Tip #8
Don’t Always Raise the Rent
Written on August 28, 2012 by Lucas Hall, updated on July 11, 2014
Raising the rent should be a standard practice when a lease is up for renewal with the current tenants or when you have a turnover of tenants.
I try to raise the rent 2-4%. However, it’s also a very influential bargaining chip, and should be played appropriately.
When you have a stellar tenant (one that pays on time and maintains your property), you should try your best to get him/her to renew the lease. A quality tenant is far greater than a 3% raise in rent. Eventually, they will inevitability leave, and you will always be able to raise the rent for the next tenant.
Topics: Landlord Tips, Rent & Expenses
About Lucas Hall
Lucas is the Chief Landlordologist at Cozy. He has been a successful landlord for over 10 years, with dozens of happy tenants and a profitable income property portfolio.
Read more about Lucas's story.
19 Comments
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Omar
I agree 100%! In fact I usually never raise the rent on my tenants unless there is a major cost issue. The reality is that a change in tenant can easy cost you 2-3 months rent (on a good day) and 6 months if they decide to trash the place. As Lucas mentioned, most tenants will leave at sometime anyway so if you can keep them another year, its a huge savings.
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Lucas Hall
Thanks for your feedback Omar. I’m glad to see I’m not the only one who usually only raises the rent between tenants. I’ll reconsider my policy if I ever have a tenant stay longer than 2 or 3 years, but so far, a 3 year tenancy is my record.
Brian
I am new into this landlording adventure and have learned a lot just by reading. My day job is purchasing for a large railroad and know the value of “quantity breaks.” I offer a property for $975.00 p/month for a 1-year or $950.oo p/month for a 2- year lease. I signed my third tenant ever to a 5-year lease and put granite in for him. It imporves the value and rentability of my property and he’s there for 5-years at $950.00. I try to offer something that will stay with the unit and make it appraise for more. Just my thoughts.
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Lucas Hall
Brian! I love it!
The tenant feels like they are getting “granite countertops”, which they will indeed be able to enjoy – but in the end, it’s really a gift to yourself.
1. Your house will appraise higher – more equity
2. Your tenant will be happier and might stay longer
3. The next time you go to re-lease the unit, it will have nicer finishes and therefore attract a higher paying tenant.
Genius!-
Omar Garcia
Its like buying lingerie for your wife or girlfriend. They think it is for them, but it is really for you!
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Lucas Hall
So True!!!
krupal
what are the typical profit margin that we should keep to balance rent in Toronto Ontario. After deducting the expenses, utilities & interest paid on mortgage from the rental income what percentage of profit margin should we be looking at.
Lucas Hall
Hi Krupal,
Possible profit margin on monthly rent depends on so many factors. I have 2 roommate houses, and their annual profit is about 10% of the total rent collected, after everything is paid and repaired. Other units that I have, like a little 338sq ft condo has zero profit (well, I actually think I made $3 last year, after expenses and depreciation).
It all comes down to location, quality, and type of use. My general rule of thumb for high density, high priced areas is:
60-70% – Mortgage – PITI
20-30% – Repairs
10% – Vacancy or Profit.It’s a rough gauge, but i hope it helps. As you can see, if you reduce vacancy, you profit will rise too.
Suzanne
Lucas, what about raising the rent when rents have increased significantly in the last two years? My tenant is 18 months into a 2 year lease and pays easily 10% below market price. I gave her a $50 break per month for signing a 2 year lease. She hasn’t been the best about paying on time although has always paid the late fee and I seem to have to remind her frequently to pay her water bill, as it is a lienable item here. Other than that she is a decent tenant.
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Lucas Hall
Hi Suzanne,
In my opinion, a tenant who is late with rent more than once, and forgets to pay the water bill, is not an “A+” tenant. That sounds more like a C+ tenant, at best.
If she were my tenant, I would raise her rent at the end of her 2 year lease.
I would first do my research on Craigslist to determine the realistic market rate, and then raise the rent to match – or as high as I could allowable by my state laws. Some states have limits on the amount you can raise the rent, or the amount of notice required before raising the rent. http://www.landlordology.com/state-laws
I only opt not to raise the rent when I have A+ tenants, and I would like to have them stay. Not raising the rent is an incredible bargaining chip during a lease renewal.
If you offer her a new lease with an increased rent, be prepared for the possibility that she might leave. So, be sure to offer the new lease within 60 days prior to the end of the lease, so that if she declines, you’ll have plenty of time to find another tenant.
Mars
I live in LA in an apartment building for many years, how many times a year can rent be raised? They’ve done it twice already
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Lucas Hall
Hi Mars,
Check out the information on the California Landlord-Tenant Law page.
http://www.landlordology.com/california-landlord-tenant-laws/Generally speaking, rent can be raised every time the lease is up for renewal. If you have a month-to-month, then the rent could be raised every month.
LA may have other rules in addition to the state statutes. Check with your local housing authority.
Julie Berris
I recently inherited (from my father) a property that is paid off. Tenant has been there 17 years. Unfortunately (for me) my father did not do much maintenance on the house. Tenant doesn’t seem to mind (a single middle aged male). I believe his rent is too low. He’s a “C” tenant in that the rent is always late.
I have to put on a new roof and re-pipe the gas. I’d like to raise his rent, am thinking of 10%. However, if he were to leave I’d have to make many more improvements before marketing the property. My plan now is to chip away at the projects every few months.
Wondering if I’d asking for trouble by raising the rent (I had a verbal discussion with tenant, and he put up a lot of resistance).
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PDX Gal
Don’t hesitate to raise the rent. You need to make sure you have enough for the deferred maintenance. If the current tenant moves out you’ll probably be better off by being able to find a better tenant.
Miguel A Rivera
I really like the information. I also have some rental properties. Looking to sale one of the rental properties now. Hopping to do a 1031 exchange.
PDX Gal
Only potential problem with not raising the rent enough is that if the tenants stay a long time you can end up waaay under market, which is not good. This is especially the case in markets like the SF Bay Area. And then if rent control is imposed you’re scr***d.
Nelly Burns
We have two rentals and I have raised the rent on one tenant after 4 years even though they are a good tenant but the area had major rent increases. I did 3% increase on $1300. So I charged $40 dollars a month more. I told my friend who also has rentals this and he was surprised that I charged that much. This is a 3% increase correct? He said he did it by yearly rent but I don’t know what he meant.
joe schmoe
I’ve had the same tenant for 13 years. Never a late payment. I have not been paying attention, and the market rate has increased significantly. Too much to ignore, so in one harsh blow, I served a notice of rent increase, 47%. I didnt need to raise rent for costs. It was slightly higher than market at the beginning. I’m sure after 13 years it would probably be best if the tenant moved out so I can do some upgrading and get a happy new tenant instead of keeping an old bitter one.
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Rene
Hi Joe, sounds unfair in this instance. Imo it’s fine to raise the rent by 2-5% on a good tenant, but 47%? ‘Market rate’ doesn’t mean your apartment was worth that much, especially if it’s been a long time since you made any improvements. There won’t be many people at your funeral if you interact with people with this kind of worldview. Greed is destroying the world.
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