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Rent: raise it or not?
HI! This is my first discussion! Thanks in advance for opinions & let me know if you need more info...
I need to decide ASAP if I should raise the rent at my apartment. It currently rents for $1900 & I make a $500 profit each month (it’s actually less b/c I have to declare earning & pay taxes on it… I haven’t figured that into my profit margin). In my area, 2-beds range from $1600 (dumpy) - $2500 (high end). My place is nicer than most: granite, SS, brand new w&d, hardwood, big top-floor deck; BUT no parking & it’s only 850SF. The couple there now is awesome, if they stay it’d be their 3rd year & I haven’t raised rent. Also, I caved & allowed their dog – which most places don’t.
So… is it crappy to raise the rent on good tenants? The BF says it’s a business & I should make as much $$ as possible – he’s thinking up it to $2200. Part of me agrees that’s still a good deal for them... but I also REALLY appreciate good tenants. I’m thinking a modest increase of $25/50 per month if they stay.
Thoughts???
Re: Rent: raise it or not?
This may not be advised at all on the MM board, but MIL has a house she rents out and makes a decent profit on. The woman has been very good and has rented it for a few years. She gave her a choice 2 years back to sign a 1 year lease with raised prices or lock into a 5 year lease with smaller price increases. The woman opted to lock into a 5 year lease. It's worked out really well for her, but that may not work in your situation. Sometimes having a good tenant that respects your property is worth more than a few dollars a month.
I wouldn't raise the rent $300, that seems a little steep especially without more notice. I think $50-100 is more fair.
If they re-sign a lease each year then I would tell them to expect a 3% increase each year. That puts it at a $57 increase this year.
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
i agree, the dog doesn't come into play, except, they'd have a hard time finding an apartment that allows dog. I DID collect a $150 cleaning fee so i can have the place professionally cleaned when they leave. i know first hand that cleaning dog hair from baseboards is NO fun.
I’m on board with what you're all saying, just interested in new perspectives. I’m leaning towards a $50 jump, but I love the idea of telling renters upfront to expect a 3% increase yearly, I'll be doing that going forward. I should add, if I thought they couldn’t afford it, I wouldn’t raise it at all. Add’l info…
-Their combined income is $275k+ (we’re LinkedIn -- they’re still employed).
-BF is out of work. I believe a great offer is around the corner, but as of now—unemployed. It hasn’t hurt us yet… but that could change, he’s the breadwinner.
-I’ve never had trouble renting the apt, I always collect multiple applications & have been able to be selective.
-Lease is up May 31. I want to reach out tomorrow & let them know about an increase & give 1 month to make a decision. An increase wouldn't take effect until June 1.
Probably doesn't change anything, just putting it all out there. Unless they’re ready to buy, I think they’ll stay b/c moving is so darn expensive & a hassle.
Thanks for chiming in!
I've owned a duplex, where I live on one side, for the last 5 years and bought another one a few months ago. So I'm just starting to get my feet wet with real estate investing, but have learned a lot about it.
Like the other PPs suggested, I'd raise the rent a bit. I especially like @brij2006 suggestion of raising it by 3% to an extra $57/month. The reason I like it is because you can phrase it to your tenants that, although you have not increased the rent over the last three years, you now need to raise it by 3% to cover some of your own rising costs. People get that. They understand inflation. It puts the $50-$57 monthly increase into perspective.
You can also tell them that, with their new lease coming up, you have been checking out fair rent prices and will now need to raise the rent to (insert new rent price that is $200-$300/month more). I can almost guarantee you it will cause them to move out and you will lose your great, long term tenants. There is nothing wrong with that, but it is a gamble. Your next tenants might be awesome also and stay for a long time...but at $300/month more. Or they could be a nightmare. Or be great, but only stay for their one year lease and then move again.
Me personally, I'd raise it the $50ish/month now, raise it $60/month (3%) again next year (assuming it is the same tenants) and start to at least edge it more toward a fair market rent or at least not let it fall further behind. But then I'm also lazy and my LEAST favorite part about LLing is looking for a new tenant. So I'm more inclined to not get as much money, but have an easier life.
One resource I highly recommend for determining a fair rental rate is www.rentometer.com. You basically put in the rental address and number of bedrooms. Then it pops out for you some of the rented properties around you with the same number of bedrooms and what those rental rates are. Along with an average. It's not perfect, especially since it only looks at number of bedrooms, but it will get you in the ballpark. Searches are free, though there is a monthly paid membership option that provides more info.
For your "cash flow" calculation, make sure to include "soft" costs also. Those are costs that might not be a set amount every month/year like a mortgage and insurance, but will happen over the course of renting out your property. I participate in a real estate investing forum called Bigger Pockets (also free) and, almost universally, these are the percentages people use for their analysis of "soft" costs for buy/hold investments:
Maintenance (5%-10% of rental amount), maintenance is for smaller, routine types of repairs or replacements.
Capital Expense (5% of rental amount), these are bigger types of repairs, like having to replace the roof every 20 years.
Vacancy (8-10% of rental amount), this accounts for time when the property will be vacant and not have renters. Such as between tenants. An 8% set aside=one month of vacancy per year.
Like yourself, I don't pay that much attention to how taxes affect my cash flow, other than I know I will owe money at the end of the year because of my rental income (and other side income) and just prepare myself for a $2-$3K tax bill. But I'm always surprised at just how much of my rental income I can write away with expenses.
Here is (to me) a crazy one. Did you know that rental property...as in the property itself...is considered a depreciating asset? So that's a write-off/expense each year.
Just be sure that pet deposits are legal in your state. Here in Massachusetts a landlord can only collect first, last, and 1 month security. If an apartment was $1000/month the landlord could say "well the security deposit is normally only $500, but since you have a dog I want $1000" but if you've already paid a full month's rent in security deposit they cannot collect an additional deposit beyond that - they can't charge you $1k as a regular security deposit plus an additional $500 for a pet deposit.
I don't think you should base raising rent on their salaries, their dog, or how hard it would be for them to find a new place to rent. It should simply be based on what a fair rent price is for the unit, regardless of the individual tenant situation--especially since they've already lived there for a couple of years.
Was $1900 fair when you first set the price, or did you under price it to begin with?
TTC since 1/13 DX:PCOS 5/13 (long, anovulatory cycles)
Clomid 50mg 9/13 = BFP! EDD 6/7/14 M/C 5w6d Found 11/4/13
1/14 PCOS / Gluten Free Diet to hopefully regulate my system.
Chemical Pregnancy 03/14
Surprise BFP 6/14, Beta #1: 126 Beta #2: 340 Stick baby, stick! EDD 2/17/15
Riley Elaine born 2/16/15
TTC 2.0 6/15
Chemical Pregnancy 9/15
Chemical Pregnancy 6/16
BFP 9/16 EDD 6/3/17
Beta #1: 145 Beta #2: 376 Beta #3: 2,225 Beta #4: 4,548
www.5yearstonever.blogspot.com
On the subject of salary, other than making sure new tenants make at least 3x the rent amount from all income sources, I don't care what their salary is or how they spend their money. It is not something I consider one way or the other with a rent increase either.
To use an extreme example, let's say the fair rent for my house is $1300/month and my tenants are paying $1200/month. If they suddenly won $100,000 in the state lottery around the time their lease expired and still wanted to stay renting with me, I wouldn't turn around and tell them the rent is now $1400/month because they can afford it (not saying you are doing that, OP). Though I'd raise it $25-$50/month if I'd been planning to anyway.
SITB - weird formatting
A general good point is to just know all the basics of the tenant/landlord laws for your area. Someone else mentioned changing the amount of rent after a lease ends can require a 60 day notice in some places.
It is astounding how much landlord/tenant laws vary, not only by state, but even by county.
For example, Massachusetts is mentioned above. They happen to have very tenant friendly laws. They are right up there with CA and NY, in that regard.
Very good point - obviously whatever you do has to be legal within the laws of your state! I brought up the pet deposit simply because I paid one to bring our cat into our old apartment. It was a one-time $300 payment, and I was willing to pay it in order to adopt our cat and have it be above-board. Many other tenants at my apartment were willing to pay it as well.
I’m not raising the rent $200 or 300 -- that was never my plan. That was an idea the BF floated. I said I was considering a modest $25-50 increase. $1900 was fair 2 years ago, but rents in the neighborhood have shot up. I do think I could get $2300 now – but it never felt right to raise it that much on the people there. Great advice to plan on a 3% yearly increase.
I’m not basing the rent on their salary. I brought it up b/c I said if I thought it (“it” = a modest increase) would be a hardship, I wouldn’t raise it at all. Never my intention to jack it up b/c they do well.
I haven’t been doing this long, still learning in the ins & outs of being a landlady.
Wow! Three months worth of rent for a deposit? Is that typical? I've never had to put more than one month down and a few places less than that.
It really depends on the local culture, but I don't think it's typical. But then only having to put one month down is definitely not typical either. Or did you mean one month with a security deposit? That is the most common configuration.
I've rented places in CA, Louisiana, and FL. All very different parts of the country. And I always needed to pay the security deposit and first month's rent. Never less and never a last month's rent. With that said, sometimes apartment complexes will do security deposit specials. Like the security deposit is only $300 instead of equal to the first month's rent. But that is more a marketing tactic. You'll rarely see that for anything other than a large complex.
As a landlady myself, I require the security deposit and a signed lease to take my rental off the market. Then the first month's rent at move-in. There have been a few times when I have also informed a potential tenant they would also need last month's. But those were always the same special scenario. Someone who said, "Yay! Moving to NOLA from (insert out of state area). I don't have a job yet, but I'll get one when I get there."
Ummm...yeeaahhh...no job yet, I need further protection. Like last month's rent also. But that was always discussed before a lease was signed. It's usually an immediate end to the conversation which, as far as I am concerned, is good riddance. Which is ironic because I moved here without a job yet, so I'm not necessarily knocking it, but I also had 6 month's worth of living expenses saved up. Not a shoestring.
Actually, although it is a common requirement throughout the country that a security deposit is kept in a separate interest bearing account, that isn't true everywhere. And especially designating a specific interest rate like 5% is for your region, which is an outrageous percentage, so I'm guessing it is a penalty interest rate for LLs for not keeping it in a separate interest bearing account?
For example, in the entire state of Louisiana, there is no stipulation at all that a security deposit has to earn interest or even be kept in a separate account.
When we moved to this area, we noticed a lot of the apartment complexes were going for security bonds rather than a deposit. So instead of paying say $500 for the deposit that was refundable, you paid $80 for a non-refundable bond from some third party that would pay out in the event the complex needed to take your deposit.
We never looked at private rentals though.
Interesting! I have never heard of anything like that. Sounds like an insurance policy, of a sort. I'm going to post on my BP board and ask about this. I think people would be clamoring for my rentals even more if they only had to pay a small, non-refundable bond.
However, from an LL side, I suspect policies like that will be so riddled with exclusions and fine print, they wouldn't be worth the paper printed on. But still worth investigating.