As owners of investment property we continuously look for ways to cover our expenses. As the cost of maintenance, utilities and taxes rise, we need to find ways to offset those increases.
The Answer is Always to Raise The Rent, But by How Much?
Most importantly, you have to understand your marketplace. Are the rents in your marketplace going up or going down?
There are a few ways to investigate this question, but I recommend researching competitive properties and listing the results on a market survey chart. If possible, it is always better to compare apples to apples rather than apples to oranges so be sure to select properties that most resemble yours.
For example, if you have a 50-year-old house, you need to find a 50-year-old house to compare it to. Location is important as well. You should attempt to find a similar property within a 1 mile radius of your rental to make your information more accurate. If your rental house has been renovated and you are comparing it to one that has not been renovated then you need to make adjustments to your model and make a dollar adjustment for the renovation in your market survey. The same kind or adjustments need to be made for apartments or commercial rentals.
I have drafted a sample market survey chart for an apartment property below:
|# of Units|
|Age of Complex|
|1 Bedroom Rent|
|FEES & DEPOSITS|
|Pet Deposit/ Pet Fees|
|OTHER COST INFO:|
|Move in Rental Special?|
|Utility Costs: billed directly to tenants & included in the rent|
|Free Covered Parking|
|Washer & Dryer|
|Other relevant notes:|
What Do I Do With This Information?
Since you have picked similar properties, you can use the information to adjust your rents to your tenants. You could increase rent, put utility charges in place, charge pet rent or adopt a new charge that one of your competitors has put in place. (For example, 10 years ago virtually no one charged pet rent. Today this cost has become relevant, especially as more and more landlords allow tenants to have pets.)
As you evaluate your potential rent increases you should also take occupancy rates and tenant demographics into consideration. You might find that properties in your area have a high vacancy rate and there is no room to increase rents. You also might find that if you raise your rents too high you will lose good tenants that just don’t have any way to manage the rent increase because their pay has not increased. Most tenants can handle a 3-5% increase, but if you increase their rents by 20% they might have to move.
As a landlord, you also need to consider the cost of turning your units as part of the equation for increasing rents. It is not unlikely that you could spend $500 to $1,000 for a normal tenant turn and $2,000-$5,000 for the total renovation of a two bedroom apartment property. A $100 monthly increase in rent could justify a tenant turn – with costs up to $1,000, but with costs of $5,000 to fully renovate/update a unit, you will need to be aiming at a rent increase of closer to $250 a month.
Don’t be Afraid to Increase Rent
Reviewing your rents on an annual basis is necessary to keep up with the cash expenses and maintain the value of your property. This means that you need to be committed to annual increases as well. However, be very careful if the marketplace is soft. Remember that real estate investing is cyclical, in some years the rents are strong and in some they are weak. It all depends on the marketplace supply and demand. Apartment developers will keep building until they run into a lack of demand. Bankers will keep lending until they recognize the marketplace is overbuilt.
As long as you stay educated and track the marketplace you will make the right decisions on rent and fee increases.
[Editor’s Note: If your building falls under the jurisdiction of city rent control, you are limited to raising your rents the allowable amount once each year.]
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company.. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).