Why Increase rent every year makes sense for Landlords?
Increase rent every year is something that is intimidating you? You are uncertain about this move. You are concerned that increasing the rent may lead to a vacancy. What if you have turned to a greedy landlord and your tenant will hate you for raising the rent? Ain`t you risking your business just to grab some little extra pennies? Don`t you think you are getting emotional and not thinking logically? Stop being an emotional wreck and let’s get straight to the logics.
Increasing Rent is a part of a business and not doing so can be risky for your business. You should raise the rent every year to stay current with market trends and keeping up with the economy. Rent Raise also provides an opportunity to provide even more value to the tenants.
Why should you Increase Rent Every Year?
Rent Rates increase every year and is an integral element in the landlord business. As a landlord, you can increase the rent every year. However, it totally depends upon you and the conditions of your business. So, if you feel your business actually needs a rent raise, do it with confidence. And, if you still feel uncertain, here is what you need to know on why should you increase the rent every year?
1. Current Market Prices
It is very important to market your rental with current market prices. The trend of markets changes from time to time. Various factors including interest rates, inflation, economic growth, and political environment affect our markets.
Being a landlord, you should stay proactive with the conditions of the market. If the conditions of the market are harsh and unfavorable, you can`t risk a vacancy by putting high prices. But, when the market conditions are good and vacancy rates are very thin. The landlords in your area may tend to increase the price of rentals a bit.
It helps them make up the low rents they collected during hard times. If the market prices around your area of comparable rentals are correcting and your property is in a comparable shape with now little high priced rentals. Then why not take advantage of this opportunity.
It is important you review the rental rates in your market every few months to keep your pricing well and competitive. You can increase the rent every year by 3%-5%. It is standard and comes under fair pricing rules. The tenant wouldn`t bother much if he has to pay $1236 instead of $1200 monthly.
2. Inflation
Inflation is on peak in our recent economy. With inflation, the prices of commodities also go up. You need to spend more money as you were paying before to buy the same set of services. The direct effect of inflation is clearly visible with the operational costs of your business.
With inflation, the operating cost of your business also goes up. You will be paying more in property taxes, insurance premiums, and in professional fees. And if you pay the utility bills by yourself, these will also be going to procure inflation effects on them.
So, how are you thinking to absorb the effects of inflation on your rental business? You surely can cut on some unnecessary expenses. But that too alone is unable to cover the increased operating cost of your business. And, cutting on profits to make up the increased operational costs of business doesn`t make any sense.
Furthermore, if you see, most tenants also get a hike every year from their employers to avoid ravages from inflation. This means tenants are also well aware and well prepared about the effect of inflation. The tenant wouldn`t mind for a little increase in rent. However, the increase in rent is justified and falls under fair rental pricing.
3. Increasing Value for Tenants
The rental markets are facing tough competition. There are a lot of similar rental units available in your area for the tenants. Your tenants may likely to consider new options every then and now. And if they find a good deal, they will most likely switch.
Nonetheless, there are a lot of factors than just one that motivates a tenant to rent a new place. In such tight markets, only a fool can think of increasing rent every year. Don`t you think the same? Maybe yes, but there is an opportunity you shall not miss this problem. As for the opportunity, you need to be creative and think from the perspective of successful landlords.
Don`t you think increasing some value for your tenants on the property can act as a double sword for your competition. Adding some more value for your tenants in some way will not only stand your rental above from the competition. But you can also increase your rent every year to a bit by making valuable changes for tenants every year.
Improving the lifestyle of your tenant by adding some extra value for them is always appreciable. And, they don`t mind paying a little extra for the improvement. Your tenant won`t mind paying an extra $30 a month if you can change the old, stained and dusty carpet.
4. Rising Economy and Environment Changes
The local economy of the housing markets is improving gradually. Prices of houses are on an incline. The value of your property is also increasing as per the market value. New employers are entering into your markets. They are bringing new job opportunities, higher incomes, and lots of other favorable outcomes for your business.
The environment has been now a lot more improved. The tenants that are earlier staying in weak neighborhoods are now experiencing a much plush environment. A lot of new small businesses and services are now establishing near your property. A lot more grocery stores, post offices, restaurants have opened up in your locality. Public transports are improved. The location now looks more appealing and posh.
These situations are collectively appreciating the rates of your property. And if the rate of property increases, the rent should also be adjusted accordingly. The rent you charge monthly is in general a multiple of 0.8%-1.1% of the value of the property. So it actually makes sense to increase the rent if your localities are experiencing favorable changes.
5. Gradual hikes are important
Gradual increases in rent every year are important. You are surely going to increase the rent every year if the above-mentioned factors are favoring your business. But for a moment, think if you don’t increase the rent because maybe your tenant will move out. Then you surely are risking your landlord business. Don`t you think not increasing the rent this year will create trouble increasing the rent next year?
You have made a rental agreement with your tenant that rent will increase a few percentages every year. And this year, you don`t go by lease thinking your tenant will appreciate. The next year even if you will feel the actual need of increasing the rent, you may not able to do it. It is general human psychology that will make your tenant resist the rent increase or they will switch to some new place.
One of a landlord feels good about not raising the rent and is operating on break even. His tenants are staying on the property for 6 years now and don`t get an increase in these years. Their lease is about to expire and they are willing to renew it. On request, the landlord told them about renewing their lease at $1500 instead of $1100.
A sudden $400 increase monthly as the landlord hasn`t increased single money in 6 years. The landlord even promised to change the carpets and make some necessary renovations but the tenants left the place. Do you think a $400 rental increase per month will be justified for tenants? The landlord should have increased their rent gradually by $50 every month per year.
The Bottom Line
Rent increase per year is the part of the landlord business and not doing so poses a risk for the business. Your tenants are well aware of the rent increase and there is no point in not doing it. However, be justified and perform the art of rental price increase with perfection.
Read: How to Increase the Rent without losing even a Single Tenant?
Also, a point to consider here is you should always evaluate your business and the market trends in your area before making this move. Sometimes, increasing the rent can play against you when market conditions are not good. So, take the call when you feel it right and is suited for your rental business.