Should you raise your tenants rent?
Here is the question:
Should you raise your tenants rent?
It sounds simple and many books I have read and depending on where you live, many people will say “yes” raise it the maximum allowed for your area every year.
Nova Scotia (where we currently live) does not have rent control. We do have guidelines and lead time rules that layout when you can levy increases, we also have an annual allowable amount, but other than that, it is market regulated, more details on how it is done in Nova Scotia at:http://www.novascotia.ca/sns/access/land/residential-tenancies/allowable-rent-increase.asp
The question landlords need to ask themselves, is not can I raise the rent? but more Should you raise the rent?
I know a lot of larger companies make it a policy to have annual rent increases. If a company has 5000 units and they raise all the rents by $1.00 per month, it would definitely have a large impact on the bottom line.
In the small landlord market, there are other factors to consider than just the monthly revenue.
I want to use an example of a person with 100 units or less.
The answer to the question is not simple, because you need to ask yourself some important questions:
- What is the real market rent for the unit?
- Is the current tenant paying market rent or close to market rent?
- What is the vacancy rate in the area (can you fill the unit quickly if the tenant leaves)?
- What will it cost to get the unit ready for another tenant (make sure to factor in the cost of advertising and time it takes to show the unit)?
- What is the tenants profile (are they a good fit for the unit? Have they been there for a long time?)
- Is it worth the risk of having to find and take a chance with a new tenant, if the current one leaves?
Each question is extremely important to ask yourself.
The reason is this:
What I find to be the key to success in the landlord / property management business is to have happy, long term tenants who pay the rent on time, look after the property and do not call you to complain.
I will agree that most tenants are like this, however, I have also experienced some not so great tenants, so when I get a great tenant I really appreciate them.
I also evaluate the true cost of replacing a tenant. This is especially important for small landlords, and people operating in competitive rental markets.
Here is a simple example that should make you think:
Example 1 – Bill a long term low maintenance tenant has been renting from you for five years. You inherited him with the building, and he was paying a bit below market when you bought the place five years ago. You raised the rent when you bought the property, but have not since then. The other units in the building that have turned over in the past five years are commanding more rent.
Should you be raising Bill’s rent on an annual basis, or at anytime?
What will it cost if he leaves?
If Bill has been renting for a long time, significant upgrades could be required before a new tenant moves in.
If you need to do a kitchen upgrade, paint, some flooring etc.., it could cost between $1000 – $5000.
Lets say it is going to cost $2500. If you increase the rent $50 per month and he leaves. If you can now get $100 more per month to bring it up to market value, it will take 25 months, or just over two years to breakeven. That does not factor that the new tenant may not be as great, also since the average time for tenancy is two years, they could leave and you could be doing another turnover.
In the end, it will be up to you and the regulations in the area. Just make sure to look at the big picture, before you make your decision.
Michael P Currie