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Rental costs have gone up, up, and up. Everywhere we look, we see headlines about the exorbitant cost of renting, whether an apartment or an STR.
Small real estate investors must strike a balance. They’re torn between raising rental amounts to account for inflation, high property prices, taxes, and rental demand, plus the tension of sustainability. After all, higher rental prices without a rentership experience that justifies it might drive good residents to look elsewhere.
Landlords are also balancing the challenging economic times many residents are facing, where decisions often come down to paying rent or paying for other necessities. Many landlords themselves are facing tough decisions, as well as delaying upgrades and repairs and deferring more maintenance to account for late and uncollected rents.
The stress investors feel is coming from both sides. On one, the desire to keep pace with local rental rates is part of the calculation we all use to measure the success of an investment. On the other, there’s the need to keep properties occupied and producing revenue. How do we balance each to hit the sweet spot we all look for as investors?
6 Guidelines for Raising Rent Ethically
Raising rental rates is part of the industry. It can’t be avoided. Whether you’re a solo investor or looking for compassionate, effective property management, this is how to raise rent with respect and keep your properties occupied and producing revenue.
1. It starts with respect
Perhaps you noticed the word “resident” when you started reading this. It was used intentionally. The word evokes thoughts of ownership, long-term stays, and respect.
It is very different from the word “tenant.” Tenant evokes short-term, dime-a-dozen, anyone will do, and indeed a relationship of “we are not on the same level.”
If you want to keep your properties occupied longer, at the highest rent possible, a great place to start is in your everyday approach to these properties.
A resident not only occupies your property, providing a deterrent for vandalism and theft, but they also provide the revenue we use to pay the bank note, reducing the principal on borrowed money. A resident provides the revenue to pay for vacancies and maintenance and is the front-line defense to mitigate minor issues and keep them from becoming significant issues.
How you treat a resident from the moment you show them a property influences how good of a resident they will be. The better your relationship with the resident, the higher the likelihood that they stay for many years and are willing to pay intermittent rent increases.
2. Give residents plenty of notice
Budgets are tight these days. The old 30% rule for rent doesn’t work for most renter households. Many spend 40% or more on housing costs!
This is why investors must be mindful and strategic when they raise prices. You don’t want to not raise prices just to keep residents—it’s not worth it if it causes your investment to stop being profitable—but you need to do so with compassion and respect. Part of that means giving plenty of notice.
You don’t want to bamboozle your residents when their lease is up. As soon as you know a rent increase is happening, discuss it with your residents. They need time to see if it works within their budget without worrying about a quick move-out. At REI Nation, we work six months in advance and recommend at least three months of lead time.
3. Make it evidence-based, not arbitrary
If your residents ask about the reason behind the price hike, you should be ready to give one. Are you lining up with market rent in the area? Does a tax increase mean your costs are more? Will the resident get more benefits from management or needed improvements and amenities?
Regardless, you should have a solid justification for increasing rent beyond a personal want to make more money. If you can show evidence that you can raise rents higher than the amount or percentage you are increasing them, this can go a long way toward easing the resistance from a resident. No one will look forward to a rental increase, but keeping rents slightly below what is justified can ease the pushback.
4. Leave room for negotiation
Residents feel respected when you give them options. They should be able to accept the price increase, reject it, move out, or negotiate.
Be open to striking a deal. They might be willing to sign a longer-term lease for a gradual price increase. You must weigh if guaranteed occupancy evens out compared to the cost of finding new occupants under a typical lease term.
5. Make it a conversation, not a demand
At the end of the day, the best thing you can do is respect your residents enough to communicate. Be honest and open with them. Talk it through, and listen to their thoughts and feelings.
Remember, this isn’t a typical business relationship. Your clients—the residents—rely on you for their home. It’s not just a property to them.
We’ve heard of too many residents facing a too-quick turnaround to move because the owner sold unexpectedly or rent was raised without notice. It’s stressful and unfair, especially for those who are good property stewards.
These are people. You’re in a people business. So treat them with the same compassion and grace you’d like to be shown. If you’re working through property managers, be sure they’re on the same page here. A reasonable owner doesn’t do much good if management rules with an iron fist!
6. Start small
Incrementally raising prices is easier to swallow than a big jump. An increase of 5% or more in one sitting will likely cause turnover. That’s not the end of the world, but if you have exceptional residents, it’s something you want to avoid.
Either way, a smooth, upward curve that can be anticipated is often better than unpredictable changes. As mentioned, residents will often be OK with signing a multiyear agreement with built-in, incremental price changes.
The Bottom Line
Ultimately, investors shouldn’t be afraid of “chasing away” residents. Sometimes, prices must rise to keep up with the market or other growing expenses. How you do it will determine how well people react.
Speak with your property manager about how they raise rent, discuss it, and negotiate terms. Even if you aren’t directly involved in the process, you want to be on the same page and in the know.
This article is presented by REI Nation
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
