed by tenants, it will be understood. They include:
- Cost of living increases.Generally speaking, everything you pay for costs a little more from year to year. If you don’t charge slightly more for rent, you are essentially losing ground.
- Rising maintenance expenses.From the cost of materials to the rate you have to pay your maintenance person, it is more expensive from one year to the next to keep a rental property in good condition.
- Tax increases. The taxes you pay on your property will almost certainly go up every year. A bump in rental rate helps cover that increase.
- Property improvements.Whether you renovate a kitchen, add central air conditioning, or make some other enhancement to the property, it is reasonable to adjust the rent accordingly.
- Market competition.You can be sure your renters know what the current market rents are for comparable properties, and even if you keep your rents a bit below market, you should still keep them close.
Key Considerations for Raising the Rent
If you intend to raise the rent on a property, there are some things you should keep in mind. For example, you must be in compliance with any applicable law including how much notice, and in some areas and for Section 8 tenants, even how much you can raise rents.
Most renters will react much better to a rent increase when it includes some explanation of the above-mentioned drivers and reasons for the increase. You might even want to have a conversation and express some understanding and compassion for the renter’s perspective.
Finally, the more notice you can give a tenant of a rent increase the better. That way they can either begin budgeting for the new rate, or if they choose to leave, you will have more time to make plans and find a new tenant at full market rent.