Want a better return on your rental investments?
Landlords need to understand how to tactfully and effectively raise rents, without losing their tenants. Turnovers can be costlier than a Kardashian’s wardrobe, so if you want to maximize ROI you need to minimize turnovers while keeping rents on the rise.
But no one wants to hear that their rent is going up. So how can you deliver this bad news without alienating your best tenants?
1. Raise the rent every year, even if only slightly.
Every year, like clockwork, you should raise the rent. Even if it’s only by $15-20.
Why? Isn’t that just spiteful with no real income bump?
No, it actually has nothing to do with the money. The point is to set expectations – you are reinforcing the notion that the rent goes up every year, no exceptions. Don’t worry, none of your renters will go through the hassle of moving over $15/month.
Maybe neighborhood demand is stable this year, so you’re only raising the rent to keep pace with inflation. Or maybe demand in the area has skyrocketed, and you need to boost the rent significantly to keep pace with the market. Regardless, you’re sending a message: grass is green, the sky is blue, and rent goes up every year.
2. Never raise the rent more than 10%.
No matter how much your tenants like the rental unit and get along with you, they will balk if you raise the rent by more than 10%.
Most people’s budgets can’t handle their rent going up by $400/month. If your rent is dramatically below market value, don’t just hit your tenants with a massive rent hike all at once. Raise it gradually, in manageable increments over the course of several years.
This is yet another reason to raise the rent every year: don’t put yourself and your renters in a situation where the rent is so far below market pricing it requires a huge hike.
3. Pave the way with good relations.
Long before you ever need to raise the rent, you’ll be signing the initial lease agreement with the tenants and probably contacting them by phone a few times over the course of the first year. You’ll already know their children’s names from the rental application, and you’ve probably met their children at least once.
A simple way to warm parents to you is to ask about their children by name. You don’t need to actually remember their names; just pull out the rental application before you call them and ask how Little Bobby is doing. If they moved from another school district, you can always ask how the kids are doing in the new school.
If the tenants don’t have kids, you can always ask about their job, or a quirky hobby of theirs.
Keep a few notes each time you talk to your tenants, so you can reference them the next time you call them. It will take you thirty seconds to keep and reference these notes, but even this basic level of human contact will warm your relationship with them from “This landlord just wants a rent check” to “She’s a nice woman.”
4. Deliver the news by phone, but still send a written notice.
By law, you need to send written notice of rent increases, usually 30-60 days in advance. In some states, it’s as high as 90 days’ written notice.
By the laws of common courtesy, you should deliver bad news gently, by phone. No one likes to open a piece of mail that says “Surprise! You owe me an extra $150/month starting next month.”
Be warm, polite, firm and add the slightest hint of remorse (don’t overdo this last). Explain that you know it’s bad news, but rent for the new lease period will be higher than the last. If they ask why, simply tell them the rent rises every year alongside neighborhood rents and inflation.
Tell them that you would like to keep them as tenants, and that you hope they continue to rent with you. You’re now positioned to offer them an alternative.
5. Offer a reduced rent hike, if they sign a long-term lease renewal.
“Pay more” or “leave” don’t have to be the only two options. What if you could offer a third option that allays their worries and keeps your rental unit occupied for years to come?
One option you can give them is to sign a multi-year lease agreement, and have the rent only rise by $X instead of $Y.
Or you don’t have to offer any discount on the rent hike this year, but you can offer to let them avoid next year’s rent hike by locking in this rent for two years (or even three!).
Long-term tenants are where landlords make high returns. Turnovers are expensive, between lost rent, new paint, new carpets, advertising, screening tenants, and possibly paying a leasing agent or property manager.
6. Ask tenants about desired upgrades, and consider them.
Talking to tenants about upgrades is a little tricky, because you don’t want the tenant to tie the idea of upgrades to the idea of rent hikes. Over the course of the year, ask the tenant what property upgrades would make the most difference to them, if they could wave a magic wand. If you manage a large building, consider a formal survey; if it’s just a few tenants, ask around verbally.
Consider which desired upgrades would have the biggest impact on your long-term asking rents. If you could spend $1,500 and be able to charge another $75 in rent, then in under two years that upgrade will have paid for itself. Property upgrades also incentivize tenants to renew their lease and stay long-term.
If possible, make the upgrades after raising the rent, instead of just before. You can offer it as an inducement to renew long-term: “By the way, I took to heart your suggestion of installing new countertops. I’ve put down a deposit and the workers will be coming next month.”
It’s a delicate dance, raising the rent. It takes tact, professionalism, friendliness and firmness, but if handled right, your tenants will all renew their lease agreements. Higher rents and longer-term lease contracts? A recipe for higher ROI.♦
Have any tips for raising the rent? Any bad experiences? Tenants ever chase you out with a pitchfork? We love stories… share in the Comments section below!