With inflation so hot right now, should landlords raise their rents faster than usual?
Deni and Brian walk through what you need to know about raising rents during high inflation.
Audio Podcast Version
Also available on iTunes, Stitcher, and wherever else you listen 🙂
Resources Mentioned in This Podcast & Video:
Brian: Hey, guys. Happy Tuesday.
Deni: Hi, everyone. How are you doing today? You know, we’re so used to a countdown, and this new software that we use for this stream doesn’t have a countdown, so I wait for it, and then all of a sudden, you’re live.
Brian: So, Brian Davis and Dennis Sippy here, founders of Spark Rental. Every Tuesday, we hop on here live with you guys and talk to you some real estate investing topics, financial independence topics, early retirement topics, you know, personal finance stuff. So last week we talked all about actually last week we interviewed the Wilsons.
Deni: Yeah, that was really cool.
Brian: Yeah. So, Erin Wilson, retired at 35 and a few years ago, and then Greg Wilson just retired a couple of months ago at age 42 to mostly to spend more time with their three young kids. So, it was really fun talking.
Deni: To them when they have a set of twins and another one.
Brian: Yeah, yeah. They’ve got three kids under the age of five, which is Betty.
Deni: Yeah, I remember those days.
Brian: But yeah, so we talked about how they did that with a mix of rental properties and buying an online business and of course regular stock investments. So anyway, it was a super fun conversation. If you missed it, we highly recommend you go back and listen to that podcast episode. Deni, what’s up for today?
Deni: Today we are going to talk about and it’s a hot topic, I’ve noticed it in various social media platforms about typical rent increases versus the crazy inflation that’s going on right now. So how much do you hike your rent? So, we’re going to talk about that. So, if you have any questions, you just have any comments, please put them in the comments. And it doesn’t even have to be related to this. If you have a question, just throw it our way or even a subject you want us to.
Brian: And by the way, we will be diving even deeper into inflation tomorrow in our live webinar. It’s a free webinar at 2 p.m. Eastern, 11 a.m. Pacific. And we’re going to talk about seven ways to protect your portfolio against inflation.
Brian: So, we’re going deep analysis live.
Deni: Yes. And complete no sales pitch, nothing like that. Just information. I also put the link to sign up in the comments.
Brian: There you go. But yeah, but today we’re just talking about a little bit of a narrower topic of how much do you raise your rents during a period of high inflation like we’re experiencing right now?
Deni: And I’ve just put in the comments if you have properties, what gauge do you use? How much do you increase your rentals? Let us know. So, Brian, talk a little bit about why bother increasing. You’ve got good tenants in there.
Brian: Well so a lot of landlords, especially newbie landlords, you know, landlords with maybe one or two properties, people who haven’t been doing this very long, a lot of them feel reluctant to raise rents. They’ve been tenants most of their lives themselves. They remember being a tenant and they’re like, oh, you know, I want to I want to be my tenant’s buddy. I want to be their pal. I don’t want to be the bad guy to raise rents, but that is not how the world works. You know, as you can see, with the rampant inflation that we’re experiencing right now, rents do go up over time. The value of the dollar goes down over time. Right. And rents are actually one of the main driving forces behind inflation, which is one of the reasons why rental properties make such a good hedge against inflation themselves. But those landlords who are afraid to raise rents. What happens is, though, they’ll let three, four, five years go by without raising rents, suddenly they’ll realize that every other house in the neighborhood is renting for three, four, $500 more than their house. And they’re like, oh my God, I’m losing all this money every month, you know? So, then they frantically raise the rent by 300 bucks, 400 bucks a month, which is unfair to the tenant. I mean, that is a shock to their budget. And it’s not realistic to expect a tenant paying 1100 bucks a month in rent to suddenly go to paying 1500 bucks a month in rent. It’s not fair to tenant.
Deni: Here, you’ve been nice. You think you’ve been nice this whole time, not raising their rent and then you give them sticker shock, which is.
Brian: Yeah, that’s way worse than just raising the rent a moderate amount every year. I mean, what you should be doing is raising the rent every year to keep pace with the market rents in your neighborhood. So often that’s 2%, 3%, maybe 5% a year. Right now, with inflation going up so high and with rents rising so quickly, that might mean more than 5%. This is an unusual period. So just take guidance from your neighborhood, from the market rents, and use that as your yardstick. Don’t try to gouge. Your tenant’s right. Don’t. Don’t try to lift the rent by 10% if market rents are only up by 7% in your neighborhood or whatever. But aim for the market rent right in your neighborhood. And that might mean raising the rents by less than the official inflation numbers. It might be in raising the rents more than the official inflation numbers. It’s really not about inflation. It’s about your neighborhood’s market rent.
Deni: So, Brian, how often for a fixed-term lease, you probably would do it like at the end of the term, which is usually annual or a little bit more. But what about periodic leases like you have a month to month? How often would you increase theirs?
Brian: I still raise the rent every year and I think it’s important to do that, to raise the rent like clockwork every single year. Partially because of what we just talked about. Know you don’t want to fall so far behind on market rents that you end up sticker shocking your tenant. But also, it sets expectations with your tenants so that they know that the rent will go up every year, but you’re not going to gouge them on rent increases every year either. The rents go up every single year, a moderate amount. They can expect it. They can budget for it. They won’t freak out when you raise the rent every year because they know to expect it. So, I think every year, like clockwork, you should be raising the rent. And if you need to put a reminder in your calendar every year, then do what you got to do. But it should be like clockwork. You need to be running your rental business like a business. There’s no room for emotion. There is no room for palling around with your customers. You should be professional and respectful and polite and friendly with them, but you are not their friend. There is some professional distance here and that’s a good thing, right?
Deni: Yes. So also, we offer a rent increase letter. It’s free. I’m going to put the link for that to it. There are procedures that you have to follow when you’re increasing rents. You just can’t call them up and say you’re going to pay this whenever, although some people do.
Brian: And in particular, that procedure is there’s a written notice period.
Deni: Right. And each state is different. So, you just got to make sure I know your state laws.
Brian: And sometimes city laws to some major cities do impose their own limits.
Deni: The other thing we’re going to get into like how much currently do we increase rents with what’s going on? But I just want to make sure everybody knows there are states and locations that have restrictions on how much you can raise the rent. So, you have to be careful. I mean, we all know about California and New York. I mean, that’s pretty. But, you know, Oregon just made their statewide. It wasn’t before. Now it is. So, I mean, just make sure you’re looking in your location and your state’s for how much you can raise it, how long it takes for notice periods.
Brian: Right. And those are typically percentages. So, they’ll say landlords can raise the rent by up to 5% each year or something like that. And by the way, I just put a link in the comments there for maps of states and cities with anti-landlord laws, with laws that are very heavily kind of places that have the rent increase restrictions and other heavy restrictions on landlords. These are the kind of places where you should not invest in rental properties.
Deni: New York or California.
Brian: And Oregon and Washington and Baltimore City and Chicago. They might be wonderful places to live, and they might be wonderful places to visit. They’re not wonderful places to be a landlord or to invest in rental properties. So, something to keep in mind.
Deni: So. Right, Brian, how do we figure this out? You know, do you rent raise it 2%, 5%, 7%? I mean, things are increasing crazy right now. So how do you figure this out?
Brian: Yeah. So, at the last official CPI data, which was for March of this year, the cost of goods and services had risen eight and a half percent on average for 12 months earlier, which is really high. I mean, that’s the highest inflation rate that we’ve seen since 1981, which is the year I was born. By the way, to give you a sense of just how far back we’re talking about here. So, again, inflation is not it’s an indicator of some of what’s going on in the rental markets, but it’s not a 1-to-1 correlation. So, you really want to like we said earlier, want to look at what is the market rent in your neighborhood and that’s what you want to raise the rent to. And that might mean raising your rents by less than the official inflation rate, or it might mean raising the rents by more than the official inflation rate. But the official inflation rate is just an average of all of the goods and services that consumers pay for in the US. Rents have been rising faster than the average inflation rate over the last year. And some of that is because, for the first year and a half or so of the pandemic, we had the eviction moratorium in place.
Brian: So that held rents artificially low during that year and a half because landlords were afraid to raise rents because they knew that they couldn’t actually enforce those rents. They couldn’t enforce their lease agreements. When the moratorium was lifted, the predicted tsunami of evictions didn’t happen. But what did happen is that rents started taking off because all that stimulus money floating around in the economy had to go somewhere and real estate had already. Real estate home prices had been skyrocketing throughout the pandemic, so rents have been racing to catch up. So that was one of those unintended consequences of the eviction moratorium and all of the stimulus money and the enhanced unemployment and all that stuff is that you ended up with all of this money circulating in the economy. Rents had been held artificially low for a year and a half, and then all of a sudden, the restrictions get lifted and rents start going to catch up with home prices and they just take off.
Deni: And don’t you think we have to keep in mind that labor right now, like finding people to do maintenance or the cost of supplies for maintenance, or if you have to even replace like a refrigerator or something. Those prices have gone crazy right now and you need to keep all this. You know, take it into consideration.
Brian: No question. Yeah. Labor prices are super high right now. Material costs are super high. And in some of this is what’s driving inflation, too. So, yeah, as a landlord, you have many expenses and you’re going to be paying a lot more for repairs today than you did two or three years ago.
Deni: So, I may even have a hard time getting somebody out to do the work.
Brian: That’s true, too, given the labor shortage among skilled laborers. So, raising rents does not make you a greedy person or a bad landlord or any of the other tropes out there that people love to throw around about landlords. These are the realities of being in business, and as a real estate investor, you are in business, and you need to act like it. So, all right, I’m off the soapbox.
Deni: So, is there anything else, Brian, that you want to let everybody know about with this, the subject? I know we’re going to talk about it a little bit more in-depth tomorrow.
Brian: A Lot more in-depth, not so much about raising rents, but we will be talking about seven ways to protect your portfolio and your money from inflation. And there are a couple of bonus ideas in there as well for protecting your money from inflation. So, yeah. Join us tomorrow. It’s a free webinar, no sales pitch. We’re going to keep this one pretty light and lean and quick and just walk you through what are the things that you should invest in to protect against inflation? What are the things to avoid during inflationary periods like we’re in right now? And yeah, that’s it. It’s going to be yeah, very direct and concrete, no wishy-washy ness. We’re just going to walk you through what’s good to invest in and what to avoid right now.
Deni: Absolutely. So, if nobody has any questions.
Brian: And did we link to our article on hedging against inflation as well?
Deni: Oh, I meant to do that. Sorry, I have that link.
Brian: We’ll throw that in there too. But yeah. So, reserve a seat for the webinar tomorrow. Again, it’s 2 p.m. Eastern, 11 a.m. Pacific. It’s totally free. It’s live. You can ask us questions on the fly. We will be responding as we go. And yeah, we can’t wait to see you tomorrow. at 2 p.m. Eastern.
Brian: All right, guys. Have a great night. We’ll see you tomorrow.