Is the amount you charge for rent steadily increasing? In most cases, it should be. In the United States, between 2000 and 2017, the average rent went up about 14.6% according to recent census data. However, many landlords are afraid to follow this trend. It’s an understandable concern: There exists the possibility of pricing out of your target market.
On the other hand, this concern has to be tempered with the need to make sufficient income. So how do you know when and how to raise the rent? Here are some things to keep in mind.
The Effects of the Rent Staying Too Low
When rent is set too low, a slow avalanche of problems starts to rumble toward you and the value of your investment. For example, your ROI suffers because you likely are not getting enough money to keep up with inflation. Inflation is just a word economists use to say prices are getting higher. The costs of fuel, hardware, and labor tend to go up over time, not down. If your rental prices are not following suit, your spent income will outpace the speed at which it comes in.
The loss of profits can be especially devastating with appreciation in value factored into your record keeping. In the vast majority of areas, and certainly in and around Richmond, properties tend to appreciate. Amenities which are kept up to date and attractive highlight this concept. Your net worth as a property owner hinges on the accurate calculation of these values.
1. Don’t Raise the Rent Too Fast
Many leases place limits on how quickly a landlord can raise the rent. This helps protect tenants from suddenly finding themselves in a position where they cannot afford their rent. Carefully inspect your lease agreement to make sure the amount you would like to raise the rent complies with any restrictions in your area.
2. Keep up with the Local Market
Raising the rent can help you keep pace with the local Richmond market. Why is this helpful? The local market takes into consideration many factors that reflect the micro economy of the area. While the amount you choose to charge may be calculated by factoring in what your expenses and desired profit are, other factors should be considered. The desirability of the area is a somewhat subjective concept. However, it is translated into numbers in the form of rental rates. You have the right to capitalize on upward economic momentum.
However, more is at stake than just securing profits. If you choose to keep your rents low, some good renters may bypass your property. Unfortunately, they may presume it's of poor quality when compared to other Richmond rental options. Most people assume that the rental rate reflects the quality of their homes. By deflating your rental prices, you could be making them think your property is worth less than it is. The best way to understand what rate your property should be charging is through a thorough rental analysis.
3. Think Ahead
The option to raise the rent should be included in your original lease agreement. You can take it a step further and schedule increases in the rent and put it in the agreement. Being transparent about your rates will ease the concerns of tenants, and in the end, they will be glad they had a heads up. This will also help fortify the relationship between you and your renters. A good, honest relationship helps keep renters coming back to renew their leases.
4. Raise the Rent Between 3% to 5% Each Year
It's a wise move to raise the rent a little at a time. An increase of between 3% and 5% is typically accepted. In other words, if your tenants are paying $800 in rent right now, and you decide to raise the rent 3% the following year the rent increase would look like this:
$800*(1.03) = $824
If you raised it an additional 3% the year after that, you would have increased your income by $48.72 over two years:
$824*(1.03) = $848.72
If you aren't sure whether your percentage should be closer to 3% or 5%, contact a property management company. Ask about how much other landlords increase their rent year-over-year to get a clear picture of what your market will bear.
Regardless of whether or not it makes sense, raising the rent isn't easy! It can be challenging to be the bringer of bad news—even when expecting such news. Bringing in a property management partner to handle rising rental rates is a great way to ease the emotional burden. Mission Realty Property Management can take care of figuring out how much to raise the rent, when to do so, and communicate with tenants on your behalf about the increases.
A rental market analysis of your property is a crucial part of the rent-rate process. Performing a rental analysis yourself can be time-consuming and require considerable research. This is why Mission Realty Property Management is pleased to offer our owner-partners a FREE rental analysis! Get in touch with us today, and let's work together to start maximizing the true value of your investment!