Rental Property Owners: When To Consider Raising Rents

by Randy Zimnoch

Demand for rental property has never been higher. Between the difficulty of obtaining a mortgage and more renters focusing on increasing their savings, it is certainly a good time to be a landlord. That being said, just because you own a rental property doesn’t mean you can name your rental price. If you are considering increasing your monthly rent, there are a few things you need to consider. Even if your market warrants a slight bump, it may not be the best thing for your rental portfolio. A quality tenant is always better than trying to squeeze every last dollar out of a property.

The first thing you need to consider with your property is what your goals are. Everyone would like to make more money every month, but if increasing your rent brings you unforeseen problems, it may not be worth it. If you are interested in holding onto the property for the long term, increasing rent may not be for you. A higher rent will increase your cash flow, but it can also make it more difficult to find tenants and increase how you will need to present the property. Money is always nice, but if you increase your rent too much, it can cause more problems than it is worth.

In order to determine if an increase works for your property, you need to know what is on the market. Blindly increasing – just because you saw something on the news about high demand for rental properties – may not work in your area. You need to know what is out there and what other properties have that you don’t. This requires you to do your homework. Physically see as many homes on the market in your area as you can and evaluate their pros and cons. If you are realistic about the strengths of your property – in comparison to your market – you can get a good idea of whether or not you can bump up your rent. If you overprice your property, you will end up having trouble finding tenants, which could result in your taking on a bad one out of desperation.

If you find that an increase is warranted, you would be wise to give your tenants more than enough time to adjust. In most cases, you should only increase from lease to lease – and not before. There are times, however, when a tenant is on a month-to-month lease or they want to stay in the property after the original lease expires. The more notice you can give them, the better chance they will accept it and brace for the change. Before you do this, you should evaluate if the increase is really worth all that finding a new tenant entails. If you have a good tenant that pays on time every month and takes care of your house, you may not realize how good you have it. How much they are worth depends on you, but if you have ever dealt with a bad tenant, you know that good tenants can make your life that much easier. Most rent increases will not be staggering, but the $50 or $100 a month may be important to your tenant. A good tenant that will stay in the house may be worth waiting to increase until they decide to leave.

While the rental market is hot now, there is no telling when that will change. It does make sense at times to increase your rent and maximize your cash flow, but you need to always have an eye on the market. If you overprice your property, it can cause less demand – which will force you to scramble at the 11th hour to find a tenant. The right amount is one in which there is constant demand and you can pick and choose among the best possible tenants. If the demand is low, it will force you to consider a bad tenant – which will cost more than any slight rental increase you are considering. Investing is all about risk vs. reward. If the reward of trying to squeeze an extra couple of dollars is more than the risk of taking on a bad tenant, increasing the rent doesn’t make sense at this time.

It is also important to note that raising the rent may not be legal for your given property or town. If you are on a fixed rate rent or there are caps, you will need town approval before you can up your rent. This process can take several weeks, so you had better start it early enough to get your approval and properly promote your property. You may also need to justify your increase with comparable rentals or improvements you have made to your property. Check with your local municipality if you have rent controlled tenants and are considering making an increase.

There is a difference between maximizing your rental value and knowing when less is more. If you are leaving hundreds of dollars on the table, it certainly makes sense to raise your rent. If you are just trying to squeeze the last dollar out of a deal, you could easily end up doing more harm than good. You should know your tenants, your market and what the pros and cons are of making any increase. Only after you evaluate everything, can you determine if the increase is worth it. In some cases, it may not be in your best interest.